UK Residency

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 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK ties (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident

Ties
 Close family in UK (wife, child)
 House in UK used at least 1 night in past year
 In the UK more than in any other country
 In UK more than 90 days in past 2 years
 Doing substantive work in the UK (more than 40 days)

UK Residency and Domicile

• If an individual is UK resident and UK domiciled, he is subject to UK income tax on his
worldwide income.
• If an individual is not UK resident, then he is only subject to UK income tax on his UK
income.
• If an individual is UK resident but not UK domiciled, he is subject to UK income tax on
his worldwide income BUT there are 2 options: Remittance or Arising basis

Arising basis
• The whole Overseas income will be taxed in the UK
• Personal Allowance (PA) will be deducted

Remittance basis
• Only Income remitted back (sent back) to the UK will be taxed
• NO PA will be deducted
• Pay the Remittance Basis Charge (RBC)

RBC
£0 if UK resident for <7 of previous 9 tax years
£30,000 if UK resident for >=7 of previous 9 tax years
£60,000 if UK resident for >=12 of previous 14 tax years
If unremitted overseas income (Income that stays abroad) is <=£2,000 - the remittance
basis will apply automatically, there will be no RBC
If unremitted overseas income >£2,000 - there are two options - Remittance or Arising
basis (Explained above)

Income Tax From Employment Income

Salary X
Commission or bonus X
Benefits X
Allowable Deductions (X)
= Total Employment Income X
Less PA (X)
Taxable Income X
Income Tax (20%/40%/45%) X
Allowable deductions:
1. Contributions to an occupational pension scheme. Note that Payments to a personal pension scheme are NOT
allowable deductions.
2. Travel, subsistence and entertaining incurred wholly, exclusively and necessarily in the performance of duties of
employment
3. Subscription to a professional body (e.g.) ACCA. Note that payments for gym memberships are NOT allowable
deductions.
4. Deficit on a mileage allowance
5. Donations to charity. Note that Donations to political parties are NOT allowable deductions.
6. Capital allowances are available for plant and machinery provided by an employee for use in his duties

Benefits
Employees pay Income Tax (I.T) (Taxable Benefit x I.T rates 20%/40%/45%) , NO NIC
Employers pay NIC Class 1A (15.05%)

Benefits are Time Apportioned - If a benefit is available for only few months in the tax
year e.g. 8 months, so pay the I.T. on it for only e.g. 8 months (Benefit x I.T rate x 8/12
months)

Mileage allowance
This arises when an employee uses their own car on employer’s business. The information below is provided in the
exam:
Authorised Mileage Allowance: Cars
Up to 10,000 miles 45p
Over 10,000 miles 25p
• Anything below the allowance will be deductible
• You have to pay I.T and NIC Class 1 (Employee + Employer) on Anything above the Allowance. This is because, this is
cash received by the employee, not a benefit.

Use benefit
Employer lends an asset to employee for private use e.g. flat rent paid, computer, motorcycle

Assessable Benefit: 20% * market value * x/12 X

Less: Rent paid to employer to use asset (X)
X

Gift Benefit
If the employer decides to give the asset as a gift that was originally for use benefit. The employee will need to pay
income tax (I.T.) on the money value of gift benefit. Money value of the gift is the higher of the market value at date
of the gift and:

Original Market Value X

Less use benefit over the years (X)
X

Living accommodation benefit

If an employer provides an employee with a home to live in, without the home being necessary for the employee to
do his or her job, the employee will have to pay income tax on a living accommodation benefit.

• If the employer owns the home, then the home’s Annual Value will be used.
• If the employer is renting the home, then the higher of the Annual Value and Rent Paid by the employer will be
used.
• The amount paid by the employee to the employer will be deducted to give the living accommodation benefit.
Annual value x I.T. rate (20%/40%/45%) = I.T. on the Living accommodation benefit
Rent Paid x I.T. rate (20%/40%/45%) = I.T. on the Living accommodation benefit

Additional benefit
There is an additional benefit that can arise if the employer owns the home and it cost the
employer more than £75,000 when he purchased it.
The Additional benefit is ADDED to the Living accommodation benefit (above).
How to calculate the money value of the additional benefit?
Did the employer buy the home more than 6 years before he gave it to the employee to
use?
1. No
(Cost - £75,000) * Official rate of interest (2.00% for 22/23) = Additional benefit
Note
The Cost will include the actual cost of the home plus any amount spent on extending/
enhancing the home.
2. Yes
(Market value - £75,000) * Official rate of interest = Additional benefit

Motor cars
If an employer gives an employee a motor car to use for business and private purposes
• (List price - capital contribution) * % = Car benefit
• The list price can be reduced by a maximum of £5,000 - even if the employee has contributed
more than this, it will only be reduced by £5,000.
• Deduct the employee’s Contribution towards the running costs from the benefit
• If there is no private use of the car there is no taxable benefit
The information below is provided in the exam:
The percentage rates are increased by 4% for diesel cars. (This 4% surcharge is for diesel cars which do not meet the
real driving emissions 2 (RDE2) standard). Company diesel cars meeting the RDE2 standard are treated as if they were
petrol cars. The percentage rates are increased by 4% for diesel cars which do not meet the standard, but
not beyond the maximum percentage rate of 37%.

Fuel provided for private use

Multiply £25,300 by the percentage used for calculating fuel benefit

Beneficial Loan Benefit

This benefit arises when an employer gives an employee a loan at an interest rate that is cheaper than the official
interest rate (2.00% for 22/23). Carefully note – if the loan is £10,000 or less, no beneficial loan benefit will arise at
all. If the loan is above £10,000 – then the full benefit will arise.

Money Value of the Loan Benefit X

Less Interest Actually Paid by Employee (X)
Beneficial Loan Benefit X

Exempt Benefits
• Employees pay NO I.T and NO NIC
• Employers pay NO NIC

Examples:
• One mobile telephone
• Parking space at or near an employee’s work
• Spent time overseas on business - Payments for private incidental expenses (e.g. telephone calls) are exempt up to
£10 per night when spent outside the UK. Note that the equivalent UK allowance is only £5 per night
• The use of a company gym
• The provision of meals in a staff canteen
• Payments for home working are exempt up to £6 per week
• The provision of a place in a workplace nursery
• A non-cash long-service award (e.g. a watch) - if it is for a period of service of at least 20 years, and the cost of the
award does not exceed £50 per year of service
• The payment of medical costs of up to £500 - e.g. an employee had been away from work for 2 months due to an
injury, and the recommended medical treatment was to assist her return to work
• Relocation cost of moving house - £8,000 is exempt

Taxable Benefits
• Employees pay I.T. (Taxable Benefit x I.T rates 20%/40%/45%) and NO NIC
• Employers pay Class 1A NIC
Examples:
• Use of the second mobile telephone
• If a company provides an employee with a leased motorcycle for travelling from home to work

Cash Reimbursement
• Employees pay I.T. (Cash Received x I.T rates 20%/40%/45%) and Class 1 Employee NIC
• Employers pay Class 1 Employer NIC

Examples:
• If a Company reimburse an employee for the cost of driving his own car for business purposes
• The Cash compensation in respect of sale of the house in short notice at low price
Assessable profits on commencement
Step 1: The first tax year (TY1) - From the date the trade starts to the next 5 April.

Step 2: The second tax year (TY2) - Does the accounting date fall in Tax Y2?
• IF YES = How long is this accounting period?
If less than 12 months long = Calculate profits for the first 12 months (Start date + 12 months)
If more than 12 months long = Calculate profits for the 12 months until the Y/E in Y2 (Y/E date - 12 months)
• IF NO = Assess the actual profits in tax year 2
i.e 6 April to 5 April

Step 3: The third tax year (TY3)

• Use a current 12 months accounting period

Opening years’ relief

If a loss is made within the first 4 tax years of trading, then the loss can be relieved against
total income of the individual for the previous 36 months on a FIFO basis.

Assessable profits on cessation

Calculate a Balancing Charge or a Balancing Allowance
The Balancing charge is ADDED to the Profit
The Balancing Allowance is DEDUCTED

e.g. TWDV = 0 TWDV = £100

Market price is £100 Market price is £50

Balancing charge = £100 Balancing allowance =£100 - £50 = £50

Step by step:
1) Calculate the profit: Profit + Balancing charge (or - Balancing allowance) - Overlap profit
2) Deduct the PA £12,570
3) Calculate the Income tax - Check whether you should use 20% or 40% income tax rates
4) Calculate the NIC - sole trader Class 4 + 2 (watch out how many months you use for the calculation)

Trading Loss on cessation

You get the relief on the Terminal Loss (NOT the Trading Loss = Final loss in the final period + Overlap profit)

Terminal loss = loss in the final 12 months of trading

06/04 – date of cessation X
12 months before date of cessation - 05/04 before date of cessation (If this is a profit, ignore it.) X
Plus: any overlap profits X
Terminal loss that relief can be claimed for X

Terminal Loss can be offset against your Current Trading profit and the 3 previous tax years on a LIFO basis.

Trading Loss relief

Trading losses can be:
1. Used against Current year total income PLUS Capital gains
2. Carried back 12 months and used against Total income PLUS Capital gains
3. Carried forward against Trading income of future years
Note:
• You can choose whether you will use the Trading loss against your Total income
• But if you do so, you have to use the loss in FULL. So therefore, you might waste your
PA (£12,570)
• After you use Total Income of the year, then you can go to the Capital Gain of the year
(But you don’t need to) - if the Net Capital gain is less than £12,300 (annual exemption)
then don’t use the loss against your Capital gain to save the Annual exemption

Other Income restriction

Other income (is any other income than a Trading income) such as:
• Property income
• Interest income
• Employment income

Cap on Income Tax Reliefs – Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income

Capital allowances

Special Rate Pool

1. Integral features of a building, For example, electrical, thermal, cooling systems.
2. Long life assets - assets, when new, with an expected economic working life of 25 years or more when
total expenditure based on a 12-month accounting period exceeds £100,000

Annual investment allowance (AIA)

The annual investment allowance for the tax year is £1,000,000. This is given to an individual for a 12 month period
and is time apportioned if the period is below 12 months. (in the exam … CA x X/12, where X is a number of months)
The A.I.A cannot be given to motor cars purchased in the tax year.

First year allowances (FYA)

These are given for motor cars which have zero CO2 emissions. This is a 100% allowance on the cost of the car and it
is given in the period of acquisition. The F.Y.A. is not time apportioned and not given to second hand cars.

Enhanced capital allowances for companies

• 130% FYA is given for the purchase of main pool assets, in the year of purchase.
• 50% FYA is given for the purchase of special rate pool assets, in the year of purchase.
• Therefore, AIA should not be used for the purchase of main pool assets, as they will
already receive the 130% FYA.
• The AIA should be used for the purchase of special rate pool assets and then the 50%
FYA should be given for any amount exceeding the AIA.

Capital allowances for motor cars

• If a car has zero CO2 emissions, then the FYA is given
• For cars with a CO2 emission of <= 50g/km, an 18% W.D.A. (main pool assets).
• For cars with a CO2 emission of > 50g/km, a 6% W.D.A. (special rate pool assets).

Assets with private use

Companies do not have assets used privately. Therefore, the capital allowances given are not reduced by the % of
private usage by an employee of a company.

A Sole trader - If an asset is used privately by the owner of the business, the capital allowance given must
be reduced by the % of private usage. If an asset is used privately by an employee of the business, the capital
allowance given is not reduced by the % of private usage.

Final year of trading

- In the final year of trading, the A.I.A., W.D.A., F.Y.A. are not given. Instead, balancing allowances and balancing
charges are computed on each pool.

Structural and Buildings Allowance

- Available for structure / building purchased for use in the trade or unused structure / building renovated for use in
the trade. For example, offices, warehouses, factories.
- The cost of land does not qualify for the SBA.
- The allowance is 3% per annum for 33 years and 4 months.
- This allowance will be given from the date that the asset is brought into use in the trade, not for the entire period in
which it was purchased.
- If the structure / building is sold, there is no balancing allowance or balancing charge, the 3% allowance will
continue to be given for the remaining period out of 33 years and 4 months. However, the allowances that have been
given will be added to the sale proceeds when calculating the capital gain / capital loss.

