AAT Level 4 - Personal Tax - PSTX

Purpose of taxation

1. Raise revenue for government expenditure; and

2. Redistribution of wealth.

3. Stabilise economy.

4. Influence behaviour.

Tax base

Value of income or assets on which tax imposed.

Tax rate

Percentage applied to tax base to give tax liability.

Tax structures

1. Proportional - rate stays same whatever value of tax base.

2. Regressive - rate is inversely proportional to income, e.g. VAT.

3. Progressive - rate increases as tax base increases, e.g. income tax.

Responsibility

Tax return prepared by tax practitioner but responsibility is with taxpayer, and it should be approved by taxpayer before submitted.

Irregularities

1. Establish facts.

2. Is it trivial?

3. If not trivial, advise client discloses to HMRC.

4. If client refuses, resign, and inform HMRC, but don't give reason.

5. Consider making report to MLRO or NCA.

Tax planning

Reducing tax liability using methods in line with law, and in the way government intended.

Tax avoidance

Reducing tax liability using methods in line with law, but not in the way government intended.

Tax evasion

Reducing tax liability using methods not in line with law.

Fiscal year

6 April one year to 5 April next year.

Residence

1. Test of where taxpayer is living in tax year.

2. Resident of UK if spend 183+ days.

3. Individuals resident in UK for a tax year are liable to UK income tax on worldwide income.

4. Non-UK residents only liable to UK income tax on income arising in UK.

Domicile

A more permanent test of taxpayers normal home, often determined by where they will return to be buried.

Employed or self-employed

1. Employee has contract of services.

2. Self-employed person has contract for services.

Earnings from employment

1. Money earnings - salaries.

2. Taxable benefits - provided by employer, e.g. company car.

Employment income is taxed in fiscal year according to...

Earlier of date of payment, and date entitlement arises.

Assessable benefits, or benefits in kind

Income assessed under employment income = gross income received in tax year, plus assessable value of benefits received, less allowable deductions.

Benefits, general approach

1. Calculate the benefit using relevant method (cash cost or other).

2. Pro rata if not provided for whole tax year.

3. Deduct contributions employee made towards benefit, with exception of fuel benefit.

Fuel benefit

1. If receive fuel for private journeys in company car, assessable benefit is car scale charge x £22,200.

2. If removed then reinstated, full annual charge assessable.

3. Unlike all other benefits, employee contribution does not reduce taxable amount unless full amount.

Car benefit

1. Company car for private use taxed on % of list price.

2. Covers benefit of not having to buy, tax, insure or repair.

3. Ignore discounts.

4. Add accessories, unless disabled or work use.

5. Capital contributions to £5,000 reduce list price.

6. Maximum scale charge is 37%.

7. Contributions to running costs reduce benefit once calculated.

Van benefit

1. Fixed taxable benefit for use of van.

2. Flat rate fuel benefit.

3. Private use only between home and work is not taxable.

Job related accommodation

Not an assessable benefit

Non-job related accommodation

1. If employer owns, benefit is annual value.

2. If cost > £75,000, add excess > £75,000 x official rate of interest.

3. Include cost of improvements before start of tax year.

4. If employer bought > 6 years before employee moves in, market value replaces cost.

5. If employer rents, benefit is > of rent paid and annual value.

Living expenses

1. Taxable benefit in full.

2. If accommodation is job-related, benefit is maximum of 10% of employee's earnings PLUS other non-accommodation benefits.

Assets made available by employer to employee for private use

1. General rule is market value of asset x 20%.

2. If asset acquired by employee, assessed on greater of:

- market value at acquisition less employee contribution;

- market value at first use less benefits already assessed for use less employee contribution.

Vouchers

Assessable benefit = cost to employer of providing voucher.

Loans

1. Applies to beneficial loans > £10,000 that are interest free or below commercial interest rate.

2. Benefit is average loan, i.e. amount of loan at start and outstanding loan at end x official rate of interest, less interest actually paid x m/12.

