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Advanced Taxation (UK)

Study Notes FA 2023-24
Tutor Mr.Aqil Kirmani

FA 2023

For candidates Appearing for exams in the period June 2024 to March 2025
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CONTENTS

1. INHERITANCE TAX (IHT) ...................................................................................................... 9

Transfer of Value: ........................................................................................................................ 10
Lifetime Calculations on Lifetime Transfers ................................................................................ 12
Rates of Lifetime IHT for CLTs only............................................................................................ 14
Payment of lifetime IHT:............................................................................................................... 14
Death Calculations on Lifetime Transfers .................................................................................... 15
Taper Relief: .................................................................................................................................. 16
Fall in Value Relief: ................................................................................................................... 16
Business Property Relief: .............................................................................................................. 17
Agricultural Property Relief: ........................................................................................................ 21
Related Property Rule:.................................................................................................................. 23
Proforma Death Estate Computation: .......................................................................................... 25
Valuation of Assets for Death Estate: ........................................................................................... 29
Quick succession Relief: ................................................................................................................ 32
Reduced rate of IHT for substantial legacies to charity: .............................................................. 33
Gift with Reservation: ................................................................................................................... 34
Deed of Variation: ......................................................................................................................... 35
Overseas aspects of IHT:............................................................................................................... 36
Transfer of unused Nil Rate Band: ............................................................................................... 37
2. CAPITAL GAIN TAX (CGT) ......................................................................................................... 37
Chargeable Assets: ........................................................................................................................ 38
Calculations of Gain / loss on Single Asset: .................................................................................. 39
Exceptional Disposals/Variations to computations: ..................................................................... 41
Business Asset Disposal Relief: ..................................................................................................... 49
Investors’ relief: ........................................................................................................................... 52
Rollover Relief: .............................................................................................................................. 52
Hold over Relief:............................................................................................................................ 54
Gift Holdover Relief: ..................................................................................................................... 54
Incorporation Relief: ..................................................................................................................... 58
E.I.S deferral- Relief: .................................................................................................................... 61
S.E.I.S Exemption: ........................................................................................................................ 62
Principal Private Residence Relief (PPR): .................................................................................... 63
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Letting Relief: ................................................................................................................................ 64

Damaged/Lost Destroyed Assets ................................................................................................... 65
Shares and Securities: ................................................................................................................... 68
Sale of Right Nil Paid: ................................................................................................................... 69
Negligible Value Claim:................................................................................................................. 70
Takeover / Reorganisation: ........................................................................................................... 71
Payment of Capital Gain Tax: ...................................................................................................... 73
IHT Deduction against CGT ......................................................................................................... 75
3. INCOME TAX (IT) ..................................................................................................................... 80
Qualifying Loans: .......................................................................................................................... 81
Personal Allowance: ...................................................................................................................... 86
Employment Income: .................................................................................................................... 89
BENEFIT IN KIND: ..................................................................................................................... 91
Living Accommodation ................................................................................................................... 91
• Fuel for Private Travelling: ................................................................................................... 96
Van Benefit: ................................................................................................................................... 97
Gift of Asset: .................................................................................................................................. 97
Beneficial Loans: ........................................................................................................................... 98
EXEMPT BENEFITS Employees:................................................................................................. 100
Statutory Mileage Allowance: ..................................................................................................... 102
National Insurance Contribution (NIC): .................................................................................... 103
Class 1 Primary: .......................................................................................................................... 104
SHARE OPTIONS ...................................................................................................................... 105
Company Share Option Plans (CSOP): ...................................................................................... 107
Enterprise Management Incentive (EMI): ................................................................................. 108
Enterprise Management Incentive (EMI): ................................................................................. 109
Unapproved Share Incentives: .................................................................................................... 112
Real Estate Investment Trust: .................................................................................................... 115
Tax efficient Investments: ........................................................................................................... 120
➢ Individual Savings Accounts (ISAs): ............................................................................... 120
➢ Accrued income................................................................................................................ 121
Enterprise Investment Scheme (EIS):......................................................................................... 122
Venture Capital Trusts (VCT): ................................................................................................... 123
Seed Enterprise Investment Scheme (SEIS): .............................................................................. 124
Enterprise Investment Scheme (EIS):......................................................................................... 126
Venture Capital Trusts (VCT): ................................................................................................... 126
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Seed Enterprise Investment Scheme (SEIS): .............................................................................. 126

PENSIONS .................................................................................................................................. 128
Retirement 65 years (+- 10 years) ........................................................................................... 131
Trading Profits: ........................................................................................................................... 132
Capital Allowance: .................................................................................................................. 137
Written Down allowance (WDA): ........................................................................................... 137
Short life Asset (SLA):............................................................................................................. 140
Special Rate Pool (WDA @ 6%): ............................................................................................ 141
Basis Period: ..................................................................................... Error! Bookmark not defined.
Change in Accounting Reference Date: ....................................... Error! Bookmark not defined.
Conditions for valid change in Accounting Reference Date: ....... Error! Bookmark not defined.
Cessation Tax Year Rule: ............................................................. Error! Bookmark not defined.
TRADING LOSS RELIEFS: ...................................................................................................... 144
Incorporation Relief: ............................................................................................................... 146
Terminal Loss Relief: .............................................................................................................. 148
Partnership: ................................................................................................................................. 149
NIC Class 2 and 4: ....................................................................................................................... 152
Cash basis of Accounting: ........................................................................................................... 153
Overseas Aspects of Individuals: ................................................................................................ 155
Consequences of Being Resident and Non-UK domiciled: ..................................................... 157
Remittance Basis Charge: ....................................................................................................... 158
Splitting a tax year: ..................................................................................................................... 159
Leaving the UK ........................................................................................................................ 159
Arriving in the UK................................................................................................................... 160
Calculation of Overseas Income:............................................................................................. 163
Overseas Aspects of Capital Gains: ........................................................................................ 164
Disposal of Overseas Assets: ..................................................................................................... 164
Stamp Duty .............................................................................................................................. 167
Income Tax Administration: ....................................................................................................... 169
1. Notification of chargeability: ........................................................................................... 169
2. Tax Returns: .................................................................................................................... 169
3. Retaining records:............................................................................................................ 170
1. Compliance Check: .......................................................................................................... 171
2. Discovery Assessment: ..................................................................................................... 172
3. Payment of IT & NIC ...................................................................................................... 173
Payment of NIC: ...................................................................................................................... 174
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4. Late payment penalties .................................................................................................... 174

Ethics ........................................................................................................................................... 176
1. Prospective clients ............................................................................................................ 176
2. Conflicts of interest .......................................................................................................... 177
3. HMRC Errors or Tax irregularities ................................................................................ 177
4. Tax avoidance or Tax evasion ......................................................................................... 178
5. Money laundering ............................................................................................................ 178
(GAAR): ................................................................................................................................... 179
CORPORATION TAX ..................................................................................................................... 180
Example ........................................................................................ Error! Bookmark not defined.
Administration: ....................................................................................................................... 182
5. Compliance Check: (same as Individuals) ...................................................................... 184
6. Discovery Assessment: ..................................................................................................... 185
Non-trading Loan Relationship Interest Income ........................................................................ 188
Trading Profits: £........................................................................................................... 189
Trading Loss Reliefs (options): ................................................................................................... 191
Intangible Assets ...................................................................................................................... 194
Transfer Pricing Legislation: .................................................................................................. 195
Research & Development Expenditure:.................................................................................. 197
Substantial Shareholding Exemption: .................................................................................... 204
Close Company ........................................................................................................................ 205
• Personal Service Company (IR35): ..................................................................................... 207
Groups of Companies:................................................................................................................. 217
75% Capital Gain Group: ....................................................................................................... 218
De-Grouping Charge: .............................................................................................................. 219
75% Loss Relief Group: .............................................................................................................. 222
Loss Relief Overseas Group Members: ...................................................................................... 225
Consortia: ................................................................................................................................ 226
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________...................... 227
Sale of Trade & Assets without Change of Ownership (at least 75%):.................................. 228
Controlled Foreign Company ..................................................................................................... 233
(CFC): .......................................................................................................................................... 233
5. Value Added Tax .................................................................................................................... 236
Types of Supply ........................................................................................................................... 237
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Opting to tax (waive the tax exemption): ................................................................................ 238

Partially Exempt Business ....................................................................................................... 239
Overseas Aspects of VAT ........................................................................................................ 246
VAT REGISTRATION ........................................................................................................... 248
VAT Deregistration ................................................................................................................. 250
VAT Accounting ...................................................................................................................... 251
VAT SCHEMES FOR SMALL BUSINESSES ...................................................................... 252
VAT ADMINISTRATION.......................................................................................................... 257
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EXAM FORMAT
From June 2023 the ATX-UK exam will feature three (as opposed to four) multi-tax
questions. An analysis of the marks available for each of these questions is set out
below:

Section A Section B

Q1 Q2 Q3 Total

Technical marks 40 20 20 80

Professional skills marks 10 5 5 20

Total marks 50 25 25 100

The Section A question will be similar in style to question 1 in previous ATX-UK

exams. It will consist of a number of exhibits, one of which will be the email from the
manager setting out the requirements in the form of ‘work to be carried out’. The
technical marks will include five marks in respect of ethics. You should note that, due
to the increased number of marks in question 1, candidates should expect the
number of exhibits to generally increase compared to that seen within question 1
under the previous exam format.

