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UK Taxation (TX-UK)
Finance Act 2021- For the period 6th April 2021 – 5th April 2022

Income Tax
Normal Rate Dividend Rate

Basic Rate £1 - £37,700 20% 7.5%

Higher Rate £37,701 - £150,000 40% 32.5%
Additional Rate £150,001 – above 45% 38.1%

Savings income nil rate band – Basic rate taxpayers £1,000

- Higher rate taxpayers £500

Dividend nil rate band £2,000

A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal Allowance
£
Personal Allowance 12,570
Transferable amount (Marriage allowance) 1,260
Income limit 100,000

Where adjusted net income is £125,140 or more, the personal allowance is reduced to zero.

Residence Status
Days in UK Previously resident Not previously resident
Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties (or more) Automatically not resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties
91 to120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

Child benefit income tax charge

Where income is between £50,000 and £60,000, the charge is 1% of the amount of child benefit
received for every £100 of income over £50,000.

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Car benefit percentage*

The relevant base level of CO2 emissions is 55 grams per kilometre. The percentage rates applying to
petrol-powered motor cars (and diesel-powered motor cars meeting the RDE2 standard) with
CO2 emissions up to this level are

51 grams to 54 grams per kilometer 14%

55 grams per kilometer 15%

1% applies to electric-powered motor cars with zero CO2 emissions

For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilometre, the electric
range of a motor car is relevant:

Electric Range
130 miles or more 1%
70 to 129 miles 4%
40 to 69 miles 7%
30 to 39 miles 11%
Less than 30 miles 13%

Note (will not be given in the exam): There is a 4% surcharge for diesel cars which do not meet the real
driving emissions 2 (RDE2) standard. The first such cars are now coming on to the market. Company
diesel cars meeting the RDE2 standard are treated as if they were petrol cars. The percentage rates
(including the lower rates of 14%) are increased by 4% for diesel cars which do not meet the standard,
but not beyond the maximum percentage rate of is 37%. Round down to nearest 5 in the working. Very
important to check if the diesel car meets RDE2 standard or not

Car fuel benefit*

The base figure for calculating the car fuel benefit is £24,600.

Individual savings accounts (ISAs)

The overall investment limit is £20,000.
Note (will not be given in the exam): The savings income nil rate band for basic and higher rate taxpayers
means that there is no tax benefit to invest in cash ISA for many individuals. However, cash ISAs are
advantageous for additional rate taxpayers and for other individuals where their savings income nil rate
band is already utilized.
The availability of the dividend nil rate band means that there is no tax advantage to receiving dividend
income within a stocks and shares ISA for many individuals. However, chargeable gains made within a
stocks and shares ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore
advantageous where chargeable gains are made in excess of the annual exempt amount

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Property Income*
Basic rate restriction applies to 100% of finance costs relating to residential properties.

Pension scheme limits*

Annual allowance £40,000

Minimum allowance £4,000

Income limit £240,000

Lifetime allowance £1,073,100

The maximum contribution that can qualify for tax relief without any earnings is £3,600

Approved mileage allowances: cars

Up to 10,000 miles 45p
Over 10,000 miles 25p

Capital allowances: rates of allowance*

Plant and machinery
Main pool 18%
Special rate pool 6%

Motor cars
New electric-cars with zero CO2 emissions (FYA) 100%
CO2 emissions between 1 and 50 grams per kilometer 18%
CO2 emissions over 50 grams per kilometer 6%

Annual investment allowance

Rate of allowance 100%
Expenditure limit £1,000,000

Enhanced Capital Allowances for Companies

Main pool super deduction 130%
Special rate pool first year allowance 50%

Commercial Structures and Buildings

Straight-line allowance 3%

Cash basis accounting

Revenue limit £150,000

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Cap on income tax reliefs

Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.

Corporation Tax

Rate of tax – Financial year 2021 19%

- Financial year 2020 19%
-Financial year 2019 19%
Profit threshold £1,500,000

Value added tax (VAT)

Standard rate 20%

Registration limit £85,000
Deregistration limit £83,000

Inheritance tax: tax rates*

Nil rate band £325,000

Residence nil rate band £175,000
Rate of tax on excess – Lifetime rate 20%
- Death rate 40%
Inheritance tax: taper relief

Years before death: Percentage reduction

Over 3 but less than 4 years 20%

Over 4 but less than 5 years 40%
Over 5 but less than 6 years 60%
Over 6 but less than 7 years 80%

Capital gains tax*

Normal rates Residential property
Rates of tax – Lower rate 10% 18%
- Higher rate 20% 28%

Annual exempt amount £12,300

Lifetime Limit:
- Business asset disposal relief £1,000,000
- Investor’s relief £10,000,000

Rate of tax 10%

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National Insurance Contributions*

Class 1 Employee £1 − £9,568 per year Nil
£9,569 − £50,270 per year 12%
£50,271 and above per year 2%

Class 1 Employer £1 − £8,840 per year Nil

£8,841 and above per year 13.8%
Employment allowance £4,000

Class 1A 13.8%

Class 2 £3.05 per week

Small profits threshold £6,515

Class 4 £1 − £9,568 per year Nil

£9,569 − £50,270 per year 9%
£50,271 and above per year 2%

Rates of interest*
Official rate of interest 2%
Rate of interest on underpaid tax 2.6%
Rate of interest on overpaid tax 0.50%

Standard penalties for errors

Taxpayer behavior Maximum Minimum penalty – Minimum penalty –

penalty unprompted disclosure prompted disclosure

Deliberate and concealed 100% 30% 50%

Deliberate but not concealed 70% 20% 35%
Careless 30% 0% 15%

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Summary Notes (TX)

What is tax?
Tax is a source of revenue which is received by a government regulated body from the residents of the
country. This body is appointed by the government and is called Her Majesty’s Revenues and Customs
(HMRC) in UK.

Types of taxes
 Direct tax: A direct charge to income e.g. income tax
 Indirect tax: An indirect charge to income i.e. tax on consumption (VAT).

 Financial year (year for which accounting records are made) should be of 12 months and there is
no restriction on the months i.e. it can start from any month of year and end after 12 months
whereas fiscal year (year for which tax is paid/ HMRC’s year-end) is fixed starting from 6th April
and ending at 5th April of a particular year.
 Our fiscal year is 6th April 2021- 5th April 2022

For calculation purpose we consider from April to March.

In order to calculate taxable income for fiscal year 21/22, we would take total income of 9 months from
the year 2021 (April to December) and total income of 3 months from the year 2022 (Jan to March).

Income Tax Calculation

 Income tax is calculated based on the taxable income.

 UK follows a band system to tax the income of an individual.
 These bands are mentioned in the tax rate sheet and are consumable i.e. once a particular
source of income consumes the band, any other income will be taxed according to the next
band.
 Incomes are classified into 3 broad heads namely non-savings, savings and dividend.
 An allowance is given by HMRC to individuals each year called personal allowance which for the
current fiscal year is £12,570.
 This personal allowance is deducted from the total income to calculate the taxable income on
which tax rates are applied according to the type of income and the band they lie in.
 PA is reduced by £1 for every £2 by which a person’s adjusted net income exceeds £100,000.
Adjusted net income is the net income (total income less qualifying interest and loss relief) less
gross personal pension contribution and gift aid donations (to be discussed in class).
 Qualifying interest is the interest paid on following loans and is deductible from the total
income:
- Loan to buy plant and machinery for partnership/ employment use. The interest is allowed
for three years only.
- Loan to buy equity share in an employee-controlled unquoted company.
- Loan to invest in a partnership.
- Loan to invest in a cooperative.
- Loan to pay inheritance tax.

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Income Tax Proforma

Following is the income tax proforma and the steps according to which tax will be calculated.

Non-saving Saving Dividend

£ £ £
Trading income X
Property income X
Employment income X
Pension income X
Trust income X
REIT income X
Interest income X
Dividend income X
Total income X X X
Less qualifying interest (X) (X) (X)
Net income X X X
Personal allowance (X) (X) (X)
Taxable income X X X

Steps to calculate tax will be discussed in class.

Points to note:
- Non-savings incomes include trading, employment, property and pension income.
- Savings income include interest from bank, building societies, National savings and
investment (exempt income), government bonds and company loan stock.
- Dividend income consists of dividend received from the companies.
- Exempt income (income on which there is zero tax) include:
1. Individual savings account- Annual limit to invest in ISA is £20,000 which can either
be in the form of stocks or cash. Income received from cash ISA is in the form of
interest and income received from stock ISA is in the form of dividend. Both of the
incomes are exempt.
2. Savings certificate- These certificates are issued by NS&I.
3. Prizes from premium bonds are exempt.
4. Child benefit allowance- It is an allowance received by a parent to raise one child
and is exempt. This becomes partially repayable if the ANI of a parent exceeds
£50,000 in a year (to be discussed in class).

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Gift aid donations

These are non-repayable donations made to charities.

Tax treatment:
GAD attracts three tax reliefs:
- 20% contribution by HMRC. For example, if a person wants to make a GAD of £1,000, he/she
would only have to pay £800 (net contribution), the remaining £200 will be paid by HMRC.
- Basic rate and higher rate band extension by the gross amount of GAD so that more income
is taxed at a lower rate.
- ANI reduction is done by the gross amount resulting in a greater saving of personal
allowance.

Transferrable Personal Allowance

- Amount that can be transferred = £1,260
- Conditions:
a. The transfer can only be made between spouse/ civil partner
b. Both the receiver and the one making the transfer of PA should be basic rate
taxpayers.
c. The transfer does not result in an increased PA rather a tax saving of £252
(£1,260 x 20%). Since, it’s a relief, this amount cannot reduce the tax liability
below zero.

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Property Tax

Two types of properties:

1) Residential Property- does not generate income
2)Investment Property – property is rented out to generate income which is classified under property
income.

- Property income is taxable on cash basis (previously accruals basis) i.e. tax will be applied as
soon as the rent is received and expenses will be allowed as soon as they are paid.
- If property income exceeds £150,000 then accrual basis shall be used. Although cash basis is the
default category to calculate property income, accrual basis can be opted for.

 Property expenses are of two types:

1)Allowed expenses: Expenses that are incurred wholly and exclusively for the purposes of
property and are deductible. These include;
- repair and maintenance,
- renovation and decoration
- insurance, if the property is purchased by the landlord
- water and council tax
- bad debts written off
- agent commission
- advertisement
- legal charges
- rent paid
-interest paid on loan acquired to buy the property (subject to special tax rules- to be discussed
in class). There are separate cases for residential and non-residential properties.
- in case of furnished accommodation, replacement cost for furniture is also allowed (to be
discussed further in class)
- Pre-trading expenditure also allowed
- Capital expenditure related to plant and machinery
-Replacement domestic items relief: For domestic items (TV, furniture) in residential properties.
Replacement cost - proceeds from the disposal of the original item. The replacement cost shall
be amount excluding any improvements on the new item. (Not available on FHL and properties
on which rent-a-room relief has been claimed).

