TX (F6) Course Notes TY 2018

TX (F6) Course notes
Syllabus A: THE UK TAX SYSTEM AND ITS ADMINISTRATION ......................2
Syllabus A1. The overall function and purpose of taxation. ...............................................................2

Syllabus A2. Principal sources of revenue law and practice ............................................................. 6
Syllabus A3. The systems for self-assessment and the making of returns .......................................14
Syllabus A4. The Time Limits ......................................................................................................17
Syllabus A5. The Procedures relating to compliance checks, appeals and disputes ........................ 23
Syllabus A6. Penalties for non-compliance ...................................................................................25
Syllabus B: Income Tax And Nic Liabilities .....................................................27
Syllabus B1. The scope of income tax. .......................................................................................27

Syllabus B2. Income from employment ......................................................................................32
Syllabus: B3. Income from self-employment ................................................................................75
Syllabus B4. Property and investment income ............................................................................144
Syllabus B5. The Comprehensive computation of taxable income ...............................................174
Syllabus B6. National insurance contributions for employed and self-employed persons .................189
Syllabus B7. Exemptions and reliefs in deferring and minimising income tax liabilities ...................... 198
Syllabus C: Chargeable Gains For Individuals ..............................................215
Syllabus C1. The scope of the taxation of capital gains ...............................................................215

Syllabus C2. The basic principles of computing gains and losses ................................................218
Syllabus C3. Gains and losses on the disposal of movable and immovable property ...................... 239
Syllabus C4. Gains and losses on the disposal of shares and securities ....................................... 250
Syllabus C5. Entrepreneurs’ relief ..............................................................................................262
Syllabus C6. The use of exemptions and reliefs to minimise capital gains tax .................................268
Syllabus D: Inheritance Tax ...........................................................................283
Syllabus D1. Basic principles of computing transfers of value ....................................................... 283

Syllabus D2. IHT arising on lifetime transfers and on death ...........................................................301
Syllabus D3. Exemptions to defer / minimise IHT ........................................................................ 318
Syllabus D4. Payment of inheritance tax ....................................................................................324
Syllabus E: Corporation Tax Liabilities ..........................................................330
Syllabus E1. The scope of corporation tax .................................................................................330

Syllabus E2. Taxable total profits ...............................................................................................335
Syllabus E3. Chargeable gains for companies ............................................................................381
Syllabus E4. The comprehensive computation of corporation tax liability ........................................ 400
Syllabus E5. Group corporate structure for C.T. ......................................................................... 404
Syllabus F: Value Added Tax ......................................................................... 415
Syllabus F1. The VAT registration requirements ...........................................................................415

Syllabus F2. Computation of VAT liabilities ..................................................................................427
Syllabus F3. The effect of special schemes ...............................................................................454
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Syllabus A: THE UK TAX SYSTEM AND ITS
ADMINISTRATION
Syllabus A1. The overall function and purpose of taxation.
Syllabus A1a. Describe the purpose (economic, social etc) of taxation in a modern economy
The Economic Purpose
Tax can be used by governments to affect:
1. Inflation
Higher tax levels should decrease inflation
2. Employment
Higher tax levels should increase employment (if spent by governments in the
right way!)
Tax can also be used by governments to affect businesses and

individuals:
• It encourages saving by offering NISAs (new individual savings accounts)
It encourages charity donations by offering Gift Aid tax relief
It encourages new businesses by offering investment tax relief
• It discourages motoring by fuel duties
It discourages drinking alcohol by imposing high duties etc
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Social Justice Purpose
This can be done through Progressive taxation:
This simply means the higher earners pay a higher % of their income as taxes - thus
redistributing the wealth in society from the rich to the poor
So, income tax is an example of a progressive tax
The opposite of this is Regressive taxation where higher earners pay a lower % of
their earnings as tax
Ad Valorem Principle
Here everyone pays the same % of tax regardless of income
- e.g., VAT on a computer is the same regardless of your income
The final form of tax is Proportional Taxation
This is where the tax levels (% of earnings) remain the same regardless of income
levels
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Syllabus A1b) Explain the difference between direct and indirect taxation
c) Identify the different types of capital and revenue tax.
Direct Taxes - tax paid directly to HMRC
So this is SIMPLE, dimple x
Basically DIRECT taxes are paid DIRECTLY to HMRC
But, in true accountancy style, we complicate it unnecessarily by splitting them into

revenue and capital taxes - but hey-ho we can roll with that...
Direct Revenue Tax
These are based on income / profits
Basically the more income or profit, the more tax you pay..
1. Example 1: Income Tax
2. Example 2: Corporation Tax
3. Example 3: National Insurance Contributions
Direct Capital Tax
These are based on assets sold or gifted
Basically the more the asset is sold for (or the higher the gift), the more tax you pay..
1. Example 1: Capital Gains Tax
2. Example 2: Inheritance Tax
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Indirect Taxes - taxes paid to HMRC indirectly through an intermediary
oooh an intermediary - get me!
Basically think of this as a shop for example - you buy an item with tax on it, but
you pay the shop. The shop then pays this tax to the HMRC.
Example: VAT
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Syllabus A2. Principal sources of revenue law and practice
Syllabus A2a. Describe the overall structure of the UK tax system.
HMRC
Her Majesty's Revenue and Customs *Salutes* ;)
This controls all aspects of tax law in the UK
Purpose of HMRC
1. Make sure there is money available to fund public spending
2. Help families and individuals who need financial support
HMRC Main Duties:
1. Implement the tax laws
2. Oversee the tax admin
Miscellaneous HMRC stuff
Staff are known as "Officers of Revenue and Customs"
Branches are all over UK
Most taxpayers never deal with HMRC direct - instead they file their tax returns
online and pay electronically (compulsory for companies)
The responsibility for assessing how much tax is payable is down to the taxpayer
under a system called "self - assessment" (good name then, really!)
Individuals can still ask HMRC to calculate the tax though for them - companies
can't
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Structure of the UK tax system
HM Revenue and Customs (HMRC)
The treasury formally imposes and collects taxation.
The management of the treasury is the responsibility of the Chancellor of the

Exchequer.
The administration function for the collection of tax is undertaken by HMRC
Commissioners
At the head of HMRC are the commissioners whose duties are:
1. To implement statue law
2. Oversee the process of UK tax administration
The main body of HMRC is divided into District offices and Accounting and
payment offices
District Offices
The Commissioner appoints Officers of HMRC to implement the day to day work of
HMRC
Accounts and payment offices
These concentrate on the collection and payment of tax.
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Syllabus A2b) State the different sources of revenue law.
A2c) Describe the organisation HM Revenue & Customs (HMRC) and its terms of reference.
Stop snoring at the back! Learn thezzzzzzze....
There's a few of these sources, but do try and learn the basics - here we go..
Tax Legislation (Statute law)
Law so you HAVE to follow them or boy, you're in deep doggy-do
1. Updated annually by the Finance Act (made by the chancellor of the exchequer)
- referred to as "The Budget"
2. Statutory instruments - These give detailed guidance where necessary on points

of law
Case Law
These are decisions made previously by judges in court about taxation matters
1. The "case" will help decisions be made in similar circumstances
2. The "case" rulings are binding
HMRC Guidance
These explain the laws and help interpret the law
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The main types are:
1. Statements of Practice Provide clarification of how rules should be applied
2. Extra statutory concessions I know! :(
These allow laws to be relaxed where their implementation would cause undue
hardship
3. Internal HMRC Manuals Give guidance for their staff but are also available to the
public
4. Briefs Not that sort!
These just provide details of a specific tax issue that's arisen
5. HMRC website, leaflets etc
Use non-technical language aimed at the general public
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Syllabus A2d. Explain the difference between tax avoidance and tax evasion, and the
purposes of the General Anti-Abuse Rule (GAAR).
Tax EVASION is ILLEGAL
The main forms of tax evasion are:
Not giving all information
Giving false information
Tax AVOIDANCE is LEGAL
It's arranging your income to minimise tax - although HMRC are introducing anti-
avoidance legislation to lower the advantages to the taxpayer
Tax avoidance features..
No misleading information given
Can use loopholes in the tax system
The General Anti-Abuse Rule (GAAR)
This fights artificial and abusive schemes (unreasonable courses of action) which
are used to avoid paying tax
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Syllabus A2e. Appreciate the interaction of the UK tax system with that of other tax
jurisdictions.
A2f) Appreciate the need for double taxation agreements.
This is where income could get taxed under 2 different

systems
Double Taxation Agreements
These are agreements between countries over how certain items are taxed - and
take precedence over UK law
They either:
Exempt some overseas income from UK tax or
Provide tax relief if it has been taxed in 2 countries
EU Influences
The EU would like to remove differences between countries policies as these can
cause distortions and be barriers to trade for some countries
EU countries do NOT have to align their tax policies - but can jointly enact laws
called Directives
One example is the VAT directive
However the rates of VAT are not aligned...
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Syllabus A2g. Explain the need for an ethical and professional approach.
Advising on tax? You have duties to the HMRC too!
Information given to HMRC must be complete and accurate
Examples:
Not declaring taxable income
Claiming un-entitled reliefs
Not notifying HMRC of their mistakes re under payment of tax etc
If the client commits an offence - you need to decide if it was an error or fraud
You then explain to the client that they should disclose the error to the HMRC
If the client won't disclose still - then you must stop representing the client and
disclose matters to HMRC if it's in the public interest or you think there might be
money laundering
Professional and ethical guidance
Accountants often act for taxpayers in dealings with HMRC.
Their duties and responsibilities should be towards both clients and HMRC
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The accountant must uphold standards of the ACCA that is
1. To adopt an ethical approach to work, employers and clients
2. Acknowledge the professional duty to society as a whole
3. Maintain an objective outlook
4. Provided professional high standards of service, conduct and performance at all

times.
The ACCA “Code of Ethics and Conduct”
The ACCA “Code of Ethics and Conduct” sets out five fundamental principles which
members should adhere to meet these expectations, namely:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour
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Syllabus A3. The systems for self-assessment and the
making of returns
Syllabus A3a. Explain and apply the features of the self- assessment system as it applies to
individuals.
Self assessment (SA) is for income not collected at

source*
*An example of tax collected at source and employment income (PAYE)
How Self-Assessment works..
Remember it is the responsibility of the taxpayer to calculate their own tax liability
1. Taxpayer is sent a notice to complete the SA (online or on paper)
2. There are deadlines for filing the SA (31/10 for paper and 31/1 online) or 3
months after being given notice if its later
3. It covers income tax, class 4 NIC and CGT
4. Payment is due 31st January the following year (interim payments on account
may also be paid)
5. 31st January the following year is known as the filing date (for both paper and
online) - different to the "actual file date"
6. Online filing - Tax returns submitted electronically automatically calculate the tax
due
7. Paper filing - HMRC will (optionally) calculate it if filed by 31st October. If a

taxpayer submits a paper return on time, they can ask HRMC to calculate the
tax due.
8. When the HRMC calculate the tax they make no judgement on the accuracy of
the information given to them
9. HMRC then deliver a statement of account to the taxpayer as a reminder of

amounts due 
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Syllabus A3b. Explain and apply the features of the self- assessment system as it applies to
companies, including the use of iXBRL
Companies must submit a corporation tax return within

12m of their period end
They must pay the tax within 9m + 1day of their of their chargeable period end
(CAP) but they do not have to file their return until 12 months after the CAP end.
Therefore many submit their corporation tax return before the 9m + 1day payment
deadline too
Features of self assessment for companies
Must be done online
Financial statements are submitted along with it - using iXBRL
Inline eXtensible Business Reporting Language (iXBRL)
iXBRL?!! See this is what happens when you let a bunch of accountants try to come
up with something "cool" :)
iXBRL allows for the exchanging of business information electronically and tags the
accounts so they can be read by a computer
HMRC then uses online software to read the iXBRL info
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Other Options
1. Integrated Software Applications
These automatically insert the iXBRL tags and produces accounts/computations

in the iXBRL format
2. Managed Tagging Services
Company outsources this tagging process
3. Conversion Software
Applies tags and so converts the info into iXBRL
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Syllabus A4. The Time Limits
Syllabus A4a.Recognise the time limits that apply to the filing of returns and the making of
claims.
Either HMRC or Taxpayer may amend the return
HMRC
May amend any obvious errors (e.g. adding up errors) within 9 months of the date of
filing
Taxpayer
May amend within 12m of the January filing date
Notification of Chargeability
The onus is on the taxpayer to inform HMRC that they are liable to tax - must be
done within 6 months of the first tax year - unless there's no actual tax liability
If no notification is made then penalties will occur
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Syllabus A4b. Recognise the due dates for the payment of tax under the self-assessment
system, and compute payments on account and balancing payments/repayments for
individuals.
Generally the next 31st January
This is the date for income tax, NIC class 2 & 4 and CGT
Payments on Account (POA's)
These are made if less than 80% of last years tax liability was deducted at source
(unless less than £1,000)
Therefore employees don't need to make POAs as more than 80% of their tax
liability is deducted at source
They only apply to income tax and class 4 NIC - NOT FOR CGT
DATES for POAs
1. 1st = 31st January
2. 2nd = 31st July
3. Balance on 31st January next year (normal due date)
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CALCULATION of POAs
Based on last years "relevant amount" (half payable on each POA)
Relevant amount = tax due - amount deducted at source
Example
Jack’s tax bill was £10,200 - of which 2,500 was collected using PAYE
What is the amount of the POA’s
Answer
POA 1 £3,850 (10,200 - 2,500 = 7,700/2)
POA 2 £3,850
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Syllabus A4c. Explain how large companies are required to account for corporation tax on a
quarterly basis and compute the quarterly instalment payments
Claims to reduce POAs - anytime before next 31

January
The taxpayer would do this if he expects the taxable income to be lower this year
than last (as last years was used to calculate the POA)
The grounds for the claim must be made
If the actual taxable income ends up being higher then interest will be charged on
the underpaid POA tax, and a penalty if the reduction in POA was fraudulent (and
not an innocent error)
Payment of Tax
1. Companies pay tax by self assessment
2. Estimated tax is payable 9 months and one day after the end of each accounting
period (due date), with provisions for quarterly instalment payments for ‘large’
companies. Payment must be made electronically
3. Interest due to the HMRC on tax paid late will run from the due date to the date
of payment at a rate of 3% per annum.
4. Interest on overpayments of tax will run from the later of the due date or the date
tax was actually paid at a rate of 0.5% per annum.
Under self assessment interest on tax paid late will be deductible against
interest receivable.
Interest received on overpaid corporation tax will be taxable as Interest receivable
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Quarterly Instalments
1. Quarterly instalments apply to large companies.
2. A large company is one with a profit exceeding £1.5M based on a single

company with no related 51% group companies and which prepares accounts
for a 12 month period.
The profit limit must be divided by the number of 51% related group companies
and time apportioned for a chargeable accounting period of less than 12
months.
3. The instalments are based on the estimated current year’s liability.
4. The four quarterly instalments will be made in months 7, 10, 13 and 16 following
the start of the accounting period.
The instalments are due on the 14th of the month.
Thus for the accounting year ended 31 March 2019 the first quarterly instalment
payment would be due October 14, 2018 followed by further payments due
January 14 2019, April 14 2019, and July 14, 2019
5. Quarterly payments are not required if the company was not large in previous
CAP.
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Syllabus A4d. List the information and records that taxpayers need to retain for tax purposes.
How long should business records be kept?
Business records and personal records need to be retained for a number of years
after the tax returns have been submitted for that year.
The time for which these records need to be retained are:
Retention of records
Business records 5 years from 31January following end of the tax year
Personal records 12 months from 31January following end of the tax year
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Syllabus A5. The Procedures relating to compliance
checks, appeals and disputes
Syllabus A5a) Explain the circumstances in which HM Revenue & Customs can make a
compliance check into a self-assessment tax return.
A5b) Explain the procedures for dealing with appeals and First and Upper Tier Tribunals
Appeals
Tax appeals are heard by the Tax Tribunal which is made of:
• First Tier Tribunal 

Deals with most cases.
• Upper Tribunal 
Deals with complex cases.
What is a tax assessment?
Opening up a tax assessment means that either the taxpayer or HMRC thinks the
taxpayer has paid too much or too little tax and wants this to be corrected.
The following table shows when a taxpayer or HMRC can open up a tax
assessment.
HMRC can open a normal enquiry for a tax return, 12 months from the date of
submission.
However, if HMRC suspects something more serious, they can raise a discovery
assessment.
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The time limit for raising this discovery assessment depends on the reason of
suspicion of HMRC (mentioned below).
After HMRC raises a discovery assessment, taxpayers can raise an appeal within 30
days.
Taxpayers claim for overpayment relief 4 years from the end of the tax year
HMRC can open an enquiry 12 months from submission of the return
HMRC can raise a discovery 

assessment
— No careless or deliberate behaviour 4 years from the end of the tax year
— Tax lost due to careless behaviour 6 years from the end of the tax year
— Tax lost due to deliberate behaviour 20 years from the end of the tax year
Taxpayers right of appeal   30 days from the assessment — appeal

against an assessment in writing
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Syllabus A6. Penalties for non-compliance
Syllabus A6a. Calculate late payment interest and state the penalties that can be charged.
Penalties for incorrect returns
The amount of penalty is based on the amount of tax understated, but the actual
penalty payable is linked to the taxpayer’s behaviour, as follows:
1. There will be no penalty where a taxpayer simply makes a genuine mistake.
2. There will be a moderate penalty (up to 30% of the understated tax) where a tax
payer fails to take reasonable care.
3. There will be a higher penalty (up to 70% of the understated tax) if error is
deliberate.
4. There will be an even higher penalty (up to 100% of the understated tax) where
the error is deliberate and there is also concealment of the error.
A penalty will be substantially reduced where the taxpayer makes disclosure,

especially unprompted disclosure to HMRC.
Late payment for balancing payments
The late payment penalty for balancing payments are 5% for tax unpaid 30 days
after payment due date, further 5% if still unpaid after 6 months and a further 5% if
still unpaid after 12 months.
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Late payment interest
If a tax liability is paid late, in addition to the late payment penalty, interest will be
charged.
You will be told the rate of interest in the exam
If the liability is outstanding for less than a full year, then this will be apportioned
accordingly.
For example a corporation tax liability of £300,000 was outstanding for 4 months.
How much late payment interest will be payable assuming a rate of 3%?
4/12 x 3% x £300,000 = £3,000
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Syllabus B: Income Tax And Nic Liabilities
Syllabus B1. The scope of income tax.
Syllabus B1a. The residence of an individual
How is the residence of an individual determined?
3 Stages to determine UK residency
If a person is UK resident in a particular tax year they must pay income tax on
their UK and overseas income.
If a person is not UK resident, then they do not pay UK income tax on their
overseas income, they only pay on their UK income.
The determination of whether a person is UK resident is based on 3 major

stages in the following order:
1. Is the person automatically resident overseas? (2 tests)
2. Is the person automatically UK resident? (3 tests)
3. None above satisfied, use table.
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STAGE 1: Is the person automatically resident overseas?
If one of the two tests below are satisfied, then the person is automatically resident
overseas and will only pay UK income tax on his UK income.
Test 1 – Short stay in UK Test 2 – Employed abroad
In UK for less than 16 days in the tax Employed overseas and visits UK for
year. less than 91 days during the tax year.
OR
In UK for less than 46 days in tax year

and never previously UK resident.
Illustration:
Shayna is in the UK for 40 days during the tax year. She was not previously UK
resident.
Will she be considered to be UK resident for this tax year?
Solution:
No - Shayna satisfies Test 1 – Short stay in the UK. This is because she is in the UK
for less than 46 days and has not been UK resident previously.
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STAGE 2: Is the person automatically UK resident?
If any of the tests below are satisfied, then the individual is automatically UK
resident and will pay UK income tax on his worldwide earnings. If none of the above
tests are met, then there are detailed rules to follow to determine residency.
Test 2 – Nowhere else to Test 3 - Employed in the

Test 1 - Long stay
go UK
Spends at least 183 days Employed full time in the

Only home is in the UK
in the UK in the tax year UK.
Illustration:
Hemant is in the UK for 60 days during the tax year, his only house is in the UK.
Will he be considered to be UK resident for this tax year?
Solution
Yes - Hemant will be considered to be UK resident for this tax year because he
satisfies Test 2 – nowhere else to go.
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The foundation of the detailed rules is based on:
Was the individual previously UK resident?
How many days did they spend in the UK in this tax year?
Do they have the amount of UK ties necessary to be considered UK resident in this

tax year?
Days in the UK Previously UK resident Not previously UK resident
Less than 16 days Automatically not UK resident Automatically not UK resident
16-45 Resident if 4 UK ties Automatically not UK resident
46-90 Resident if 3 UK ties Resident if 4 UK ties
183 days Automatically UK resident Automatically UK resident
Ties
1. Close family in the UK (Wife, child).
2. House in UK which is used during the tax year. (at least 1 night during the tax
year)
3. In the UK for more time than any other country.
4. In UK for more than 90 days in either of the previous 2 tax years.
5. Doing substantive work in the UK. (40 days or more)
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Illustration:
Candice has always been UK resident.
During this tax year she purchased a villa in India where she lived for most of this
tax year.
She has a house in the UK where her husband and children stay. During this tax
year she spent 100 days in the UK.
Will Candice be considered to be UK resident in this tax year?
Solution:
Yes - Candice will be considered to be UK resident.
This is because:
1. She spent 100 days in the UK. (Therefore: Resident if 2 UK ties)
2. She was previously UK resident.
3. She has 2 ties in the UK, close family and a house.
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Syllabus B2. Income from employment
Syllabus B2a. The factors - employment or self-employment
Employed or self-employed?
Why do we want to know whether an individual is employed or self

employed?
We want to know whether an individual is employed or self employed because there

is a difference in the tax allowable deductions for the employed and the self
employed.
Additionally, there is a difference in the National Insurance Contributions payable by

the employed and the self employed.
How to determine whether an engagement is treated as employment or self

employment?
The main test of an employment as opposed to self-employment is the existence of

a contract of service (employee) compared with a contract for services (self
employed).
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If there is no contract of service, the following suggest employment:
Factors Explanation
If the individual holds an integral position (e.g.) chairman of the

Integral
organisation, they must be employed. You cannot hold key positions
Position
and be self employed.
An employee will be paid his regular wage regardless of the
Risk organisation making a profit or not. He does not bear the financial
risk.
The employer controls the manner and method of work, the
Control
employee must obey.
Legal The employee is entitled to benefits normally provided to employees,

rights for example: holiday pay and sick pay.
Equipment The employee does not provide his own equipment.
The employee is obliged to work personally and exclusively for the

Exclusivity
employer, and cannot hire their own helpers.
Illustration:
Liam is a driver of luxury cars and started working for Super Cars Ltd on 6 April.
He works a set number of hours each week and is paid an hourly rate for the work
that he does.
When Liam works more than the set number of hours, he is paid overtime.
Liam is under an obligation to accept the work offered by Super Cars Ltd., and the
work is carried out under the control of the customer services manager.
All the vehicles used by Liam are provided by Super Cars Ltd.
What are the factors that indicate that he should be treated as an employee?
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Solution:
Risk – none. He works for a set number of hours and is paid at an hourly rate. If he
works more than the set number of hours, he is paid overtime.
Control – the customer services manager controls the manner in which the work is
done.
Equipment – all of the cars driven are provided by Super Cars Ltd.
Exclusivity – Liam must do the work provided to him personally.
Conclusion:
Liam will pay income tax under the employment income rules.
Liam will also pay Employee Class 1 NIC.
Super Cars Ltd will pay Employer’s Class 2 NIC and Class 1 A NIC on behalf of
Liam.
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Syllabus B2b. Recognise the basis of assessment for employment income.
Which employment income to tax in a tax year?
Emoluments
Emoluments are amounts that an employee will pay income tax and national
insurance contributions on.
They include:
• salary
• bonus
• benefits
Emoluments are taxable on the earlier of 2 dates:
1 When a person becomes entitled to payment of the earnings
2 When payment is made
Example
Peter became entitled to be paid a bonus on 31 January 2019 (Tax year 18/19).
He was actually paid the bonus on 30 April 2019 (Tax year 19/20).
• He should pay income tax on it in the tax year 18/19.
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Illustration:
Frank is employed in Cow plc and his annual salary is £36,000.
On 06/01/19 his annual salary was increased to £42,000.
Note His salary is due for a tax year which runs from 6th April - 5th April and
salaries accrue evenly over a tax year.
His salary has changed in between the tax year.
Therefore, the salary per month must be calculated and then totalled to give a figure
for the entire year.
Additionally, Frank receives the following bonuses based on the company’s results:
For the year ending 31/12/2017 £3000. He became entitled to the bonus on
31/12/17 and was paid the bonus on 31/5/18.
For the year ending 31/12/2018 £10,000. He became entitled to the bonus on
31/12/18 and was paid the bonus on 31/5/19.
• Required:
Calculate the taxable income in 2018/19.
Solution:
His salary accrues evenly over the year from

06/04/2018 - 05/04/2019, therefore:
For the 9 months (06/04/18 - 05/01/19), he will be £36,000 * 9/12 = £27,000
entitled to:
For the remaining 3 months (06/01/19 - 05/04/19), £42,000 * 3/12 = £10,500
he will be entitled to:
Salary in Total 27 + 10.5 = £37,500
His bonus of £3,000 will be taxed in the tax year 17/18 as he became entitled to it
on 31 December 2017.
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His bonus of £10,000 will be taxed in the tax year 18/19 as he became entitled to it
on 31 December 2018.
Conclusion:
Salary= £37,500
Bonus = £10,000
Total income = £47,500
Less personal allowance = (£11,850)
Taxable income = £35,650
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Syllabus B2c. Income assessable
What is taxable employment income?
Employment income to be assessed for tax include:
1. Salary
2. Wages
3. Bonus
4. Commission
5. Benefits in kind - there are 2 types of benefits - taxable benefits and exempt
benefits.
Only taxable benefits will have income tax paid on them, exempt benefits will
not.
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Syllabus B2d. Allowable deductions
Expenses that you are allowed to deduct from

employment income
Total employment income calculation:
Salary x
Commission x
Benefits in kind x
= Gross emoluments x
Less allowable deductions (x)
= Total employment income x
Allowable deductions:
1. Contributions to an occupational pension scheme.
Note that Payments to a personal pension scheme are NOT allowable

deductions.
More in Topic Pensions.
2. Travel, subsistence and entertaining incurred wholly, exclusively and necessarily

in the performance of duties of employment
3. Subscription to a professional body (e.g.) ACCA
4. Note that payments for gym memberships are NOT allowable deductions.
5. Deficit on a mileage allowance Topic The Authorised approved mileage

allowances.
6. Donations to charity
Note that Donations to political parties are not allowable deductions.
7. Capital allowances are available for plant and machinery provided by an

employee for us in his duties Topic Capital allowances
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Illustration:
Paresh had a salary of £30,000.
He paid £500 for his ACCA subscription.
He also paid £1,000 for travel to Scotland for business purposes entirely.
Finally, he paid £1,000 into a charity under a payroll deduction scheme.
What will his employment income be?
Solution:
Salary £30,000
Less:
ACCA subscription (£500)
Business travel expense (£1,000)
Gift aid donation (£1,000)
Employment income £27,500
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Syllabus B2e. Discuss the use of the statutory approved mileage allowances.
The authorised mileage allowances
This arises when an employee uses their own car on employer’s business.
• The employee is entitled to receive this mileage allowance from their employer to
compensate for additional costs of running the vehicle due to business miles.
• The amount that can be received tax free is set by HMRC.
Anything in excess that is received from the employer will be taxable, and
anything below the allowance that is received from the employer will be
deductible.
Motor car Up to 10,000 miles Above 10,000 miles
Authorised mileage allowance 45p 25p
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Illustration:
Kerry has a salary of £20,000 per annum.
She uses her own car for employer’s business, the mileage allowance received from
her employer is 50p per mile.
She drove 12,000 business miles in the tax year.
• What is her taxable income?
Solution:
Mileage allowance received = (12 000*0.5) = £6,000
Authorised mileage allowance = (10 000*.45) + (2 000*0.25) = £5,000
Therefore, £1,000 excess will be taxable
Conclusion:
Salary £20,000
Unauthorised mileage allowance £1,000
Total employment income £21,000
Less personal allowance (£11,850)
Taxable income £9,150
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Illustration:
Instead, Kerry receives 35p per business mile.
What is her taxable income?
Solution:
Mileage allowance received = (12 000*0.35) = £4,200
Authorised mileage allowance = (10 000*.45) + (2 000*0.25) = £5,000
Therefore, the deficit of £800 will reduce her employment income.
Salary £20,000
Mileage allowance deficit (£800)
Total employment income £19,200
Less personal allowance (£11,850)
Note Travelling between home and work does not count as business miles. This is
considered to be ordinary commuting.
Note Travelling to a temporary workplace will count as business miles. A temporary

workplace is one that you attend irregularly or for less than 24 months
Note Travelling between work and client's offices will count as business miles.
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Syllabus B2f. Explain the PAYE system, how benefits can be payrolled, and the purpose of
form P11D.
The system for paying income tax for employed

individuals.
How does PAYE work?
Most tax in respect of employment income is deducted under the PAYE system.
The objective of the PAYE system is to collect the correct amount of tax over the
year.
An employee’s PAYE code is assigned to ensure that their allowances etc. are given
evenly over the year.
The PAYE system applies to most cash payments, other than reimbursed expenses,
and to certain non-cash payments.
• In addition, PAYE applies to round sum expense allowances and payments

instead of benefits.
It is the employer’s duty to deduct income tax and national insurance

contributions from the pay of his employees.
If he fails to do this, he must pay over the tax which he should have deducted
and the employer may be subject to penalties.
It is now possible for an employer to choose to include most taxable benefits

within their normal payroll, with the employee’s income tax liability being
collected under PAYE. This is referred to as the payrolling of benefits.
Living accommodation benefits and beneficial loans must still be reported on the
P11D.
Any “Payrolled” benefits do not now have to be reported on the P11D. The P11D
is a form submitted by the employer that lists the benefits provided to an
employee in a tax year.
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PAYE codes
An employee’s PAYE code indicates the amount of tax free pay he is entitled to.
The PAYE code will include the employee’s personal allowance and any allowable
deductions and be restricted be various taxable amounts.
• The codes are determined by HMRC.
The employer must act according to the code unless further notified by HMRC,
even if the employee appeals against the code.
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Syllabus B2g. Explain and compute the amount of benefits assessable
Use benefit
If an employer lends an asset (e.g. a computer) to an employee, and the employee

uses this asset privately, then the employee must pay income tax on this benefit.
Examples of assets lent:
1. Computers
2. TV sets
3. Boats
4. Furniture
5. Motorcycles
How much income tax needs to be paid on this benefit?
1. We need to find the value of the benefit in money terms.
2. On this money value, we will apply the income tax rate.
Monetary value of benefit
1. We must find the market value of the asset when it was first given to the
employee.
2. Multiply this by 20%.
3. Multiply this value by the number of weeks/months the employee had access to
the asset.
For example, multiplying by 9/12 means that the employee had access to the
asset for 9 out of 12 months in the tax year.
4. Deduct any rent that the employee pays to the employer to use the asset.
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Proforma:
Assessable benefit: 20% * market value * x/12 X
Less: Rent paid to employer to use asset (X)
Use benefit X
Illustration:
Manish’s employer purchased a dishwasher for Manish’s use on 1 April costing

£900. Manish paid his employer £150 to use the dishwasher for the tax year.
What use benefit will be assessable on Manish?
Assessable benefit: 20%*£900*12/12 = 180
Less: Rent paid to employer to use asset (150)
Use benefit 30
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Gift benefit
This benefit is linked with the use benefit explained above.
After an employer has given the employee an asset to use privately, the employer
may then decide to give this asset to the employee as a gift.
For example, an employer gave his employee a computer to use for private
purposes for 2 years. After 2 years, the employer then decided to give this
computer to the employee as a gift.
The employee will need to pay income tax on the money value of gift benefit.
How to calculate the money value of this gift?
The money value will be the higher of 2 figures:
Figure 1:
• Find the cost to the employer (the original market value of the asset).
• Deduct any use benefits that the employee has already paid income tax on.
For example, if the computer cost the employee £750 2 years ago when he
purchased it, and the use benefit that the employee paid income tax on for each
year was £150, then the gift benefit will be:
Original market value £750
Year 1 (£150)
Year 2 (£150)
Gift benefit £450 - Income tax will be paid on this figure.
Figure 2:
• Find the market value of the asset at the date of the gift to the employee.
For example, after 2 years, if the computer had a market value of £500, the
benefit would be:
Market value at date of gift £500
Therefore, the Gift benefit is £500
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Note that we must take the higher figure out of Figure 1 and Figure 2:
• Figure 1: £450
• Figure 2: £500
Therefore, the gift benefit in this case would be £500
Illustration:
Manish’s employer purchased a dishwasher for Manish’s use on 06/04/2017,

costing £900.
On 06/04/2018 Manish was given the dishwasher by his employer. It’s market
value then being £150.
• What gift benefit will be assessable on Manish?
Solution:
Use benefit assessed in 17/18:
Use benefit assessed 20% * £900 * 12/12 = 180
Use benefit 180
Gift benefit assessed in 18/19:
Figure 1: £
Market value when first provided 900
Less: Use benefit already assessed (180)
Gift benefit 720
Figure 2: £
Market value on date of gift 150
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Gift benefit 150
Higher of:
Figure 1 : £720
Figure 2 : £150
The gift benefit that will be assessed on Manish is £720 
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Living accommodation benefit
If an employer provides an employee with a home to live in, without the home being
necessary for the employee to do his or her job, the employee will have to pay
income tax on a living accommodation benefit. 
 
If the home is necessary for the employee to do his or her job, then this benefit will
not arise.
When is a home necessary for an employee to do their job?
Examples of when a home is necessary for an employee to do their job properly

include:
1. A nanny needs to live in the same home that their child lives in to do their job.
Otherwise, they will not be able to do their job. In this case, providing
accommodation will be considered to be work related and a benefit will not
arise.
2. Someone in an army needs to live at the army base, otherwise they will not be
able to do their job.
3. A hotel-worker being provided living accommodation at the hotel will help them
perform their duties better.
4. If there is a special threat to the employee’s security and he lives in the

accommodation as part of special security arrangements, this will ensure that he
is safe to do his job. For example, the Prime Minister or President.
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How to calculate the living accommodation benefit?
• If the employer owns the home, then the home’s annual value will be used.
• If the employer is renting the home, then the amount of the benefit is the higher
of the rent paid by the employer and the annual value.
• The amount paid by the employee to the employer will be deducted to give the
living accommodation benefit.
Illustration - If the employer is renting the home
Ashok, a sales manager, lives in a flat that his employer has given him to live in.
The employer pays rent of £5,000 per annum for the flat, and Ashok pays the
employer £1,000 per year to use the flat. The annual value of the flat is £4,900.
• What is the living accommodation benefit that Ashok will have to pay income tax
on?
Solution:
Rent paid by employer (as this is

5,000
higher than annual value)
Less: Rent paid by employee to employer (1,000)
Living accommodation benefit 4,000
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Illustration - If the employer owns the home
Vandana, a marketing manager, lives in a flat owned by her employer.
The flat has an annual value of £4,000 and she pays the employer £500 per annum
to use the flat.
• What is the living accommodation benefit that she will have to pay income tax
on?
Solution:
£
Annual value 4,000
Less: Rent paid by employee to employer (500)
Living accommodation benefit 3,500
Additional benefit
There is an additional benefit that can arise if the employer owns the home and it
cost the employer more than £75,000 when he purchased it.
How to calculate the money value of the additional benefit?
Did the employer buy the home more than 6 years before he gave it to the
employee to use?
1. No 
(Cost - £75,000) * Official rate of interest (2.5% for 18/19) = Additional benefit
Note 
The Cost will include the actual cost of the home plus any amount spent on
extending/enhancing the home before the start of the current tax year.
2. Yes
(Market value - £75,000) * Official rate of interest = Additional benefit
Note: 
The market value of the home when it was first given to the employee to be used
(the purchase price is not used here).
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Illustration - LESS than 6 years
She has occupied the flat for the last 5 years.
The employer bought this flat 5 years ago and paid £85,000.
4 years ago, he spent £10,000 to add a garage onto the flat.
What additional benefit that will she have to pay income tax on?
Solution:
(Cost - £75,000) * Official rate of interest (2.5%) = Additional benefit
(£85,000 + £10,000) = £95,000 (cost plus enhancement expenditure)
(£95,000 - £75,000) *2.5% = £500
£500 is the additional benefit that Vandana will have to pay income tax on.
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Illustration - MORE than 6 years
She has occupied this flat for the last 7 years, and moved in when the flat had a
market value of £100,000.
The employer bought this flat 15 years ago and paid £85,000.
What additional benefit that will she have to pay income tax on?
Solution:
(Market value - £75,000) * Official rate of interest = Additional benefit
(£100,000 - £75,000) *2.5% = £625
£625 is the additional benefit that Vandana will have to pay income tax on.
Conclusion:
The normal benefit and the additional benefit are added together to give the total
living accommodation benefit that the employee will pay income tax on.
• For example, Vandana will either pay income tax on:
£3,500 + £500 = £4,000 (Flat was not purchased more than 6 years ago)
or
£3,500 + £625 = £4,125 (Flat was purchased more than 6 years ago)
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Motor cars
If an employer gives an employee a motor car to use for business and private
purposes, then a benefit will arise which income tax must be paid on by the
employee.
• If there is no private use of the car there is no taxable benefit
• The benefit is a percentage of the car’s list price.
The list price of the car will be given to you in the exam.
The list price includes the list price of any accessories fitted to the motor car.
If an employee pays a capital amount towards receiving the car from the
employer, then this list price will be reduced by this capital contribution.
The list price can be reduced by a maximum of £5,000 - even if the employee
has contributed more than this, it will only be reduced by £5,000.
For example the list price of a car is £15,000 and an employee has made a
capital contribution towards it of £7,000 - the list price of the car will only reduce
to £10,000 (£15,000 - £5,000).
Then, this list price will be multiplied by a percentage to give the amount of
benefit to be taxed on.
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• How to determine the percentage?
CO2 emissions Percentage Petrol

50g/km or less 13%
51 to 75 g/km 16%
76 to 94 g/km 19%
95 g/km 20%
> 95g/km Add an additional 1% for every complete 5g/km above 95 g/
km
Maximum 37%
percentage
The percentage rates are increased by 4% for diesel cars.
The maximum percentage that can be used is 37%.
Reductions
So far, we have calculated the benefit as:
(List price-capital contribution) * % = Car benefit
This benefit can be reduced by 2 things:
1. If the motor car is unavailable for periods of at least 30 days of the tax year for
example if the car was not available to the individual for one month in the tax
year, then the benefit will be multiplied by 11/12 - because the car was only
available for 11 months in the tax year, and
2. Where the employee makes a contribution to the employer for the use of the
motor car, this is also known as making a contribution towards the running costs
of the car.
Note contributing towards the running costs of a car are different to the capital
contribution to reduce the list price of a car.
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For example An employer gave an employee a motor car to use for private and
business purposes that had a list price of £17,000 - the employee made a
capital contribution of £8,000 towards the list price. The employee also
contributed £1,200 per annum towards the running costs of the car.
The taxable benefit would be:
List price less capital contribution: £17,000 - £5,000 (max) = £12,000
£12,000 * % = Benefit - £1,200 ( running cost contribution). = Taxable benefit.
Pool cars
The use of a pool car does not result in a company car benefit.
A pool car is one provided for the use of any employee to use for business
purposes and is kept at the business place of work..
Illustration:
Arora plc provided the following employees with company motor cars:
• 1) Lina was provided with a new diesel powered company car on 6 August.
The motor car has a list price of £13,500 and an official CO2 emission rate of
112 grams per kilometre.
Lina had an accident in October and was unable to use the car for 2 months,
however the car was always available to her to use.
• 2) Naina was provided with a new petrol powered company car throughout the
year.
• 3) Falak was provided with a new petrol powered company car throughout year.
Falak paid Arora plc £1,200 for the use of the motor car.
• 4) Jayna was provided with a new petrol powered company car throughout the
year.
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The motor car had a list price of £16,000 and an official CO2 emission rate of
• 5) Saayan was provided with a new diesel car throughout the year.
The motor car had a list price of £11,000 and an official CO2 emission rate of
Required: 
Calculate the taxable benefit for Lina, Naina, Falak, Jayna and Saaya.
Solution:
1) Lina
was provided with a diesel powered company car. The CO2 emissions are 112g/km.
The CO2 emissions are above 95g/km, so the relevant percentage is 27% (20% +
4%(diesel car) + 3% (1% for every complete 5g/km above 95g/km ie 110-95 = 15 /
5 = 3%).
The CO2 emissions figure of 112 is rounded down to 110 so that it is divisible by
five.
The motor car was only available for 8 months during the year, so the benefit is
£2,340 (13,500 × 27% × 8/12).
Note that even if Lina was unable to use the car herself for 2 months, the fact that
the car was available for her to use at all times means that the benefit will not be
reduced because of these 2 months.
2) Naina
The CO2 emissions are above the base level figure of 95 grams per kilometre.
The CO2 emissions figure of 177 is rounded down to 175 so that it is divisible by
five.
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The base level percentage of 20% is increased in 1% steps for each complete 5
grams per kilometre above the base level,
so the relevant percentage is 36% (20% + 16% (175 – 95 = 80/5)). The motor car
was available throughout the year so the benefit is £5,904 (16,400 × 36%).
3) Falak
The CO2 emissions are 239g/km.
The CO2 emissions are above the base level figure of 95 grams per kilometre.
The relevant percentage is 48% (20% + 28% (235 – 95 = 140/5)), but this is
restricted to the maximum of 37%.
The motor car was available throughout the year so the benefit is £7,162 (22,600 ×
37% = 8,362 - 1,200).
The contribution by Falak towards the use of the motor car reduces the benefit.
4) Jayna
The CO2 emissions are between 76 grams per kilometre and 94 grams per
kilometre so the relevant percentage is 19% as it is a petrol car.
The benefit is £16,000 × 19% = £3,040
5) Saaya
The CO2 emissions are between 51 grams to 75 grams per kilometre and the
relevant percentage is 20% (16% + 4% (diesel car)).
The benefit is £11,000 × 20% = £2,200
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Fuel provided for private use
1. The car benefit also covers the running costs of the car BUT does not take
account of fuel provided for private use.
2. The amount of fuel benefit is computed on a base figure of £22,400 multiplied by

the percentage used for calculating the car benefit.
The fuel benefit is reduced proportionately where private use fuel is withdrawn
(and not reintroduced during the year) or the car is only given part way through
the tax year.
3. No reduction is made if the employee contributes towards the cost of petrol for
private use.
If he pays for all fuel used for private motoring the charge is cancelled.
Illustration:
Calculate the fuel benefit for Lina, Naina, Falak, Jayna and Saaya assuming also
that Falak pays Arora plc £600 during the year towards the cost of private fuel,
although the actual cost of this fuel was £1,000.
Solution:
Lina
£23,400 × 27% × 8/12 = £4,212 

The fuel was not available for first 4 months
Naina
£23,400 × 36% = £8,424
Falak
£23,400 × 37% = £8,658
There is no reduction for the contribution made by Falak since the cost of private
fuel was not fully reimbursed.
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Jayna
£23,400 × 19% = £4,446
Saaya
£23,400 × 20% = £4,680
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Vans and heavier commercial vehicles
1. Where an employee uses an employer’s van for journeys between home and
work and other private use is insignificant there is no benefit.
2. Where private use is not insignificant the tax charge is £3,350 p.a.
3. An additional charge is made for fuel provided for unrestricted private use equal
to £633 p.a.
4. Both benefits are time apportioned if the van is unavailable to the employee for
30 days or more during any part of the tax year.
Van benefit
If an employer gives an employee a van to use for private journeys, if the amount of
usage is not significant, then no benefit will arise that an employee needs to pay
income tax on.
However, if the private usage of the van is significant, then a benefit will arise that
an employee will pay income tax on
How to calculate the money value of the benefit?
The money value is a flat tax charge of £3,350 per annum.
Therefore, if the van was only provided for 9 months in the tax year, then the tax
charge would be £3,350 * 9/12 = £2,512
How to calculate the monetary value of the private fuel benefit?
If the employer also provides the employee with fuel for their private journeys,
another benefit will arise that the employee must pay income tax on.
The money value is a flat tax charge of £633 per annum.
Therefore, if the fuel for private journeys were only provided for 9 months in the tax
year, then the benefit for the private fuel provided would be £633*9/12 = £475
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Illustration:
An employee uses his employer’s van significantly for private journeys throughout
the tax year.
The employer also pays for the fuel for the employee’s private journeys.
What taxable benefit would arise because of the employer paying for private fuel?
Solution:
£633
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Beneficial Loan Benefit
This benefit arises when an employer gives an employee a loan at an interest rate
that is cheaper than the official interest rate (2.5%).  
 
