IMC 1 11-13

  1. Who pays income tax?
    all individuals and trusts resident in the UK and their worldwide income.
  2. Tax year
    April 6th to april 5th
  3. Tax free income
    • NS&I certificates
    • NS&I certificate childrens bonus bonds
    • Individual Savings accounts (ISAs)
    • Child Trust FUnds (CTFs)
    • Qualifying life assurance policies in the hands of the original owner
    • save as you earn (SAYE) schemes (interests and gains)
    • premium bond prizes
    • Gambling wins such as from the lottery
    • compensation payments of up to 30K GBP when emplyment ends
    • life assurance bond withdrawals of up to 5% p.a. of the original premium
  4. Main types of income tax
    • 1. income from emplyment or self employed earnings
    • 2. savings income, including interest and dividends
    • 3. investment income including property income
  5. Order of taxation
    • 1. earnings and proerty income
    • 2. interest
    • 3. dividends
  6. personal allowance
    7,475 GBP
  7. Starting rate
    Starting rate for savings: 10% £0-£2,560
  8. Basic rate
    Basic rate: 20% £0-£35,000
  9. Higher rate
    Higher rate: 40% £35,001-£150,000
  10. Additional rate
    50% above 150,000 GBP
  11. Starting rate onlyt applies
    where savings income falls below the starting rate limit
  12. UK dividends are treated as if recieved
    net of deemed (or notional) 10% tax credit so are grossed up by 100/90
  13. dividends fallin into the higher tax rate are
    taxed 32.5%
  14. dividends falling into the additional rate are taxed
    at 42.5%
  15. Who is allowed to deduct the personal allowance?
    every individual (including a child)
  16. personal allowance is deducted from
    • non savings income first
    • savings income second
    • and lastly from dividend income
  17. Do people over 65 have a higher age rated personal allowance?
    Damn skippy!
  18. Loan interest payment can be deducted from total income if for one of the following purposes
    • -loan to buy plant or machinery for partnership use (interest allowed for 3 years)
    • -l t b p o m f employment use (3 years)
    • -l t b interest in unquoted employee controlled company
    • -l t invest in a partnership
    • -l t invest in a co-operative
  19. Payroll giving scheme
    • employees can authorise their employer to deduct charitable donations from their gross salary before calculating tax via PAYE
    • -this gives the employee automatic tax relief at his or her marginal highest rate of tax
  20. Tax reductions do not affect income rather they
    reduce the amount of tax calculated on income
  21. Tax reductions are
    • 1. investments in venture capital trusts (VCTs) 30%
    • 2. Investments under the enterprise investment scheme 30%
  22. Tax reductions for VCTs and enterprise investment schemes may qualify of up to the lower of
    • 1. a % of the amount subscribed for qualifying investments and
    • 2. the indivudals tax liability
  23. A tax reduction can only reduce an individuals tax liability to
    zero, cannot create repayment
  24. If indiviual is entitled to both tax reductions
    the VCT reducer is deducted first
  25. An individual who is UK resident but not UK domiciled may claim to be taxed on overseas income on the
    remittance basis, only taxed in overseas income that is brought to the UK
  26. An individual must pay an additional 30K GBP remittance basis charge in order to use the remittance basis if
    • -claims the remittance basis for the tax year
    • -is aged 18 or over in the tax year
    • -has been UK resident for at least 7 of the nine tax years preceding the tax year
  27. NICs
    National Insurance contributions
  28. Who pays NICs?
    payable by employees and their employers and also by self employeed individuals
  29. The main classes of NICs are
    • Class 1
    • -primary, paid by employees
    • -secondary, paid by employers
    • Class 2
    • -Paid by the self employeed
    • Class 4
    • -paid by the self employed
  30. Employees pay main primary contributions of
    11%, between the earnings threshold of 5,715 GBP and the upper earnings limit of of 43, 875 GBP or the equivalent monthly or weekly limit. They also pay additional primary contributions of 1% on earnings above the upper earnings threshold
  31. Employers pay secondary contributions of
    12.8% on earnings above 5,715 GBP or the equivalent month or weekly limit, there is no upper limit
  32. Class 2 NICs
    are payable at a flat rate of 2.40 GBP per week
  33. Class 4 NICs
    pay a fixed 8% between lower limit of 5,715 GBP and upper limit 43, 875 GBP. Additional raye contributions are 1% of profits above that limit