3. Any loan written off is always assessable.

Exempt benefits

1. If staff party per head > £150, whole amount taxable.

2. If incidental overnight expenses > £5, whole amount taxable, but can be aggregated.

3. Household costs for employees working from home to £4 per week. More with evidence.

4. Occasional taxis > 9pm.

Allowable deductions from employment income

1. Contributions to occupational pension scheme deducted directly from salary.

2. GAYE.

3. Qualifying travel expenses, i.e. for business travel or to temporary place of work < 24 months.

4. Allowable mileage rates.

5. Entertaining and subsistence.

6. Professional fees and subscriptions.

Tax planning and employment income

1. Take advantage of exempt benefits and allowable deductions.

2. Don't contribute more than £5,000 to list price of car.

3. Choose cars with lower CO2 emissions.

4. Repay all private fuel or none.

5. Increase benefits in kind as no National Insurance payable, rather than salary.

Property income is assessed on...

An accruals basis.

Allowable deductions from property income

1. Incidental expenses.

2. Interest on loan to buy property, but not capital repayments.

3. Repairs if not improvements.

4. Rates and council tax.

5. Insurance and management expenses.

6. Irrecoverable rents.

7. Replacement furniture relief.

Replacement furniture relief

1. No relief for initial purchase.

2. For like for replacement.

3. Reduced by proceeds on sale of furniture replaced.

Not allowable deductions from property income

1. Improvements.

2. Renovations.

3. Depreciation.

Property income computation

Total property income, adding together all income from all properties less total allowable expenditure = assessable property income.

Property losses

Are carried forward and offset against first available profits.

Tax planning and property income

1. Partner paying tax at lowest rate should be property owner.

2. Partner with little or no income should receive sufficient property income to offset personal allowance against it.

Savings income

1. Basis of assessment is interest received in tax year. Interest accrued but not received is not included.

2. From 6 April 2016, all interest received is gross.

Tax rates on savings income

1. Starting rate of 0% for savings income up to £5,000. ONLY applies if taxable non-savings income < £5,000.

2. Savings allowance of 0% to first £1,000 savings for basic rate and first £500 savings for higher rate. Additional rate taxpayers do not benefit.

Dividend income

1. Income received on investment made in shares.

2. From 6 April 2016, dividends are received gross.

Tax rates on dividend income

Dividend nil rate of 0% for first £5,000 of dividend income for ALL taxpayers regardless of whether basic, higher or additional rate.

Tax free investments not included in income tax computation

1. Income from National Savings & Investments Certificates.

2. Up to £15,240 in an ISA.

Other exempt income

1. Statutory redundancy.

2. Winnings and prizes.

3. Scholarships and education grants.

4. Child benefit and some other benefits.

5. Interest on damages for personal injuries.

6. LA grant.

7. Interest on income tax repayments.

8. Interest on SAYE sharesave accounts.

Tax planning and savings income

1. Invest maximum yearly amount in ISA.

2. Invest in other tax free investments.

3. Partner paying tax at lowest rate should receive interest or dividends.

Proforma for income tax computation

1. Income separated and totalled in 3 columns: non-savings, savings, and dividends.

2. Less deductible payments gives net income.

3. Less personal allowance gives taxable income.

4. Tax rates applied to cumulative income in order, to give tax liability.

5. Less tax deducted at source gives income tax payable.

Income brought into computation gross

All income brought into proforma gross of any tax deducted at source, e.g. PAYE.

Personal allowance

1. Personal allowance is deducted in specific order, either in full or to bring income down to zero. The rest is carried over to next category of income.

2. Order is:

- non-savings income

- savings income

- dividend income.

Personal allowance restriction for income > £100,000

1. Personal allowance reduced by £1 for every £2 where adjusted net income > £100,000.

2. Adjusted net income = total income less gross gift aid donations and personal pension contribution.

3. Restriction = 0.5 x adjusted net income - £100,000.

4. Gross up gift aid or pension contribution if necessary, i.e. 100/80.

5. If > £122,000, personal allowance reduced to nil.

Tax planning and personal allowance restriction

Pay enough gift aid or personal pension contribution to bring adjusted net income down to £100,000.