Short life assets

- are main pool assets that have an expected life of 8 years or less.

Disposal of the assets

Use LOWER OF
1. Proceeds
2. Original cost
When an item of P&M is sold - the lower of the sale proceeds received or the original cost of the asset is deducted
from the written down value of the relevant pool.
Example
Written down value = £100
Sale proceeds received = £120
Original cost of the asset = £80
Then £80 will be deducted from the pool to give a balancing allowance of £20.

Partnerships and limited liability partnerships

Profit to be shared = Tax adjusted profit - Capital Allowances (only business use %) - Salary - Interest on capital

Share incentive plans - (Employers give shares to employees)

Income tax - when you receive them
Pay No income tax or NIC, (If you hold the shares for more than 5 years)
Capital gains tax (CGT) - when you sell them
- when you take the shares out (if you sell them immediately), there is no CGT because, the
cost = market value.
- The cost for the person withdrawing becomes the market value on the date when they
withdrew, so if they sell on that date, then they’ll get market value - so no gain
- if you sell them at a later date, then there will be CGT because the market value would
increase.
For example:
Today I withdraw at a market value of 50 - this is also my base cost, If I sell today I will only
get 50 (market value) - so no gain
- if I sell in 1 year, I will get 60, so capital gain is 60-50=10 and there will be CGT

Conditions:
• Shares must be offered to all employees who have been working in the company for >=
18 months (It can NOT be selective)
• Maximum value of shares that the employer can give to the employee each tax year
cannot exceed £3,600.
• Shares must be held for 5 years.

Share options
A share option is an offer to an employee of a right to purchase shares at a future date at a
pre-determined fixed price which is set at the time the offer is made.

Types:
1. Company share option plan (CSOP)
2. Enterprise management incentive share option scheme (EMIs)
3. Save As You Earn (SAYE)

Income tax Implications:

On Grant:
Pay NO income tax or NIC
On Exercise:
Pay IT If: Market value @ Grant date > Exercise price, then the difference will be a taxable
benefit.

When you sell the shares

Pay CGT: (Market value @ sale date - Market value @ grant date) x CGT tax rate
REMEMBER: When you sell shares, the Entrepreneur relief is available (Tax @10%) if:
1. the individual has 5% shareholding
2. the individual is also an employee of the company for 24 months prior to the disposal. This Does NOT apply to EMI,
there are different conditions (see below)

1) Company share option plan (CSOP)

This scheme can be available to some employees only (can be selective) Max. £30,000 options in issue per employee
in a tax year.

2) Enterprise management incentive scheme

This scheme can be available to some employees only (can be selective)
When you sell the share, the Entrepreneur relief is available (Tax @10%) if:
- the option was granted at least 2 year before the date of disposal
- the individual has worked for the company for at least 2 year prior to the date of disposal

Conditions that the company needs to satisfy:

1. Gross assets must be <= £30 million
2. Must have <= 250 employees
3. Maximum value of share options issued must not exceed £3,000,000
Conditions that the employee needs to satisfy
1. Employees must work for at least 25 hours per week
2. Employee must own less than 30% of the shares in the company
3. Maximum value of share options per employee £250,000

3) SAYE scheme
• Each employee pays a minimum of £5 per month and a maximum of £500 per month into a SAYE scheme, for a
period of 3 or 5 years.
• Interest on the scheme is exempt from income tax.
• At the end of the scheme the money can be used to exercise the share options or the employee may just withdraw
the money on their own.

Conditions
1) The amount saved must be > £5 per month but < £500 per month
2) The savings contract must last for 3 or 5 years.
3) The scheme must be available to all employees who have worked for a specified
qualifying period (which cannot exceed five years).
4) The exercise price must be >80% of the shares’ market value @ grant date

Lump sum receipts (Redundancy package)

Exemption: £30,000 - statutory redundancy/ex gratia/compensation of loss of office - NO I.T or NIC
If you receive > £30,000 e.g.:
- ex gratia/benefits (e.g. leased car) - pay I.T and Class 1 A NIC (paid by employer)
- payment in Lieu of notice - if contractual - Pay I.T. and Class 1 NIC (employee and employer)
- payment in Lieu of notice - if non contractual and not customary of employer, any amount given that would equal to
normal pay given in notice period - Pay I.T. and Class 1 NIC (employee and employer), anything in excess of this
amount can fall within the £30,000 of qualifying expenditure, if excess - Pay I.T. and Class 1 A NIC (paid by employer).

The Corporation Tax deductions in Respect of the Redundancy package:

- statutory redundancy
- ex gratia payments
- any payments that the company makes in respect of the employee are deductible
- any NIC also paid by the company in respect of these payments (Class 1 & Class 1a)
- leased car - if CO2 emissions are > 50g then only 85% of expense will be deductible

Overseas traveling and Exempt benefit

NO I.T. and NO NIC
- Travelling costs to or from the UK at the beginning and end of employment
- Travel costs both within the UK and outside the UK, for a spouse and children to visit the employee working abroad
are allowable provided:
a) The employer bears the cost
b) The employee has worked overseas for at least 60 continuous days
Up to two return trips are allowable each year.
- An employee working outside of the UK can make any number of return trips to the UK without incurring a taxable
benefit when the cost is borne by the employer.
The trips to the UK must be wholly and exclusively for employment purposes, if they are not, then this will be a
taxable benefit.
- Up to £10 per night is allowable where an employer reimburses an employee for personal incidental expenses when
they are on a business trip abroad, for example, for telephone calls and laundry expenses.
Personal Service Companies
- an employee forms a limited company (a personal service company) and then hires out his or her services in the
name of the company. This would allow the individual to get the tax and national insurance advantages that are
available to a company but not an individual.

Conditions:
1. The company provides services to the client
2. The services are carried out by the individual
3. The individual must own >=5% of the share capital in the intermediary company

Services provided via a PSC to a small organisation

PSC will determine whether or not IR35 rules apply
If yes, calculate deemed salary and pay IT and Class 1 NIC on it

Calculation of the deemed salary:

Income in respect of relevant engagements £A
Less: Statutory deduction (5% × £A) (X)
NICs paid by employer (Class 1 Secondary) (X)
Pension contributions (X)
Salary paid (X)
Deemed salary including employer’s NICs £B
Less: Employer’s NICs (£B × 15.05/115.05) (X)
Deemed salary £C

Ignore:
- Any dividends paid by personal service company
- Costs of administering the company.

Services provided via a PSC to a medium or large sized organisation

- Client is responsible for determining the status of the individual
If IR35 rules apply, client will calculate and pay the income tax and NIC on the deemed direct payment (DDP).

Payment in respect of services provided(Net of VAT) X

Less: Direct cost of materials incurred by the PSC (X)
Less: Deductible employee expenses incurred by PSC (X)
DDP X

Change an accounting date

Conditions
1. The change of accounting date must be notified to HMRC by the 31/01 following the tax year in which the change
was made.
2. The first accounts to the new accounting date must not exceed 18 months in length.
3. A change of accounting date must not have occurred within the previous 5 years.

Calculation:
Profit - Overlap profit (for the number of months that will make the taxable accounting
period 12 months)
For example, if the new period is 13 months, then you can deduct 1 month of overlap
profit.

Annual investment allowance

The AIA must be split between related companies. Companies owned by the same individual will be regarded as
related where they are:
a) Engaged in the same activities or
b) Share the same premises
This could be the case if an individual runs two companies from home, the AIA will be split between the two
companies.

Income tax on property business profits

You pay Income tax on:
1. Rent received/receivable (when you let something out - Rental income)
2. Premium received on the grant of a short lease

2 ways to calculate Property business profits:

1. Cash basis (if Property income < £150,000) - All cash received/paid in the tax year
1. Accrual basis (if Property income > £150,000) - All income + expense relating to the tax year (doesn’t matter
whether the cash was received /paid or not in this tax year)

Proforma:
Rent received/receivable in the tax year X
Plus: Income element of a short lease (See below) X
Less: Allowable expenses (X)
Property business profit/loss X/(X)

Allowable expenses:
To be allowable, an expense must have been incurred wholly and exclusively in connection with the business, for
example:
1. Insurance
2. Agent’s fees
3. Other management expenses
e.g. cleaning expenses
4. Repairs - however capital expenditure to improve the property are not allowed.
e.g. Building a garage is not allowable
5. Decorating
6. Impairment losses e.g. A tenant left owing 1 month’s rent which you were unable to recover.
7. Advertising costs
8. Cost of replacing windows, doors and boilers
9. Interest on a loan to purchase a non-residential property
10. AMAP - If a car is used and motor expenses are incurred because of the property, then if the cash basis is used,
the motor expenses are not allowable, the AMAP will be used.

Property finance cost restriction

For loans taken to purchase or repair residential properties, there is a finance cost restriction.
1. No allowable cost for property income
2. Get a tax credit of (100% x 20% x finance cost) - this is deducted from Tax liability

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

Premiums granted for short leases (less than 50 years)

Landlords pay tax on the Income Element:
• Capital element: Premium received * ((number of years of lease - 1) * 2%)
• Income element: Income Element = Premium received - Capital element

Tenants (Traders) can deduct:

• Trading profit deduction - Income element (calculated above) / number of years of lease
• Rent paid
Rent a room relief
- is available if you let furnished rooms out in your main residence.The relief must be claimed 22 months after the
end of the tax year
Choose the lower one of:
Method 1:
Gross rent X
Less: Rent a room relief (£7,500)
Property income X

Method 2:
Gross rent X
Less: Allowable expenses (X)
Property income X

Furnished holiday lettings (FHL)

1. The accommodation must be available for letting for at least 210 days in the tax year.
2. The accommodation must actually be let for 105 days in the tax year.
3. The accommodation must be let on a commercial basis.
4. There must be no more than 155 days of longer term occupation in the tax year.
5. Longer term occupation occurs where there is a continuous period of occupation by the same person for more
than 31 days.

Relief for property losses

Relief is only given against future Property Income
FHL Loss can be used against FHL Profit only
You can’t mix FHL with UFHL Profit or loss
Property business losses cannot be carried back to previous accounting periods.

ISA
The overall investment limit is £20,000

Income Tax

Dividend income
This includes dividends received from UK companies. The first £2,000 of dividend income benefits from a 0% rate.
This £2,000 nil rate band is available to all taxpayers, (the basic, higher or additional rate).

Personal allowance
The personal allowance is reduced to Nil if the adjusted net income is £125,140. (£125,140-
£100,000)/2 = £12,570.
Transferable Personal Allowance
20% * (£1,260) = £252 is the maximum tax credit that can be given to the spouse who
is paying tax.

Qualifying loans
REMEMBER:
Interest Payable on the Loans below is deducted from Total Income.
1. Loan to purchase plant and machinery (P&M) which is acquired for the use in the employment of the taxpayer
Illustration: A loan taken out to Purchase a computer to use for employment
2. Loan to purchase P&M for the use in the business of a partnership, in which the taxpayer is a partner. Illustration:
A partner would have taken out a personal loan to purchase a computer for use in the partnership, here interest
payable would be deducted from Total income for 3 tax years only
3. Loan to purchase an interest in a partnership. Illustration: Partner A puts in £20,000 into the partnership bank
account to fund the business. If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the £1,400
payable from his total income.
4. Loan to buy shares in a close company. This is allowable as long as the taxpayer owns at least 5% of the ordinary
share capital or works for the greater part of his time in the management of the company.