The Section B questions will also be similar in style to the Section B questions in
previous ATX-UK exams. Each will generally consist of a single exhibit of information
and a set of requirements.
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PROFESSIONAL SKILLS

The 20 professional skills marks will be awarded for demonstrating the following
skills:

• Communication
• Analysis and evaluation
• Scepticism
• Commercial acumen

The Section A question will examine all four of these skills.

The Section B questions will examine a combination of professional skills

appropriate to the particular question. Each one will examine a minimum of two
professional skills from analysis and evaluation, scepticism and commercial acumen.
Communication skills will not be examined in Section B.

Videos will be available to discuss these skills in more detail as they specifically
relate to the ATX UK exam.

It is important to realise that there is no need to address the professional skills

separately when answering a question. Instead, the professional skills marks will be
awarded for the way in which questions are answered – ie by reference to the
approach taken, the manner in which the work is carried out and the particular
technical points which are identified and discussed.

You will earn the professional skills marks by:

• following any instructions and responding to all of the requirements

• taking time to think about the information provided and how the relevant technical
rules apply to the work you are doing on an ongoing basis as you work through the
exam
• taking care making it as easy as possible for the ‘manager’ (ie the marker) to follow
and understand what you have done.

As noted, the professional skills marks are not earned separately, instead they are
awarded by reference to the technical work you do. This means that you should treat
the exam as being out of 80 (as opposed to 100) marks, such that when you are
organising your time, you have just over 2.4 minutes per mark. Accordingly, when
compared with the previous format of the exam, you have more time to think about:
the requirement, what you want to say, and how you want to say it. This should give
you the time to exercise your professional skills when answering the questions.
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1. INHERITANCE TAX (IHT)

Inheritance tax:
When a chargeable person makes transfer of value of a chargeable property, implications of IHT
may apply.

Chargeable person;
Individuals and trusts are the chargeable persons for IHT.
Chargeable property;
1. If an individual is UK domiciled worldwide property will be chargeable.
2. If an individual is non-UK domiciled only UK property would be chargeable and all the
overseas assets will be exempt.

Chargeable Occasions:
1. Lifetime transfer
2. Transfer due to Death (in accordance with will or rules of intestacy)

Types of life time transfers

1. Potentially exempt transfer (PET)
2. Chargeable life time transfer
3. Exempt transfer

PET:
A gift by an individual to another individual, In to a disabled trust, into certain old trusts (not
examinable).

CLTs:
A gift by an individual to any trust(excluding charities).

Exempt Transfers:
A gift that is specifically deemed to be exempt from IHT, example transfer between spouses,
charity & qualifying political party.
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Life time tax on life time transfers

Exempt Transfers Potentially Exempt Chargeable Lifetime
Transfers (PETs) Transfers (CLTs)
During Lifetime
No IHT payable No IHT payable, only gross IHT to pay calculated using
chargeable amount is to be the lifetime rates of tax i.e at
calculated, Gift will be exempt 20%
If Donor lives 7 years
No IHT payable No IHT payable No further IHT payable
Gift becomes Exempt
Death tax on Lifetime transfers
If Donor dies within 7 years
No IHT payable The PET becomes chargeable IHT calculated using the death
on death. rates of tax i.e at 40%, and
then deduct the amount of life
time IHT to find payable/nil.

Transfer of Value:

– If all of the units owned by donor are transferred or If whole of the property is being
transferred, without any consideration in exchange, in this case it would be open market
value of an asset.

– But if all of units owned by donor are not transferred, we have to perform following
calculations.

Value of estate
Before making transfer xxx
After making transfer (xxx)
Transfer of Value xxx (donor nay kya khoya = Transfer of Value)
Note: Related property rule see later
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Example:1

Mr. A owns three adjacent shops. He gifted one of the shop to his daughter at 1st June 2021.
Valuation of shops is as follows:

MV
Single Shop £40,000
Two Shops £100,000
Three Shops £190,000

Calculate transfer of value of PET made by Mr. A.

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Example 2

Mr. A owns four chairs out of a set of five, one is owned by his brother. He wants to transfer two
Chairs to his Son at 1st December 2021.

1 chair £10,000
2 chairs £14,000
3 chairs £25,000
4 chairs £38,000
5 chairs £50,000

Calculate Transfer of Value of Two Chairs gifted to his son.

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Example
Sansa Stark owns 6,000 shares in Lanisters Ltd and unquoted Investment Company (representing
60% shareholding). She transferred 2,000 shares to his Brother Rob Stark at 15/7/23.
Shareholding of Lanisters Ltd at 15/7/23 was as follows: -
£
1 to 30% 15/ share
31-49% 25/ share
50-70% 45/share
70% and above 60/share
Required: Calculate Transfer of Value on transfer of 2,000 shares by Sansa.

Lifetime Calculations on Lifetime Transfers

For PETs: For CLTs:

Value of estate Value of estate

£ £
Before transfer xxx Before transfer xxx
After transfer (xxx) After transfer (xxx)
Transfer of Value xxx Transfer of Value xxx
Less: Exemptions ( xxx ) Less: Exemptions ( xxx )
Chargeable Amount xxx Chargeable Amount xxx

Calculate Lifetime Tax Using Life Time Rates

Exemptions:

1. Small gift exemption;

If an individual makes a gift of up to £250 per person per tax year, such gifts will be
exempt but on de-minimis rule.
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2. Transfer within spouses and civil partners;

• If the receiving spouse is UK domiciled any amount transfer will be exempt

• If the receiving spouse is non-UK domiciled, in this case exemption is restricted to
maximum of £325,000 (unless election for deemed domicile has been made, see
overseas aspect)

3. Normal expenditure out of income; to claim this exemption an individual has to prove
the following to HMRC;
• There is no impact upon standard of living of donor because of making transfer
• Amount transferred was expense out of income not asset out of estate.

4. Marriage exemption; if the donor is making a lifetime transfer upon marriage of

someone, in this case marriage exemption would be dependent upon relationship of donor
with groom/bride. If the donor is;

• Parent £5,000
• Grandparent £2,500
• Anyone else £1,000
• Fiancé to fiancé £2,500

(On the condition that marriage should take place)

5. Transfers to charities; if an individual transfers any amount to approved UK charities

regardless of being national or local are exempt.

6. Transfer to Qualifying political parties; if an individual makes any transfer to

qualifying political party it would be exempt. A political party would be considered as
qualifying if;

• There are at least two elected members in house of commons or;

• Only one elected member but total votes casted to the party were at least 150,000.

7. Annual exemption;
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• Is £3000 per tax year.

• If there is any unused annual exemption of any tax year it could be carried forward
for one tax year only. But it is compulsory to deduct current year Annual exemption
1st and then previous year’s Exemption.
• If there are more than one transfers in a tax year either PET or CLT . Annual
exemption applies chronologically (i.e in an order, according to date of transfer in a
tax year.
• For tax planning purposes CLT must carried out first in a tax year rather than PET for
better use of Annual exemption.

8. APR (See Later)

9. BPR (See Later)

Rates of Lifetime IHT for CLTs only

Nil Nil
£1 - £325,000

If Trustees Pay IHT If Doner Pays IHT

Above £325,000
20% 25% or 20/80

G.C.A N.C.A

Payment of lifetime IHT:

Will be dependent upon whether the transfer was made in;

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1. IHT must be paid by 30th April after the tax year if the transfer was made in first six
months of the tax year (that is on or before 30th September of the tax year in which
transfer was made).

2. IHT must be paid within six months from the end of the month of transfer, if transfer was
made in last six months of the tax year (that is after 30th September of the tax year of
transfer)

Form Charlotte test your understanding State the due date for payment of tax.

Steps to Calculate Life Time Tax on CLT:

Candidates should first identify from scenario that, who would be paying life time tax on CLT?

IF TRUSTEES TO PAY TAX:

1. Look back seven years from the DATE OF THE TRANSFER to identify Gross
Chargeable Amounts of Chargeable Transfers already been made to deduct from current
tax year’s NRB and remaining will be available NRB for transfer we are dealing with.
(using 7 years accumulation principle)

2. Any part of the Chargeable Amount of CLT covered by the nil rate band is taxed at 0%
and above amount would be charged at 20%.