For example, a beneficial loan benefit would arise if an employer gave an employee
a £15,000 loan at 1% per annum.
This is because 1% is cheaper than the 2.5% official interest rate.
Carefully note – if the loan is £10,000 or less, no beneficial loan benefit will arise at
all.
If the loan is above £10,000 – then the full benefit will arise
Proforma
Money value of the loan benefit X
Less: Interest actually paid by employee (X)
Beneficial loan benefit X
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How to calculate the monetary value of the loan benefit?
There are 2 ways to calculate the monetary value of the loan benefit.
The average method applies automatically but the taxpayer or HMRC can elect for
the strict method if it is more beneficial for them
eg the taxpayer will elect when the strict method produces a smaller benefit figure
and HMRC can elect of the strict method gives a MUCH higher benefit figure.
1. Average method
(Loan outstanding at start of year + Loan outstanding at end of year)/2 * Official

interest rate = £x
2. Strict method
You must find the interest payable for the actual loan outstanding at all times. (Much
easier to understand with an example)
Illustration - Average method
Vijay was given a loan of £35,000 by his employer on 06/04/2018. Interest is

payable on this loan at 1% per annum.
On 01/06/2018, Vijay repaid £5,000 of the loan and on 01/12/2018, Vijay repaid
another £15,000 of the loan.
The remaining £15,000 was still outstanding at 05/04/2019.
• What is the taxable benefit of the beneficial loan using the average
method?
Solution:
Average method £
Money value of the loan benefit (£35,000 + £15,000)/2 * 2.5% 625
Interest actually paid by employee

Less: (258)
(w1)
Beneficial loan benefit 367
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(W1) - Interest paid by Vijay on loan
From 06/04/2018 (2 months) Vijay paid 1% interest on £35,000 £35,000 * 1% *

– 01/06/2018 loan outstanding = 2/12 = £58.3
From 01/06/2018 (6 months) Vijay paid 1% interest on £30,000 £30,000 * 1% *

– 01/12/2018 loan outstanding (£5,000 was repaid)= 6/12 = £150
(4 months) Vijay paid 1% interest on £15,000

From 01/12/2018 £15,000 * 1% *
loan outstanding (another £15,000 was
– 05/04/2019 4/12 = £50
repaid)=
£367 – is the beneficial loan benefit that Vijay would have to pay income tax on IF
the average method was used.
Illustration - Strict method
Vijay was given a loan of £35,000 by his employer on 06/04/2018. Interest is

payable on this loan at 1% per annum.
On 01/06/2018, Vijay repaid £5,000 of the loan and on 01/12/2018, Vijay repaid
another £15,000 of the loan.
The remaining £15,000 was still outstanding at 05/04/2019.
• What is the taxable benefit of the beneficial loan using the strict method?
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Solution:
Strict method £
Monetary value of the loan benefit Vijay should have paid (w1) 646
Vijay actually paid (figure from
Less: (258)
previous example)
Beneficial loan benefit 388
Vijay should have paid: £146+£375+£125 = £646
£35,000 *
From 06/04/2018 (2 months) Vijay should pay 2.5% interest on
2.5% * 2/12 =
– 01/06/2018 £35,000 loan outstanding =
£146
(6 months) Vijay should pay 2.5% interest on £30,000 *

From 01/06/2018
£30,000 loan outstanding (£5,000 was repaid) 2.5% * 6/12 =
– 01/12/2018
= £375
(4 months) Vijay should pay 2.5% interest on £15,000 *

From 01/12/2018
£15,000 loan outstanding (another £15,000 2.5% * 4/12 =
– 05/04/2019
was repaid) = £125
Conclusion
Vijay’s loan benefit with the average method is : £367
Vijay’s loan benefit with the strict method is : £388
Which one will he pay income tax on?
Vijay will pay tax on the loan benefit arising from the average method - £367 - as
this is the automatic method and the strict method is not so different that HMRC
would elect for it.
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Summary
1. A beneficial loan is one made to an employee below the official rate of

interest (2.5%)
2. The benefit is the interest on the loan at the official rate, less any interest
actually paid by the employee.
3. There is no benefit if the loans do not exceed £10,000 in total at any time
in the tax year
4. The benefit is calculated using the average method or the strict method
Average method
This uses the loan outstanding at the beginning and the end of the tax year.
If the loan is taken out or paid back during the tax year, that date is used instead
of the beginning or end the tax year.  
Strict method
This calculates benefit day by day on the balance actually outstanding.
Either the taxpayer or HMRC can elect to use the strict method.
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Other benefits
Generally, the basis for calculating the taxable value of any other benefit is the cost
to the employer.
There are various benefits which are exempt or partially exempt.
Although correctly identifying the tax treatment of such a benefit may result in only a
half mark or one mark, it is important that you correctly identify such benefits so
that time is not wasted with unnecessary calculations.
Finally, there is no exhaustive list of benefits, but you must keep in mind that if an
employee is using something for personal purposes and the employer is paying for
it, then the benefit that is likely to arise is the cost to the employer.
For example if an employer provides education for an employee's child that cost the
employer £600, then the benefit that will arise on the employee is the cost to the
employer of £600.
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Illustration:
Vary plc provides its employees with various benefits.
The benefits were provided:
1) Denzil was provided with two mobile telephones.
The telephones had each cost £250 when purchased by Vary plc in January.
The company paid for all of Denzil’s business and private telephone calls.
2) Emily had her health club membership fee of £710 paid for by Vary plc
3) Frederick spent 5 nights overseas on business for Vary plc.
The company paid him a daily allowance of £10 to cover the cost of personal
expenses such as telephone calls to his family.
4) Grace was paid £11,000 towards the cost of her removal expenses when she
permanently moved to take up her new employment with Vary plc, as she did not
live within a reasonable commuting distance.
The £11,000 covered both her removal expenses and the legal costs of acquiring
a new main residence.
5) Hillary’s three year old daughter was provided with a place at Vary plc’s
workplace nursery.
The total cost to the company of providing this nursery place was £10,800 (240
days at £45 per day).
6) June had the use of Vary plc’s company gym which is only open to employees of
the company.
The cost to Vary plc of providing this benefit to June was £340.
7) Kristin was provided with free meals in Vary plc’s staff canteen.
The total cost of these meals to the company was £1,460.
The canteen is available to all of the company’s employees.
8) Larry regularly works from home two days per week, and was paid an allowance
of £192 (48 weeks at £4 per week) to cover the extra light and heat costs that
were incurred due to this home working.
9) Marge was given a watch valued at £750 as an award for her 20 years of
employment at Vary plc.
10) Nile had £440 of her medical costs paid for by Vary plc.
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She had been away from work for two months due to an injury, and the
recommended medical treatment was to assist her return to work.
What taxable benefits will arise on the employees? 
Solution:
1) Denzil
Providing one mobile phone to an employee does not result in a taxable benefit.
If additional mobile phones are provided to employees then 20% of the market
value of the phone will be the tax benefit assessed on the employee.
This is very similar to the use benefit
• The provision of one mobile telephone does not give rise to a taxable benefit.
• The taxable benefit for the use of the second telephone is £50 (250 x 20%).
2) Emily
• The benefit of the health club membership is the cost to Vary plc of £710.
3) Frederick
• Payments for private incidental expenses are exempt up to £10 per night when
spent outside the UK, so the allowance does not result in a taxable benefit.
• Note that the equivalent UK allowance is only £5 per night.
4) Grace
• Only £8,000 of the relocation costs is exempt, and so the taxable benefit is
£3,000 (11,000 – 8,000).
5) Hillary
• The provision of a place in a workplace nursery does not give rise to a taxable
benefit.
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6) June
• The use of a company gym does not give rise to a taxable benefit.
7) Kristin
• The provision of meals in a staff canteen does not give rise to a taxable benefit.
8) Larry
• Payments for home working are exempt up to £4 per week, so the allowance
does not result in a taxable benefit.
9) Marge
• A non-cash long-service award is not a taxable benefit if it is for a period of

service of at least 20 years, and the cost of the award does not exceed £50 per
year of service.
10) Nile
• The payment of medical costs of up to £500 does not result in a taxable benefit.
The exemption applies where medical treatment is provided to an employee to

assist them to return to work after a period of absence due to ill-health or injury.
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Syllabus B2h. Recognise the circumstances in which real time reporting late filing penalties will
be imposed on an employer and the amount of penalty which is charged.
RTI reporting
Employers must send income tax and NIC information to HMRC electronically every
time employees are paid, and make their PAYE payments electronically on the 22nd
of the month under the Real Time Information reporting system.
• There are penalties if submissions made during the tax year are made late,
though there is no penalty for the first month in a tax year that submissions are
paid late.
• Thereafter a monthly late filing penalty of between £100 and £400 is charged
depending on the number of employees.
An additional penalty of 5% of the tax and NIC due may be charged where the
submission is more than 3 months late.
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Syllabus: B3. Income from self-employment
Syllabus B3a. Basis of assessment for self employment income
The basis of assessment for self-employment income
The basis of assessment for a sole trader is the taxable trade profits (self-employed
income) for a 12 month period of account ending in a tax year.
The tax year runs from 6 April to 5 April. 

For example: The tax year 2018/19 runs from 6 April 2018 to 5 April 2019.
How are trading profits assessed to tax?
An individual can choose a date to end their accounts.
Whichever tax year that ending date falls into, the profits of that entire year will be
assessed in that tax year.
For example If an individual has a year ending of 30 November, then for the year
ending 30 November 2017 - this ends in the tax year 18/19 (06/04/18 - 05/04/19),
therefore the profits for that year ending 30 November 2018 will be assessed to tax
in the tax year 18/19.
This is very simple, it is known as the current year basis of assessment
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Syllabus B3b. Badges of trade
Badges of trade
These are used to help differentiate whether a person is trading or whether they
are selling their capital assets.
• The need to differentiate between these 2 types of transactions arises

because an individual who is trading will be assessed to income tax and
national insurance contributions based on self employment.
• However, an individual who is making sales of their capital assets will be

assessed to capital gains tax.
Badges
1. Subject matter
– anything can be trading stock but some items are more likely to be so than
others.
For example, a sale of a substantial number of toilet rolls is considered trading.
2. Length of period of ownership
– normally, trading stock is held for a short period of time.
For example an item that is held for less than 12 months will be considered
trading stock, but an item that is held for more than 12 months is likely to be
considered a capital asset.
3. Frequency of similar operations
– the more often a deal takes place, the greater the assumption that it is a
disposal of trading stock.
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For example if cars are bought and sold throughout the year, this will be
considered to be the trading of cars; however if there is a one time sale of one
car, then that is likely to be considered to be the sale of a capital asset.
4. Subsequent work
– change of character of an asset to make it more saleable is likely to be

indicative of trading.
For example, buying bulk marble for flooring and breaking it down into smaller
saleable units to use for individual floors, will be considered trading. Also,
advertising and making the item more marketable may be indicative of trading.
5. Circumstances
– sudden emergency, for example the urgent need of cash can negate the
presumption of trading.
For example selling a vintage car from a collection of vintage cars because of

the urgent need of cash will be considered to be the sale of capital assets.
This is because the motive is not to trade cars, it is to obtain cash quickly.
6. Motive
– intention of making a profit is necessary for trading.
For example, selling cars at a loss just to get immediate cash will not be
considered trading, but waiting to sell cars at a price that will earn a profit will
indicate trading.
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Illustration:
On 1 May, Tony was made redundant from his job as a marketing executive. Tony
decided to purchase a house for £180,000.
• Tony lived in the house as his main residence while living there he refurbished
it at a cost of £27,700, the renovations were completed on 10 August.
After completing the refurbishment, he was offered a new job and he immediately
put the house up for sale; and it was sold for £275,000 on 31 August.
• Tony had no other income or capital gains.
• Will this be considered to be trading income or a capital gain?
Solution:
Trading income or
Badge Reason
Capital Gain?
A house can be considered to be both a

Subject matter Trading + Capital
trading and capital asset.
Length of period of
Less than one year Trading
ownership
Frequency of similar
None before Capital
operations
Subsequent work Yes the house was refurbished Trading

Circumstance New job resulted in sale Capital
He earned a profit, however this was

Motive not his motive, he sold due to the new Capital
job.
As there are 4 badges pointing towards this being a capital gain and only 3 pointing
towards this being trading income, the profit made on sale will be considered to be
a capital gain.
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Syllabus B3c. Allowable expenditure
Adjusting the accounting profit
Allowable or Disallowable expenses?
Net Profit (PBIT) is adjusted to arrive at Trading profit
The main adjustments are to disallow for tax certain non-allowable expenses and to
exclude any non-trading income.
You must keep in mind that allowable expenses are usually expenses incurred
directly because of the business.
Personal expenses are not allowable.
The general rule is that expenditure not wholly and exclusively for the purpose of the
trade is not allowable
Net profit X
ADD BACK: Disallowable expenses X
LESS: Income assessable elsewhere (X)
LESS: Non-taxable income (X)
LESS: Capital allowances (X)
Tax adjusted trading profit X
Note:
When preparing this calculation, be careful to start with the NET profit per accounts.
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Disallowable expenses
The following expenses are disallowed by a business.
Therefore, if they have been deducted to arrive at net profit, they must be added
back.
For example, if the net profit is £10,000 and a disallowed expenses (£1,000) has
been deducted, then tax adjusted profit will be £10,000 + £1,000 = £11,000
• Capital expenditure including depreciation is not allowable
Note:  
Repair to an asset is revenue expenditure and is allowable
Improvement to an asset is capital expenditure and is not allowable
For example, purchasing a building to carry out trade in is a capital expense

and disallowed, but repairing this building is revenue expense and allowed.
• Reliefs 
- such as qualifying loan interest payments are not allowable as they are dealt
with as a deduction from total income.
For example, paying interest on a loan used to purchase inventory is known as

a qualifying loan interest, this is already deducted under a different heading in
the income tax computation, therefore it cannot be deducted again.
• Entertaining and gifts
Entertaining is disallowed, unless entertaining employees
For example, spending money to entertain suppliers of stock is disallowed.
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• Subscriptions and donations
National charity donations are not allowable
Charitable donations (made under Gift Aid) these are not allowable as tax relief is
given by extending the tax bands when calculating income tax.
Political donations - these are not allowable
• Fines and penalties
Disallowed unless the fine is paid on behalf of an employee and incurred whilst
on business
For example, if the employee receives a parking ticket whilst delivering goods to
a customer, this is generally allowable by HMRC
A fine for poor health and safety would not be allowable
• The owner’s salary, or drawings or interest on capital invested in the

business are disallowed
For example, if the owner of the business pays himself 10% interest on the
capital that he has invested of £200,000 - this £20,000 interest is disallowed and
cannot be deducted.
• Interest paid on overdue tax is not deductible and interest received on

overpaid tax is not taxable
For example, if interest is payable of £100 due to the late payment of tax - this
is not allowed and cannot be deducted to arrive at taxable income.
• Irrecoverable Debts (Trade debt write offs & allowances)
These are allowable; the tax treatment follows the accounting treatment
However non trade write offs are not allowable and so the expense is added
back.
For example if an item of trading inventory was sold on credit, but the actual
cash never came from the customer, then this is an irrecoverable debt which is
an allowable expense.
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For example a loan was made to an employee and then the employee left
without paying it back and it was written off, then this is an irrecoverable debt,
but it is disallowed because it is not a trading item.
Allowable expenses
If they have not been deducted to arrive at tax adjusted profit, they must be.
For example if net profit is £10,000 and there is an allowed expense of £1,000 that
has not been deducted, then the tax adjusted profit will be £10,000 - £1,000 =
£9,000
However, If they are correctly deducted, you will indicate these expenses with 0 in
the exam, because these items do not require adjustment.
For example if net profit is £10,000 and there is an allowed expense of £1,000 that
has been deducted, then the tax adjusted profit will be £10,000 and you will
indicate the allowed expense with 0.
1. Entertaining and gifts
Gifts to employees are allowable
Gifts to customers are only allowable if
• they cost less than £50 per person per year, and
• the gift is not food, drink, tobacco or vouchers exchangeable for goods and
services
• the gift carries a conspicuous advertisement for the business.
For example as Christmas presents, a sole trader can give his customers pens
with the company logo printed on them as gifts, as long as they cost less than
£50 per customer.
2. Subscriptions and donations
Trade or professional association subscriptions are allowable
Charitable donation (Not made under Gift Aid)
• if it is wholly and exclusively for trading purposes (e.g promoting business’

name), and it is to a local charity then it is allowable
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For example if a donation was made to a local charity and in return, at the
charity fundraiser, the business was shown as a sponsor/organiser, then this
would be an allowable expense.
3. Legal and professional charges
Allowable if connected with the trade and are not related to capital items
specifically allowed by statute:
• costs of obtaining loan finance
• costs of renewing a short lease (50 years or less)
For example if a loan was taken out to purchase inventory for trading, the legal
costs associated with obtaining this loan and the interest cost of the loan are
considered to be allowable expenses.
4. Interest payable
Interest paid on borrowings for trading purposes is allowable on an accruals

basis therefore no adjustment is needed.
For example if a loan was taken out to purchase inventory for trading, the
interest cost of the loan are considered to be allowable expenses.
5. Premium paid for the grant of a lease
The premium itself is disallowed as is any amortisation of the premium. The

allowable amount is:
(51 – n)/50 × Premium
An alternative calculation that you may have seen before is:
Premium - (2% x (n-1) x Premium)
n = number of years of the lease
This is shown in Topic Premiums granted for short leases
6. The private expenditure of the business owner
If the owner uses a car in the business and 20% of his mileages private, then
only 80% of motor expenses are allowable.
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However if the owner provides an employee with a car, and 20% of the mileage
is for private use by the employee, then the full amount of motor expenses is
allowable. (The employee is taxed on the private use under Employment
Income).
Private expenses example 

If the owner uses his own 4 storey premises as his place to conduct trading and
incurs expenses of £1,000, but he also lives on one of the floors, then 1/4 of the
expenses have been used for private purposes and £250 will be disallowed and
£750 will be allowed.
7. Any salary paid to the family of the owner of the business must not be
excessive. Only salary at the commercial rate for the work done is allowable.
For example John ran his business as sole trader and employed his wife Mary
to work for him as a sales executive. Other sales executives are paid £750 per
week, but his wife was paid £1,000. Only £750 will be an allowable expense,
because the remaining £250 will be considered to be excessive.
8. If an owner removes goods from the business for his own use he must add back
the item as a sale at market value, unless the owner accounts for the cost of the
goods in the business accounts then they need only add back the lost profit on
the item.
For example if the owner of a business takes goods from his store that cost him
£750 and would normally be sold for £1,000. He must either record the sale of
£1,000 and deduct cost of £750 - therefore increasing the profit of his store by
£250.
Or, he can simply add £250 to the net profit in his accounts.This would only work
if the owner has not included the purchase figure in the accounts.
Read the question carefully, for example, if the owner had included the item in
purchases, then the sale of £1,000 would need to be added to profits in order for
there to be an overall profit of £250 left to tax.
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9. Pre-trading expenditure
– allowable if it is expenditure incurred in the seven years before a business

commences to trade then it is treated as an expense incurred on the day the
business starts trading and follows the above rules.
This is shown in Topic Relief for pre-trading expenditure.
Illustration:
Sunny is self-employed running a retail shop.
Sunny’s statement of profit or loss for the year is as follows:
£ £
Gross Profit 140,880
Expenses:
Depreciation 4,760
Light and heat (Note 1) 1,525
Motor expenses (Note 2) 4,720
Professional fees (Note 3) 2,300
Rent and rates (Note 1) 3,900
Repairs and renewals (Note 4) 5,660
Sundry expenses (Note 5) 2,990
Wages and salaries (Note 6) 84,825
110,680
Net profit 30,200
Notes
Note 1: Private accommodation
Sunny and his wife live in a flat that is situated above the clothing shop.
Of the expenditure included in the statement of profit or loss for light, heat, rent and
rates, 40% relates to the flat.
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Note 2: Motor expenses
During the year, Sunny drove a total of 12,000 miles, of which 9,000 were for private
journeys.
Note 3: Professional fees
Professional fees are as follows:

£
Accountancy - including £250 in respect of a capital gains tax
700
computation.
Legal fees in connection with the purchase of the clothing shop 1,200
Debt collection 400
Included in the figure for accountancy is £250 in respect of a capital gains

2300
tax computation.
Note 4: Repairs and renewals
The figure of £5,660 for repairs and renewals includes £2,200 for decorating the
clothing shop, and £1,050 for decorating the private flat.
The building was in a usable state when it was purchased.
Note 5: Sundry expenses
The figure of £2,990 for sundry expenses, includes £640 for gifts to customers of
food hampers costing £40 each, £320 for gifts to customers of pens carrying an
advertisement for the clothing shop costing £1.60 each, £100 for a donation to a
national charity, and £40 for a donation to a local charity’s fete.
The fete’s programme carried a free advertisement for the clothing shop.
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Note 6: Wages and salaries
The figure of £84,825 for wages and salaries includes the annual salary of £15,500
paid to Sunny’s wife.
She works in the clothing shop as a sales assistant.
The other sales assistants doing the same job are paid an annual salary of £11,000.
Note 7: Goods for own use
During the year, Sunny took clothes out of the shop for his personal use without
paying or accounting for them.
The cost of these clothes was £460, and they had a selling price of £650.
Note 8: Plant and machinery
The capital allowances available for the year are £13,060.
(In the actual examination you may be required to prepare a capital allowances
computation and work out this figure. - see Topic Capital allowances)
Calculate Sunny’s tax adjusted trading profit.
Solution:
Tax adjusted trading profit
£ £
Net proft as per accounts 30,200

Add: Items debited in P&L – not allowed for tax purposes
Depreciation 4,760
Light and heat (40% × £1,525) 610
Motor expenses (9,000/12,000 × £4,720) 3,540
Personal tax work 250
Legal fees re purchase of new shop (capital) 1,200

Rent and rates (40% × £3,900) 1,560
Decorating private flat 1,050
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Gift of food hampers 640
Donation to national charity 100

Excessive remuneration to Sunny’s wife
(£15,500 – £11,000) 4,500

Own consumption (goods were included in purchases) 650
18,860
Adjusted trading profIt 49,060
Less: Capital allowances (given - note 8) (13,060)

Tax adjusted trading profIt 36,000
Note: Personal taxation expense has been added to the net profit because personal
expenses are not allowable.
Note: The purchase amount for the shop has been added back because this is not
a trading revenue expense, this is a capital expense.
Note: The donation to the local charity is allowable but the donation to the national
charity is not allowable.
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Syllabus B3d. Cash basis for small businesses
Small businesses are allowed to use the cash basis
if the business’ turnover does not exceed £150,000
This basis may result in a lower profit to be taxable, and therefore will reduce the
income tax payable.
• The business may continue to use the cash basis until the turnover exceeds
£300,000.
Calculation of profit
1. Total cash receipts of the business plus the sale of capital items are included.
For example If the business sells trading stock worth £25,000 and sells a capital
asset worth £50,000, both of these will be included to give a sales figure of
£75,000.
2. Total cash expenses of the business including purchase of capital items used for
business are deducted.
For example If the business purchases trading stock worth £25,000 and
purchases a capital asset worth £50,000, both of these will be included to give a
purchase figure of £75,000.
3. There is an exception of the purchase of motor cars, these will not be included in
the calculation of profit under the cash basis. (Vans purchased will be allowable).
For example, a motor car was purchased for £40,000. Even though this is a
capital item, this will not be included in the purchases of the businesses under
the cash basis.
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Illustration:
Sales for the period were ￡61,000 of which ￡4,000 was still owed by business
customers at the end of the period.
Inventory on May 31, amounted to ￡1,800.
Purchases and expenses of the period (all allowable) amounted to ￡29,000 of

which ￡2,000 was still owed to suppliers at the end of the period.
• What is profit according to the normal basis and cash basis?
Solution:
Normal Basis £
Revenues 61,000
Cost of sales (29,000 – 1,800) (27,200)
33,800
Cash Basis £
Receipts (61,000 – 4,000) 57,000
Payments (29,000 – 2,000) 27,000
30,000
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Understanding operation
The above calculation of profit only includes cash item, therefore things such as:
receivables, payables, opening and closing inventory will be ignored.
The business will only pay income tax on its cash profits.
Simple proforma to use:
Cash sales received in the tax year x

Cash sales of plant and machinery in the tax year (not car) x
Less:
Cash purchase of inventories in the tax year (x)
Cash allowable expenses in the tax year (x)
Cash purchases of plant and machinery in the tax year (x)
Motor expenses (Authorised mileage allowance) (x)
Tax adjusted trading profit
Motor expenses
The purchase capital expense of motor cars and the running expenses will not be
allowed.
Instead, under this scheme, to replace these expenses, an authorised mileage

allowance will be given.
This is:
1. For the first 10,000 business miles – 45p/mile
2. For any business miles after 10,000 – 25p/mile
For example, the motor car that was purchased for £40,000, drove 15,000 business
miles.
The allowable deduction will be (10,000 miles * 0.45) + (5,000 miles *0.25) = £5,750
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Illustration:
Barry commenced a new self employment business on 06/04/2018.
The following information relates to the year ended 05/04/2019:
1. Sales receipts of £81,000 with a further £750 owing on 05/04/2019.
2. Purchase of inventories of £20,000.
3. Closing inventories of £680 at 05/04/2019.
4. On 10/06/2018 Barry purchased a car with C02 emissions of 185g at a cost of

£15,000. Barry drove 12,000 business miles and 4,000 private miles. The total
motor expenses amounted in £3,600.
5. Computer equipment purchase cost £2,500.
6. Other expenses (allowable) cost £17,600 with a further £400 owed as a payable
at 05/04/2019.
Calculate the tax adjusted trading profit according to the accruals basis and the
cash basis.
Should Barry elect to enter into the Cash basis scheme?
Solution:
Accruals basis
Sales £81,750 W1
COS (£19,320) W2
Gross profit £62,430

Capital allowances (£3,400) W5
Motor expenses (£2,700) W3
Other allowable expenses (£18,000) W4

Tax adjusted trading profit £38,330
W1
Cash and credit sales calculation:
• £81,000 + £750 = £81,750
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W2
Cost of sales calculation:
• Opening inventory + purchases – closing inventory.
0 + £20,000 - £680 = £19,320
W3
Motor running expense calculation:
• The motor running expense must be adjusted for business use only, as
private expenses are not allowable.
£3,600 * 12,000/16,000 = £2,700
W4
Other allowable expenses
• £17,600 + £400 = £18,000
W5
Capital allowance calculation:
• AIA £2,500 (computers)
WDA £15,000 * 8% = £1,200 * 12,000/16,000 = £900 (car: CO2 >110g/km: special

rate pool)
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The Cash Basis
Tax adjusted trading profit (Cash basis)
Cash sales £81,000
Cash purchases (£20,000)
Cash expenses (£17,600)
Cash capital expenditure (£2,500)
AMAP (£5,000) W1
W1
AMAP
• 10,000 miles * 0.45 = £4,500
2,000 miles * 0.25 = £500
• Barry should choose to elect into the cash basis scheme as this results in a
lower taxable profit for him
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Syllabus B3e/E2b. Relief for pre-trading expenditure
When does trading commence?
Trading commences on the first day on which a trader makes a sale.
However, the trader would have incurred expenditure before this date, for
example, advertising expenditure and/or rent paid in advance.
• This expenditure incurred before trading has commenced is known as “pre-

trading expenditure”.
Pre-trading expenditure will get tax relief by being treated as though it was
incurred on the first day that a sale is made, if the following conditions are
satisfied.
Conditions for pre-trading expenditure to be allowable
• 1) It is incurred within 7 years of the commencement of the trade.
• 2) It is an allowable expense.
• For example, if goods were purchased for sale for the business 4 years
before the business had its first sale; this purchase price will be deducted
from the first profits also.
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Illustration:
Manny made his first sale in his packaging business on 04/05/2018.
Before this he incurred the material expenses of £3,000 on 31/12/2017.
• Will this expenditure be deducted from the sales revenue to arrive at tax
adjusted trading profit?
Solution:
Yes, this expenditure will be deducted from his sales revenue to arrive at the tax
adjusted trading profit.
It will be treated as though the expenditure was incurred on 04/05/2018.
This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.
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Syllabus B3f. Assessable profits on commencement
Assessable profits on commencement
Step 1: The first tax year (TY1)
The first tax year is the year during which the trade commences.
For example: 
if a trade commences on 1 June 2018 the first tax year is 2018/19 (06/04/2018 –
05/04/2019)
The basis period for the first tax year runs from the date the trade starts to the
next 5 April.
So a trader commencing in business on 1 June 2018 will be taxed on profits

arising from 1 June 2018 to 5 April 2019 in 2018/19.
Step 2: The second tax year (TY2)
Does the accounting date fall in Tax Y2?
• YES
How long is this accounting period?
o < 12 months long
Calculate profits for the first 12 months of trading
o ≥ 12 months long
Calculate profits for the 12 months to the accounting date ending in Y2
• NO
o Assess the actual profits in tax year 2
i.e 6 April to 5 April
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For example if trade commenced on 01/01/2018 and accounts were
prepared to 31/07/2018, the first tax year is 17/18 and the second tax year is
18/19 - but there is no accounting date ending in the second tax year.
Therefore, profits from 06/04/2018-05/04/2019 will be taxed in the second

tax year (18/19).
So, let's go back to our original example:
Assuming that the accounting date is 31 May 2019
The second tax year (TY2) - 2019/20
• Does the accounting date (31 May 2019) fall in Tax Y2 (2019/20)?
YES
• How long is this accounting period?
1 June 2018 - 31 May 2019
≥ 12 months long
Therefore, calculate profits for the 12 months to the accounting date ending
in TY2:
1 June 2018 - 31 May 2019
Step 3: The third tax year (TY3)
• Use a current 12 months accounting period
So, let's go back to our example (assuming they continue to make accounts up
to 31 May each year):
• The third tax year (TY3) - 2020/21:
1 June 2019 - 31 May 2020
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Step 4: Comment on Overlap profits
If the same profits have been taxed two times, at the end of the question,
mention how much profit has been taxed 2 times.
For example if a business commenced trading on 01/01/2018, prepared

accounts to 31/12/2018 and made a trading profit of £12,000 during the 12
months.
The first tax year would be 17/18 (01/01/2018-05/04/2018) and 3 months of

profit would be of £3,000 (3/12*£12,000) would be taxed.
The second tax year would be 18/19 and as the accounting period is 12 months
long, the full £12,000 would be taxed.
Therefore, the £3,000 of 17/18 has been taxed 2 times, this is the overlap profit.
You must mention this in your answer.
Illustration 1: ≥ 12 months long
Peter starts to trade on 1 January 2018 making up accounts to 31 December.
He made profit of £10,000 for the year ended 31/12/2018 

He made profit of £15,000 for the year ended 31/12/2019
1. The first tax year (TY1 = 2017/18)
1/1/2018 - 5/4/2018
Profit = £10,000 x 3/12 = £2,500
2. The second tax year TY2 = 2018/19 (06/04/2018 – 05/04/2019)
Does the accounting date (31/12/2018) end in TY2?
YES
How long is this accounting period?
≥ 12 months long 1/1/2018 - 31/12/2018
Calculate profits for the 12 months to the accounting date ending in Y2 
1/1/2018 - 31/12/2018
Profit = £10,000
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3. The third tax year (TY3 = 2019/20)
Use the current 12 months accounting period 

1/1/2019 - 31/12/2019
Profit = £15,000
4. Comment on Overlap profits
Trading profits £10,000 + £15,000 = £25,000
Less profits assessed (£2,500 + £10,000 + £15,000) = (£27,500)
Overlap profits £2,500
Illustration 2: < 12 months long
Draco commences business on 01/01/2018.
He prepares his accounts to 31/07
• Below are the trading profits for the accounting periods:
£10,500 for the 7 months to 31/07/2018
£33,600 for the year ended 31/07/2019
• What trading profits will be assessed for 17/18, 18/19 and 19/20?
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Solution:
1. The first tax year (TY1 = 2017/18)
1/1/2018 - 5/4/2018
Profits 3/7 * £10,500 = £4,500
2. The second tax year TY2 = 2018/19 (06/04/2018 – 05/04/2019)
Does the accounting date (31/7/2018) end in TY2?
YES
How long is this accounting period? (1/1/2018 - 31/7/2018)
< 12 months long
Calculate profits for the first 12 months of trading - 01/01/2018 - 31/12/2018
Profits £10,500 + (5/12 * £33,600) = £24,500
3. The third tax year (TY3 = 2019/20)
Use the current 12 months accounting period: 

01/08/2018 - 31/07/2019
Profits £33,600
4. Overlap profits
Trading profits £10,500 + £33,600 = £44,100
Less profits assessed (£4,500 + £24,500 + £33,600) = (£62,600)
Overlap profits £18,500
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Illustration 3 - when the accounting date doesn't fall in Tax Y2
Lachmi commenced self employment on 01/01/2017.
She had a profit of £10,000 for the period ending 30/04/2018.
Calculate the tax adjusted trading profit for the period ended 30/04/2018.
Solution
1 The first tax year (TY1 = 2016/17) 

Assessed period 01/01/17 - 05/04/17 = 3/16 * £10,000 = £1,875
2 The second tax year TY2 = 2017/18 (06/04/2017 – 05/04/2018) 
Does the accounting date (30/4/2018) end in TY2?  

NO 
Therefore, profit will be calculated as follows:
Assessed period 06/04/17 - 05/04/18 = £10,000 * 12/16 = £7,500
3 The third tax year (TY3 = 2018/19) 
Does the accounting date (30/4/2018) end in TY3?  

YES
How long is this accounting period? (1/1/2017 - 30/4/2018)
> 12 months long therefore tax the last 12 months of the long period 
01/05/17 - 30/04/18 = £10,000 * 12/16 = £7,500
4 Overlap profits 
Overlap profits created: £1,875 + £7,500 + £7,500 - £10,000 = £6,875 
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Syllabus B3f. Assessable profits on cessation
Assessable profits on cessation
Cessation of a business
The penultimate tax year will be taxed as normal.
The basis of assessment for the final tax year is as follows:
1. Actual trading profits from the end of the previous accounting period to the
date of cessation.
2. Deduct any overlap profits to find the trading profit assessment of the final
year.
Illustration:
Barry has been trading for many years and making up his accounts to 31/01. He
ceases to trade on 31/05/2018, with trading profits as follows:
Year ended 31/01/2018 £55,000
Year ended 31/05/2018 £6,000
He has overlap profits of £2,000
What is his assessment in the final tax year of trading?
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Solution:
Final tax year
Tax year 18/19
Accounting period 01/02/2018-31/05/2018
Profits £6,000
Less overlap profits (£2,000)
Trading profit assessable £4,000
Illustration:
In the final period of trading, 01/02/2018 - 31/05/2018, Barry had a tax written
down value on his main pool of £1,000 and sold the main pool assets for £600.
What would his profit assessment be in 18/19?
Solution:
Trading profit £6,000 

Less:
Overlap profits (£2,000) 

Balancing allowance (£400)
Trading profit assessable £3,600
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Syllabus B3g. Choice of accounting date
Choice of accounting date
What accounting date should you choose?
The choice of accounting date will affect:
• The level of profits to be taxed in that year
• The overlap profits created
• The timing and amount of tax payments.
Advantages of tax year ending on 05/04
1. No overlap profits created
2. Minimise the final year’s liability
3. Simplicity
Advantages of tax year ending on 30/04
1. Time to prepare accounts and calculate tax.
2. Time lag between earning income and paying tax.
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Conditions to change an accounting date
An individual must meet certain conditions in order to qualify to change an

accounting date:
• The change of accounting date must be notified to HMRC by the 31/01

following the tax year in which the change was made.
• The first accounts to the new accounting date must not exceed 18 months in
length.
• A change of accounting date must not have occurred within the previous 5
years.
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Syllabus B3h/E2c. Capital allowances
Capital allowances
Plant and machinery(P&M) for capital allowances purposes
Capital Allowances (Tax depreciation) are deducted from Operating profits
• CA are given for P&M used in the business only
• CA are given for a period of account eg for a year ended 31/12/18, and are
deducted in the adjustment of profits calculation to reach the Trading Profits
figure
Plant is defined as assets that perform an active function in the business
e.g. office furniture and equipment including moveable office partitioning.
Machinery will include motor vehicles and computers, including building

alterations necessary for the installation of plant and machinery.
Rates of allowance %
Main pool assets 18
Special Rate Pool assets 8
Capital allowances are now also available on integral features of a building including
lifts and escalators, electrical systems, heating and air cooling system.
Main pool
1. Computers, equipment, shelving, vans and lorries
2. Movable office partitioning
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3. Alterations to building incidental to the installation of plant and machinery
4. Tables and chairs
5. Fire regulation expenditure
Special Rate Pool
The following asset acquisitions should be allocated to the special rate pool:
1. Integral features of a building
– these include all major systems in a building.
For example, electrical, thermal, cooling systems.
2. Long life assets
These are assets, when new, with an expected economic working life of 25 years
or more when total expenditure based on a 12-month accounting period
exceeds £100,000
Writing down allowances
W.D.A.’s are given on main pool assets and special rate pool assets.
For main pool assets, the W.D.A. is 18% for a 12 month period
For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2018.
The writing down allowance on these assets will be £18,000 (£100,000*18%) in the
year ending 31/12/18. 
 
Note if the above period was for 6 months, then the WDA for the main pool would
be £9,000 (£100,000*18%*6/12) in the period ending 31/12/18.
For special rate pool assets, the W.D.A. is 8% for a 12 month period.
For example Assets in the special rate pool had a brought forward value of
£100,000 at 01/01/18.
year ending 31/12/18.
Note if the above period was for 6 months, then the WDA for the main pool would
be £4,000 (£100,000*8%*6/12) in the period ending 31/12/18.
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First year allowances
These are given for motor cars which have an emission of less than or equal to 50g
per km.
This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.
The F.Y.A. is not time apportioned for a period of less than 12 months.
For example, a car was purchased on 01/05/2018 for £100,000.
It had a CO2 emission of 48g/km.
The first year allowance for this car will be £100,000 ( £100,000*100%).
Note if the above period was for 6 months, then the FYA would still be £100,000 - it
is not reduced for a period of less than 12 months.
Annual investment allowance
The annual investment allowance for the tax year 18/19 is £200,000.
This is given to an individual for a 12 month period and is time apportioned if the
period is below 12 months.
Ideally, this A.I.A should be allocated to special rate pool assets purchased first
because the allowances on these assets are only 8% per year, therefore tax relief on
these assets is received over a longer period.
Once allocated to special rate pool assets purchased in the tax year, then if any of
the allowance is remaining, it can be allocated to main pool assets purchased in the
year.
The A.I.A cannot be given to motor cars purchased in the tax year.
For example a business purchased equipment worth £300,000 in their year ended
31/03/2019.
The annual investment allowance for the tax year ending 31/03/2019 is £200,000
(maximum available).
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For the remaining £100,000 (£300,000- £200,000), a writing down allowance will be
available.
As equipment is a main pool asset, the writing down allowance will be £18,000
(£100,000*18%).
The total capital allowances available will be AIA + WDA = £218,000 (£200,000
+ £18,000)
Note if the above period was for 6 months, then the AIA would be (£200,000*6/12) =
£100,000 + WDA (18%*£200,000*6/12) = £18,000. This would total to £118,000 of
capital allowances for the 6 month period.
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Illustration:
Buzzy Ltd. in the year ended 05/04/2019 made the following transactions..
Date Item Price
01/05/2018 Ventilation system and lift for his freehold office building £278,000
26/06/2018 Machinery purchased and alterations made to office £29,300

building to install the machinery
08/08/2018 Movable partition walls £22,900
11/03/2018 New decorative wall constructed £41,200
The tax written down value on the main pool was £87,800 on 06/04/2018.
What are Buzzy Ltd. capital allowances?
Solution:
Special Capital
Particular AIA Main pool
rate pool allowances
Tax written down value brought

£87,800
forward
Additions:
Ventilation system and freehold
£278,000
office building
AIA (£200,000) £78,000 £200,000
Machinery purchased and
£29,300
alterations
Movable partition walls £22,900
Total £140,000 £78,000
WDA 18%/8% (£25,200) (£6,240) £31,440
Tax written down value carried

£114,800 £71,760 £231,440
foward
Notice how the AIA was first allocated to special rate pool assets.
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Also notice that the expenditure on the decorative wall is not eligible for capital
allowances as this does not qualify as plant and machinery.
The capital allowances for the year ended 05/04/2019 are £231,440.
This is the total of: 

WDA 18% on the main pool of £25,200 
+ 
WDA 8% on the special pool of £6,240 
+ 
AIA of £200,000 
= £231,440
Illustration:
Shivani commenced trading on 1 July 2018 and prepared accounts to 31 December

2018 thereafter.
Shivani made the following acquisitions of main pool assets:
Accounting Period to 31 December 2018 £
1 July 2018 Plant 70,000
20 October 2018 Computer equipment 80,000
Accounting Year ended 31 December 2019
19 October 2019 Machinery 30,000
What capital allowances will be allowed for both periods?
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Solution:
Capital Allowance Computations
6 month period to 31 December Main Allowances

2018 Pool
Additions (AIA)
1 July 2018 Plant 70,000
20 October 2018 Computers 80,000
150,000
AIA (max 6/12 x 200,000) (100,000) 50,000 100,000
WDA (max 6/12 x 18% x 50,000) (4,500) 4,500
Total Allowances 104,500
Tax Written Down Value (TWDV) c/ 45,500
f
Year Ended 31 December 2019

TWDV b/f 45,500
Additions (AIA)
19 October 2019 30,000
AIA (30,000) 30,000
WDA (18%) (8,190) 8,190
TWDV c/f 37,310
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Assets with private use
A company
Companies do not have assets used privately.
This is because all of the people who work in the company are considered to be
employees of the company.
Therefore, the capital allowances given are not reduced by the % of private usage
by an employee of a company.
A Sole trader
If an asset is used privately by the owner of the business, the capital allowance
given must be reduced by the % of private usage.
If an asset is used privately by an employee of the business, the capital

allowance given is not reduced by the % of private usage.
Illustration (a sole trader)
Mia has been in a business as a sole trader, preparing accounts to 31 March.
On 1 November, she bought computer for £3,000 which she uses 70% in her
business and 30% privately.
She has already used the AIA in this year.
Calculate the capital allowances.
Solution: 
WDA = £3,000 x 18% = £540 
Capital Allowances (business use only) £540 x 70% = £378
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Illustration (a company)
Cow Ltd. is a trading company, preparing accounts to 31 March.
On 1 November, the company bought computer for £3,000 which is used by the
sales manager 30% privately.
Cow Ltd. has already used the AIA in this year.
Solution: 
WDA £3,000 x 18% = £540
Note: The private use of the computer by the employee is not relevant for capital
allowance purposes.
 
No adjustment is ever made to a company's capital allowances to reflect the private
use of an asset.
Compute capital allowances for motor cars
The F.Y.A is given to motor cars purchased that have a CO2 emission of less than
50g/km.
For cars with a CO2 emission of between 50-110, an 18% W.D.A. is given, therefore
these are considered to be main pool assets.
For cars with a CO2 emission of more than 110g, an 8% W.D.A. is given, therefore
these are considered to be special rate pool assets.
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Illustration (a Company)
Cow Ltd.:
06/04/2018 Tax written down value on main pool of £16,800
25/06/2018 Purchase of car for £10,600. The car had CO2 emissions of 96g/km.
What are Cow Ltd. capital allowances?
Solution:
Main Special rate Capital

Particulars F.Y.A.
Pool pool allowances
Tax written down value

£16,800
brought forward
Additions:
Car 40g/km £22,000 (£22,000) £22,000
Car 96g/km £10,600 £10,600
Car 142g/km £18,000 £18,000
Total (£22,000) £27,400 £18,000
WDA (18%/8%) (£4,932) (£1,440) £6,372
Tax written down value carried

£22,468 £16,560
forward
Total capital allowances for the year £28,372 (£22,000 + £6,372)
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Illustration (ANNA - a Soletrader )
Purchase of car for £10,600.
The car had CO2 emissions of 96g/km.  

25/06/2018
This car is 60% privately used by Anna’s husband who is an
employee of the business.
16/02/2019 The car had CO2 emissions of 142g/km.
This car is 30% used privately by Anna.

14/03/2019 The car had CO2 emissions of 40g/km.
This car is 25% privately used by Anna’s assistant.
What are Anna’s capital allowances?
Solution:
Capital
Main Special
Particulars F.Y.A. allowan
Pool rate pool
ces
Tax written down

£16,800
value brought forward
Additions:
Car 40g/km £22,000 (£22,000) £22,000
Car 96g/km £10,600 £10,600
Car 142g/km £18,000 £18,000
Total (£22,000) 27,400 £18,000
(£1,440) *
70%
business £5,940
WDA (18%/8%) (£4,932)
use = (W1)
Capital
allowance
Tax written down

22,468 £16,560
value carried forward
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W1:
The capital allowance is reduced by % of private usage
£4,932 + (£1,440 * 70%) = £5,940
W2:
The tax written down value carried forward is calculated using the entire W.D.A.
£18,000 - £1,440 = £16,560
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Disposal of the assets
Use LOWER OF
1. Proceeds
2. Original cost
When an item of plant or machinery is sold - the lower of the sale proceeds received
or the original cost of the asset is deducted from the written down value of the
relevant pool.
For example, if the written down value is 100 and sale proceeds received are
120 but the original cost of the asset is 110, then 110 will be deducted from the
pool to give a balancing charge of 10.
The difference between proceeds and original cost will be treated as a capital
gain.
Compute balancing allowances and balancing charges
In the final year of trading, the A.I.A., W.D.A., F.Y.A. are not given.
Instead, balancing allowances and balancing charges are computed on each pool.
Balancing adjustments on the pools can only occur on cessation of trade.
A balancing allowance will be deducted from trading profit to find tax adjusted
trading profit and a balancing charge will be added to trading profit to find tax
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Illustration:
Karen Ltd. prepares accounts to 05/04.
The company ceased to trade on 05/04/2019 on which all of its plant and
machinery was sold for £8,000.
The written down value on its main pool at 06/04/2018 was £11,000.
The company purchased machinery for £4,000 during the year.
Solution:
Particulars Main pool Capital allowances

TWDV b/f £11,000
Additions £4,000
Total £15,000
Disposals (£8,000)
Balancing allowance £7,000 £7,000
Karen Ltd.’s balancing allowance in her final year of trading is £7,000.
Recognise the treatment of short life assets
Short life assets are main pool assets that have an expected life of 8 years or less.
A de-pooling election can be made so that the asset gets its own W.D.A.’s and on
sale of the asset, a balancing allowance or balancing charge can arise.
The benefit of this election is that a balancing adjustment will arise within 8 years,
which would not have arisen, if this de-pooling did not take place.
 