National insurance contributions (NICs)

Bonus or Dividends or Benefits?
Employees:
Bonus - pay I.T. and NIC Class 1 Employee
Dividends - pay I.T. and NO NIC
Benefits - pay I.T, NO NIC

Employers:
Bonus - Class 1 Employer
Dividends - Nothing
Benefits - pay NIC Class 1A

Pensions
Exam STYLE
1) Check how much you are allowed to contribute to Pension Scheme. You can contribute the amount which is within
Relevant Earnings: Relevant Earnings are the greater of
• £3,600
and
100% of:
• Trading income (e.g. profits from a business)
• Employment income (e.g. salary)
• Income from furnished holiday lettings (e.g.) rental income from a FHLA (Remember NOT Unfurnished properties)

2) Check how much your Adjusted Income is

• if AI (Adjusted Income) is more than £240,000
For example if the taxpayer has AI of £260,000 - then he will be entitled to (£260,000 - £240,000 = £20,000/2 =
£10,000, A.A. £40,000 - £10,000 = £30,000 - annual allowance available. Therefore, a person with AI of £312,000 or
more, will only be entitled to an annual allowance of £4,000
A.I. (Self employed) = Net Income
A.I. (Employed) = Net income + Employer/Employee contributions to pension
scheme

3) Check how much Annual allowances are available (in the last 3 years)
The information below is provided in the exam:
Is there any Annual Allowance Charge? If you want to contribute more than Annual Allowances are available, then
you will have to pay I.T on the difference. Eg. You want to contribute £80,000 and your Annual Allowance is £50,000,
you will have to pay I.T on £30,000

4) Extend your bands

Remember that you can Extend your bands by the contribution (£80,000) - so £37,700 + £80,000 = £117,700 band
will be taxed by 20%

Transfers between husband and wife or civil partners

- the transfer is @ NO Gain, NO Loss
Example: Husband transferred an investment property (£50,000 cost) to his wife.
The Market value is £100,000.
So the transfer is for £50,000
If the wife wants to sell it:
Selling price £100,000
Cost (£50,000)
AEA (£12,300)
Taxable gain £37,700
Pay CGT: £37,700 x 10% = £3,770
£300 (£38,000 - £37,700) x 20% = £60
 UK Residency and Domicile - CGT
This is the same as per Income Tax
• If an individual is UK resident and UK domiciled, he is subject to UK CGT on his worldwide assets.
• If an individual is not UK resident, then he is subject to UK CGT on disposals of all UK land and buildings (both
residential and non-residential properties).
• If an individual is UK resident but not UK domiciled, he is subject to UK CGT on his worldwide assets BUT there are
2 options: Remittance or Arising basis

Arising basis
• The Overseas gains will be taxed in the UK
• Annual Exemption (AEA £12,300) and DTR will be deducted

Remittance basis
• Only Gains remitted back (sent back) to the UK will be taxed
• NO AEA will be deducted
• Pay the Remittance Basis Charge (RBC)

RBC
£0 if UK resident for <7 of previous 9 tax years
£30,000 if UK resident for >=7 of previous 9 tax years
£60,000 if UK resident for >=12 of previous 14 tax years
If unremitted overseas Gains (Gains that stay abroad) is <=£2,000 - the remittance basis will apply automatically,
there will be no RBC
If unremitted overseas income >£2,000 - there are two options - Remittance or Arising Basis

Non UK residents selling UK residential property

Gain arising after 5/4/2015 is taxable
Tax:
Normal (Default) Method:
Proceeds - (MV @ 5/4/2015 or Cost (if purchased after 5/4/15))

Non UK residents selling UK non-residential property

Normal (Default) Method:
1) Sale proceeds - MV at 5/4/2019
OR
Straight line method:
2) (Sale proceeds - Original cost) x No of months owned after a 5/4/19 / total ownership period {this method requires
an election}

Note:
- Where the UK land/building is used for business purposes, rollover relief may be available. However, the
replacement asset would have to be UK land/buildings (and not, for example, fixed plant and machinery).

Double Tax Relief

- Calculate both taxes (UK and overseas) and then deduct the lower one

Individuals coming to and leaving the UK

Pay UK CGT if:
- the individual leaves the UK for a period of less than 5 years and also
- were UK resident for at least 4 out of the previous 7 tax years
Chargeable Gains For Individuals

Rate 10% - After considering a person's taxable income, any remaining amount falling within the
basic rate band is charged at 10%
Rate 20% - Once the entire basic rate band has been used, then a rate of 20% is applied.
For a residential property only - The same treatment applies as explained above, except that the 10% rate is
replaced with 18% and the 20% rate is replaced with 28%.
Rate 10% - This rate is used for capital gains that qualify for entrepreneurs’ relief (£1,000,000 of
chargeable gains) and investors’ relief (£10,000,000 of chargeable gains)

Connected Persons - CGT

= relatives, business partners, other than a spouse/civil partner
- the transfer is @ Market Value
- capital loss on disposal - only set off against capital gains from disposal to the same
connected person

CGT Paid In Instalments

Normally, CGT should be paid on 31 January following the Tax Year of a Disposal. CGT can be paid in instalments if:
1. The Sales Proceeds received are in instalments themselves and
2. They are received over a period of 18 months
Then pay the CGT in instalments: Over the shorter of
• 8 years
• Period over which the Sales Proceeds are received

Capital Loss Relief

The unrelieved capital losses may be carried forward against their Chargeable gains in the next year
- For current year losses first deduct the loss and then the Annual exemption £12,300
- For capital losses brought forward, deduct the Annual exemption of £12,300 first and then deduct the brought
forward losses

Don’t pay CGT if:

You transfer the assets to your husband or wife or civil partner.

Capital Loss Relief (For Sale Of Unquoted Trading Shares)

Capital losses may be set off against TOTAL INCOME in current and previous year

Capital losses in tax year of death

Capital losses may be carried back and set off against the chargeable gains of the previous 3 years on a LIFO basis.
A part disposal (land)
Cost = Original purchase cost * [A / (A+B)]
Where:
A – Disposal proceeds received (Independent expert valuation)
B – Market value of the remainder of the asset
Calculation:
Proceeds at market value - Costs from above = Chargeable gains
Chargeable gains - Annual exempt amount (£12,300) = Taxable gain
Taxable gain x CGT rate (10%/20%) = Capital Gains Tax (CGT)

Insurance proceed for fully damaged assets

Insurance Proceeds - Original full cost = Chargeable gains
Insurance proceed for partly damaged assets
1) Cost = Original Full cost * [A / (A+B)]
Where:
A – Insurance proceeds received
B – Market value of the asset after the damage
2) Insurance Proceeds - Costs from above = Chargeable gains
3) Chargeable gains - Annual exempt amount (£12,300) = Taxable gain
4) Taxable gain x CGT rate (10%/20%) = Capital Gains Tax (CGT)
Example:
Insurance proceeds £10,000
Painting valued originally £50,000
Painting’s value after the damage £42,000
Calculation:
Cost = £50,000 x [ £10,000 / (£10,000 + £42,000)]
Cost = £9,615
Chargeable gains = £10,000 - £9,615 = £385
Taxable gain = £385 - AEA £385 = £0
Capital Gains Tax (CGT) = £0 x 10% = £0

Negligible Value Claims (No value)

Treat as a Disposal so you realise a Capital Loss and C/F against future Capital Gains
Example:
House cost £10,000.
Fire - House destroyed - NO Value
Calculation:
Sales Proceeds £0 - Cost (£10,000) = Capital Loss £10,000

Entrepreneur's relief / Business Asset Disposal

Relief (CGT 10%)
This rate is used for capital gains for the first £1,000,000 of chargeable gains
Conditions to get the relief:
1. The asset must have been owned for at least 2 years prior to the disposal.
2. The election for the relief must be made by the first anniversary of the 31/01 following the end of the tax year of
the disposal.
Therefore, if the tax year of disposal is 22/23, then the election must be made by 31/01/25.
3. It must be a disposal of a qualifying asset.

Qualifying assets include:

1. The disposal of a whole business run by a sole trader or by partners in a partnership.
The assets must have been used for business purposes
Also, the entire business must be disposed of, if a single trading asset is disposed of it, it will not qualify for the relief.
E.g. ER applies for (10%):
• Goodwill (but see below the exception)
• Freehold office, Business Premises
• Warehouse (but must be used for business purposes)
Exempt (do NOT pay tax on those):
• Inventory stock
• Debtors or Cash
ER does NOT apply for:
• Investment property - is just held for investment, not used in the trade
• If you transfer a business to a Close company (< 5 shareholders) and if the individual is a shareholder in that
company, then E.R is NOT available for Goodwill

2. Individual business assets of the individual’s or partnership’s trading business that has now ceased.
Note the disposal of assets must take place within 3 years of cessation of trade. The difference here is that the entire
business is not being sold, it is being shut down.

3. The disposal of shares in a trading company, where the individual has 5%

shareholding and is also an employee of the company, for 24 months prior to the
disposal. e.g. A shareholder disposed of a 20% shareholding in a company. He had been an employee and owned the
shares for more than 24 months. Things to note:
• a) Gains that qualify for entrepreneur’s relief will take priority in using up the basic
rate band limit first.
Therefore, it is likely that other capital gains will normally fall into the higher band
and pay CGT at 20%.
• b) The annual exemption and relief for losses is NOT automatically given to the
gains which qualify for entrepreneur’s relief.
Therefore 2 separate calculations should be made and gains which do not qualify
should be given the annual exemption and losses carried forward first, in order to
save CGT at a higher rate.

Investors’ Relief
Investors’ relief (IR) extends the benefits of ER to certain investors who do not meet the conditions for ER.
To qualify for investors’ relief, the shares disposed must be:
1. unlisted ordinary shares in a trading company;
2. newly issued shares acquired by subscription;
3. owned for at least 3 years after 17 March 2016
The investor must not be an employee or director of the company whilst owning the shares.
IR is subject to a separate lifetime limit of £10,000,000 of qualifying gains. These gains are taxed at 10%.

Principal private residence relief (Living in Your house)

Simply, don't pay any tax if you sell your house. BUT you will have to if:
1. You didn't live there all the time
2. Used it for business purposes.

Where part of a residence is used exclusively for business purposes throughout the period
of ownership, the gain in relation to that part is NOT covered by relief.
Calculate the Gain:
Capital gain * Period of occupation (Deemed occupation) / Period of ownership
Deemed occupation:
1. Last 9 months - if the property was the individuals main residence at some point
2. Employment Abroad - Any periods during which the individual was required by his employment to live abroad.
The person must come back to live in the house after this period and must live in the house before this period to be
considered to be deemed occupation.
3. Employment Elsewhere in the UK - Any period up to 4 years during which the individual is required to live
elsewhere in the UK due to employment. The person must live in the house before and after this period
4. Up to 3 years for any reason. The person must live in the house before and after this period

Letting relief (Letting your house)

- If an individual lives in a property as their main residence and lets all or part of the residence for residential
purposes, while they are living in the house.
- On the disposal of this property, in addition to claiming PPR relief, the Letting relief is also available to reduce the
capital gain.
This relief is the lower of:
• PPR relief given
• £40,000
• Gain attributable to letting

Rollover relief (The replacement of business assets)

- If you sell your warehouse and buy a new one, you can decrease the Capital gain by deducting the new warehouse's
purchase costs.
- 75% Gains Group is a Single entity and can apply for a Group Rollover Relief
Conditions:
1. The new and old assets must be used for business purpose.
2. You have to replace the asset 12 months prior to the sale or 36 months post the sale.
3. No Rollover relief is available if the amount NOT reinvested exceeds the chargeable
gain.
Qualifying assets:
• Land and buildings
• Fixed plant and Fixed machinery (NOT movable)
Assets that NOT Qualify:
• Movable machinery
• Intangible assets (Patent, Trade marks)

Step by step approach

Step 1 - Calculate the Chargeable gain
Disposal proceed X
The Original Purchase costs (X)
Legal fees (X)
Chargeable gain X

Step 2 - Calculate how much is NOT reinvested

Disposal proceeds - Purchase costs of the NEW asset
How much you get for the OLD asset X
How much you pay for the NEW asset (X)
Amount NOT reinvested X

Step 3 - Check whether the amount NOT reinvested (Step 3) exceeds the
Chargeable gain (Step 2)
No Rollover relief is available if the amount NOT reinvested > the chargeable gain.

Step 4 - Calculate the new Chargeable gain

Disposal proceed X
The Original Purchase costs (X)
Chargeable gain X
Rollover relief (Balancing figure) (X)
The new Chargeable gain (Step 3) X
Step 5 - Calculate Base cost
Basically, the Purchase costs of the NEW asset - the Rollover relief. This base cost will be used as the cost against the
disposal of the new office.