IF DONOR PAY’S TAX:

1. Look back seven years from the DATE OF THE TRANSFER to identify Gross
Chargeable Amounts of Chargeable Transfers already been made to deduct from current
tax year’s NRB and remaining will be available NRB for transfer we are dealing with.
(using 7 years accumulation principle)
2. Any part of the Chargeable Amount of CLT covered by the nil rate band is taxed at 0%
and above amount would be charged at 25% (20/80).
3. Calculate Gross chargeable amount (NCA+ Tax= GCA).

Death Calculations on Lifetime Transfers

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• Identify which of the lifetime transfers become chargeable on death. By noticing whether
individual died within seven years of making the life time transfer or not.
• We need to perform death calculations on those life time transfers only after whom
individual survived for less than 7 years.
• Find available NRB for the transfer chargeable on death. Look back seven years from the
DATE OF THE TRANSFER to identify Gross Chargeable Amounts of Chargeable
Transfers already been made to deduct from death tax year’s NRB and remaining will be
available NRB on the transfer we are dealing with. (using 7 years accumulation principle)
• Any part of the Gross Chargeable Amount of Chargeable Transfers covered by the nil
rate band is taxed at 0% and above amount would be charged at 40%.
• Deduct Taper Relief.
• Deduct life time tax if CLT.(up to nil)

Note: Life time tax could never create tax refund

Taper Relief:

Will be dependent upon duration within date of transfer and date of death. Available at CLT &
PET to calculate death tax. Relief will be as follows;
More – up to % of death IHT
0 – 3 years Nil
3 – 4 years 20
4 – 5 years 40
5 – 6 years 60
6 – 7 years 80

Fall in Value Relief:

1. If an individual makes a lifetime transfer (either PET or CLT) and after making transfer,
value of asset transferred decreases and transfer becomes chargeable upon death, in this
case fall in value relief will be applicable in death calculations.
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2. FIV relief will only be available if asset transferred was not a wasting or depreciating
in nature.
3. If the asset is retained by donee till the death of donor, FIV relief will be difference in
value at the date of transfer and at the date of death.
4. But if the asset had been sold by the date of death of donor (at arm’s length) relief will
still be available but it would be difference of value at the date of transfer and date of
sale.
5. FIV relief would not have any impact on any other lifetime transfers of donor.

Test Ur Understanding From Kaplan

Tim died on 30 June 2021. On 30 April 2018 Tim had made a gift of 100,000 shares (a 1% holding) in
ABC plc a quoted company, into a discretionary trust. Tim paid the IHT arising on the gift. Tim had made
no other lifetime gifts. ABC plc’s shares were worth £3.65 each on 30 April 2018 and £3.35 each when
Tim died on 30th June 2020.

a) Calculate the IHT liability arising in respect of Tim’s lifetime transfer on 30 April 2018,
stating when it is due for payment.
b) Calculate the gross chargeable amount to carry forward for the IHT on the death estate
computation.
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Business Property Relief:

• BPR will be available upon both gifts during lifetime and transfers at death through will
(death estate).
• BPR will be available upon worldwide property if;
1. Property is Relevant Business Property.
2. Property was held for minimum period of ownership.
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Relevant Business Property:

• Upon Gift of unincorporated trade that is sole trade or partnership. In this case BPR will
be 100%.
• Upon gift of an asset owned by individual but used by Unincorporated Partnership
Trade or in a Company Controlled By Donor and rent is not charged, would attract
50% BPR.
• Upon transfer of shares of unquoted trading company 100% BPR will be available.
• Upon transfer of securities of unquoted companies there will be 100% BPR but if donor
has voting control of the company before transfer.
• Shares and securities of a quoted trading company would qualify for 50% BPR but
only if donor has voting control of the company.

Minimum Period of Ownership:

A relevant business property will qualify for BPR if it has been held for at least two years
preceding the date of transfer.

Exceptions to the minimum period of ownership;

1. Replacement Property: if the property transferred has not been held for two years before
the date of transfer, still BPR will be available if all of the following conditions are
fulfilled;

• Property being transferred was purchased as a replacement of previous relevant

business property.
• Combined period of ownership of both properties should be at least two out of
five years preceding the date of transfer.
• If both of above conditions are fulfilled, BPR will be available upon lower of:
o Value of current property
o Value of previous relevant business property

2. Successive Transfer: if a property transferred was not held for two years before transfer
but following conditions are fulfilled, BPR will be available;

• The property being transferred was received not purchased.

• When transferred first donor qualified for BPR.
• Any of three:
o Either the property was transferred due to death of first donor or;
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o Property is now chargeable due to death of second donor or;

o Death of both,

Example:

Mr. A wanted to transfer shares of Y Ltd. an unquoted trading company valued at £200,000 at 1st
January, 2024. He received these shares from his father when he died at 1st June, 2022 His father
owned these shares for 10 years before his death and shares were valued at £160,000 on death of
his father.

Requirement: Calculate GCA for transfer to be made at 1st January 2024 by Mr. A.
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Test Ur Understanding (BPR) From Kaplan

On 31 December 2023, an unquoted trading company JKL Ltd was taken over by MNO Ltd,
another unquoted trading company. Marsha had owned ordinary shares in JKL Ltd for four
years before the takeover. The consideration on the takeover consisted of ordinary shares in
MNO Ltd.
On 30 June 2024, Marsha gifted her shares in MNO Ltd to her sister. The shares in MNO Ltd
were worth £160,000. She had made no other lifetime gifts.

Her shares in JKL Ltd had been worth £110,000 on 31 December 2023.

Calculate the gross chargeable amount of Marsha’s lifetime gift to her sister.

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Partial Non-Trading Company:

If shares gifted are of such a company which owns business assets as well as any non-business
assets, BPR will be applied upon the following:

Transfer of value x Business Assets of Company

Total assets of company

Test Ur Understanding

On 31 May 2023, wendy gifted 40,000 shares in STU LTD, an unquoted trading company to her niece on
the occasion of her marriage. Wendy had owned the shares since 2017 and on 31 May 2023 the shares
were worth £180,000. On that date, STU LTD owned assets worth £500,000 which included an investment
property valued at £50,000.
Wendy had made no other lifetime transfers.

Calculate the gross chargeable amount of Wendy’s lifetime gift.

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Withdrawal of BPR:

Amount of BPR being calculated and deducted in lifetime calculations will be added back into
GCA while performing death calculations if:

1. The relevant business property is not used for business purposes by the date of death
of donor.
2. Business property has been sold by donee by the date of death of donor and
replacement business property was not purchased.
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Agricultural Property Relief:

Unlike BPR, APR is only available in respect of gifts of agricultural properties situated in UK,
European economic area, Channel Island and isle of men.
APR will be available if;

1. Property is relevant agricultural property.

2. It was held for minimum period of ownership.

Relevant Agricultural Property:

• Any land & building which is used for cultivation or animals will be considered as
relevant agricultural property, including farmhouse & farm cottages.
• But APR would only be available in respect of agricultural value of agricultural
property, regardless of tenanted or self-farm.
• If an individual owns shares in a farming company upon transfer of such shares, APR
would only be available if individual has voting control of the farming company,
regardless of being quoted or unquoted.

Minimum Period of Ownership:

• Self-farm: two years before transfer, 100% APR
• Tenanted land: seven years before transfer, 100% APR

Note: Rate of APR for tenanted land will be reduced to 50% if:
1. Tenancy agreement started before 1st September, 1995.
2. At the date of transfer the owner does not have the right to obtain vacant
possession (Qabza) within the next two years.

Note: exceptions to minimum period of ownership are replacement property and successive
transfer, same as for BPR, with two out of five years’ time of combined ownership for self-farm
and seven out of ten for tenanted land.
Test Ur Understanding 7 (APR) From Kaplan

ZAC plans to gift his farming business and 20,000 cash to his grandson on the occasion of his
marriage 1st January 2024. He has made no other lifetime gifts in the preceding seven years.
ZAC lives on the farm and has owned and worked the business for the last seventeen years.
A surveyor has recently valued ZAC’’S farm and its land as follows:
£
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Agricultural value 600,000

Development Value 400,000
Market value of farm land and buildings 1,000,000
Animals and inventory 150,000
Plant and machinery and motor vehicles 80,000
Market value of farming business 1,230,000

Calculate the chargeable amount of ZAC’S gift to his grandson.

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Withdrawal of APR:

Amount of APR calculated and deducted in the lifetime calculations will be added back into GCA
in death calculations if:

1. Agricultural property is not used for agricultural purposes anymore.

2. Agricultural property has been sold by donee by the date of death of donor and has not
purchased any replacement agricultural property.