  34. Who pays CGT?
    payable by chargeable persons on the chargeable disposal of a chargeable asset, someone who is resident or ordinarily resident in the UK
  35. Chargeable persons
    • individuals
    • companies
    • trusts
  36. Key exempt chargeable assets are
    • -private cars
    • -NS&I certificates and premium bonds
    • -Investments held in ISAs
    • -foreign currency for private use e.g. used for holidays or homes abroad
    • -individuals private primary home
    • -gilts (treasurey stock)
    • -qualifying corporate bonds (QCBs) i.e. non convertible debt instruments (debentures) issued by companies and denominated in sterling
    • -enterprise investment scheme investments held for 3 years
  37. Chargeable assets include
    foreign currency, shares and other investments
  38. Disposals to spouses or civil partners are tax neutral for
    CGT purposes (there is no gain and no loss)
  39. CGT annual exempt amount is
    10, 600 GBP
  40. Trustees are only entitled to half og
    the individulas annual exempt amount i.e. 5, 300 GBP
  41. Net capital gains
    capital losses are deducted from capital gains arising in the same tax year
  42. A flat tax rate on capital gains
    • -of 18% applies in excess of the annual exempt amount for basic rate taxpayers
    • -of 28% for higher rate taxpayers
  43. Entrepreneurs relief
    • -reduce tax rate on the first 2m GBP of chargeable gains from 18% to 10%
    • relief applies to
    • the whole or part of a trading business
    • assets unsed in a business that has ceased
    • shares in a trading company where the individual held 5% or more of the voting shares
    • assets used in a partnership
    • certain disposals by trustees
  44. actual mechanics of 10% entrepreur tax relief
    reduce eligible gains by 4/9 leaving 5/9 chargeable and apply the 18% (5/9 x 18% = 10%)
  45. IHT
    • is a tax on gifts or transfers of value made by chargeable persons
    • -primarily a tax on wealth left on death, also applies to gifts within seven years of death and to certain lifetime transger of wealth to trusts
  46. IHT applies to
    • -lifetime gifts to trusts
    • -gifts on death (usually in a will)
    • -lifetime gifts in the person making the gift (the donor) dies within 7 years of making that gift
  47. IHT for individuals who are not domiciled in the UK
    only transfers of UK assets are liable to IHT
  48. PET
    • potentially exempt transfer is a lifetime gift made by an individual to another individual
    • -a PET is exempt from IHT when made, and will remain so if the donor survives for at least 7 years after making the gift
  49. CLT
    Chargeable lifetime transfer, is not covered by an exemption
  50. Exemptions applying to lifetime transfer only (including PETs)
    • Small Gifts exemption
    • -outright gift to individuals totalling 250 GBP or less per donee in any one tax year are exempt
    • -does not apply to gifts to trusts
  51. Annual exemption
    • the first 3,000 GBP of value transferred in a tax year is exempt from IHT
    • -used after all exemptions take place
    • -3K exemption is applied to earlier gifts before later gifts
    • -any unused portion is carried one year forward only, and only after the following years exemption has been used
  52. IHT is a tax on transfers of capital, not on gifts of income, examples
    • 1. made as part of the donors normal expenditure
    • 2. out of income and
    • 3. leaves the transferor with sufficient income to maintain his usual standard of living
    • -mainly covers such gifts as paying grandchildrens school fees
  53. Wedding gifts
    • 1. 5000 GBP if from parent of a party to the marriage or civil partnership
    • 2. 2500 GBP if from a grandparent of one of the parties to the marriage or civil partnership