If the asset is not sold within the 8 years of acquiring the asset, then the written
down value is added back to the main pool.
This happens on the 8th anniversary of the end of the accounting period in which
the asset was acquired.
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Illustration:
Aadi prepares accounts to 05/04 each year.
At 06/04/2018 the WDV of the main pool was £14,000.
On 01/07/2018 Aadi purchased machinery for £220,000.
On 01/09/2018 Aadi purchased a printer for £8,000 and made a short life asset
election.
On 01/07/2019, the printer was sold for £4,000.
Calculate the capital allowances for the two years ending 05/04/2020
Solution:
Year ended 05/04/2019
Particulars AIA Main Short life Capital

pool asset allowances
Tax written down value £14,000

brought forward
Additions:
Machinery £220,000
AIA (£200,000) £20,000
Printer £8,000
Total (£200,000) £34,000 £8,000 £200,000
WDA 18% (£6,120) (£1,440) £7,560
Tax written down value £27,880 £6,560 £207,560

carried forward
Particulars Main Short life Capital allowances

pool asset
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Tax written down value brought £27,880 £6,560
forward
Disposal proceeds (£4,000)
WDA 18% (£5,018) £5,018
Tax written down value carried £22,862 Nil £7,578

forward
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Syllabus B3i. Relief for trading losses
Relief for trading losses - for individuals
Trading losses can be:
1. Carried forward against the Trading income of the same trade of future

years
2. Relieved against Current year total income plus capital gains
3. Carried back against 12 months of total income plus capital gains
1) Trading losses carried forward against the Trading income of future years
Illustration:
Peter had a Trading loss of £50,000
Next year, Peter made the following income:
Trading income £20,000
Property income £10,000
Interest income (gross) £5,000
How can the trading loss be carried forward?
Trading loss of (£50,000) will be relieved against the trading income generated next
year.

Less c/f trading loss (£20,000)
Trading income Nil
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Total income £15,000
Loss memo:
Trading loss (£50,000)
c/f loss relief £20,000
Loss to be carried forward in the future (£30,000)
2) Trading losses relieved against Current year total income plus capital gains
Trading losses can be relieved against the total income of the current year and the
total income of the previous 12 months.
If the total income of the year has been used, then the chargeable gains of that year
can also be used to relieve the loss remaining.
Total income consists of:
1. Trading income
2. Property income
3. Interest income
4. Employment income
Other Income
is any income other than Trading income.
For example:
1. Property income
2. Interest income
3. Employment income
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Other Income - maximum limit
For using the loss against other income (not including trading income), there is a
maximum limit which applies, this is the greater of £50,000 or 25% of total other
income.
For example:
if you have a trading loss of £300,000 and employment income (other income) is
£250,000, the amount that can be relieved is the greater of £50,000 or (25% x
£250,000) = £62,500.
Therefore, the amount of loss that would be relieved against employment income
that year is £62,500.
Note, this applies to the carryback claim against total income also.
However, the previous year's trading profit can be entirely used, it only applies to
other income,
For example:
This year, you have a trading loss of £300,000 and no other income.
Last year, there was a trading profit of £10,000 and other income for the year was
£250,000, the amount that can be relieved is the greater of £50,000 or (25%*
£250,000) = £62,500 PLUS £10,000 from trading profit, therefore £72,500 of loss
can be relieved.
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Illustration
This year, John had a trading loss of (£100,000).
Last year, He had a trading income of £2,000 and other income of £300,000.
How much of his trading loss can he relieve using the carry back total income
claim?
Solution 
Trading loss (£100,000)
Trading profit £2,000
Other income Restriction
The higher of: 

25% x £300,000 = £75,000 0r £50,000
Therefore, he can relieve £2,000 + £75,000 = £77,000 of his trading loss using the
carry back total income claim.
Chargeable gains of the year
Once the total income of a year has been relieved against, and there is still
trading loss remaining, then the loss can be used against the chargeable gains
of the year.
The amount of trade loss available to offset against chargeable gains is the lower
of:
- trade loss left
- current year capital gains less current year capital losses less the full
amount of capital losses brought forward.
Chargeable gains do not have to be utilised in the loss claim but if the taxpayer
chooses to use the trade loss against capital gains of the same year then the
loss is treated as a current year capital loss and so it cannot be restricted to
preserve the annual exemption.
The only times you can restrict a capital loss to preserve the annual exemption
are on capital losses b/f and capital losses in the year of death. 
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For example Kathy had a capital gain of £44,000. She has a capital loss brought
forward of £4,000 and has trading losses available of £24,000 - after a claim
against the total income.
Gain 44,000
Current year trade loss (24,000)
Loss b/f (4,000)
Chargeable gain 16,000
Annual exemption (11,700)
Taxable gain 4,300
Illustration:
Jane had a trading loss of £100,000 and uses £45,000 against her current year total
income claim.
She had chargeable gains of £50,000 and a loss b/f of £1,000. She wants to use the
loss against chargeable gains.
How much of the trading loss will she relieve against the chargeable gains?
Solution:
Trade loss available: lower of
- trade loss left £55,000 (100,000 - 45,000)
- capital gain less losses cy and bf £49,000 (50,000 - 1,000)
Therefore £49,000 is available to offset against current year gains.
Gain 50,000
Current year trade loss (49,000)
Loss b/f (NIL*)
Annual exemption (11,700)
Taxable gain NIL
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*the loss b.f of £1,000 does not need to be used this year as the gain that is left after
using the cy trade loss is covered by the annual exemption. The £1,000 capital loss and
the remaining trade loss of £6,000 (55,000-49,000) will be carried forward.
Illustration:
Peter made the following income for the year ended 05/04/2017:
Capital gains £15,000
Trading income (£75,000)
How can the trading loss of the year ended 05/04/2018 be relieved against the
current year total income and carried back against total income for 12
months? 
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Solution:
£65,000 of the trading loss of (£75,000) incurred in the year ended 05/04/2018
will be carried back against the total income generated in 05/04/2017 and Peter
will receive a refund of any tax paid. This wastes the personal allowance
unfortunately.
The remaining loss of £10,000 will be used against total income of the current
year. This leaves total income of £15,000 of which will be mostly covered by the
personal allowance.
It would not be advisable to use the £10,000 remaining loss against the gains of
£15,000 in either year as most of the gains would be covered by the annual
exemptions.
In the year ended 05/04/2018
Trading income Nil
Interest income £5,000
Trading income total income claim (£10,000)
The personal allowance has not been wasted.
In the year ended 05/04/2018 and 05/04/17
Trading loss relief Nil
Annual exemption (£11,700)
Taxable gains £3,700
Note - assumes the PA and AE are the 2018/19 rates
The carry back total income claim for 12 months:
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Trading loss relief carry back claim (£65,000)
Total income £Nil
The personal allowance is wasted in 16/17.
Loss memo:
Trading loss of 05/04/2018 (£75,000)
Carry back total income claim £65,000
Current year total income claim £10,000
Loss to be carried forward Nil
Note carefully that it is a carry back claim against total income for 12 months.
Therefore, if there is a shorter chargeable accounting period before the loss making
year, then the claim extends back for a full 12 months.
Opening years’ relief
If a loss is made within the first 4 tax years of trading (after applying the opening
year rules) …
… then the loss can be relieved against total income of the individual for the
previous 3 tax years on a FIFO basis.
The loss cannot be restricted to save personal allowances.
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Illustration:
Mary started trading in 2015/16. She had never worked before she opened her
business.
She made the following trading profits/losses in the following tax years.
2015/16 Trading profit £2,000 

2016/17Trading profit £17,000  
2017/18Trading profit of £12,000  
2018/19Trading loss of (£10,000)
How can Mary apply the opening years relief for trading losses?
Solution:
Trading loss of (£10,000) in 2018/19
Relieve first against: 

2015/16Trading profit £2,000  
2018/19 Trading loss (£2,000)
Trading profit reduced to £0 in 2015/16
Trading loss of (£8,000) in 2018/19 remaining
Relieve second against:
2016/17Trading profit of £17,000  

2018/19 Trading loss (£8,000)
Trading profit reduced to £9,000 in 2016/17
2018/19 loss to carry forward - £nil
Note  
That the opening years relief has to be applied on a FIFO basis, therefore the
personal allowances for 15/16 was wasted.
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Terminal loss relief
If a trading loss occurs in the final 12 months of trading, then this trading loss can
be offset against any trading profits of the final tax year of trade and then carried
back for 3 tax years against the trading profits of the company on a LIFO basis.
Once again, the loss cannot be restricted to save any personal allowances.
Additionally, for the years in which tax has already been paid, this will result in a
repayment of tax.
There is a specific way to compute a the terminal loss
This is:
First, calculate from 06/04 to the date of cessation x
Second, calculate from 12 months before date of cessation to 05/04

before date of cessation NOTE: if this calculation produces a profit
x
figure, ignore it. If this calculation produces a loss then include it in the
terminal loss figure.
Plus: any overlap profits x
Terminal loss that relief can be claimed for x
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Illustration:
• Mr. Unlucky, ceased trading on 30/09/2018 and incurred a loss for the 9 months
of (£13,500).
• The trading profits for the year ended 31/12/2017 were £22,500.
• He had overlap profits of £2,000.
• What is the terminal loss that Mr. Unlucky can claim terminal loss relief on?
Solution:
05/04/18-30/09/18 =
= 6 months/9 months * (£13,500)
(£9,000)
01/10/17-05/04/18
= 3 months / 12 months * £22,500 = £5,625

=
= 3 months / 9 months * (£13,500)
(£4,500)
The net is a profit and so the figure is
Total in penultimate
ignored for the purposes of the terminal 1,125
tax year
loss calculation
=
Overlap profits
(£2,000)
Terminal loss (£9,000 + £2,000) (£11,000)
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Illustration:
How would Mr. Unlucky obtain terminal loss relief for this loss?
Solution:
He had profits of £22,500 in the year ended 31/12/2017.
• Terminal loss relief states that the terminal loss must be relieved against
trading profits from the same trade of the last 3 tax years on a LIFO basis.
Therefore,
Trading profits £22,500
Terminal loss relief (£11,000)
The factors that will influence the choice of loss relief claims are:
1. Loss relief is as soon as possible.
2. Loss relief is obtained at the highest tax rate.
3. Personal allowances are saved when the claims are made
Illustration:
If Mr Unlucky had trading profits of £4,000 in the year ended 31/12/17 instead of
£22,500, the terminal loss calculation would have been as follows:
Loss from 6/4 to cessation (6/9 x £13,500) £(9,000)
Loss from 1/10 to 5/4 (3/9 x £13,500) £(4,500)
3/12 x £4,000) £1,000__
Net loss in previous tax year £(3,500)
Overlap profits £(2,000)
Terminal loss £(14,500)
The key difference to note between the two illustrations is the figure prior to 5/4.
In the first illustration it produced a profit and so it was ignored. In the second
illustration it produced a loss and as such it was included in the terminal loss
figure. 
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Syllabus B3j. Partnerships and limited liability partnerships
Partnerships and limited liability partnerships
What is a partnership?
A partnership is a single trading entity, but for taxation purposes each partner is
treated individually.
Allocation of the trading profit or trading loss
1. The trading income or trading loss is divided between the partners according to
their profit sharing arrangements.
2. Partners may firstly be entitled to salaries and interest on capital.
The balance of any trading profit (or loss) will then be allocated in the profit sharing
ratio (PSR).
Illustration 1
Peter has been in partnership with Paul for many years.
The partnership's tax adjusted trading profit is £120,000.
The partners share profits equally.
• Required:
What will Peter's and Paul's share of tax adjusted trading profit be?
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Solution:
£120,000 x 1/2 = £60,000
• Peter and Paul will both have £60,000 profit.
A change in the profit sharing agreement
If the profit sharing agreement is changed during a period of account, the profit
must be time apportioned before allocation under the different agreements.
Illustration 2
Peter has been in partnership with Paul and Claire.
Paul resigned as a partner on 1 January 2019.
The partnership's tax adjusted trading profit for the year ended 5 April 2019 is
£120,000.
The partners have always shared profits equally, and continued to do so after Paul
resigned.
All partners have overlap profits of £5,000, which they incurred on the start of
trading.
• Required:
What will Peter's share of tax adjusted trading profit be?
What will Paul's share of tax adjusted trading profit be?
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Solution:
Tax adjusted trading profit for Paul:
6/4/2018 - 31/12/2018
£120,000 x 9/12 x 1/3 = £30,000 

Less: 
Overlap profits (£5,000) 
Tax adjusted trading profit for Paul £25,000
Note as seen in Topic Assessable profits on commencement, Assessable profits on

cessation - overlap profits are deducted from total profits when a person ceases to
trade.
• Tax adjusted trading profit for Peter:
6/4 2018 - 31/12/2018
£120,000 x 9/12 x 1/3 = £30,000
• 1/1/2019 - 5/4/2019
£120,000 x 3/12 x 1/2 = £15,000
• £30,000 + £15,000 = £45,000 profit for Peter
Illustration 3
Canda and Panda are in partnership.
The trading income was £18,000
Profits are shared between Canda and Panda in this ratio 3:2, after paying salary of
£3,000 to Canda.
Calculate Canda’s share of residual trading profits.
Solution:
£18,000 - £3,000 = £15,000*3/5 = £9,000
If the question had asked for her total profit share then she would have been
entitled to her salary of £3,000 plus the residual profit share of £9,000, giving a total
income from the partnership of £12,000.
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Illustration 4
Doug and Rob are in partnership.
The trading income for the year ended 30 September 2018 was £18,000
• Up to 30 June 2018 profits were shared between Doug and Rob 3:2, after paying
salaries of £3,000 and £2,000 per annum.
• From 1 July 2018 profits were shared 2:1 after paying salaries of £6,000 and
£4,000 per annum.
• Required:
Show the allocation of trading profits for the Accounting Period ended 30
September 2018.
Solution:
Total Doug Rob

£ £ £
1/10/2017 to 30/6/2018
(Income £18,000 × 9⁄12 =

13,500)
5,000 x 9/12 = 3,000 x 9/12 = 2,000 x 9/12 =

Salaries (9/12)
3,750 2,250 1,500
13,500 - 3,750 = 9,750 x 3/5 = 9,750 x 2/5 =

Profit shared (3:2)
9,750 5,850 3,900
Profit + salary 13,500 8,100 5,400
1/7/2018 to 30/9/2018
(Income £18,000 × 3/12 =

4,500
Salaries (3/12) 2,500 1,500 1,000
Profit shared (2:1) 2,000 1,333 667

Profit + Salary 4,500 2,833 1,667
Total allocation 18,000 10,933 7,067
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Partnership capital allowances
1. Capital allowances are deducted as an expense in calculating trading profit.
2. If assets are used privately, the business proportion is included in the

partnership’s capital allowances computation.
Illustration 5
Peter has been in partnership with Paul.
The partnership's tax adjusted trading profit is £120,000. this figure is before taking
account of capital allowances.
Capital allowances for the period are £20,000.
The partners share profits equally.
• Required:
What will Peter's and Paul's share of tax adjusted trading profit be?
Solution:
£120,000 - £20,000 = £100,000 

£100,000 x 1/2 = £50,000
• Peter and Paul will both have £50,000 profit.
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Commencement and cessation
1. The rules for commencement and cessation are the same as for a sole trader.
2. The profit is allocated between the partners for accounting periods and then
the assessment rules are applied.
3. Each partner is effectively taxed as a sole trader on his/her share of the

adjusted trading profit
4. Continuing partners will be assessed using CYB
5. When a new partner joins a partnership, he is treated as commencing a new

trade and hence the opening years rules apply
6. When an old partner leaves a partnership he is treated as ceasing a trade

and hence the closing years rules apply
7. Each partner has his own overlap profit available for relief.
As long as there is at least one partner common to the business before and
after the change, the partnership continues.
Illustration 6
Ann and Beryl have been in partnership since 1 July 2016 making up their accounts
to 30 June each year. On 1 July 2018 Clair joins the partnership.
The partnership’s trading profit is as follows:

£
Year ended 30 June 2017 12,000

Profits are shared equally.
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1) Show the amounts assessed on the individual partners for all relevant tax
years of assessment.
Profits will be allocated between the partners as

follows:
Total Ann Beryl Clair
£ £ £
y/e 30/6/2017 12,000 6,000 6,000 -
y/e 30/6/2018 14,000 7,000 7,000 -
y/e 30/6/2019 24,000 8,000 8,000 8,000
2) Compute each partner’s trading income as though they were a sole trader
Ann and Beryl will both be assessed as follows,

based upon a commencement on 1 July 2016:
£
1 July 2016 to 5 April
2016/17 (Actual) 4,500
2017 £6,000 × 9/12
Year ended 30 June
2017/18 (CYB) 6,000
2017
Year ended 30 June
2018/19 (CYB) 7,000
2018
Year ended 30 June
2019/20 (CYB) 8,000
2019
They will both carry forward overlap profits of £4,500.
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Clair will be treated as commencing on 1 July 2018,
and will be assessed on her share of the partnership
profits as follow:
1 July 2018 to 5
2018/19 (Actual) April 2019 £8,000 6,000
× 9/12
Year ended 30
2019/20 (CYB) 8,000
June 2019
She will carry forward overlap profits of £6,000
Partnership losses
1. Losses are allocated between partners in the same way as profits.
2. Loss relief claims available are the same as for sole traders.
3. A partner joining the partnership may claim under opening years loss relief, for
losses in the first four tax years of his membership of the partnership.
This relief is not available to existing partners.
4. A partner leaving a partnership may claim under terminal loss relief. This relief is
not available to partners remaining in the partnership.
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Illustration 7
John, James and Paul are in partnership making up their accounts to 5 April.
During the year, Paul left the partnership and George joined in his place.
The partnership made a trading loss of £40,000 during the year.
• Required:
State the loss relief claims that will be available to the partners.
Solution:
Paul will be entitled to terminal loss relief since he has actually ceased trading.
George will be entitled to claim opening years relief since he has actually
commenced trading.
John and James will not be entitled to either of the above reliefs.
All the partners will be entitled to relief against total income of the current or
previous tax year and against gains.
All the partners except Paul will be entitled to carry forward relief.
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Syllabus B4. Property and investment income
Syllabus B4a. Computation of property business profits
Computation of property business profits
How to pay income tax on property business profits?
What does property business profit consist of?
Income from land and buildings in the UK will be liable to assessment under
property income.
This includes: rent received/receivable under any lease or tenancy agreement and
the premium received on the grant of a short lease
Property income is assessed in the following manner:
Rent receivable in the tax year x
Plus: premiums received in the tax year x
Less: capital element of the premium received in the tax year (x)
Property business profit/loss x/(x)
From 2018/19 the default method for the calculation of property income is the cash
basis - rental income received less allowable expenses paid. This gives automatic
bad debt relief as rental income is not taxed unless it is received.
Rental income and allowable expenses will be assessed on an accruals basis when:
Property income receipts for the tax year exceed £150,000
The property business is carried on by a company
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An election is made for the accruals basis to apply (elect by 31 January 2021 for
2018/19 tax year
Under the accruals method, whatever income is allocated to the tax year and
whatever expenses are allocated to the tax year will be taxable in that tax year.
When this income is actually received in hand or when the expenditure is actually
paid out does not matter.
For premiums received due to grant of a short lease, the entire income element of
the premium will be assessed in the tax year that it is received.
This calculation will be illustrated in Topic Premiums granted for short leases.
NOTE: in your exam you should assume that the cash basis applies unless told
otherwise.
Illustration:
Penny owned two properties which were let out unfurnished until both properties
were sold on 31 December 2018.
The following information is available in respect of the two properties:
Property one Property two
Rent received 3,500 7,300
Allowable revenue expenditure (4,800) (2,500)
What is her property business profit?
Solution:
Revenue 3500 + 7300 = 10,800
Allowable cost (4,800 + 2500) = (7,300)
Property business profit 3,500
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Illustration:
Anne bought a property and rented it out for the first time on 01/07/2018.
The rent of £1,000 is paid in arrears on the last day of each month. The payment for
March 2019 was not received until 10 April 2019.
She paid allowable expenses of £300 in November 2018 and £500 in May 2019 for
repairs that were completed in March 2019.
• Required:
Calculate the property income, using (i) the cash basis and (ii) the accruals basis.
Solution:
(i) cash basis (ii) accruals basis
8 x £1,000 = 9 x £1,000 = £9,000
£8,000
(rent is accrued for
Rent received / receivable (1 July -
(March rent was the whole period
5 April)
not received until from 1 July 2018 to
after 5 April 2019). 5 April 2019).
Allowable expenses (£300) (£300)
(£500)
Property income assessable £7,700 £8,200
Note
On the cash basis the March 2019 rent was not received before the tax year end
and so it is not taxed in 2018/19. The expense of £500 was not paid until after the
tax year end and so it is excluded from the calculation. Both of these items will be
dealt with in the tax year 2019/20.
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Allowable expenses:
These are expenses incurred by the landlord and reduce the taxable property
business profits.
To be allowable, an expense must have been incurred wholly and exclusively in

connection with the business, for example:
• Insurance
• Agent’s fees
• Other management expenses
• Bah
e.g. cleaning expenses
• Repairs
Capital expenditure is NOT allowed, therefore repairs are allowable, however

capital expenditure to improve the property are not allowed.
This differentiation can be made simpler by asking yourself whether the

expenditure improved the income earning capacity of the property, if it did, it is
likely to be capital expenditure.
Capital allowances may be claimed for expenditure on plant and machinery used
for the maintenance of the property.
• Interest on a loan to purchase a property (subject to a cap of 50% in 2018/19
• Decorating
• Impairment losses
e.g. A tenant left owing 1 month’s rent which you were unable to recover.
• Advertising costs
• Cost of replacing windows, doors and boilers
• Motor expenses
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If a landlord uses their own vehicle to travel to and from the property they can either
deduct the actual motoring costs or use the approved mileage allowance which we
saw in the Topic The authorised mileage allowances.
• Replacement furniture allowance (this replaces the old wear and tear
allowance and is available for all properties (except furnished holiday lets)
whether fully or part furnished)
Individuals and companies deduct the actual cost of replacing furniture and
furnishings when calculating the property income from renting out a residential
property.
Furnishings include items such as beds, televisions, fridges and freezers,

carpets and floor coverings, curtains, and crockery and cutlery.
There is no relief for the initial cost of furniture and furnishings, there is only relief
when assets are replaced.
The amount of relief is reduced by any proceeds from selling the old asset which
has been replaced (Replacement cost - sale proceeds = replacement
furniture relief).
Also, relief is not given for any cost which represents an improvement, for
example, if a washing machine is replaced with a washer-dryer, only the cost of
an equivalent washing machine qualifies for relief.
Example, during April 2018, Fred furnished a residential property with a cooker
costing £440, a washing machine costing £330, and floor coverings costing
£2,200.
The cooker was sold during December 2018 for £110, and replaced with a
similar model costing £460.
The washing machine was scrapped, with nil proceeds, during March 2019.
It was replaced by a washer-dryer costing £670, although the cost of a similar

washing machine would have been £360.
What would the replacement furniture allowance be?
Replacement furniture relief: 

Cooker (£460 – £110) = (£350) 
Washing machine = (£360)
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Note:
No relief is available for the initial cost of the cooker, washing machine and floor
coverings.
Relief for the replacement cooker is reduced by the proceeds of £110 from the
sale of the original cooker.
No relief is given for that part of the cost of the washer-dryer which represents
an improvement over the original washing machine.
Illustration - Impairment losses under the accruals basis
Howard had an unfurnished property and charged rent of £800 per month payable
at the end of each month.
The property was let from 06/04/2018 - 31/12/2018 when the tenant left owing 1
month’s rent which Howard was unable to recover. Allowable expenses paid in the
period amounted to £500.
What is Howard’s property income assessable for 2018/19 using the accruals
basis?
Solution:
Rent receivable 9 months * £800 = £7,200
Impairment losses 1 month * £800 = (£800)
Allowable expenses = (£500)
Property income assessable = £5,900
Note: impairment losses do not exist under the cash basis as property income
is based on rental income actually received.
Pre-trading expenditure
Relief is available for revenue expenditure incurred before letting commenced.
• This means that it must be incurred within 7 years of renting
• It will be treated as though it is incurred on day 1 of renting
Illustration:
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Hailey owned a furnished flat that she acquired on 01/06/2018.
She paid mortgage interest of £700 on the loan taken out to acquire the property.
On 01/06/2018 she incurred advertising fees of £500 and paid an insurance

premium of £300 for the year to 31/05/2019.
He paid decorating costs of £900 on 15/06/2018.
The flat remained empty until 01/12/2018 when it was rented for £500 payable
monthly in advance.
Solution:
Rent receivable ( 1 Dec 17 - 5 April 19) 4 months * £500 = £2,000
Allowable expenses:
Decorating (£900)
Advertising (£500)
Insurance 10/12*£300 (£250)
Mortgage interest (50%*£700) (£350)
Property income £450
Note: under the cash basis the whole of the insurance premium is accounted for in
the tax year because it was paid in the tax year.
Under the accruals basis, when calculating the insurance premium payable, the
premium has been paid for 12 months to 31/05/2019, but we only need the
premium applicable until 05/04/2019, this is why 10/12 months are taken.
Note if there was furniture that was replaced for this property, then this would also
be deducted when calculating the property loss.
Note from 2017/18 there is a restriction on the amount of mortgage interest that can
be deducted from property income. In 2018/19, only 50% of the interest can be
deducted from property income. The remaining 50% is taken off the income tax
liability at the basic rate of 20%. This means that any higher rate or additional rate
taxpayers will not get full relief for the interest expense.
So in this illustration, Hailey deducts £350 (50% x £700) from property income and
then would deduct £70 (50% x £700 x 20%) from her income tax liability.
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This is explored in more detail in Topic Property Income Finance Costs
Syllabus B4b. Furnished holiday lettings
Furnished holiday lettings
What is a furnished holiday letting?
Advantages of being classified as a furnished holiday letting are:
1. Capital allowances are claimed on the cost of furniture instead of claiming

replacement furniture relief if the accruals basis is used (Refer to Topic Capital
allowances). If the cash basis is used then deduction is available for the capital
costs of the furniture when paid.
2. Annual investment allowance is 100%. (This is a part of capital allowances and

can be seen in Topic Capital allowances)
3. Relevant earnings when calculating the maximum amount that can be invested
in a registered pension scheme includes income from a furnished holiday letting.
(Refer to Topic Pensions)
4. Rollover relief is available if the owner invests in another furnished holiday

letting. (Refer to Topic Rollover relief, Holdover relief)
5. Gift relief is available on the gift of a furnished holiday letting. (Refer to Topic
Rollover relief, Holdover relief)
6. Entrepreneur’s relief is available on the disposal of a furnished holiday letting.

(Refer to Topic Rollover relief, Holdover relief)
Note - the restriction to mortgage interest does not apply to furnished holiday
lets.
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In order to qualify to be a furnished holiday letting, the following conditions
need to be satisfied:
1. The accommodation must be situated in the European Economic Area.
For example in Malta.
2. The accommodation must be available for letting for at least 210 days in the tax
year.
3. The accommodation must actually be let for 105 days in the tax year.
4. The accommodation must be let on a commercial basis.
This means that no one person should occupy the letting for more than 31
consecutive days in the tax year.
For example if the letting is let for 105 days in the tax year, it cannot be let by
one person for more than 31 days at a stretch.
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Syllabus B4c. Rent a room relief
Rent a room relief
What is rent a room relief?
Two methods to calculate the relief
This relief is based upon letting a room out in your main residence where you live.
There are 2 methods under which the income from letting this room can be
assessed.
One of the two methods below can be chosen
Method 1:
If an individual lets a room, furnished, in their main residence – the gross rent up to
£7,500 is exempt.
Alternative – rent a room relief calculation:
Gross rent x
Less: rent a room relief (£7,500)
Property income x
Method 2:
This exemption may be ignored if under normal treatment (rental-allowable

expenses) the tax payer is able to generate a lower assessable income, that is
where the allowable expenses exceed £7,500.
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Ordinary calculation:
Gross rent x
Less: rent a room relief (x)
Wear and tear allowance (x)
Property income x
The election for 2018/19 must be made by 31/01/2021 and stays in force until it is
revoked.
Illustration:
Sunder rents a room in his main residence. Gross rents are £145 per week and
expenses amount to £120 per year.
• What is his property income assessable and when does the relevant election
need to be made?
Solution:
Ordinary calculation:
Rent receivable 52 weeks * £145 = £7,540
Allowable expenses (£120)
Alternative – rent a room relief – calculation:
Rent receivable £7,540
Rent a room relief exemption (£7,500)
Sunder will decide to elect the rent a room relief exemption as this produces the
lower property income assessable. He will have to make this election by 31/01/2021
for income receivable in 2018/19.
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Syllabus B4d. Premiums granted for short leases
Premiums granted for short leases
How are premiums paid for short leases taxed?
The grant of a short lease
When a tenant takes on a new lease, he may pay a one off premium to the landlord
in addition to the annual rent.
• This premium is paid to the landlord for the lease to secure the property space
for a number of years by the person renting the space.
• If this lease is for less than 50 years, then it is considered to be a short lease and
a part of it will be taxable in the year that it is received
• This taxable part is known as the income element of the premium.
• The part that is not taxable is known as the capital element of the premium
received.
Calculating the income element and capital elements of the premium:
• Capital element:
Premium received * ((number of years of lease-1)*2%)
• Income element:
Premium received-capital element = income element
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Illustration:
Amanda was granted a 22 year lease of a property on 01/05/2018. She paid the
landlord a premium of £6,900 and also pays rent of £2,100 per month.
• What will the property income assessable be for the landlord is 2018/19?
Solution:
Calculation of income element of lease that will be taxable
£6,900*((22-1)*2%) = £2,898 is the capital element of the lease
Therefore, 
£6,900-£2,898 = £4,002 is the income element that will be taxed
Rent received 11 months * £2,100= £23,100

Income element of premium received £4,002
Trading profit deduction for traders
If a trader paid a premium for a short lease he may deduct the following annual
amount against his trading profit in each of the year’s of the least in which the
property is used in the trade.
This deduction per year is calculated as:
• Income element of premium / number of years of lease
This is in addition to any rent paid.
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Illustration:
Amanda is using the property for her trade.
• What will be the allowable deduction from property income in 2018/19 for
Amanda?
Solution:
Rent paid (as shown above) £23,100
Lease payment (£4,002/22) £182
Property payments £23,282
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Syllabus B4e.
Understand and apply the restriction on property income finance costs
Property income finance costs
If a loan is taken out to either purchase or repair a residential property, there is a

restriction on the amount of interest expense that will be allowable.
How does the restriction work?

1) 50% of the interest expense will be deductible from property income,
2) The remaining 50% will be use to create a tax credit (a deduction from the income
tax liability) at 20%.
Who/What does this restriction NOT apply to?

1) Companies
2) FHLA
3) Non residential property
The restriction has no impact on basic rate taxpayers but it still applies to them.
Illustration:
 
Freddie purchased a freehold house.
The property was then let throughout the tax year at a monthly rent of £1,000 (all
rent was received in the year).
Freddie partly financed the purchase of the property with a repayment mortgage,
paying mortgage interest of £4,000.
The other expenditure on the property amounted to £1,300, and this is all allowable.
Freddie has a salary of £80,000.
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Solution:
Freddie’s property income is:
Rent received (£1,000*12) = £12,000
Less:
Mortgage interest (£4,000*50%) = (£2,000)
Other expenses (£1,300)
His income tax liability is:
Total £88,700
Less P.A. (£11,850)
Taxable Income £76,850
Income tax
£34,500 * 20% = £6,900
£42,350*40% = £16,940
Total £23,840
Interest relief (£4,000*50%*20%) ( £400)
I.T. Liability £23,440
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Syllabus B4f. Property business loss relief
Property business loss relief
How is a property business loss given tax relief?
Relief is only given against future property business profits
If total expenses exceed total income, the property income assessable is NIL and
the excess property loss is carried forward and offset against future property
income profits ONLY.
Illustration:
In 2017/18 a trading income of £6,000 was generated and a property loss of

(£1,000) was generated.
In 2018/19 a trading income of £1000 was generated and property income of £800
was generated.
What property income will be assessable to income tax in the years 17/18 and
18/19?
Solution:
2017/18 – Nil (as if property loss is incurred, the income assessed is Nil and can
only be used against future property profits)
2018/19
Property loss b/f (£800)
Property income assessed Nil
Property loss carried forward to 2019/20 = (£200)
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Note that for a furnished holiday letting loss, this can only be carried forward
against future furnished holiday letting profits, it cannot be relieved against other
property income.
For example, if there was a FHLA loss of £1,000 in 17/18 and property income of
£1,000 (from a different property) in 18/19 - the FHLA loss would not be relieved
against the other property income in 18/19.
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Syllabus B4g/B5a)/B5d. Compute the tax payable on savings and dividends income.
Tax payable on savings and dividend income/Income

tax computation/Income tax payable
What is included in taxable income?
Computation of Taxable Income
An Income Tax Computation is prepared for each taxpayer and records the income
to be taxed for that individual for a tax year.
The tax year runs from April 6 to following April 5.
The tax year 2018/19 runs from April 6, 2018 to April 5, 2019.
Therefore each source of income requires its own basis of assessment to determine
how much income is to be assessed to tax in each such tax year.
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Proforma income tax computation
Non-savings Savings Dividends Total

income income
£ £ £ £
Trading Profit X X
Less Trading Loss relief – (X) (X)
brought forward
Employment Income X X
Property Income X X
Dividends from UK companies X X
Building society interest X X
Bank deposit interest X X
Other interest X X
TOTAL INCOME X X X X
Less
Qualifying interest (X) (X)
Other Trading Loss reliefs (X) (X)
NET INCOME X X X X
Less: Personal Allowance (X) (X)
TAXABLE INCOME X X X X
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Non savings income
This includes income from employment, income from self employment and property
income.
Savings income
Savings income is all types of interest income, and for the exam, it is received gross
- therefor you just need to include the received amount in the income tax
computation.
Savings income now benefits from a 0% rate, because there is a savings income nil
rate band.
For basic rate taxpayers, the savings income nil rate band for the tax year 2018/19
is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not
benefit from any savings income nil rate band.
Do not confuse this with the personal allowance, this savings nil rate band is
only for savings income, if there is no savings income then it cannot be used
against any other types of income.
Also do not confuse this with the savings income starting rate of £5,000 which
applies if there is taxable non savings income of less than £5,000.
Savings income in excess of the savings income nil rate band is taxed at the basic
rate of 20% if it falls below the higher rate threshold of £34,500, at the higher rate of
40% if it falls between the higher rate threshold of £34,500 and the additional rate
threshold of £150,000, and at the additional rate of 45% if it exceeds the additional
rate threshold of £150,000.
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• Example of a higher rate payer
Jina has a salary of £45,600 and savings income of £1,800.
Income tax on:
Non savings income 

Employment income £45,600 
Personal allowance (£11,850) 
£33,750 at 20% = £6,750 
Savings income 
Savings income £1,800 
£500 at 0% = £0 
£250 at 20% (£34,500 - £33,750 - £500) = £50
£1,050 (£1,800 – £500 - £250) at 40% = £420 

 
Tax liability (6,750 + 0 + 50 + 420) = £7,220
Note if she was a basic rate taxpayer, then the savings nil rate band would have
been £1,000 and if she was a additional rate taxpayer, then there would be no nil
rate band available.
Also notice that the nil rate band uses up the basic rate band.
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Dividend income
This includes dividends received from UK companies.
The first £2,000 of dividend income for the tax year 2018/19 benefits from a 0%
rate.
This £2,000 nil rate band is available to all taxpayers, regardless of whether they
pay tax at the basic, higher or additional rate.
• Example of dividend nil rate band
Eesha has a salary of £56,000 and dividend income of £6,800.
Income tax on:
Non savings income 

Employment income £56,000 
Personal allowance (£11,850) 
34,500 at 20% = £6,900 

9,650 (44,150 – 34,500) at 40% = £3,860
Dividend income 
Dividend income £6,800 
2,000 at 0% =£Nil 
4,800 (6,800 – 2,000) at 32.5% = £1,560 
 
Tax liability (6,900 + 3,860 + 1,560) = £12,320
Carefully note
These nil rate bands are not deductions, they just allow some savings and
dividend income to be taxed at 0%.
They also use up the bands so, if there is taxable non savings income of £20,000
and taxable savings income of £15,000, even though £500 of the savings
income is at 0% it still uses the band and so £35,000 is taxable in total meaning
that this taxpayer is higher rate.
Only the personal allowance is a deduction which must be first given to non
savings income, then savings income and then dividend income.
This also applies for other reliefs. 
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Income that is exempt from income tax
1. Interest or bonuses on National Savings & Investment Certificates
2. Interest and dividends within an Individual Savings Account [ISA]
3. Gaming, lottery and premium bond winnings
The difference between an income tax liability and income tax payable
Income tax liability is a taxpayers total tax liability for the year.
Tax payable is the amount of tax that is still owing at the end of the year.
For example, if you are an employee with no other income, you are unlikely to have
any tax to pay at the end of the year as it has all been deducted at source by your
employer via PAYE.
You would still calculate your tax liability, then deduct any tax paid at source via
PAYE to leave you with a tax payable figure.
Therefore,
Income tax liability – tax deducted at source = Income tax payable
Non-savings income is taxed at the following rates:
£1-£34,500 at 20% (basic rate band)
£34,501-£150,000 at 40% (higher rate band)
£150,001 - onwards at 45% (additional rate band)
Savings income is taxed at the following rates:
£1-£34,500 at 20% (basic rate band) (unless the starting rate is available and then it
is £0 - £5,000 at 0% and £5,001 to £34,500 at 20%)
£34,501-£150,000 at 40% (higher rate band)
£150,001 - onwards at 45% (additional rate band)
Remember to use your savings nil rate band!
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Dividend income is taxed at the following rates:
£1-£34,500 at 7.5% (basic rate band)
£34,501-£150,000 at 32.5% (higher rate band)
£150,001 - onwards at 38.1% (additional rate band)
Remember to use your dividend nil rate band!
Illustration:
For the tax year 2018/19, Joe has a salary of £40,000, savings income of £2,000
and dividend income of £9,000.
During the year, he paid interest of £300 which was for a qualifying purpose.
Joe’s employer deducted £5,800 in PAYE from his earnings.
What is the income tax payable by Joe for 2018/19?
Solution:
Type of income £
Employment income 40,000
Savings income 2,000
Dividend income 9,000
Total income 51,000
Interest paid (300)
Personal allowance (11,850)
Taxable income 38,850
Income tax:  
Income tax:  
27,850 (40,000 – 300 – 11,850) x 20% = £5,570 
500 at 0% = £0 
1,500 (2,000 – 500) x 20% = £300 

2,000 at 0% = £0 
2,650 x 7.5% = £199 
4,350 (9,000 – 2,000 – 2,650) x 32.5% = £1,414
Tax liability (5,570 + 300 + 199 + 1,414) = £7,483 £7,483
Less PAYE (£5,800)
Income tax payable £1,683
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Note
Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
The dividend 0% nil rate band used up some of the basic rate band leaving £2,650
of the basic rate band for some of the dividends with the remainder of the dividends
being taxed at the higher rate.
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Savings income starting rate band
There is a tax rate of 0% for savings income within the savings income starting rate
band (£5,000) (don't confuse this with the Savings income nil rate band, that you
have seen in the previous topic)
The savings income starting rate only applies where the savings income falls wholly
or partly below the starting rate limit.
Keep in mind that income tax is charged first on Non-savings income.
The savings income starting rate band counts towards the basic rate limit of
£34,500.
Example (using the Saving starting rate band)
Peter has a trading income of £13,000 and savings income of £9,000.
Calculate Peter's tax liability.
• Solution 
NSI 
13,000 - PA 11,850 = £1,150 x 20% = £230 
SI 
Savings income starting rate band: £5,000 - £1,150 = £3,850 x 0% = £0 
Savings nil rate band - basic rate taxpayer = £1,000 x 0% = £0 
(£9,000 - £3,850 - £1,000) = £4,150 x 20% = £830 
Tax liability = £230 + £830 = £1,060 
Note: We used the Savings starting rate band here because the Non-savings
taxable income was below £5,000. In fact, it was £1,150, therefore we could still use
£3,850 (5,000 - 1,150) savings starting rate band and use 0% rate.
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Example (where you can't use the Saving starting rate band)
Peter has a trading income of £46,350 and savings income of £9,000.
Calculate Peter's tax liability.
• Solution
 
NSI 
 
46,350 - PA 11,850 = £34,500 x 20% = £6,900 
Peter is a higher rate taxpayer since his Total taxable income is more than £34,500
(£34,500 + £9,000 = £43,500). 
SI 
Savings nil rate band - higher rate taxpayer = £500 x 0% = £0 
(£9,000 - £500) = £8,500 x 40% =£3,400 
Tax liability = £6,900 + £3,400 = £10,300 
Note: We could NOT use the Savings starting rate band here because the Non-
savings taxable income was more than £5,000. In fact, it was £34,500 
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Syllabus B4hi)
h) Recognise the treatment of individual savings accounts (ISAs) and other tax exempt
investments.
ii) Understand how the accrued income scheme applies to UK Government securities (gilts)
Individual Savings Accounts and other tax exempt

investments
What is an Individual Savings Account
Individual Savings Accounts (ISA’s) have for many years been the most common
form of tax efficient investment.
The individual savings account (ISA) investment limit for is £20,000.
The £20,000 limit is completely flexible, so a person can invest £20,000 in a cash
ISA, or they can invest £20,000 in a stocks and shares ISA, or in any combination of
the two – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.
The main advantages of ISAs are:
1. Income is free of income tax
2. Disposals of investments within an ISA are free from capital gains tax
3. Disposals of investments within an ISA are free from capital gains tax
Components of an ISA
1. Cash - for example in a bank account
2. Stocks and shares listed anywhere in the world
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National savings
These offer a variety of products some of which are tax free, e.g. National Savings
Certificates
However, some National Savings & Investments (NS&I) products are taxable,
namely:
• NS&I Easy Access account / NS&I Direct Saver Account
• NS&I Investments accounts
• The income is received gross without deduction of tax at source.
The nature of the investments are historically risk free.
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Syllabus B5. The Comprehensive computation of taxable income
Syllabus B5b. Calculate the amount of personal allowance available.
Personal allowance
What is a personal allowance?
Personal allowance
is an amount on which income tax will not be charged.
If an individual makes income above this allowance amount, then income tax will be
charged on that additional income and the relevant rates.
Calculation of the personal allowance
For the tax year 2018/19 the personal allowance is £11,850 but it is reduced if the
taxpayer has adjusted net income for the year in excess of £100,000.
If the adjusted net income exceeds £100,000 then the personal allowance is
reduced by ½ of the excess of £100,000.
Therefore, the personal allowance is reduced to Nil if the adjusted net income is
£123,700. (£123,700-£100,000)/2 = £11,850.
How to calculate Net income and Adjusted net income?
Net income = Total income – qualifying interest payments – trading loss reliefs.
• Adjusted net income = Net income – gross personal pension contributions -

gross gift aid contributions.
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How does this all look?
Total income
Less: X
Trading loss reliefs (X)

Qualifying interest (X)
Less:
Personal allowance (X)
Taxable income X
Illustration:
Bubble has net income of £103,150 and has a gross personal pension contribution
of £2,000.
• How much personal allowance will she be entitled to?
• What is her taxable income?
Solution:
Adjusted net income = £103,150 - £2,000 = £101,150
Personal allowance reduction
£101,150 - £100,000 = £1,150 / 2 = £575
• £11,850
• (£575)
• £11,275 is the personal allowance available to Bubble
Total income
Net income £103,150
Personal allowance (£11,275)
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Syllabus B5c. Understand the impact of the transferable amount of personal allowance for
spouses and civil partners.
Transferable Personal Allowance
What is a transferable P.A.?
For an unused personal allowance to be transferrable between spouses/civil

partners:
One individual must be a non-taxpayer and have unused P.A.
The other individual must be a basic rate tax payer.
• The maximum amount that can be transferred from the non taxpaying spouse is:
£1,190
• (This must be available to the non-taxpayer to actually transfer)
• This transfer will be given in the form of a 20% tax credit to the spouse who is
taking it: 20% * (£1,190) = £238 is the maximum tax credit that can be given to
the spouse who is paying tax.
• Thus, this amount will be deducted from their income tax liability to reduce their
income tax payable.
• The election to transfer must be made within 4 years of the end of the tax year to
which it should apply, and remains automatically effective until it is withdrawn.
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Illustration:
A husband has trading income of £30,000. His wife only has employment income of
£8,000.
• Does she have unused personal allowance?
• How much of her unused personal allowance can she transfer to her husband?
• How will this reduce his income tax payable?
Solution:
Wife
Personal allowance (11,850)
Taxable income Nil
Unused P.A. = £3,850 – the maximum that can be transferred is £1,190.
Husband
I.T. liability = £18,150 * 20% = £3,630
Tax credit of unused

(£238)
P.A. (£1,190 * 20%)
I.T. payable £3,392
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Syllabus B5e. Qualifying loans
Qualifying loans
Trading income and property business income
Certain interest payments made on loans taken are deducted from trading income
and property business income.
These include taking out a loan for trading purposes and taking out a loan to
purchase an investment property.
The interest payments here will be deducted from their respective headings that
they relate to.
• Here, we will look at the interest payments which will reduce a taxpayer’s
total income.
• Interest paid on certain loans are deductible from a taxpayer’s total income is
known as interest paid on qualifying loans.
The main types of eligible loans are:
1. Loan to purchase plant and machinery which is necessarily acquired for the use
in the employment of the taxpayer
Illustration:
Purchasing a computer to use for employment, if a loan was taken out to make
this purchase, then the interest payable is deducted from total income.
2. Loan to purchase plant and machinery for the use in the business of a
partnership, in which the taxpayer is a partner.
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Illustration:
A partner would have taken out a personal loan to purchase a computer for use
in the partnership, here interest payable would be deducted from total income
3. Loan to purchase an interest in a partnership.
Illustration:
Partner A puts in £20,000 into the partnership bank account to fund the
business.
If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the
£1,400 payable from his total income.
4. Loan to purchase ordinary shares in a close company
This is allowable as long as the taxpayer owns at least 5% of the ordinary share
capital or works for the greater part of his time in the management of the
company.
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Syllabus B5f. Understand the treatment of gift aid donations and charitable giving.
Gift aid donations
There are 3 tax benefits available for making personal gift aid donations:
Let's say that an individual makes a gift aid donation of £1,000
1. Pay net of 20%.
For example, if an individual want to make a gift aid donation of £1,000, he

needs to pay 80% and HMRC will make the remaining 20% donation on his
behalf.
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Increase the basic and higher rate bands by the gross gift aid donation.
Therefore, this same individual will increase his basic rate band to 34,500 +
1,000 = £35,500 and his higher rate band to 150,000 + 1,000 = £151,000.
This will result in an additional £1,000 being taxed at the lower rate of 20%
instead of 40%, and an additional £1,000 being taxed at the higher rate of 40%
instead of 45%.
3. Gross gift aid donation are deducted from net income to arrive at adjusted net
income.
Adjusted net income is used to determine the amount of personal allowance

available. (Topic Personal allowance)
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Illustration:
Eli has a trading profit of £50,000 and he paid £2,400 to charity under the gift aid
system.
• Show the tax benefits of this donation.
Calculate Eli’s income tax liability
Solution:
Benefit 1:
• Eli paid £2,400 (80%)
HMRC paid £600 (20%)
Benefit 2:
• Basic band extension: £34,500 + £3,000 = £37,500
Higher band extension: £150,000 + £3,000 = £153,000
Benefit 3:
Adjusted net income = £50,000 - £3,000 = £47,000
Income tax liability
Personal allowance £11,850
£37,500 * 20% = £7,500
(£38,150 - £37,500) = £650 * 40% = £260
Total income tax liability £7,760
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Syllabus B5g. Child benefit tax charge
Child benefit tax charge
Child benefit charge
The child benefit is a monetary benefit that the UK government provides to

individuals with children, regardless of their financial standing.
• The child benefit charge is designed to claw back the benefit from individuals
with high income
• If an individual who claims child benefit has an adjusted net income in excess of
£50,000, an income tax charge arises.
The charge is levied at the rate of 1% of the amount of the child benefit received
for every £100 of income above £50,000.
• Therefore, if the adjusted net income exceeds £60,000, then the charge is equal
to the full amount of the child benefit received.
Thus, if an individual expects their adjusted net income to exceed £60,000, they
can choose instead not to claim child benefit.
• The tax charge will be collected through the self-assessment system along with
the income tax payable.
How to calculate adjusted net income?
Adjusted net income = Net income – Gross personal pension contributions
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Illustration:
Vineeta earns £60,000. She receives £1,000 of child benefit.
• How much of the benefit will be clawed back by the government?
Solution:
Income above £50,000:
• = £60,000 - £50,000 = £10,000
For every £100 above £50,000, 1% of the benefit will be returned:
£10,000 / £100 = 100% of the benefit will be returned
Benefit returned:
100% * £1,000 = £1,000
Therefore, Vineeta can choose instead not to claim child benefit.
How is the benefit returned to the government?
The benefit that needs to be returned to the government is added to the income tax
liability of the taxpayer.
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Syllabus B5h/7b.
B5h) Understand the treatment of property owned jointly by a married couple, or by a couple
in a civil partnership.
B7b) Understand how a married couple or a couple in a civil partnership can minimise their tax
liabilities.
Jointly owned property by a married couple/civil

partners
Understand the treatment of property owned jointly by a married couple, or by a

couple in a civil partnership.
• If assets are owned jointly then the rule is that any income generated from the
asset must be split 50:50.
• It is possible to make a declaration of beneficial interest in order that the joint

income is split in order to the actual entitlement.
• If one spouse does not own any shares in the property, shares can be
transferred to that spouse to result in actual entitlement.
Transferring just 5% of shares can result in actual entitlement of 50% to income.