2) Not allowed expenses: Expenses that are not deductible. These include;
- capital expenditure related to land and buildings example improvements
- estimates and provisions for example provision for doubtful debt and depreciation
- Cars

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 Premium on property
Premium is a one-time payment and is taxed on cash basis. By paying/ receiving premium an individual
receives/ submits a right to sublet the property. Premium is taxed in the following manner:

Premium received xxx

[(N -1) x amount of premium] x 2% (xxx)
Taxable Premium xxx

Where:
N = no. of years of lease

 Rent a room relief

Conditions:
- Residential Property
- At least one furnished room Tax
treatment:
Higher of will be allowed from the property income PnL:
1)Actual allowed expenses
2) £7500

Note: Any relief or allowance cannot create a loss. Expenses are 100% deductible therefore only
expenses can create a loss.

 Jointly held property between husband and wife

Default ownership % is 50:50 whereas if election is made then the ownership % will be split based on
actual ownership %.

 Furnished Holiday Letting

- Hoteling business
- Capital allowances are available on the furniture instead of allowed replacement cost
- Income qualifies for relevant earnings for pension relief (later in the course)
- Capital gains tax rollover relief, entrepreneur’s relief and relief for gifts of business assets are
available.

Conditions:
- FHL must be situated in UK
- Accommodation is available for let for at least 210 days during the year
- Accommodation is commercially let for at least 105 days during the year
- Longer term occupation (a continuous of more than 31 days during which the accommodation is
occupied by the same person) is of not more than 155 days in a year.

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 Restriction of Finance Cost

- Finance cost restriction applies to individuals (and not companies) who buy residential property
or if the funds are used to repair such property.
- No restriction if the funds are used to buy an FHL
- 100%* finance costs are subject to the basic rate restriction
- For e.g. if the mortgage interest on residential property purchased by individual is £4000. The
interest cost in the property income PnL shall attract a 20% income tax relief against the income
tax liability i.e. £800 (4000 x 20%)

 Property Business Loss

- Loss arises when a rental income < allowable expenses
- Landlords having more than one property aggregate their profits and losses to calculate the
aggregate profit/ loss
- If there is an aggregate loss then no tax shall be assessed in the current year and the loss shall
be carried forward indefinitely and utilized against future profits.

Interest Income
 First £1,000 will be taxed at 0% for basic rate tax payer.
 First £500 will be taxed at 0% for higher rate tax payer.
 No nil rate band for additional rate tax payer.
 Where the savings income lies with-in the first £5,000 of the taxable income, the savings income
will be taxed at 0% regardless of the band in which the taxpayer lies.
 Interest income received from the bank and building societies is received gross.
 Interest income received from unlisted companies is received net of 20% WHT.
 Interest received on National savings certificate and Individual savings account (cash) is exempt.

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Pensions
Pension is the amount saved by a person for his old age. In UK a person can have two types of pension
plans:
- State managed pension plan
This plan is for everyone and is managed by the government. Contributions are made into the plan by
the name of National Insurance Contribution (to be covered later).

- Private pension plan

This plan is separate for everyone and is maintained by an individual or his employer with a pension
fund.

There are two types of private pension plans:

1)Occupational pension plan- This plan is maintained by the employer (Er). Both employee (Ee) and
employer (Er) can contribute into the plan.

 If Er contributes: - exempt benefit for Ee

- allowed expense for employer from its trading PnL
 If Ee contributes: - allowed expense for Ee from employment PnL.

2)Personal pension plan- This plan is maintained by an individual himself. Both an individual and his/her
employer can contribute into the plan.

 If Er contributes: - exempt benefit for Ee

- allowed expense for employer from its trading PnL
 If an individual contributes: - 20% contribution by HMRC
- Basic and higher rate band extension by gross amount
- ANI reduction by gross amount

UK Relevant Earnings
Relief for pension contribution is only given if the contribution is made from the following incomes
known relevant earnings.
- Employment income
- Trading income
- Furnished holiday letting

Relief of gross PPC is given lower of on:

1.Total gross pensions paid (by Ee in both occ. and personal fund and individual in all personal
pension funds)
2. Higher of:
i) £3600
ii) 100% chargeable UK relevant earnings

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Annual allowance
Maximum amount on which pension relief (including individual/ Er contribution in PPC and Ee/Er
contribution in occupational pension scheme) is allowed is called annual allowance. Following is the
annual allowance for current year and preceding years.
021/22*= £40,000 – To be used first
018/19= £40,000 Once AA of 21/22 is used the remaining
019/20= £40,000
B/f AA shall be used on FIFO basis
020/21= £40,000

 Annual allowance is available if a person is part of a registered pension plan.

 Any unused annual allowance can be carried forward for three subsequent years and will be
used on FIFO basis.
 Annual allowance is diminished by £1 for every £2 by which a person’s adjusted income exceeds
£240,000* down to a minimum tapered annual allowance of £4,000*. Following will be the
calculation:
Net Income X
Ee cont. in occupational plan X
Er cont. in occupational plan X
Er cont. in personal pension X
Adjusted income X
Limit (£240,000)*
Excess XXX

The half (1/2) of this excess is deducted from AA to get the available AA. Minimum AA for the year can
be £4,000*.
For self-employed adjusted income equals net income.

Tax consequences of annual allowance

Any contribution made in excess of available annual allowance will be taxed at non-saving rates and will
be taxed as the last chunk of income.

Extraction of Pension
Funds can be extracted from pension plan after the person has crossed minimum pension age i.e. 55
years. Amount in fund which can be extracted is of two types:
- Income portion: This is the portion that the fund has earned through various investments.
Income extracted from fund shall be taxed under the non-savings head as pension income.
- Capital portion: It is the amount originally contributed by an individual in the fund. Upon
extraction of the capital amount, up till the lifetime amount of £1,073,100* there is no tax and
can only be extracted 25% lumpsum and remaining 75% as annuities. Annuities (75%) shall be
taxed at usual non-savings rates. Any amount beyond the lifetime tax will suffer 55% tax if
extracted lumpsum and 25% if extracted through annuities.

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Employment Income

Employed vs Self-employed? (to be discussed in class)

Basic employment income is calculated as follows:

Salary X
Bonus/ Commission X
Reimbursed expenses X
Cash vouchers X
Taxable benefits (multiple) X
Less: allowed expenses (X)
Employment income X

 Salary, bonus and commission are taxable cash benefits which become part of the employment
income PnL as soon as they are received.
 Whereas some taxable benefits are non-cash, such as car benefit, fuel benefit and
accommodation benefit and require some computation before becoming a part of the
employment income PnL.
 Income shall be assessed on earliest of dates for normal employees:
- Actual payment received
- Entitlement to any such taxable payment
 For Key Management Personnel such as directors, two more dates are to be considered:
- When the payment to which the KMP is entitled is credited to company accounts
- If earnings are determined:
 Before the end of period of account = earnings shall be assessed at the end
 After the end of the period of account = assessment date becomes the date when
earnings are accrued

Exempt Benefits- (Book reading recommended)

Following are the benefits that are exempt i.e. no tax will be applied on them:
- Employer’s contribution in employee’s occupational pension plan.
- Entertainment provided to employees by genuine third parties.
- Gift of goods received by third parties having a VAT inclusive cost of not more than £250 in a
tax year. If excess, whole amount will be taxable and not just access.
- Relocation expense of up to £8,000. If exceeds, excess will become chargeable.
- Sporting and recreational facilities provided to employees that are not available to general
public for e.g. company gym.
- Non-cash award for long service (a period of up to 20 years) having a cost of not more than
£50 per year of service and no such award was given to the employee in the last 10 years.
- Welfare and career counselling
- Bicycles and cycling safety equipment provided to employee to get to and from work.
- Workplace parking

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- The cost of travelling through a work bus having a seating capacity of 12 or more and a mini
bus having a seating capacity of more than 9 but less than 12.
- Up to £15,480 a year received by an employee for attending a full-time course which lasts at
least a year and the employee is present in the course for at least 20 weeks in a year. Any
amount excess will make the whole amount chargeable and not just excess.
- Work related training is also an exempt benefit
- Private use of one mobile phone along with top up vouchers for that phone. Any subsequent
phone will be taxable as a benefit.
- Loans that do not exceed £10,000 at any point in time of the year.
- Employer provided uniforms which employees must wear as part of their duties for example
in Honda Motors.
- Air miles or car fuel coupons obtained as a result of business expenditure but used for
private purposes.
- Cost of staff parties which are open to the general staff provided that the cost per head per
year is less than £150 (VAT inclusive).
- Private medical insurance premiums paid to cover treatment if the employee is outside UK
for the purposes of job. Other medical insurance is taxable. Eye tests and glasses for
employees are an exempt benefit.
- Payments up to £6 a week for employees who work wholly or partly at home. The allowance
covers extra lighting and heating costs incurred due to homeworking. No need to provide
records of actual expenses.
- Overnight expenses of £5/night in UK and £10/night to overseas employees. If excess, then
whole will be taxable.
- Recommended medical treatment costing £500 per employee per tax year. If the amount
exceeds £500 then it will be wholly taxable.
- Workplace childcare is an exempt benefit. Although employer supported childcare and
childcare vouchers are exempt up till £55 per week attracting a maximum relief of £11 (£55
x 20%).

Taxable Benefits

 General Rule of Thumb: The cost of providing the benefit becomes a taxable benefit for the
employee for example company provided vouchers or company credit card through which the
employee purchases goods or services.

Following benefits are taxable:

1. Accommodation benefit
This benefit arises when the employer (Er) provides an accommodation to the employee (Ee) for private
use. Following is the method of taxation:
i) Basic Charge: This charge is a rent adjustment and is higher of:
- Annual value i.e. the market rent
- Actual rent paid by Er

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ii) Additional Charge: This charge is in addition to the basic charge and is only applied if the Er
owns the accommodation provided to the Ee. Following is the way to calculate additional
charge:

[(Cost + improvements made prior to current year) – 75000] x 2%

Note: Use market value at the date of provision of house to the employee instead of cost if the gap
between the purchase date of the house (by employer) and the provision date of house (to employee) is
of more than 6 years because it is assumed that within 6 years market value of the house changes
significantly.

 If there is business use of the property then the benefit will be prorated and only the private use
will be taxed.
 If employee contributes an amount towards the usage of accommodation, it will be deducted
from the total benefit.
 Any ancillary expenses borne by employer e.g. utilities, water and council tax, on behalf of
employee will become a taxable benefit for the employee.

Job related accommodation

If accommodation is provided:
 Because it is necessary to perform the job e.g. army, gate keeper.
 Because it is required for better performance of job e.g. non-management staff.
 Because it is required for security reasons e.g. government officials.
Then;
- No basic charge
- No additional charge
- Ancillary benefits will be taxed but up till a maximum of 10% of employment income

 For directors only the first two exceptions apply if and only if:
- They have < 5% shares in the company
- Are full-time working directors (i.e. not NED) or the company is an NGO.

2. Car benefit
This benefit arises when the Er provides a car for private use to its Ee. Following is the method of
taxation:

Cost of car x CO2 emission %*

Cost of car is calculated in the following manner: It should be assumed for exam
List price X purposes that all cars are
Import duty/ legal cost X registered after 6th April 2020.
Accessories added to prior year X
Less Capital contribution by Ee (X)
Cost of car X

 Accessories added in the current year will be assessed next year.

 Maximum amount of capital contribution allowed to be deducted is £5,000.