    • 2. 1000 GBP if from any other person
  54. Are gifts to UK charities exempt from IHT?
  55. Gifts between spouses/civil partners are exempt
    • if domiciled in the UK
    • if the donor is UK domiciled, but the donee is not, exemption is limited to 55,000 total. Any lifetime gift over 55,000 will be a PET
    • -if neither spouse nor civil partner is domiciled in the UK, there is no limit on the exemption
  56. Can a claim be made to transfer any unused nil rate band from spouse/cp to the surviving spouse/cp
  57. After all exemptions have been made the first ______ of a CLT is taxed at 0% or the
    • 325,000 GBP
    • nil rate band
  58. Nil rate band applies over the past
    7 years, anything over is taxable at 20%
  59. Taper relief
    • the rate of IHT is 40% BUT the longer the transferor lives after giving the gift, the less the tx
    • 3 years or less-40% IHT
    • between 3 and 4 years-32%
    • between 4 and 5 years-24%
    • between 5 and 6 years-16%
    • -7 years- 8%
  60. IHT on a lifetime transfer on death is payable by the
  61. 2 types of trust
    IIP trust and discretionary trust
  62. IIP Trust
    • -interest income is taxed at 20%
    • -dividends are taxed at 10%
  63. Discretionary trust
    • -first 1000 GBP is taxed at 10% for dividends and 20% for interest income
    • -any remaining income is taxed at the additional rate
    • interest income is taxed at 50% (the trust rate)
    • dividends are taxed at 42.5% (the trust dividend rate)
  64. The latest filing date for a self assessment tax return for a tax year
    • -31 october in the next tax year for non electronic return
    • -31 january in year 2 for an electronic return
  65. for paper tax returns
    the individual may make the calculations or ask the HMRC to do it, only if before 31 october
  66. Self assessed tax payment may be made into 3 payments
    • 1st- 31 January in the tax year
    • 2nd-31 july after the tax year
    • 3rd-31 january after the tax year
  67. the relevant amount
    payments on account are usually required where the income tac and class 4 NICs due in the previous year exceeded the amount of income tax deducted at source
  68. Payments on account
    • each equal to 50% of the relevant amount for the previous year
    • on account of CGT are never required
    • not required if falls below 1000 limit
    • not required for taxpayers who paid 80% or more of their tax liability for the previous year through PAYE or other deduction at source arrangements
    • the balance of any incometax and class 4 NICs together with all CGT due for a year, is normally payable on or before the 31 january following the year
  69. If tax is paid late
    • interest is charged from the due date to the date of payment
    • charges of 5% at 30 days, 6 months and 12 months
  70. Payment of PAYE
    • employers are required to pay PAYE and NIC deductions made on paydays falling between 5th of calendar month and the 6th of the next calendar month to HMRC within 14 days of the end of th tax month
    • -if made electronically, date is extended by 3 days
  71. Form P60
    PAYE form, employer is required to provide at the end of each tax year, by may 31 of the following tax year
  72. SDLT
    • Stamp Duty Land Tax applies to land transactions
    • -generally payable as a % of the consideration paid for the land, payable by the purchaser
  73. UK Residential Stamp tax
    • 0%-0-125,000
    • 1%- 125,001-250K
    • 3%-250,001-500K
    • 4%-500K-1m
    • 5%-1m +
  74. UK Non residential Stamp Tax
    • 0%-o-150K
    • 1%-150K-250K
    • 3%-250K-500K
    • 4%-500K +
  75. Disadvantaged Residential Land Stamp Tax
    • 0%- 0-125K
    • 1%-125K-250K
    • 3%-250K-500K
    • 4%-500K+
  76. Disadvantaged Non-Residential Land Stamp Tax