If more shares are transferred, then more income can be legally transferred.
• Ideally, to be tax efficient, the declaration should assign more income to the
individual who is a lower rate tax payer and potentially has some unused
personal allowance.
The overall objective is to save tax for the family as a whole.
Illustration:
A couple has a joint property of which generates annual income of £100,000.
The husband contributed nothing towards the purchase of the house and the wife
contributed 100% towards the purchase of the house.
How will this income be split if no declaration is made?
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Solution:
If no declaration is made, then the income will be split in the following manner:
Husband £50,000
Wife £50,000
Illustration:
For the same couple above, the following information relates to their yearly income
aside from the property income.
• Husband: £100,000 salary per annum.
Wife: Not earning
• If the declaration is made to split the income according to actual entitlement,

how much income tax will be saved as a couple?
Solution:
Current situation
Husband
Salary £100,000
P.A. Nil (Income above £123,700)
Wife
P.A. (£11,850)
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Husband
£34,500 * 20% = £6,900
(£150,000 - £34,500) * 40% = £46,200
Total £53,100
Wife
£34,500 * 20% = £6,900
(£38,150-£34,500) * 40% = £1,460
Total £8,360
• The husband is already paying tax at a higher rate and with the £50,000 property
income, he will not have any personal allowance remaining.
• Therefore, the husband and wife should make a declaration so that the husband
is able to use his personal allowance, as both individuals are already paying
income tax at the higher rate.
• A declaration should be made to transfer 100% of the property income to the

wife, so that the both individuals can utilise their personal allowances fully.
• This will save them tax at £11,850 x 40% = £4,740 (At ATX - UK this kind of
short cut calculation is expected. The long version is shown below for
completeness)
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After declaration:
Husband
Salary £100,000
Property income £Nil
P.A. (11,850)
Wife
Wife

P.A. (£11,850)
Income tax liability (same calculation for both husband and wife as they both now
have income of £100,000 less the personal allowance)
£
£34,500 * 20% = 6,900
(£88,150 - £34,500) * 40% = 21,460
Total 28,360
Total liability of husband and wife before declaration (£53,100 +

£61,460
£8,360)
Total liability of husband and wife after declaration (£28,360 +
(£56,720)
£28,360)
Tax saving £4,740
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Note:
1. A joint bank account will always be taxed 50:50 regardless of who contributions
what amount
2. If shares are owned, dividends are always divided according to the exact
proportion to which each is actually entitled, it is never assumed that it is in
equal proportions.
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Syllabus B6. National insurance contributions for employed
and self-employed persons
Syllabus B6a. NICs
National insurance contributions (NICs)
We have the following classes of NIC:
1. Employee’s Class 1  

 
Paid by employees
2. Employer’s Class 1
Paid by employers
3. Class 1A
Paid by employers
4. Class 2 
 
Paid by the self-employed
5. Class 4
Paid by the self-employed
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Syllabus B6a. Class 1 and 1A NIC
NIC for the employed
There are 3 types of contributions that are payable for those who are
employed:
1. Employee’s Class 1
2. Employer’s Class 1
3. Class 1A
Class 1 Primary is paid by employees
For the tax year 18/19 the rates of employee class 1 NIC is 12% and 2%.
A rate of 0% is paid on earnings below £8,424.  

A rate of 12% is paid on earnings between £8,425-£46,350. 
A the rate of 2% is paid on all earnings above £46,351 onwards
NIC Paid by Paid on behalf Limits Rates

of
Employee’s Employees Employee cash £0-£8,424  0% 
Class 1 earnings
£8,425- 12%
£46,350
£46,351 - 2%
onwards
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Illustration - Employee’s Class 1
Cow plc has one employee who is paid £47,000 per year.
Calculate the Class 1 NIC primary payable by the employee.
Solution:
Employee’s Class 1 payable:
8,424 * 0% = £0 
£46,350-£8,424 = £37,926 * 12% = £4,551 
£47,000 – £46,350 = £650 * 2% = £13
Total Employee’s Class 1 NIC payable = £4,564
Note that when you are calculating the NIC payable, you need to start paying from
£8,424.Therefore, you will subtract £8,424 from £46,350 and so forth.
Employer’s Class 1 NIC is paid by employers
Employer’s Class 1 NIC is paid by employers on the employee earnings.
There is an employment allowance of £3,000 (given in the exam) available per

employer to reduce the employer’s Class 1 Secondary NIC payable.
Note: this allowance is not available to companies where the only employee is the
Director.
The rate of employer class 1 NIC is 13.8% and is paid on all earnings over £8,424 in
the tax year.
There is no higher limit for the earnings.
NIC Paid by Paid on behalf of Limits Rates
Employer’s Employee cash £0-

Employer 0%
Class 1 earnings £8,424
£8,424
13.8%
onwards
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Illustration - Employer’s Class 1
Cow plc has three employees who are each paid £45,000 per year.
Calculate the Class 1 secondary payable by the employer in 18/19.
Solution:
£8,424 * 0% = £0 
£45,000 – £8,424 = £36,576 * 13.8% = £5,047
£5,047 x 3 employees = £15,141 

Less employment allowance = (£3,000)
Total Class 1 Secondary payable = £12,141
Class 1A is paid by employers
Class 1A NIC is paid by employers on behalf of the benefits provided to employees.
Note that you may have to calculate the monetary value of the benefits, and then
calculate the Class 1 A NIC payable, based on the benefit's monetary value.
These explanations can be found in topics The statutory approved 

mileage allowances and RTI reporting
The amount of benefits assessable
The rate of employer Class 1 A NIC is 13.8%.
Benefits provided to
Class I A Employer No limits 13.8%
employee
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Illustration Class 1A NIC
Jane is employed by Cow plc and earns £25,000 per year.
During 18/19 she received the following taxable benefits:
Car benefit £4,500 

Fuel benefit £2,222 
Medical Insurance £1,800
Calculate the Class 1A NIC liability in 18/19.
Solution:
Car benefit £4,500 

Fuel benefit £2,222 
Medical insurance £1,800 
Total benefits = £8,522
Class 1 A NIC payable = £8,522 * 13.8% = £1,176
Illustration - Calculating monetary value of car benefit
John has been given a petrol car to use for private purposes during the tax year
2017/18.
The car has a list price of £10,000 and it has a CO2 emission of 150g.
What is the monetary value of this benefit? 

What will the Class 1 A NIC payable be upon this benefit?
Solution
Calculating the car benefit:
150g-95g = 55g/5g = 11% +20% = 31%
31% * £10,000 = £3,100 is the monetary value of the car benefit
Class 1 A NIC payable = £3,100*13.8% = £428
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Syllabus B6a. Class 2 and 4 NIC
Class 2 and 4 NIC
Contributions for the self employed
Class 2 NIC is £2.95 per week.
The small earnings exemption is £6,205 which means that if the trading profits are
below this figure no Class 2 NIC is payable. 
 
If trading profits are above this amount then £2.95 is paid per week
Profits £5,900 Profits £6,300
No Class 2 NIC payable because of small Class 2 NIC payable = 52 weeks *

profits exemption £2.95 = £153
Class 4 NIC is payable by the self employed on behalf of their earnings
The rates of Class 4 NIC are 9% and 2%.
The rate of 0% is paid on profits below £8,424. 

The rate of 9% is paid on profits between £8,425-£46,350  
The rate of 2% is paid on all profits over £46,350

£0-£8,424 
0% 
Self Self employed £8,424-£46,350  
Class 4 9%  
employed cash earnings £46,350 -
2%
onwards
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Illustration:
Calculate the NIC payable by Shobha if she is self-employed in 18/19 has self-
employed income of £47,000.
Solution:
Class 2 NIC payable = £2.95 * 52 weeks = £153
Class 4 NIC payable: 

£8,424 * 0% = £0 
£46,350-£8,424 = £37,926 * 9 % = £3,413 
£47,000 - £46,350 = £650 * 2% = £13
Total Class 4 NIC payable = £3,426
Total NIC payable £3,579
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Syllabus B6a. The annual employment allowance
The annual employment allowance
Employment allowance
Annual employment allowance
There is an employment allowance of £3,000 available per employer to reduce the

employer’s Class 1 Secondary NIC payable.
This allowance cannot be used to reduce the employer's Class 1 A NIC payable or

the employee's Class 1 NIC payable. It is only available to reduce the employer's
Class 1 NIC payable.
This will reduce the liability that results from the calculation of Employer’s Class 1
NIC by £3,000.
Do not mistake this for a lower limit.
Illustration:
Arya has a salary of £50,000 per annum.
What will her:
1) Employee’s Class 1 NIC payable be?
What will her employer's:
1) Class 1 NIC payable be?
2) Class 1 A NIC payable be?
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Solution:
Employee’s Class 1 NIC:
£8,424 * 0% = £0
(£46,350-£8,424) = £37,926 * 12% = £4,551
(£50,000-£46,350) = £3,650 * 2% = £73
Total Employee’s Class 1 NIC payable = £4,624
Employer’s Class 1 NIC: £8,424 * 0% = £0
(£50,000-£8,424) = £41,576 * 13.8% = £5,737
Employer’s Class 1 NIC liability £5,737
Less annual employment allowance (£3,000)
Class 1 Secondary NIC Payable £2,737
Class 1 A NIC payable= Nil
There is no Class 1 A because the employee was not given any employment
benefits.
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Syllabus B7. Exemptions and reliefs in deferring and
minimising income tax liabilities
Syllabus B7a. Explain and compute the relief given for contributions to personal pension
schemes, and to occupational pension schemes.
Pensions
Types of pension schemes
Occupational pension schemes
These are pension schemes that are run by an employer.
An employee can contribute into the scheme and an employer can contribute into
the scheme on behalf of the employee.
If an employee contributes into the scheme, tax relief is given as follows:
• The contribution made by the employee is deducted from their salary in arriving
at taxable income.
It is basically treated as an allowable expense.
Illustration 1:
David has a salary of £20,000 for the year ended 05/04/2019.
During the year he has contributed £1,000 into his occupational pension scheme.
• What is his taxable income for 18/19?
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Solution:
Salary £20,000
Less:
Pension contribution (£1,000)
Net income £19,000
Less:
Taxable income £7,150.00
Registered personal pension schemes
There are 3 tax benefits available for making personal pension contributions into a
registered scheme.
They are exactly the same as the tax benefits available for making gift aid
donations.
 
These are:
1. Pay net of 20%.
For example, if an individual want to make a personal pension contribution of

£1,000, he needs to pay 80% and HMRC will make the remaining 20%
contribution on his behalf.
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Increase the basic and higher rate bands by the gross personal pension
contribution.
Therefore, this same individual will increase his basic rate band to £35,500 and
his higher rate band to £151,000.
This will result in an additional £1,000 being taxed at the lower rate of 20%, and
an additional £1,000 being taxed at the higher rate of 40%.
3. Gross personal pension contributions are deducted from net income to arrive at
adjusted net income.
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Adjusted net income is used to determine the amount of personal allowance
available.
Illustration 2:
Eli has a trading profit of £50,000 and he paid £2,400 (net) to a registered personal
pension scheme in the tax year 18/19.
• Show the tax benefits of this contribution.
Calculate Eli’s income tax liability for 18/19.
Solution:
Benefit 1:
Eli paid £2,400 (80%)
HMRC paid £600 (20%)
Benefit 2:
Basic band extension: £34,500 + £3,000= £37,500
Higher band extension: £150,000 + £3,000 = £153,000
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Benefit 3:
Adjusted net income = £50,000 - £3,000 £47,000
£37,500 * 20% = £7,500
(£38,150 - £37,500) * 40% = £260
Total income tax liability £7,760
Limitations of the tax relief available
Pensions do have the taxable benefits mentioned above.
However, there are 2 limitations under which contributions must be to qualify for the
tax relief outlined.
These are:
1. They must be within the relevant earnings of the individual. If not, a certain
amount of the contribution will be taxable.
2. If they are within the relevant earnings, they must be also within the annual
allowances of the individual. If they are not, a certain amount of the contribution
will be taxable.
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What are relevant earnings?
These are the greater of
• £3,600 and
100% of:
• Trading income (e.g) profits from a business
• Employment income (e.g.) salary
• Income from furnished holiday lettings (e.g.) rental income from a FHLA
For example
if an individual has trading profits of £50,000, then the greater of £3,600 and
£50,000 will be chosen as relevant earnings, £50,000 will be the relevant earnings.
if an individual has trading profits of £3,000, then the greater of £3,600 and £3,000
will be chosen as relevant earnings, £3,600 will be the relevant earnings.
What is the annual allowance?
This is an allowance given to individuals every year.
The individual can use the allowance yearly, and the amount unused is carried
forward for 3 years but only if they are a member of a pension scheme in those
years.
• Therefore, at any particular time, an individual can use their current year
allowance plus 3 years’ b/f unused annual allowances on a FIFO basis.  
The gross contributions are deducted from the annual allowances.
2015/16 £40,000
2016/17 £40,000
2017/18 £40,000
2018/19 £40,000
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Illustration 3:
Sally's trading income for the year ended 05/04/2019 were £60,000.
Sally made contributions of £56,000 (gross) into a personal pension scheme during
the tax year 18/19.
She has made gross pension contributions of £30,000 per annum for the last 10
years.
How much of the pension contribution qualifies for relief? 

What is the income tax liability of Sally?
Solution:
Sally’s relevant earnings are the higher of £3,600 and £60,000:
Therefore, Relevant earnings is £60,000.
Therefore, the pension contribution is within 100% of relevant earnings.
However, is the contribution within the annual allowance?
Current year annual allowance £40,000

15/16 b/f annual allowance 40,000 - 30,000 £10,000
Total allowance £70,000
Gross contribution £56,000

Total allowance (£70,000)
The contribution is within the annual allowance, therefore £56k qualifies for
the tax relief
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What happens if the gross contributions are above the relevant earnings or
annual allowance available?
The additional amount is added to the total income, on top of other income,
therefore it is chargeable to income tax at the highest rate that the individual pays.
This is called the annual allowance charge.
Annual allowances only start to accumulate in the first year that an individual makes
a contribution.
Illustration 4:
Sally is self employed.
Her trading income for the year ended 05/04/2019 were £60,000.
Sally made contributions of £56,000 (gross) into a personal pension scheme during
the tax year 18/19.
She has made gross pension contributions of £39,000 per annum for the last 10
years.
• How much of the pension contribution qualifies for relief?
• How much will result in an annual allowance charge?
• What is the income tax liability of Sally? 
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Solution:
Sally’s relevant earnings are the higher of £3,600 and £60,000:
• Relevant earnings: £60,000
• Therefore, the pension contribution is within 100% of relevant earnings.
• However, is the contribution within the annual allowance?
Current year annual allowance £40,000

Total allowance £43,000
Gross contribution £56,000

Total allowance (£43,000)
Annual allowance charge £13,000
Total income
Annual allowance charge £13,000
Basic Band extension: £34,500 + £56,000 = £90,500
Income tax liability:
Total income £73,000 

Less P.A. (£11,850) 
£61,150 * 20% = £12,230
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Tapered annual allowance
• If ANI (Annual Net Income) is more than £150,000 then the CURRENT year
Allowance is a tapered allowance
• It means that the normal annual allowance of £40,000 is reduced by £1 for every
£2 by which a person’s adjusted income exceeds £150,000, down to a
minimum tapered annual allowance of £10,000.
This is similar to how personal allowances are reduced, except the

adjusted net income in this case needs to be £150,000 to reduce, not
£100,000.
Therefore, a person with adjusted income of £210,000 or more, will only be

entitled to an annual allowance of £10,000 (£40,000 – ((£210,000 – £150,000)/2)
= £10,000).
Tapering applies on a tax year basis, so a taxpayer with variable income might
find themselves entitled to the full £40,000 annual allowance for some years, and
a tapered annual allowance in other years.
For example
• if the taxpayer only has adjusted net income of £100,000
then they will be entitled to the full £40,000 but
• if the taxpayer has adjusted net income of £160,000
then they will be entitled to (£160,000 - £150,000 = £10,000/2 = £5,000,
£40,000 - £5,000 = £35,000 annual allowance available.
A.N.I. = Total income - gross personal pension contributions - gross gift aid
donations
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Remember that it is only the 2016/17, 2017/18 and 2018/19 annual
allowances that you will apply this tapering to, the other allowances are
always given in full
• If the annual allowance is not fully used in any tax year, then it is possible to
carry forward any unused allowance for up to three years on a FIFO basis
For this exam, you will be carrying forward annual allowances from 2015/16
onwards based on the £40,000 that was applicable in that year.
If there is any annual allowance remaining from 2018/19, after the tapering has
been done to the allowance, this can also be carried forward in the normal way.
General rule carry forward is only possible if a person is a member of a pension

scheme for a particular tax year.
Therefore, for any year in which a person is not a member of a pension scheme
the annual allowance is lost.
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Illustration ANI < £150,000
Peter has made the following gross personal pension contributions:
2015/16 £32,000  
2016/17 £31,000  
2017/18 £19,000  
2018/19 £48,000
Peter's adjusted income for the tax year 2018/19 is £140,000.
Will Peter be subject to an annual allowance charge?
Solution:
No, Peter will not be subject to an annual allowance charge.
The pension contribution of £48,000 for 2018/19 has used all of Peter’s annual
allowance of £40,000 for 2018/19 and £8,000 (48,000 – 40,000) of the unused
allowance of £8,000 (40,000 – 32,000) from 2015/16.
Unused allowances to carry forward to 2019/20:  

£9,000 (40,000 – 31,000) from 2016/17 
£21,000 (40,000 – 19,000) from 2017/18
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Illustration ANI>£150,000
Chirag has made the following gross personal pension contributions:
2015/16 £32,000  
2016/17 £31,000  
2017/18 £19,000  
2018/19 £8,000
His adjusted net income for the year is £250,000. This is the first time that his ANI
has been above £150,000.
Will Chirag be subject to an annual allowance charge?
Solution:
Yes.
Chirag’s tapered annual allowance for 2018/19 is the minimum of £10,000 because
his adjusted income exceeds £210,000.
His contribution this year is only £8,000 - therefore it is within the tapered annual
allowance of £10,000 and he will have £2,000 to carry forward to 2019/20.
Unused allowances to carry forward to 2019/20: 

of £9,000 (40,000 – 31,000) from 2016/17,  
£21,000 (40,000 – 19,000) from 2017/18 
£2,000 (£10,000 – £8,000) from 2018/19.
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Syllabus B7c. Basic income tax planning
Tax planning
When we dealt with jointly owned assets, we illustrated the tax advantage to be
gained from transferring ownership of an income producing asset, such as a rental
property from a higher rate taxpayer to a spouse who was only a basic rate
taxpayer, or even greater tax savings to be had when the transferee spouse was not
even a basic rate taxpayer and was not therefore using some or all of their personal
allowance.
This would allow income that would have been taxed at 40% to now be taxed at
20% or indeed not taxed at all if the income fell within the available personal
allowance of the transferee spouse.
The introduction of nil rate bands for savings income and dividend income has
created opportunities for spouses to reduce their overall charge to income tax and
may even give an advantage to transferring such income from a basic rate taxpayer
spouse to a higher rate taxpayer spouse!
Example
Donald and Theresa are a married couple and have regular annual income as
follows:
Donald 
Salary £60,000
Theresa  
Salary £18,000 
Interest £2,000 
Dividends £9,000
It is clear from the above information that Donald is a higher rate taxpayer with
taxable income of £48,150 (60,000 – 11,850) and Theresa is a basic rate taxpayer
with taxable income of £17,150 ((18,000 + 2,000 + 9,000) – 11,850).
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In this situation it would normally be the case that for tax planning purposes it
would be advisable to see if any investment income could be moved from the
higher rate taxpayer to the basic rate taxpayer.
This, however is not possible as Donald’s only income is his salary.
The introduction of the nil rate bands, however, means that in the above example
tax savings can be achieved if firstly, £500 of the interest income could be made by
Donald and therefore use his savings income nil rate band of £500 that is currently
being wasted.
This income is being taxed at 20% on Theresa as she has savings income in excess
of her nil rate band of £1,000.
Theresa is £2,000 - £1,000 = £1,000 * 20% = £200
If she transferred £500 to her husband, he would use his nil rate band and she
would save: £500 * 20% = £100
The second transfer would be of sufficient shares to move £2,000 of dividend

income from Theresa to Donald in order that both may use their dividend income nil
rate bands of up to £2,000.
Currently Theresa is being taxed at 7.5% on £2,000 of her dividend income, so a tax
saving of £150 (£2,000 * 7.5%) would be possible here.
Clearly in practice choosing the right amount of interest bearing securities and
shares to transfer to Donald to allow usage of the available nil rate bands may be a
little difficult to precisely achieve.
Carefully keep in mind that it is now not necessary to transfer from a higher rate
payer to a basic rate payer to save tax, it can be the other way round.
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Income tax in the exam
Exam tips for the income tax questions!
Section A and Section B Income tax questions
For the objective questions on income tax, remember that it's an all or nothing
game, you either get the 2 marks or you get 0 marks.
All of options are not random numbers but answers that you can actually think are
correct if you have made a small mistake (that the examiner has already thought
you will make).
To avoid this, you must be very careful to read the exact requirement!
For example, does the question ask you to compute Income Tax Liability or Payable
or even Taxable Income?
Does it ask for Class 1 NIC payable by the employer or all Class 1 NIC payable
(employer and employee) or all NIC payable by the employer (Class 1 and Class 1A
NIC of the employer?
Does the examiner ask for the allowable expenses of the trader to be computed or
the disallowable?
Always pick out the easier MCQ first and if there are a few that you find very
difficult, do not waste your time on them until the end as there are marks that you
can score more easily in Section C - as the examiner gives you marks for your
workings, so even if your final answer is wrong there, you should be able to score
some marks.
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Section C Income tax question
You will see a 15 mark Income Tax question which is likely to require an Income tax
Computation to be prepared including a combination of employment income with
assessable benefits, property income, interest and dividend income. It may also
include the opening or closing years of an unincorporated trader as the individual
moves from employment to self employment during the tax year or vice versa.
Remember to keep all of these rules in mind!
Income tax computation
Non-savings Savings Dividend

Total
Income Income Income
£ £ £ £
Trading Profit x x
Less Trading Loss relief –

(x) (x)
brought forward
Employment income x x
Property income x x
Dividends from UK companies x x
Building society interest x x
Bank deposit interest x x

TOTAL INCOME x x x x
Less
Qualifying interest (x) (x)
Other Trading Loss reliefs (x) (x)
NET INCOME x x x x
Less: Personal Allowance (x) (x)
TAXABLE INCOME x x x x
Employment income (salaries, wages) must be included gross in the computation

before deduction of PAYE by the employer and these will always be stated gross in
the exam question.
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Dividends and interest must always be included gross in the computation.
Deductions are always made first from non savings income, savings income and
then dividend income.
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Syllabus C: Chargeable Gains For Individuals
Syllabus C1. The scope of the taxation of capital gains
Syllabus C1a. The scope of capital gains tax
The scope of capital gains tax
You should pay CGT on:
1. The sale or gift of the whole or part of an asset.
For example out of a 10 acre plot of freehold land, 5 acres is sold.
Capital gains tax will be paid on the disposal of the 5 acre part.
2. The loss or destruction of an asset.
For example a painting costing £5,000 was destroyed in a fire.
This destruction will be considered to be a capital disposal.
The disposal proceeds will be Nil and therefore a capital loss of (£5,000) will be
realised on destruction.
3. Compensation in connection with an asset.
For example a painting costing £5,000 was destroyed completely in a fire.
The painting was insured and insurance proceeds of £10,000 were received
because of the loss of the painting.
Capital gains tax should be paid on (£10,000-£5,000) = £5,000.
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Chargeable assets
All assets are chargeable unless specifically exempted.
This list is provided in C1b.
Chargeable person
An individual who is resident in the UK is a chargeable person and is therefore

subject to UK CGT on their worldwide assets.
Note the differences between companies and individuals
1. Companies pay corporation tax on their capital gains whereas individuals pay
capital gains tax.
2. Companies have an indexation allowance up to December 2017 which allows for

the adjustment of the cost of an asset for inflation, whereas individuals have an
annual exemption.
3. Companies can use rollover and holdover relief with respect to their chargeable
gains whereas individuals have a much wider array of reliefs available to them.
4. Companies can be part of 75% gains groups whereas individuals cannot.
5. Loss relief is dealt with differently between both companies and individuals.
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Syllabus C1b. Assets which are exempt
Assets which are exempt
Exempt assets include:
• Motor cars suitable for private use
• Animals (wasting chattels that do not qualify for capital allowances)
• Debtors
• Cash
• Chattels bought and sold for less than £6,000
• Corporate bonds
• Government securities
• Trading stock
• Shares in individual savings accounts ISA
• Shares in a VCT
• Foreign currency for private use (Cash)
• Works of art given for national use
• Damages for personal injury
• Life insurance policies (Cash)
• National Savings and Investment certificates
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Syllabus C2. The basic principles of computing gains and
losses
Syllabus C2/5a. Compute and explain the treatment of capital gains.

and Compute the amount of capital gains tax payable.
The treatment of capital gains
The capital gain is calculated as follows:
Disposal proceeds X
Less: Incidental cost of disposal (X)
Less: Acquisition cost (X)
Capital Gain (Chargeable gain) / (Capital loss) X / (X)
Illustration:
A chargeable asset was disposed of for £10,000.
On it’s disposal, £1,000 of legal cost was incurred.
The asset originally cost £5,000.
Which of these costs will be classified as incidental cost to disposal?
Which of these costs will be classified as acquisition cost?
Solution:
The legal cost of £1,000 is classified as the incidental cost to disposal.
This is because it has been incurred because of the disposal.
Incidental cost to disposal can also include advertising cost and agency fees.
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• The original cost of the asset of £5,000 is classified as the acquisition cost.
This is because it is the amount spent to acquire the asset originally.
Capital gain calculation:
Disposal proceeds £10,000
Incidental cost to disposal (legal cost) (£1,000)
Acquisition cost (£5,000)
Capital gain (Chargeable gain) £4,000
Capital gains tax is calculated as follows:
Capital Gains (Chargeable gain) X
Less: Annual exempt amount (11,700)
Taxable Gains X
CGT × 10%, 20% or 18%, 28% X
Annual exempt amount
This is an amount of capital gain that will not be subject to capital gains tax.
It is similar to the personal allowance that individuals get.
The amount is £11,700 for 2018/19.
If this amount is not used in a particular tax year, then it is wasted.
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The rates of capital gains tax are:
• Rate 10%
After considering a person's taxable income, any remaining amount falling within
the basic rate band is charged at 10%
• Rate 20%
Once the entire basic rate band has been used, then a rate of 20% is applied.
• For a residential property only
The same treatment applies as explained above, except that the 10% rate is
replaced with 18% and the 20% rate is replaced with 28%.
• Rate 10%
This rate is used for capital gains that qualify for entrepreneur's relief.
There are conditions that need to be met in order to be able to use this rate.
They are discussed in Topic Entrepreneur's relief.
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Illustration 1
Peter sold a capital asset and this resulted in a taxable gain of £40,000.
Peter has taxable income of £20,000. (Basic rate band: £34,500)
Required: 
Calculate Peter's capital gain tax.
Solution:
Taxable gain 40,000
Basic band remaining (£34,500 - £20,000) = £14,500
Capital Gains Tax (£14,500 * 10%) = £1,450
(£40,000 - £14,500) * 20% = £5,100
Total capital gains tax payable = 1,450 + 5,100 = £6,550
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Illustration 2
Peter sold a residential property and this resulted in a chargeable gain of £40,000.
Peter has taxable income of £20,000. (Basic rate band: £34,500)
Required: 
Calculate Peter's capital gain tax.
Solution:

Annual exempt amount (11,700)
Taxable gain 28,300
Basic rate band remaining (£34,500 - £20,000) = £14,500
Capital gains tax (£14,500 * 18%) = £2,610
(£28,300 - £13,500) * 28% = £4,144
Total capital gains tax payable = 2,610 + 4,144 = £6,754
Illustration 3
Katherine has a trading profit of £35,600 in 2018/19. (Basic rate band: £34,500)
Additionally, she sold a capital asset giving a rise to a taxable gain of £15,000.
What is her capital gains tax payable for 2018/19?
Note A taxable gain is after the deduction of the annual exempt amount.
Solution:

Basic rate band left £34,500 - £23,750 = £10,750
Capital gains tax £10,750 * 10% = £1,075
(£15,000 - £10,750) * 20% = £850
Total capital gains tax payable 1,075 + 850 = £1,925
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Illustration 4
What if Katherine had capital gain (Chargeable gain) of £15,000?
Solution:
Basic rate band left = (£34,500 - £24,100) = £10,400
Chargeable gain £15,000
Less:
A/E (£11,700)
Taxable gain £3,300
CGT £3,300 * 10% = £300
The rate used is 10% because the taxable gain of £3,300 fell entirely into the
remaining basic rate band of £10,400 that remained. 
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Syllabus C2b. The treatment of capital losses
The treatment of capital losses
Capital losses
1. Current year capital losses are set against current year capital gains in the same
tax year.
2. The set off is made to the maximum possible extent and cannot be restricted to
avoid wasting the annual exemption.
3. If there are insufficient gains to set off the capital losses in the year they arise,
the unrelieved capital losses may be carried forward.
4. The capital losses brought forward only reduce the capital gains to the level of
annual exemption and therefore do not waste the annual exemption.
5. Any unrelieved capital losses brought forward are carried forward to the next
year to be set off against capital gains.
Illustration:
Fiona and Jane made capital gains and capital losses for the years 2017/18 and
2018/19 as set out below:
Fiona Jane
2017/18
Capital gains 15,000 7,000
Capital losses 10,000 10,000
2018/19
Capital gains 17,000 13,700
Capital losses 5,200 2,000
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Calculate the taxable gains for Fiona and Jane for both 2017/18 and 2018/19 and
the amount of any losses carried forward at the end of 2018/19.
Solution:
Fiona 17/18 18/19
Capital gains £15,000 £17,000
Capital losses (£10,000) (£5,200)
Net capital
£5,000 £11,800
gains/loss
Annual
(£5,000) (£11,700)
exemption
Taxable gain Nil £100
Jane 17/18 18/19
Capital gains £7,000 13,900
Capital losses (£10,000) (2,000)
(£3,000) will be carried

Net capital
forward against c. gains £11,900
gains/loss
of 18/19
Capital losses
brought (£200)
forward
Annual
Wasted (£11,700)
exemption
Nil. The loss of (£2,800) will

Taxable gain Nil be carried forward to 19/20 c.
gains.
Note that the current year losses must be set off to a maximum without any
restriction and thus wastage of the annual exemption.
However, capital losses brought forward will be set of partially to save the annual
exemption. 
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Syllabus C2c. Transfers between husband and wife or civil partners
Transfers between husband and wife or civil partners
Don’t pay CGT if:
You transfer the assets to your husband or wife or civil partner.
• If a husband transfers an asset to his wife, she would be treated as though

she acquired the asset on the same date and at the same cost as husband
did.
Illustration:
On 01/05/2006 a man acquires a piece of land for £10,000.
On 01/05/2018 he transfers it to his wife when the market value of the land is
£80,000.
• Will a capital gain be assessable on the husband?
Solution:
The wife would be treated as though she acquired the asset on 01/05/2006 for
£10,000.
Therefore, this transfer would have been made at no gain/no loss and no capital
gain would be assessable.
Illustration:
What if this man made the same transfer to his daughter?
• Will a capital gain be assessable on the daughter?
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Solution:
A capital gain would arise on the father:
Sale proceeds (deemed to be market value) £80,000
Cost (£10,000)
Capital gain £70,000
• Note: As the father made a gift to the daughter and no sale proceeds were
actually received, the market value of the land will be considered to be the
value that the asset is sold for.
You will see the treatment of gifts in C2a
Why is this treatment beneficial?
This treatment is beneficial if one spouse does not have any capital gains and is a
basic rate taxpayer.
• It would be wise to transfer the chargeable asset to this spouse so that they can
fully utilise their annual exemption and pay capital gains tax at the lower rate of
10% since their basic band is not fully being used (unless it is a residential
property, then the lower rate is 18%).
• IF the asset stays with the spouse who is a higher rate payer and already has
capital gains, then an annual exemption allowance would be wasted and capital
gains tax would be paid at 20% (unless it is a residential property, then the
higher rate is 28%).
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Illustration:
Greg owned a piece of land bought on 01/06/2010 for £40,000.
For the tax year 18/19, he has taxable income of £50,000 and already has net
capital gains of £20,000.
He wants to sell this land for sale proceeds of £65,000.
• Greg’s wife is a housewife and does not have any income or capital gains of
her own.
He thinks that it is wise to transfer the asset to his wife and let her sell it.
• What amount of tax will Greg save if he does this?
Solution:
Without transferring the asset to his wife:
• Net capital gains £20,000
• Gain on land (W1) £25,000
• Net capital gains £45,000
• Annual exemption (£11,700)
• Taxable gains £33,300
• Capital gains tax payable at 20% = £6,660
• The CGT payable specifically on the land is = 20% * £25,000 = £5,000
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W1:
• Cost (£40,000)
• Net capital gain £25,000
Why is CGT payable at 20% and not 10%?
• This is because he has used his entire basic rate band up with his taxable
income. (Explained in Topic: The treatment of capital gains)
Transferred the asset to wife and she sold it:
• Disposal proceeds £65,000
• Cost (£40,000)
• Net capital gain £25,000
• Annual exemption (£11,700)
• Taxable gain £13,300
• Capital gains tax is payable at 10% because this taxable gain falls entirely
into the basic rate band = £13,300 * 10% = £1,330
• Savings:
• CGT paid by husband on the land: £5,000
• CGT paid by wife on the land: £1,330
• Saving: £3,670
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Syllabus C2d. Allowable expenditure on a part disposal
Allowable expenditure on a part disposal
Allowable cost for part disposal
A part disposal
If an individual owns a chargeable asset that he has only disposed a part of, a
capital gain will arise.
For example, if an individual owns a large piece of land and decides to only dispose
of a part of it, this is known as a part disposal.
Or, if an individual owns 5 antique vases, bought as a set, then disposing of only 2
from the set is considered to be a part disposal of the whole set.
A cost from the entire asset cost must be given to the part of the asset being disposed of.
This is known as the allowable cost. This allowable cost is then deducted from the
proceeds received for the part disposal, to arrive at a capital gain.
How much cost can you deduct from the disposal proceeds?
= Original purchase cost * [A / (A+B)]
Where:
A – Disposal proceeds received 

B – Market value of the remainder of the asset (Given in question)
Illustration:
Peter buys a house for £26,000 in October, 1996.
He has never lived in the house as his main residence.
He sells the garden for £100,000 in August 2018, incurring selling costs of £1,000.
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The value of the remaining house in August 2018 is £160,000.
• What capital gain will arise on this sale?
Solution:
Allowable cost for part sold:
• Original purchase cost = £26,000
Proceeds received (A) = £100,000
Market value for the remainder of the house (B) = £160,000
• Original purchase cost * [A / (A+B)]
£26,000 * [£100,000 / (£100,000 + £160,000)] = £10,000
• Notice that only £10,000 is considered to be the allowable cost.
This is because, this is the amount of cost that relates only to the part of the
asset being disposed of.
The other £16,000 is known as the base cost.
It relates to cost that will be used to calculate the capital gain when the
remainder of the asset is disposed of.
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Chargeable gain on sale:
Incidental cost to sell (£1,000)
Net proceeds £99,000
Allowable cost (£10,000)
Less annual exemption (£11,700)
Illustration:
The base cost of remaining house is: Original purchase cost – Allowable costs used.
£26,000 - £10,000 = £16,000
If the remainder of the house was disposed of for £120,000 after one year, what
taxable gain would arise then?
Allowable cost (£16,000)
Less annual exemption (£11,700)
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Syllabus C2e. Insurance proceeds received for a damaged/lost/destroyed asset.
Insurance proceeds received for a damaged/lost/

destroyed asset.
Damaged/lost/destroyed chargeable asset

When a chargeable asset is destroyed/lost/damaged and the value of the asset has
become negligible (very small value), then a person can make a negligible value
claim.
The asset will be treated as though it has been disposed of at it’s current, negligible
value, therefore the person can realise a capital loss. The asset does not actually
have to be disposed of, it is just a way of realising a loss. When the asset is sold in
the future, the negligible value will be used as its cost.
Illustration:
A painting was acquired for £10,000 and damaged in a fire.
It now is worth a negligible amount.
How will it be treated for capital gains tax?
Solution:
Disposal proceeds £ Nil
Capital loss (£10,000)
• This capital loss will be relieved against current year capital gains, and if it
cannot be relieved fully, it will be carried forward to be relieved against future
capital gains.
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• Note the painting could be valued at any amount and this same treatment
would apply.
For example, if the painting was valued at £100,000 at the time it was
damaged, then the capital loss realised would be:
Disposal proceeds £ Nil
Insurance proceeds received for damaged/lost/destroyed chargeable asset
You have to pay CGT on the insurance proceeds.
The disposal proceeds are the amount of money received from the insurance
company.
Capital gains calculation:
Proceeds received from insurance company X 

Cost of asset lost/destroyed (X) 
Chargeable gain X
The disposal is treated as though it occurred in the tax year that the insurance
proceeds are received.
Illustration:
Holly owned a vase which was destroyed on 06/04/2018, she had paid £28,000 for
it on 01/05/2008.
The market value when it was destroyed was £80,000 however she only received
£68,000 of insurance proceeds.
What will the capital gains treatment be if she does not decide to reinvest the
proceeds?
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Solution:
For the tax year 18/19
Insurance proceeds £68,000
Note the insurance proceeds received are £68,000, this will be used in the
computation.
It does not matter that the market value at the time of disposal was £80,000 -
the actual insurance proceeds received will be used.
Insurance Rollover Relief (IRR)
You get IRR if the insurance proceeds received are reinvested into another
replacement asset within 12 months of the proceeds being received.
• However, if only some of the proceeds are reinvested, then the proceeds
which are not reinvested will be taxable immediately.
For example: 
Insurance proceeds received £1,000 
Asset costing £900 was destroyed 
Reinvestment in a new asset £950
The capital gain that resulted was £100 (£1,000 - £900)
The £50 of insurance proceeds not reinvested (£1,000 - £950) will be taxable
immediately.
The remaining £50 of capital gain will be deferred to be taxed at a later date.
This is known as the gain rolled over
• How is this £50 of capital gain deferred to be taxed at a later date?
It is deducted from the cost of the replacement asset.
£950 - £50 = £900
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This £900 is known as the base cost of the replacement asset.
This base cost will be used as the cost of the replacement asset when it is
disposed.
Illustration:
What if Holly used the insurance proceeds to buy a replacement vase for £59,000
on 01/03/2019?
What capital gain will be realisable in this case?
Solution:
Proceeds received £68,000
IRR (40,000 - 9,000) balancing figure £31,000
Capital gain realisable now (w1) £9,000
Working 1:
Proceeds reinvested within 12 months of receipt (£59,000)
Capital gain realisable now (w1) (proceeds not reinvested) £9,000
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Base cost of replacement vase:
Cost to acquire the new vase – Capital gain rolled over = Base cost of replacement
vase
Capital gain rolled over:
Total capital gain £40,000 