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 1% applies to electric-powered motor cars with zero CO2 emissions

 For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilometre, the
electric range of a motor car is relevant*

Electric Range
130 miles or more 1%
70 to 129 miles 4%
40 to 69 miles 7%
30 to 39 miles 11%
Less than 30 miles 13%

 For a car with CO2 emission of more than 50gm/km following is the schedule:

CO2 emission (grams/km)* Petrol engine Diesel engine

51 – 54 gms 14% 18%
55 gms 15% 19%

 There is a 4% surcharge for diesel cars that do not meet the real driving emissions 2 (RDE2)
standard. The first such cars are now coming on to the market. Company diesel cars meeting
the RDE2 standard are treated as if they were petrol cars. Very important to check If the diesel
car meets RDE2 standard or not
 For every gram round down to nearest 5 grams for example 98 grams will become 95 grams.
 For every 5 grams excess of 55grams, 1% will be charged incrementally.
 Maximum % charge is 37% for both petrol and diesel cars.
 Pool cars (cars used by all employees) are an exempt benefit.
 Repairs and maintenance cost paid by employer for an employee’s car is an exempt benefit.
 If Er pays the cost of the driver, it will be taxed as a benefit for Ee.
 Any contribution made by an Ee for using the car (does not include capital contribution) will
reduce the amount of car benefit. This contribution is called usage contribution.

3. Fuel benefit
This benefit arises when the Er provides fuel to an Ee for private use. This is calculated as follows:

£24,600 x CO2 %
 CO2 is the same as car benefit.
 Partial usage contribution i.e. partial payment of fuel cost by Ee to Er cannot reduce the fuel
benefit.
 Fuel benefit can only be written off in full if and only if the cost of fuel used for private purposes
is paid back to the Er in full.

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EXAMPLE 14
During the tax year 2021-22, Fashionable plc provided the following employees with company motor
cars:

Amanda was provided with a hybrid-electric company car throughout the tax year 2021-22. The motor
car has a list price of £32,200, an official CO2 emission rate of 24 grams per kilometre and an electric
range of 90 miles.

Betty was provided with a new diesel powered company car throughout the tax year 2021-22. The
motor car has a list price of £16,400 and an official CO2 emission rate of 109 grams per kilometre. The
motor car meets the RDE2 standard.

Charles was provided with a new diesel powered company car on 6 August 2021. The motor car has a
list price of £13,500 and an official CO2 emission rate of 112 grams per kilometre. The motor car does
not meet the RDE2 standard.

Diana was provided with a new petrol powered company car throughout the tax year 2021-22. The
motor car has a list price of £84,600 and an official CO2 emission rate of 188 grams per kilometre. Diana
paid Fashionable plc £1,200 during the tax year 2021-22 for the use of the motor car.

Amanda
With CO2 emissions between 1 and 50 grams per kilometre, the electric range of the motor car is
relevant. This is between 70 and 129 miles, so the relevant percentage is 4%. The motor car was
available throughout 2021-22, so the benefit is £1,288 (32,200 x 4%).

Betty
The CO2 emissions are above the base level figure of 55 grams per kilometre. The CO2 emissions figure of
109 is rounded down to 105 so that it is divisible by five. The minimum percentage of 15% is increased in
1% steps for each five grams per kilometre above the base level, so the relevant percentage is 24% (15%
+ 9% ((100 – 55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met.
The motor car was available throughout 2021-22, so the benefit is £3,936 (16,400 x 24%).

Charles
The CO2 emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is
29% (15% + 10% ((105 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The motor
car was only available for eight months of 2021-22, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO2 emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is
40% (15% + 25% ((180 – 55)/5)), but this is restricted to the maximum of 37%. The motor car was
available throughout 2021-22, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by
Diana towards the use of the motor car reduces the benefit.

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EXAMPLE 15
Continuing with example 14.

Amanda was provided with fuel for private use between 6 April 2021 and 5 April 2022.

Betty was provided with fuel for private use between 6 April 2021 and 31 December 2021.

Charles was provided with fuel for private use between 6 August 2021 and 5 April 2022.

Diana was provided with fuel for private use between 6 April 2021 and 5 April 2022. She paid
Fashionable plc £600 during the tax year 2021-22 towards the cost of private fuel, although the actual
cost of this fuel was £1,000.

Amanda
Amanda was provided with fuel for private use throughout 2021-22, so the benefit is £984 (24,600 x
4%).

Betty
Betty was provided with fuel for private use for nine months of 2021-22, so the benefit is £4,428 (24,600
x 24% x 9/12).

Charles
Charles was provided with fuel for private use for eight months of 2021-22, so the benefit is £4,756
(24,600 x 29% x 8/12).

Diana
Diana was provided with fuel for private use throughout 2021-22, so the benefit is £9,102 (24,600 x
37%). There is no reduction for the contribution made by Diana because the cost of private fuel was not
fully reimbursed.

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4. Van benefit
This benefit arises when the Er provides a van for private use to an Ee. Fixed £3,500 will be charged as
benefit. If private fuel is provided for the van then fuel charge of £669 will arise. No fuel benefit for van
with zero CO2 emissions.

5. Usage benefit
This benefit arises if the Er has provided any asset other than car, fuel, van, accommodation and exempt
benefits to Ee for private use. The benefit is computed as follows:

If Er has rented that asset then benefit amount = Actual rent paid by Er
If Er owns that asset then benefit amount = Cost x 20%

6. Gift benefit
This benefit arises when the Er gifts an asset to an Ee. This benefit will be assessed at higher of:

a) Market value of asset X

Amount paid by Ee (X)
Employment benefit X

b) Cost of asset X
Usage benefit assessed (X)
Net book value Amount X
paid by Ee (X)
Gift/ Employment benefit X

7. Loan benefit
This benefit arises when the Er gives a loan to an Ee at a rate less than the official rate of interest (2%).
There are two ways of calculating the loan benefit:

i) Precise method: According to this method we prorate each individual loan (on the basis of
months) up till the period it was paid back i.e. up till the period it was in employee’s books.
Each loan is then multiplied by the difference between rate provided to Ee and official
interest rate (2%) to get the benefit. (example in class)
ii) Average method: According to this method we take an average of the loan outstanding at
the start and end of the fiscal year and multiply it by the difference between rate provided
to Ee and official interest rate (2%). (example in class)
 Loan benefit will not arise if the loan balance remains below £10,000 through-out the year
(refer to the list of exempt benefits).

NOTE: All of these taxable benefits shall be taxed ONLY for the number of the months in a fiscal year
for which they were provided to an Ee. Therefore, proration of the benefits will be required if the
benefits were provided for only part of a fiscal year.

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Allowed expenses

Expenses must be incurred wholly, exclusively and necessarily in the performance of duties. These are
deducted from the employment income and are as follows:
 Professional subscription or educational fees paid.
 Employee’s contribution in occupational pension plan.
 Costs incurred for purchasing partnership shares in SIP (ATX).
 Mileage allowance: If an employee uses his personal transport (car) for employment purposes
then HMRC allows him a deductible expense from employment PnL.
- For business miles travelled between 0 – 10,000 = 45 pence/ mile
- For business miles travelled above 10,000 = 25 pence/ mile
 For bicycles- 20p
 For Motorcycles- 25p
 For walk- 5p
- If Er provides cash against any mileage allowance then it will be fully taxable.
- Mileage allowance is not given on private miles and miles travelled between home and
permanent work place.
- Permanent work place is a work place where an individual works for 25 months or more.
- Temporary work place is a work place where an individual works for 24 months or less.
 Payments made to charity made under a payroll deduction scheme operated by employer.
 Job related expenses.
 Travelling expense is allowed if it is incurred in the performance of duties.
 An Ee required to work at home may be able to claim a deduction for the additional costs of
working from home.

National Insurance Contributions (NIC)

This is a state-funded pension plan from which a person is supported for e.g. medical support or support
to unemployed/ old age persons.
 It is mandatory for both employer and employee to make these contributions on behalf of the
employee.
Exam focus: Learning the bands by heart is not necessary as it will be given in the tax rate sheet
provided to you in the exam.

Employee contributions
Class I Ee NIC is paid by employee on all cash benefits received including salary, bonus, commission and
mileage allowance received in excess of 45p.

Employer contributions
Class I Er NIC- Paid by Er on all cash benefits (mentioned above) paid to Ee. Employment allowance of
£4,000* is available which will reduce the amount of class I Er NIC to be paid to HMRC. This allowance is
not available to companies where a director is the sole employee or the last year’s contributions
exceeded £100,000.
Class IA Er NIC- Paid by Er on all taxable benefits (non-cash) provided to Ee.

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Forms

Read from book. Tax administration for individuals

• These are forms that are completed as part of the system.

• Prepared by HMRC

• P2 – Notice of Coding

• Prepared by the employer (given to the employee)

• P11D – Details of employees’ benefits-in-kind and expenses for the tax year

• P60 – Details of employee’s total pay, tax and NICs for the year

• P45 – Employee leaving form - Details total pay, tax and NIC up to that point

• P46 – Employee joining form – requesting information where employee has no P45.

PAYE Real Time Information (“RTI”) system now in force. This means that versions of these forms no
longer need to be sent to HMRC physically but electronically

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Income from Self-Employment

Readings from the book:

- Cash basis of accounting for small business

Readings from technical articles:

- Adjustment of Profit (will be discussed in class)

Badges of Trade

These factors indicate whether the proceeds are to be treated as income or gains:

 Subject matter of transaction: Are the goods normally used for trading?
 Ownership duration: Short period of ownership indicates trading.
 Frequency of similar transactions: Frequent transactions indicate trading.
 Improvements: Improvements to the good to make it more marketable indicates trading.
 Reason for sale: Sale in regular conditions indicate trading. Forced sale for e.g. reflects contra.
 Motive: Intention to earn profit/ reinvest may indicate trading.

Trading Income Profit and Loss

Accounting Profit X
Add Back: Expenses allowed in accounting but not allowed by HMRC X
Add Back: Income not included in accounting but taxable by HMRC X
Less: Expense not included in accounting but allowed by HMRC (X)
Less: Income included in accounting but not taxable by HMRC (X)
Taxable Trading Profit X

Disallowable/ Non-deductible expenditure

Following expenditures are not allowed to be deducted for the purposes of calculating adjusted taxable
trading profit:
- Penalties and fines borne by the trader. This includes penalties for late payment of tax or
parking fines. This also includes payment of extortion money bribes.
- Capital expenditures including any depreciation and profit and losses on the sale the sale of non-
current asset and legal fee is disallowed.
- Any expense that is not wholly for the purposes of trade. If the expenditure has a dual nature
i.e. it is incurred for both business and private purpose then only the business portion of the
expense will be allowed if it can be bifurcated.
- Bad debt of non-trade receivable is not deductible.
- Entertainment to customers is non-deductible. Entertainment to employees is allowed.
- If gift to customers cost more than £50 per donee per year or is related to food, drinks, tobacco
or vouchers exchangeable for goods then it is not deductible. Gifts to employees is allowed.
- 15% of the lease cost for cars with CO2 emission of more than 50 g/km is disallowed. 100% of
the lease cost is allowed if the emission rate is below 50g/km.
- Any subscription or donation paid which is for reasons other than the benefit of trade is not
deductible for e.g. political donations.

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- Legal charges related to capital and non-trading items are not deductible such as charges
incurred for issuance shares or to acquire a new asset. Charges incurred for trade debt
collection for e.g. are allowed.