    • 0%-0-150K
    • 1%-150K-250K
    • 3%-250K-500K
    • 4%-500K +
  77. For first time buyers until march 2012
  78. Transactions in residential land in disadvanted areas
  79. For non residential buyers, where the transaciton involved a grant of a lease
    the zero rate is not available if annual rent exceeds 1000
  80. Net present value of rent Residential leases
    • 0%-0-125K
    • 1%-Over 125K
  81. NPV of rent non residential
    • 0%-0-150K
    • 1%-Over 150K
  82. SDLT on NPV of rent is payable in addition to
    SDLT on any lease premium
  83. the rate applies to the amount of NPV in the slice and not
    to the whole value
  84. SDRT
    Stamp Duty Reserve Tax is a tax on electronic share transactions, also payable on electronic purchases of units in unit trusts or share in open-ended investment companies
  85. SDRT Rate
    payable by the purchaser at a flat rate of 0.5% based on the amount paid for the shares
  86. Disallowed corporate expense
    • certain expenses that are deducted from the profits in the financial accounts cannot be deducted for tax purposes
    • -client or supplier entertainment expenditure and provisions for uncertain debt (although bad debts are allowed)
  87. Depreciation charged by a company in its financial accounts is not allowable expenditure for tax purposes since the company determines the depreciation rate BUT the company can deduct
    capital allowance instead
  88. Companies recieve interest gross, and therefore must
    calculate it into overall profits to be taxed
  89. interest paid by a company
    such as debentures, is deductible for tax purposes and does not usually have to be adjusted for
  90. Dvividends recived from a company to a company are
    tax free
  91. Capital gains made by a company on the disposal of its fixed assets
    are chargeable to corporate tax and not to capital gains tax, only individuals pay CGT
  92. Corporate tax rates
    • are fixed for financial years
    • a financial year runs from 1 april to 31 march
  93. Corporate Main rate
    • 26%
    • total profits plus gross dividends 1,500,000 or more
  94. Corporate small profits rate
    • 20%
    • profits less than 300K
  95. Companies with profits between 300K and 1,500,000
    charged marginally 29.5% between these 2 figures
  96. Corporate tax losses
    if the company does not make claim to carry the losses back, it can carry them forward indefinitely and offset them against future profits from the same trade
  97. VAT
    Value added tax is a tax on turnover not profit
  98. Standard VAT Rate
  99. certain supplies, which fall under the standard rate supplies are charged a reduced rate of
    5%, example is domestic fuel
  100. Zero rated suppliers are taxable at
    • 0%,
    • example-supply of books
    • output is zero rated but inputs are standard rated will obtain repayments of the VAT paiud on purchases
  101. An exempt supply is not chargeable to VAT, example
    is the supply of financial services or insurance
  102. A person making exempt supplies is unable to recover VAT on inputs
    example-must shoulder the burden of VAT, by increasing prices
  103. A trader becomes liable to register for VAT if
    • -the value of taxable supplies in any 12 month period exceeds 70K (the historical test)
    • or
    • -if there are reasonable grounds for believing that the value of the taxable supplies will exceed 70K in the next 30 days (the future test)
  104. A trader may deregister if
    he expects the value of his taxable supplies to fall below 68K
  105. Compulsorily deregistered
    a trader who no longer makes taxable supplies
  106. Calculating VAT
    • if a traders output VAT exceeds his input VAT at the end of a VAT period (usually 3 months) he must pay the difference to the HMRC