Non Business Use

If an asset is NOT used 100% for Business purposes, then the Gain can NOT fully
be rolled over. What you have to do is: Multiply the Gain by the % of the business use or. Multiply the Gain by the
years of the business purposes / total years of the ownership (e.g. Gain x 3/5years)

Holdover relief
If the new asset purchased is a depreciating asset (an asset with an expected life of 60 years or less)
Examples:
• Leasehold land and buildings
• Fixed plant and machinery

The gain arising on the disposal of the old asset is NOT rolled over and cannot be
deducted from the cost of the new asset. Instead, the gain is to be temporarily frozen or “held over” until it becomes
chargeable on the earliest of the 3 following dates:
1. Date on which the new asset is disposed of.
2. Date on which the new asset ceases to be used in the trade.
3. 10th anniversary of acquisition of the new asset.

Gift Holdover relief

A gift is a chargeable disposal and if the asset is a chargeable asset, it will be subject to
capital gains tax. When a gift relief is claimed, the donor’s gain is deferred. Qualifying assets:
1) Assets used in the trade of donor (where he’s a sole trader).
2) Shares in an unquoted company.
3) Shares in a personal company (must own at least 5% of shares and it’s a trading Co.).

Step by step approach:

1) Calculate gain on donor :
Market Value X
Cost (X)
Chargeable gain X
2) Donor will not have to pay CGT and the gain is deferred. The gain is deducted from the donee’s cost (MV):
Cost to donee(MV) X
Gain (X)
Base cost X

Restrictions:
1) If you’re gifting shares and that company holds investment assets, only the gain that relates to the trading part is
eligible for gift relief :
eg: Chargeable gain on gift of shares = £15,000
trading assets = £500,000
investments = £100,000
£15,000 x £500,000/£600,0000 = £12,500 is eligible for gift relief.
2) If asset is not used in trade for the entire period owned: gain x trading period/ownership period eg: gain on gift of
asset = £12,000
asset was owned for 8 years but used in trade for 4 years
Gain eligible for gift relief = £12,000 x 4/8 = £6,000.
3) Donee must be UK resident.
However, where a non-UK resident gifts UK land/building used in his trade, the done can also be non-UK resident.
Note:
- The relief is available only for individuals, not companies.
- The claim must be made by both the donor and donee and must be made 4 years from the end of the tax year in
which the disposal occurred. eg: gift made in tax year 22/23 - claim must be made by 5 April 2027

Enterprise investment scheme (EIS) - (Income tax)

If a qualifying individual invests in qualifying unquoted EIS/SEIS company shares, the amount invested can be used to
reduce the individual's income tax liability.
Conditions to be a qualifying investor
1. Individual at least 18 years and must subscribe for newly issued shares.
2. Must not own shares before the investment.
3. Must own less than 30% of the shares.
4. Must not be an employee of the company before making the investment, but can become a paid director of the
company after making the investment.

Income tax implications

• In the tax year in which investor subscribes for the shares he can claim EIS relief at 30%.
• This means that he can reduce his income tax liability by: (Amount invested x 30%).
• The maximum relief that can be given is £300,000, therefore if more than £1,000,000 is invested, only £300,000 EIS
relief can be claimed.
• Dividends received by investors from the EIS company are subject to income tax at 8.75%, 33.75% and 39.35%.
• This relief can be claimed in the current or previous tax year.
• If the EIS shares are sold within 3 years of ownership, the relief given will need to be paid back to HMRC.

Enterprise investment scheme (EIS) - CGT

If you dispose of any chargeable asset and reinvest in unquoted shares in a qualifying EIS, then you can defer some
(or all) of the gain. Chargeable gain = Capital gain - Amount Reinvested into EIS

Conditions to be a qualifying investor

1. The individual must be UK resident
2. The reinvestment must occur between 12 months before and up to 36 months after the gain arises
3. The reinvestment must be wholly for cash, in new shares in an unquoted trading company, trading in the UK.

When EIS Share are sold

Any gain deferred will become chargeable eg. We bought them for £10,000, therefore the Capital Gain Deferred was
£10,000, so now we will have to pay CGT on £10,000. If they are sold within 3 years - Capital gain is chargeable (Will
have to pay the CGT) BUT Capital Loss is allowable (will get the loss relief). If they are sold after 3 years - Capital gain
is EXEMPT and Capital Loss is allowable (will get the loss relief).

Seed enterprise investment scheme (SEIS)

An SEIS is similar to the EIS but is intended to promote investment in smaller early stage trading companies.
Conditions for investors in SEIS Companies
1. Individual at least 18 years and must subscribe for newly issued shares.
2. Must not own shares before the investment.
3. Must own less than 30% of the shares.
4. Must not be an employee of the SEIS company before making the investment but can become a paid director of
the company after making the investment.

Income tax implications for SEIS investment

• In the tax year in which investor subscribes for the shares he can claim SEIS relief at 50% (tax reducer).
• Dividends received by investors from the SEIS company are subject to income tax at 8.75%, 33.75% and 39.35%.
• If investor sells the shares within three years he must repay 50% of the proceeds for the shares.
• The upper limit on SEIS relief is £50,000 (50% x 100,000) each tax year.
• This relief can be claimed in the current or previous tax year.
Incorporation Relief
Normally if an individual sells his business:
- he will have Chargeable gains on the individual assets (Business Premises, Goodwill)
- will have to pay the CGT on them
- however, because he sells all of his business and owned the business for more than 2 years, then he can get the
Entrepreneur Relief @ 10%
However, there is a way to DEFER this CGT
If an individual sells his business (sole trader business/partnership) to a company, then the Chargeable gain that will
arise can be deferred.

Conditions for the relief

All of the following conditions must be satisfied.
1. The business must be transferred as a going concern
2. All of the assets (except cash) are transferred to a company
3. The consideration received for the transfer must be received in the form of shares in the company.

How to calculate incorporation relief?

If the consideration is fully in shares, then the whole capital gain is deferred
If the consideration is only partly in shares, then the following formula is used:
Deferred gain = Total capital gain * (M.V. of the shares received / M.V of the total
consideration (shares + cash))

This deferred gain is deducted from the cost of the shares, to produce a lower base cost, which will be used to
calculate the capital gain when the shares are disposed of. If an individual wants entrepreneurs’ relief when the
shares are ultimately disposed of, the qualifying time period of holding the shares for 2 years prior to disposal must
be met.
The pre-incorporation period (i.e the period for which the individual owned the unincorporated business) will also
count towards the 2 years qualifying time period. This helps in getting entrepreneurs’ relief sooner.
Example: Tom runs a business as a sole trader. After 3 years, he sold his entire business as a going concern to Peter
Ltd, for a consideration of £900,000 which was received fully in shares of Peter Ltd. The chargeable gains on the
assets sold were £300,000. Tom sold the shares after 9 months for £1,000,000.
All the conditions were satisfied and so incorporation relief will be given automatically. He received the consideration
fully in shares and so the entire gain can be deferred.
Market value £900,000
Chargeable gain (£300,000)
Base cost for shares £600,000
The disposal of shares after 9 months by Tom will qualify for entrepreneurs’ relief and the gain will be taxed at 10%,
since the pre-incorporation period of 3 years will count towards the 2 year qualifying time period for entrepreneurs’
relief.

Sale proceeds £1,000,000

Base cost (£600,000)
Chargeable gain £400,000
CGT = £400,000 * 10% = £40,000

Inheritance Tax
A gift made during a person’s lifetime may be either:
1) Potentially exempt transfers - do NOT pay IHT straight away. Any transfer that is made to another individual is a
potentially exempt transfer (PET). If the donor survives for 7 years then NO tax is paid. If the donor dies within 7
years - pay the IHT 40%, the value of a PET is fixed at the time that the gift is made.
2) Chargeable lifetime transfers - pay IHT straight away. If Donee (Trustee) pays - 20%. If Donor pays - needs grossing
up (Calculate the Value of the gift + IHT paid) - pays 25%. For example, parents may not want to make an outright gift
of assets to their young children.
Instead, assets can be put into a trust with the trust being controlled by trustees until the
children are older.
- If the donor dies within 7 years of making the gift - An additional tax liability may arise
- The value of a CLT is fixed at the time that the gift is made, but the additional tax (40%) liability is calculated using
the rates and allowances applicable to the tax year in which the donor dies.

Payment of inheritance tax and the due date

During Life - CLT:
The due date is the later of:
• 30 April following the end of the tax year in which the gift is made.
• 6 months from the end of the month in which the gift is made.
PET and CLT additional IHT:
The donee is responsible for any additional IHT that becomes payable as a result of the death of the donor within 7
years. The due date is 6 months after the end of the month in which the donor died.
On death:
The personal representatives of the deceased’s estate are responsible for any IHT that is payable.
The due date is 6 months after the end of the month in which death occurred.
IHT paid in Instalments (10 yearly instalments)
- Land & Buildings,
- Unquoted shares ( Holding must be valued @ > £20,000 and you must own more than 10%)
- Controlled Company Shares ( You must own > 50% share capital)
- Sole trader or partnership

7-year accumulation principle

Every individual receives a nil rate band (NRB), if their total chargeable transfers exceed this NRB, only then is
inheritance tax payable. The NRB must be applied in chronological order - it is given to the gift made earliest.
For example: if an individual dies in January 2023 having made a CLT in June 2011 of
£255,000, this CLT will not be taxable on the death as he survived for more than 7 years.
If he had also made a PET in August 2017 of £200,000 this will be taxable. In computing the NRB available to go
against the PET, however, the £325,000 will be reduced by the amount of the June 2011 CLT.
Therefore, the NRB available to the PET would be (£325,000 - £255,000) = £70,000
IHT payable on the PET
Value of PET £200,000
Less NRB (£70,000)
£130,000 *40% = £52,000

Residence Nil Rate Band

In addition to the nil rate band already given, there is another residence NRB of £175,000.
Conditions to get residence NRB:
1. The death estate must consist of a main residence
2. It must be given to direct descendants (children/grandchildren)
3. It is only available if an individual dies on/after 06/04/2017
4. Unused residence NRB can be passed between spouses as normal, even if the first death was before 06/04/2017

Taper Relief
- reduces the amount of tax payable where a donor lives for more than 3 years, but less than 7 years, after making a
gift.

Diminution in value principle (Unquoted shares)

Use Diminution in value principle when you gift:
• Ordinary shares in unquoted company
• Land

Calculation:
Value before (not the independent expert) MINUS Value after. Then deduct A/E £3,000 or Taper relief if available Gift
of Shares - Wife + husband own them together e.g. If a husband owns 75% and his wife 25% of a company and you
are gifting the shares to someone, the Gifting % will be based on both husband’s and wife’s holdings, so take the
share price reflecting 100% ownership when you give some shares to someone.

Valuation rule for shares

If shares are disposed of by way of a gift, no proceeds will actually be received, therefore you will calculate the
disposal proceeds to calculate the capital gain in this way:
Unquoted shares:
Market value will be given in exam.
Quoted shares - For CGT
Average method: (Lowest bargain price + Highest bargain price) / 2
Average method (Quoted shares)

Step by step approach:

• Step 1 - Value the shares using:
- Average method
Method: 1/2 up method. This method is used when recorded bargain prices are given.
For example £3.00, £3.02, £3.09
• The value of one share will be:
• (Lowest bargain price + Highest bargain price) / 2
• = (£3.00 + £3.09) / 2 = £3.05
• Step 2 CGT - Calculated Disposal proceeds
= Number of shares given * value per share (step 1)
• Step 3 CGT - Calculated CGT @ 10%/20%
Deduct the AEA £12,300

Quoted shares - For IHT

Average method: (Lowest bargain price + Highest bargain price) / 2
OR
1/4 method: Lower value + (1/4) (Highest range value - Lowest range value)
Step by step approach:

• Step 1 - Value the shares using the lower of:

- 1/2 up method
- 1/4 method
Method 1: Average method
This method is used when recorded bargain prices are given.
For example £3.00, £3.02, £3.09
• The value of one share will be:
• (Lowest bargain price + Highest bargain price) / 2
• = (£3.00 + £3.09) / 2 = £3.05
Method 2: 1/4 up method
This method is used when there are a range of values given.
For example £3.00 - £3.10
• The value of one share will be:
• Lowest range value + 1/4 (highest range value - lowest range value)
• = £3.00 + 1/4 (£3.10-£3.00) = £3.03
The lower value from both methods is £3.03 so we will use that.