Gain realised immediately (£9,000) 
Capital gain rolled over £31,000
Cost of new vase £59,000
IRR (£31,000)
Base cost of vase £28,000
What if Holly disposes of the new vase after 10 years for £100,000?
Base cost (£28,000)
Insurance proceeds used in restoration
If an individual receives insurance due to the damage of an asset and spends the
insurance proceeds on restoring the asset plus an additional amount, the base cost
of the asset will be treated as:
Cost £X 
(Insurance proceeds received) (£X) 
+ Additional amount spent £X 
Base Cost £X
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Illustration:
On 15/01/2019, a timepiece owned by Kamal fell and was badly damaged.
The timepiece had been purchased for £99,000. Kamal received insurance
proceeds of £54,000 and he additionally spent a total of £45,000 on restoring the
timepiece to working condition again.
What is the base cost of the timepiece after restoring it?
Solution:
Cost £99,000 
Proceeds (£54,000) 
Additional spent £45,000 
Base cost £90,000
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Syllabus C3. Gains and losses on the disposal of movable
and immovable property
Syllabus C3ab. Chattels and wasting assets
Chattels and wasting assets
Exempt chattels and wasting assets.
Chattels
A chattel is a piece of tangible, movable property (something that you can touch
and move).
Your personal possessions will normally be chattels.
For example, items of household furniture, paintings, cars, items of plant and
machinery fixed to a building.
Some chattels are exempt and some are chargeable to capital gains tax.
A wasting chattel is exempt from capital gains tax.
A wasting chattel is one with a life of 50 years or less.
For example, racehorses, boats.
Exception to the exemption of wasting chattels:
Plant and machinery (with a life of less than 50 years) on which capital allowances
have been claimed are treated as non wasting chattels.
A capital gain needs to be calculated on their disposal, but a capital loss will not be
allowable on their disposal.
• It is possible that they are exempt under the non-wasting chattel exemption
(being bought and sold for less than or equal to £6,000).
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Non wasting chattel capital gains calculation:
Cost Proceeds Treatment
<=£6,000 <=£6,000 Exempt
<=£6,000 >£6,000 Normal calculation but the gain is restricted to 5/3*(Gross

proceeds-£6,000)
>£6,000 <£6,000 Deemed gross proceeds = £6,000
>£6,000 >£6,000 Normal calculation
Illustration:
Maria sold the following assets in December:
1. An antique table which had cost £3,000 and was sold for £5,000
2. A painting which had cost £2,000 and was sold for £10,000
3. An antique vase which had cost £8,000 and was sold for £3,000
4. A set of china which had cost £7,000 and was sold for £8,000.
Solution:
1. The table is exempt as it was bought and sold for less than £6,000
2. The painting:
Proceeds £10,000
Cost (£2,000)
Maximum gain assessable = 5/3*(£10,000-£6,000) = £6,667
3. The vase:
Deemed proceeds £6,000
Cost (£8,000)
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Capital loss £(2,000)
The proceeds are deemed to be £6,000 as it was bought for more than £6,000
and sold for less than £6,000.
4. The china:
Proceeds £8,000
Cost (£7,000)
This is the normal calculation as the set of china had been bought and sold for
more than £6,000.
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Syllabus C3c. Principal private residence relief
Principal private residence relief
Principal Private Residence Relief
What is it?
Simply, don't pay any tax if you sell your house.
• But you will have to if you didn't live there all the time or used it for business
purposes.
How much capital gain is exempt with PPR Relief?
• FULL exemption
If you occupied the property throughout the entire period of ownership.
• Partial exemption
If you stay there only for part of the period.
This is calculated as:
Capital gain * Period of occupation/Period of ownership
There are however periods of absence which are deemed to be full occupation
1. Last 18 months - if the property was the individuals main residence at some
point in time.
For example An individual purchased a house on 31/03/2002, he lived in it

for 2 months and then travelled the world, living in hotels until he sold it on
31/03/2019.
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The last 18 months of ownership of the house, from 01/10/2017-31/03/2019
will be considered to be occupied by the individual, even though he did not
live there at the time.
2. Any periods during which the individual was required by his employment to
live abroad.
The person must come back to live in the house after this period in order for
this time to be considered to be deemed occupation.
For example An individual purchased a house in London on 31/03/2002, he

lived in it for 2 months and then moved to Barbados for employment for 4
years, he then returned to live in the house until he sold it on 31/03/2019.
For capital gains tax purposes the 4 years during which the individual lived
abroad will be considered to be deemed occupation by the individual.
This is because the reason for living abroad was employment purposes and
he moved back to the house when he returned.
3. Any period up to four years during which the individual is required to live
elsewhere in the UK due to employment.
For example An individual purchased a house in London on 31/03/2002, he

lived in it for 2 months and then moved to Newcastle for employment for 4
years, he then returned to live in the house until he sold it on 31/03/2019.
For capital gains tax purposes the 4 years during which the individual lived
elsewhere in the UK will be considered to be deemed occupation by the
individual.
This is because the reason for living elsewhere in the UK was employment
purposes and it was for 4 years only, and he moved back to the house when
he returned.
4. Up to three years for any reason.
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For example An individual purchased a house on 31/03/2002, he lived in it
for 2 months and then traveled the world until 31/03/2005, he then moved
back to the house and lived in it until he sold it on 31/03/2019.
For capital gains tax purposes the 3 years during which the individual was
travelling will be considered to be deemed occupation by the individual.
This is because the reason up to 3 years for any reason is allowable and he
lived in the house when he returned.
For points 2 and 3, where an individual is not living in their main residence
due to work, if they do not return to their house to live in it after because of
another work engagement immediately after the first one, this will still be
considered deemed occupation.
Illustration:
On 30 September 2018, Jane sold a house for £400,000.
The house had been purchased on 1 October 1998 for £167,500.
Jane occupied the house as her main residence from the date of purchase until 31
March 2002.
The house was then unoccupied between 1 April 2002 and 31 December 2005 due
to Jane moving to Chicago for work.
From 1 January 2006 until 31 December 2012, Jane again occupied the house as
her main residence.
The house was then unoccupied until it was sold on 30 September 2018.
What capital gain arises on this sale?
Solution:
Principal private residence exemption £183,093 (232,500 x 189/240).
The total period of ownership of the house is 240 months (189 + 51), of which 189
months qualify for exemption as follows because the unoccupied period from 1
January 2013 to 31 March 2017 is not a period of deemed occupation because it
was not followed by a period of actual occupation.
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Disposal proceeds 400,000
Acquisition cost (167,500)

232,500
PPR Exemption (183,093)
Capital gain 49,407
Exempt months Chargeable months
1 October 1998 to 

42
31 March 2002 (occupied)
1 April 2002 to 

31 December 2005  45
(working overseas)
1 January 2006 to 

31 December 2012  84
(occupied)
1 January 2013 to 

51
31 March 2017 (unoccupied)
1 April 2017 to 

30 September 2018  18
(final 18 months)
189 51
Illustration:
Dolly bought a house on 1 April 1989 for £10,000.
She lived in it for 3 months.
Then she worked abroad for 24 months.
She came back and lived in the house for another 174 months.
Then she lived and worked elsewhere in UK for 48 months.
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Dolly never returned to the house and it was sold 108 months later in December
2018 for £150,000.
Calculate the chargeable gain arising.
Solution:
The total period of ownership of the house is 357 months, out of which 219 months
qualify for the PPR exemption.
The 4 years of working elsewhere in the UK cannot be classified as deemed

occupation because she never returned to the house to live in it after that.
The exemption is 219/357 * £140,000 = £85,882
Less cost (10,000)
Capital Gain 140,000
Less PPR relief (W1) (85,882)
Chargeable Gain 54,118
Actual & Deemed Absent

(W1)
Occupation (months) (months)
(actual) 3
(working overseas) 24
(actual) 174
4 years work in the UK 48

Living elsewhere 90
(4 years work in UK/

18
last 18 months)
219 138
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Business use
Where part of a residence is used exclusively for business purposes throughout the
period of ownership, the gain in relation to that part is not covered by relief.
Illustration:
On 30 September 2018, Henry sold a house for £155,000.
The house had been purchased on 1 October 2009 for £100,000.
Throughout the period of ownership, the house was occupied by Henry as his main
residence, but one of the house’s five rooms was always used as Henry's office
premises.
What capital gain arises on this disposal?
Solution:
The principal private residence exemption is restricted to £44,000 (55,000 x 4/5).
This is because 1 out of 5 rooms of the house has always been used only for
business purposes.
The capital gain arising on the sale is £11,000
Acquisition cost (100,000)
PPR exemption (44,000)
Capital gain 11,000
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Letting relief
If an individual lives in a property as their main residence and lets all or part of the
residence for residential purposes;
on the disposal of this property, in addition to claiming PPR relief, the letting relief is
also available to reduce the capital gain.
This relief is the lower of:
• PPR relief given
• £40,000
• Gain attributable to letting
Illustration:
Candy bought a house on 1 April 1989 for

£30,000 and occupied as follows:
1/4/1989 – 31/3/1991 lived in it
1/4/1991 – 30/9/1996 travels the world and lets the house
1/10/1996 – 31/3/2006 lived in it
Moved out of the house on 31 March

1/4/2006 – 31/3/2019 2018 to live with her children and the
property was empty.
Candy sold the house on 31 March 2019 for £250,000.
Calculate the chargeable gain arising.
Solution:

Less cost (30,000)
Capital Gain 220,000
Less PPR relief (W1) (117,333)
102,667
Less Letting relief (W2) (18,333)
Chargeable Gain 84,334
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Actual & Deemed Absent
Occupation (months) (months)
1/4/1989 –
(actual) 24
31/3/1991
1/4/1991 – (Any
36 30 (house let)
30/9/1996 reason)
1/10/1996
– (actual) 114
31/3/2006
(empty
1/4/2006 – and last
18 138
31/3/2019 18
months)
192 168 360
PPR relief figure 192/360=× 220,000 = 117,333
(W2)  
(i) PPR relief figure £117,333
(ii) £40,000 
 
(iii) Gain in the let period not covered by PPR relief 30/360× 220,000 = 18,333
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Syllabus C4. Gains and losses on the disposal of shares
and securities
Syllabus C4a. Gift of quoted shares
Gift of quoted shares
If you give away shares as a gift
You will have to pay Capital gains tax on it
Step by step approach:
1. Step 1 
Value the shares using:
Lower quoted price + 1/2 (higher quoted price - lower quoted price)
Note: the share valuation rules are different for IHT so be careful not to confuse
them
2. Step 2 
Calculated Disposal proceeds  
= Number of shares given * value per share (step 1)
Illustration:
Megha gifted 1,000 shares in N plc when they were quoted at 400-408 pence
per share, with marked bargains on that day of 398p, 402p, and 407p.
• Calculate the value to be used for capital gains disposal proceeds.
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Solution:
1. Step 1 - Value the shares 

 
400 + 1/2 (408 - 400) = 404p
Note: the marked bargains are not relevant for CGT life gifts but they would be
relevant for IHT
2. Step 2 - Calculated Disposal proceeds
= Number of shares given * value per share (step 1) 

= 1,000 shares * £4.04 = £4,040
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Syllabus C4bc. Identification rules for individuals
Share matching rules for individuals
Share matching rules
The problem
When shares are disposed of, a problem arises in finding their allowable cost, if
the shares were acquired over a long period of time.  
The solution 
To make this simpler, HMRC uses a set of rules to determine the acquisition date
and cost of the shares being disposed of.
These rules are called the matching rules.
Disposals of shares are matched with acquisitions in the following order:
1. Shares acquired on the same day of disposal.
2. Shares acquired in the next 30 days following the disposal (FIFO).
3. Shares from the share pool.
This would be much easier to understand if we did an example!
Illustration:
Benazir owns shares in L plc.
She acquired 1,500 shares in the company on 31/05/2016 for £20,000, and 500
shares on 30/06/2017 for £10,000.
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On 07/03/2019 Benazir bought a further 200 shares in L plc. for £4,000.
Benazir sold 1,000 shares in L. plc for £25,000 on 28/02/2019.
Calculate Benazir’s capital gain on the disposal of the shares in February 2019.
Solution:
We need to dispose of 1,000 shares.
Let us apply our matching rules to see which shares we are disposing of.
FIRST MATCH –
SECOND MATCH – 30 days THIRD MATCH –
same day
following disposal acquisition share pool
acquisition
800 shares
07/03/2019 – 200 shares for
None. needed from share
£4,000.
pool.
Share pool:
Description Number Cost
31/03/2016 purchase 1,500 20,000
30/06/2017 purchase 500 £10,000
2,000
Total £30,000
shares
(800
Disposal from share pool (800/2000) * £30,000 = (£12,000)
shares)
1,200
Remaining in share pool £18,000
shares
Specially note how the cost of the shares from the share pool is calculated.
(No. of shares to be disposed from pool/Total shares in pool) * Total cost in pool =
Average cost that we apply to our disposal
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Calculating capital gain:
Acquisition cost:
07/03/19 (£4,000)
Share pool (£12,000)
• You also might want to try to draw a timeline to ensure that you do not miss
any acquisition dates!
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Syllabus C4d. Bonus issues, rights issues, takeovers and reorganisations
Bonus issues, rights issues, takeovers and

reorganisations
Bonus Issues
This is an issue of shares to existing shareholders in proportion to the number of

shares owned.
• For example, if you owned 500 shares and a 1:5 bonus issue was declared,
you would receive (500/5) *1 = 100 bonus shares.
• These shares are deemed to be acquired at the same date and at the same
cost as the original shares to which they relate.
They have no cost of their own.
Therefore, in your share pool, a bonus issue will only result in an increase in
the number of shares, and no increase in the cost of shares
Illustration:
Mina purchased shares in C Co.
The details of her purchases are below:
• May 2018 Purchased 3000 shares for £3,000
• Jan 2019 Purchased 1500 shares for £2,000
• March 2019 Bonus issue of 1:3 declared by the company
• How many shares will Mina receive under the bonus issue?
• What is the cost of these shares?
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Solution:
• Total shares in company = 4,500
• New shares received = (4,500/3) * 1 = 1,500
• The bonus shares will have a cost of £0
A rights issue
occurs where a company offers its existing shareholders the right to buy extra
shares.
Rights issues are similar to bonus issues in that the number of shares offered to
each shareholder is generally in proportion to his or her existing shareholder.
• The only difference is that a price is paid for these shares.
• The price for the shares is normally lower than current market value, in order
for the existing shareholders to be attracted to taking up the issue.
Illustration:
Jack is an employee in Jill Ltd.
He had the following transactions in the company’s shares:
• Jul 2018 Purchased 6,000 shares for £15,000
• Sep 2018 Purchased 900 shares for £2,700
• Dec 2018 Took up 1:5 rights issue for £2.00 per share
• What will the rights issue cost Jack if he decides to subscribe to the issue
fully?
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Solution:
• Total shares in company = 6,900
• New shares received = (6,900/5) * 1 = 1,380 shares
• The rights shares will have a cost of £2.00 * 1,380 shares = £2,760
Bonus issues and rights issue and disposal
• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.
• The bonus issues will be included in the share pool at no cost and the rights
issue shares will be included in the share pool at their respective cost.
• Nothing changes with the matching rules.
Takeovers/Reorganisations
Takeovers or company reorganisations normally occur when a company is facing
financial difficulty.
They attempt to change the structure and ownership of a company by having

another company take over the individual company.
This will result in the identity and management changed of the individual
company, in the hope of better decisions being made for the company in the
future, resulting in a longer life for the company.
Takeovers/Reorganisations can either be for a share for share exchange, or a

takeover can be for a cash exchange.
We will deal with both of these situations separately via the use of illustrations.
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Takeovers (share for share exchange)
• If a takeover is for a share for share exchange, then no capital gains tax
arises immediately.
• The market value of the new holding provided will be used to apportion our
initial holding cost.
• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.
Illustration:
Jayna owned 2000 shares in A plc. which cost her £2,000 in 2010, and A plc
was being taken over by B plc in 2019.
• Jayna was offered by B. plc 1,500 ordinary shares with a market value of
£3,000 and 500 preference shares with a market value of £1,000.
• Jayna takes up the offer.
• Will capital gains tax arise immediately?
• If not, when Jayna sells these new ordinary shares and new preference
shares, what cost would be attributed to each?
Solution:
There will be no immediate charge to CGT as this is a ‘paper for paper’

exchange - there is no cash involved.
The original cost of the A Plc shares will just need to be apportioned between
the new ordinary and preference B Plc shares.
Total market value of new holding: £3,000 + £1,000 = £4,000
• Total cost of original holding: £2,000
Cost attributed to ordinary shares:
Market value of ordinary shares/Total market value of new holding * original cost
• = £3,000/£4,000 * £2,000 = £1,500
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Cost attributed to preference shares:
Market value of preference shares/Total market value of new holding * original

cost
• = £1,000/£4,000 * £2,000 = £500
• Jayna needs to use these costs as the acquisition cost when she decides to
sell the shares in B. plc.
(She cannot use the market value of the shares when they were given to her).
Takeovers (share for cash exchange)
• If a takeover is for a share for cash exchange, capital gains tax will arise
immediately for the proportion of cash given compared to the total market
value of the new holding.
initial holding cost to be used.
Illustration:
Jayna owned 2000 shares in A plc which cost her £2,000 in 2010, and A plc was
being taken over by B plc in 2019.
Jayna was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and
cash of £1,000.
Solution:
Total cost of original holding: £2,000
= £3,000/£4,000 * £2,000 = £1,500
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Cost attributed to cash given:
Market value of preference shares/Total market value of new holding * original cost
= £1,000/£4,000 * £2,000 = £500
Jayna needs to use this £500 as the acquisition cost of the shares that she is
deemed to have disposed of for the cash received.
Capital gains:
Acquisition cost (£500)
Capital gain £500
No capital gain will arise on the share element, as described above.
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Syllabus C4e. Exemptions available for gilt-edged securities and qualifying corporate bonds
Exemptions available for gilt-edged securities and

qualifying corporate bonds
Exemptions
Disposals of gilt edged securities and qualifying corporate bonds are exempt from
capital gains tax.
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Syllabus C5. Entrepreneurs’ relief
Syllabus C5b. Explain and apply entrepreneurs’ relief.
Entrepreneurs’ relief
Entrepreneur’s relief
covers the first £10,000,000 of qualifying chargeable gains that a person makes in
their lifetime.
• It operates by charging CGT at 10% for the disposals on which it is claimed

regardless of an individual’s taxable income.
Conditions to get the relief:
1. The asset must have been owned for at least one year prior to the disposal.
2. The election for the relief must be made by the anniversary of the 31/01
following the tax year of the disposal.
Therefore, if the tax year of disposal is 18/19, then the election must be made by
31/01/21.
(It is not the 31/01 immediately after the tax year, it is the one following the tax
year of the disposal.)
3. It must be a disposal of a qualifying asset.
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Qualifying assets include:
1. The disposal of a whole business run by a sole trader or by partners in a

partnership.
The assets must have been used in the trade to qualify for the relief.
Also, the entire business must be disposed of, if a single trading asset is
disposed of it, it will not qualify for the relief.
2. Individual business assets of the individual’s or partnership’s trading

business that has now ceased.
Note the disposal of assets must take place within three years of cessation of
trade.
The difference here is that the entire business is not being sold, it is being
shut down.
Therefore, no trading activity will continue and this is why the assets can be
disposed of within 3 years of cessation
3. The disposal of shares in a trading company, where the individual has 5%

shareholding and is also an employee of the company, for 12 months prior to
the disposal.
Entrepreneurs’ relief will be available on the entire disposal, regardless of

whether the trading company owns assets for investment or not.
Illustration:
On 14 October 2018, a shareholder of Numbers Ltd, an unquoted trading company,

sold his entire shareholding in the company.
He had been the advertising director of Numbers Ltd since the company’s
incorporation on 1 December 2017.
He had 40% shares in the company since its 1 December 2016.
Will this disposal qualify for entrepreneurs’ relief?
Solution:
This disposal will not qualify for entrepreneurs’ relief because:
• The shares were owned for less than one year.
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Illustration:
Sunder disposed of his business to an unconnected person. The business had the
following asset values:
• Goodwill £150,000
• Freehold office £200,000
• Inventory stock £20,000
• Debtors £30,000
• Investment property £100,000
• Cash £50,000
• Which of the assets will qualify for entrepreneurs’ relief on disposal of the
entire business?
Solution:
The investment property does not qualify for entrepreneurs’ relief as only assets that
are used in the trade can qualify.
An investment property is just held for investment, not used in the trade.
Market
Asset Capital gains tax treatment
Values
Entrepreneurs’ relief available. Taxed at

Goodwill £150,000
10%
Entrepreneurs’ relief available. Taxed at

Freehold office £200,000
10%
Inventory stock £20,000 Exempt

Debtors £30,000 Exempt
Cash £50,000 Exempt
Investment
£100,000 Taxed normally at 10% or 20%.
property
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Illustration:
In March 2019, Sunder also disposed of a 20% shareholding in Cow Ltd.
He had been an employee of Cow Ltd. since June 2017, when he acquired the
shares.
The gain arising on disposal was £200,000.
• Will this gain be eligible for entrepreneurs’ relief?
Solution:
Yes it will be.
This is because he has owned the shares and worked in the company for more than
one year.
Illustration:
On 30 October 2018, Bhumi sold a business that she had run as a sole trader since
1 February 2011 to an unconnected person.. The disposal resulted in the following
chargeable gains:
Goodwill 150,000
Freehold office building 400,000
Freehold warehouse 180,000
730,000
The warehouse had never been used by Bhumi for business purposes.
Bhumi has taxable income of £6,000 for the tax year 2018/19.
She has unused capital losses of £30,000 brought forward from the tax year
2017/18.
What is Bhumi's capital gains tax liability for the year?
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Solution:
Gains qualifying for entrepreneurs’ relief £

Goodwill 150,000
Freehold office building 400,000
550,000
Other gains
Freehold warehouse 180,000

Capital losses brought forward (30,000)
150,000
Annual exempt amount (11,700)

138,300
Capital gains tax:  55,000

550,000 at 10%
138,300 at 20% 27,660
Tax liability 82,660
Explanation:
• The capital losses and the annual exemption is set against the gains that do not
qualify for entrepreneur’s relief.
• This is because it saves more tax to set the losses and exemptions against gains
that are taxed at a higher rate of 20%.
• £28,500 (34,500 – 6,000) of Mika’s basic rate tax band is unused, but this
remaining band limit is first set against the gains qualifying for entrepreneurs’
relief of £550,000 even though this has no effect on the 10% tax rate.
• If there is any basic rate band remaining, then it will be used for gains that do not
qualify for entrepreneurs’ relief.
Things to note:
• a) Gains that qualify for entrepreneurs’ relief will take priority in using up the
basic rate band limit first.
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Therefore, it is likely that other capital gains will normally fall into the higher
band and pay CGT at 20%.
• b) The annual exemption and relief for losses is not automatically given to the
gains which qualify for entrepreneur’s relief.
Therefore 2 separate calculations should be made and gains which do not

qualify should be given the annual exemption and losses carried forward first,
in order to save CGT at a higher rate.
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Syllabus C6. The use of exemptions and reliefs to minimise
capital gains tax
Syllabus C6ai. Rollover relief
Rollover relief
Rollover relief (The replacement of business assets)
If you sell your warehouse and buy a new one, you can decrease the Capital
gain by deducting the new warehouse's purchase costs.
Conditions:
1. The new and old assets must be used for business purpose.
2. You have to replace the asset 12 months prior to the sale or 36 months post
the sale.
3. No Rollover relief is available if the amount not reinvested exceeds the

chargeable gain. (See below)
Qualifying assets:
• Land and buildings.
• Fixed plant and machinery.
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Step by step approach
1. Step 1 - Get the information
About the OLD asset: 

- Disposal proceeds of the OLD asset 
- Original purchase costs of the OLD asset 
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees)
About the NEW asset: 

- Purchase costs of the NEW asset
2. Step 2 - Calculate the Chargeable gain
Disposal proceeds X 
The Original Purchase costs (X) 
Legal fees (X) 
Chargeable gain X (proceeds not reinvested)
3. Step 3 - Calculate how much is NOT reinvested
Disposal proceeds - Purchase costs of the NEW asset
How much you get for the OLD asset X 

How much you pay for the NEW asset (X) 
Amount NOT reinvested X
4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds

the Chargeable gain (Step 2)
No Rollover relief is available if the amount NOT reinvested exceeds the

chargeable gain.
5. Step 5 - Calculate the new Chargeable gain
Disposal proceed X 
The Original Purchase costs (X) 
Chargeable gain X 
Rollover relief (Balancing figure) (X) 
The new Chargeable gain (Step 3) X (proceeds not reinvested)
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6. Step 6 - Calculate Base cost
Basically, the Purchase costs of the NEW asset less the Rollover relief
This base cost will be used as the cost of the new office when it is disposed of in
the future.
Illustration 1
Peter sold a freehold warehouse for £200,000 on 1 January 2019.
The warehouse had been purchased for £150,000.
Peter incurred legal fees of £10,000 in connection with the purchase.
On 1 February 2019, he bought another freehold factory for £100,000.
Required: 
Calculate the chargeable gain.
Step by step answer

- Disposal proceeds of the OLD asset = £200,000 
- Original purchase costs of the OLD asset = £150,000 
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees) =
£10,000

- Purchase costs of the NEW asset = £100,000
Disposal proceed 200,000 
The Original Purchase costs (150,000) 
Legal fees (10,000) 
How much you get for the OLD asset 200,000 

How much you pay for the NEW asset (100,000) 
Amount NOT reinvested 100,000
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Amount NOT reinvested (Step 3) = £100,000 > Chargeable gain (Step 2) =

£40,000
No Rollover relief is available if the amount NOT reinvested exceeds the

chargeable gain.
Therefore the chargeable gain will be £40,000.
Illustration 2
Peter sold a freehold warehouse for £300,000 on 1 January 2019.
The warehouse had been purchased for £150,000.
On 1 February 2019, he bought a freehold factory for £200,000.
Required: 
Calculate the chargeable gain.
Step by step answer

- Disposal proceeds of the OLD asset = £300,000 
- Original purchase costs of the OLD asset = £150,000

- Purchase costs of the NEW asset = £200,000
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How much you get for the OLD asset 300,000 

How much you pay for the NEW asset (200,000) 
Amount NOT reinvested 100,000

Amount NOT reinvested (Step 3) = £100,000 < Chargeable gain (Step 2) =

£150,000
5. Step 5 - Calculate the new Chargeable gain
Chargeable gain 150,000 
Rollover relief (balancing figure) 150,000 - 100,000 = (50,000) 
The new Chargeable gain (Step 3) 100,000
Illustration 3
Jeremy sold his business office on 30/06/2018 for £350,000.
This office cost him £100,000.
He bought another business office for £250,000 on 31/12/2018.
• How much of his capital gain can be rolled over?
• What is the base cost of his new business office?
Solution:
Rollover relief (balancing figure) (250,000 - 100,000) (£150,000)
Capital gain now (w1) (proceeds not reinvested) £100,000
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W1 Proceeds not reinvested:
Old office sale proceeds £350,000
New office costs (£250,000)
Capital gain to be realised now £100,000
Base cost of new business office:
Cost of new office £250,000
Rollover relief (£150,000)
Base cost of new office £100,000
• This base cost will be used as the cost against the disposal of the new
office.
Qualifying assets that are not fully used in the business
Assets that are not used in the business entirely will have restrictions for roll over
relief on sale.
The amount of gain that cannot be rolled over, and must be realised now is:
% of asset not used in business * Chargeable gain.
Illustration:
Jeremy had another property purchased for use in his business.
However, he did not require the entire property for his business and rented out
20% of the property.
The property cost him £400,000 on 06/06/2008 and he sold it for £800,000 on
06/06/2018.
He bought another property for use in his business on 12/12/2018 for £900,000.
He will use 100% of this property for his business.
• How much of his capital gain can be rolled over?
• What is the base cost of his new business office?
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Solution:
Rollover relief (400,000 - 80,000) (£320,000)
Capital gain now (W1) £80,000
W1:
All proceeds relating to the business element of the property were reinvested
(80%*£800,000) BUT 20% of the property was not used in business (£80,000 =
20% * £400,000) 
Therefore, Rollover relief is restricted to £320,000 (£400,000 - £80,000)
Cost of office £900,000
Gain to be rolled over (£320,000)
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Syllabus C6aii. Holdover relief
Holdover relief
Holdover relief
If the new asset purchased is a depreciating asset (an asset with an expected
life of 60 years or less at the time of acquisition) for example, leasehold land and
buildings or fixed plant and machinery the gain arising on the disposal of the old
asset is not rolled over and cannot be deducted from the cost of the new asset.
Instead, the gain is to be temporarily frozen or “held over” until it becomes

chargeable on the earliest of the 3 following dates:
1. Date on which the new asset is disposed of.
2. Date on which the new asset ceases to be used in the trade.
3. 10th anniversary of acquisition of the new asset.
Illustration:
Craig purchased a freehold factory in 2009 for £100,000.
In June 2016 he sold it for £300,000 and purchased a leasehold factory with a
55-year lease for £350,000 in December 2018.
Craig then sold the leasehold factory in October 2019 for £400,000.
• What capital gain will be chargeable in the tax year 17/18 and in 18/19?
Solution:
• 17/18 capital gain:
Gain held over (W1) (£200,000)
Chargeable gain Nil 
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• 18/19 Capital gain:
Capital gain £50,000 

+ 
Capital gain held over £200,000
Total capital gain £250,000
W1:
Disposal proceeds received £300,000
Disposal proceeds reinvested (£350,000)
Capital gain now Nil
• Therefore, the entire gain (£200,000) will be held over as all of the disposal
proceeds are reinvested.
Note:
The £200,000 capital gain held over becomes chargeable in the tax year 2018/19
because the asset against which it was held over has been sold.
Also note that the gain held over was not deducted from the cost of the new
asset, it was held over in its own right.
No holdover relief for assets that do not qualify.
Holdover relief is available for qualifying business assets (chargeable business

assets).
Qualifying business assets are basically assets that are used in the business, not
assets held for investment (chargeable assets).
Therefore, if a gift is made of unquoted shares (a qualifying business asset),

holdover relief is available for the capital gain, however it will not be available for
the proportion of assets held by the business for investment (non-business)
purposes.
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Illustration:
On 5 October 2018, Tina made a gift of her entire holding of 20,000 £1 ordinary
shares in Banana Ltd, a personal company, to her daughter.
The market value of the shares on that date was £200,000.
The shares had been purchased on 1 January 2016 for £140,000.
On 5 October 2018, the market value of Banana Ltd’s chargeable assets was
£150,000, of which £120,000 was in respect of chargeable business assets.
Tina and her daughter have elected to hold over the gain as a gift of a business
asset.
What chargeable gain will arise on this gift?
Solution:
Tina’s chargeable gain is:
Deemed proceeds £200,000  

Cost (£140,000)  
£60,000  
Holdover relief (£48,000) W1 
£12,000
WI
Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), the

proportion of chargeable assets to chargeable business assets.
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Capital gains in the exam
Capital gains in the exam
Capital gains tax in the exam
Tips for the exam
Below are a few tips for the exam!
Good luck!!
• Make sure you identify any exempt disposals so that you do not waste time
performing unnecessary calculations.
• An unincorporated business is not treated as a separate entity for CGT

purposes. Therefore, when a business is disposed of you should deal with
each asset separately.
• Do not forget to deduct the annual exempt amount if it is available.
• When dealing with shares it is important to look carefully at the dates to see if
same day or 30-day matching is applicable.
• It is important to establish how much of a person’s basic rate tax band is

available. Remember that a taxable income figure is after the personal
allowance has been deducted.
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Syllabus C6b. Basic capital gains tax planning
Capital gains tax planning
How to plan to minimise the capital gains tax liability?
Gifting or selling assets has 2 results for tax - inheritance tax and capital gains tax,
therefore the choice to gift must be made carefully, in order to avoid both taxes!
Example
A owns 100% of the shares in A Ltd an unquoted trading company.
A Ltd has 100,000 £1 ordinary shares in issue all of which were subscribed for at
par by A in 2004, from which date A has been the managing director of the
company.
Share valuations have now been agreed as follows: 

20% £10 per share 
40% £15 per share  
80% £20 per share  
100% £25 per share
What are the tax implications of gifting 20,000 of his shares to his daughter?
Inheritance tax implications
For IHT purposes the gift would be a potentially exempt transfer (PET) and have no
immediate tax implications.
If A died within 7 years of the transfer the PET would become chargeable at either
nil rate and / or 40% rate depending upon what other transfers had been made by A
prior to this gift.
If A survived for at least 3 years then any IHT computed would be reduced by taper
relief.
Any such IHT payable would be payable by the donee, V and should be paid within
6 months of the end of the month in which the death occurred.
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The value of the PET would be the fall in value of the estate of A.
Before the gift 100,000 shares @ £25ps £2,500,000
After the gift 80,000 shares @ £20ps £(2,000,000)
Transfer of value £500,000
Capital gains tax implications
The shares are £1 ordinary shares which were subscribed for at par, so the cost is
£1 per share.
The gain that arises would be included in the net gains of the tax year from which
the annual exempt amount would be deducted to derive the taxable gain.
The question then arises as to what tax rate would apply?
Shares in unquoted trading companies are a qualifying business asset for purposes
of entrepreneurs’ relief and as A owns the minimum required 5% shareholding and
is an employee of the company, a claim for entrepreneurs’ relief is available and will
result in a 10% tax rate being applied to the taxable amount of the gain.
There is however another RELIEF that is available where such an asset is gifted!
Yes gift relief is available to be claimed, jointly by A and V, as shares in an unquoted

trading company are qualifying business assets for gift relief purposes.
This would allow the entire gain to be deferred, such that the donor, A, would not
now be chargeable and the daughter, V would be deemed to acquire the shares at
the original cost to the father of £20,000 instead of a cost of £200,000.
Without gift relief the shares would be deemed acquired by V at their open market
value of £200,000. With gift relief, that cost is reduced by the amount of the
deferred gain (£180,000) and thus a cost to V of £20,000 would then apply.
NOTICE how the value for IHT and CGT are different. For CGT you value the asset
that is given away, eg a 20% shareholding. For IHT you look at how much the gift
reduces the donor’s estate by. In this case it reduced it from a 100% holding of
shares to an 80% holding of shares.
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Conclusion:
For those taxpayers with both a capacity and a willingness to make gifts in lifetime
and not just on death, the further guidance that they may request from you is
whether to make such gifts in lifetime or wait and gift the assets upon their death.
It is again a consideration of the capital taxes that is the key issue.
If assets are gifted on death there will be no CGT and the beneficiaries will acquire
those assets at their then value, thus wiping out any accrued gains on those assets.
The assets, however at their then open market value (probate value) will then be
included within the chargeable estate at death, which being in excess of the
available nil rate band will be charged to IHT at a rate of 40%.
 
Therefore to avoid IHT it would be better to gift in lifetime as when a PET is made
there is no immediate charge to IHT and the PET will only become chargeable if the
donor dies within 7 years.
The further advantages for IHT of gifting in lifetime are that if the taxpayer at least
survives for 3 years then taper relief will reduce any IHT payable, plus the value of
the PET is “frozen” at the date of the transfer meaning that an appreciating asset
will have a lower value charged to IHT than if it had been kept until death.
Lifetime gifts will also benefit from annual exemptions.
 
The problem of course with gifting in lifetime as we have already seen is CGT, as a
gift in lifetime is a chargeable disposal and a gain must be computed using the
open market value of the asset.
This, however will only happen if the asset is a chargeable asset so that exempt
assets such as cash, chattels and cars could be gifted without any CGT arising.
If assets are chargeable assets then they may still be gifted if the gains arising each
tax year do not exceed the AEA, for example if the taxpayer gifts an asset valued at
£50,000 and it cost £40,000, there will be a chargeable gain of £10,000 which will
be covered by the AEA of the taxpayer.
This will have removed £50,000 of value from the taxpayer’s estate which at death
may have been charged to 40% IHT.
If chargeable assets will give rise to more substantial gains then as we have seen
above, if the asset is a qualifying asset for gift relief then the gain may be deferred
by a claim for gift relief.
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If the asset was the principal private residence of the taxpayer then PPR relief would
be available to exempt any gain arising.
You should keep all of these things in mind for written sections in the exam!
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Syllabus D: Inheritance Tax
Syllabus D1. Basic principles of computing transfers of
value
Syllabus D1a. Chargeable persons
Chargeable persons
Chargeable persons
A person who is domiciled in the UK is liable to IHT in respect of their worldwide assets.
For TX IHT - people will always be domiciled in the UK.
Additionally, the only relevant chargeable person is an individual.
Married couples (and registered civil partnerships) are not chargeable persons because
each spouse (or civil partner) is taxed separately.
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Syllabus D1b. Transfer of value, Chargeable Transfer, Potentially Exempt Transfer
Transfer of value, Chargeable Transfer, Potentially

Exempt Transfer
What is a transfer of value?
It is the reduction in value of a person's estate because they made a gift
A gift made during a person’s lifetime may be either:
1. Potentially exempt transfer (PET)
2. Chargeable lifetime transfers (CLT)
1) Potentially exempt transfers
Any transfer that is made to another individual is a potentially exempt transfer (PET).
If the donor survives for seven years then the PET becomes exempt and can be
completely ignored.
A PET only becomes chargeable if the donor dies within seven years of making
the gift.
 
So, remember:
• If the donor dies within seven years of making a PET then it becomes
chargeable.
• Tax will be charged according to the rates and allowances applicable to the
tax year in which the donor dies.
• However, the value of a PET is fixed at the time that the gift is made.
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Illustration:
Sophie died on 23 January 2019.
She had made the following lifetime gifts:
8 November 2011 – A gift of £450,000 to her son.
12 August 2016 – A gift of a house valued at £610,000 to her daughter.
By 23 January 2019, the value of the house had increased to £655,000. Sophie did
not live in the house after the gift.
Solution:
The gift to Sophie’s son on 8 November 2011 is a PET for £450,000.
Because the PET was made more than seven years before the date of Sophie’s
death it is exempt from IHT.
The gift to Sophie’s daughter on 12 August 2016 is a PET for £610,000 and is
initially ignored.
It becomes chargeable as a result of Sophie dying within 7 years of making the gift,
and the transfer of £610,000 less annual exemptions of £3,000 pa for 2016/17 and
2015/16 will be charged to IHT based on the rates and allowances for 2018/19. No
taper relief will apply because Sophie dies within 3 years of making the gift.
2) Chargeable lifetime transfers
Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).
• There is no legal definition of what a trust is, but essentially a trust arises
where a person transfers assets to people (the trustees) to hold for the
benefit of other people (the beneficiaries).
For example, parents may not want to make an outright gift of assets to their
young children.
Instead, assets can be put into a trust with the trust being controlled by
trustees until the children are older.
• Unlike a PET, a CLT is immediately charged to IHT based on the rates and
allowances applicable to the tax year in which the CLT is made.
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An additional tax liability may then arise if the donor dies within seven years
of making the gift.
Just as for a PET, the value of a CLT is fixed at the time that the gift is made,
but the additional tax liability is calculated using the rates and allowances
applicable to the tax year in which the donor dies.
Illustration:
Lim died on 4 December 2018.
She had made the following lifetime gifts:
2 November 2011 – A gift of £420,000 to a trust.
21 August 2016 – A gift of a house valued at £615,000 to a trust. By 4 December

2018, the value of the house had increased to £650,000.
Solution:
The gift to the trust on 2 November 2011 is a CLT for £420,000, and will be
immediately charged to IHT based on the rates and allowances for 2011/12.
There will be no additional tax liability as the gift was made more than seven years
before the date of Lim’s death.
The gift to the trust on 21 August 2016 is a CLT for £615,000, and will be
immediately charged to IHT based on the rates and allowances for 2016/17.
Lim has died within seven years of making the gift so an additional tax liability may
arise based on the rates and allowances for 2018/19.
Saving IHT
It is beneficial for a grandparent to give their grandchildren gifts to save IHT.
This is because if the grandparent gave it to their child and then their child gave it to
their child - IHT would be paid 3 times as all 3 individuals would die, whereas if the
grandparent gave the gift directly to their grandchild, IHT would only be paid twice
as there would only be 2 death's involved for IHT - the gift never went to the third
person.
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Syllabus D1c. Diminution in value principle
Diminution in value principle
Transfers of value may need to be calculated using the diminution in

value principle
Ordinary shares in unquoted company as a GIFT
Normally, as seen in Topic Transfer of value, Chargeable Transfer, Potentially

Exempt Transfer for most assets the transfer of value will be the same as the open
market value of the asset
e.g. gifting a property worth £250,000 or cash of £100,000, but for some assets,
notably shares in unquoted companies the transfer of value may be considerably
higher than the market value of the asset being gifted.
The transfer of value will be calculated as the difference in estate value before and
after the gift of the asset.
Illustration:
A owns 60% of the shares in A Ltd. A Ltd has 100,000 £1 ordinary shares in issue.
Share valuations have been agreed as follows:
20% £10 per share

40% £15 per share
60% £25 per share
80% £40 per share
Required:
Compute the transfer of value if A were to die leaving his shares to his daughter, or
alternatively if he were to make a lifetime gift of 20,000 shares to his daughter.
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Solution:
• If A died owning his 60,000 shares, a 60% shareholding, they would be

valued at £25 per share i.e. 60,000 @ £25 = £1,500,000.
• If, however, he were to give 20,000 shares in lifetime the transfer of value
would not be based on the value of a 20% interest i.e. £10 per share, but
would be computed as the difference between the value of his estate before
and after the transfer:
Before 60,000 shares (60%) @ £25 = 1,500,000
After 40,000 shares (40%) @ £15 = 600,000
Transfer of Value 900,000
A transfer of value will arise by the gift of an asset either in lifetime and / or on
death.
For most taxpayers, as stated above, their only transfers of value will arise as a
result of their death.
Illustration:
B owns 80% of the shares in B Ltd. A Ltd has 100,000 £1 ordinary shares in issue.
Share valuations have been agreed as follows:
20% @ £10/share 
40% @ £15/share 
60% @ £25/share 
80% @ £40/share
Compute the transfer of value and IHT payable if B were to die 2 years after leaving
20,000 shares to his daughter.
All exemptions and Nil Rate Band have been used up.
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Solution:
If A died owning his 80,000 shares, a 80% shareholding, they would be valued at
£40 per share i.e. 80,000 @ £40 = £3,200,000.
If, however, he were to give 20,000 shares in lifetime the transfer of value would not
be based on the value of a 20% interest i.e. £10 per share, but would be computed
as the difference between the value of his estate before and after the transfer:
Before 80,000 shares * £40 = £3,200,000 

After transfer 60,000 shares * £25 = £1,500,000
Value of PET 
£3,200,000 - £1,500,000 = £1,700,000
IHT payable £1,700,000 * 40% = £680,000
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Syllabus D1d. Demonstrate the seven year accumulation principle taking into account
changes in the level of the nil rate band.
7 year accumulation principle
What and how is inheritance tax paid on?
2 things to remember
1. Firstly, every individual receives a nil rate band. If their total chargeable transfers
exceed this nil rate band, only then is inheritance tax payable.
2. Secondly, if a transfer is made MORE than 7 years before an individual dies, then
inheritance tax on death will not be paid on that transfer.
The nil rate band is £325,000, and for previous years it has been:
2006–07 285,000
2007–08 300,000
2008–09 312,000
2009–10 325,000
2010–11 325,000
2011–12 325,000
2012–13 325,000
2013–14 325,000
2014–15 325,000
2015–16 325,000
2016–17 325,000
2017-18 325,000
2018-19 325,000
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The rate of IHT payable as a result of a person’s death is 40%
This is the rate that is charged on:
• a person’s estate at death
• PETs that become chargeable as a result of death within seven years
• any additional tax payable on CLTs made within seven years of death
The rate of IHT payable on CLTs at the time they are made is 20% (half the death
rate). This is the lifetime rate.
The tax rates information that will be given in the tax rates and allowances
section of the exam in this period is:
£1 – £325,000 Nil
Excess – Death rate 40%
– Lifetime rate 20%
Where nil rate bands are required for previous years then these will be given to you
within the question.
Illustration 1:
Sophie died on 26 May 2018 leaving an estate valued at £600,000.
The IHT liability is as follows:
Death estate
£
Chargeable estate 600,000
IHT liability
325,000 at nil% 0
(600,000 - 325,000) = 275,000 at 40% 110,000

110,000
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Illustration 2:
Ming died on 22 April 2018 leaving an estate valued at £300,000.
On 30 April 2016, she had made a gift of £240,000 to her son.
This figure is after deducting available exemptions.
Solution:
IHT liabilities are as follows:
Lifetime transfer – 30 April 2016 (Less than 7 years)
Potentially exempt transfer 240,000
The PET is initially ignored.
Additional liability arising on death
The IHT must be calculated for the gift £240,000, because Ming gave it to her son
Less than 7 years before she died.
£
The PET utilises £240,000 of the nil rate band of £325,000. No IHT is payable.
Death estate £
IHT liability
(325,000 - 240,000) = 85,000 at nil% 0

(300,000 - 85,000) = 215,000 at 40% 86,000
86,000
Only £85,000 (325,000 – 240,000) of the nil rate band is available against the death
estate.
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Illustration 3:
Joe died on 13 October 2018 leaving an estate valued at £750,000.
On 12 November 2015, he had made a gift of £400,000 to a trust.
The trust paid the IHT arising from the gift.
The nil rate band for the tax year 2015/16 is £325,000.
1) Gift of £400,000 to a trust - On 12 November 2015
Lifetime transfer £
Chargeable transfer 400,000
IHT liability
325,000 at nil% 0
(400,000 - 325,000) = 75,000 at 20% 15,000
15,000
The gift to a trust is a CLT.
The lifetime IHT liability is calculated using the nil rate band for 2015/16.
Additional liability arising on death (13 October 2018) £

IHT liability
325,000 at nil% 0
75,000 at 40% 30,000
IHT already paid (15,000)
Additional liability 15,000
The additional liability arising on death is calculated using the nil rate band for
2018/19.
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2) Death estate (13 October 2018)

IHT liability 750,000 at 40% 300,000
The CLT made on 12 November 2015 has fully utilised the nil rate band of £325,000.
A NRB is given every year, therefore the CLT used the NRB of 15/16 when
lifetime tax was calculated
The NRB of 18/19 is used to calculate tax paid on death, it is first given to the
CLT and then the death estate because it is allocated in chronological order
Illustration 4:
Mr Wealthy made the following gifts during his lifetime.
01/11/2017 £333,000 into a trust for his son (the trustees paid any life tax) 
14/11/2018 £50,000 cash to his daughter
He died in January 2019 with an estate valued at £500,000.
What is his IHT payable during his lifetime and on his death? 
Ignore annual exemptions. 
The NRB of 17/18 and 18/19 are £325,000.
Solution:
Gift to trust £333,000 

Less NRB (£325,000) 
£8,000 *20% = £1,600 lifetime tax.
On death: 
NRB is £325,000 (New NRB for 18/19)
This is allocated on chronological order - first to the CLT, then PET, then death
estate.
CLT £333,000  
NRB (£325,000) 
£8,000 *40% = £3,200 
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IHT paid (£1,600) 
IHT due £1,600
PET £50,000 * 40% = £20,000 IHT due
Death estate £500,000 *40% = £200,000 IHT due on death estate
The 7 year cumulation period
In most of the illustrations so far, all the lifetime transfers, both PET’s and CLT’s
have taken place within the 7 years prior to death and have all therefore been
chargeable to IHT on the death of the taxpayer.
Very important note The earliest / oldest transfers within this period are first to use
the nil rate band with the later transfers and / or the chargeable estate at death then
being taxed at 40%.
Basically, the nil rate band must be applied in chronological order - it is given to the
gift made earliest.
If PET’s have been made more than 7 years before the date of death
• they were neither chargeable when made nor chargeable on death, they are
exempt IHT and are ignored.
A CLT made more than 7 years before death
• These transfers were chargeable when made using the nil rate band in force at
that date but are not chargeable on death as the taxpayer has survived for the
required 7 years.
The 7 year cumulation period, however means that when computing the IHT on
either a PET or CLT made within the 7 years of death it is necessary to take account
of any CLT made within the 7 years prior to it, so as to determine how much nil rate
band, if any, remains to use against that transfer.
For example
if an individual dies in January 2019 having made a CLT in June 2008 of £255,000,
this CLT will not be taxable on the death as he survived for more than 7 years.
If he had also made a PET in August 2015 of £200,000 this will be taxable.
In computing the nil rate band available to go against the PET, however, the
£325,000 will be reduced by the amount of the June 2008 CLT.
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Therefore, the NRB available to the PET would be (£325,000-£255,000) = £70,000
IHT payable on the PET 

Value of PET £200,000 
Less NRB (£70,000)
£130,000 *40% = £52,000
Illustration:
Lachlan made a CLT in 2008 of £200,000 and a PET in 2011 of £255,000
He died in 2018 with an estate value of £500,000.
NRB in 2018 is £325,000.
How will the NRB be shared? 