    • if input VAT exceeds output VAT he will recieve a payment
  107. Not all input VAT is deductable
    i.e. VAT on motor cars and on business entertainment
  108. The principle UK deposit takers are
    banks and building societies
  109. NS&!
    natoinal savings and investments is a government agency that also takes cash deposits, guaranteed by the government so ae completely secure
  110. NS&I offers 2 dfferent savings accounts
    • 1. teh easy access savings account
    • 2. the investment account
    • They also offer savings certificates, childrens bonus bonds and cash ISAs
  111. Bank and building society interest is usually paid
    • net of 20% income tax
    • -non taxpayers can reclaim the full 20% deducted
    • -starting rate taxpayers can reclaim a 10% refund
    • -basic rate taxpayers are neutral
    • -higher rate pay a further 20%
    • -additional rate pay a further 30%
  112. Interest on NS&I Easy access savings accounts and Investment accounts is paid
    gross, tax liability must be paid through self assessment system
  113. Interest from Savings certificates and childrens bonus bonds is
    tax free
  114. Cash on a deposit investment does not grow in value, it simply
    produces income, so there is no CGT
  115. Fixed interest or fixed "income" securities
    pay a pre-specified return, in the form of capital and income. such securities are also generally called bonds
  116. Examples of bonds
    gilts, corporate bonds, loan stock, debentures and loan notes are names given to types of bonds
  117. Bonds are
    loans, with the investor as the lender. the holder of the bond, that is, the investor-will recieve any interest payment (the coupon), and normally repayment of capital on maturity of the bond
  118. Fixed interest securities generally have
    • 1. a fixed redemption value which the issuer will repay to the bondholder on maturity
    • 2., a fixed rate of interest (the coupon) expressed as a % of face value, usually paid every 6 months
    • 3. a pre-specified redemption date (maturity date)
  119. Accrued income scheme
    • Interest payments are made to the holder who was registered 7 business days before the interest payment dat. If the stock is sold before this date it is sold with the interest (cum interest)
    • -sales after this date are made without interest (ex interest)
  120. Under the accrued income scheme, wheree securities are transferrewd the accrued interest reflected in the value of the securities is taxed
    seperately as savings income. The seller is treated as entitled to the proportion of intereest which has accrued since the last interest payment. The buyer is entitled to relief against the interest he recieves. This relief is equal to the maount assessable on the seller
  121. The accrued income scheme does not apply
    • where the sellers holdings of gilts or coporate bonds did exceed 5000 GBP
    • -in the tax year in which the next interest due date falls
    • -the previous tax year
  122. Interest recieved from fixed interest securities is taxed
    at the same rates as other (eg bank) interest
  123. Interest from government stocks is paid gross unless
    • -the investor elects to have 20% tax deducted from it
    • -the gilt was purchased before 6 april 1998 and investor has not elected for gross payment
  124. interest on corporate bonds (debentures) is generally paid
    net of 20% income tax
  125. Individuals pay no CGT on disposals of their holdings of
    • Gilts
    • qualifying corporate bonds (most company loan stock and debentures)
    • -gains on such disposals are exempt and losses are not allowable (ie cannot be set off against other gains)
  126. limited companies are generally
    private companies, which may be owner managed and cannot offer their shares to the general public
  127. to offer shares for sale to the public, a company must be a
    • plc (public limited company) which can either
    • -seek a full listing on the main market of the LSE or
    • -join the AIM or
    • -join Plus Markets, the UKs independent public market dedicated to smaller companies
  128. An investor buys ordinary equity shares for 2 reasons
    • 1. to recieve dividends from the companies earnings stream (income)
    • 2. to gain from the increase in the value of the share (capital gain)
  129. Shareholders recieve dividends which are paid with a
    • 10% tax credit
    • -the tax credit is 1/9 X the dividend recieved
    • the tax credit is not real tax so cannot be repaid to the taxpayer, although it can reduce the taxpayers liability
  130. The position for a dividend recieved of 90 GBP for a non tax payer
    • net dividend 90
    • tax credit 10
    • gross dividend 100
    • additional tax due nil
    • net income 90
  131. The position for a dividend recieved of 90 GBP for a basic rate taxpayer 10%
    • net dividend 90
    • tax credit 10
    • gross 100
    • additional tax due nil
    • net income 90
  132. The position for a dividend recieved of 90 GBP for higher rate taxpayer (32.5%)
    • net div 90
    • tax cred 10
    • gross div 100