Income not included in accounting but taxable by HMRC

- This mainly includes unrealized profit on a sale made intercompany which is removed from the
accounts but for tax purposes it is treated as sales.
- This also includes personal drawings of goods by the trader. It is treated as sales made by the
trader to himself and profit (based on market selling price) is added back to the accounting
profit.

Income included in accounting but not taxable by HMRC

- These mainly include three types of income:
 Capital receipts e.g. gain on sale assets, shares or bonds issuance of bonds.
 Income taxed through other sources such as rental income (property) and interest
income (savings).
 Income specifically exempt from tax such as government grants.

Expenses not deducted in accounting but allowed by HMRC

- Capital allowances (tax allowable depreciation- see later in the handout).
- Amortization of lease premium (refer property income) paid to a landlord to lease the land for
trading purposes.
- Pre-trading expenditure incurred within 7 years prior to the start of the business is allowable IF
it would have been allowable had the business already started.

NOTE: Perform remoteness test (is an expense plausible to the trade) and duality test (expense should
be wholly and exclusively for trade purposes) while assessing whether the expense shall be allowed or
not.

National Insurance Contribution (NIC)

Two types of NICs are payable which are as follows:
- Class 2 NIC- Payable where profits exceed a small profits threshold of £6,515.
- Class 4 NIC
NOTE: Details of these NICs are given in the tax rate sheet which will be provided in the exam.

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Capital Allowances
Capital allowance is the tax allowable depreciation. The rates and method of depreciation is described in
the law and presented through the finance act.
 Capital allowance is given in a reducing balance method called the Written Down Allowance
(WDA)
 There are two types of pools in which assets are classified and both of them have a different
rate of WDA:
 Main Pool- WDA = 18%
 Special Rate Pool – WDA = 6%
 An Annual Investment Allowance (AIA) of £1,000,000 is given on the purchase of new assets
(not available on the opening tax NBV). That means any amount above the AIA will be subject to
a WDA for a new asset. This allowance is given for a 12-month period.
 Following assets are eligible for capital allowances:
 Plant and Machinery- Building or land is not considered a part of plant and machinery
and is not applicable for capital allowance (separate capital allowance for building*).
Following items will be considered as part of plant and machinery:
 Any alteration in the building or land to install items of plant and machinery.
 Gas and sewerage systems installed mainly to serve a particular machinery or
plant used in the trade.
 Warehousing equipment of products of all types for example cold rooms
 Refrigeration and cooling systems.
 Sound insulation mainly installed for the purposes of trade.
 Computers and software, telecommunication and surveillance systems.
 Moveable buildings intended to be moved during the course of trade including
moveable partition walls.
 Integral features of a building are classified and allowed through special rate
pool (see below). These items include electrical systems, cold water systems,
water heating, ventilation, air cooling/ purification system, lifts and external
solar shading.

 Buildings- Through the structures and building allowance*, a new type of capital
allowance has been introduced. Relief is given as an annual straight-line allowance of 3%
over a 33⅓ year period (33 years and four months).
 The SBA is only available where a building (or structure) has been constructed
on or after 29 October 2018 (the date of the 2018 Budget). However, a question
will only be set where construction is on or after 6 April 2020 (1 April 2020 for
limited companies).
 Offices, retail and wholesale premises, factories and warehouses can all qualify
for the SBA (as can walls, bridges and tunnels).
 The value of land is excluded, as is any part of a building used as a dwelling
house.

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 Expenditure which qualifies as plant and machinery cannot also qualify for the
SBA. Similarly, expenditure which qualifies for the SBA cannot also qualify for
the plant and machinery annual investment allowance.
 Where an unused building is purchased from a builder or developer, then the
qualifying expenditure will be the price paid less the value of the land.
 The building (or structure) must be used for a qualifying activity such as a trade
or property letting.
 The SBA can only be claimed from when the building (or structure) is brought
into qualifying use. This means that the SBA will be time apportioned for the
period when first brought into use, unlike plant and machinery allowances
which are always given in full for the period of purchase.
 A separate SBA is given for each building (or structure) qualifying for relief.

EXAMPLE 1
Hipster Ltd prepares accounts to 31 March. On 1 July 2021, the company purchased a newly constructed
factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1
September 2021.
The qualifying expenditure for SBA is £360,000 (470,000 – 110,000). The factory was brought into use on
1 September 2021, so the SBA for the year ended 31 March 2022 is £6,300 (360,000 at 3% x 7/12).
An allowance of £10,800 (360,000 at 3%) will be given in subsequent years.
Relief is also given for the cost of subsequent improvements, or where a building is renovated or
converted.

EXAMPLE 2
Ballpoint Ltd prepares accounts to 31 March. The company renovated a disused warehouse (originally
purchased in 2011) at a cost of £82,000, with the warehouse subsequently brought into use on 1
January 2022.
The renovation expenditure qualifies for relief. As the warehouse was brought into use on 1 January
2022, the SBA for the year ended 31 March 2022 is £615 (82,000 at 3% x 3/12).
The original cost of the warehouse does not qualify for the SBA, being purchased prior to 29 October
2018. Even if it had qualified, the SBA for the renovation expenditure would have been kept entirely
separate from the SBA on the original cost.
Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or
structure) that has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3%
allowance for the remainder of the 33⅓ year period based on original cost.
However, on a disposal, the allowances that have been claimed are effectively clawed back by adding
them to the sales proceeds in order to determine the chargeable gain or allowable loss arising.

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EXAMPLE 3
Continuing with example 1.
Hipster Ltd sold its factory to Gentrified Ltd on 31 March 2022 for £500,000 (including land of £120,000).
Gentrified Ltd also prepares accounts to 31 March.
The sale of the factory will not affect Hipster Ltd’s SBA claim for the year ended 31 March 2022. From
the year ended 31 March 2023 onwards, Gentrified Ltd will claim £10,800 (360,000 at 3%) annually
based on the original cost to Hipster Ltd. The SBA will run for the remaining 32 years and nine months of
the 33⅓ year period that commenced on 1 September 2021.
Hipster Ltd’s sale proceeds of £500,000 will be increased by the allowance claimed of £6,300. The
chargeable gain on the disposal will therefore be £36,300 (500,000 + 6,300 – 470,000).

You should assume that for any question involving the purchase (as opposed to a new construction) of a
building, the SBA is not available unless stated otherwise.

 Office equipment
 Furniture, fixtures and fittings
 Delivery van
 Tractors
 Cars (not eligible for AIA)
 New electric-powered motor cars with zero CO2 emissions – 100% allowance in
year of purchase.
 CO2 emissions up to 50 g/km – 18% WDA through main pool.
 CO2 emissions over 50 g/km – 6% WDA through special pool.

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 Capital allowance (AIA and WDA) is calculated on pro rata basis depending on the short and long
period of account- [WDA = NBV x 18% x no. of months/12]. Full in the year of purchase, none in
the year of sale.
 First Year Allowance (FYA) at a rate of 100% is available on new electric-powered motor cars
with zero emissions. This means that 100% of the cost of the new car purchased will be allowed
in the first year i.e. the year of purchase. The FYA is not pro-rated unlike AIA and WDA.
 When a plant is sold, proceeds limited to the original cost, are taken out of the pool and
provided that the trade is still being carried on, WDA is calculated on the pool balance
remaining.
 AIA shall be used in the following order:
 Special rate pool (SRP)
 Main pool
 Short-life asset pool
 Private-use asset pool
 A balancing charge (gain on disposal) occurs when the disposal proceeds exceed the balance
remaining on the pool. A negative balance is created in the capital allowance which leads to an
increase in the profits. This mostly takes place when trade is ceased.
 A balancing allowance occurs when the balance remaining in the pool exceed the disposal
value. BA only arises when the trade ceases or when an asset is sold from the single asset pool.
 If VAT can be reclaimed on the purchase of asset then the qualifying expenditure will always be
net of VAT except for cars which will be inclusive of VAT.
 Assets that are hire purchased shall be recorded at MV excluding interest payable at the date of
inception of lease.
 Upon cessation of trade no AIA, FYA or WDA are given on the final period of account (for
individuals) or accounting period (for companies). The remaining assets on all of the pools are
disposed/ deemed to disposed at MV. If a balancing charge (gain on disposal) arises, it reduces
the capital allowance. If a balancing allowance (loss on disposal) arises, it adds to capital
allowance.
 Disposal of an asset will be done at lower off:
 Cost
 Disposal proceeds

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Main Pool/ General Pool

 Most of the expenditure on plant and machinery including cars having emission rate ≤ 50 g/km,
is relieved through the main pool having a WDA of 18%.
 Balance of assets dealt under special rate pool, private use of trader and short life assets will
not be included in the main pool.
 An addition of an asset in the pool increases the balance of the pool and a disposal decreases
the balance of the pool.
 Assets held before start of the trade and brought into the trade (at the start of the trade) will be
treated as bought for their market value at the time when they are brought in.
 If the balance in main pool is £1,000 or less for 12-month period, it can be completely written
down and the balance reduced to 0.

Special Rate Pool (SRP)

 Expenditure on thermal insulation, long life assets, features integral to a building and cars with
CO2 emission of more than 50 g/km will be included in SRP.
 WDA of 6% is applicable.
 Long life asset has following characteristics:
 Life of 25 years or more.
 Cost more than £100,000 in a chargeable period (this amount will be adjusted for
chargeable period of more or less than 12 months).
Note: If the life of the asset is not mentioned then it is classified through general pool.
 Following assets are not treated as long life assets:
 Plant and machinery in retail shops, showrooms, hotels, offices and dwelling
houses.
 Cars.
 If the balance in special rate pool is £1,000 or less for 12-month period, it can be completely
written down and the balance reduced to 0.

Private use assets

 An asset which is partly used by the trader/ partner for private use is put into a separate single
asset pool. It could either be an asset from the main pool (WDA 18%) or special rate pool (WDA
6%).
 Capital allowances are calculated on full cost but only the business use portion is allowed as an
expense. This restriction applies to AIA, FYA, WDA, balancing allowances and balancing charges.

Short life assets

 These assets are part of plant or machinery having a life of 8 years or less.
 An irrevocable election called the de-pooling election is made to separate the asset from the
main pool and classify it in a single asset pool.
 If the asset is not disposed of after 8 years, any remaining balance on the pool will be added to
the main pool and will be subject to WDA accordingly.
 WDA for SLA is 18%.

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Basis Period Assessment

 This topic will be taught in class for both TX and ATX students.

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Partnership Income

 HMRC treats each individual partner as a sole proprietor for the purposes oftax.
 Each partner is accounted for his/her share of profit.

Share of
Profit

Interest Share of
Partner's on
salary residual
capital profit

 The breakup of share of profit (as mentioned above) for the year under consideration will be
summed up and treated as a trading profit for the partner.

 Therefore, partner’s salary and interest on capital is not an allowed expense from Partnership
profit.
 Any partner entering into the partnership will apply opening year rules to its profits.
 Any outgoing partner shall apply closing year rules to itsprofits.
 Capital allowances are deducted from the partnership trading accounts in the same way as the
sole proprietor’s trading account.
 LLPs are taxed in the samemanner.