How much IHT will be payable?
Solution:
He will have to pay death tax when he dies, his NRB of 2018 will first go to the
PET BUT, the PET must share it with the CLT because it was within 7 years of the
PET.
Therefore, NRB available to PET is (£325,000-£200,000) = £125,000
IHT payable on PET 

Value £255,000 
Less NRB (£125,000) 
£130,000 * 40% = £52,000
 
Then, for his death estate - the NRB will only be shared with the PET as that is
within 7 years of the date of death.
NRB available on death = £325,000 - £255,000 (Value of PET) = £70,000
IHT on death estate: 

Estate value £500,000 
Less NRB (£70,000) 
£430,000 * 40% = £172,000
Note on death, NRB is shared 7 years back for PETs but ALL CLT's share the NRB.
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Illustration:
Lachman made a PET in 2008 of £200,000 and a PET in 2011 of £255,000.
He died in 2018 with an estate valued at £500,000.
NRB is £325,000.
How will the NRB be shared? 

How much IHT will be payable?
Solution:
He will have to pay death tax when he dies, his NRB of 2018 will first go to the 2011
PET of £255,000 BUT, the PET will not share it with the 2008 PET of £200,000
because that was given more than 7 years ago.
IHT payable for PET 

Value of PET £255,000 
NRB (£255,000) 
Nil payable
Remaining NRB for the death estate £325,000 - £255,000 = £70,000
The NRB for the death estate will only be shared with the 2011 PET of £255,000 as
that is within 7 years.
IHT payable on death estate 

Value of estate £500,000 
Less NRB (£70,000) 
£430,000*40% = £172,000
Note on death, NRB is shared with PET's that occur within 7 year's of death.
Note
When a gift is made during lifetime, the value of the gift is frozen and will only
become chargeable to IHT when the person who made the gift dies.
Therefore, if a grandmother makes a gift to her grandchild - IHT will only be paid
once by the grandmother and the second time when the grandchild dies, this
avoid's the additional IHT payable if the grandmother made a gift directly to her
child.
To avoid additional IHT - making gifts to grandchildren as opposed to children is a

good option. 
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Syllabus D1e. Taper Relief
Taper Relief
What is taper relief?
This is:
It would be somewhat unfair if a donor did not quite live for seven years after
making a gift with the result that the gift was fully chargeable to IHT.
Therefore, taper relief reduces the amount of tax payable where a donor lives for
more than three years, but less than seven years, after making a gift. The reduction
is as follows:
Years before death Percentage reduction %
Over three years but less than four years 20
Over four years but less than five years 40
Over five years but less than six years 60
Over six years but less than seven years 80
Although taper relief reduces the amount of tax payable, it does not reduce the
value of a gift for cumulation purposes.
The taper relief table will be given in the tax rates and allowances section of the
exam.
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Illustration:
Winnie died on 9 January 2019. She had made the following lifetime gifts:
• 2 February 2012 – A gift of £473,000 to a trust. The trust paid the IHT arising
from this gift.
• 16 August 2015 – A gift of £320,000 to her son.
These figures are after deducting available exemptions.
The nil rate band for the tax year 2011/12 is £325,000, and for the tax year 2015/16
it is £325,000
Lifetime transfers £
2 February 2011
IHT liability
325,000 at nil% 0
148,000 at 20% 29,600
29,600
16 August 2014
Additional liabilities arising on death
2 February 2011
IHT liability
325,000 at nil% 0
148,000 at 40% 59,200
Taper relief reduction – 80% (47,360)
11,840
Additional liability 0
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The taper relief reduction is 80% because the gift to the trust was made between
six and seven years of the date of Winnie’s death.
Although the final IHT liability of £11,840 is lower than the amount of IHT already
paid of £29,600, a refund is never made for life tax paid, it can only reduce the IHT
liability to zero.
16 August 2015
IHT liability 320,000 at 40% 128,000
102,400
The taper relief reduction is 20% because the gift to the son was made between
three and four years of the date of Winnie’s death.
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Syllabus D2. IHT arising on lifetime transfers and on death
Syllabus D2a. Tax implications of lifetime transfers
Tax implications of lifetime transfers
What tax liability arises on lifetime transfers?
When calculating the tax liability on lifetime transfers, there are three aspects that
are a bit more difficult to understand and can therefore cause problems.
Chargeable lifetime transfer preceded by a potentially exempt transfer that

becomes chargeable
The situation where a chargeable lifetime transfer (CLT) is made before a potentially
exempt transfer (PET) is fairly straightforward, and was covered previously.
However, where the sequence of gifts is reversed, the IHT calculations are more
complicated because the PET will use some or all of the nil rate band previously
given to the CLT.
Illustration:
Ali died on 3 March 2019. He had made the following lifetime gifts:
• 1 August 2016 – A gift of £360,000 to his son
• 21 November 2017 – A gift of £240,000 to a trust
The nil rate band for all the tax years is £325,000.
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1 August 2015
21 November 2016
No lifetime IHT is payable because the CLT is less than the nil rate band for
2017/18.
1 August 2015
IHT liability 325,000 at nil% 0

35,000 at 40% 14,000
14,000
£
21 November 2016
IHT liability 240,000 at 40% 96,000

IHT already paid (Nil)
The nil rate band for 2018/19 of £325,000 has been fully utilised by the PET made
on 1 August 2016. 
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Grossing up
So far, in all of the examples concerning a CLT, the trust (the donee) has paid any
lifetime IHT at the rate of 20%.
However, when the donor of the gift is paying IHT on the gift into the trust the rate
of 20/80 (25%) is used as the gift is deemed to be the net amount of money that is
leaving the donors estate. The estate value falls by the gift plus the tax in this case. 

For the death tax calculations, the amount of the gift will need to be grossed up by
the amount of the tax. Any available annual exemptions are deducted prior to
grossing up.
The annual exemptions are explained in Topic Exemptions - there is an annual

exemption of £3,000 each year that is allowed, and if the annual exemption of
£3,000 of the previous year has not been used, this can be brought forward and
used in the current year, after allocating the current year annual exemption.
For example if a cash gift was made into a trust in February 2019 of £100,000 and
no other gifts had been made previously, then the annual exemptions of £3,000
(18/19) and then £3,000 (17/18) would be deducted first.
£100,000 - £3,000-£3,000 = £94,000 would be the value of the transfer and IHT
would be calculated on the 94,000.
Illustration:
On 17 June 2015, Annie made a gift of £406,000 to a trust. She paid the IHT arising
from the gift.
Annie has not made any other gifts since 6 April 2015.
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The lifetime IHT liability is calculated as follows:
£ £
Value transferred 406,000
Annual exemptions
2015/16 3,000
2014/15 3,000
(6,000)
Net chargeable transfer 400,000
IHT liability
325,000 at nil% 0
75,000 x 20/80 18,750
Gross chargeable transfer 418,750
The amount of lifetime IHT payable by Annie is £18,750. This figure can be
checked by calculating the IHT on the gross chargeable transfer of £418,750:
IHT liability
325,000 at nil% 0
93,750 at 20% 18,750
18,750
Once the gross chargeable transfer has been calculated, then this figure is used in
all subsequent calculations.
CLTs are never re-grossed up on death, even if the nil rate band is reallocated as a
result of a PET becoming chargeable.
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Illustration:
Continuing with example 2, Annie died on 12 March 2019.
12 March 2019 £
IHT liability
325,000 at nil% 0
93,750 at 40% 37,500
30,000
When an IHT question involves a CLT, then make sure you know who is paying the
IHT. Grossing up is not necessary if the trust (the donee) pays.
Seven-year cumulation period
Jayne died on 18 March 2019 leaving an estate valued at £450,000. She had made
the following lifetime gifts:
1 August 2010 – A gift of £200,000 to a trust
1 November 2016 – A gift of £280,000 to a trust
These figures are after deducting available exemptions. In each case, the trust paid
any IHT arising from the gift.
Note: if the question in the exam does not say who pays the tax then you will
always assume that the donor pays the tax and use 20/80 (25%).
The nil rate band for the tax year 2010/11 is £325,000, and for the tax year 2016/17
it is £325,000.
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Lifetime transfers - 1 August 2010 £
No lifetime IHT is payable because the CLT is less than the nil rate band for
2010/11.
Lifetime transfers - 1 November 2015 £

IHT liability
(325,000 - 200,000) = 125,000 at nil% 0
155,000 at 20% 31,000
31,000
The CLT made on 1 August 2010 is within seven years of 1 November 2016, so it
utilises £200,000 of the nil rate band for 2016/17.
1 August 2009 £
There is no additional liability because this CLT was made more than seven years
before the date of Jayne’s death on 18 March 2019.
1 November 2016 £
IHT liability
125,000 at nil% 0
155,000 at 40% 62,000
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The CLT made on 1 August 2010 utilises £200,000 of the nil rate band for 2018/19
of £325,000 because it was made 7 years before this CLT.
Death estate
IHT liability
45,000 at nil% (325,000 - 280,000) 0
405,000 at 40% 162,000

162,000
The CLT made on 1 August 2010 is not relevant when calculating the IHT on the
death estate because it was made more than seven years before the date of Jayne’s
death on 18 March 2019.
Therefore, only the CLT made on 1 November 2016 is taken into account, and this
utilises £280,000 of the nil rate band of £325,000.
Total IHT: life tax £31,000 + death tax £31,000 + 162,000 = £224,000
Illustration:
The same situation as in example 4, except that on 1 November 2016 Jayne made a
gift of £280,000 to her daughter rather than to a trust.
1 August 2010
1 November 2016
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£
1 August 2010
1 November 2016
IHT liability
The CLT is entirely covered by the NRB, therefore there is no lifetime tax
payable, and it was made 7 years before death, therefore there will be no
additional death tax payable.
Notice that the PET does not pay lifetime tax, and on death it used NRB first,
therefore paying no death tax either.
Death estate

IHT liability
45,000 at nil% 0
405,000 at 40% 162,000
162,000
Total IHT: Life tax £0, death tax £162,000.
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Syllabus D2b. IHT liability on the death estate
IHT liability on the death estate
Tax liability on the death estate
Until now, the examples have simply given a figure for the value of a person’s
estate.
However, it may be necessary to calculate the value.
A person’s estate includes the value of everything that they own at the date of death
such as property, shares, motor vehicles, cash and other investments.
A person’s estate also includes the proceeds from life assurance policies even
though the proceeds will not be received until after the date of death.
The actual market value of a life assurance policy at the date of death is irrelevant.
The following deductions are permitted:
• Funeral expenses
• Debts due by the deceased provided they can be legally enforced. Therefore,
gambling debts cannot be deducted, nor can debts that are unenforceable
because there is no written evidence.
• Mortgages on property. This does not include endowment mortgages

because these are repaid upon death by the life assurance element of the
mortgage. Repayment mortgages and interest-only mortgages are
deductible.
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Illustration:
Andy died on 31 December 2018.
At the date of his death he owned the following assets:
• A main residence valued at £425,000 - this was not left in his will to a direct
descendent.
This had an outstanding interest-only mortgage of £180,000.
• Motor cars valued at £63,000.
• Ordinary shares in Herbert plc valued at £54,000.
• Building society deposits of £25,000.
• Investments in individual savings accounts valued at £22,000, savings

certificates from NS&I (National Savings and Investments) valued at £19,000
and government securities (gilts) valued at £34,000.
• A life assurance policy on his own life. On 31 December 2017, the policy had
an open market value of £85,000 and proceeds of £100,000 were received
following Andy’s death.
On 31 December 2017, Andy owed £700 in respect of credit card debts and he had
also verbally promised to pay the £800 legal fee of a friend.
The cost of his funeral amounted to £4,300.
£ £
Property 425,000
Mortgage (180,000)
245,000
Motor cars 63,000
Ordinary shares in Herbert plc 54,000
Building society deposits 25,000
Other investments (22,000 + 19,000 + 34,000) 75,000
Proceeds of life assurance policy 100,000
562,000
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Credit card debts 700
Funeral expenses 4,300
(5,000)
IHT liability
325,000 at nil% 0
232,000 at 40% 92,800
92,800
The promise to pay the friend’s legal fee is not deductible because it is not legally
enforceable.
Unlike capital gains tax, there is no exemption for motor cars, individual savings
accounts, saving certificates from NS&I or for government securities.
The IHT liability on the life assurance policy could have easily been avoided if the
policy had been written into trust for the beneficiaries of Andy’s estate.
The proceeds would have then been paid directly to the beneficiaries, and not form
part of Andy’s estate.
Illustration:
Joe Kerr died on April 6 2018, leaving £25,000 to his friend and the remainder to his
nephew.
At the date of his death Joe owned the following assets:
His principal private residence valued at £300,000 upon which the outstanding
repayment mortgage at the date of death was £80,000. The house was not left to a
direct descendent.
A holiday home valued at £140,000
Bank and Building Society Deposits amounting to £230,000
12,000 Shares in Joe Ltd valued at £20 per share
A life assurance policy with an open market value on April 6 2018, of £125,000 from
which proceeds of £140,000 were received into trust following Joe’s death.
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Joe had no outstanding expenses at the date of his death.
Joe's wife only used 50% of her NRB at the date of her death and Joe never made
any gifts previous to his death, so his NRB is fully available.
How much will his nephew inherit?
Solution:
Death estate
House £300,000 
Less:  
Repayment mortgage (£80,000) 
Holiday home £140,000 
Bank deposits £230,000 
Shares (12,000*£20) = £240,000
Total estate £830,000
NRB available (£325,000 + 0.5*£325,000) = (£487,500)
Chargeable estate = £342,500
IHT payable = 40%*£342,500 = £137,000
Therefore, his nephew will inherit:
£830,000 - £25,000 (gift to friend) - £137,000 (IHT paid from estate) = £668,000
Note: the life assurance policy was written into trust for the beneficiaries and so it
does not become chargeable to IHT in the death estate. 
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Syllabus D2c. Transfer of unused NRB between spouses
Transfer of unused NRB between spouses
What if a spouse does not use their entire nil rate band?
This is how the other spouse benefits:
Any unused nil rate band on a person’s death can be transferred to their surviving
spouse (or registered civil partner).
The nil rate band will often not be fully used on the death of the first spouse
because any assets left to the surviving spouse are exempt from IHT (see the
following section on transfers to spouses).
A claim for the transfer of any unused nil rate band is made by the personal
representatives who are looking after the estate of the second spouse to die.
The amount that can be claimed is based on the proportion of the nil rate band not
used when the first spouse died.
Even though the first spouse may have died several years ago when the nil rate
band was much lower, the amount that can be claimed on the death of the second
spouse is calculated using the current limit of £325,000.
Illustration:
Nun died on 29 March 2019.
None of her husband’s nil rate band was used when he died on 5 May 2006.
When calculating the IHT on Nun’s estate a nil rate band of £650,000 (325,000 +
325,000) can be used because a claim can be made to transfer 100% of her
husband’s nil rate band.
Note: the nil rate band in 2006/07 was not £325,000 but it is the unused percentage
that is carried forward and not the amount of unused nil band. Therefore, Nun can
use 100% of the current value of the nil band as well as her own nil band.
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Illustration:
Win died on 24 February 2019 leaving an estate valued at £800,000.
Only 60% of his wife’s nil rate band was used when she died on 12 May 2007.
On 10 May 2014, Win had made a gift of £200,000 to his son.
The nil rate band for the tax year 2014/15 is £325,000
Lifetime transfer – a gift of £200,000 to his son
No life tax on a PET.
Covered by the 2014/15 NRB
Death estate

IHT liability
255,000 at nil% (325,000 + (40% x 325,000) - 200,000 PET) 0

545,000 at 40% 218,000
218,000
Win’s personal representatives can claim the wife’s unused nil rate band of
£130,000 (325,000 x 40%). We use the NRB for 2018/19 (the second person who
dies)
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The amount of nil rate band is therefore £455,000 (325,000 + 130,000), of which
£200,000 is utilised by the PET made on 10 May 2014. 
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Syllabus D2d
d) Understand and apply the residence nil rate band available when a residential property is
inherited by direct descendants.
Residence NRB
An additional nil rate band has been introduced where a main residence is inherited
on death by direct descendants (children and grandchildren).
For the tax year 2018/19, the residence nil rate band is £125,000.
The residence nil rate band is only available if:
1) The individual dies on or after 6 April 2018
2) Their estate includes a main residence
3) It is inherited by direct descendants
Illustration:
Sophie died on 26 May 2018 leaving an estate valued at £800,000. Under the terms
of her will, Sophie’s estate was left to her children. The estate included a main
residence valued at £250,000.
Solution:
The inheritance tax (IHT) liability is:
Chargeable estate £800,000
IHT liability:
£125,000 at 0% (residence NRB)
£325,000 at 0% (NRB)
£350,000 *40% = £140,000
The residence nil rate band of £125,000 is available because Sophie’s estate
included a main residence and this was left to her direct descendants.
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Transferring Residence NRB
In the same way in which any unused normal nil rate band can be transferred to a
surviving spouse (or registered civil partner), the residence nil rate band is also
transferable. It does not matter when the first spouse died.
Illustration:
Trevor died on 19 June 2018 leaving an estate valued at £700,000. Under the terms
of his will, Trevor’s estate was left to his children. The estate included a main
residence valued at £300,000.
Trevor’s wife died on 5 May 2007. She used all of her nil rate band of £325,000.
Solution:
Trevor’s IHT liability is:
Chargeable estate £700,000
IHT liability:
£575,000 at 0% (£325,000 NRB + £125,000 Trevor Residence NRB + £125,000

Trevor’s wife’s unused residence NRB)
£125,000 *40% = £50,000
Trevor’s personal representatives can claim the wife’s unused residence nil rate
band of £125,000.
The amount of residence nil rate band is therefore £250,000 (125,000 + 125,000).
Note:
1) The value of the main residence is after deducting any repayment mortgage
or interest-only mortgage secured on that property (as normal).
2) If a main residence is valued at less than the available residence nil rate
band, then the residence nil rate band is reduced to the value of the
residence.
If an individual’s death estate is valued at more than £2 million then the

residence NRB is reduced by £1 for every £2 that the estate is over £2
million. The whole residence NRB will be withdrawn once the value of the
estate exceeds £2.25 million. 
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Syllabus D3. Exemptions to defer / minimise IHT
Syllabus D3a. Exemptions
Exemptions
Which exemptions are available for IHT?
Transfers to spouses
Gifts to spouses (and registered civil partners) are exempt from IHT.
This exemption applies both to lifetime gifts and on death.
Illustration:
Sophie died on 25 June 2018.
On 12 April 2014, she had made a gift of £400,000 to her husband.
Sophie's estate on 25 June 2018 was valued at £900,000.
Under the terms of her will, Sophie divided her estate equally between her husband
and her daughter.
Lifetime transfers
The gift on 12 April 2014 is exempt as it is to Sophie’s husband.
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Death estate
£
Value of estate 900,000
Spouse exemption (900,000/2) (450,000)
IHT liability
325,000 at nil% 0
125,000 at 40% 50,000
50,000
There are a number of other exemptions that only apply to lifetime gifts.
Small gifts exemption
Gifts up to £250 per person in any one tax year are exempt.
This exemption can not be used to reduce the value of a greater gift.
For example, a gift of £249 to one person will be wholly exempt, but if the gift is
£251 it will be wholly taxable. It is possible to use the exemption any number of
times by making gifts to different donees.
Illustration:
During the tax year 2018/19, Peter made the following gifts:
On 18 May 2018, he made a gift of £240 to his son.
On 5 October 2018, he made a gift of £400 to his daughter.
On 20 March 2019, he made a gift of £100 to a friend.
The gifts on 18 May 2018 and 20 March 2019 are both exempt because they do not
exceed £250.
The gift on 5 October 2018 for £400 does not qualify for the small gifts exemption
because it is more than £250.
The whole amount of £400 will be chargeable unless it can be covered by Peter’s
annual exemption for 2018/19 (see the next section).
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Annual exemption
Each tax year a person has an annual exemption of £3,000.
If the whole of the annual exemption is not used in any tax year, then the balance is
carried forward to the following tax year.
However, the exemption for the current tax year must be used first, and any unused
brought forward exemption cannot be carried forward a second time.
Therefore, the maximum amount of annual exemptions available in any tax year is
£6,000 (£3,000 x 2).
Illustration:
Simone made the following gifts:
On 10 May 2017, she made a gift of £1,400 to her son.
On 25 October 2018, she made a gift of £4,000 to her daughter.
The gift on 10 May 2017 utilises £1,400 of Simone’s annual exemption for 2017/18.
The balance of £1,600 (3,000 – 1,400) is carried forward to 2018/19.
The gift on 25 October 2018 utilises all of the £3,000 annual exemption for 2018/19
and £1,000 (4,000 – 3,000) of the balance brought forward of £1,600.
Because the annual exemption for 2018/19 must be used first, the unused balance
brought forward of £600 (1,600 – 1,000) is lost.
The annual exemption is applied on a strict chronological basis, and is therefore

given against PETs even when they do not become chargeable.
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Illustration:
Nigel made the following gifts:
On 17 May 2017, he made a gift of £60,000 to his son
On 25 June 2018, he made a gift of £100,000 to a trust.
The gift on 17 May 2017 utilises Nigel’s annual exemptions for 2017/18 and
2016/17.
The value of the PET is £54,000 (60,000 – 3,000 – 3,000).
The gift on 25 June 2018 utilises Nigel’s annual exemption for 2018/19. The 2017/18
annual exemption is not available as it has been used by the PET.
The value of the CLT is £97,000 (100,000 – 3,000). No lifetime IHT liability is payable
because this is within the nil rate band for 2018/19.
Ideally the gift to the trust should have been made before the gift to the son.
Normal expenditure out of income
IHT is not intended to apply to gifts of income.
Therefore, a gift is exempt if it is made as part of a person’s normal expenditure, is

made out of income and that person is left with sufficient income to maintain their
normal standard of living.
To count as normal, gifts must be habitual.
Therefore, regular annual gifts of £2,500 made by a person with an annual income
of £100,000 would probably be exempt.
A one-off gift of £70,000 made by the same person would probably not be, and
would instead be a PET or a CLT.
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Gifts in consideration of marriage
This exemption covers gifts made in consideration of a couple getting married or

registering a civil partnership.
The amount of exemption depends on the relationship of the donor to the donee
(who must be one of the two persons getting married):
• £5,000 if the gift if made by a parent.
• £2,500 if the gift is made by a grandparent or by one of the couple getting

married to the other.
• £1,000 if the gift is made by anyone else.
Illustration:
On 19 September 2018, William made a gift of £20,000 to his daughter when she
got married.
He has not made any other gifts since 6 April 2017.
The gift is a PET, but £5,000 will be exempt as a gift in consideration of marriage
and William’s annual exemptions for 2018/19 and 2017/18 are also available.
The value of the PET is therefore £9,000 (20,000 – 5,000 – 3,000 – 3,000).
This remaining £9,000 will only be chargeable to IHT if William dies before
19/09/2025 (within 7 years of making the gift)
Note: the marriage exemption is deducted from the value of the gift BEFORE the
annual exemptions. 
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Syllabus D3b. Basic inheritance tax planning
Basic IHT planning

How to pay as little IHT as possible?
IHT planning
The overall objective is to ensure that the HMRC get as little as possible and the
next generations get as much as possible.
 
The total inheritance payable can be reduced if a person makes lifetime gifts rather
than death gifts.
Lifetime exemptions can apply to reduce the total inheritance tax payable.
• Make lifetime gifts each year sufficient to use the Annual Exemption – £3,000.
• Make as many small gifts of £250 per donee per tax year.
• On the marriage of a son, daughter, grandchild, nephew and niece make gifts
covered by the marriage exemption.
From a parent £5,000  

From a grandparent £2,500  
From any other person £1,000
• Make lifetime gifts of appreciating assets and those which do not generate a
significant CGT liability.
• Lifetime gifts to other individuals can reduce IHT as they will not give rise to any
IHT when the gift is made and will be totally exempt from IHT if the donor lives
for > 7 years.
• If the donor dies within 7 years then IHT may become payable on death but
provided the donor lives for > 3 years the IHT payable will be reduced by taper
relief.
• There is no IHT saving by lifetime giving of assets that qualify for BPR or APR at
100%.
• Ensure that estates of husband and wife are shared so that each spouse will fully
use their nil bands in the event that they should die at the same time.
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Syllabus D4. Payment of inheritance tax
Syllabus D4a. Payment of inheritance tax and the due date
Payment of inheritance tax and the due date
When does inheritance tax need to be paid?
For Chargeable lifetime transfers:
The donor is primarily responsible for any IHT that has to be paid in respect of a
CLT.
However, a question may state that the donee is to instead pay the IHT.
Remember that grossing up is only necessary where the donor pays the tax.
The due date is the later of:
• 30 April following the end of the tax year in which the gift is made.
• Six months from the end of the month in which the gift is made.
Therefore, if a CLT is made between 6 April and 30 September in a tax year, then
any IHT will be due on the following 30 April.
If a CLT is made between 1 October and 5 April in a tax year, then any IHT will be
due six months from the end of the month in which the gift is made.
The donee is always responsible for any additional IHT that becomes payable as a
result of the death of the donor within seven years of making a CLT.
The due date is six months after the end of the month in which the donor died.
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For potentially exempt transfers
The donee is always responsible for any additional IHT that becomes payable as a
result of the death of the donor within seven years of making a PET.
The due date is six months after the end of the month in which the donor died.
For death estate:
The personal representatives of the deceased’s estate are responsible for any IHT
that is payable.
The due date is six months after the end of the month in which death occurred.
However, the personal representatives are required to pay the IHT when they deliver
their account of the estate assets to HM Revenue and Customs, and this may be
earlier than the due date.
Where part of the estate is left to a spouse, then this part will be exempt and will not
bear any of the IHT liability.
Where a specific gift is left to a beneficiary, then this gift will not normally bear any
IHT. The IHT is therefore usually paid out of the non-exempt residue of the estate.
Illustration:
Alfred died on 15 December 2018. He had made the following lifetime gifts:
20 November 2016 – A gift of £420,000 to a trust. Alfred paid the IHT arising from
this gift.
8 August 2017 – A gift of £360,000 to his son.
Alfred’s estate at 15 December 2018 was valued at £850,000. Under the terms of
his will, he left £250,000 to his wife, a specific legacy of £50,000 to his brother, and
the residue of the estate to his children. The residue of the estate did not include a
residential property.
The nil rate band for the tax years 2016/17, 2017/18 and 2018/19 is £325,000. 
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Lifetime transfers
20 November 2016
£
Net chargeable transfer 420,000
IHT liability
325,000 at nil% 0
95,000 x 20/80 23,750
The due date for the IHT liability of £23,750 payable by Alfred was 31 May 2017.
8 August 2017
The PET is initially ignored.
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20 November 2016
£
IHT liability
325,000 at nil% 0
118,750 at 40% 47,500

The due date for the additional IHT liability of £23,750 payable by the trust is 30
June 2019.
8 August 2017
IHT liability 360,000 at 40% 144,000
The CLT made on 20 November 2016 has fully utilised the nil rate band.
The due date for the IHT liability of £144,000 payable by Alfred’s son is 30 June
2019.
Death estate
£
Value of estate 850,000
Spouse exemption (250,000)
IHT liability 600,000 at 40% 240,000
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The due date for the IHT liability of £240,000 payable by the personal
representatives of Alfred’s estate is 30 June 2019.
Alfred’s wife will inherit £250,000, his brother will inherit £50,000, and the children
will inherit the residue of the estate of £310,000 (850,000 – 250,000 – 50,000 –
240,000).
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Inheritance tax in the exam
Tips for the exam
IHT in the exam!
Below are a few points that might help jog your memory and ensure that you score
well in the IHT section of the exam!
Make gifts early in life 

Gifts should be made as early in life as possible so that there is a greater chance of
the donor surviving for seven years.
Gifts made just before death will be of little or no IHT benefit, and may result in a
capital gains tax liability (whereas transfers on death are exempt disposals for
capital gains tax purposes).
Make use of the nil rate band 

Gifts can be made to trusts up to the amount of the nil rate band every seven years
without incurring any immediate charge to IHT.
Gifts to trusts within seven years of each other will be subject to the seven year
cumulation period, whilst an immediate charge to IHT will arise if a gift exceeds the
nil rate band.
Skip a generation 
When making gifts either during lifetime or on death, it can be beneficial to skip a
generation so that gifts are made to grandchildren rather than children. This avoids
a further charge to IHT when the children die. Gifts will then only be taxed once
before being inherited by the grandchildren, rather than twice.
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Syllabus E: Corporation Tax Liabilities
Syllabus E1. The scope of corporation tax
Syllabus E1ab. Period of account and CAP
Period of account and CAP
Period of account
A period of account is the period for which a company prepares its accounts.
Normally, a period of account is for 12 months, however it may be longer or shorter

than this.
This will normally occur when the company starts to trade, ceases to trade or
changes its accounting date.
The maximum length of a period of account is 18 months.
Accounting period / Chargeable accounting period
Normally, a company’s chargeable accounting period is the same as it’s period of

account.
The difference between both is that a chargeable accounting period must be equal
to or less than 12 months.
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However, a period of account can exceed 12 months.
• In the case where a company’s period of account exceeds 12 months, then 2

chargeable accounting periods will be created.
The first one for the first 12 months and the second one for the remaining
months in the period of account.
• It is the chargeable accounting period for which a corporation tax

computation is prepared.
Therefore, if a period of account is split into 2 chargeable accounting periods

because it is longer than 12 months, then 2 corporation tax computations will
result.
When does a chargeable accounting period start or end?
A CAP will normally start immediately after the end of a previous CAP.
• A CAP will also start when a company commences to trade, or when its
profits become liable to corporation tax.
• A CAP will normally finish 12 months after the beginning of the period or at
the end of a company’s period of account.
• A CAP will also finish when a company ceases to trade, or when its profits
otherwise cease being liable to corporation tax.
Financial Year (FY)
Financial years run from 01 April – 31 March.
• FY 18 = 01/04/2018 - 31/03/2019
• Financial years determine which corporation tax rates to use.
• However, from FY17 – there is a single rate of corporation tax of 19%

regardless of the size of the company. (FY16 20%)
• For the ATX - UK examination, students will be required to calculate a hybrid

rate of corporation tax when a chargeable accounting period spans an earlier
financial year.
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Illustration:
A company prepares accounts for the 15 month period from 01/01/2017 -

31/03/2018.
• What is the period of account?
• What are the chargeable accounting periods?
• How many corporation tax computations will be prepared?
Solution:
Period of account:
01/01/2017 – 31/03/2018
Chargeable accounting periods:
01/01/2017-31/12/2017 (First 12 months)
01/01/2018-31/03/2018 (Last 3 months)
2 corporation tax computations will be prepared, one for each chargeable

accounting period.
Note: in the case of the first chargeable accounting period, 3 months fall in FY16
and 9 months fall in FY17 and so a hybrid rate of corporation tax will need to be
calculated.
(3/12 x 20%) + (9/12 x 19%) = 19.25%
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Illustration:
Smarty Ltd. became incorporated on 26/05/2018.
It commenced trading on 01/11/2018.
It prepared its accounts to 31/03/2018.
When does Smarty Ltd,’s accounting period start?
Solution:
It starts on 01/11/2018, this is because the company commenced trading on this

date.
Note normally the accounting period starts after the previous one has finished,
however as Smarty Ltd. does not have a previous accounting period, their
accounting period starts when they commenced to trade.
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Syllabus E1c. Residency of a company
Residency of a company
Who pays UK corporation tax?
How is UK residency determined for companies?
A company is resident in the UK if:
1. It has been incorporated in the UK, for example. K Ltd. or B plc.
2. It is centrally managed and controlled in the UK for example, M. Inc. which

was incorporated overseas has majority of its board meetings held in the UK,
and most of its directors are resident in the UK.
Illustration:
B Inc. was incorporated in Barbados.
All of the company's board meetings are held in the UK.
Will the company be considered to be UK resident and therefore have to pay UK

Corporation Tax?
Solution:
Yes, the company will be considered to be UK resident and therefore pay UK

Corporation Tax.
This is because, even though it has been incorporated overseas, it is centrally

managed from the UK.
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Syllabus E2. Taxable total profits
Syllabus E2a. Allowable expenditure in calculating T.A.T.P.
Allowable expenditure in calculating Tax adjusted

trading profit
How to calculate Tax adjusted trading profit?
Profit before tax "PBT" (Operating profit) X

+ Disallowed expenses X
Allowable expenses 0*
- Non trading income (X)
- Capital allowances (X)
Tax adjusted trading profit X
* At the exam you will start the adjustment with the profit before taxation of £X and
deal with all the items listed and you will indicate with a zero (0) any items which do
not require adjustment.
Allowable expenses
Are expenses which should be included in taxable profits.
Therefore we have to keep them in Profit before tax.
You will indicate these expenses with 0 in the exam, because these items do not
require adjustment.
• Patent royalties’ receivable/payable
• Staff costs
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• Impairment losses
• Legal fees:
- in connection with the Issue of loan notes (for trading activities) 

- in connection with an action brought against a supplier for breach of
contract 
- in connection with the registration of trade marks
• Loan arrangement fee for trading
• Income element of premium paid for grant of short lease for trading
premises
• Gifts to customers if:
- they cost LESS than £50 per recipient per year 

- are not of food, drink, tobacco 
- are not vouchers for exchangeable goods 
- carry an advertisement for the company making the gift (e.g. pens costing
£30 each displaying company's name)
• Repairs
For example: 
- Repairs to warehouse following a flood 
- Repainting the exterior of the company's office building
• Accountancy
• Entertaining employees
The only exception to the non-deductibility of entertaining expenditure is

when it is in respect of employees.
• Non-qualifying charitable donations
Illustration 1:
Operating profit is £100,000.
Expenses included in Operating profit: 

Repairs to warehouse following a flood £100 
Entertaining employees £30 
Accountancy £15 
Legal fees in connection with the registration of trade marks £5 
Gifts to customers - pens costing £30 each displaying company's name = £60
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Required:
Calculate Tax adjusted trading profit.
Solution:
Profit before tax "PBT" (Operating profit) 100,000

Allowable expenses:
Repairs 0
Entertaining employees 0
Accountancy 0
Legal fees 0
Gifts 0
Tax adjusted trading profit 100,000
Note: All expenses were indicated with 0, because these items do not require
adjustment, they were all allowable.
Disallowable expenses
Are adjustments which INCREASE taxable profits.
Meaning these items were included in PBT, but should not have been there,
therefore we have to take them away by ADDING them to PBT.
An Example: 
The expense of £10 is included in PBT (e.g. £100) but should not have been there,
so you need to take the expense away from PBT and therefore you add the expense
to PBT (100 + 10 = £110) and therefore you will increase Profit.
• Entertaining customers and suppliers UK and overseas
Note:  
The only exception to the non-deductibility of entertaining expenditure is
when it is in respect of employees.
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• Depreciation / Amortisation (usually given in the question)
• Legal costs:
- of acquiring a short lease 

- for issue of preference shares 
- for renewal of long lease
• Issue cost of shares
• Dividends
• Issue cost and interest for non-trading loan
• Capital expenditure
e.g.  
- costs of new computers 
- Extending the office building in order to create a new reception area 
- Improvement of the building rather than repair
• Donations:
- to political parties 
- paid under the gift aid scheme
• Gifts to customers if:
- they cost MORE than £50 per recipient per year (e.g. pens costing £60) 
- are of food, drink, tobacco (e.g. food hampers) 
- are vouchers for exchangeable goods 
- don't carry an advertisement for the company making the gift (e.g pens not
displaying company's name)
Remember that the above is just a summary of the important points

mentioned in Topic: Allowable expenditure.
Illustration 2:
Operating profit is £100,000 

Depreciation £500 
Capital Allowances £400
Expenses included in Operating profit: 

Donations to political parties £25 
Entertaining employees £30 
Accountancy £15 
Legal fees in connection with the registration of trade marks £5 
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Legal fees for issue of preference shares £20 
Gifts to customers - pens costing £30 each displaying company's name = £60 
Gifts to customers - watches costing £60 each = £120
Required:
Calculate Tax adjusted trading profit.
Solution:
Profit before tax "PBT" (Operating profit) 100,000

+ Disallowed expenses:
+ Donations 25
+ Legal fees for issue of preference shares 20
+ Gifts to customers - watches costing £60 eac 120
+ Depreciation 500
Allowable expenses:
Entertaining employees 0
Accountancy 0
Legal fees in connection with the registration of trade marks 0
Gifts to customers - pens costing £30 each displaying company's name 0
- Capital allowances (400)
Tax adjusted trading profit 100,265
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Illustration:
Alpha Ltd. had an accounting profit of £59,850.
The following items are included in the accounting profit figure:
Income from sales £20,000

Cost of 4 computers £5,000
Interest paid on a loan for working capital requirements £3,000
Depreciation £1,250
What is the tax adjusted accounting profit?
Solution:
Accounting profit £59,850

Allowable expenses (Interest paid ) 0
Add: disallowed expenditure
Capital expenditure on computers £5,000
Depreciation £1,250
Deduct: capital allowances (£5,000)
Tax adjusted accounting profit £60,830
Note:
1. A company is allowed an annual investment allowance of £200,000 per year.
This means that a company can spend up to £200,000 on capital items, for
example computers and be allowed the full expenditure to be an allowable
expense in the tax year.
Therefore, as the capital expenditure on computers is only £5,000 – the

annual investment allowance will take care of this.
2. The loan interest is allowable as it is a loan for trading requirements
As companies will have shareholders (people who own the company) and
directors/employees (people who work for the company) separated, there are
some differences between the rules for unincorporated traders and
companies:
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These include:
• No private element of expenses added back
• Drawings (cash and goods) are not relevant for companies.
Dividends are paid out of post-tax profits.
• Family salaries are not relevant for companies.
Basically, there will not be any personal use of expenses because everyone who
uses the company’s money or facilities will be an employee, not an owner.
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Syllabus B3e/E2b. Relief for pre-trading expenditure
Relief for pre-trading expenditure
When does trading commence?
Trading commences on the first day on which a trader makes a sale.
However, the trader would have incurred expenditure before this date, for example,
advertising expenditure and/or rent paid in advance.
• This expenditure incurred before trading has commenced is known as “pre-

trading expenditure”.
• Pre-trading expenditure will get tax relief by being treated as though it was
incurred on the first day that a sale is made, if the following conditions are
satisfied.
Conditions for pre-trading expenditure to be allowable
• 1) It is incurred within 7 years of the commencement of the trade.
• 2) It is an allowable expense.
• For example, if goods were purchased for sale for the business 4 years
before the business had its first sale; this purchase price will be deducted
from the first profits also.
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Illustration:
Manny made his first sale in his packaging business on 04/05/2018.
Before this he incurred the material expenses of £3,000 on 31/12/2017.
• Will this expenditure be deducted from the sales revenue to arrive at tax
adjusted trading profit?
Solution:
Yes, this expenditure will be deducted from his sales revenue to arrive at the tax
It will be treated as though the expenditure was incurred on 04/05/2018.
This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.
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Syllabus B3h/E2c. Capital allowances
Capital allowances
Plant and machinery(P&M) for capital allowances purposes
Capital Allowances (Tax depreciation) are deducted from Operating profits
• CA are given for P&M used in the business only
• CA are given for a period of account eg for a year ended 31/12/18, and
are deducted in the adjustment of profits calculation to reach the Trading
Profits figure
• Plant is defined as assets that perform an active function in the business
• e.g. office furniture and equipment including moveable office partitioning
• Machinery will include motor vehicles and computers, including building

alterations necessary for the installation of plant and machinery
Rates of allowance %
Main pool assets 18
Special Rate Pool assets 8
Capital allowances are now also available on integral features of a building including
lifts and escalators, electrical systems, heating and air cooling system.
Main pool
1. Computers, equipment, shelving, vans and lorries
2. Movable office partitioning
3. Alterations to building incidental to the installation of plant and machinery
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4. Tables and chairs
5. Fire regulation expenditure
Special Rate Pool
The following asset acquisitions should be allocated to the special rate pool:
1. Integral features of a building
– these include all major systems in a building.
For example, electrical, thermal, cooling systems.
2. Long life assets
These are assets, when new, with an expected economic working life of 25
years or more when total expenditure based on a 12-month accounting
period exceeds £100,000
Writing down allowances
W.D.A.’s are given on main pool assets and special rate pool assets.
For main pool assets, the W.D.A. is 18% for a 12 month period
For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2018
The writing down allowance on these assets will be £18,000 (£100,000*18%) in

the year ending 31/12/2018. 
 