Example:

Since 2008 Mr A holds 75% share-holding in A LTD. He gifted his share-holding on 31 October 2023
to his daughter worth £375,000.
Accounts of A LTD show:
£
Farm Land 350,000
Other assets 150,000
500,000
The farm has always been let to tenants for previous 9 years.
Agricultural Value of the farm land was £300,000. The other assets 150,000 all use in A Ltd’s trade.
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Calculate gross chargeable amount.

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Related Property Rule:

For the calculation of transfer of value, ownership of all related parties should be considered.
Following are the related parties;
1. Donor’s spouse or civil partner.
2. Any exempt body that is charity or political party. If property is owned by them at;
a. Date of transfer or;
b. Even if the exempt body sold it, still it would be considered as related property
for five years after date of sale.

In such scenarios, value of estate will be calculated using following formula:

Value of Estate: Value of total related property x A

A+B
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Where A = value of donor’s estate

B = value of other related party’s estate

In case of shares; A = number or % of donor’s shareholding

B = number or % of other related party’s shareholding

Note: If market value per share is given in the question then:

Value of Estate = MV per share of total related property x Number of donor shares

Test Ur Understanding (Related Property) From Kaplan

Sara owns two antique chairs which are part of a set of six. Her husband owns another three, and
her daughter owns one.

1 chair £5,000
2 chairs £15,000
3 chairs £25,000
4 chairs £40,000
5 chairs £60,000
6 chairs £90,000
Calculate the transfer of value relating to the gift of one chair by Sara for IHT purposes.
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Test Ur Understanding (Related Property) From Kaplan

On 28 November 2022, James gave his son 6,000 ordinary shares in Simons Ltd, an unquoted trading
company. The company share capital immediately before the transfer comprised 20,000 ordinary shares
held as follows:
Number
James 8,000
His wife 2,000
His brother 5,000
His sister 3,000
 25

His father 2,000

Total 20,000
The agreed values for the shares are:
Holding £
75% or more 10
50.01%_74.99% 8
50% exactly 7
30%_49.99% 6
10%_29.99% 4
Under 10% 3

Calculate the transfer of value relating to the gift of 6,000 shares by James for IHT purposes.
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Proforma Death Estate Computation:

£ £
Freehold Property x
Less: Mortgage (except endowment mortgage) (x) x
Foreign Property x
Less: Expenses (restricted to maximum 5% of property value) (x) x
Business owned by Sole Trader / Partnership (BPR may apply) x
Farm (APR may apply) x
Stocks and shares (including ISAs) x
Government securities x
Insurance policy proceeds x
Death in service policy x
Leasehold property x
Motor cars x
Personal chattels x
Debts due to the deceased x
Interest and rent due to the deceased x
Cash and Bank on deposit (including ISAs) x
x
Less: Debts due by the deceased (x)
 26

Outstanding taxes (e.g. IT, CGT due) (x)

Funeral Expenses (x)
Free Estate x
Less: Exempt legacies (e.g. spouse, charity, political party) (x)

Net Free Estate (GCE in the absence of GWR and settled property) x

Add: Gift with reservation x

Settled property (interest in an IPDI trust) x

Gross Chargeable Estate x

IHT on estate value is calculated as follows:

£
IHT on chargeable estate x
Less: Quick Succession Relief (if applicable) (x)
x
Less: Double taxation Relief
Lower of:
i) Foreign tax suffered
ii) AER* x foreign property value in estate (x)
IHT payable xx

Due Date for IHT: Earlier of;

• Six months after end of month of death
• On delivery of estate accounts to HMRC

Calculating AER: IHT after QSR / Chargeable Estate x 100

Test Ur Understanding (Death Estate)

Tom died on 30 June 2023 leaving the following assets:

£
House 200,000
Cottage 250,000
Unincorporated business 400,000
Bank account 75,000
Quoted shares in a trading company 100,000
Car 15,000

At the date of his death Tom owed £2,000 on his credit card, and
£3,000 of income tax and CGT. Tom has owned the business for 20
 27

years.

In Tom’s will he left

• the business, the house and shares to his wife

• the cottage to his son
• the residue to his daughter.

Tom made a lifetime gift of £115,000 in cash to his son in August 2020.

Compute the IHT payable as a result of Tom’s death.

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Residence nil rate band

Residence nil rate band (RNRB) of £175,000 applies in tax year 2023-24 when calculating
IHT of death estate on: -
1. Calculating tax on death estate.
2. The chargeable estate includes a Residential property
3. Which has been the Deceased Residence
4. Is inherited on death by the deceased direct descendants (e.g child / grand-children).
5. The date of death is on or after 6 April 2017.
6. RNRB is lower of
• £175,000
• The value (net of repayment mortgages) of residential property
Important to Note:
• Unlike the normal RNRB is not available when calculating the additional tax
due on lifetime gifts as a result of death. So, if a house is given to a child
 28

during lifetime, the RNRB is not available when calculating any death tax due
as a result of the PET becoming chargeable.
• Note that the deceased must only have lived in the residential property at
some time. It does not have to have been the deceased’s main residence or
be lived in by the deceased at the date of death also there are no minimum
occupancy requirements.

• The residence nil rate band is also transferable. It does not matter when the
first spouse died. (see later)

EXAMPLE 37
Sophie died on 26 May 2023 leaving an estate valued at £850,000. Under the terms
of her will, Sophie’s estate was left to her children. The estate included a main
residence valued at £325,000.

The inheritance tax (IHT) liability is:

Solution

Tapered withdrawal of the RNRB:

The RNRB will be withdrawn:
• From estates with a net value (before deducting APR, BPR and exemptions)
exceeding £2 million
• At a rate of £1 for every £2 exceeding the threshold.

The RNRB will therefore be reduced to nil when the net estate is £2.35 million or more
(£2 million + (£175,000 × 2)).

Example
On 1 May 2023 Davina died, leaving the following assets and liabilities:
£
House (net of a repayment mortgage of £100,000) 600,000
Bank account 700,000
 29

Quoted shares 750,000

Credit card bills (3,000)
Value of estate 2,047,000

Davina left the house, which she had lived in for many years, to her daughter, the shares to her
husband and the residue of her estate to her son.
Calculate the available RNRB and the IHT liability on the death estate, assuming Davina had
not made any lifetime gifts.
Solution:
Davina is entitled to the RNRB as she died after 6 April 2017 and has left a residential home to a
direct descendant (i.e. her daughter).
The value of Davina’s estate (net of liabilities) exceeds £2 million. The maximum RNRB is therefore
tapered as follows:
£
Maximum RNRB 175,000
Less: 50% × (£2,047,000 – £2,000,000) (23,500)
Reduced maximum RNRB 151,500

Estate value 2,047,000

Less: Exempt legacy to husband (shares) (750,000)
Gross chargeable estate 1,297,000
Less: RNRB (151,500)
Less: NRB at death (no lifetime transfers) (325,000)

Taxable amount 820,500

IHT liability (£ 820,500 × 40%) 328,200

Valuation of Assets for Death Estate:

1. Quoted Shares/Securities:
Lower of:
a) Lower quoted price + ¼ (Higher quoted price – Lower quoted price)
b) (Highest bargain + Lowest bargain) / 2

Example:
Mr. A owns 10,000 shares of Y Plc at 1/1/22 when he died.
At 1/1/23 Quoted Prices £6 - £9
Market Bargain £5, £5.5, £7, £8
Calculate Transfer of value of shares.
 30

2. Jointly Held property:

1. Joint Tenants;
• If one dies property would pass on to the other owner,for example husband or
wife
• Value would be based upon % of ownership

2. Tenants in common;
• If one dies, share would pass in accordance with the terms of their will or in
accordance with the rules of intestacy to a third party.
• Value would be based upon % of ownership and then deduct further 10%

3. Units in Unit trusts:

Value to be used will be lower quoted value.
4. Settled Property:

• If an individual is life tenant of interest in possession trust (IIP) or immediate post

death interest trust (IPDI)
• In such case whatever the value of assets IIP or IPDI holds would become settled
property in the death estate of life tenant
• Inheritance tax in respect of settled property would be paid by trustees of IPDI and
would be suffered by remainder man.
Test Ur Understanding (Death Estate Comprehensive)
Wilma died in a car crash on 4 October 2023.
Under the terms of her will, the estate was left as follows:

• £120,000 to her husband.

• £50,000 to the Political Party.
• Residue of her estate to her Son including her main residence.

At the date of her death, Wilma owned the following assets.

(i) Her main residence valued at £243,000.

(ii) A flat in London valued at £150,000. An endowment mortgage of £70,000 was secured on this
property.
(iii) Four shops valued at £50,000 each. Wilma’s husband Fred owns two adjacent shops valued at
£60,000 each. The combined value of all six shops is £370,000.
(iv) A villa situated overseas worth $200,000. The exchange rate on 4 October 2017 was $10 to £1.
(v) A half share of partnership assets which are valued at £400,000 in total. The partnership trades in
 31

the UK. She had been partner in this business since 2012.
(vi) 20,000 shares in ZAM plc. The shares were quoted at 198p – 206p, with bargains of 196p, 199p
and 208p.
(vii) 8,000 units in the CBA unit trust, valued at 130p – 136p.
(viii) Bank balances of £57,850.