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Overseas Taxation

Inheritance
Income Tax
Tax
Capital Gains Tax
Taxed based on residency status: Taxed based on domicile status:
 If a person is UK resident, he  If a person is domiciled in UK,
has to pay income tax on he has to pay IHT on
worldwide income and CGT on worldwide assets (availability
worldwide gains (availability of of Double Taxation Relief)
Double Taxation Relief)  If a person is non-UK
 If a person is non-UK resident domiciled then he has to pay
then only UK income and gains IHT on UK assets only
will be taxed

Rules for Residency

The status of residency is determined in the following manner and hierarchy:

1. A person is automatically not UK resident if he lives in UK for less than

- 91 days and has an overseas job, or
- 46 days such that he has not been resident for the last 3 years, or
- 16 days such that he has been a resident of UK for 1 year out of last 3 years

If any of the above do not meet then move onto the 2nd step of automatic residence test

2. A person is automatically UK resident if they have lived in UK for at least

- 183 days in the tax year, or
- 30 days in a tax year and his only home is in UK, or
- 365 days continuously working full time such that it does not lie in one tax year

3. If a person does not satisfy any of the automatic tests then the number of ties (mentioned
below) along with days spent in UK (mentioned in tax rate sheet) shall determine his residency

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Family If an individual has close family (spouse/ civil partner or children [under 18 years])
in UK who are UK resident
Accommodation Has a house in UK such that he lives in it for 91 consecutive days
Work Works in UK for at least 40 days
Days in UK Has spent more than 90 days in either or both of the previous two tax years
Country Has spent more time in UK than any other country in the world

Split Year Basis

If a person leaves or arrives in UK permanently/ with permanent intention or due to full-time job, then
his residency status will change the same day

Domicile Status

Domicile status is a status that is beyond residency and nationality and is achieved in the following
manner:

 Origin- automatically acquire domicile of father when born i.e. if UK is permanent home of
father
 Dependency – till the age of 16 years a child is domicile dependent on father
 Choice – after the age of 16 years a person can change his/her domicile such that all ties with
old country are severed and residence is established on a permanent basis in UK

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Capital Gains Tax- Individuals

 CGT is calculated on the value increase of the asset when the asset is sold.
 It’s a tax paid on gains arising on chargeable disposals of chargeable assets made by chargeable
persons.

 The key difference between an income tax and capital gain is that income tax is calculated on
the income generated from an asset whereas CGT is calculated on any gain realized on the
disposal of the underlying asset or any asset of such kind (held of investment purpose).

If sold at arm’s length

Disposal Proceeds/ Market Value xxx then DP = Selling
Less Selling costs (xxx) price otherwise DP =
Net disposal proceeds xxx MV

-Add up all disposals Less Allowable expenditure

for the year to get net Cost of acquisition (COA) xxx
gain/ net loss. incidental costs xxx
capital expenditures xxx No restriction of
-B/f losses are to be loss to save
used after current year (xxx)
AEA. Additional
losses. Chargeable gain/ allowable loss xxx/(xxx)
(xxx) loss to be c/f
Less Current year losses
against future
Net Chargeable gain xxx
capital gains.
Less AEA (12,300)*
xxx
Set off against
Less B/f losses (xxx)
first available
Taxable Gain xxx net ch. Gains.
Any remaining
to be c/f.

- Taxed as the last chunk i.e. after income tax.

- Extended band due to GAD and gross PPC shall
be taken into consideration.

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-This the value at -Includes all Chargeable gain

costs to own or This is the gain
Disposal Proceeds/ MV
which the asset is up till £12,300
sold. retain an asset (FY 21/22) is

Annual exemption
on which
-MV is used including exempt. This capital gains tax

Taxable gain
where the improvement. exemption is for
the whole year rate is applied.

Cost
transaction is not -COA= MV/ value 10% tax is
at arms length or of transfer where therefore
between a sale is through £12,300 will be applicable on
connected gift. applicable on all BR taxpayers.
parties such as disposals during HR and AR
- COA = MV at the year. Cannot
parents, siblings death, where taxpayers pay
be b/f or c/f.
and children. transfer is at the CGT at 20%.
time of death.

The tax rates applicable on disposal of residential property is 18% and 28% for BR and HR/AR
respectively.

AEA and any losses shall be first relieved against residential

property gains, if any since the tax rates are higher.

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 Chargeable Disposals

Chargeable Exempt
- Sale or gift of the whole or part of an - Disposals as a result of death.
asset. - Gifts to charities.
- Exchange of asset.
- Loss or destruction of an asset.
- Capital receipts such as insurance proceeds
for a damage of an asset or receipts for the
surrender of rights to an asset.

 Chargeable Assets

Chargeable Exempt
 Goodwill  Motor Vehicles (including vintage cars)
 Freehold Land and Buildings  Main residence
 Unquoted and quoted shares  Cash
 Chattels (tangible and moveable assets)  Chattels of some types
 ISA investment
 Qualifying Corporate Bonds (QCBs)
 Gilt-edged securities
 NS&I certificates
 Foreign currency held for private use
 Current assets (inventory and
receivables)
 Prizes and betting winnings

 Chargeable Persons
- For income tax and CGT, persons resident in UK are liable to pay tax on worldwide assets.
- Those who are not resident in UK, pay tax on UK assets only.

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EXAMPLE 29
For the tax year 2021-22, Adam has a salary of £44,000. During the year, he made net personal pension
contributions of £4,400. On 15 June 2021, Adam sold an antique table and this resulted in a chargeable
gain of £21,800.

For the tax year 2021-22, Bee has a trading profit of £60,000. On 20 August 2021, she sold an antique
vase and this resulted in a chargeable gain of £20,100.

For the tax year 2021-22, Chester has a salary of £43,500. On 31 October 2021, he sold a residential
property and this resulted in a chargeable gain of £47,300.

Adam
Adam’s taxable income is £31,430 (44,000 less the personal allowance of 12,570). His basic rate tax band
is extended to £43,200 (37,700 + 5,500 (4,400 x 100/80)), of which £11,700 (43,200 – 31,430) is unused.

Adam’s taxable gain of £9,500 (21,800 less the annual exempt amount of 12,300) is fully within the
unused basic rate tax band, so his capital gains tax liability is therefore £950 (9,500 at 10%). This will be
due on 31 January 2023.

Bee
Bee’s taxable income is £47,430 (60,000 – 12,570), so all of her basic rate tax band has been used. The
capital gains tax liability on her taxable gain of £7,800 (20,100 – 12,300) is therefore £1,560 (7,800 at
20%). This will be due on 31 January 2023.

Chester
Chester’s taxable income is £30,930 (43,500 – 12,570), so £6,770 (37,700 – 30,930) of his basic rate tax
band is unused. The capital gains tax liability on Chester’s taxable gain of £35,000 (47,300 – 12,300) is
therefore:

6,770 at 18% 1,219

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7,904
28,230 at 28%

9,123
Tax liability

Assuming Chester’s income for the tax year 2021-22 was correctly estimated at the time of the
residential property disposal, his capital gains tax liability of £9,123 will have been paid 30 days after the
disposal (30 November 2021), with no adjustment necessary under the self-assessment system.

As shown in example 28 above, where a person has both residential property gains and other gains,
then the annual exempt amount and any capital losses should initially be deducted from the residential
property gains. This approach will save capital gains tax at either 18% or 28%, compared to either 10%
or 20% if used against the other gains.

However, how any unused basic rate tax band is allocated between chargeable gains does not make any
difference to the overall capital gains tax liability (since the differential is 10% in both cases).

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EXAMPLE 30
For the tax year 2021-22, Douglas does not have any income. On 15 June 2021, he sold an antique vase
and this resulted in a chargeable gain of £19,000. On 28 August 2021, he sold a residential property and
this resulted in a chargeable gain of £39,800.

Ignoring the payment on account in respect of the residential property gain, Douglas’ capital gains tax
liability is:

Residential property gain 39,800

Annual exempt amount (12,300)

27,500

Other gain 19,000

Capital gains tax:

27,500 at 18% 4,950
10,000 (37,700 – 27,500) at 10% 1,020
8,800 (19,000 – 10,200) at 20% 1,760

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Tax liability 7,730

 The annual exempt amount is set against the residential property gain.

 The capital gains tax liability could alternatively be calculated as:

19,000 at 10% 1,900

18,700 (37,700 – 19,000) at 18% 3,366

8,800 (27,500 – 18,700) at 28% 2,464

7,730

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Part Disposal of Asset

 This issue arises when a part of an asset is disposed of.

 Following is the manner in which the gain on disposed part will be calculated:

DP of disposed part xxx

Cost of disposed part (xxx)
Chargeable gain xxx

 Issue arises in determining the cost of the disposed part. Once, the cost of the disposed part is
calculated in the manner mentioned below, the cost of the remaining part of the asset (base
cost) is calculated by deducting cost of disposed part from the original cost of asset.

Cost of disposed part = Total cost x Disposal Proceeds

DP +MV of remaining asset

Base Cost (cost of remaining part of asset) = Original cost xxx

Cost of disposed part (xxx)
Base cost xxx

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Destruction of Asset/ Lost Asset

 According to HMRC, destroyed or lost asset is treated as disposed at either nil disposal proceeds
or disposal proceeds equals too insurance proceed.

Disposal Proceeds (Insurance proceeds/ scrap value/ nil) xxx

Cost (xxx)
Chargeable gain/ allowable loss xxx/ (xxx)

 If 100% proceeds are reinvested i.e. full reinvestment then complete gain on the disposal can be
deferred against the cost of new asset. Reinvestment to be made within 12 months.

Purchase cost of new asset xxx

Gain of previous asset (xxx)

Base cost xxx

 If 100% proceeds are NOT reinvested i.e. partial reinvestment then lower of will become
chargeable now:
 Chargeable gain
 Cash in hand (Disposal proceeds – reinvestment into new asset)

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Damage of Asset

 If an asset is damaged, it is treated as a part disposal by HMRC.

Disposal Proceeds (Insurance proceeds/ scrap value/nil) xxx

Cost of disposed part (total cost x DP/ DP +MV of remaining asset) (xxx)
Chargeable gain/ allowable loss xxx/ (xxx)

Original cost of asset xxx

Cost of disposed part (xxx)
repair cost xxx
Base cost xxx

 If full reinvestment (95% or more of the DP) is made in restoring/ repairing the asset then the
gain can be deferred through reducing the base cost of the asset.
Original cost of asset xxx
Cost of disposed part (xxx)
Gain of disposed part (xxx) CDP + GDP = Disposal proceeds
repair cost xxx
Base cost xxx

 Partial reinvestment follows a net proceed treatment (DP – restoration cost) which is NOT part
of the course.

Note: Reinvestment of the proceeds must be made within 12 months of receiving the proceeds.

Negligible Value Claim

If an asset’s MV becomes negligible, a claim can be made to treat the asset as sold and immediately
acquired at its current market value to create an allowable loss

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Shares and Securities

 Disposal at MV= mid-price quote at the date of disposal.

Shares are a HMRC presented a The cost will be

solution to this deducted in the
homogeneus following order:

Suggestion
asset therefore it problem by issuing

Solution
the "matching 1.Cost of shares
is very difficult to
Issue

order rule." The purchased on the same

distingush the day as disposal
cost of the shares
purchase cost of will be deducted 2.Cost of shares
each share from the DP purchased in the
following 30 days of
according to this sale (averaging up)
rule.
3.Average cost of
shares from share pool

 In case of bonus issue of shares by a company, only the number of shares will be added to the
share pool (example of what a share pool looks like is given below).
 In case of rights issue of shares by a company, the number of shares multiplied its exercise price
will be added to the share pool.