Note if the above period was for 6 months, then the WDA for the main pool
would be £9,000 (£100,000*18%*6/12) in the period ending 31/12/2018.
For special rate pool assets, the W.D.A. is 8% for a 12 month period.
For example Assets in the special rate pool had a brought forward value of
£100,000 at 01/01/2018
tax year ending 31/12/2018.
Note if the above period was for 6 months, then the WDA for the main pool
would be £4,000 (£100,000*8%*6/12) in the period ending 31/12/2018.
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First year allowances
These are given for motor cars which have an emission of less than or equal to
50g per km.
This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.
The F.Y.A. is not time apportioned for a period of less than 12 months.
For example, a car was purchased on 01/05/2018 for £100,000.
It had a CO2 emission of 48g/km.
The first year allowance for this car will be £100,000 ( £100,000*100%).
Note if the above period was for 6 months, then the FYA would still be £100,000
- it is not reduced for a period of less than 12 months.
Annual investment allowance
The annual investment allowance for the tax year 18/19 is £200,000.
This is given to an individual for a 12 month period and is time apportioned if the
period is below 12 months.
Ideally, this A.I.A should be allocated to special rate pool assets purchased first
because the allowances on these assets are only 8% per year, therefore tax
relief on these assets is received over a longer period.
Once allocated to special rate pool assets purchased in the tax year, then if any
of the allowance is remaining, it can be allocated to main pool assets purchased
in the year.
The A.I.A cannot be given to motor cars purchased in the tax year.
For example a business purchased equipment worth £300,000 in their year

ended 31/03/2019.
The annual investment allowance is £200,000 (maximum available).
For the remaining £100,000 (£300,000- £200,000), a writing down allowance will be
available.
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As equipment is a main pool asset, the writing down allowance will be £18,000
(£100,000*18%).
The total capital allowances available will be AIA + WDA = £218,000 (£200,000
+ £18,000)
Note if the above period was for 6 months, then the AIA would be (£200,000*6/12) =
£100,000 + WDA (18%*£200,000*6/12) = £18,000. This would total to £118,000 of
capital allowances for the 6 month period.
Illustration:
Buzzy Ltd. in the year ended 31/03/2019 made the following transactions.
Date Item Price
01/05/2018 Ventilation system and lift for his freehold office building £278,000
Machinery purchased and alterations made to office

26/06/2018 £29,300
building to install the machinery
08/08/2018 Movable partition walls £22,900
11/03/2018 New decorative wall constructed £41,200
The tax written down value on the main pool was £87,800 on 31/03/2018.
What are Buzzy Ltd. capital allowances?
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Solution:
Particular AIA Main pool Special Capital

rate pool allowances
Tax written down value £87,800

brought forward
Additions:
Ventilation system and £278,000

freehold office building
AIA (£200,000) £78,000 £200,000
Machinery purchased and £29,300

alterations
Movable partition walls £22,900
Total £140,000 £78,000
WDA 18%/8% (£25,200) (£6,240) £31,440
Tax written down value carried £114,800 £71,760 £231,440

foward
Notice how the AIA was first allocated to special rate pool assets.
Also notice that the expenditure on the decorative wall is not eligible for capital
allowances as this does not qualify as plant and machinery.
The capital allowances are £231,440.
This is the total of: 

WDA 18% on the main pool of £25,200 
+ 
WDA 8% on the special pool of £6,240 
+ 
AIA of £200,000 
= £231,440
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Illustration:
Shivani commenced trading on 1 July 2018 and prepared accounts to 31 December

2018 thereafter.
Shivani made the following acquisitions of main pool assets:
Accounting Period to 31 December 2018 £

1 July 2018 Plant 70,000
Computer
20 October 2018 80,000
equipment
Accounting Year ended 31 December 2019
19 October 2019 Machinery 30,000
What capital allowances will be allowed for both periods?
Solution:
6 month period to 31 December 2018 Main Allowances

Pool
Additions (AIA):
1 July 2018. Plant 70,000
20 October 2018. Computers 80,000
150,000
AIA (max 6/12 x 200,000) (100,000) 50,000 100,000

WDA (max 6/12 x 18% x 50,000) (4,500) 4,500

Tax Written Down Value (TWDV) c/f 45,500
Year Ended 31 December 2019
TWDV b/f 45,500
Additions (AIA)
19 October 2019 30,000
AIA (30,000) 30,000
WDA (18%) (8,190) 8,190
TWDV c/f 37,310
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Compute capital allowances for motor cars
The F.Y.A is given to motor cars purchased that have a CO2 emission of less than
50g/km.
For cars with a CO2 emission of between 50-110, an 18% W.D.A. is given, therefore
these are considered to be main pool assets.
For cars with a CO2 emission of more than 110g, an 8% W.D.A. is given, therefore
these are considered to be special rate pool assets.
Illustration:
Anna Ltd.:
Purchase of car for £10,600. The car had CO2 emissions of 96g/
25/06/2018
km.
Purchase of car for £18,000. The car had CO2 emissions of
16/02/2019
142g/km.
Purchase of car for £22,000. The car had CO2 emissions of 40g/
14/03/2019
km.
What are Anna Ltd. capital allowances?
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Solution:
Special
Main Capital
Particulars F.Y.A. rate
Pool allowances
pool
Tax written down

£16,800
value brought forward
Additions:
Car 40g/km £22,000 (£22,000) £22,000
Car 96g/km £10,600 £10,600
Car 142g/km £18,000 £18,000
Total (£22,000) £27,400 £18,000
WDA (18%/8%) (£4,932) (£1,440) £6,372
Tax written down

£22,468 £16,560
value carried forward
Assets with private use
A company
Companies do not have assets used privately.
This is because all of the people who work in the company are considered to be
employees of the company.
Therefore, the capital allowances given are not reduced by the % of private usage
by an employee of a company.
A Sole trader
If an asset is used privately by the owner of the business, the capital allowance
given must be reduced by the % of private usage.
If an asset is used privately by an employee of the business, the capital

allowance given is not reduced by the % of private usage.
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Illustration (a sole trader)
Mia has been in a business as a sole trader, preparing accounts to 31 March.
On 1 November 2017 she bought computer for £3,000 which she uses 70% in
her business and 30% privately.
She has already used the AIA in the year to 31 March 2018.
Solution: 
WDA as at y/e 31 March 2018 
£3,000 x 18% = £540 
Capital Allowances (business use only) £540 x 70% = £378
Illustration (a company)
Anna Ltd. is a trading company, preparing accounts to 31 March.
On 1 November 2017 the company bought computer for £3,000 which is used by
the sales manager 30% privately.
Anna Ltd. has already used the AIA in the year to 31 March 2018.
Solution: 
WDA as at y/e 31 March 2018 
£3,000 x 18% = £540
Note: The private use of the computer by the employee is not relevant for capital
allowance purposes.  
No adjustment is ever made to a company's capital allowances to reflect the private
use of an asset.
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Compute balancing allowances and balancing charges
In the final year of trading, the A.I.A., W.D.A., F.Y.A. are not given.
Instead, balancing allowances and balancing charges are computed on each pool.
Balancing adjustments on the pools can only occur on cessation of trade.
A balancing allowance will be deducted from trading profit to find tax adjusted
trading profit and a balancing charge will be added to trading profit to find tax
Illustration:
Karen Ltd. prepares accounts to 05/04.
The company ceased to trade on 05/04/2019 on which all of its plant and
machinery was sold for £8,000.
The written down value on its main pool at 06/04/2018 was £11,000.
The company purchased machinery for £4,000 during the year.
Solution:
Particulars Main pool Capital allowances

TWDV b/f £11,000
Additions £4,000
Total £15,000
Disposals (£8,000)
Karen Ltd.’s balancing allowance in her final year of trading is £7,000.
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Recognise the treatment of short life assets
Short life assets are main pool assets that have an expected life of 8 years or less.
A de-pooling election can be made so that the asset gets its own W.D.A.’s and on
sale of the asset, a balancing allowance or balancing charge can arise.
The benefit of this election is that a balancing adjustment will arise within 8 years,
which would not have arisen, if this de-pooling did not take place.
 
If the asset is not sold within the 8 years of acquiring the asset, then the written
down value is added back to the main pool.
This happens on the 8th anniversary of the end of the accounting period in which
the asset was acquired.
Illustration
Aadi prepares accounts to 31/03 each year.
At 06/04/2018 the WDV of the main pool was £14,000.
On 01/07/2018 Aadi purchased machinery for £220,000.
On 01/09/2018 Aadi purchased a printer for £8,000 and made a short life asset
election.
On 01/07/2019, the printer was sold for £4,000.
Calculate the capital allowances for the two years ending 05/04/2020
Solution
Particulars AIA Main Short life Capital

pool asset allowances
Tax written down value brought £14,000

forward
Additions:
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Machinery £220,000
AIA (£200,000) £20,000
Printer £8,000
Total (£200,000) £34,000 £8,000 £200,000
WDA 18% (£6,120) (£1,440) £7,560
Tax written down value carried £27,880 £6,560 £207,560

forward

Particulars Main Short life Capital allowances
pool asset
Tax written down value brought £27,880 £6,560
forward
Disposal proceeds (£4,000)
WDA 18% (£5,018) £5,018
Tax written down value carried £22,862 Nil £7,578
forward
Disposal of the assets
Use LOWER OF
1. Proceeds
2. Original cost
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When an item of plant or machinery is sold - the lower of the sale proceeds received
or the original cost of the asset is deducted from the written down value of the
relevant pool.
For example, if the written down value is 100 and sale proceeds received are 120
but the original cost of the asset is 110, then 110 will be deducted from the pool to
give a balancing charge of 10. The difference between proceeds and original cost
will be treated as a capital gain.
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Syllabus E2d. Property business profits and relief for property losses
Property business profits and relief for property losses
Compute property business profits
The calculation of property business profits is exactly the same as that for
individuals with 3 exceptions:
1. Interest payable on a loan to buy an investment property is deducted from

“Interest income” under the loan relationship rules as opposed to “property
business profits”. The 50% restriction to interest expenses that we saw in the
income tax topic does not apply to companies.
2. There is no rent a room relief for companies as a company will not have a
main residence.
3. Property losses for a company are entirely relieved against total taxable
profits of the current year or carried forward to future years before any
qualifying charitable donations can be deducted.
This treatment continues for future years.
Please refer to Topics Computation of property business profits, Furnished

holiday lettings, Rent a room relief, Premiums granted for short leases,
Property business loss relief to review how property business profits are
calculated.
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Illustration:
For the year ended 31/03/2019 Theta Ltd. has:

Property loss (£20,000)
Qualifying charitable donation £85,000
What will Theta Ltd. taxable total profits be?
Solution:
Property loss (£20,000)
Net income £80,000
Qualifying charitable donation (£80,000)
Taxable total profit Nil
Note that the property loss is relieved before the qualifying charitable donation
against total income.
Additionally, this has resulted in £5,000 of the qualifying charitable donation being
wasted.
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Syllabus E2e. Carry forward relief of trading losses
How to get tax relief for trading losses?
If a company makes a trading loss, then it can relieve the loss by carrying it forward
and deducting it from it's future total profits.
This rule is new and applies to losses made from 1 April 2017.
In your TX - UK exam you will not be tested on losses that arose before 1 April
2017.
Claims for carried forward loss relief must be made within 2 years of the end of the
accounting period in which the loss is relieved.
For example Cow plc made a trading loss of (£30,000) in the tax year ending
31/03/2018.
Cow plc made a trading profit of £50,000 in the tax year ending 31/03/2019 and has
investment income of £20,000.
In the tax year ending 31/03/2019 Cow plc will:

Investment income £20,000
Total profits £70,000
Less: 
Trading loss carried forward (£30,000)
Trading profit £40,000 - this is the amount that will be taxed, after the carried
forward loss has been deducted.
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Unlike current year and carry back loss relief, under carry forward loss relief a
company can choose the amount of trading loss to use in order to save its
charitable donations.
For example Cow plc made a trading loss of (£30,000) in the tax year ending
31/03/2018.
Cow plc made a trading profit of £50,000 in the tax year ending 31/03/2019.
Cow plc also made a qualifying charitable donation of £35,000 in the tax year
ending 31/03/2019.
In the tax year ending 31/03/2019 Cow plc will:

Less: 
Trading loss carried forward (£15,000) (restricted to save charitable donation)
Trading profit £35,000  

Less: 
Qualifying charitable donation (£35,000)
Trading profit £Nil - no trading profit will be taxed in the tax year ending
31/03/2019.
The remaining trading loss of £15,000 (£30,000 - £15,000) will be carried forward to
future years
Trading losses can be carried forward for any amount of time, until the full amount
of the loss has been relieved.
There is another way that trading losses can be relieved.
This is the current year total income relief and carry back total income relief,
these are explained in Section E.2.f.
Note This other relief is normally used before the carry forward relief.
This is because companies want loss relief as soon as possible.
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Illustration:
Pulkit Ltd. made the following income for the year ended 31/03/2018:

Qualifying charitable donations £5,000

How can the trading loss of the year ended 31/03/2018 be relieved?
Solution:
The trading loss of 31/03/2018 can be relieved against:
1. Total profits of future years
Look at how we can relieve the loss
Trading loss of (£50,000) incurred in the year ended 31/03/2018 will be relieved
against the total profits generated in 31/03/2019.
BUT only £40,000 of the loss needs to be used, the remaining £5,000 of total profits
is covered by the qualifying charitable donations.
The remaining £10,000 of the loss will be carried forward to offset against future
total profits.

Trading loss carried forward (£40,000)
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Qualifying charitable donations (£5,000)
Taxable total profits £NIL
Loss memo:
Trading loss incurred in 31/03/2018 (£50,000)
C/F loss relief in 31/03/2019 £40,000
Loss to be carried forward to 31/03/2020 (£10,000)
Note: an alternative would be to use the loss in the current year and offset £25,000
against other income. The downside of this is that £5,000 of donations would be
wasted.
Restrictions on carried forward loss relief
Companies are entitled to a deductions allowance of £5m for a 12 month period.
Carried forward losses can be relieved in full up to the amount of the deductions
allowance plus 50% of the company’s profits after deduction of current period loss
reliefs (including group relief) and the deductions allowance.
You only need to have an awareness of this restriction for the TX - UK paper. 
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Syllabus E2f. Total income relief for trading losses
Total income relief for trading losses
How to get tax relief for trading losses?

If a trading loss is made, it can be deducted from a company's total income
For example in the tax year ending 31/03/2019, Cow plc. made a trading loss of
(£100,000), it also had property income of £75,000 and chargeable gains of
£35,000.
Cow plc can relieve the trading loss by deducting it from it's total income:
Property income £75,000 

Chargeable gains £35,000 
Total £110,000 
Less: 
Current year trading loss (£100,000) 
Total profits £10,000 - this is the amount that corporation tax will be paid on.
The carry back total income claim means that if a company makes a trading loss in
a tax year, it can deduct the loss from the previous 12 month's total income.
For example in the tax year ending 31/03/2019, Cow plc. made a trading loss of
(£100,000), it had no other income in that year.
Cow plc. had property income of £75,000 and chargeable gains of £35,000 in the
tax year ending 31/03/2019.
Cow plc can relieve the trading loss by deducting it from it's total income in the tax
year ended 31/03/2019.

Chargeable gains £35,000 
Less: 
Trading loss carried back (£100,000) 
Total income £10,000 - this is the amount that corporation tax will be paid on.
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Unlike for individuals, the current year total income claim must be made before the
claim against total income for the previous 12 months.
For example Milk plc. made a trading loss of (£100,000) in the tax year ending
31/03/2019.
It also had property income of £25,000 in the tax year ending 31/03/2019.
Milk plc. had total income of £200,000 in the tax year ended 31/03/2018.
The trading loss of 31/03/2019 must first be deducted from total income of
31/03/2019, and can then be carried back to the total income of 31/03/2018.
Current year relief:

Less 
Current year trading loss (£25,000) 
Total income £Nil - no corporation tax will be paid in the year ending
31/03/2019
Carry back relief:

Less: 
Trading loss carried back (£75,000) 
Total income £125,000 - corporation tax will be paid on this amount in the tax
year ended 31/03/2018.
Note you must always use the trading loss in the current year before you
carry it back.
The loss must be deducted in full when a claim is being made.
It cannot be deducted partially.
Therefore, qualifying charitable donations are deducted after the trading loss
and may be wasted.
For example Antler plc. made a trading loss of (£100,000) in the tax year
ending 31/03/2019.
It also had property income of £125,000 and made qualifying charitable donations
of £35,000 in the year.
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Year ending 31/03/2019:

Less: 
Trading loss (£100,000) 
Less: 
Qualifying charitable donations (£25,000) 
Total income £Nil - no corporation tax will be paid.
Note £10,000 (£35,000-£25,000) of the qualifying charitable donation was

wasted because the claim for loss relief must be made in full.
There is another way to claim loss relief, this is the carry forward claim, explained in
Topic Carry forward relief of trading losses.
After the current year total income claim and carry back total income claim, if
there is still a trading loss remaining - the carry forward claim is then used.
Illustration:

How can the trading loss of the year ended 31/03/2019 be relieved?
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Solution:
The trading loss of 31/03/2019 can be relieved against:
1. Current year total income
2. Carry back 12 months of total income
3. Total Profits of future years
Here we will illustrate only the current year total income claim and the carry back
claim against total income for 12 months.
Trading loss of (£30,000) incurred in the year ended 31/03/2019 will be relieved
against the total income generated in 31/03/2019.
Trading income Nil
Trading income total income claim (£25,000)
The qualifying charitable donations for the year ended 31/03/2019 have been
wasted.
In the year ended 31/03/2018:
The carry back total income claim for 12 months:
Trading loss relief carry back claim (£5,000)
Taxable total profits £55,000
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Notice here that the qualifying charitable donation has not been wasted, as there
was enough income remaining for it to be deducted.
Loss memo:
Trading loss of 31/03/2018 (£30,000)
Current year total income claim £25,000
Carry back total income claim £5,000
Loss to be carried forward Nil
Little tricks!
There are 2 areas in claiming loss relief that you should be aware of:
1. If the period before your loss making period is less than 12 months, your
carry back relief claim is for 12 months, therefore you will have to go one
further period back for the remaining months.
For example If a loss making period was 1 year long, the period before that was 6
months long and the period before that one was 1 year long; then you will take the
full 6 months of the previous period and 6 of the 12 months total income for the
period before that also - to make sure that you have gone back a full 12 months.
2. You must compare the same months of loss and profit.
For example Above, for the period that was 12 months long, but for which I could
only offset against 6 months - I must compare 6 month's of profit with 6 months of
loss, and take the lower of them as the amount of loss I can deduct.
You'll see this clearly in Lina Ltd. Illustration below.
Illustration
Lina Ltd. had the following results:
Year ended 6 months ended Year ended

30.06.2018 31.12.2018 31.12.19
Trading profits/
£60,000 £2,000 £(66,000)
loss
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Chargeable gains £2,000 £10,000 £10,000
Total income £62,000 £12,000 £10,000
What amount of loss relief will the company get if they use the current year and
carry back total income claims for loss relief?
Solution
Note the company's last accounting period is only for 6 months.
Therefore the carry back 12 month claim will use these 6 months and go further
back 6 months to make up an entire 12 month claim.
6 months ended Year ended

Year ended 30.06.2018
31.12.2018 31.12.2019
Trading profits/
£60,000 £2,000 Nil
loss
Chargeable gains £2,000 £10,000 £10,000
Total income £62,000 £12,000 £10,000
Total income
Current year/12 (£10,000)
months claim
Total income
Carry Back 12
months claim (set £(12,000)
off in full in this
period)
Total income
Carry back 12 Lower of: 6/12*£66,000 =
months claim £33,000 (Loss for the 6 months) 
(restrict set off to or
lower of 6 months of 6/12*£62,000 = £31,000 (total

profit or 6 months of income for 6 months)
loss)
(£31,000)
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Total taxable
£31,000 £Nil £Nil
profts
Terminal loss relief

If a trading loss occurs in the final 12 months of trading, then this trading loss can be
carried back for 36 months against the total income of the company, on a LIFO (last in first
out) basis.
Once again, the loss cannot be restricted to save qualifying charitable donations.
For example Creamy plc. made a trading loss of (£100,000) in its final year of trading.
It had the following total income:
Year ended 31/03/2019 - £40,000 

Year ended 31/03/2018 - £20,000 
Year ended 31/03/2017 - £55,000
The trading loss of (£100,000) will first be relieved against the total income of 31/03/2019:

Less: 
Terminal loss relief (£40,000) 
Total income £Nil - whatever corporation tax has been paid will be repaid to the company
by HMRC
Then,
The trading loss of (£60,000) (£100,000-£40,000)will second be relieved against the total
income of 31/03/2018:

Less: 
Total income £Nil - whatever corporation tax has been paid, part of it will be repaid to the
company by HMRC
Then,
The trading loss of (£40,000) (£100,000-£40,000-£20,000)will second be relieved against

the total income of 31/03/2017:

Less: 
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Total income £15,000- whatever corporation tax has been paid, part of it will be repaid to
the company by HMRC
Note for the years in which tax has already been paid, this will result in a repayment of tax.
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Syllabus E2g. Factors that influence choice of loss relief claim
Factors that influence choice of loss relief claim
Influencing loss relief claims
There are 2 factors that will be relevant in the TX exam that will influence the
choice of the loss relief claim:
1. Relief as soon as possible
Therefore, the current year total income and and carry back 12 months’ total
income claim are much more likely to be used before the carry forward claim
against trading profits
2. The rate of corporation tax
The rate of corporation tax fell from 20% in FY16 to 19% in FY17 and has
remained at 19% for FY18. However, the rate is expected to fall in the future
and so it is best to try and utilise losses as soon as possible to obtain relief at
the highest rate
3. Making a large company a small company for corporation tax purposes
If a loss relief claim can reduce the size of the company, then this will avoid
the company having to make quarterly instalments of corporation tax.
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Syllabus E2h. Loan relationship rules
Loan relationship rules
The loan relationship rules
Basis of assessment of “Interest Income”
There is an “interest element” in the corporation tax computation for companies.
All interest is received gross for companies and the basis of assessment for interest
income is the accruals basis.
Operation of “Interest Income”
Any interest payable or receivable by companies will be deducted from or added to

“interest income”
• For example, if a loan was taken out to purchase an investment property, the
interest payable would be deducted from this area, not property income.
• However, there is one exception to this rule, that is that any loan taken or
received for trading purposes will have its interest payable or receivable
adjusted within “Trading profits”.
• Otherwise, any non trading loans will be adjusted within “Interest income”.
Summary of similarities and differences between individuals and companies
Particular Individuals Companies
Gross/Net Gross and net Gross
Accruals Accruals Accruals
Trading/Non trading Deducted from their Deducted from Interest income,

loans respective areas except for trading loans
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Simple proforma:
Bank and building society interest receivable x

Gilt interest receivable x
Loan note interest receivable x

Repayment interest receivable from HMRC x
Less:
Loan arrangement fee (x)
Interest payable on loan to buy inv. Prop. (x)
Late payment interest on overdue tax (x)
Interest surplus/deficit x/ (x)
Illustration:
Seeta Ltd. took out a £190,000 loan on 01/07/18 in her year ended 31 March 2019.
The arrangement fee for this loan amounted to £1,400.
The interest on this loan is £7.25% per annum. She used this loan for various
activities:
1. £130,000 to buy an investment property.
2. £45,000 to repair an office building that is rented out.
3. £15,000 to fund working capital requirements.
How much of the interest payable will be taken under the Interest income?
Solution:
The year ends 31/03/2019. Therefore 9 months of interest will be payable.
9/12 * (190,000 * 7.25%) = £10,331
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Interest Income:
1. Loan interest to buy an investment property is allowable
2. Loan interest to repair an investment property is allowable 

= (£130,000+£45,000)/£190,000 * £10,331 = £9,515
Trading income:
1. Loan interest to fund working capital requirements will be treated as a trading

expense.  
£10,331 - £9,515 = £816
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Syllabus E2i. Qualifying charitable donations
Qualifying charitable donations
Tax relief is available for qualifying charitable donations
You can deduct charitable donations from the taxable total profits.
Also note the difference between how qualifying charitable donations are
treated between individuals and companies:
1. Companies deduct these payments, whereas individuals cannot deduct the

payments from their income.
2. A company makes the payment gross, whereas an individual makes the

payment net.
Illustration:
Satya Ltd. has the following income and expenses for the year ending
31/03/2018:
Interest receivable £20,000
Chargeable gains £10,000
Qualifying charitable donation £15,000
Compute the taxable total profits for the year.
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Solution:
Interest receivable £20,000
Chargeable gains £10,000
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Syllabus E2j. Computation of taxable total profits
Computation of taxable total profits
How to calculate taxable total profits?
Taxable total profits include:
Trading income x
Other income and gains:
Property income x
Interest income x
Capital gains x
Less:
Loss relief claims (x)

Qualifying charitable donations (x)
= Taxable total profits x
Each of these areas are discussed in detail in their respective sections.
Remember that dividends received are not subject to corporation tax and are
therefore not included in taxable total profits.
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Illustration:
Lachmi Ltd. has the following income for the year:

She has also received a dividend from a non-associated company of £18,000.
What are Lachmi Ltd. taxable total profits for the year?
Solution:
Taxable total profits for the year
Less:
Notice that dividends received are not included.
They are exempt and only used for the calculation of Augmented profits for
payment of corporation tax.
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Little trick!
Interest income is taxed on an accruals basis.
This means that the interest which is taxed is the interest which is receivable during
the year, not the interest which is actually received during the year.
For example, bank interest receivable of £2,000 was accrued at 31 March 2018
and and £1,000 was accrued at 31 March 2019 respectively.
This means that £2,000 should have been paid in the year ended 31 March 2018
but was not, and £1,000 should have been paid at 31 March 2019, but has not been
paid yet.
The interest actually received during the year ended 31 March 2019 was £6,000.
Therefore, how do we figure out what the amount is that should have actually been
received for the year ended 31 March 2019?
Amount paid - Amount due for previous year + Amount still due at this year end =
Amount that should have been paid for this year.
£6,000 was paid  

(£2,000 was paid towards the amount due at 31 March 2018)
Therefore, £4,000 paid was actually due for the year ended 31 March 2019 
+ 
£1,000 is still to be paid for the year ended 31 March 2019
Therefore, £6,000-£2,000+£1,000 = £5,000 is actually due for the year ended 31

March 2019 - this amount will be used in the proforma.
Illustration:
Kamal Ltd. has the following results for the year ended 31/03/2019
£
Trading profits/loss before capital allowance 30,000
Chargeable gains 2,000
Interest income 62,000
Property income 50,000
Dividends received 100,000

Capital allowances for the year 3,000
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Qualifying charitable donations 15,000
Kamal Ltd. had £2,000 interest accrued at 31/03/2018 and £3,000 of interest
accrued at 31/03/2019.
What will Kamal Ltd.'s taxable total profits be for the year ended 31/03/2019?
Trading profits/loss before capital

30,000
allowance
Less: capital allowances (3,000)
Tax adjusted trading profits 27,000
Interest receivable 62,000-2,000+3,000

63,000
=63,000
Chargeable gains 2,000
Property income 50,000
Total income 142,000
Less:
Qualifying charitable donations (15,000)
Taxable Total Profits 127,000
Taxable Total Profits 127,000
Exempt dividends 100,000
227,000 (This is below the upper limit, so the

Augmented Profits company is a small company and would not
have to pay its corporation tax in instalments)
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Syllabus E3. Chargeable gains for companies
Syllabus E3ab. Capital gains computation
Capital gains computation
How to calculate capital gains?
Capital gains and losses are netted off for each tax year
Corporation tax is paid upon this net gain.
For a company’s capital gain, the following computation can be used:
Disposal proceeds X
Less: Incidental cost of disposal (X)
Net proceeds X
Less: Acquisition Costs (X)
Capital Gain / (Capital loss) X / (X)
Less: Indexation allowance (X)
Taxable gain X
After all individual indexed gains and losses have been computed, then they must be
aggregated and the following computation can be used.
Capital Gains in tax year X
Less: Capital losses in tax year (X)
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Net Capital Gains in tax year X
Less: Capital losses brought forward
Taxable Gains X
This final figure is then taken to the TTP computation if it is a gain and carried
forward if it is a loss.
What is the indexation allowance?
The indexation allowance is an allowance given to companies to remove the part of

the gain that has been produced by increases in inflation rather than genuine
increases in the value of the asset. Indexation therefore reduces the chargeable
gain.
This allowance is given to companies, instead of the annual exemption.
How do we calculate the indexation allowance?
Prices increase due to inflation, therefore to avoid a company paying tax due to the
increases in inflation, an indexation allowance is calculated based on retail price
indexes to remove the effects of inflationary increases in the capital gain.
Total cost of asset *

(R.P.I disposal date – R.P.I. acquisition date)/R.P.I. acquisition = Indexation
date allowance
Note: you will not be expected to calculate indexation allowances in your

exam. You will be given the correct figure to use.
Other things regarding the Indexation allowance:
1. The indexation allowance can only reduce a capital gain to Nil, it cannot
create a capital loss or increase a capital loss.
2. If an asset has been enhanced, therefore capital expenditure has been

incurred to improve the earning capacity of the asset, then another
indexation allowance must be calculated for this enhancement expenditure.
The same calculation is used, replacing “cost” with the “enhancement
expenditure” and the “R.P.I acquisition” with R.P.I at enhancement date. Total
enhancement expenditure of asset * (R.P.I disposal date or Dec 17 – R.P.I.
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enhancement date)/R.P.I. enhancement date = Indexation allowance for
enhancement expenditure
3. If there are incidental costs to acquisition or enhancement, for example, legal

costs incurred on the date of purchase, this cost also needs to be included in
the “total cost” and indexed along with it.
4. If the R.P.I factor has fallen from the month of acquisition to the month of
disposal, the indexation allowance is Nil.
5. Indexation was frozen in December 2017 so any inflation element of a gain

from January 2018 will be taxable.
Illustration:
Greenwood Ltd. disposed of an investment property on 31/12/2018.
He received disposal proceeds of £115,000 for the property and incurred legal fees
on disposal of £5,000.
He has initially purchased the property for £15,000 and incurred incidental costs on
acquisition of £1,500 on 31/12/2008.
He had spent £25,000 to extend the property on 31/12/2010.
Relevant indexation factors are:
On cost 0.306
On enhancement 0.218
What is his capital gain for the tax year 18/19?
Solution:
Incidental costs to dispose (£5,000)
Net sale proceeds £110,000
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Extension cost (£25,000)
Unindexed gain £70,000
Indexation allowance for acquisition (£5,049) (W1)
Indexation allowance for extension (£5,450) (W2)
The unindexed gain is a capital gain from which indexation allowance has not been
deducted from yet.
W1:
I.A. for acquisition:
0.306 * £16,500 = £5,049
Note that the incidental costs to acquire are included (15,000 + 1,500) = 16,500.
W2:
I.A. for enhancement:
0.218 * £25,000 = £5,450
Note: even though the asset was not sold until December 2018, indexation is only
calculated to December 2017. 
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Syllabus E3c. Capital losses
Capital losses
How to get relief for capital losses?
When a company has a capital loss:
1. It is first set off against any Capital gains arising in the same accounting
period.
2. Any remaining capital loss is then carried forward and set off against future
Capital gains.
Illustration:
Kruti Ltd. sold a office building on 06/06/2018 for £400,000, the unindexed cost of
the asset was £420,000.
There were no other chargeable asset sales in the tax year 18/19.
In the tax year 19/20, Kruti Ltd. realised a capital gain of £25,000 on the sale of a
small piece of land that the company owned.
Solution:
• 2017/18
Disposal proceeds £400,000 

Acquisition cost (£420,000) 
• The capital income to be assessed to corporation tax in 2018/19 is Nil.
The loss of (£20,000) will be carried forward and set off against future capital
gains.
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• 2019/20:
Net capital gain £25,000 

Capital loss b/f (£20,000) 
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Syllabus E3de. Disposals of shares by companies, with share identification rules
Disposals of shares by companies, with share

identification rules
Matching rules
Disposals of shares for individuals and for companies are extremely similar.
There are 2 differences, these are that we index the cost of the shares and when
looking at shares to be sold, and we do not look 30 days after the sale, we look 9
days previous to the sale.
• There is no other difference between the two.
• For this reason, the same illustrations and quizzes have been used to explain
this are so that you can compare for yourself both applications.
• When shares are disposed of, a problem arises in finding their allowable cost,
if the shares were acquired over a long period of time.
• To make this simpler, HMRC uses a set of rules to determine the acquisition
date and cost of the shares being disposed of.
• These rules are called the matching rules.
Disposals of shares are matched with acquisitions in the following order:
1. Shares acquired on the same day of disposal.
2. Shares acquired within 9 days before disposal date (there is no indexation

calculation required for this match)
3. Shares from the share pool.
This would be much easier to understand if we did an example!
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Illustration:
Benazir owns shares in L plc.
She acquired 1,500 shares in the company on 31/05/2015 for £20,000, and 500
shares on 30/06/2016 for £10,000.
On 21/02/2019 Benazir bought a further 200 shares in L plc. For £4,000.
Benazir sold 1,000 shares in L. plc for £25,000 on 28/02/2019.
Calculate Benazir’s capital gain on the disposal of the shares in February 2019.
Solution:
We need to dispose of 1,000 shares.
Let us apply our matching rules to see which shares we are disposing of.
FIRST MATCH – same SECOND MATCH – 9 days previous THIRD MATCH –

day acquisition to disposal acquisition share pool
800 shares needed

None. 21/02/2019 – 200 shares for £4,000.
from share pool.
NOTE: you do not round indexation in the share pool
Indexation factors:
To June 2016 £356
To Dec 2017 £1,731 
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Share pool:
Description Number Cost Indexed cost

31/03/2015 purchase 1,500 £20,000 £20,000
Indexing to June 2016: 

£356
Indexed cost of March 15

£20,356
purchase
30/06/2016 purchase 500 £10,000 £10,000
Total £30,356
Index to Dec 17: £1,731
Total 2,000 £30,000 £32,087
(800/2000) * £30,000 = (800/2000)*£32,087 =
Disposal from share pool (800)

(£12,000) (£12,835)
1,200
Remaining in share pool £18,000 £19,252
shares
Specially note how each purchase will be indexed to the next EVENT date (an
event being either a purchase, sale or rights issue).
 
Calculating capital gain:
Acquisition cost:
07/03/19 (£4,000)
Share pool (£12,835)
Note: The share pool figure in the above calculation is the indexed cost figure. This
could be shown separately as cost £12,000 and indexation (12,835 - 12,000) £835.
This is useful to be aware of because indexation cannot create or increase a loss so
if the proceeds had been £11,000 and the cost £12,000 there would have been an
allowable loss of £1,000. But if you had not separated out the cost and indexation
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you would have calculated a loss of (11,000 - 12,835) £1,835 which would have
been incorrect.
• You also might want to try to draw a timeline to ensure that you do not miss
any acquisition dates!
• From this illustration, you have learnt how to index shares.
• Shares issued through a bonus issue will not be indexed as no money has
been paid for them.
• It will be assumed as though they have been acquired on the last purchase
date.
• Shares that have been issued via a rights issue will be indexed as normal, as
money has been paid for them.
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Syllabus E3f. Bonus issues, rights issues, takeovers and reorganisations
Bonus issues, rights issues, takeovers and

reorganisations
Share issues
Bonus issues, rights issues, takeovers and reorganisations.
Once again, the treatment of bonus issues, rights issues, takeovers and
reorganisations are exactly the same for companies and individuals.
The only difference is that a company will index its cost, whereas an individual will
get an annual exemption.
For this reason, very similar illustrations and quizzes have been used so that the
difference can be highlighted to you.
Bonus Issues
This is an issue of shares to existing shareholders in proportion to the number of

shares owned at the date of the bonus issue.
• For example, if you owned 500 shares in a company and a 1:5 bonus issue
was declared, you would receive (500/5) *1 = 100 bonus shares.
• These shares are deemed to be acquired at the same date and at the same
cost as the original shares to which they relate.
• They have no cost of their own.
• Therefore, in your share pool, a bonus issue will only result in an increase in
the number of shares, and no increase in the indexed cost of shares.
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Illustration:
Mina purchased shares in C Co.
The details of her purchases are below:
• May 2018 Purchased 3000 shares for £3,000
• Jan 2019 Purchased 1500 shares for £2,000
• March 2019 Bonus issue of 1:3 declared by the company.
• How many shares will Mina receive under the bonus issue?
• What is the cost of these shares?
Solution:
Total shares in company = 4,500
• Bonus shares received = (4,500/3) * 1 = 1,500 shares
• New total of shares at March 2018 = 4,500+1,500 = 6,000 shares
• The bonus shares will have a Nil cost.
• When they are included in the share pool, the shares purchased previously
will not be indexed to the bonus issue date.
• The indexation of all of the shares will only happen once the next monetary
purchase happens.
Rights Issues
A rights issue occurs where a company offers its existing shareholders the right to
buy extra shares.
Rights issues are similar to bonus issues in that the number of shares offered to
each shareholder is generally in proportion to his or her existing shareholder.
• The only difference is that a price is paid for these shares.
• The price for the shares is normally lower than current market value, in order
for the the existing shareholders to be attracted to taking up the issue.
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Illustration:
Jack is an employee in Jill Ltd.
He had the following transactions in the company’s shares:
• Jul 2018 Purchased 6,000 shares for £15,000
• Sep 2018 Purchased 900 shares for £2,700
• Dec 2018 Took up 1:5 rights issue for £2.00 per share
• What will the rights issue cost Jack if he decides to subscribe to the issue
fully?
Solution:
Total shares in company = 6,900
• Bonus shares received = (6,900/5) * 1 = 1,380 shares
• The rights shares will have a cost of £2.00*1,380 shares = £2,760
• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.
• The bonus issues will be included in the share pool at no cost and the rights
issue shares will be included in the share pool at their respective cost.
• The rights issue share purchase will cause indexation of the previous
purchases until this date as this is a monetary purchase.
• Nothing changes with the matching rules.
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Takeovers
Takeovers can either be for a share for share exchange, or a takeover can be for a
cash exchange.
We will deal with both of these situations separately via the use of illustrations.
• Takeovers (share for share exchange)
• If a takeover is for a share for share exchange, then no capital gains tax
arises immediately.
initial holding cost.
• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.
Illustration:
Jayna owned 2000 shares in A plc which cost her £2,000 in 2009, and A plc was
being taken over by B plc in 2019
£3,000 and 500 preference shares with a market value of £1,000.
• If not, when Jayna sells these new ordinary shares and new preference
shares, what cost would be attributed to each?
Solution:
Total market value of new holding: £3,000+£1,000 = £4,000
= £3,000/£4,000 * £2,000 = £1,500
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Cost attributed to preference shares:
= £1,000/£4,000 * £2,000 = £500
• Jayna needs to use these costs as the acquisition cost when she decides to
sell the shares in B. plc.
• (She cannot use the market value of the shares when they were given to her).
• Takeovers (share for cash exchange)
• If a takeover is for a share for cash exchange, capital gains tax will arise
immediately for the proportion of cash given compared to the total market
value of the new holding.
initial holding cost to be used.
Illustration:
Jayna owned 2000 shares in A plc. which cost her £2,000 in 2009, and A plc was
being taken over by B plc in 2019.
£3,000 and cash of £1,000.
Solution:
= £3,000/£4,000 * £2,000 = £1,500
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Cost attributed to cash given:
= £1,000/£4,000 * £2,000 = £500
Jayna needs to use this £500 as the acquisition cost of the shares that she is
deemed to have disposed of for the cash received.
Capital gains:
Acquisition cost (£500)
Capital gain £500
• No capital gain will arise on the share element, as described above.
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Syllabus E2g. Rollover relief
Rollover relief
Capital gain reliefs for companies
Rollover relief for companies
Rollover relief for companies is the same as rollover relief for individuals.
The only difference between the two is that the indexed gain is rolled over for
companies, whereas individuals do not index the gain.
Explanation
Subject to certain conditions a company may claim that the gain arising on the
disposal of a business asset may be rolled over against the cost of acquiring a
replacement business asset.
Main effects:
1. Disposal of the old asset will arise in neither a gain nor a loss.
2. Cost of the new asset is reduced by the indexed gain that would have been
chargeable on the disposal of the old asset if the claim for roll over relief had
not been made.
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Conditions:
1. The disposal must have been of a qualifying business asset and the
reinvestment must be in a qualifying business asset.
2. The reinvestment must be made 12 months prior to the sale or 36 months

post the sale.
3. All of the sale proceeds received on the sale must be reinvested for
qualification of full roll over relief. If only some of the sale proceeds are
reinvested, then:
Total sale proceeds received-sale proceeds reinvested = indexed capital gain

realised NOW.
Total indexed capital gain-indexed capital gain realised now = indexed capital
gain to be rolled over.
Qualifying assets:
1. Land and buildings.
2. Fixed plant and machinery.
Both of these assets must be used in the business.
Illustration:
Jeremy Ltd. sold its business office on 30/06/2018 for £350,000.
This office cost the company £100,000 on 29/09/2002. Jeremy Ltd. bought another
business office for £250,000 on 31/12/2018. Indexation factor 0.915
• How much of the indexed capital gain can be rolled over?
• What is the base cost of new business office?
Solution:
Unindexed capital gain £250,000
Indexation allowance (W1) (£91,500)
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Indexed capital gain £158,500
Gain deferred (£58,500)
Capital gain now (W2) £100,000
Cost of office £250,000
Gain to be rolled over (£58,500)
This base cost will be used as the cost against the disposal of the new office.
W1:
0.915 * £100,000 = £91,500
W2:
Disposal proceeds received £350,000
Disposal proceeds reinvested (£250,000)
Capital gain to be realised now £100,000
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Syllabus E4. The comprehensive computation of
corporation tax liability
Syllabus E4a.Compute the corporation tax liability
Compute the corporation tax liability
How to calculate the corporation tax liability?
Corporation tax liability
A company will pay corporation tax at the rate of 19% for FY18 and FY17.
If a company’s CAP falls into a financial year prior to FY17 a hybrid rate will need to
be calculated.
As you know, dividends received by a company from non-associated companies

are not charged to corporation tax.
However, they do determine whether a company is small or large.
How?
You will need to add the dividends figure it to the taxable total profits.
If the total of this exceeds the upper limit, then the company will be deemed to be
large.
Do not forget that dividends are just used to determine whether a company is small
or large, they are never subject to corporation tax!
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Illustration:
A company has taxable total profits of £1,450,000.
They have received a dividend from a non-associated company of £250,000.
• Will they be considered to be a large company?
Illustration:
T.T.P £1,450,000
Dividend : £250,000 £250,000
Augmented profits £1,700,000
Yes, the total has crossed £1,500,000 and therefore the company will be considered
to be a large company.
They will pay corporation tax at 19% like small companies but the difference is that
they will have to pay their corporation tax in quarterly instalments.
Corporation tax due 19% * £1,450,000 = £275,500
Related 51% group companies
Companies count as related 51% group companies if:
1. One company owns more than 51% of the other
2. Both companies are owned more than 51% by the same company
Which companies can/cannot be included in the group?
1. An individual is not a company, therefore if an individual controls 2

companies, these companies will NOT be related 51% companies.
2. Dormant companies are not considered to be related companies.
3. Companies resident overseas are considered to be related companies.
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What is control?
The parent company needs to own more than 50% of the share capital of the
subsidiary at the end of the previous chargeable accounting period. The 50% needs
to be both direct and effective interest. For example if A Ltd owns 51% of B Ltd
and B Ltd owns 51% of C Ltd, the situation would be as follows:
A Ltd is related to B Ltd so A would divide the limit by 2
B Ltd is related to A Ltd and C Ltd so B would divide the limit by 3
C Ltd is related to B Ltd so C would divide the limit by 2
What are the tax implications of related 51% group companies?
1. One annual investment allowance is given to the entire group. The group can
decide which companies get the allowance. Therefore, it is tax efficient to
allocate the allowance to large companies and companies which have
purchased special rate pool assets.
2. The upper limit of £1,500,000 is divided by the number of related 51% group
companies to determine an upper limit for each company in the group. If the
individual company’s profits exceed the upper limit, then they are deemed to
be a large company and must pay quarterly instalments of their corporation
tax.
Illustration 1:
Q Ltd owns 51% of Z Ltd. and 65% of A Ltd.