• Step 2 IHT - Calculated Value of the Gift

= Number of shares given * value per share (step 1)
• Step 3 IHT - Calculated IHT @ 40%
Deduct the A/E £3,000 and NRB £325,000 + Use the NRB of your spouse if it’s available. Also check for the Taper
relief available

Exemptions
Disposals of gilt edged securities and qualifying corporate bonds are exempt from capital
gains tax.

IHT liability on the death estate (when you die)

A person’s estate includes the value of everything that they own at the date of death such as property, shares, motor
vehicles, cash and other investments. A person’s estate also includes the proceeds from life assurance policies even
though the proceeds will not be received until after the date of death.
The actual market value of a life assurance policy at the date of death is irrelevant.
The following deductions are permitted:
• Funeral expenses
• Debts due if they can be legally enforced
• Gambling debts cannot be deducted, nor can debts that are unenforceable because there is no written evidence
• Mortgages on property
• Endowment mortgages cannot be deducted, because these are repaid upon death by the life assurance element of
the mortgage
• Repayment mortgages and interest-only mortgages are deductible

Transfer of unused NRB between spouses

Any unused nil rate band on a person’s death can be transferred to their surviving spouse (or registered civil partner).
Illustration:
Nun died on 29 March 2023
None of her husband’s nil rate band was used when he died on 5 May 2006. When calculating the IHT on Nun’s
estate a nil rate band of £650,000 (£325,000 + £325,000) can be used because a claim can be made to transfer 100%
of her husband’s nil rate band.
Exemptions
Transfers to spouses - Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies
both to lifetime gifts and on death.

Small gifts exemption - Gifts up to £250 per person in any one tax year are exempt.

Annual exemption (Use only during the life NEVER on Death!)

Each tax year a person has an annual exemption of £3,000. If the whole of the annual exemption is not used in any
tax year, then the balance is carried forward to the following tax year.
Therefore, the maximum amount of annual exemptions available in any tax year is £6,000 (£3,000 x 2).

Normal expenditure out of income

Regular annual gifts of £2,500 made by a person with an annual income of £100,000 would probably be exempt. A
one-off gift of £70,000 made by the same person would probably not be, and would instead be a PET or a CLT.

Gifts in consideration of marriage

The amount of exemption depends on the relationship of the donor to the donee (who must be one of the two
persons getting married):
• £5,000 if the gift if made by a parent.
• £2,500 if the gift is made by a grandparent or by one of the couple getting married to the other.
• £1,000 if the gift is made by anyone else.

Domicile - IHT
An individual who is UK domiciled or (Deemed Domicile) is charged to UK IHT on his worldwide assets.
An individual who is not UK domiciled is charged to UK IHT only on assets situated in the UK.

Types of domicile for IHT:

Domicile of choice – an individual can change their domicile from one country to another if they don’t retain a
property or move burial arrangements or change nationality/citizenship from one country to the other.
For example, if you were UK domiciled since birth but you emigrated to France (you sold all property in London and
you changed your nationality), then you will be French domiciled. However, you will still retain UK domiciled for 3
years after you change your domicile.

Deemed domicile – for an individual to be deemed domicile in the UK for IHT purposes at the relevant time (ie at the
time of a transfer of value) they must satisfy any one of the following two conditions:
1. Long term resident
– this applies to an individual who was never UK domiciled but has been resident in the UK for at least 15 years out of
the previous 20 tax years immediately preceding the relevant tax year, and for at least 1 of the 4 tax years ending
with the relevant tax year. For example, if you have been UK resident since 2002, but never UK domiciled, and you
made a gift of a home in France in 2022, this gift will be chargeable to UK IHT, because you are deemed domicile, as
you have been resident in the UK for the last 20 tax years.
2. Formerly UK domiciled individual.
This is an individual who:
- was born in the UK; and
- has a UK domicile of origin; and
- is UK resident in the relevant tax year; and
- was UK resident in at least 1 of the 2 tax years immediately before the relevant tax year.

For example, Tom was born in the UK in 1976 and his father was UK domiciled. In 2003 he moved to Australia. He was
a UK resident for the tax year 20/21 and returned to the UK in August 2022 to live permanently. He will be deemed
UK domicile in 2022/23.
If you are UK domiciled and have a foreign asset, you will pay UK IHT and overseas IHT, in your UK IHT computation:
Take the Foreign asset value and deduct 5% of the house or the legal fees (take the lower value). Then deduct the
Double tax Relief = Lower of the UK or Foreign IHT

If you are not UK Domiciled:

e.g. You have an asset in the UK - selling it and give the proceed to your sister. If the sale proceeds will go to the bank
account located in the UK - you pay the UK IHT. If the sale proceeds will go to the bank account located OUTSIDE the
UK - you DON’T pay the UK IHT

Gifts with reservation

If you give somebody an asset (a house) and keep using it. If you are not paying rent at the market value rate, then:
You should calculate the gift as a PET and a Death gift and HMRC will choose the higher value.

PET - A/E - Taper relief

On Death - No A/E and No Taper relief
So HMRC will always choose the value as a Death gift

Business Property Relief (BPR)

= reduces the value of lifetime gifts and the value of an individual’s death estate
Investment property is NOT eligible for BPR
Conditions:
- An asset must be owned for 2 years prior to the transfer
- If the asset has been transferred from a spouse the periods owned by each spouse can be added together
- For example, if a husband owned relevant property for 1 year and transferred it to his wife, then the wife owned it
for another year and transferred it to their son, BPR will be available on the transfer to the son because the total time
of ownership for husband and wife can be added up.
Eligible Assets:
1) Land, building, machinery (50% relief) - must be owned personally and used in the business controlled (>50%
share) by the individually E.g. If you gift a farm - 2 years ownership, have to work on it

2) Quoted shares and securities (50% relief) - Individual must have a controlling interest (>50%) in the company

3) Unquoted shares and securities (100% relief) - Where the asset was a lifetime gift, the asset must either still be
owned by the donee or have been replaced with other relevant asset at the date of the donor’s death in order to
get BPR on the additional tax payable by the donee.
- For example, if a father gifted his son an unquoted shares holding during his lifetime, this will be a P.E.T. and IHT will
only be payable if the father dies within 7 years of making the gift. If the son sells the shares, he must replace them
with relevant property for BPR in order to get the relief when the father dies.
- Where an asset was inherited and was eligible for BPR at the time of transfer one, there is no minimum ownership
period for BPR on transfer two.
This is called the successive transfers rule.
- For example, if a father gifted his son unquoted trading shares on his death which he had owned for 4 years and
were eligible for BPR, if the son dies within 1 year of the gift and gives them to his brother on death, this second
transfer will automatically be eligible for BPR because the first transfer was eligible for BPR.

4) Sole-trader/ partnership businesses (100% relief)

Withdraw of BPR if:
- The Asset is not used for business purposes at the date of death of donor.
- The Asset has been sold by donee before the date of death of donor and NO
replacement was purchased

Agricultural Property Relief (100%)

- available for Agricultural value of an Agricultural Property situated in the UK, EEA
- The Relief is available for: Land, Farmhouse, Barn, Shelter Belts
- Not available for: Plants & Machinery and Inventory
- It is available on both lifetime & death transfer but deducted before any other Exemptions and reliefs
- It is available upon agricultural value of agricultural property if it is held for minimum period of ownership.
Conditions:
- If a farm is owned by the individual and he is farming himself there, then he needs to have owned it for 2 years
prior to the transfer
- If the individual has let the farm to someone else to farm, then it has to have been tenanted for 7 years prior to the
transfer

If donor has inherited the Property on the death of spouse the combined period of ownership of both spouses
should be greater than minimum ownership period. If the existing agricultural property has replaced the previous
agricultural propertythen APR will be available if period of ownership of both the properties is at least 2 years
out of last 5 year if property is owner managed and 7 years out of 10 years if property is under tenant ship.
Withdraw of APR if:
- Agricultural property is not used for agricultural purposes anymore
- Agricultural property has been sold by donee by the date of death of donor and has not purchased any replacement
agricultural property

Quick Succession Relief:

It arises when two death IHT arise within 5 years and available to 2nd deceased person. It is deducted from IHT
liability and calculated as follows:
QSR = IHT paid on first death X Appropriate %
IHT paid on first death = (Total IHT paid on 1st death / Gross chargeable estate on 1st death) X value of gift

Exempt transfers
These are transfers that will not result in IHT payable:
• spouse - after the marriage date
• civil partner
• charity
• political party

Relief for a Fall in value

The chargeable amount of a lifetime gift (CLT and PET) is calculated and fixed at the time of
gift. If the gift becomes chargeable on death (donor dies within 7 years of making the gift):
1) An increase in value of the gift will be ignored
2) A decrease in value of the gift will get relief for the fall in value

Condition for the fall in value claim

The asset must still be owned by the donee at the date of death, or if it has been sold, it
must have been sold in an arms length transaction.
Example:
PET for £300,000.
When the person dies, the value is £200,000.
So, calculate the IHT on £200,000

Reduced IHT Rate (36%) on death estate

- available only on death!
- is applied instead of 40% if the charitable legacy (Registered UK Charity, gift to charity)exceeds 10% of death estate
before deduction of the charitable legacy but after deduction of the available NRB
E.g. Charitable legacy > 10 % of (Chargeable estate - NRB)
If it is, then (Chargeable estate - Charitable legacy - NRB) x 36%

Deed of Variation
The will of a person could be changed even after death of that person by entering into deed of variation.
Following conditions must be fulfilled:
- Deed must be in writing
- Must be signed by all beneficiaries
- Should be submitted within 2 years of death
- It should state that change was for tax efficiency
Why to do it?
- To increase the Charitable legacy to get the reduced rate of 36%
- To give gifts to grandchildren instead (To avoid one generation of IHT)

Close Companies
= It is a company controlled (> 50%) by 5 or less than 5 shareholders.
- UK resident
Example:
An individual owns 100% of the ordinary capital of A Ltd.
Benefits (e.g. a laptop) provided to a person who is:
1) a Shareholder and also an Employee of a Close company:
The individual
- You have to Calculate the Taxable benefit and then
- pay the I.T (20%/40%/45% rates) on the Taxable benefit
The company - pays the value of the benefit and the Class 1A NIC (will be deductible
expenses from trading profits)
2) a Shareholder ONLY (you are NOT an employee) of a Close company:
The individual
- the benefit will be treated as a dividend income
- So, you have to pay I.T. (8.75%/33.75%/39.35% rates) and NO NIC!
The company - it will be assumed that they have paid a Dividend Income equal to the value of the benefit, and this is
NOT a deductible expense from trading profits.

Loan from a close company to a Shareholder + Employee

- Calculate the Taxable benefit (Value of the loan x 2.00% official rate)
- The company pays Class 1A NIC (Taxable benefit (loan) x 15.05% NIC Class 1A)
- The company has to pay a Penalty @ 33.75% on the amount of loan (Value of the loan)
- Due date to pay the penalty is 9 months & 1 day or quarterly basis
Penalty can be avoided if (all of these must be satisfied):
a) Amount of loan is ≤ £15,000.
b) Individual is full time employee of the company.
c) Individual owns ≤5% shares in the company.
d) The loan is repaid within 9 months & 1 day
But once the penalty is paid, it cannot be repaid.
Loan from a close company to a shareholder ONLY
It is treated as a Dividend Income. The Penalty is also payable here BUT The Penalty is repaid when loan is
repaid/written off.