Example of share pool

Date of No. of Purchase price Total
Purchase Transaction shares (cost) cost

1-Jan-22 Purchase 10,000 5 50,000

2-Feb-22 Rights issue 5,000 2.5 12,500

3-Mar-22 Bonus issue 5,000 0 0

Total 20,000 62,500

Q. Calculate the gain on sale of shares (according to matching order rules) if a sale of 5000 shares takes
place at a price of $7 per share on 4th April 2022.

Disposal proceeds (5000*7) 35,000

Cost of shares purchased on 4th April 2022 (No such purchase) -
Cost of shares purchased 30 days following 4th April (No such purchase) -

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Average cost from share pool (5000*62500/20000) (15,625)

Chargeable Gain 19,375

Share pool after disposal of shares

Date of Purchase Transaction No. of shares Purchase price (cost) Total cost
1-Jan-22 Purchase 10,000 5 50,000
2-Feb-22 Rights issue 5,000 2.5 12,500
3-Mar-22 Bonus issue 5,000 0 0
Total 20,000 62,500
4-Apr-22 Sale (5,000) (15,625)
Net after disposal 15,000 46,875

Rollover Relief

 Gain on disposal of a qualifying asset can be rolled over (deferred) against the cost of a new
qualifying asset if the reinvestment in the new qualifying asset is made within the qualifying
period
 Method of rollover is the same as previously discussed i.e. the gain on the disposed asset will be
deducted from the cost of new asset.

Qualifying Asset
• Assets having life more than 50 years (non-depreciating assets)
• Land and building
• Plant and machinery
• Goodwill

Qualifying Period
• 1 year before disposal date
• 3 years after disposal date

 The rules for chargeable gains based on full reinvestment and partial reinvestment remain the
same as discussed above.

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Gift holdover Relief (GR)

 If an asset that is disposed of and the proceeds are reinvested in an asset that is eligible for
capital allowance then the gain on the disposed asset shall be frozen (held).
 The base cost of the new asset shall not be reduced by the gain on the previous asset mainly
because the new asset is eligible for capital allowance (tax allowable depreciation)
 Since, the base cost is not reduced, capital allowance will be available on 100% cost of
the asset resulting in a saving in trading profit
 Hence, this reduced trading profit will save income tax of 20%, 40% or 45% depending
on the case
 The held gain will become chargeable on earliest of the three dates:
 10 years
 Disposal of new asset purchased
 Cessation of business use of new asset

Business and Non-business Use

 Rollover and holdover reliefs are business reliefs therefore, will only be applicable on the
business portion of the asset i.e. the deferral of business use of the gain can only be made
against the business use of new asset. Example in class.

Business Asset Disposal Relief*

 This relief is available to an entrepreneur who disposes of his business

 CGT rate is 10% regardless of the level of taxable income. But the gains eligible for business
asset disposal relief consume the BRB therefore, any other gains may be taxed at 20%.

Disposal of assets eligible for ER are as follows:

Disposal of going concern business including furnished holiday letting (FHL)

Disposal of business assets of ceased business within 3 years of cessation

Disposal of shares in a personal company.

• Person must be an employee of the company (part-time or full-time)
• Must own at least 5% shares of the company or 5% voting rights
• Company must be a trading company

 In ALL the above cases, ownership period of at least 2 years is required.

 ER applies to the first £1 million* gain on qualifying business disposals. This is the lifetime limit
for ER.
 If there are two gains to be taxed (one is eligible for BADR and the other one is not) then
preference of AEA (£12,300) will be given to the gain not eligible for BADR.
 Relief must be claimed by 31 January 2024 for FY2021/22.

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Investor’s Relief
 This relief applies to the disposal of unquoted ordinary shares in a trading company including
companies quoted on the Alternative Investment Market (AIM). Relief is available if:
 They are subscribed for (new) on/ after 17th March 2016.
 Held for minimum 3 years from 6th April 2016 onwards.
 SH must not be an employee (unremunerated director is an exception).
 Lifetime limit of £10million, separate from BADR.
 Gains taxed at 10%.

Paper to Paper Takeover/ Reorganization

 This relief is applicable when a company takes over another company.

 The consideration that the shareholder of the investee receives from the investor is eligible for
the paper-to-paper takeover relief.

Types of considerations and their tax treatment

Cash Ordinary Shares Preference Shares Loan Notes (QCB)

• Normal CGT is • No CGT will be • No CGT will be • Gain on loan

charged if cash is charged upon charged upon note
received as a share share consideration
consideration consideration consideration shall be
computed but
will be frozen up
till the maturity
of loan notes

 Questions discussed in class

 No tax on share consideration because the shareholder has not yet realized his/her investment
in cash
 QCBs are Qualifying Corporate Bonds. QCBs are exempt assets therefore no chargeable gain
arises on the disposal of QCB.
 Whereas the gain on the shares previously held (of the investee) will be frozen if QCB is received
as consideration
 This gain shall crystallize for tax upon the disposal or maturity of QCB, whichever is earlier

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Qualifying Corporate Bonds

These are loan notes issued by a company that are

 Denominated in pound sterling (£) and no currency derivatives such as swaps
 Carry market interest rate
 Loans not convertible in shares

Working of Paper-to-paper takeover

 The cost of the previously held shares (of investee) are allocated on to the consideration
received based on the market value of the consideration
 Gain is calculated on cash and QCBs by deducting its allocated cost from its market value
 Following format is used to calculate the market value and cost (example)

Mr. X acquired 18,000 shares of Co. A @ £7/share = £126,000. Co. B purchased Co. A at a later date and
paid Mr. X (shareholder of co. A) a consideration of 12,000 Co. B ordinary shares having MV of £15 each,
16,000 Co. B QCBs having MV of £8 each and £9,000 in cash against Mr. X’s 18,000 shares in Co. A. After
1-year Mr. X sold 9000 O/S of Co. B @ £20 and 2000 QCBs @ £12.
Calculate chargeable gain.

Types of No. of Per unit Market Total % of total Cost

consideration units price MV consideration allocation

Ordinary share 12,000 15 180,000 57% 71,546

QCB 16,000 8 128,000 40% 50,877

Cash 9,000 3% 3,577

317,000 100% 126,000

Cash Portion
DP 9,000
Cost (3,577)
Gain 5,423

QCB
DP 128,000
Cost (50,877)
Gain 77,123
Freeze/ Held (77,123)
Net Gain -

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Types of No. of Per unit Market % of total Cost

consideration units price Total MV consideration allocation

Ordinary share 12,000 15 180,000 58% 68,377

QCB 16,000 8 128,000 42% 48,62

308,000 100% 117,00

Later Disposal

Sold 9000 O/S @ £20 each

DP (9000*20) 180,000
Cost (71546*9000/12000) (53,659)
Gain 126,341

Sold 2000 QCB @ £12 each Exempt Asset

Only the gain of £77,123 (128000 – 50877) will become chargeable for 2000 QCBs only. This gain
actually pertains to 16,000 QCBs therefore apportionment will be done

77123*2000/16000 = £9,640

Disapplication of Paper-to-paper relief

 In this case old shares will be treated as disposed and new shares will be treated as acquired at
market value
 Deferral through paper to paper relief also depends on certain factors such as:
 Lower tax rates through ER if the previously held shares are eligible for ER – Do not
defer gain
 If the new shares are eligible for ER then defer the gain on previously held shares

Conditions for Paper-to-paper takeover relief

 Takeover transaction must NOT be for tax avoidance and it MUST be a commercial transaction
 Any of the following must be met:
 Takeover offer must be a public offer
 At least 25% shares must be purchased by the investor
 At least 51% voting rights must be acquired if shareholding acquired is less than 25%
e.g. jumbo shares

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Private Residence Relief (PRR)

 If a person sells his/ her principle residence then gain relating to the period of occupation is
exempt.
 Principle private residence is the one in which a person principally lives and does not use
commercially. If a person has multiple residences then only one residence can be declared as
the principle residence
 Principle residence should be the residence with maximum expected value growth so that
maximum gain can be exempted
 If the residence has an extended land then only up till 0.5 acre is assumed to be part of the
house
 If the house is divided into several parts then only the parts serving for residential purposes can
be exempted (business use of private residence can never be exempted under PPR relief)
 A caravan can also be treated as a PPR if it has a water and electricity connection

Period of Occupation

It is the period in which an individual is considered to be living in his/her principle private residence.
There are two types of period of occupations:
 Actual Period of Occupation is the period in which the person actually lives in the house
 Deemed Period of Occupation is the period during which a person is assumed to be living in the
house but actually is not. This period includes:
- Last 9 months* before the disposal of the house, if the person actually lives in the house for
at least one month during the whole period of ownership
- Following periods are considered deemed periods if supported by APO before and after:
o Absence of 36 months due to any reason
o Absence of up to 4 years due to employment/ self-employment with in UK
o Absence of any period due to employment abroad

 Actual period of occupation is counted if a person lives for one month in the house at least
 HMRC waives the post-absence APO requirement for deemed period of occupation if a person
does not fulfill it due employment issues

Business Use of Private Residence

 PPR will not be available on the business use portion of the residence
 However, last 9 months will be exempted before disposal if the business portion of the house
has been occupied for residential purposes for at least one month during the period of
ownership

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Letting Relief

If a person lets out his principle residence during chargeable period such that the owner is in shared
occupancy* with the tenant then he can avail a letting relief at lower of:

o £40,000
o PPR relief
o Chargeable gain x Chargeable letting period
Total months

Note: Chargeable period is the period for which a chargeable gain will arise after the relief of
PPR.

EXAMPLE 36
On 30 September 2021 Mae sold a house for £326,000. The property had been purchased on 1 October
2007 for £122,000.

Throughout the period of ownership, the property was occupied by Mae as her main residence, but two
of the property’s eight rooms (25% of the property) were always let out exclusively to tenants.

The chargeable gain on the house is:

Disposal proceeds 326,000

Cost (122,000)

204,000

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Private residence relief (153,000)

Letting relief (40,000)

Chargeable gain 11,000

 Private residence relief is restricted to £153,000 (204,000 x 75%).

 Letting relief is the lower of:

o £40,000

o £153,000 (the amount of private residence relief)

o £51,000 (the amount of the non-exempt gain attributable to the letting (204,000 x 25%))

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Gift Relief

 According to HMRC, a gift of an asset is treated as a disposal at market value by the donor to
the donee.
 Therefore, a gain will be charged to the donee on which he/she will have to pay tax
 This gain can be deferred through gift relief as the donee has received a gift that is non-cash.
 The gain will be deferred in the following manner:

DP= MV xxx
Cost (xxx)
Gain xxx
Gift relief (xxx)
Chargeable now -

 Since, the donee has now received the asset, the DP of donor will become the cost for
donee.
 The deferral of the gain will take place by reducing the base cost of the asset gifted to
donee by the amount of chargeable gain

Cost for Donee /MV xxx

Gift relief (xxx)
Base cost for donee xxx

 Gifts can be made to connected persons which include:

 National charities
 Spouse (no gain/ no loss)
 Political parties

 GR is available in the following two ways:

Full Gift
• No proceed is received by the donor from the donee
• 100% gift element i.e. full gift relief

Partial Gift
• Some proceed is received by the donor from the donee
• Gift relief = Gift element = Market value of gift - Amount received
• Planning Point = Donor should take enough consideration such that
chargeable gain after GR equals annual exemption

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 Gift relief is only available on the gift of Chargeable Business Assets.