Wilma is also the life tenant of an immediate post death interest trust. The value of the trust fund on 4
October 2022 was £260,000.

Wilma’s outstanding income tax liability was £7,500, and her funeral expenses amounted to £2,000.
She had made no lifetime gifts.

Calculate the IHT that will be payable as a result of Wilma’s death. Explain who will pay and who will suffer the
IHT liability.
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Single Grossing up

If the residue legatee is an exempt person following would be required: -

Net Chargeable Estate is to be calculated from will of a deceased person by adding the share of
chargeable legatees. (NCE)
The value of NCE must be used for calculating IHT but using the following

NCE (in excess of the nil band) x 40/60

Example:
Mr. A died at 1st May 2023 leaving a free estate of £900,000. According to his will he left his
estate as follows:

• £75,000 each to his two daughters

• £250,000 to his son
 32

• £50,000 to political party

• Residual of the estate to his wife.

Calculate the IHT payable on transfer of assets owned by Mr. A at death.

Quick succession Relief:

When the same asset becomes chargeable second time because of two deaths within five years,
QSR will be available on second death. Amount of QSR is treated as a tax credit and will be
deducted from Inheritance tax of death estate. Amount of QSR will be calculated using following
formula:

QSR = IHT on first death x % of QSR

If Duration between both deaths

More than – up to % of QSR
0–1 100
1–2 80
2–3 60
3–4 40
4–5 20
5 onwards Nil
Example:
Mr. A died at 1 January, 2024 leaving a free estate valued at £ 180,000. In his estate there are
shares of Q Plc valued at £120,000 at 1/1/24. He received these shares at his father’s death at
1/11/22 when shares are valued at £90,000. GCE of his father at 1/11/22 was £600,000 and IHT
paid in respect of his father’s death estate was £110,000. Mr. A has one life time transfer of
£380,000 to his brother at 15/5/22.
Requirement: IHT payable as a result of death of Mr. A.
. . .
.
Double Taxation Relief:

DTR could be provided by any of the following;

1. Bi lateral treaty: in this case UK and overseas country has certain arrangements in place
because of which tax payer would not be suffering any double tax. Candidates in this case
would be required to identify either of following treatments to apply from exam question:

o Property would be either taxable for UK IHT only

 33

o Property would not be taxable for UK IHT as it would only be taxable in

the overseas country.

2. Unilateral treaty: In this case UK does not have any double taxation arrangement with
overseas countries and so overseas property of the tax payer would be taxed in both
countries, in this case HMRC will allow DTR to be deducted from IHT liability as a tax
credit.

Amount of DTR will be lower of:

o Overseas tax on overseas property

o UK tax on overseas property

Test Ur Understanding (QSR AND DTR) From Kaplan

Peter Died on 15 August 2023 leaving an estate Valued at £375,000. The estate included property
situated overseas valued at £60,000. Overseas IHT of £18,000 was paid on this property. The estate
also included a 4% interest in quoted shares that Peter inherited on the death of his mother on her
death on 10 November 2020. At the time of her death the shares were worth £50,000, and on peter’s
death they were worth £115,000. IHT of £80,000 was paid on a total estate of £400,000 on his
mother’s death.
Peter had made no life time gifts and he left his entire estate to his son.
Calculate the IHT payable as a result of Peter’s death.
. . .
.
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.
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Reduced rate of IHT for substantial legacies to charity:

A reduced death rate of 36% will be applicable rather than 40% if an individual left 10% or more
of the “baseline amount” for qualifying charities.

Baseline is calculated as follows:

Gross Chargeable estate xxx
Less: nil rate band(not RNRB) (xxx)
Add charitable legacies xxx
Baseline amount xxx
 34

Test Ur Understanding (Reduced NRB, Charity) from Kaplan

Han died on 1 May 2023 leaving an estate consisting of:

House £320,000
Quoted shares £145,000
Cash £67,000

Han owed tax of £3,200 at his death. In his will he left £215,000 to his wife and £25,000 to
Oxfam, a UK registered charity. Han had made one lifetime gift to his son of £310,000 on 10
April 2021.
Requirements
- Calculate IHT liability.
- Calculate increase in charitable legacies, in order to apply reduced rate of
IHT at death estate.
- Calculate Tax cost/saving resulting from increase in charitable legacies.
- Explain is it beneficial to increase charitable legacies or not.

Gift with Reservation:

If an individual makes a lifetime transfer and

1. Legal ownership of the asset has been transferred but

2. Donor retains some benefits in the asset transferred
Tax treatment:

1. If the reservation is still in place by the date of death of donor, in this case it would not be
considered as lifetime transfer rather it would be added into donor’s death estate as GWR.
(M.V at the time of death will be taken)
2. If the reservation has been lifted before the death of donor in this case it would be deemed
lifetime transfer on the date when reservation was lifted (without annual exemption).
Example:
If a person gives his home to his child on condition that he can go on living in it until his
death, this would count as a gift with reservation of benefit.
Exception to the Rule:

1. When circumstances of donor have been changed and it was not a foreseeable event at
the date of transfer.
2. Where donor pays arm’s length consideration for reservation retained.
 35

Will Planning:

• Leave chargeable estate for exempt legacies

• Leave exempt estate for chargeable legacies
• If Nil Rate Band available, transfer to chargeable legacies up to amount of NRB available
• Transfer to grandchildren when children are wealthy to avoid IHT on one generation.

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;

1. It must be in written form & signed by all beneficiaries of previous & new will
2. It should not be for any consideration in return for change in will
3. Should be submitted within two years of death
4. It should state that change was for tax efficiency

Associated Operations: (Anti-Avoidance tax rule)

The associated operations rule may apply where there are two or more transactions which affect
the same property and as a result tax is avoided.

For example, if an asset is transferred piecemeal, so that the total value of the individual
transactions is less than the value of the whole asset. Where tax is avoided by making a series of
transactions and the associated operations rule is applied.

If applied, series of transfers will be ignored for IHT purposes and it would be replaced with one
life time transfer which will be deemed to be occurring on the date when last transfer was made.

Exception to the rule; If the above said transfers were within spouses in that case associated
operations does not apply.

For example,
Trustees might own some valuable paintings. They could give D, an individual, custody of the
paintings for several years, on normal commercial terms (so that there would be no gratuitous
intent). The trustees' interest in the paintings would be reduced in value, because someone else
had custody of them. The trustees could then give an interest in the paintings to D's son. The
value of what was given to D's son would be lower than it would otherwise have been, saving tax.
 36

HMRC would, however, retrieve the tax by treating the arrangement with D and the gift to his
son as associated operations.

King Question in Kit vacant possession vs non-vacant

Overseas aspects of IHT:

An individual’s worldwide assets would be chargeable if individual is UK domiciled. But only

UK property would be chargeable if individual is non UK domiciled.

Deemed Domiciled: (this concept is only for IHT)

1. Under the new rule, individuals are deemed UK domiciled where they:

- have been resident in the UK for at least 15 out of the 20 tax years immediately
preceding the relevant tax year

2. An individual who has been UK domiciled and moves abroad also changing its UK
domicile, every such individual will be deemed to be UK domiciled for three years after
cancellation of UK domicile.

3. Deemed Domiciled through Election;

a. This election can be made during lifetime and in this case it could be effective
from date of election or if tax payer wants seven years before date of election
(but not before 6th April, 2014)
b. This election is also available at death in which case it must be made within two
years of the death
 37

c. If an individual elects for deemed domicile is irrevocable although this deemed

domicile status lapses automatically if an individual remains not resident in UK
for consecutive four years.

Transfer of unused Nil Rate Band:

Unused Nil Rate Band (NRB) or Residence Nil Rate Band (RNRB) of a deceased individual
could be used by his/her surviving spouse on percentage basis but only at death of
surviving spouse. To claim unused nil rate band by surviving spouse his/her executor
must file the claim within two years of death of surviving spouse.

Note: NRB will be used on death calculations first then for death estate.

Percentage will be used when one spouse die before tax year 09/10 and other spouse
die after tax year 09/10, hence different nil rate bands available for both spouses.

But for RNRB 100% will be available even if the first spouse died before 6 April 2017 as
it was not introduced before that. But it can only be utilized against the residential
property transferred to a direct descendant

2. CAPITAL GAIN TAX (CGT)

Capital Gain Tax:
When a chargeable person makes chargeable disposal of chargeable assets, implications of CGT
applies.