Accounting periods on winding up

Date of commencement of winding up = the day when a liquidator is appointed
Date of Completion of winding up = the day when the winding up is finished
You have to prepare 2 Corporation tax computations (CTC) for:
1) Normal accounting period (AP) - End of AP - Date of commencement of winding up
2) Final CTC - Date of commencement of winding up - Date of Completion
Example:
Y/E 30/6
A liquidator was appointed on 1/1/2023
The winding up was finished on 31/3/2023
Solution:
AP: 01/7/2022 - 31/12/2022
Final CTC: 1/1/2023 - 31/3/2023

Distributions On Winding Up
If a shareholder receives payments from winding up:
A. Before appointment of liquidator
- it is treated as a Dividend Received
- e.g. the distribution of the available profit
- he has to pay the income tax on it
B. After appointment of liquidator
- it is treated as a Capital receipt
- he has to pay the CGT on the gain
If a company receives payments from winding up:
- it is treated as a Dividend Received
- there is no CT on Dividends Received by a Company
Example:
A Ltd. is owned by Peter (30% and B Ltd. (70%). Y/E 30/6
A liquidator was appointed on 1/1/2023
The winding up was finished on 31/3/2023
A Ltd. will distribute the available profits to its shareholders (= a Dividend Received) on
31/12/2022 or on 31/3/2023
Peter is eligible for E.R., he is an additional rate taxpayer.
Required:
What are the Tax implication if the distribution is made on 31/12/2022 or on 31/3/2023?
B Ltd. - there is no CT on the Dividend Received by a Company
Peter - if it is on 31/12/2022 - the Dividend Received will be taxed @ 39.35% (I.T)
- if it is on 31/3/2023 - the Dividend Received will be taxed @ 10% (CGT - E.R)

Company Purchasing Its Own Shares

If a company purchases its own shares, the amount of money received by the shareholder
may be treated as:
• Dividend income - pay I.T.
• Capital income - pay CGT
To be treated as Capital Income, all of the conditions must be satisfied:
a) Company must be an unquoted trading company and the buy back of shares by the company must be for the
benefit of their trade.
b) Shares must have been owned for at least 5 years by the individual.
c) The shareholder must be UK Resident.
d) Either all of the shareholding of individual must be bought back or at least 75% of his/her shareholding must be
bought back.
e) After buy-back, individual must NOT be able to exercise more than 30% control of the company.
Calculation of capital receipt:
Disposal proceeds - purchase price = capital gain/capital loss. If any of the above conditions are not satisfied, then the
receipt will be treated as a Dividend income.
Calculation of dividend income:
No. Shares x (MV - Initial Share price) = Dividend income
- Check how much Employment income do you have, so that you know which tax rate you should use for the
Dividend Income (8.75%/33.75%/39.35%)
- Don’t forget to use the Dividend NRB £2,000
- Check whether there are any Dividends received from another company
- So, if the Dividend Income is £9,000, then the I.T. is £9,000 - £2,000 NRB = £7,000 x 8.75% = £613

Double Tax Relief

If a UK Resident company owns another company that operates from a permanent establishment overseas, an
election can be made the exempt the overseas profits from UK corporation tax (CT).
If this exemption is not made, then profits of the company overseas will be taxed in the UK as well as the other
country.
This means that the profits are being taxed twice and there is double tax relief for this. Calculation of DTR:
DTR is lower of:
(i) Overseas tax on overseas income.
(ii) UK corporation tax on overseas income.
Controlled Foreign Companies = an overseas resident company
Conditions:
a) must be controlled by UK resident companies and/or individuals, and
b) has been incorporated or acquired to artificially divert profits from the UK (this can happen if the overseas country
has low rates of tax, therefore profits will be created in the overseas company and taxed at a lower rate)

CFC Charge:
- UK resident company who owns at least 25% of foreign company has to pay a CFC charge (additional corporation
tax) to HMRC.

Calculation of the CFC Charge:

Remember: Do NOT include Chargeable Gains in the Chargeable Profits below [% of ownership the UK company x
Chargeable profits (Trading profit) of the CFC x C.T. Rate] – Foreign tax paid in the Foreign Country
- The CFC charge will be added to CT liability

When can the CFC charge be avoided?

1) If the foreign company did not have any chargeable profits (income profits but not chargeable gains, which have
been artificially diverted out of the UK), or
2) If the foreign company satisfies ONE of the exceptions listed below applies.
Exceptions:
1) Low profits exception
- the foreign company’s Trading profits do NOT exceed £500,000 and its non-trading income (Chargeable gains) does
not exceed £50,000.
2) Low profit margin exception - if the foreign company’s accounting profits are less than 10% of its allowable
expenditure
3) Excluded territory exception - if the foreign company is resident in a country which is specifically listed as an
excluded territory.
4) Tax rate is sufficiently high exception
- if the foreign company pays corporation tax overseas which is at least 75% of the amount of tax that would have
been paid if the company had been UK resident.
5) Exempt period exception
- There is an initial 12 month exemption from the CFC rules. This exemption will initially apply but will not apply in
the future.

Residency of a company
A company is resident in the UK if:
1. It has been incorporated in the UK, for example. K Ltd. or B plc.
2. It is centrally managed and controlled in the UK for example, M. Inc. which was incorporated overseas has majority
of its board meetings held in the UK, and most of its directors are resident in the UK.

Property business profits and relief for property losses

The calculation of property business profits is exactly the same as that for individuals with 3 exceptions:
1. Interest payable on a loan to buy an investment property is deducted from “Interest income”
2. There is no rent a room relief for companies as a company will not have a main residence.
3. Property losses are relieved against Total Income of the current year before any qualifying charitable donations can
be deducted. Property losses can be c/f against Total Income in the next year

Relief for trading losses

Trading losses can be:
1. Relieved against Current year total income plus capital gains
2. Carried back 12 months of Total income plus capital gains
3. Carried forward against the Total income of future years
For Individuals - You can carry back 12 months without using the current yearBut for the companies - you have to use
the current year’s profit before you carry the loss back.

If we are using the total income of the current and previous year, then the loss must be deducted before any
Qualifying charitable donations. However, if we are using the total income of future years, we can restrict the amount
of loss and save our Qualifying charitable donations.

Terminal Loss
If a trading loss occurs in the final 12 months of trading, then this trading loss can be carried back for 36 months
against the Total income of the company, on a LIFO (last in first out) basis. The loss cannot be restricted to save
qualifying charitable donations.

Factors that influence choice of loss relief claim

1. Relief as soon as possible. Therefore, the current year total income and and carry back 12 months’ total income
claim are much more likely to be used before the carry forward claim against trading profits
2. Making a large company a small company for corporation tax purposes. If a loss relief claim can reduce the size of
the company, then this will avoid the company having to make quarterly instalments of corporation tax

Qualifying charitable donations

You can deduct charitable donations from the taxable total profits. How to calculate taxable total profits?
Trading income X
Other income and gains:
Property Income X
Interest Income X
Capital Gains X
Less:
Loss Relief Claims (X)
Qualifying Charitable Donations (X)
= Taxable Total Profits X
C.T = TTP x 20%
Remember that dividends received are not subject to corporation tax and are therefore not included in taxable total
profits.

Capital gains computation

Capital gains and losses are netted off for each tax year. Corporation tax is paid upon this net gain. For a company’s
capital gain, the following computation can be used:

Disposal proceeds X
Less: Incidental cost of disposal (X)
Net proceeds X
Less: Acquisition Costs (X)
Less: Indexation allowance until December 2017 (X)
Capital gain/Capital loss X / (X)

After all individual gains and losses have been computed, then they must be aggregated and the following
computation can be used.

Capital Gains in tax year X

Less: Capital losses in tax year (X)
Net Capital Gains in tax year X
Less: Capital losses brought forward
Taxable Gains X

Indexation allowance
- is given to companies, instead of the annual exemption.
- Is an allowance given to companies to reduce the chargeable gain
- It is only given until December 2017.
- It cannot create a capital loss or increase a capital loss
- It can only reduce a capital gain to Nil
Illustrated here:
You will be given this indexation factor in the exam. You will not need to
calculate it.
Capital losses
When a company has a capital loss:
1. It is first set off against any Capital gains arising in the same accounting period.
2. Any remaining capital loss is then carried forward and set off against future Capital Gains

Rollover relief for companies

Rollover relief for companies is the same as rollover relief for individuals. The only difference between the two is that
the indexed gain is rolled over for companies, whereas individuals do not index the gain.
Conditions:
1. The disposal must have been of a qualifying business asset and the reinvestment must be in a qualifying business
asset.
2. The reinvestment must be made 12 months prior to the sale or 36 months post the sale.
3. All of the sale proceeds received on the sale must be reinvested for qualification of full roll over relief. If only some
of the sale proceeds are reinvested, then: Total sale proceeds received-sale proceeds reinvested = indexed capital
gain realised NOW. Total indexed capital gain-indexed capital gain realised now = indexed capital gain to be rolled
over.
75% loss group
A Ltd. —75%— B Ltd.
A Ltd. —95%— B Ltd. —80%— C Ltd.
A Ltd. (Parent) must have 75% effective interest in C Ltd. (Subsidiary) … in this case 95% x
80% = A.Ltd has 76% effective interest in C Ltd.
The effect of 75% loss groups:
- UK members of a 75% group can surrender losses to other UK members
- We want to make a Large company Small, so we give our losses to a company with large profits
- The large company pays Corporation Tax (CT) in 4 instalments during the year, whereas the small company pays CT
just once a year (9 months + 1 day after Chargeable Accounting Period (CAP))
- trading losses - you don’t need to deduct the losses from your Income before you give it your Group member to
deduct
- property losses and qualifying charitable donation - you have to deduct them from your own income and then you
can give them to your Group members.
- You can surrender trading losses/property losses carried forward - but you must use them against your own income
first and the member company taking the losses must deduct their own brought forward losses first.

Surrendering for Co-terminus periods:

- You have to use exactly the same number of months when you want to surrender your losses
- If you want to give your losses to another Group member: Compare your losses with the profits of another group
member for the exactly the same period and choose the LOWER one

Example:
A Ltd. Loss (£400,000) Y/E 31/3/2023
B Ltd. Profit £800,000. Joined the group on 1/1/2023
Step by step Exam approach:
1. Make a Large Company Small
• We want to make a Large company Small, so we give our losses to a company with big profits
2. Calculate the Threshold for A Large Company:
• £1,500,000 / number of members of the Group company
• £1,500,000 / 2 = £750,000
3. Check for the Co-Terminus Period
• the period must be the same
• so, if a member of the group joined the group during the tax year, then you have to take only those relevant
months
• the Y/E is @31/3/2023 and B Ltd. Joined the group on 1/1/2023, so there are only 3 months the same
4. Reveal the losses against the profits
• compare the amount of profit and loss and choose the lower one and then release that amount
• Loss: £400,000 x 3/12 months = £100,000 < Profit: £800,000 x 3/12 = £200,000
• So, take £100,000 of the loss and reveal it against the B Ltd.’s profit
• £800,000 - £100,000 = £700,000, here we managed to make the Large company Small, because the Profit of each
company is less than £750,000

Example - Surrendering carried forward trading loss

A Ltd results for 31/3/23 - Total income £100,000
b/f Trading loss (£150,000)
B Ltd results for 31/3/23 - Total income £200,000
b/f Trading loss (£10,000)
Solution:
A Ltd must use it’s own income entirely first, bringing it’s income to Nil (£100,000 - £100,000) and then surrender the
remaining £50,000 of carried forward loss to B Ltd. B Ltd must deduct it’s own brought forward loss first £200,000 -
£10,000 = £190,000 and can then accept A Ltd’s carried forward loss of £50,000, bringing it’s total income to:
£190,000 - £50,000 = £140,000 for the year ended 31/3/23.
75% Gains Group
A Ltd. —75%— B Ltd.
A Ltd. —75%— B Ltd. —75%— C Ltd.
A Ltd. (Parent) must have more than 50% effective interest in C Ltd. (Subsidiary), however the DIRECT interest must
be at least 75%. Only UK Resident members! Advantages of 75% Gains Groups:
1. Transfer assets at NO gain or NO loss
The asset will be transferred between group members at its indexed cost (cost + indexation until date).
This is similar to husband/wife or civil partner transfers for individuals.
2. Obtain group rollover relief
Therefore one member of a group can sell a qualifying asset, and if another member purchases a qualifying asset
within the time limit, the chargeable on the first asset can be rolled over against the second purchase of the other
group member. Capital losses of a member of the group can be deducted here too (Rollover relief conditions must
still be satisfied)
- The new and old assets must be used for business purpose.
- You have to replace the asset 12 months prior to the sale or 36 months post the sale.).
3. Chargeable gains or capital losses can be given to group members freely, to reduce their taxable total profits as
necessary. An asset does not have to be physically moved and sold by another group member for a chargeable gain
or capital loss to arise on them, the gain or loss can simply be transferred.