Chargeable Asset is the asset: Exempt Assets are those assets on which NO CGT is
charged. These include:
 On which CGT is charged
 All other assets other than exempt
assets  Cash
 Debtors Current Assets
 Inventory
 VCT shares
 Vehicles/ cars
Business Assets are those assets which are used  Prize bonds
in trading activities of the business e.g. building,  Qualifying Corporate Bonds (QCB)
machine, etc.  Personal residence
 National Savings Certificate
Non-business Assets are assets such as
investments in other entities, land purchased
for letting or personal assets

 Since, gift relief is a business relief it will be calculated in the following manner:
Gain x Chargeable Business Assets
Gift Relief =
Total Chargeable Assets

Disapplication of Gift Relief and Planning Points

 Claiming gift relief results in a transfer of chargeable gain from donor to donee. Therefore, an
election in their (both donor and donee) tax return will be required to avail gift relief
 Making an election will require an assessment of tax planning opportunities for both donor and
donee. Following factors shall be considered:
o Tax rates for both donor and donee depending on their income bracket at the time of
gift and at future disposal by donee
o Availability of capital losses
o Availability of annual exemption
o Availability of BADR

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Conditions for Gift Relief

 Donor and donee must be UK resident

 Any of the following must be met:
o Gift of unincorporated business i.e. sole trader (including FHL) or partnership
o Gift of unquoted shares of a company Must have business
o Gift of quoted shares of a company if the donor has at least 5% holding assets
 Agriculture property, if eligible for APR in IHT
 Any transaction that is immediately chargeable to IHT shall qualify for GR
 Election is required by both donor and donee

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Chattels

Chattels are assets that are tangible + moveable e.g. cars, cell phones, etc. Buildings (non-moveable)
and shares (intangible) are not chattels.

There are two types of assets having different CGT treatments:

Wasting Asset

Wasting Chattels Wasting Non-chattels

 Life < 50 years  Life < 50 years
 Tangible + moveable  Intangible + immovable
 Examples: vehicles, cell  Examples: software, copyrights,
phone, plant, machinery, trademarks, etc.
boat, etc.  CGT will be charged
DP xxx
 These assets are exempt for
CGT NBV (cost x remaining life/ total life) (xxx)
 However, CGT will on them Gain xxx
if it’s plant and machinery
which is eligible for capital
allowance.

Non-wasting Assets

Non-wasting Chattels Non-wasting non-chattels

 Life > 50 years  Life > 50 years
 Tangible + moveable e.g. gold,  Intangible + immovable
painting, antiques, etc.  E.g. goodwill, shares and land
 If DP and cost ≤ £6,000 then it will  Normal CGT will be computed
be exempt.
 If DP and cost > £6000 then normal
CGT will apply
 Special rules if the asset is bought
or sold at ≤ £6,000.

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£6,000 rule

CGT on death

 All assets are transferred at probate value (market value) on the date of death
 The transfer is at no gain/ no loss

Planning

Loss making assets should be sold during the year so that loss is realized. Any assets with an anticipated
chargeable gain should be transferred at the date of death at no gain/ no loss

Transfer between spouses/ civil partners (living together and not separated)

 Assets between spouses/ civil partners are transferred cost to cost i.e. no gain/ no loss.

Planning

- Loss making assets should be transferred before marriage so that loss is realized
- Any transfer before marriage having a chargeable gain should be disposed to the extent of
available losses and A/E.
- Each individual’s annual exemption and basic rate band can be utilized.

Capital Losses

 Relief for capital loss (cost > DP) is available in the following manner:
1. Set off against current year gain This is an auto claim therefore no partial
claim is allowed
2. Remaining capital loss will be carried forward against future gains. Partial claim is
allowed in this case
3. In the year of death capital loss can be carried back up till 3 years against capital gains.
Partial claim is allowed in this case

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Change in Terminologies:

- Land will now be measured in Hectares rather than acres.

Change in Method of CGT Payment

- Regular date: 31 January 2023 (along with Income Tax balancing payment)
- For Residential Property

- A payment on account must now be made within 30 days where capital gains tax is payable in
respect of a disposal of residential property. A return must be submitted to HMRC at the same
time.
- The calculation of the payment on account takes into account the annual exempt amount, any
capital losses incurred in the same tax year prior to the disposal of the residential property, plus
any brought forward capital losses. Any other chargeable gains and capital losses incurred
subsequent to the disposal of the residential property are ignored.
- It is necessary to make an estimate as to how much of the taxpayer’s basic rate tax band will be
available for the tax year.
- The residential property gain is still included in the taxpayer’s self-assessment capital gains tax
computation following the end of the tax year, with the payment on account being deducted
from the total capital gains tax liability. Any additional tax is payable on 31 January following the
tax year. If a repayment is due, then this will be claimed when the self-assessment tax return for
the tax year is submitted.
- A payment on account of capital gains tax has nothing to do with the normal self-assessment
payments on account due on 31 January in the tax year, and 31 July following the tax year.
- The calculation of payments on account where there is more than one residential property
disposal during a tax year is not examinable at TX-UK.

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- EXAMPLE 28
Zack, a higher rate taxpayer, had the following chargeable gains and capital losses during the tax
year 2021-22:

10 April 2021 Capital loss of £4,600 from the disposal of shares

31 May 2021 Chargeable gain of £28,200 from the disposal of shares

31 August 2021 Chargeable gain of £82,000 from the disposal of residential property

10 March 2022 Capital loss of £14,000 from the disposal of shares

- A payment on account of capital gains tax will have been made on 30 September 2021 in respect
of the residential property disposal on 31 August 2021, calculated as:

Residential property gain 82,000

Capital loss – 10 April 2021 (4,600)

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Annual exempt amount (12,300)

65,100

Payment on account: 65,100 at 28% 18,228

- The additional capital gains tax payable on 31 January 2023 is:

Residential property gain 82,000

Capital losses (4,600 + 14,000) (18,600)

Annual exempt amount (12,300)

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51,100

Other gain 28,200

Capital gains tax:

51,100 at 28% 14,308
28,200 at 20% 5,640

19,948

Payment on account (18,228)

Payable on 31 January 2023 1,720

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Lifetime Gifts

 A person makes a gift:

 During his life
 To another person;
 Is called a Potentially Exempt Transfer (PET).
 No lifetime tax on PET
 However, if the donor dies within 7 years of making the donation then the PET will
become chargeable to inheritance tax @ 40%.
 Donee (the one who receives lifetime gift) shall pay the tax on the death of the donor

 A person makes a gift:

 During his lifetime
 To a trust;
 Is called a Chargeable Lifetime Transfer (CLT)
 Lifetime tax is charged at
- 20%, if donee (trustees of the trust) pays tax
- 25%, if donor pays tax (general assumption if the examiner is silent)
 On the death date, an additional IHT @ 40% will be applicable on CLT if the person dies
within 7 years of making the gift
 Any tax paid during the lifetime (lifetime CLT) will be adjusted from the death date tax
- Note: If the donor pays lifetime tax on CLT, the gift amount assessed on the
death date will be grossed up i.e. Amount at death date = Value of gift + tax paid
by donor. (reason to be explained in lectures)

PET becomes chargeable

Gift to Individual (PET) if person dies EXEMPT

>
Additional IHT on 7th Year No additional
Gift to Trust (CLT)
CLT if person dies IHT on CLT

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Following reliefs are available for gifts made during the lifetime:
 Annual exemption of £3,000 is available which, if unused, can be carried forward to the next
year and can be used after the current year’s A/E only.

Deducted after all exemptions such as

marriage exemption or transfer to spouse.

 A nil rate band for both lifetime and death tax are available of £325,000.
 Amount of NRB will be taxed at 0%
 While calculating lifetime tax, the NRB at the date of gift will be taken into account and
will be reduced for any Gross Chargeable Transfers (CLT) made 7 years before the that
gift date
 For death tax on lifetime gifts, death date NRB will be used and the gift made first in the
last 7 years will become chargeable first at death. The amount of NRB will be considered
from the date of gift and any GCTs made 7 years prior to gift date and chargeable at
death date will reduced NRB (explanation in class)

 Taper relief is available on lifetime gifts chargeable to death tax (Death within 7 years of making
PET and/ or CLT). Relief will reduce the death tax on lifetime gift in the following manner:

Years before date of death:

Taper
Over Less than relief
%
0 3 0
3 4 20
4 5 40
5 6 60
6 7 80

 No taper relief if a person dies within 3 years of making the gift

 If a person dies after 7 years of making the gift then the gift is not charged for death tax
therefore, taper relief is not relevant

 Gift received on marriage (one marriage) is exempt through marriage exemption in the
following manner (excess will be treated as PET):
 £5,000 by a parent
 £2,500 by a grandparent or remote ancestor
 £2,500 by a party to the marriage or civil partnership (e.g. bride to groom and vice
versa)
 £1,000 by anyone else.
 Small gift exemption of £250/ donee/ tax year is available on the lifetime gifts. Complete gift
will be treated as PET if the amount is more than the aforementioned

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 Routine gift is exempt if having satisfied following conditions:

 It is made as part of the normal expenditure out of a person’s income
 Does not affect donor’s standard of living
 When a person makes a lifetime gift, the value of asset gets locked and at the death date, tax is
not charged on any increase in value of that gift

Reliefs available on both Lifetime and Death gifts

 Any gift made to exempt party will not be charged for IHT. Following are treated as exempt
parties for IHT purposes:
 Spouse- no limit if both are UK domiciled
 Charity trust (reduced IHT of 36% is applicable- to be discussed in relief section)
 National institution e.g. museums, national galleries, NP organizations
 Political parties
- at least two members are elected to the House of Commons
- OR one member was elected and at least 150,000 votes were casted for the
party
 Agriculture Property Relief will be available (to be studied under reliefs section)
 Business Property Relief will be available (to be studied under reliefs section)

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Death Gift

 Gifts at the time of death are made through a will

 Net assets (total assets – total liabilities) are gifted through nomination in the will to relevant
parties
 Net assets are calculated in the following manner through Death Estate

Assets xxx
Liabilities (xxx)
Reasonable funeral expense (xxx)
Total death estate xxx
Gift on death to exempt
parties (xxx)
Chargeable Death Estate xxx

 Assets
 All assets owned by a person on the death date are valued at Market Value (Probate
value)
 Only amount receivable from life insurance policy will be included in the death estate
and not its market value
 Valuation of shares held, if any, will be done at lower of:
- Quarter- up rate (Quoted price)

Lowest quote + (highest quote - lowest quote)

4

- Average bargain (transaction price)

(Lowest bargain + highest bargain)

2

 Mutual funds units will be valued at the lowest bid price

 All shares and securities are to be taken ‘cum dividend’ (for shares) and ‘cum interest’
(for securities). If the prices are mentioned ex-dividend or ex-interest then the value of
shares/ securities will be calculated in the following manner

Shares Securities
Value using lower of rule xxx Xxx
Next dividend payment xxx
Next interest payment* 80% Xxx
Value to be included in estate xxx Xxx

- 80% of total amount received will be taken because interest is received net of
20% tax from listed companies.