    • additional tax due 22.50
    • net income 67.50
  133. The position for a dividend recieved of 90 GBP for additional rate taxpayer (42.5%)
    • 90
    • 10
    • 100
    • additional tax due 32.50
    • net income 57.50
  134. the effective rate of tax on the net dividend for
    1. a higher rate taxpayer
    2. an addiotnal rate taxpayer
    • 1. (22.5/90 X 100)25%
    • 2. 32.5/90 X 100) 36%
  135. Profit for CGT=
    • proceeds (less expenses of the sale) less costs of investing in the shares
    • -expenses of sale include brokers commission
    • -original cost of purchasing shares includes
    • purchase cost, brokers commission, SDRT (0.5% on electroni purchases in the UK equities)
  136. Individuals (if not for owning own home) can invest in property in the following 2 ways
    • 1. 'buy to let' ownership of residential property
    • 2. commercial property
  137. Profits from renting out property are taxed the same way as earnings, ie they are taxed as
    non savings income at 20%, 40% or 50%
  138. Mortgage interest on the let property is
    a deductable expense when calculating the letting profit
  139. Other costs that are deductable
    • -maintanence costs
    • -10% (x the rental income) 'wear and tear' allowance or, alternatively, the cost of replacing (but not the original purchase price of) furniture, fixtures and fittings
    • -estate agents commission
    • -management expenses
  140. improvement expenditure (ie adding an extension to the property) is
    not deductable
  141. if the landlord is non-UK resident
    the tenant or letting agent must deduct basic rate tax from the property income before paying the rent to the non-resident landlord. The landlord may apply to the HMRC to be allowed to recieve gross payments of rent if he completes the self assessment tax return and keeps his tax affairs up to date
  142. PPR
    if the property being let has ever been the investors principal private residence, the gain on the sale of the property may be fully or partly exempt from capital gains tax, depending on how long he has owned the property and how long he actually lived in it before renting it out
  143. If the property has never been the investors PPR
    the gain will be taxable in full
  144. Expenses of sale and purchase that can be deducted include
    • legal fees
    • purchase cost
    • SDLT (% based on the original value of the property)
    • -property will not usually qualify for entrepreneurs relief
  145. Indirect investments
    instead of directly buying the property or shares, invests in a product that invests
  146. Why are pension schemes encouraged by the government?
    • they want individuals to make financial provisions to cover his needs when he reaches a certain age
    • -there are state pension arrangements which provide some financial support, but the government prefers the individual to make his own pension provision
  147. In order for tax relief for pensions schemes
    the scheme must be registered with HMRC
  148. Income from investments within a pension
    are tax free, as is any growth of the fund when the pension fund disposes
  149. tax free wrapper
    pension fund is a tax free wrapper around the investments within it
  150. An individual can make tax relievable contributions to his pension arrangements up to the higher of
    • -his earnings (employment and self employment income) in the tax year and
    • -3,600
  151. Contributions to personal pensions are paid net of bsic rate tax, which gives imnmediate releif to all taxpayers, further tax releif is given if
    • the individual is a higher or additional rate taxpayer
    • -the relief is given by increasing the basic rate limite for the year by the gross amount of contributions for which he is entitled to relief
  152. Pension annual allowance
    • 50K
    • limit of total pension that can be put into a pension for each tax year
  153. If the amount put into the pension exceeds the annual allowance
    there is an income tax charge on the individual of 40%
  154. From April 6 2011, income tax relief on pension contributions will be restricted for individuals with over
  155. Age limit to begin pension payments is
    55 or if incapacitated by ill health
  156. At 55, member can take
    • -an income pension and/or
    • -a lump sum (up to 25% can be taken as tax free lump some)
    • from the pension scheme
  157. Pension income is taxable as
    non savings income
  158. Lifetime allowance for pension fund
    the maximum value for a pension fund is 1.8m
  159. if pension fund exceeds lifetime allowance
    • income tax charge on the excess value of the fund
    • -lump sum-charge of 55%
    • -pension income-25%
  160. ISA
    individual savings accounts are tax free savings accounts
  161. 2 types of ISAs
    • 1. cash
    • 2. stocks and shares
  162. Can trustees invest in ISAs?
  163. Annual subscription limit of ISAs
    • 10,680 of which no more than 5,340 (50%) can be in cash
    • -once max limit is hit, no more can be added in that year, even if withdrawals are made