Chargeable Person:

Resident individual: Will be chargeable individual for assets sold World Wide.

Non Resident individual: Will be chargeable for

• UK Business Assets.
• UK Land and buildings (both residential and commercial)
Chargeable Disposal:
Following are chargeable disposals.
• Selling at Arm’s Length
• Gifting or undervalued sales of an asset
• Assets which are damaged, lost or destroyed due to theft or any disaster.
• Selling Part of an asset.
 38

• Selling an asset at Barter trade.

Following are Exempt disposals;
• Transfer/gifts to charity
• Transfers due to death

Chargeable Assets:
All assets are chargeable except the following list of exempt assets;
1. Motor Vehicles including cars
2. Qualifying Corporate Bonds (QCB)
3. National Saving Certificates
4. Investments held under Individual Saving Account (ISA)
5. Certain chattels ( proceeds & cost less than 6,000)
6. Shares of Venture Capital Trust (VCT)
7. Principal Private Residence (PPR or main residence) conditional
8. Government Gilts (Government securities / Guilt Edge securities)
9. Stocks / debtors / cash or any current asset used in the business of individual
10. Live chattels boats & Caravans

CGT computations for tax year 23/24: £

Gains for the tax year xxx

Less losses for the tax year (set-off basis) (xxx)
Net Gains / (loss) xxx / (xxx)
Less Annual Exemption (6,000)
Less b/f Capital loss (Partial Claim Basis) (xxx)
Taxable Gains / Nil xxx / Nil

Capital losses:

1. If there is any capital loss in current tax year it would be deducted from the gains of same
tax year and if there is still any unrelieved loss it would be called as net loss.
2. Net losses are accumulated with any previous brought forward loss and will be carried
forward to relief against future net gains (partial claim is allowed). These losses will be
carried forward indefinitely unless losses consume or individual dies.
3. If there are any net losses in the tax year of death it could be carried back for previous
three tax years, against net gains (partial claim is allowed).
 39

CGT percentage:

Taxable gains x Basic and/or Higher = CGT

Bands All Other Assets Residential

Properties
Basic Rate Band £1 - £37,700 10% 18%
Higher Rate Band Above £37,701 20% 28%

Where a person has realised gains in respect of residential property and other chargeable asset,
then the any capital losses and annual exemption should initially be deducted from the gains of
residential property and then to other gains. This approach will save capital gains tax at either
18% or 28%, compared to 10% or 20% .

Calculations of Gain / loss on Single Asset:

£ £

Proceeds xxx
Less incidental cost of disposal (xxx)
Net Proceeds xxx
Less Allowable Cost:
Original Cost (purchase cost + incidental cost of purchases) xxx
Enhancement Expense xxx (xxx)
Gain / Loss xx/(xx)

Test your Understanding From Kaplan

Julie sold the following assets in the tax year 2023/24

• A residential investment property on 1 July 2023 for £650,000. She had acquired the building
for £80,000 in June 2008 and had extended it at a cost of £30,000 in June 2010.
• A painting on 1 August 2023 for £20,000, incurring auctioneer’s fees of 10%. She had acquired
the painting for £35,000 in April 2011.
• A rare comic book on 1 December 2023 for £30,000. The comic book had been purchased on 1
December 2008 for £8,000.
 40

Julie had capital losses brought forward of £16,000. Julie’s taxable Income for the tax year 2023/24
was: -
1. £40,000.
0R
2. £25,000.

Required: Calculate Julie's capital gains tax payable for the tax year 2023/24 in both
cases and state the due date for payment.
 41

Exceptional Disposals/Variations to computations:

1. Transfer/Sale within connected person other than spouses:

Connected persons are:
• Blood relatives of an individual.
• Relatives of individual’s spouse.
• Business partners.
• Spouses and relatives of business partners.
• Any trust to which an individual is settlor, life tenant and remainder man.
• Any company in which individual has control.

Tax Treatment
• Actual proceeds in this case will be replaced with market value at the date of
transfer/sale may result in gain/loss.
• Deemed proceed of the donor (i.e market value) is considered as allowable cost for
donee also known as base cost.

Example:

Mr. A

01-06-14 Purchased the asset £70,000

01-09-17 Enhancement Expense £15,000
01-01-24 Market Value £160,000
01-01-24 Transfer/sold to daughter for £70,000.

Calculate gain chargeable for Mr.A on disposal & future base cost for his daughter
. .
. .
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VALUING QUOTED SHARES
(In Case Of Transfer/Sale within connected person other than spouses)

• Value/share will be Average Of Quoted Prices on the day of Gift only

And

• Unlike IHT Bargain prices no longer have any relevance for capital gains tax purposes.

For example, if shares are quoted at £5.10 – £5.18, then the value per share to be used is
£5.14 ((£5.10 + £5.18)/2).
 42

2. Transfer/Sale within spouses or civil partner:

Actual proceeds will be replaced with Allowable Cost thus resulting in no gain/no loss.

Basis of Suggestion to client (P6 ! !)

1. Availability of losses today
2. Availability of annual exemption today
3. Availability of Basic rate band.

TEST YOUR UNDERSTANDING FROM KAPLAN

Charlie bought a seaside flat in Cornwall in December 1998 for £23,600 to use when he was on
holiday from work. The flat has never been used as Charlie’s main residence and does not qualify
as furnished holiday accommodation.
In November 2023 Charlie decided to gift the flat which was worth £175,000.

A. Calculate the chargeable gain arising on the gift of the flat assuming Charlie gifted the flat
to:
I. His sister
II. His wife

B. Calculate the chargeable gain arising if the sister sells the flat in May 2024 for £200,000.
C. Calculate the chargeable gain arising if the wife sells the flat in May 2024 for £200,000.

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.
 43

3. Part Disposal: Whenever an individual is selling part of a land/building Allowable cost

should be calculated as follows:

Allowable Cost = Total Allowable Cost x A / A + B

Where A = Market Value of portion Sold

B = Market Value of portion Unsold
Example:
1/1/15 Purchased 10 hectares of land for £60,000
1/6/22 Sold 2 hectares of land for £200,000
1/6/22 MV of remaining 8 hectares was £300,000
1/7/25 sold all remaining 8 hectares for £360,000

Calculate gain on disposal as at;

1. 1/6/22.
2. 1/7/25.

• Small Part Disposal

Criteria for Small Part Disposal (land & building):

If proceeds received from part disposal are;
▪ Less than or equal to 20% of the market value of full asset AND
▪ Total proceeds received by individual during the tax year from sale of
all land and building should not exceed £20,000

• If elected as small

No Calculation of gain or loss is required at the Disposal Date.

Rather New Reduced cost will be calculated as Follows

Original Cost (Full asset) xxx

Less Proceeds (of Part Disposal) (xxx)
New Base Cost xxx
 44

Example:
Mr A
1/12/15 Purchased 10 hectares of land for £110,000
1/8/22 Sold 1 hectare of land for £18,000
1/8/22 MV of remaining 9 hectares was £250,000
1/2/25 Remaining 9 hectares were sold for £280,000

Calculate gain on sale of 1 hectare and Mr A

a) Elect for small part disposal
b) Don’t elect for small part disposal.
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 45

4. Chattels:

Personal Business

(Tangible, movable property) (Movable P&M)

Antiques, paintings Business Plant &
& expensive decoration items Machinery
(Except for heavy,
immovable, industrial P &
Case 1 = Proceeds & Cost both less than £6000 Exempt Asset Machinery)

❖ Sold at Gain:
Case 2 = Proceeds/Cost < £6000 not examinable Case 1 & Case 4
Not Examinable
Case 3 = ❖ Sold at Loss:
Reduced to Nil

Case 4 = Proceeds & Cost both > 6000 Normal Calculation

5. Wasting assets (Any Asset with a useful life of Upto or Less than 50 Years)

For CGT Chattels summarized as below:

Wasting Chattels Non Wasting Other wasting assets

≤50 years Chattels ≤50 years
>50 years
˗ Heavy immovable
Live Chattels P&M P&M
˗ Jewellery ˗ Patent rights
Boats & sold at
˗ Antique ˗ Copy Rights
Caravans
˗ Painting ˗ Short leases

NGNL Apply £6000 Apply £6000

Rule Rule

Loss
(Ignore)
(Covered by capital Allowances)
 46

Allowable cost for other wasting assets (Patent Rights + Copy rights):

The allowable cost of these assets is deemed to be reduced over the life of asset on straight line
basis.