Substantial Share Exemption

If a Trading company sells its shareholding (part or whole) to another Trading Company, then NO Capital Gain will
arise. Conditions:
A substantial shareholding is one where the investing company holds:
• 10% or more of the ordinary share capital; and
• 10% of the profits available for distribution to equity holders; and
• 10% of the assets available for distribution to equity holders upon a winding up.

The conditions must be met for a continuous 12 month in the last 6 years. Note carefully, the sale must be out of a
10% or more holding, it does not need to be of a 10% holding for the SSE to apply.

R&D Expenditure For SME

Research and development expenditure is 100% deductible from trading profits, if the expenditure relates to the
trade. There is enhanced relief for this expenditure if the company is small or medium.

Enhanced Relief: If any expenses qualify for “enhanced relief” then an extra 130% of these expenses will be allowed
to be deducted from trading profits.

Expenses which will qualify for enhanced relief are as follow:

a) All direct costs; material, fuel, power, water & staff cost including employee NIC of that staff (but excluding cost of
benefits in kind)
b) Software either purchased or developed to be used for R&D only
c) 65% of the payment made to subcontractors if any (i.e. 130% of 65%)

R&D Expenditure - Large Companies

Where a large company incurs qualifying expenditure on R&D, it can claim a tax credit equal to 13% of the R&D
expenditure. This has two effects:
a) 13% of R&D expenditure is included as taxable income and taxed at 19% (the C.T. rate).
b) 13% of R&D expenditure is deducted from corporation tax liability.

What Is A Non Trading Deficit?

If interest payable on a non trading loan is more than the interest receivable on non trading loans, then a non trading
deficit will be created.
This can be used to reduce:
1) Total profits of the current chargeable accounting period
2) Interest income of the previous 12 months
3) Future non trading income (overseas or property income, capital gains, interest income).

Intangible Fixed Assets

An intangible fixed asset is an asset that cannot be touched. Normally, amortisation is an allowable expense for the
intangible fixed asset from trading profits, however as the IFAs normally have very long lives, there is an alternative
treatment available.
Alternative treatment
1) Elect to not apply the normal accounting deduction of amortisation.
2) Deduct 4% p.a. on a straight line basis.
The election for the alternative choice of treatment is irrevocable and should be made within 2 years from year of
acquisition of asset.
On disposal of an intangible fixed asset, a company will calculate a profit of loss on the sale. This will be the sale
proceeds less the net book value (purchase price – amortisation until date). A profit will increase taxable total profits
and a loss will decrease taxable total profits.

Transfer Pricing
Transfer pricing legislation is applicable upon transactions between connected companies. Companies are connected
if:
– One company directly or indirectly participates in the management, control or capital of the other company, or
– A third party directly or indirectly participates in the management, control or capital of both companies

If transfer pricing rules apply then the transaction between related parties are
recorded at an arm’s length price.
Transfer pricing rules:
1) If a large company transacts with any other company, then the transfer pricing rules apply.
2) If a small/medium company transacts with an overseas company resident in nonqualifying territory (a company
which is not in the UK and has no DTR agreement with the UK), then the transfer pricing rule apply.
3) If a small/medium company transacts with a UK small/medium company or an overseas company resident in
qualifying territory, then the transfer pricing rules do not apply.

Consortium
Conditions:
- 2 or more companies (UK or overseas)
- they mutually own ≥75% shareholding in another company
- each company owns 5% - 74% of the company
REMEMBER: A Company can NOT own more than 75% of another company because then it would make a 75% Loss
Group
A consortium company (CC) and consortium member (CM) can transfer losses to each other. Losses cannot be
transferred between consortium members.
CM A — 60% — CC X and CM B — 20% — CC X
CM A can transfer the loss to CC X (back and forth)
AND
CM B can transfer the loss to CC X (back and forth)
BUT
CM A can NOT transfer the loss to CM B
Amount of loss that can be surrendered
LOWER OF:
% of ownership x CC’s Profit/Loss
or
CM’s Profit/Loss
Remember that loss relief must be for Co-terminous periods (The same period), so if the two companies have
separate accounting periods, the loss needs to be apportioned. An overseas company can become part of a
consortium arrangement but it cannot take advantage of the reliefs.

De-grouping charge
The De-Grouping Charge arises: If a member of a 75% Gains Group leaves the group (sell the company) within 6 years
of an asset being transferred @ No Gain / NO Loss
It is calculated as:
M.V at date of original intra-group transfer
Less: original cost plus indexation allowance
= De-grouping Charge

De-grouping charge is added to the Sale Proceed (When you sell the company) Then Deduct the Cost and Pay CT on
it:
(Sale Proceeds + De-grouping charge - Cost - Indexation Allowance) x 19%
SSE will apply here, if you sell the company and owned it for at least 12 months
SSE = “If a Trading company sells its shareholding to another Trading Company, then NO
Capital Gain will arise”
So The De-grouping charge will be exempt if the substantial shareholding exemption (SSE)applies. Transfer of
intangible assets:
Transfers of assets between members of a 75% gains group are transferred at no gain/no loss. If a member leaves the
group within 6 years of an intangible asset being transferred at no gain/no loss, as a result of its sale and that sale
(share disposal) qualifies for SSE, the de-grouping charge relating to the intangibles transferred will not arise.

SDLT
SDLT is exempt on transfer between 75% gain group companies BUT the exemption will be withdrawn if recipient
company leaves the group within 3 years from date of intra-group transfer.

Stamp Taxes
This table is provided in the exam:

Stamp Duty
Stamp duty is charged on the transfer of shares and securities. It only applies to transfers made using a stock transfer
form (i.e. paper transactions). Stamp duty is paid by the purchaser at the rate of 0.5% of the consideration. The duty
is rounded up to the nearest £5.

Stamp Duty Land Tax

SDLT is payable by purchaser on transactions of UK property. The value on which SDLT is charged includes any VAT
payable on the transaction. SDLT is payable with the return which should be submitted within 30 days of completion
date (date when contract become legally enforceable).
Exemptions
1) Gifts - If the transfer is a gift, there is no consideration and hence no stamp duty is payable.
2) Transfers within groups: Transfers of assets between 75% group companies are exempt. However, stamp duty
becomes payable if the transferee company does leave the group within 3 years of the transfer whilst still holding the
asset.
3) Miscellaneous: The following transfers are also exempt from stamp duty:
– Assets transferred as part of divorce arrangements
– Property passing to a beneficiary under a will or intestacy
– Variation of a will within two years of the date of death
– Reorganisation and takeover
– Unit trust and Changes in trustees.
– Government stock
– Securities traded on AIM (Alternative Investment Market)
– Most company loan notes except convertible loan notes

VAT Registration - Compulsory and Voluntary

This table is provided in the exam:

When is it compulsory to register for VAT?

When your sales (excluding VAT) go over the registration limit (£85,000). There are 2 separate tests for compulsory
registration:
1. Historic Turnover
2. Future Prospects
When you satisfy both tests HMRC will use the test that gives the earlier registration date.

Historic Turnover test

At the end of every month check to see if the last 12 month sales were over £85,000. If so, you have 30 days to tell
HMRC (30 days of the end of the month in which the limit is exceeded). You are then registered for VAT from the end
of the next month (or earlier if agreed).

So let’s say the limit was exceeded in April. You must notify HMRC by 30th May (within 30 days of the end of the
month - April). You will be registered for VAT from 1st June

Future Prospects test

If you think the limit (£85,000) will be reached over the next 30 days then you have 30 days to tell HMRC and
registration starts at the beginning of the 30 days you expect to reach the limit.

For example: On 1 July, the company signed a contract valued at £100,000 for completion during
July. The company will register for VAT from 1 July and have to notify HMRC by 30 July.

De-registration
A trader stops being liable to VAT registration when it ceases to make taxable supplies. The trader must notify HMRC
within 30 days and will be deregistered from the date of cessation or from an earlier agreed date. A trader may also
deregister for VAT when its expected taxable turnover in the next 12 months is expected to fall below £83,000.
The trader may deregister for VAT if they consider this beneficial.

VAT implications on selling a business (deregistering permanently) is when a business is sold, it will cease to be
registered for VAT. You have to pay the Output VAT (e.g. on plant, equipment and trading inventory)
If you satisfy these conditions, then no output VAT will be charged:
1. The business is transferred as a going concern
2. No significant break in trading
3. The same type of trade is pursued by the transferee
4. The transferee is or will become VAT registered

Voluntary registration for VAT

Even if someone is not required to register for VAT, once they are making taxable supplies,
they are allowed to.

Advantages of voluntary registration:

1. Disguises a small company to look big. (Investors may be apprehensive to invest in a small company).
2. If a company makes zero rated supplies and standard rated purchases, then the company will be eligible for
repayments from HMRC.
For example, a VAT registered trader sells baby clothes for £240. He pays for his
advertising expenses, which cost him £120. The trader makes zero rated supplies but standard rated purchases, and
can therefore claim the input VAT paid on his advertising expense of £20. (£120 * 1/6)

Making tax digital for VAT registered businesses

VAT registered businesses now have to submit their VAT returns to HMRC via a tax digital
software. They also have to keep records digitally. The requirements do not apply to businesses with a turnover
below the VAT registration threshold of £85,000 but which are voluntarily registered for VAT.

VAT Group

Conditions:
1. 2 or more companies must be associated with each other. That is one company must own 51% or more of the
share capital in another company, or 2 companies must be under common control.
2. All companies must be UK resident or trading from a permanent establishment in the UK.

Consequences of Group Registration:

1. The VAT Group is treated for VAT purposes as a single company registered for VAT on its own.
2. There will be 1 VAT registration number for the whole group.
3. One VAT return will need to be filed on behalf of the whole group.
4. The group must have a representative who fills in the VAT return. This member will have to gather all of the output
and input VAT of the individual members and fill it in on one return. This representative is also responsible for paying
VAT on behalf of the group.

Advantages of a VAT Group:

1. There is no VAT on intra-group supplies
2. Only one return must be filed, therefore administration costs will be saved.

Disadvantages of a VAT Group:

1. All members remain jointly and severally liable
2. There are special VAT schemes for businesses such as the cash, annual and flat rate schemes. Companies in VAT
groups are not allowed to enter into the annual accounting scheme. To enter into the cash or flat rate schemes, a
business must have a turnover under a certain limit. For example, there is a VAT group with 4 companies (A Ltd., B
Ltd., C Ltd., and D Ltd.). The annual turnover of the entire group is £5,400,000, and each individual company’s annual
turnover is £1,350,000. B Ltd. wants to enter into the cash accounting scheme. The company’s individual turnover
is within the limit of £1,350,000. However, it cannot enter the scheme because the VAT group’s annual turnover of
£5,400,000 will be considered instead of the individual company turnover and so B Ltd. will not qualify.
VAT return accounting

Quarterly accounting for VAT and electronic filing:

1. On registration, the trader must charge VAT on all taxable supplies (output VAT).
2. The trader can also reclaim VAT on all taxable supplies purchased (input VAT).
3. At the end of a 3-month period, the trader accounts to HMRC for all the output tax less the input tax on their VAT
return.
4. VAT is accounted for quarterly, on 31/03, 30/06, 30/09 and 31/12.
5. VAT registered businesses must file their returns and make payments online.
6. The deadline for doing submitted the VAT return and making payments electronically is 1 month and 7 days after
the period has ended. Therefore, for the period ending 31/03/2022, the return with payment can be
submitted electronically on 07/05/2022.