  164. Is there a statutory lock period, lifetime limit or minimum subscription limit on ISAs?
  165. If between the ages of 16-18, can an individual invest in an ISA?
    yes, but only up to 5,340 into cash only ISA
  166. All income and gains in an ISA are
    completely exempt from tax
  167. if ISA holder ceases to qualify by becmoing a non-resident
    tax relief holds but no further subcriptions can be made unless UK residence is regained
  168. CTF
    • Child trust funds are available for children born after august 31 2002
    • -initially funded by a government voucher of 250 or 500 for lower income families
    • -a further sum is paid into the account by the government on the childs 7th birthday as long as they remain eligible
  169. It is possible for anyone to contribute up to
    1200 a year into the account
  170. CTF is held until the child reaches
  171. Types of CTFs
    cash accounts, unit trusts and life products
  172. Is there income tax or CGT on CTFs?
  173. Types of collective investment schemes
    • Unit trusts
    • Investment trusts
    • open ended investment companies
  174. Unit trusts are
    open ended
  175. Investment trusts are
    closed ended, i.e. fixed number of shares and they can leverage unlike unit trusts and OEICs
  176. OEICs
    hybrids of unit and investment trusts, open ended and marketed throughout europe
  177. If the unit trust of OEIC is an equity fund
    it recieves dividends net of 10% tax credit and has no further tax to pay
  178. If unit trust or OEIC is a non equity fund
    it has to pay corporate tax at 20% equivalent to basic rate tax
  179. Investment trusts are taxed in the same way as
    other companies, dividends are exempt while other income is taxed at a rate up to 26%
  180. in regards to CGT, unit trusts and OEICs are
    always exempt
  181. Investment trusts are also usually exempt from CGT as long as the company is
    HMRC approved
  182. Taxation of the investor for CISs
    • -taxation of unit trusts and OEICs are idential
    • -if fund is an equity fund, income distributions to investors are dividends and taxed in the normal way
    • -if non equity (such as cash or bonds) are treated as interest rather than dividends and are subject to 20% tax deduction at source unless the funds are held in an ISA
    • -an investment trust shareholder will only ever recieve dividends which are taxed as nomal
  183. CGT applies to all CISs
  184. Offshore funds are either
    • distributor funds (distribute at least 85% of their income) or
    • roll up funds, which accumulates income in the fund
    • -do not pay UK Tax
    • -recieved gross to the investor
  185. for distributor funds
    income for the investoris treated as taxable income in the UK, and gain is treated as capital gain
  186. for roll up funds
    all income distributions ad profits on encashment (gains) are treated as taxable income, there is no CGT exempt amount
  187. defferal of tax payment
    tax benefit is limited resulting from income being paid in gross
  188. Life assurance fund
    • is not a tax free vehicle, suffers corporate tax on its income and gains at a rate of 20%
    • -since fund suffers tax, payout is generally tax free if it is a qualifying policy
  189. a qualifying policy is one where premiums have been paid for a minimum of one of the following
    • 1. life of the life assured
    • 2. 10 years
    • 3. three quarters of the term
  190. If it is a non qualifying life assurance policy
    income tax charge on encashment
  191. a non qualifying policy is a
    • single premium bond, where a lump sum is invested in a life fund a small part of which buys cover in the event of death with the balance being invested
    • AKA investment bonds, property bonds
  192. For such life assurance bonds, up to ____ of the original premium for each year of the bonds life (including the year of the chargeable event) may be withdrawn from the bond with no immediate tax implications until 100% is reach
    5%, if over 5%, excess will be taxable
  193. offshore bond
    an offshore life assurance bond is the same as a non qualifying policy in the UK, the advantage si that the underlying life funds suffer little or no tax (gross roll up) compared with UK life funds which are taxed 20%
  194. Offshore bonds
    • 5% may be taken each year for 20 years, rollover applies to the next year i 5% is not taken
    • -taxation on encashment is subject to basic, higher and additional tax rates
    • -when dividing to find the slice of gain, we use the number of years since the beginning of the bond not the years since the last chargeable event as with an onshore bond
  195. if the investor of an offshore bond had been non uk resident for part of the time when holding the bond
    then relief for the time that he was non resident is given
  196. true or false
    if the investor is non UK resident when the offshore bond is encashed, there are no UK tax consequences?