Taxable income

Income after personal allowance deducted.

Tax liability

Tax due to HMRC before tax suffered at source, e.g. PAYE, is deducted.

Tax payable

Tax due to HMRC after tax suffered at source is deducted.

Extension to basic rate band

1. For gift aid donation or personal pension contribution.

3. Calculation is £32,000 + gross donation or contribution.

4. Gross is donation or contribution x 100/80.

Occupational and personal pension schemes

1. Occupation pension scheme - tax relief at source by calculating tax after deduction from salary.

2. Personal pension scheme - tax relief obtained by extending basic rate band.

Maximum contribution to personal pension plan to get tax relief

Greater of £3,600 and 100% of earnings.

National insurance - Class 1 Primary contributions

1. Employer deducts from employee's gross earnings and pays to HMRC.

2. Gross earnings are before allowable deductions such as pension contributions and payroll giving. Include cash equivalent benefits and exclude non-cash benefits.

3. Payable from aged 16 until State Pension age.

National insurance - Class 1 Secondary contributions

1. Paid by employer on gross earnings, which are same as for employee.

2. Payable from aged 16 with no upper age limit.

3. An employment allowance of £3,000 per year, per employer, can be used to reduce class 1 secondary liability.

National insurance - Class 1A contributions

Paid by employer on all taxable benefits provided to employee.

Tax planning - national insurance

1. Employee receives non-cash benefits rather than equivalent payment as salary, because only pays class 1 primary on gross cash earnings.

2. Employer provides exempt benefits rather than taxable benefits, because only pays class 1A on taxable benefits.

Capital gains

1. Separate computation from income tax.

2. Arises when a person disposes of a capital asset previously acquired.

3. For there to be capital gain there must have been a:

- chargeable disposal by a

- chargeable person of a

- chargeable asset.

Chargeable disposal - definition

1. Sale or gift of asset.

2. When asset lost or destroyed.

Chargeable disposal - exemptions

1. Gifts on death, as fall under inheritance tax.

2. Gifts of assets to charities.

3. Gifts to spouse.

Chargeable asset - definition

All assets unless exempt. Typically, land, holiday homes, shares and antiques.

Chargeable asset - exemptions

1. Cars.

2. UK government stock or gilts.

3. Principal private residence.

4. Wasting chattels, life < 50 years.

5. Non-wasting chattels bought and sold for < £6,000.

6. Qualifying corporate bonds.

7. Gambling/lottery wins.

8. Stocks in ISAs.

Capital gains proforma

Gross proceeds,

Less incidental costs of sale,

Equals net proceeds,

Less cost, comprising:

Original purchase price

Enhancement expenditure

Incidental costs

Equals chargeable gain or loss.

Gross proceeds

Sale value, or market value if disposal is a gift.

Incidental costs of sale

Costs necessary for sale, e.g. advertising or auction fees.

Enhancement expenditure

That increases value of asset and is intact at date of disposal.

Chargeable gain

Gain after deducting all allowable expenses from net proceeds.

Annual exempt amount

Amount that can be made during year without paying tax. Use it or lose it.

Taxable gain

Amount subject to capital gains tax, calculated as chargeable gain less annual exempt amount.

Calculating capital gains tax

1. Payable on an arising basis, i.e. where disposal has occurred in tax year.

2. Tax due payable on 31 January after end of tax year.

3. Rate of tax depends if basic rate of higher rate/additional rate taxpayer.

4. 10% on un-utilised element of basic rate band.

5. 20% thereafter.

Losses

1. Where multiple assets sold in same tax year, current year losses offset in full against current year gains.

2. Overall net loss carried forward to offset against future gains.

3. Used only to reduce gain down to annual exempt amount, with remaining loss carried forward.

4. Keep a loss memo.

Part disposal formula

Part disposal cost = original cost x A / A + B, where:

A = market value of part disposed of

B = market value of remainder of asset.