Treatment of imports to the UK, exports from the UK

Exporting outside of the U.K.
• The supply of goods is zero rated
• The supply of services is outside of the scope of VAT

Illustration
A UK VAT registered trader supplies computers costing £10,000 (VAT exclusive) to a
company outside the U.K. The supply will be treated as zero rated and therefore no output VAT will be charged.
Whether the company outside of the U.K. is VAT registered or not does not matter, the supply will be treated as
though it is zero rated.

Importing into the UK:

Acquiring from outside the U.K. who are VAT registered/not VAT registered
• The VAT charge is declared on the return as output VAT but can be reclaimed as input VAT on the same VAT return.
The net effect on VAT payable is therefore nil.
• The entries contra each other, therefore there is no actual VAT cost.

Illustration
A UK company purchased computers costing £10,000 (VAT exclusive) from a company in the U.S.A.
The VAT of £2,000 will be accounted for but not paid. On receipt, the UK company will account for the £2,000 on its
VAT return and can claim the £2,000 input VAT on the same VAT return.

Flat rate scheme

This scheme is available to small businesses. Under this scheme VAT liability is calculated by simply applying a flat
rate percentage to total turnover including zero rate & exempt supplies. (16.5% will be given in exam). No input VAT
is recoverable with the exception of non-current assets having cost more than £2,000.

VAT payable = Sale (VAT inclusive) X Flat rate %

Conditions to join the scheme:

1) Taxable turnover (exclusive of VAT) not exceeding £150,000 per annum.
2) VAT returns must be up-to-date and no convictions for VAT offences or penalties in past.
3) If the taxable turnover exceeds £230,000 the trader will have to exit the scheme.

Cash Accounting Scheme

VAT is accounted for on the basis of cash receipts and payments, rather than on the basis of invoices issued and
received (therefore automatic relief for bad debts).

Conditions to be satisfied to join the scheme:

1) Taxable turnover (exclusive of VAT) not exceeding £1,350,000 per annum.
2) VAT returns must be up-to-date and no convictions for VAT offences or penalties in past.
3) If taxable turnover exceeds £1,600,000 trader will have to exit the scheme

Annual Accounting Scheme

A single VAT return for a 12 month period (Normally accounting period of the business) is filed within 2 months from
end of the period. VAT is paid in 9 equal instalments each will be 10% of previous year’s VAT liability and
one balancing payment. Conditions to join the scheme are same as cash accounting scheme.

VAT - Additional Material - Land and Buildings

Type of supply:
1) Sale of new commercial building is standard rated. ('New' means < 3 years old)
2) Sale of residential or charitable property is zero-rated.
3) All other supplies of land and building are exempt, unless opted to tax.

Opting to tax: A VAT registered seller can opt to waive exemption and elect to opt for VAT.
Conditions: An election must be made within 30 days from date of contract. However it could be withdrawn within
1st 6 months or after 20 years otherwise it is irrevocable. A separate election should be made for each building
(election can’t be made for part of building).

Tax implication:
1) Supply of Land & Building will become taxable for VAT.
2) Rent received from that building (if rented) will become liable to VAT @ standard rate (20%).
3) Landlord can recover any input tax on the purchase and running costs of the building
4) The new owner (purchaser) has once again has both options exempt and option to tax.

Partially exempt businesses

Businesses which are engaged in both taxable and exempt supplies are called partially exempt business.
1) Input VAT for making taxable supplies is fully recoverable.
2) Input VAT for making exempt supplies is not recoverable.
3) Input VAT, Non-attributable or related to overheads is Recoverable in “proportion of taxable supplies”

Recoverable VAT = Non-attributed input VAT * (Taxable supplies/ Total Supplies)

Taxable & total supplies will be excluding VAT. Supplies of capital goods are excluded when
calculating this proportion.

De minimis limits - Whole irrecoverable input VAT will become recoverable if business is below the following De
Minimis limits:
1) Total input VAT ≤ £625 month and exempt supplies are less than 50% of total supplies.
2) Total input VAT less input VAT directly related to taxable supplies is ≤ £625 month and exempt supplies are less
than 50% of total supplies.
3) Input VAT related to exempt supplies ≤ £625 month and input VAT relating to exempt supplies is ≤50% of total
input VAT.

Capital goods scheme

This scheme is available to partially exempt businesses only and applicable upon:
1) Purchase of land and building having value £250,000 or more. The related adjustment period is 10 years however
it will be 5 years if the land and building is acquired under lease agreement.
2) Purchase of computers equipment’s having value £50,000 or more and the related adjustment period is 5 years. If
the scheme applies, the initial deduction of input VAT is made in ordinary way and then reviewed over the
adjustment period. Adjustments are made over the adjustment period if proportion of the exempt supplies changes
and is calculated as follows:
Annual adjustment = (Total input vat/Adjustment period) * (% of taxable supplies now – % of taxable supplies in year
of purchase)

Adjustments for sale:

On the disposal of an asset under the capital goods scheme during the adjustment period:
1) The annual adjustment is made as normal in the year of disposal (as if the asset had been used for the full year).
2) If the disposal was taxable (e.g. option to tax exists):
Adjustment for sale = (Total input vat/Adjustment period) * (100% – % of taxable supplies in year of purchase) *
Remaining Adjustment period
3) If the disposal was exempt:
Adjustment for sale = (Total input vat/Adjustment period) * (0% – % of taxable supplies in year of purchase) *
Remaining Adjustment period

Employment Income
PAYE - Pay As You Earn = The system for paying income tax for employed individuals - it's the income tax on
employment income that the employer pays for the employee every month.

Due dates:
Class 1 Employee NIC and PAYE - Contributions are payable by 19th of each month while 22nd of each month in case
of electronic return.
Class 1 Employer NIC and PAYE - Paid by 19th of each month while 22nd of each month for electronic return.
Class 1A NIC - On the Benefits - It is paid by 19th July following the end of the tax year. For example, 19 July 2023 for
2022/23.

P11D Form - Records of details of benefits

If an employee receives a benefit, the Employer has to submit the Form P11D to HMRC and to the Employee too.
When? 6 July following the end of each tax year
What does it include? - the full cash equivalent of all benefits

Dividends or Bonuses paid by an Employer

DIVIDENDS - If a company (an employer) pays out Dividends to the employee, it /he does not have to
account for anything to HMRC

BONUS - If a company (an employer) pays out a Bonus to the employee, it/he has to account for:
• Income Tax (I.T.)
• Class 1 Employee NIC
• Class 1 Employer NIC
to HMRC (under the PAYE regulations)

Self-employed individuals - I.T and NIC

TAX YEAR for your exam is 2022/23 - Ends on 5/4/2023

File a return by:

31 Jan (online) - after the end of the tax year
Or
31 October (Paper) - after the end of the tax year

Payment (Income Tax, Class 4 NIC, Class 2 NIC and CGT) is due on:
31st January - after the end of the tax year Eg. Tax year 2022/23 finishes on 5/4/2023 you have to file it by 31/1/2024
(online) and also pay it on 31/1/2024
• If taxpayer submits a paper return on time, they can ask HRMC to calculate the tax due.
• Tax returns submitted electronically automatically calculate the tax due.
HMRC - compliance check or discovery assessment - HMRC may amend any errors within 12 months of the date of
filing Eg. If you file it on 31/12/2023 so HMRC can amend it by 31/12/2024

Taxpayer - Taxpayer may amend within 12m of the January filing date Eg. If you file it on 31/12/2023 so you can
amend it by 31/1/2025

If payments on account are required, they are due on:

31 January in the tax year and 31 July after the tax year
31 January after the tax year (balancing payment)

Note: CGT & Class 2 NIC is only payable on 31 January after the tax year, there are no payments on account for this.

Companies - Payments of C.T.

Filing: The return is due for filling on/or before the later of:
1) 12 months after the end of the period to which return relates
2) 3 months after the date on which the notice to file the return is received

Payment:
Normal (small companies): Corporation tax is payable 9 months and one day after the end of each accounting period.
Large companies that need to pay 1/4 instalments:
1) By 14th of 7th month 25% P.O.A.
2) By 14th of 10th month 25% P.O.A.
3) By 14th of 13th month 25% P.O.A.
4) By 14th of 16th month 25% B.P

Tax Advisor - Received Refund

- if a company receives a refund from HMRC and can’t identify any reason for this refund, then:
5. Investigate the reason for the refund
6. If there is no reason - pay it back
7. If the client doesn’t want to send it back, then stop acting as an Advisor
8. Report to HMRC

Penalties for incorrect returns

The amount of penalty is based on the amount of tax understated, but the actual penalty payable is linked to the
taxpayer’s behaviour, as follows: There will be no penalty where a taxpayer simply makes a genuine mistake.

Tax Administration

Employment Income
PAYE - Pay As You Earn = The system for paying income tax for employed individuals
- it's the income tax on employment income that the employer pays for the employee every month

Due dates:
Class 1 Employee NIC and PAYE - Contributions are payable by 19th of each month while 22nd of each month in case
of electronic return.
Class 1 Employer NIC and PAYE - Paid by 19th of each month while 22nd of each month for electronic return.
Class 1A NIC - On the Benefits - It is paid by 19th July following the end of the tax year. For example, 19 July 2023 for
2022/23.
P11D Form - Records of details of benefits: If an employee receives a benefit, the Employer has to submit the Form
P11D to HMRC and to the Employee too.
When? - 6 July following the end of each tax year
What does it include? - the full cash equivalent of all benefits

Dividends or Bonuses paid by an employer

DIVIDENDS - If a company (an employer) pays out Dividends to the employee, it /he does not have to account for
anything to HMRC
BONUS - If a company (an employer) pays out a Bonus to the employee, it/he has to account for:
• Income Tax (I.T.)
• Class 1 Employee NIC
• Class 1 Employer NIC
to HMRC (under the PAYE regulations)

Self-employed individuals - I.T and NIC

TAX YEAR for your exam is 2022/23 - Ends on 5/4/2023
File a return by:
31 Jan (online) - after the end of the tax year
Or
31 October (Paper) - after the end of the tax year

Payment (Income Tax, Class 4 NIC, Class 2 NIC and CGT) is due on: 31st January - after the end of the tax year
Eg. Tax year 2022/23 finishes on 5/4/2023 you have to file it by 31/1/2024 (online) and also pay it on 31/1/2024
• If taxpayer submits a paper return on time, they can ask HRMC to calculate the tax due.
• Tax returns submitted electronically automatically calculate the tax due.

HMRC - compliance check or discovery assessment

- HMRC may amend any errors within 12 months of the date of filing
Eg. If you file it on 31/12/2023 so HMRC can amend it by 31/12/2024

Taxpayer
- Taxpayer may amend within 12m of the January filing date
Eg. If you file it on 31/12/2023 so you can amend it by 31/1/2025

If payments on account are required, they are due on:

31 January in the tax year and 31 July after the tax year
31 January after the tax year (balancing payment)

Note:
CGT & Class 2 NIC is only payable on 31 January after the tax year, there are no payments on account for this.

Companies - Payments of C.T.

Filing:
The return is due for filling on/or before the later of:
1) 12 months after the end of the period to which return relates
2) 3 months after the date on which the notice to file the return is received

Payment:
Normal (small companies):
Corporation tax is payable 9 months and one day after the end of each accounting period.
Large companies that need to pay 1/4 instalments:
1) By 14th of 7th month 25% P.O.A.
2) By 14th of 10th month 25% P.O.A.
3) By 14th of 13th month 25% P.O.A.
4) By 14th of 16th month 25% B.P

Tax Advisor - Received Refund

- if a company receives a refund from HMRC and can’t identify any reason for this refund, then:
1. Investigate the reason for the refund
2. If there is no reason - pay it back
3. If the client doesn’t want to send it back, then stop acting as an Advisor
4. Report to HMRC

Penalties for incorrect returns

The amount of penalty is based on the amount of tax understated, but the actual penalty payable is linked to the
taxpayer’s behaviour, as follows: There will be no penalty where a taxpayer simply makes a genuine mistake.