  197. REITs
    Real Estate investment trust is a listed company that ownes, manages and earns rental income from commercial and residential property
  198. REIT income tax
    • can elect for their property income (and gains) to be exempt from corp tax and must withhold basic rate 20% tax from sidtributions paid to shareholders (who cannot own more than 10% of a REITs shares)
    • -these distributions are taxed as property income on the investor, not dividends
  199. Distributions by REITs our of other income (not property income or gains)
    are taxed as dividendsin the normal way
  200. CGT on REIT disposal
  201. EISs
    Enterprise Investment Schemes, helps high risk, unlisted companies raise finance
  202. Only shares in certain companies qualify for the EIS
    must be unquoted trading company that carries on qualifying business activity for at least 3 years, shares in AIM can qualify
  203. Non qualifying business activites includeq
    banking, dealing in commodities, property development
  204. Companys EIS invest in must
    • not have assets exceeding 7m before and 8m after
    • must have less than 50 full time employees
    • must have raised less than 2m in venture capital in last year
  205. Amount subscribed in an EIS is a tax reduction, saving income tax at
    • 30%
    • Max total investment that can qualify for this income tax relief is 500K each year
  206. Tax relief may be withrawn if
    certain events such as the sale of the shares, occur within 3 years
  207. Are dividends of EIS shares taxable?
    yes, under normal rules
  208. Can trustees obtain income tax relief?
  209. EIS capital gains relief
    • after three years, if sold, no CGT, less than three years, normal CGT
    • loss is allowable, set against both capital gains and investors income
  210. EIS CGT deferral relief
    • if sold between 1 and 3 years
    • -does not depend on income tax relief being available and is also available to trustees
  211. VCTs
    Venture capial trusts are listed companies that invest in unquoted trading companies and meet certain conditions
  212. Income tax benefits for VCT investments
    • on maximum 200K per year
    • -tax reduction of 30% if held over 5 years
    • -where VCT and EIS relief is available in the same year, deduct VCT first
    • -dividends recieved are tax free income
    • -no relief for trustees
  213. Is CGT exempt on VCT sales?
    • Yes and losses are allowable
    • no minimum holding time for tax free CGT and Dividends, only for 30% of income tax benefits toi be held for 5 years
  214. When spouses/cp jointly own income generating property
    • it is assumed they are entitled to equal shares of the income
    • -if not, they may make a joint decleration to HMRC specifying the proportion of ownership
  215. A child is a
    seperate taxable person entitled to a personal allowance in his own right
  216. income transferred to the child directly is taxable
    to the parent, this rule only applies to parents though, not granparents etc.
  217. childs personal allowance and starting and basic rate bands can be used
    if child is employeed in the parents trade
  218. Tax efficient investments
    • investing in a pension
    • employer contributions to a pension
    • an ISA account
    • a CTF account
    • investing in EIS company
    • invest in VCT company shares
    • Invest in a single premium bond
    • NS&I certificates
  219. Strategies to reduce CGT liabilities
    • -transfer ownership of assets to a spouse or cp
    • -phase asset disposals over more than a tax year
    • -realise gains with the annual exempt amount
    • -dispose EIS shares (after 3 years) or VCT shares (after 5 years)
    • -dispose of other exempt assets (cars, treasury stocks, qualify corp bonds)
    • -dispose of assets standing at a loss
  220. Transfers between spouses and cp are xempt of
  221. Is the nil rate band transferrable on death to the spouse.cp?
  222. GWR
    • gifts with reservation of benefit
    • -occurs when an individual gifts property and continues to enjoy the benefit of the asset, either rent free or at a reduced cost
    • -but if donor dies still using the gift, then it is officialy in their estate not the person they gave it to
  223. Other IHT planning
    • -make full use of all availbale exemptions
    • -use the normal expenditure out of income expenses
    • -make lifetime gifts
    • -make CLTs beore making PETs in a tax year
    • -write life assurance benefits into trust
    • -use life assruance policies (written into trust) to cover future IHT liabilities
    • -leave assets to spouse/cp
Card Set
IMC 1 11-13
The UK Tax System