Disposals to connected person

1. Connected persons are direct relatives, i.e. parents, children, siblings and their spouses, or business associates, i.e. partners and their spouses.

2. Disposals to connected persons must be at market value.

3. If loss made, it can only be offset against gains to same connected party.

Disposals to spouse or civil partner

Always deemed to be at no gain or no loss.

Chattels

Tangible moving property.

Wasting chattels, life < 50 years

1. E.g. greyhounds, racehorses, speed boats.

2. Exempt from capital gains.

Non-wasting chattels, cost < £6k, proceeds < £6k

Exempt.

Non-wasting chattels, cost > £6k, proceeds > £6k

Normal CGT disposal.

Non-wasting chattels, cost > £6k, proceeds < £6k

Restrict loss, i.e. proceeds = £6k.

Non-wasting chattels, cost < £6k, proceeds > £6k

Restrict gain, i.e. lower of gain and 5/3 x gross sale proceeds - £6k.

Private residences

1. Principal private residence for full period of ownership = exempt.

2. Never occupied = full CGT.

3. Part occupied = calculate full CGT and deduct PPR relief.

Principal private residence relief

1. Period of occupation / total period of ownership x gain.

2. Where gain not covered by relief, tax rates are 18% and 28%, replacing 10% and 20%.

Deemed occupation - periods always considered

Last 18 months, provided PPR at some point.

Deemed occupation - periods considered if preceded and followed by actual occupation.

1. Employment overseas.

2. Up to 4 years where employed elsewhere in UK.

3. Up to 4 years where self-employed and worked away from home anywhere.

4. Any reason up to 3 years total.

Tax planning - private residence

1. Plan periods of absence so deemed occupation applies.

2. Ensure periods of absence preceded and followed by actual occupation.

3. Sell within 18 months of leaving.

Share disposals - issue

Shares are typically bought in more than one tranche with different costs for each purchase date.

Matching rules for shares - allocate costs in following order

1. Same day acquisitions.

2. Shares acquired in following 30 days.

3. Share pool - average costs of all other shares acquired up to day before disposal.

Share disposals - methodology

1. Separate gain calculation for each separate match.

2. Sale proceeds apportioned pro rata to number of shares matched.

3. Individual gains and losses added together.

Handling bonus issues - free shares to existing shareholders

In share pool, number of shares received is added to number of shares column and nothing is added to cost column.

Handling rights issues - new shares to existing shareholders that they pay for

In share pool, increase number of shares and cost columns.

Inheritance tax (IHT) - definition

Tax on transfer of wealth.

Lifetime tax

Charged on transfer or gift of assets, called chargeable lifetime transfers, throughout lifetime.

Death tax

1. Charged on transfer or gift of assets in 7 year's prior to individual's death.

2. Charged on value of assets listed in death estate and transferred or gifted at time of death.

IHT and domicile

1. If individual is UK domiciled, liable to IHT on worldwide transfer of assets.

2. If individual is not UK domiciled, liable to IHT on transfer of assets located in UK.

Transfers exempt from IHT

1. To spouse or civil partner.

2. To charities and political parties.

Diminution in value principle

Value of transfer is measured as fall in wealth of the donor.

Valuing shares for IHT

Listed or quoted shares valued at lower of:

- quarter up value = lower quoted bid price + 1/4 (higher quoted price - lower quoted price); and

- average marked bargain value = (highest marked bargain + lowest marked bargain) / 2.

Lifetime transfers

1. IHT dealt with in chronological order, meaning that lifetime gifts should be taken into account before transfers at death.

2. Lifetime transfers will be either PETs or CLTs.

Potentially exempt tax

1. Lifetime transfer between individuals.

2. Never any lifetime tax to pay on a PET.

3. PET only becomes chargeable to death tax if donor dies within 7 years of transfer.

4. PET becomes exempt if donor survives 7 years.