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 Liabilities
 All legal debts are deductible. Legal debts are the ones against which valid consideration
is received or are enforced legally such as outstanding taxes (income and capital)
 Debts related to gambling are not deductible
 Endowment mortgages (loans secured by insurance co.) are not deductible. Repayment
and interest-only mortgages are allowed
 Proceeds received from a life-insurance policy is allowed. MV of that policy is not
allowed

 Reasonable funeral expense is allowed according to the wealth of the person

 Exempt parties are mentioned in the lifetime gift portion

 No A/E and taper relief is given on the death estate

 Death date NRB will be available on the death estate of £325,000 (FY 21/22)
 This NRB will be reduced by any GCTs made in the 7 years prior to death including PET and CLT
 An additional Residence NRB on death estate of £175,000 is available if the following conditions
are met:
 Person dies on or after 6th April 2017 (FY 17/18)
 The chargeable death estate includes their main residence that is inherited by the direct
descendants, e.g. children/ grandchildren
- The condition for main residence is that the deceased person must have lived in
that residence during some time and not necessarily at the time of death
- The value of main residence is taken after deducting any repayment mortgages
or interest-only mortgage secured on that property
- If the main residence is valued at less than the available RNRB, then the RNRB is
reduced to the value of the residence
- If the examiner does not mention main residence, then assume that RNRB is
NOT available.
NOTE: RNRB is NOT available on death tax on lifetime gifts. It is only available on gift made through
death estate at the time of death

 RNRB is applied before the normal NRB for computational purposes

 RNRB will be withdrawn if the main residence is of high value (exceeding £2million)
 Every £1 will be reduced for £2 excess of £2million

 Transfer of Unused NRB/ RNRB

 % of unused NRB of a spouse/ civil partner on his/ her death can be transferred to the
other spouse
 This unused % will gross up the NRB available to the 2nd spouse on his/her death
 Total NRB (own + transferred) will be available for the 2nd spouse for all death taxes i.e.
death tax on lifetime tax and death tax on death estate
 % of unused RNRB can also be transferred provided the conditions of RNRB are
satisfied

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 Total RNRB (own + transferred) will only be available on transfer of property to direct
descendants through death estate
 For the purposes of RNRB, if only the 2nd spouse dies after 6th April 2017 then 100%
RNRB of previous spouse will be available for transfer
 Election to transfer the NRB has to be made within 2 years of the death of the first
donor

 CGT and IHT interaction

Always remember that ATX is about planning and both the capital taxes are inter-linked. One MUST
know what will be the impact of a gift in both CGT and IHT. CGT has NO death implications. Following
table further explains the impact

 Impact of lifetime transfers

Capital Gains Tax Inheritance Tax

 No CGT on exempt assets  No such assets in IHT
 Chargeable gain/ allowable loss arises on  Value of gift is derived by diminution in
the difference between cost and DP (MV value concept
of asset gifted)
 Gift relief is available:
-when a gift of business asset is made
-where a gift is immediately chargeable to
IHT (i.e. CLT)
 If an asset is gifted such that gift relief is
availed on the gift (CGT) and IHT is paid in
relation to that gift then the IHT paid is
allowed as a deduction when calculating
the chargeable gain arising on the disposal
of that asset by the donee.

 NO CGT is applicable on the date of death

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Administration of IHT

 IHT is payable in the following manner on the lifetime gifts:

Transfer Due date

CLT made between 6th April and 30th 30th April in the following year
September
CLT made between 1st October and 5th April 6 months after the end of the month in which
the transfer is made
PET chargeable as a result of death 6 months after the month of death
Additional IHT on CLT 6 months after the month of death

 IHT is payable in the following manner on Death Estate

Transfer Due date

Death Estate Earlier of:
 6 months after the month of death
 On delivery of estate to HMRC

Any late payment (counted after 6 months

from month of death) will be charged for
interest.

If donor uses the word “residue” for a donee in

their will for the transfer of estate then the tax
on estate will be paid by that done.
Exempt parties and parties allotted specific
legacy will not bear any burden of tax

 Installment of IHT payments

 IHT can be paid on the following assets in 10 equal installments starting from the normal
due date (subject to donee holding the asset otherwise whole of the outstanding
installments will become payable if the donee sells the asset)
- Land and building
- Shares and securities of the company where donor had control
- An unincorporated business or an interest in an unincorporated business

 These aforementioned assets MUST be transferred on either of the three events:

- Through death estate
- Lifetime gifts made within 7 years of the date of death such that donee pays tax
on that gift
 Any late payment of installment will be subject to late payment interest of 3%

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Value Added Tax (VAT)

VAT is an indirect tax:

 Collected by taxable persons
- A person/ company that is or should be registered for VAT because he is making taxable
supplies
 Making taxable supplies in the ordinary course of their business
- Any supply that is not exempt from VAT or out of scope of VAT. It includes most of the sale
of goods/ services including purchase drawings from the business
 Charged on consumer spending
 Suffered by final consumers

VAT works in the following manner:

Input and output VAT

 Input VAT is paid by businesses on their purchases and imports of goods and services
 Input VAT is reclaimable from HMRC
 Registered businesses charge output VAT on the supply of taxable goods and services. This
includes gifts of goods but not gifts of services (later in the notes)
 Output VAT is payable to HMRC
 Every month or quarter the input and output VAT is netted off and paid to or recovered from
HMRC

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Types of Supplies

Exempt Supplies Taxable Supplies

 No output VAT charged to
consumers
 No recovery of input VAT
 Businesses making exempt
supplies only, cannot register for
VAT
 Exempt supplies include:
- Financial services including
insurance
- Postal services
- Education
- Land (discussed later on)
- Services of doctors
- Entry fee of sports
competitions

Zero-rated Supplies
Standard-rated Supplies  Output VAT charged at 0%
 Output VAT charged at 20%  Input VAT can be recovered by a
 Input VAT can be recovered by a business on purchases
business on purchases  Supplies include basic necessities
 Supplies include everything other  Non-luxury food
than those listed as exempt or  Books and newspapers
zero-rated  Children’s clothing
 Medicines
 Public transport except taxis
 Exports outside UK (overseas
aspect)
 Gifts to charities
 Construction of residential and
charitable use building (not
reconstruction)

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VAT on Sale of business

Business ceased and then sold: Business sold as a going concern:

- Deregistration of VAT issues will - No VAT will be charged if:

o Purchaser is registered for/
trigger (later in notes)
liable to be registered for VAT
- VAT will be applied on the sale
o There is no significant break in
proceeds of taxable supplies
the trading
o Same trade is conducted before
and after sale

Further points to consider:

 Output VAT is charged on the price quoted by the business after any trade discount and cash
discount (if availed by the customer)
 Output VAT is charged on the replacement cost of any purchase drawings made by a sole
trader/ partner from the business
 Output VAT on gifts of inventory or capital assets will be charged (at replacement cost) except
when the gift to same person is less than £50 in a year
 No output VAT will be charged on the trade samples or service awards/ gifts to customers or
employees
 Output VAT originally paid on the invoice can be recovered from HMRC IF the receivable goes
bad (bad debt) and the following conditions are met:
 Receivable must have been written off from the accounts
 At least 6 months have passed from the payment due date
 VAT can be recovered through adding the amount to input VAT within 4.5 years of the
payment being due
 Input VAT is recoverable on the purchase of capital assets as well as revenue expenditure except
for:
 Business entertainment to UK customers, suppliers and any other stakeholders except
for staff and overseas customers
 Purchased cars which have an element of private use
 Leased cars, only 50% VAT can be recovered
 Complete input VAT can be recovered on the running expenses of car such as fuel and repair
(even if there is private use)

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 In case of fuel costs borne by business on behalf of employee/ trader/ partner

If employee/owner reimburses full cost of If employee/owner does not reimburse the

fuel to the business then output VAT will be employer then output VAT will be paid by
paid by the business on the amount the business based on a scale charge (will
reimbursed be provided in the exam)

 Output can be avoided if:

 No private fuel is provided by the business
 No input VAT is recovered by the business on the fuel purchased and provided to the
stakeholders

VAT registration and accounting schemes shall be done from the book. Below are the screenshots

VAT registration

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The Tax Point

 It is important to determine the TP of a transaction in order to identify which VAT quarter does
the transaction relate to
 Basic Tax Point
- Goods: BTP arises at the earliest of when the goods are made available to the customer,
when they are collected or delivered
- Services: When they are performed

 Consideration of Actual Tax Point (ATP) must also be made and will over ride the BTP if its not
equal

ATP

Identify BTP

On or before BTP,
- Is a tax invoice been issued, OR
- Payment been received?

Yes No

Decision: Has the tax invoice been issued

ATP = the earlier date within 14 days of BTP

No Yes

Decision: Decision:
ATP= BTP ATP = invoice date

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Accounting Schemes

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VAT records

 All business records required to make the VAT return must be kept for at least 6 years
 The records shall be:
- Copies of VAT invoices
- All records of Output VAT
- All records of input VAT and evidence supporting it
- VAT account

VAT invoices:
VAT invoice should be issued within 30 days of the date of taxable supply.

 A VAT invoice must be issued when a standard rated supply is made to a VAT registered
business.
 No invoice is required if the supply is exempt, zero-rated or to a non-VAT registered customer
 No invoice is required for payments of up to £25 including VAT which are for telephone calls, or
car park fees, or made through cash operated machines. In such cases, input tax can be claimed
without a VAT invoice.

VAT invoice must include following details:

(a) The supplier's name, address and registration number
(b) The date of issue, the tax point and an invoice number
(c) The name and address of the customer
(d) A description of the goods or services supplied, giving for each description the quantity, the unit
price, the rate of VAT and the VAT exclusive amount
(e) The rate of any cash discount
(f) The total invoice price excluding VAT (with separate totals for zero-rated and exempt supplies)
(g) Each VAT rate applicable and the total amount of VAT

If an invoice is issued, and a change in price then alters the VAT due, a credit note or debit note to adjust
the VAT must be issued. The invoice can be sent electronically provided the customer agrees.

Less Detailed VAT invoices

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:
(a) The supplier's name, address and registration number
(b) The date of the supply
(c) A description of the goods or services supplied
(d) The rate of VAT chargeable
(e) The total amount chargeable including VAT

Zero-rated and exempt supplies must not be included in less detailed invoices.

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Overseas VAT

Transaction outside UK

Export of Goods Import of Goods

Treated as zero- rated Reverse charge of VAT i.e. shown as
supply output VAT at time of import and shown
as input VAT on the same return
therefore cancels the affect

Services

If services are provided by If UK business receives

UK firm to overseas non- serviced from abroad then
business customers then reverse charge will apply and
output VAT will be paid in VAT will be paid in UK (as
UK at 20% discussed above)

Services provided to
business customers is out of
scope

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VAT Administration

 All businesses must file the VAT return online and pay the VAT online within 1 month and 7 days
of the end of the quarter
 Any VAT refund shall be made within 10 days by HMRC
 If a VAT return is filed late or a payment is made late then a default surcharge is applied in the
following manner:

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Default interest for any late payments will be charged in the same way as mentioned in self-
administration

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