Total Allowable Cost x Remaing life

Total life

Allowable cost for other wasting assets (Immoveable/Fixed Machinery):

As usually there is scrap value ;

£ £
Proceeds xxx
Allowable Cost
Original Cost xxx
(Cost – Scrap value) x used life / total life (xxx) (xxx) (NBV)
Gain / loss xx/(xx)

Example: 1 Wasting assets

On 16 March 2017 Nicholas bought an asset at a cost of £45,000. It had an estimated useful life of 25
years and an estimated scrap value of £6,000. He sold the asset on 17 March 2024.
Calculate the chargeable gain or allowable loss arising from the sale in March 2024 assuming:
i) The asset is Fixed Machinery and was sold for £42,000.
ii) The asset is not a fixed plant and machinery eligible for capital allowances and was sold
for £34,000.
iii) The asset is not fixed plant and machinery eligible for capital allowances and was sold
for £63,000.

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. .
. .
. .
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Allowable Cost for Leases:
 47

Short lease Long Lease

Up to 50 years more than 50 years

Normal Calculation
Allowable Cost:
Total Allowable Cost x % of Remaining useful life
% of Total useful life

* Percentage to be used from lease % table given in paper

Example:
Mr. A
1/1/21 Purchased patent rights with a useful life of 20 years for £40,000
1/1/24 sold them for £39,000
Calculate gain of Mr A during the year.
. .
. .
. .
. .

Examples:

Mr. A
01/10/23 Purchased a leasehold shop for £50,000 with a useful life of 40 years.
30/09/24 sold it for £90,000.

Calculate gain.

39 years 94.842%
40 years 95.457%

. .
. .
 48

. .
. .
B:

Mr. A
01/09/18 Purchased a leasehold shop for £62,000 with a useful life of 48 years.
31/01/24 sold it for £75,000.

48 years 99.289%
43 years 97.107%
42 years 96.593%

Calculate gain.
. .
. .
. .
. .

All types of Reliefs and Exemptions:

Business Asset Disposal Relief

 49

Upon sale of Investor’s Relief

Business Rollover Relief Deferral

Assets Holdover Relief

Gift Holdover Relief
Sale of any Incorporation Relief
Chargeable EIS Deferral Relief

Exemptions
Assets SEIS Exemption
Principal Private Property
Private Personal Use Letting Relief

Business Asset Disposal Relief:

1. BAD will be available upon Disposal of ;

• Shares & Securities;

- If individual owns at least 5% shareholding or more (before sale of

shares) and should also be employee of the company.
- There is a further condition of ownership of shares and employment with
the same company for at-least Two year before sale of shares.

• Sale of Unincorporated business (i.e. Property, Plant, Equipment and

Goodwill)

- If business assets are sold as a result of cessation* of complete or major

part* of the trade.
- Business must be conducted by the seller for at least two years before
cessation.
- The assets should be sold within three years of cessation, in order to
claim the BADR.

*Cessation means any of the following condition:

 50

1. Liquidation
2. Sale of business on Going Concern Basis
3. Transfer of Business to connected person
4. Transfer of sole trader trade into company

*Major part of trade means profit centre which has its own cost and revenue usually called
SBU

2. Gain qualifying BADR will be taxed at 10% regardless of level of incomes of an

individual.
3. But if there is any available basic rate band will be used or consumed by gains qualifying
for BADR first and then to those gains which do not qualify, if any.
4. If there are losses which qualify for Business Asset Disposal relief such losses would be
set off against gains qualifying for BADR only and if still there is any unrelieved loss it
would be carried forward against such future gains which qualify for BAD.
5. It will always be tax efficient to deduct losses and annual exemption from the gains not
qualifying for BADR first and then from qualifying gains.
6. BADR must be claimed within one year of 31st January following the tax year of disposal.
For disposals during 2023/24, claimed must be by 31 January 2026
7. Relief will be available upon first £1 million qualifying gain in the life of an individual.
8.
I) Restriction in respect of goodwill
Gains in respect of goodwill will not qualify for BAD if the goodwill is
Transferred to a close company and the individual and the company are related, i.e. the
individual is a shareholder in the company or an associate of a shareholder.

Exception to this rule:

(BAD will be available on gains of goodwill) if

• Individual holds less than 5% of the company’s ordinary share capital or voting rights
Or
• Holds more than 5% of the ordinary’s share capital or voting rights, but sells the whole
shareholding to another company within 28 days. The individual must holds less than 5%
of the acquiring company’s share capital and voting rights

II) Deferred Business Asset Disposals’ relief on invested gains

The availability of Business Asset Disposals’ relief has been expanded to include a gain
that would otherwise have qualified for Business Asset Disposals’ relief, but was deferred
via an investment in enterprise investment scheme (EIS) shares. On a subsequent sale of
 51

the EIS shares, the deferred gain will be charged, but will only be taxed at 10% due to the
availability of Business Asset Disposals’ relief. In order for Business Asset Disposals’
relief to be available in these circumstances a claim must be made in a year by 31 January
after the tax year in which the gain eventually became chargeable.

Example:

Gain / Loss realised upon sale of following assets by Mr A during the tax year 2023/24 are as
follows:

£ (Gain / loss)
▪ 10% shares in Y Ltd (Mr. A is working for Y Ltd and is also
Shareholder from last 3 years) 20,000

▪ Investment property 40,000

▪ Less than 1 % holding in Q plc 10,000
▪ Painting (9,000)

Taxable income of Mr A for 2023/24 was:

i) £65,000
OR
ii) £2,000
OR
iii) £20,000

Required: Calculate CGT payable by Mr. A for 2023/24, assuming he has not made any disposal
other than stated above during 2023/24.

. .
. .
. .
. .
. .
. .
. .
 52

. .
. .
. .
. .
. .

Investors’ relief:
1. Previously, where an investment in company shares was concerned, Business Asset
Disposals’ relief was only available where an individual had a minimum 5% shareholding
and was also an officer or employee of the company.
2. Relief has now been extended to external investors in trading companies which are not
listed (unlisted) on a stock exchange. (note that Companies which are listed on AIMS will
qualify)
3. This investors’ relief has its own separate £10 million lifetime limit, with qualifying gains
being taxed at a rate of 10%.
4. To qualify for investors’ relief, shares must be:

• Newly issued shares acquired by subscription on/after 17th March 2016.

• Owned for at least three years after 6 April 2016.
• Individual must not be employee of the company.

Note:

1. Unlike BADR at least 5% shareholding is not required in case of investor’s relief.

Example
Nikita sold all of her shares in SAHARA Ltd on 31st January 2022 realising a chargeable gains of
£13 Million.
She had originally subscribed for the shares in cash on 5ht August 2018 when the company
issued new shares in order to raise money to expand its manufacturing into other areas of the UK.
Nikita has taxable income of £60,000 and has never worked for Sahara Ltd.
Requirement
Calculate Nikita’s CGT payable for the tax year 2021/22.

Rollover Relief:

1. When any of the business asset (Land, Building, Plant & Machinery used in trade) is sold
and proceeds are reinvested to purchase replacement qualifying business asset.
Replacement Qualifying business assets are; Land, Building and Goodwill only but not
Plant and machinery.
 53

2. Replacement asset must be purchased within one year before or three year after the sale
of original asset.
3. If all of the proceeds are reinvested, all of the gain would be deferred but if any amount is
not reinvested, amount equal to that would not be deferred.
4. The gain being differed under rollover relief is also deducted from the Base Cost of
replacement asset, so the gain being differed today would become chargeable in future on
the sale of replacement asset. (due to reduced Base Cost)
5. If the asset sold/purchased is used partially for non-business purposes, gains relevant to
business proportions would only be qualifying for the relief.
6. Rollover relief must be claimed with 4 years of the end of the tax year. Later off;
i) When asset is sold
ii) When replacement asset is acquired
Example
Mr. A sold and office building for £500,000 at 1st May 2023. Building was purchased for
£320,000 at 15th April 2018 and has always been used 60 % for Business and remaining 40% has
never been used for Business purposes.
Mr. A is a higher Rate Tax Payer and did not dispose any other asset during 2023/24 other than
the building sold at 1st May 2023 although he purchased a warehouse to be used completely for
trading purposes at 1st Feb 2023 for £350,000.
Required: Calculated CGT payable for the Tax year 2023/24 assuming all beneficial claims
will be made.
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .

Test your understanding from Kaplan

In May 1995, Keith sold a freehold commercial building for £100,000 and realised a chargeable
gain of £58,240.
In August 1995 Keith bought another freehold commercial building for £80,000 which he sold in
July 2022 for £300,000. He did not replace this building with any other business assets.
 54

Calculate chargeable gain arising in the tax year 2022/23.

. .
. .
. .
. .
. .
. .
. .
. .

Hold over Relief:

1) Whenever land, building, goodwill, plant & machinery is sold and proceeds are reinvested to
purchase any other wasting asset (copy rights, patent rights, lease hold building, immovable
plant & machinery) or such an asset which will become wasting asset within 10 years.
2) In this case gain will be holdover rather than rollover and so new base cost of replacement
asset is not calculated and Holdover gain would become chargeable on the earlier of:

i) When it is 10 years of gain being holdover

ii) When replacement asset is sold
iii) When replacement asset becomes non business asset

3) Remaining points are same as rollover relief.