Z Ltd. owns 100% of Z Inc. (overseas company).
A. Ltd. owns 100% of B Ltd. and 100% of C. Ltd. (dormant company)
Which companies are related 51% group companies?
Solution:
There are 5 related companies in this group.
• Q Ltd, Z Ltd, Z Inc, A Ltd and B Ltd.
• C Ltd. is not considered as it is a dormant company.
• The upper limit would be: £1,500,000/5 = £300,000
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Illustration 2:
Q Ltd owns 51% of Z Ltd. and 65% of A Ltd.
Z Ltd. owns 50% of Z Inc. (overseas company).
A. Ltd. owns 60% of B Ltd. and 100% of C. Ltd. (dormant company)
Which companies are related 51% group companies of Q Ltd?
Solution:
Q Ltd is only related to Z Ltd and A Ltd so the limit would be divided by 3
C Ltd is excluded because it is dormant
B Ltd is excluded because the effective interest is less than 51% (65% x 60% =
39%)
Z Inc is excluded because the effective interest is less than 51% (51% x 50% =
25.5%)
Note:
A Ltd would include Q Ltd and B Ltd as related 51% companies (limit/3)
B Ltd would include A Ltd as a related 51% company (limit/2)
Z Ltd would include Q Ltd as a related 51% company (limit/2)
Hopefully you can see from these illustrations that there is not just one answer for a
group. It depends from which company you are looking from. The limit could be
different for each company. 
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Syllabus E5. Group corporate structure for C.T.
Syllabus E5a. 75% loss group
75% loss group
A group of companies is like a family, they can share their losses and
gains
There are 4 types of groups that you need to know:
A – Related 51% group companies
B – VAT groups
C – 75% loss groups
D – 75% gains groups
We have already dealt with related 51% group companies and VAT groups.
75% loss groups
There are 2 conditions that need to be satisfied for a company to be a part of a 75%
loss group.
These are:
1. The parent company must own (directly or indirectly) an effective interest of

75% of the ordinary share capital all member companies.
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Illustration:
A Ltd. owns 90% of B Ltd.
B Ltd. owns 90% of C. Ltd.
Which companies are members of this 75% loss group?
Solution:
All 3 companies are members.
This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect
interest of 81% (90% * 90%) in C Ltd.
Therefore, the parent effective interest is satisfied.
Illustration:
• A Ltd. owns 100% of B Ltd.
• B Ltd. owns 75% of C. Ltd.
• C. Ltd. owns 100% of D Ltd.
• Which companies are members of this 75% loss group?
Solution:
All 3 companies are members of A Ltd’s group
This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect interest
of 75% (100% * 75%) in C Ltd, and an indirect interest of 75%(100% * 75% *
100%) in D Ltd.
Therefore, the parent company condition is satisfied.
The effect of 75% loss groups
UK members of a 75% group can surrender losses to other UK members.
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What losses can they surrender?
1. Excess property losses.
This means that the property losses of the company who has generated the
loss must relieve the loss against its own total income before surrendering it
to a group member.
Thus, the loss making company’s total income should be NIL before it
surrenders its property loss.
2. Excess qualifying charitable donations.
This means that the qualifying donations of the company who has generated
the loss must relieve the loss against its own total income before
surrendering it to a group member.
Thus, the loss making company’s total income should be NIL before it
surrenders its qualifying donation.
3. Trading losses.
This means that the trading losses of the company who generated them
must NOT relieve the loss against its total income or previous year’s income
before surrendering it to a group member.
Thus, the loss making company’s total income does not need to be NIL
before it surrenders its trading loss.
This trading loss cannot be carried forward or backwards against group

members income, it can only be relieved in the corresponding period.
4. Non-trading loan relationship deficits.
A deficit arises on non-trade relationships when the non-trade interest

expense is greater than the non-trade interest income. This deficit can be
surrendered to group companies. It does not have to be set against the
surrendering companies total income first.
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Conditions for loss relief
The loss relieved must be the lower off:
1. The loss of the surrendering company for the exact same period against
which it is being surrendered.
2. The profit of the claimant company for the exact same period against which it
is being claimed.
These periods are called “co-terminus periods”.
You will be able to understand this better with an illustration.
Illustration:
• Ilea Ltd. made a loss for the year ending 31/03/19 of (£180,000).
• William Ltd. joined the group on 01/01/2019 and made a profit of £100,000
for the period ending 31/03/2019.
• Jane Ltd. had been a part of the group for many years and made a profit of
£55,000 for the year ending 30/06/2019.
• How much loss relief can be obtained?
Solution:
Loss relieved against William Ltd.
• Only 3 months are co-terminus since William Ltd. joined the group
(01/01/19-31/03/19)
Therefore the lower of:
William: 3/12 * £100,000 = £25,000
Ilea: 3/12 * £180,000 = £45,000
• £25,000 loss can be relieved against William Ltd. profits.
• Loss relieved against Jane Ltd.
• Only 9 months are co-terminus as both companies have a different year end
(01/07/18-31/03/19)
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Therefore the lower of:
Jane: 9/12 * 55,000 = £41,250
Ilea: 9/12 * £180,000 = £135,000
£41,250 loss can be relieved against Jane Ltd. profits.
Loss memo:
18/19 trading loss (£180,000)
Relief against William Ltd. £25,000
Relief against Jane Ltd. £41,250
Loss to be carried forward against Ilea future trading profits £113,750
Illustration:
A Ltd. and B Ltd. are part of a 75% loss group. They both have 31/03 year endings.
• A Ltd. makes a trading loss of (£190,000). B. Ltd makes a profit of £180,000.
• How much of A Ltd.’s loss can be relieved?
Solution:
The lower of £190,000 and £180,000, therefore only £180,000 loss can be relieved
and the remaining will be carried forward against A Ltd.’s future trading profits
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Carried forward group relief
Carried forward group relief from 1 April 2017
A company which has a post 1 April 2017 loss carried forward may transfer all or part of
that loss to a member of the 75% group.
Losses that can be surrendered:
• Carried forward trade losse;
• Carried forward property losses;
• Carried forward non-trading loan relationship deficits;
• Carried forward management expenses;
• Carried forward non-trading losses on intangible fixed assets.
Unlike current period group relief, the surrendering company can only surrender a
carried forward loss if it cannot use it itself.
When calculating available taxable profits against which to use the carried forward
loss relief, the claimant company must deduct its own losses first.
Note: if a company joins the group and already has carried forward losses, it cannot
surrender these losses to other group companies.
Illustration
Apple Plc has one 75% subsidiary, Banana Ltd. Their results for the year ended 31
March 2019 are as follows:
Apple Plc
Banana Ltd
£ £
Trading profit 70,000 40,000
Trading loss carried (5,000) (110,000)
forward from 31 March
2018
Non-trade loan 10,000 10,000
relationship income
Chargeable gain 12,000 6,000
Calculate the maximum carry forward group relief that Apple Plc can claim from
Banana Ltd.
Solution
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Banana Ltd can only surrender the amount of carried forward loss that it cannot use
itself, even if it would not choose to use the loss itself:
Carried forward trade loss £110,000
Trading profit £(40,000)
NTLR income £(10,000)
Chargeable gain £(6,000)
Loss available for carry forward group relief £54,000
Apple Plc can only claim a loss against profits after deducting it’s own losses first:
NTLR income £10,000
Carried forward trade loss £(5,000)
Available taxable total profits £87,000
Maximum carry forward group relief that Apple Plc can claim from Banana Ltd is
therefore £54,000 (the lower of £54,000 and £87,000)
Note: you will not be tested on group relief involving carried forward losses made
prior to 1 April 2017.
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Syllabus E5b. 75% gains group
75% gains group
What is a 75% chargeable gains group?
This is a group in which members can:
1. Transfer assets at no gain or no loss.
The asset will be transferred between group members at its indexed cost
(cost + indexation until date of transfer).
This is similar to husband/wife or civil partner transfers for individuals.
2. Obtain group rollover relief.
Therefore one member of a group can sell a qualifying asset, and if another
member purchases a qualifying asset within the time limit, the chargeable
gain on the first asset can be rolled over against the purchase of the second
asset of the other group member.
(Rollover relief conditions must still be satisfied).
3. Chargeable gains or capital losses can be given to group members freely, to

reduce their taxable total profits as necessary.
An asset does not have to be physically moved and sold by another group
member for a chargeable gain or capital loss to arise on them, the gain or
loss can simply be transferred.
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How does a company obtain membership into a 75% gains group?
• The parent company must hold a direct or indirect effective interest of more
than 50% in each subsidiary.
• Subsidiary companies must own a direct interest of 75% of sub-subsidiary

companies.
Illustration:
Which companies are members of this 75% gains group?
Solution:
This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect
interest of 67.5% (90% * 75%) in C Ltd.
Therefore, the parent effective interest is satisfied and the sub-subsidiary condition
is satisfied.
Illustration:
C. Ltd. owns 75% of D Ltd.
Which companies are members of this 75% gains group?
Solution:
• This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect

interest of 75% (100% * 75%) in C Ltd, and an indirect interest of
56.25%(100% * 75% * 75%) in D Ltd.
• Additionally, B Ltd. owns 75% in the sub-subsidiary C Ltd.
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• Finally, C Ltd. owns 75% in the sub-subsidiary D Ltd.
• Therefore, the parent company condition is satisfied and the sub-subsidiary

condition is satisfied.
Illustration:
Zooby Ltd. and Scrappy Ltd. are members of a 75% group. Zooby Ltd. sold a
qualifying asset for £500,000 and this resulted in a capital gain of £100,000.
• Scrappy Ltd. spent £650,000 on a qualifying asset 6 months after the sale of
of Zooby Ltd.’s asset.
What is the base cost of Scrappy Ltd.’s asset?
Solution:
As group rollover relief is available due to both assets being qualifying and
purchased within the necessary time limit, the base cost of Zooby Ltd.’s asset will
be:
Purchase cost £650,000
Gain rolled over (£100,000)
Base cost £550,000
No chargeable gain will result for Zooby Ltd. at present
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Illustration:
If two companies are members of a capital gains group and one company transfers
an asset to another.
Will this asset be transferred at its original cost or indexed cost?
Solution:
Indexed cost
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Syllabus F: Value Added Tax
Syllabus F1. The VAT registration requirements
Syllabus F1a. Recognise the circumstances in which a person must register or deregister for
VAT (compulsory) and when a person may register or deregister for VAT (voluntary).
VAT Registration - Compulsory and Voluntary
When is it compulsory to register for VAT?
When your sales (excluding VAT) go over the registration limit (£85,000).
There are 2 separate tests for compulsory registration:
1. Historic Turnover
2. Future Prospects
When you satisfy both tests HMRC (HM Revenue and Customs) will use the test
that gives the earlier registration date.
Historic Turnover test
At the end of every month check to see if the last 12 month sales were over
£85,000.
If so, you have 30 days to tell HMRC (30 days of the end of the month in which the
limit is exceeded)
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You are then registered for VAT from the end of the next month (or earlier if agreed)
• So let’s say the limit was exceeded in April
• You must notify HMRC by 30th May (within 30 days of the end of the month -
April)
• You will be registered for VAT from 1st June
Illustration 1:
Year ended 31st December. 

Sales were £96,000 (accrued evenly).
When would we become VAT registered?
Answer
• 96,000 / 12 = 8,000 per month
• So limit is reached 85,000 / 8,000 = 10.63 months (October)
• So tell HMRC by 30th November and will be registered for VAT from 1st
December
Future Prospects test
If you think the limit (£85,000) will be reached in the next 30 days alone
• then you have 30 days to tell HMRC and
• registration starts at the beginning of the 30 days you expect to reach the
limit
• For example:
On 1 July, the company signed a contract valued at £100,000 for completion

during July.
The company will register for VAT from 1 July and have to notify HMRC by 30
July.
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Illustration 2:
Guy starts to trade and in the year ended 31st December sales are expected to be
£240,000 (accrued evenly).
When would we become VAT registered?
• Answer - using the historic test because the threshold is not £85,000 in
one 30 day period alone.
• 240,000 / 12 = 20,000 per month
• 85,000 / 20,000 = 4.25 month (April)
• So limit is expected to be reached in the fourth month (April)
• So tell HMRC by 30th May and registration starts on 1st June
Note: although the historic test tells us to look back 12 months, when someone
starts to trade you look back after every month as they may need to be registered
before 12 months have gone by.
Illustration 3:
The budgeted turnover of Shobha Ltd. in the first 9 months is £810 000.
The company starts trade on the 1st of July.
When must the company register for VAT?
Solution: using the future test as the threshold is exceeded in one 30 day
period alone
£810 000 / 9 = £90 000 per month
Therefore, the limit would be crossed in the first month of operation (July).
HMRC will need to be notified by 30th July (within 30 days).
Registration will be effective from 01/07 (the beginning of the 30 day period).
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De-registration
• A trader stops being liable to VAT registration when it ceases to make taxable
supplies.
The trader must notify HMRC within 30 days and will be deregistered from
the date of cessation or from an earlier agreed date.
• A trader may also deregister for VAT when its expected taxable turnover in
the next 12 months is expected to fall below £83,000.
The trader may deregister for VAT if they consider this beneficial.
Illustration:
A company has been VAT registered for many years, however it has recently faced
financial difficulties and sales for the year ended 31/12/2018 are forecast to be
£60,000.
• Can the company deregister for VAT?
• When will the de-registration be applicable?
Solution:
The company can request HMRC to cancel its registration because its taxable
supplies for the next 12 months are below £83,000.
The de-registration will be effective from the date on which the request is made or
from an earlier agreed date.
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VAT implications on selling a business (deregistering permanently)
General Rule
• When a business is sold, it will cease to be registered for VAT.
The sale of the business is assumed to be a taxable supply for VAT purposes.
Therefore, all of the assets, such as plant, equipment and trading inventory
owned by the business, will need to have output tax payable on them when
the business is sold.
An exception is made if the VAT due is less than or equal to £1,000. In this
situation, VAT will not be payable.
• Illustration:
Cow plc. was being sold in the year ended 31/03/2019.
It owned plant and equipment costing £1,200,000 (VAT inclusive) and had
inventory remaining that cost £120,000 (VAT inclusive).
All of the input VAT on the inventory had been claimed in previous VAT
returns.
How much output VAT will be payable on the sale of this business assuming
the plant and inventory are sold for cost?
• Solution:
VAT payable 
Plant and machinery £1,200,000 * 1/6 = £200,000 
Inventory £120,000 * 1/6 = £20,000
Total VAT payable = £220,000
Exception to general rule (where the sale is not treated as a taxable

supply)
If the business disposes of its assets and trade as a going concern, no

output VAT will be charged as it will be outside the scope of VAT if the
following conditions are met.
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The conditions for this treatment are:
1. The business is transferred as a going concern
2. No significant break in trading
3. The same type of trade is pursued by the transferee
4. The transferee is or will become VAT registered
Voluntary registration for VAT
Even if someone is not required to register for VAT, once they are making taxable
supplies, they are allowed to.
For example, if a company makes zero rated supplies, they are not required to
register for VAT, but they are allowed to do so.
Advantages of voluntary registration:
1. Avoids late registration penalties.
2. Can recover input tax on supplies.
3. Disguises a small company to look big. (Investors may be apprehensive to

invest in a small company).
4. If a company makes zero rated supplies and standard rated purchases, then
the company will be eligible for repayments from HMRC.
Disadvantages of voluntary registration:
1. VAT added to the selling price will make an item more expensive for a final
consumer who is not VAT registered, and therefore reduce competitive
advantage of the business.
2. If the trader wants to remain competitive and still be VAT registered, then the
profits of the trader will suffer as they will have to suffer the output VAT
payments on their own, they cannot pass them on to the final consumer.
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Illustration:
Villa sells furniture, a taxable supply. Her taxable turnover for the previous 12
months is £68,000 and standard rated purchases are £45,000 (vat inclusive).
Villa sells to final consumers who are not VAT registered.
• Competition is high and most traders in this field are not VAT registered,
therefore, Villa cannot increase her prices. If she does, customers will go
elsewhere.
• Is it beneficial for Villa to register for VAT or not?
Solution:
Profit without registering:
Sales revenue £68,000 

Purchases (£45,000) 
• Profit after registration:
Sales revenue £68,000 

Purchases (£45,000) 
Gross profit £23,000 
Less VAT paid (£3,833) (W1) 
Net profit £19,167
• W1:
VAT payable: 20/120 * £68,000 = £11,333 

VAT receivable: 20/120 * £45,000 = (£7,500) 
Net VAT payable = £3,833
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Syllabus F1b. Circumstances for pre-registration VAT can be recovered
Recovery of pre-registration input VAT
Recovery of input VAT prior to registration
Input VAT incurred prior to VAT registration can be recovered on goods and services
purchased in certain circumstances. These include:
Purchased
Goods Services
item
Cannot be acquired more than 4 Cannot be supplied more than

Time limit?
years prior to registration. 6 months prior to registration
Must be acquired for business Must be acquired for business

Purpose?
purposes purposes
The goods purchased that pre- Services are consumed

registration input VAT will be immediately as they are
Still in hand?
claimed on must still be in inventory provided. Therefore, this is not
prior to registration. applicable.
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How do we claim the pre-registration input VAT?
We treat these goods/services as being purchased on the first day of VAT

registration, therefore we will claim the input VAT when we file our first VAT return.
Illustration:
Sunil Ltd. registered for VAT on 31/01/2019.
He has to file his VAT returns quarterly, and his first return will be filed on
01/04/2019.
Sunil Ltd. purchased inventory for the business on 31/03/2018.
This inventory is still in stock. It’s VAT inclusive price is £120.
How will the input VAT for this purchase be treated?
Solution:
Sunil Ltd. will claim the £20 (input vat paid) on his first VAT return in 01/04/2019.
This is because these goods qualify to have pre-registration VAT claimed on them.
They are used for business purposes, still in stock and purchased within 4 years of
VAT registration.
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Syllabus F1c. Conditions for companies to be treated as VAT group
Conditions for companies to be treated as VAT group
VAT registration requirements
Conditions:
1. 2 or more companies must be associated with each other.
That is one company must own 51% or more of the share capital in another
company, or 2 companies must be under common control.
2. All companies must be UK resident or trading from a permanent

establishment in the UK.
Consequences of Group Registration:
1. The VAT Group is treated for VAT purposes as a single company registered
for VAT on its own.
2. There will be 1 VAT registration number for the whole group.
3. One VAT return will need to be filed on behalf of the whole group.
4. The group must have a representative who fills in the VAT return.
This member will have to gather all of the output and input VAT of the
individual members and fill it in on one return.
This representative is also responsible for paying VAT on behalf of the group.
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Advantages of a VAT Group:
1. There is no VAT on intra-group supplies
2. Only one return must be filed, therefore administration costs will be saved.
Disadvantages of a VAT Group:
1. All members remain jointly and severally liable
2. A single return may cause administration difficulties in collecting and collating

the information
3. There are special VAT schemes for businesses such as the cash, annual and
flat rate schemes.
To enter into these schemes, a business must have a turnover under a certain limit.
Since a VAT group is treated as a single company, the whole VAT group’s turnover
will be considered in comparison to the limit, when one company in the group is
trying to enter into the scheme.
Thus, it is unlikely that a company in VAT group will be eligible to enter into such
schemes, whereas if they were not in the VAT group, they would be more likely to
qualify.
For example, there is a VAT group with 4 companies (A Ltd., B Ltd., C Ltd., and D
Ltd.).
The annual turnover of the entire group is £5,400,000, and each individual
company’s annual turnover is £1,350,000.
B. Ltd. wants to enter into the cash accounting scheme, the company’s individual
turnover is within the limit of £1,350,000, however it cannot enter the scheme
because the VAT group’s annual turnover of £5,400,000 will be considered instead
of individual company turnover and B Ltd. will not qualify.
Illustration
Jay owns shares in a number of companies set out below
60% in A Ltd., and 80% in B Ltd.
B Ltd owns 80% in C Ltd and 51% in G Inc. (An overseas company)
Which of the above companies can be in a VAT group? 
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Solution:
A Ltd., B. Ltd., and C. Ltd can be in a VAT Group.
This is because Jay effectively owns more that 50% of the shares in each of them
and they are trading from a permanent establishment in the UK.
However, G Inc. is not trading from a permanent establishment in the UK and can
therefore not be included in the group.
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Syllabus F2. Computation of VAT liabilities
Syllabus F2a. Calculate the amount of VAT payable/recoverable
Calculate the amount of VAT payable/recoverable
VAT payable/recoverable
VAT on standard rated supplies is 20%
Therefore, if an item is standard rated and VAT inclusive, then its total amount will be 100%
+ 20% = 120%.
• To find the VAT element alone:
VAT inclusive price * 20/120 = VAT element
Or
VAT inclusive price * 1/6 = VAT element
• VAT paid on standard rated purchases is called “input VAT” and can be claimed from
the government.
VAT charged on standard rated sales is called “output VAT” and must be paid to the
government.
The net of these 2 amounts will actually be payable/receivable from the government.
Illustration:
Mr. Mohan is self employed and has made standard rated sales of £120 (VAT inclusive) in
February 2018 and has standard rated purchases of £60 (Vat inclusive) from a VAT
registered supplier.
• What is Mr. Mohan’s VAT payable/recoverable?
Solution:
Output VAT: 20/120 * £120 = £20 

Input VAT: 20/120 * 60 = (£10)
Net output VAT payable = £10 
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Syllabus F2b. Understand how VAT is accounted for and administered
Understand how VAT is accounted for and administered
VAT return accounting
Quarterly accounting for VAT and electronic filing
1. On registration, the trader must charge VAT on all taxable supplies (output
VAT).
2. The trader can also reclaim VAT on all taxable supplies purchased (input VAT).
3. At the end of a 3-month period, the trader accounts to HMRC for all the
output tax less the input tax on their VAT return.
4. VAT is accounted for quarterly
5. VAT registered businesses must file their returns and make payments online.
6. The deadline for submitting the VAT return and making payments
electronically is 1 month and 7 days after the period has ended.
Therefore, for the period ending 31/03/2019, the return with payment can be
submitted electronically on 07/05/2019.
Illustration 1
Cow Ltd's sales (standard rated) for the first 3 months were:
January 2019 - £30,000 

February 2019 - £30,000 
March 2019 - £40,000
How, and when, will Cow Ltd have to submit its quarterly VAT return and pay any
related VAT liability?
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• Solution
Cow Ltd will have to file its VAT returns online and pay the VAT which is due
electronically.
The deadline for filling the VAT return and paying any VAT is one months and seven
days after the end of each quarter.
So, in our case, Cow Ltd will pay (30,000 + 30,000 + 40,000) x 20% = £20,000 VAT
on 7 May 2019 for the quarter ended 31 March 2019.
Illustration 2
For the quarter ended 30/06/2018, Pooja Ltd. had output vat of £10,000 and input
VAT of £7,000.
When will the company be required to file and pay the VAT liability and how much is
it?
Solution:
Output VAT £10,000 

Input VAT (£7,000) 
Net VAT payable £3,000
• Pooja Ltd. must file the return and make the payment online on 07/08/2018.
Other points
1. Because VAT is a self-assessed tax, HMRC make control visits to VAT

registered traders.
The purpose of a control visit is to provide an opportunity for HMRC to check

the accuracy of VAT returns.
2. A business may choose to submit monthly returns but would only do so if it

received regular VAT repayments.
This would arise where the business had standard rated purchases and
expenses but made zero rated sales and hence always had more input tax
than output tax and would claim a repayment.
3. If a trader’s VAT liability exceeds £2,000,000 over a 12-month period, they

must make monthly payments on account of the VAT liability.
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Syllabus F2c. Recognise the tax point when goods or services are supplied
Recognise the tax point when goods or services are

supplied
What is the tax point?
The tax point is the date used to identify the VAT period which should be used to
include the output or input VAT.
Basic tax point
This is:
1. The date the goods are delivered
or
2. The date the services are performed
Actual tax point:
The actual tax point is used more frequently than the basic tax point.
The actual tax point is the earlier of:
1. The date the cash is received or paid before the goods
and
2. The basic tax point
The basic tax point date is replaced by the invoice date if an invoice is issued within
14 days of the basic tax point.
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Here is a simple way to work your tax point out:
1. Step 1: 
The basic tax point is the date that the goods are delivered or services are
performed.
Use the basic tax point if the answers to the below two steps are NO.
2. Step 2: 
Is cash paid or received before the basic tax point date? (Actual tax point)
Yes – Use this date. 

No – Go to step 3
3. Step 3: 
Is an invoice issued within 14 days after the goods are delivered or services
are performed (basic tax point date)? (Actual tax point)
Yes – Use this date. 

No – Use the basic tax point date from step 1.
You will find this easier to understand with an illustration!
Illustration:
Joe is a sole trader in business selling furniture (a standard rated supply). His year
end is 31 December.
He sells furniture to Ikea on 31/05/2018 for £50,000 (Vat inclusive).
31/05/2018 Deposit of £2,000 received 

30/09/2018 Goods delivered 
12/10/2018 Invoice issued for goods 
02/01/2019 Balance of £48,000 paid for goods.
Joe files his VAT returns quarterly.
On which VAT return will this output VAT be included?
• Here is how the transaction went:
Solution:
1. Step 1: 
The basic tax point is 30/09/2018. Let us move on to the other 2 steps.
2. Step 2: 
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Yes – £2,000 deposit but the remaining has not been paid.
Therefore, for this £2,000 sale the output VAT related to it of:
£2,000 * 1/6 = £333 must be included in the VAT return filed on 30/06/2018.
Now, for the remaining £48,000 – we must go through the steps again.
1. Step 1: 
The basic tax point is 30/09/2018. Let us move on to the other 2 steps.
2. Step 2: 
No – Go to step 3
3. Step 3: 
Is an invoice issued within 14 days after the goods are delivered or services
are performed (basic tax point date)? (Actual tax point)
Yes – Invoice was issued on 12/10/2018 and the goods were delivered on
30/09/2018.
Therefore, for this £48,000 sale the output VAT related to it of:
£48,000 * 1/6 = £8,000 must be included in the VAT return filed on 31/12/2018.
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Syllabus F2d. Information that must be given on a VAT invoice
Information that must be given on a VAT invoice
What should a VAT invoice contain?
A VAT registered trader making a supply to another taxable person must issue a VAT
invoice within 30 days of the relevant tax point.
A VAT invoice must contain certain information including:
• VAT registration number
• The tax point
• The rate of VAT for each supply
• The VAT exclusive amount for each supply
• The total VAT exclusive amount
• The amount of VAT payable
• The invoice date and invoice number
• The type of supply
• The quantity and description of the goods supplied
• The company’s name and address
• The name and address of the customer
If a sales invoice is meant to be valid for VAT purposes i.e. a separate VAT invoice
does not need to be issued, then all of the above needs to be included in the sales
invoice.
Otherwise, a separate VAT invoice will need to be issued.
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Simplified VAT invoice
A less detailed VAT invoice may be issued by a taxable person where the invoice is
for a total including VAT of up to £250.
Such an invoice must show:
1. The supplier’s name, address and registration number
2. The date of the supply
3. A description of the goods or services supplied
4. The rate of VAT chargeable
5. The total amount chargeable including VAT
Zero-rated and exempt supplies must not be included in less detailed invoices.
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Syllabus F2e. Principles regarding the valuation of supplies
Principles regarding the valuation of supplies
Value of supply
The value of a supply is the VAT-exclusive price on which VAT is charged.
With a standard rate of 20%:
• Value + VAT = Selling price  

£100 + £20.00 = £120.00
Discounts offered
VAT is chargeable on the actual amount received where a discount is offered for
prompt payment.
1. If the discount is not taken the VAT is charged on the full sale price
2. if the discount is taken, then the VAT is based on the discounted price.
However, it is not as straightforward as that because we often don’t know when a

customer will pay.
Therefore, the supplier can charge the full amount of the VAT and then issue a credit
note for the discount if it is taken or the supplier can issue an invoice stating the
terms of the discount and that the customer can only reclaim the VAT on the
amount actually paid.
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Illustration:
Tony is a sole trader and makes standard rated sales.
He offers a discount of 5% to customers who pay within 14 days.
He makes a sale of £100 (VAT exclusive).
1) What is the output VAT charged if the customer pays within 14 days? 
2) What is the output VAT charged if the customer doesn't pay within 14 days?
1) Solution ( if the customer pays within 14 days):
Sale £100
Discount (5%) (£5)
Net Sale £95
Output VAT charged (20% * £95) = £19
Selling price (95 + 19) = £114
2) Solution ( if the customer doesn't pay within 14 days):

Sale £100
Discount (0%) (£0)
Net Sale £100
Output VAT charged (20% * £100) = £20
Selling price (100 + 20) = £120
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Syllabus F2f. Principal zero rates and exempt supplies
Zero rated and exempt supplies
Types of supplies
Standard rated supplies
A standard rated supply is taxable at 20%.
If a trader is VAT registered and makes standard rated purchases, they can reclaim
input VAT at 20%, and they must pay output VAT of 20% on their standard rated
sales.
For example, an accountancy firm sold their services for £240 and made purchases
of stationery of £12.  
Both of these are standard rated items and VAT inclusive.
Therefore, the net VAT payable will be:
Output VAT: £240 * 1/6 = £40 

Input VAT: £12 * 1/6 = (£2) 
VAT payable = £38
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Examples:
• Stationery
• Furniture
• Computers
• Cars
• Petrol and diesel
• Accountancy fees
• Legal fees
• Advertising costs
• Confectionery
• Vans and lorries
• Sale of freehold commercial buildings within 3 years from completion
• Re-painting office premises
• Extensions to business premises
Zero rated supplies
A zero rated supply are taxable at 0%.
If a trader is VAT registered and makes zero rated purchases, no input VAT can be
claimed, and if they make zero rated sales, no output VAT is payable.
For example, a VAT registered trader sells baby clothes for £240.
This item is zero rated, and therefore no output VAT will be payable on the sale.
On the other hand, if a trader makes zero rated supplies and has standard rated
purchases, the trader will qualify for VAT repayments.
For example, a VAT registered trader sells baby clothes for £240. He pays for his
advertising expenses, which cost him £120.
The trader makes zero rated supplies but standard rated purchases, and can
therefore claim the input VAT paid on his advertising expense of £20. (£120 * 1/6)
1. Basic food (not pet food or luxury items like alcohol and confectionary)
2. Sewerage services and water
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3. New construction work or the sale of buildings by builders where the building
is going to be used for residential/charitable purposes
4. Drugs and medicines
5. Export of goods outside the E.U.
6. Transport (but pleasure transport and transport in vehicles sitting less than 12
people is standard rated)
7. Clothing and footwear of children
8. Residential and charitable buildings
Exempt supplies
An exempt supply is not chargeable to VAT.
A person making exempt supplies cannot recover VAT on inputs, this is because
someone making solely exempt supplies will not have any taxable turnover
and cannot become VAT registered.
1. Land
2. Insurance
3. Postal services
4. Financial services for example, bank charges or credit card services
5. Education
6. Health services
7. Burial and cremation services
8. Subscriptions to professional bodies
9. Sale of freehold commercial buildings owned for more than or equal to 3

years
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Syllabus F2g. Circumstances in which input VAT is non-deductible
Circumstances in which input VAT is non-deductible
Non-recoverable input VAT
Input VAT cannot be recovered in the following circumstances:
1. Input VAT can–not be recovered in respect of business entertainment of UK

customers
2. Input VAT cannot be recovered in relation to any items that are privately used
by an owner of a business.
For example, if an owner purchases stationery for private use, input VAT
cannot be recovered on this purchase.
3. Input VAT cannot be recovered on motor cars (unless they are used 100% for
business purposes).
This applies to both employees and owners of businesses.
A car must be used 100% for business purposes in order for input VAT to be
recovered on it's purchase.
For example, an employer purchases a car for his employee.
The employee uses this car for both business and private purposes.
Input VAT cannot be recovered on the purchase price of this car.
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Input VAT can be recovered in the following circumstances:
1. Input VAT can be recovered where fuel is used for private mileage (either by a
sole trader or an employee), but output VAT must be accounted for.
Output VAT is calculated according to a scale charge based on the car’s CO2
emissions.
The scale charge is VAT inclusive and will be provided to you in the exam.
2. Input VAT can fully be recovered in respect of repairs to a motor car, provided
that there is some business use.
For example, an employer purchases a car for his employee.
The employee uses this car for both business and private purposes.
Input VAT can be recovered on the repairs incurred in respect of this car.
3. Input VAT on business entertainment is recoverable if it relates to the cost of

entertaining overseas customers!
Illustration:
In the quarter to 31 March 2019, Shiva claimed all of the input VAT on her fuel cost
(20%), which he uses for private purposes.
The fuel cost was £1,200 (VAT inclusive).
The relevant scale charge for the car is £463.
How much VAT will be paid/reclaimed for the quarter ended 31 March 2019?
Solution
Input VAT claimed: 

£1,200 * 1/6 = £200
Output VAT charged: 

£463 * 1/6 = £77
Net VAT reclaimed: 

£123
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Illustration:
Lina Ltd. is registered for VAT. All of the sales are standard rated and all figures are
inclusive of VAT.
The following information relates to the company’s VAT return for the quarter ended
31/03/2019:
• Standard rated sales of £60,000.
• Standard rated purchases and expenses of £30,000.
• On 01/01/2010 Lina Ltd. purchased a motor car for an employee costing

£12,000 VAT inclusive.
• The car is used for both business and private purposes.
• Lina Ltd. paid for the petrol and repairs of the car.
• The relevant quarterly scale charge is £300 for the quarter to 31/03/2019.
• The scale charge is based on the C02 emissions of the car.
• The petrol and running cost of the car was £2,000 VAT inclusive.
• Calculate the VAT payable for the quarter ended 31/03/2019.
Solution:
• Input VAT that can be claimed in the quarter to 31/03/2019:
Standard rated exp. and purchases: 1/6 * £30,000 = £5,000 

Purchase of motor car: Nil 
Petrol and running cost paid for: 1/6 * £2,000 = £333 
Total input VAT that can be claimed: £5,333
• Output VAT payable in the quarter to 31/03/2019:
Sales: 1/6 * £60, 000: £10,000 

Scale charge for petrol of car: 1/6 * £300 = £50 
Total output VAT Payable: £10,050
• Net output VAT Payable: £4,717
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Syllabus F2h. Relief available for impairment losses on trade debts
Relief available for impairment losses on trade debts
VAT recovered on impairment losses
Recoverability of VAT on impairment losses (bad debts)
Normally, output VAT is accounted for when an invoice is issued.
If the sale becomes an impairment loss, the seller has paid VAT to HMRC and has
not been able to recover this from the customer.
It is possible for the supplier to reclaim this VAT on the impairment loss from HMRC
provided the following conditions are met:
1. The loss has been written off in the accounting records (the income
statement)
2. 6 months has passed since the debt has been due.
If these conditions are met, then the seller can include the amount of VAT as input
VAT on the next VAT return filed and therefore get relief for it.
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Illustration:
Sahil Ltd. made a sale on 31/08/2018 for £120 (VAT inclusive). 
 
The buyer was given a 30-day credit period.
On 31/03/19, the debt was not paid and written off in Sahil Ltd.’s accounting records.
• Will the output VAT paid be refunded?
Solution:
• Sale £100 
Output VAT £20 
Selling price £120
• This £20 output was paid and included in the VAT returned filed on 30/09/2018 (VAT
returns are filed quarterly).
• The £120 was due on 30/09/2018, however it has not been paid by 31/03/19.
Therefore 6 months have passed since the debt was due to be paid and it has been
written off in Sahil Ltd.’s accounting records.
• Therefore, Sahil Ltd. will get relief for this output VAT of £20 by including it in the VAT
return filed on 31/03/19 as input VAT 
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Syllabus F2i. Default surcharge and penalty for incorrect VAT return
Default surcharge and penalty for incorrect VAT return
The default surcharge
If a taxable person: 
- submits a VAT return late, or  
- submits a return on time but makes late payment of the VAT due then:
• HMRC will issue a surcharge liability notice which will specify the surcharge
period (normally 12 months).
• If within these 12 months, you don't make another default:
You will NOT pay any surcharge.
• If within these 12 months, you make another default:
1) You will have to pay a surcharge which is calculated as a % of the tax paid late
and
2) The surcharge notice period will be extended for another 12 months.
Default involving late payment of VAT in Surcharge as a % of the VAT

the surcharge period outstanding at due date
1st default 2%
2nd default 5%
3rd default 10%
4th default 15%
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For the first and second default, if the surcharge due is less than £400, then
nothing is payable.
For the third and fourth default, there is a minimum of £30 payable, even if the
surcharge does not amount to this month.
Illustration:
Tommy has submitted his VAT returns as follows:
Quarter ended Vat paid (£) Date submitted
31/03/18 1,200 15/05/2018
30/06/18 1,000 07/08/2018
30/09/18 3,100 05/12/2018
31/12/18 1,300 02/03/2019
VAT returns late?
What are the consequences of Tommy submitting his VAT returns late?
Solution:
• 31/03/2018 
Submitted late.
Surcharge period notice issued of 12 months, ending on 31/03/19.
No default surcharge levied on initial late submission.
• 30/06/2018 
Submitted and paid on time.
Still within the surcharge period, ending on 31/03/2019.
• 30/09/2018 
Submitted late.
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This is the first default within the surcharge period, therefore a default
surcharge of £3,100 * 2% = £62 is levied.
This is not payable by Tommy because it is less than £400.
However, the surcharge notice period will now extend to 30/09/2019.
• 31/12/2018 
Submitted late.
The surcharge of £1,300 * 5% = £65 is again less than £400, therefore this
will not be payable by Tommy.
However, the surcharge notice period will now extend to 31/12/2019.
Errors on a VAT return
If a VAT return is submitted incorrectly, the following penalties and surcharges will
apply.
Disclosed by the taxpayer
Errors disclosed by a taxpayer are either defined as small or large.
If an error occurs, then default interest and a standard penalty may be payable.
These depend on whether an error is defined as small or large.
Default interest is interest based on the delayed payment of the VAT liability.
A standard penalty may be payable depending upon the reason for the late
submission.
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The difference between a small and a large error are:
A small error is defined by being less than the de-minimus limit.
The de-minimus limit is the greater of:
£10,000 and 
1% of turnover (subject to an upper limit of £50,000)
Consequences Small Error Large Error

Default interest
No Yes
payable?
Separately disclose to
How to disclose? On the next VAT return
HMRC
May be payable depending May be payable depending
Standard penalty?
in reason of error on reason of error
Illustration:
Bebe Ltd. has made an error relating to understated output VAT of £7,000 for the
quarter to 31/12/2018.
The company’s turnover for the quarter is £200,000.
How should this error be disclosed to HMRC?
• Solution:
De-minimus limit:
The greater of: 

1) £10,000 
2) 1% * £200,000 = £2,000
The error is small because it is less than the de-minimus limit.
Therefore, it can be disclosed on the next VAT return.
No interest will be payable and depending on the reason for the

understatement, a standard penalty will be decided.
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Disclosed by HMRC
- Default interest due regardless of size of error. 

- Standard penalty.
• Standard penalty is based on the reason of inaccuracy
Genuine mistake – no penalty
Careless mistake – 30% of VAT due
Deliberate mistake – 70% of VAT due
Concealment – 100% of VAT due
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Syllabus F2j. Treatment of imports, exports and trade within the EU
Treatment of imports, exports and trade within the EU
Selling to E.U. who are VAT registered
• Goods/services are treated as zero rated.
• No output VAT will be added to them.
Illustration
A UK VAT registered trader supplies computers costing £10,000 (VAT exclusive) to a

company in the E.U. that is VAT registered.
The supply will be treated as zero rated and therefore no output VAT will be
charged.
Selling to E.U. who are not VAT registered
• Goods/services are treated as standard rated.
• Output VAT will be added to selling price.
Illustration
A UK VAT registered trader supplies computers costing £10,000 (VAT exclusive) to a

company in the E.U. that is not VAT registered.
The supply will be treated as standard rated and therefore 20% output tax
of £2,000 (10,000 * 20%) will be charged.
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Exporting outside of the E.U.
• The supply of goods is zero rated
• The supply of services is outside of the scope of VAT
Illustration
A UK VAT registered trader supplies computers costing £10,000 (VAT exclusive) to

a company outside the E.U.
The supply will be treated as zero rated and therefore no output VAT will be
charged.
Whether the company outside of the E.U. is VAT registered or not does not matter,
the supply will be treated as though it is zero rated.
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Coming into the UK:
Acquiring from E.U. who are VAT registered/not VAT registered
• VAT must be accounted for on acquisition.
• The VAT charge is declared on the return as output VAT but can be reclaimed
as input VAT on the same VAT return.
The UK trader accounts for output VAT as the goods would be standard
rated if supplied in the UK.
The UK trader can claim back input VAT of the same amount on the same
return as the goods are used by a trader that only makes taxable supplied.
The net effect on VAT payable is therefore nil.
• The entries contra each other, therefore there is no actual VAT cost.
Illustration
A UK company purchased computers costing £10,000 (VAT exclusive) from a

company in the E.U.
The VAT of £2,000 will be accounted for but not paid.
On receipt, the UK company will account for the £2,000 on it’s VAT return and can
claim the £2,000 input VAT on the same VAT return.
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Importing from outside of the E.U.
It is necessary to provide a bank guarantee but VAT is then accounted for on a

monthly basis.
• UK VAT registered business must pay VAT at the time of importation.
• This VAT can be reclaimed as input VAT on the VAT return during the period in
which goods are imported.
• Therefore, the VAT is paid at the time of importation and then reclaimed as
input VAT, so there is no overall cost.
• Regular importers can defer the payments of VAT on importation by setting

up an account with HMRC.
Illustration
A UK company purchased computers costing £ 10,000 (VAT exclusive) from a

company outside of the E.U.
The VAT of £2,000 will be paid at the time of importation and then claimed as input
VAT on the VAT return during the period in which the goods are imported.
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Syllabus F3. The effect of special schemes
Syllabus F3a. Operation of and advantages of VAT special schemes
Operation of and advantages of VAT special schemes
Special schemes
These schemes are available to small businesses to reduce the work and amount of
VAT payable.
There are 3 schemes:
1. Cash accounting scheme
2. Annual accounting scheme
3. Flat rate scheme
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1) Cash accounting scheme
Operation:
1. The tax point is the date on which the output tax is received and the input tax
is paid.
2. For sales, it is the date that cash is received from customers and for
purchases, it is the date that cash is paid to suppliers.
Conditions:
1. Annual taxable turnover must not exceed £1,350,000.
2. VAT returns must be kept up to date.
3. A business must leave the scheme if annual taxable supplies exceeds

£1,600,000.
Advantages:
1. A business will not pay output tax until received from customers. This is a
cash flow advantage for the business.
2. The scheme provides automatic bad debt relief as output VAT will not have
been paid on a sale until the cash is received from the customer.
Illustration
Shivani has an annual turnover of £1,200,000.
All sales are standard rated and are made on credit for 60 days.
All purchases are standard rated are made on credit for 30 days.
If Shivani opts into the cash accounting scheme, when will she need to account for
VAT for her sales and purchases?
• Solution
Shivani will need to account for her standard rated sales 60 days after the
sale is made, as this is when the cash is received.
This will ensure that Shivani does not pay any output VAT for bad debts.
She will need to account for her standard rated purchases 30 days after the
purchase is made, as this is when the cash is paid.
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2) Annual accounting scheme
Operation:
1. One VAT return is prepared each year.
2. The VAT return is due 2 months after the annual accounting VAT period, along
with the balancing payment of VAT.
3. 9 payments of VAT are made from months 4-12 during the annual accounting
period. These are (10% * VAT paid last period).
4. The final payment (2 months after the annual accounting period) is calculated
as follows: 
 
(VAT payable for the year – 9 payments made during months 4-12 during the
period) = balancing payment.
Conditions:
1. Annual taxable turnover must not exceed £1,350,000.
2. VAT returns must be kept up to date.
3. A business must leave the scheme if annual taxable supplies exceeds

£1,600,000.
Advantages:
1. Administration costs are saved, only one VAT return is prepared per year.
2. Regular monthly payments help the cash flow of the business, small regular
payments are made as opposed to less frequent large outflows.
3. It simplifies accounting for VAT.
Illustration:
Terry for the year ended 31/12/2018 paid VAT of £10,000.
• She was eligible to enter the annual accounting scheme and for the year
ended 31/12/2018 she had VAT payable of £12,000.
• What were her payments during the year ended 31/12/2018? 

When did she make these payments? 
What was her balancing payment? 
When did she make this payment?
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Solution:
Payments on account:
• (10% * last year’s VAT paid) 

= (10% * £10,000) = £1,000 each month
• Payments on account were made from months 4-12 during the year ended
31/12/2018. Therefore, they were made from April to December. This total 9
payments on account.
• Balancing payment:
• (VAT payable for the year – payments on account) 

= £12,000 – (£1,000 * 9)  
= £3,000
• This payment is made 2 months after the year has ended. Therefore, it is
made on 28/02/2019.
3) Flat rate scheme
Operation:
1. VAT payable is computed by using a flat rate %. The flat rate % differs from
industry to industry (you will be told the % in the exam)
2. This % is multiplied by the sales revenue.
3. The sales revenue used includes VAT, exempt supplies and zero rated
supplies.
Note: from 6/4/17 there is a standard % of 16.5% for limited cost traders. This
means that, regardless of their industry, if they are deemed to be limited cost
traders, then they must use the rate of 16.5% (you will be told if this rate applies in
the exam).
Conditions:
1. Annual taxable sales must not exceed £150,000.
2. A business must leave the scheme once turnover exceeds £230,000. 
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Advantages:
1. Simplicity of scheme
2. Reduces administration costs
3. Less detailed records of input and output VAT are needed.
Illustration:
Addi Ltd. has annual sales of £84,000.
These are standard rated and inclusive of VAT.
The company also has standard rated expenses of £4,800 (VAT inclusive).
The flat rate is 16.5%.
• Is it beneficial for the company to use the flat rate scheme or account for VAT
normally?
Solution:
Flat rate scheme:
• 16.5% * £84,000 = £13,860 payable
• Normal accounting:
• Output VAT: 20/120 * £84,000 = £14,000 

Input VAT: 20/120 * £4,800 = (£800) 
Net VAT payable = £13,200
• It is not beneficial for Addi Ltd. to opt into the flat rate scheme.
458 aCOWtancy.com

TX (F6) Course Notes TY 2018

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TX (F6) Course Notes TY 2018

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TX (F6) Course notes

Syllabus A: THE UK TAX SYSTEM AND ITS ADMINISTRATION ......................2

Syllabus A1. The overall function and purpose of taxation. ...............................................................2

Syllabus B1. The scope of income tax. .......................................................................................27

Syllabus C1. The scope of the taxation of capital gains ...............................................................215

Syllabus D1. Basic principles of computing transfers of value ....................................................... 283

Syllabus E1. The scope of corporation tax .................................................................................330

Syllabus F1. The VAT registration requirements ...........................................................................415

Syllabus A1. The overall function and purpose of taxation.

The Economic Purpose

Tax can be used by governments to aﬀect:

Higher tax levels should decrease inflation

Tax can also be used by governments to aﬀect businesses and

• It encourages saving by oﬀering NISAs (new individual savings accounts)

It encourages charity donations by oﬀering Gift Aid tax relief

It encourages new businesses by oﬀering investment tax relief

• It discourages motoring by fuel duties

It discourages drinking alcohol by imposing high duties etc

This can be done through Progressive taxation:

So, income tax is an example of a progressive tax

Here everyone pays the same % of tax regardless of income

- e.g., VAT on a computer is the same regardless of your income

The final form of tax is Proportional Taxation

Direct Taxes - tax paid directly to HMRC

So this is SIMPLE, dimple x

Basically DIRECT taxes are paid DIRECTLY to HMRC

But, in true accountancy style, we complicate it unnecessarily by splitting them into

Direct Revenue Tax

These are based on income / profits

1. Example 1: Income Tax

2. Example 2: Corporation Tax

3. Example 3: National Insurance Contributions

Direct Capital Tax

These are based on assets sold or gifted

1. Example 1: Capital Gains Tax

2. Example 2: Inheritance Tax

oooh an intermediary - get me!

Syllabus A2a. Describe the overall structure of the UK tax system.

This controls all aspects of tax law in the UK

1. Make sure there is money available to fund public spending

2. Help families and individuals who need financial support

HMRC Main Duties:

1. Implement the tax laws

2. Oversee the tax admin

Miscellaneous HMRC stuﬀ

Staﬀ are known as "Oﬃcers of Revenue and Customs"

Branches are all over UK

HM Revenue and Customs (HMRC)

The treasury formally imposes and collects taxation.

The management of the treasury is the responsibility of the Chancellor of the

The administration function for the collection of tax is undertaken by HMRC

At the head of HMRC are the commissioners whose duties are:

1. To implement statue law

2. Oversee the process of UK tax administration

Accounts and payment oﬃces

These concentrate on the collection and payment of tax.

Stop snoring at the back! Learn thezzzzzzze....

Tax Legislation (Statute law)

Law so you HAVE to follow them or boy, you're in deep doggy-do

2. Statutory instruments - These give detailed guidance where necessary on points

1. The "case" will help decisions be made in similar circumstances

2. The "case" rulings are binding

These explain the laws and help interpret the law

1. Statements of Practice Provide clarification of how rules should be applied