Gift Holdover Relief:

Whenever asset is sold within connected persons, gains become chargeable upon donor due to
deemed proceeds of market value. Gain in such case could be deferred if following conditions are
fulfilled:

1. If the gift is to an individual (not a trust), gift holdover relief would only be available to
donor if it was any of the following.
 55

- Property, plant & equipment goodwill used in trade carried out by the
donor.
- Shares of unquoted trading company regardless of percentage of
shareholding of Donor.
- Shares of such a quoted trading company in which individual holds at
least 5% shareholding or more. (Personal trading co).
- In this case there is a further requirement that both donor and donee
should jointly elect for the relief which must be claimed within 4 years of
the end of tax year in which transfer takes place. e.g. By 5 April 2027 for
gifts in the tax year 2022/23

2. If an individual makes a transfer to any trust gift relief will always be available,

- Regardless of asset being transferred is business asset or not

- Further in case of quoted shares at least 5% shareholding is not required
neither company is required to be trading.
- In this case claim would only be signed by donor.

3. If the actual proceeds received by the donor are up to or less than Allowable cost, all of
the gain would be deferred but if actual proceeds are more than allowable cost, amount
above allowable cost would be immediately chargeable.

4. If individual transfer shares of such a company which owns both business and non-
business assets in such case gift holdover relief will be:-

P.T.O

Gift of Shares

Unquoted Shares of Quoted Shares

any Company
 56

Personal trading co Not personal trading co

Hold against Gift Relief = Gain x chargeable business assets GR

Total chargeable assets Not available

Example:

At 1/1/2014 Mr. A purchased a building to be used in trade for £110,000. At 1/5/2023 Mr. A
transferred this building to his son M.V of building was £200,000 at the time of transfer.

Calculate how much Gain will be deferred under gift holdover relief will be available if actual
proceeds received from son are:

1. £100,000
OR
2. £150,000
. .
. .
. .
. .
. .

Example:
Mr. A sold 5000 shares of Y Ltd 9% shareholding of unquoted trading company to his daughter
for £36,000 at 1st March 2024. Mr. A purchased this shareholding at 15th May 2018 for £60,000.
At 1/3/2024 M.V was 99,000. At 1/3/2024 M.V of Y ltd was:

£
Office premises 600,000
P&M (above 6000) 200,000
Investment property 200,000
 57

Stock debtor & Cash 100,000

Total 1100,000

Calculate gain chargeable on Mr A for the tax year 2023/24 assuming he and his daughter
will submit a valid claim for Gift Holdover Relief.?
. .
. .
. .
. .
. .

Test Your Understanding from Kaplan

Fred is a sole trader; He gave his son Ashley, a business asset on 1 July 2023 when its market
value was £75,000. Fred paid £20,000 for the asset on 1 May 2002. Ashley sells the assets for
£95,000 on 1 October 2024.
Required
a) Compute the taxable gains arising on these disposals if gift holdover relief is not claimed
b) Compute the taxable gains arising on these disposals if gift holdover relief is claimed.
c) If Ashley paid his father £53,000, what impact would this have?

. .
. .
. .
. .
. .
. .
. .
. .
Test Your Understanding from Kaplan
Jack Jones gave 30,000 ordinary shares (representing his entire 30% shareholding) in Cross Ltd,
an unquoted trading company, to his son Tom on 16 July 2021. The shares were valued at
£450,000 on that date.
Jack purchased the shares on 16 October 2011, the day he became a full time director in the
company. The shares cost Jack of £200,000.
The company’s issued share capital is 100,000 ordinary shares and its net assets had the
following market value on 16 July 2021:
£
 58

Freehold Factory 1,140,000

Investments 60,000
Net Current Assets 370,000
1,570,000
Calculate the gains chargeable for Jack during tax year 2021/22 and show the base cost for
Tom, assuming all reliefs are claimed?
. .
. .
. .
. .
. .
. .
. .
. .
. .
Condition for overseas aspects:

To claim hold against gift relief, recipient must have to be resident in the tax year in which he is
receiving gift.
and also
For next 6 tax years of the tax year of transfer, otherwise gains which has been deferred would
become chargeable upon recipient at the day before Departure.

Exception to the rule: Above said implication do not apply if:

• Individual restates his or her status back within 3 years AND
• He or she still owns the asset

Incorporation Relief:

Will be available if;

1. All of the business assets of Unincorporated trade are transferred to a company on going
concern basis.
2. Cash should not be transferred to the company.
 59

3. Incorporation relief is automatic and need not to be claimed, but if an individual do not
want to claim incorporation relief, it could be dis-apply within 2 years of 31st January
following the tax year.eg by 31 January 2027 for an incorporation takes place in 2023/24.
4. All of the gain will be deferred if all of the proceeds received as consideration are in form
of shares.
5. But if the proceeds received is a mix of shares and cash, in this case gain which could be
deferred will be as follows;

I.R = Gain x Share proceeds

Total proceeds

6. There has been an important change in respect of the two year qualifying time period
for Business Asset Disposals’ relief where an unincorporated business has been sold to
a company wholly or partly in exchange for shares where incorporation relief has
applied.

Previously, the qualifying time period for Business Asset Disposals’ relief restarted
from the date the shares were issued. With effect from 6 April 2019, the period for
which the individual owned the unincorporated business will also count towards the two
year qualifying time period.

7. This change is particularly interesting where a business is to be incorporated prior to

sale. Business Asset Disposals’ relief may now be available on the sale of the shares,
even though that sale occurs within two years of the incorporation of the business.

Example:

P. T. O

Mr. A, a sole trader has following assets in his business, he owns and worked the business
since start of Trade 1/1/2011.

Purchase date Cost £ MV £

1/5/13 Office building 150,000 200,000
Since start Goodwill Nil 60,000
1/6/14 Trading stock 35,000 50,000
310,000
He incorporated his sole trader trade into Y Ltd at 1 June 2023.
 60

Calculate gain Chargeable and new base cost of Shares of Y ltd owned by Mr A. If
consideration received from Y Ltd was:

a) 150,000 shares Only

b) 150,000 shares and £75,000 cash.
c) Calculate how much share proceeds must be acquired by MR. A if he has made no other
disposal during 2023/24 and there are b/f Capital Losses of £10,000 from 2022/23.

. .
. .
. .
. .
. .
. .

Disposal of EIS shares/SEIS Shares:

If an individual Disposes of
EIS/SEIS shares results in

OR
Gain Loss
It will be chargeable if sold within It Will always be allowable regardless of
sold within or after 3 years of ownership.
3 years of purchase and it will be exempt if
sold after 3 years of ownership.
 61

E.I.S deferral- Relief:

1. If an individual dispose any chargeable asset either business or non-business and proceeds
were re-invested to subscribe for qualifying EIS shares, gain could be deferred.
2. Maximum gain that could be deferred will be:

Lower of

Gain Amount reinvested into any lower

Qualifying EIS shares amount of
Tax payer’s choice

3. EIS shares should be subscribed not purchased from an existing shareholder.

4. The gain which will be deferred will be holdover till the disposal of EIS shares.
(mechanism of rollover does not apply)
5. If shares are sold within 3 years all of the gain on EIS share would become chargeable
along with the old ‘frozen/ holded gain’, however if the shares are sold after three years,
then EIS Gain will be exempt. Old Gain however will still become chargeable.
6. Reinvestment must take place within one year before or three years after the disposal of
asset.
7. Individual should be resident, both at the time of disposal and reinvestment.
8. Restriction of being resident is extended to 3 years after the gain being deferred and so if
individual becomes not resident within these 3 years, gain will become chargeable.
Exception to the rule: If individual becomes not resident because of working
abroad temporarily and still owns the shares at the time of regaining resident
status, in this case gain would not be chargeable.
9. Discuss interaction with BADR.

Example:
Mr A dispose of painting at 1/6/23 with the proceeds of £100,000. He originally purchased this painting at
cost of £60,000.He subscribe £50,000 in EIS shares at 1/1/24.
How much deferral relief will be available& state implications of disposal of EIS shares?
1. If he sold out these EIS shares at 1/1/25 for £74,000.
2. If he sold out these EIS shares at 1/1/25 for £26,000.
3. If he sold out these EIS shares at 1/5/29 for £114,000
. .
Test your Understanding From Kaplan
 62

Alex sold a painting in November 2020 for £275,000 realising a capital gain £150,000
Alex subscribes for qualifying EIS shares in Milan Ltd, a trading company, the following month at a cost
of £268,000. She has no other capital transactions for the tax year 2020/21, but has capital losses brought
forward form 2019/20 of £6,000.
Three years later in the tax year 2022/23 Alex sells the EIS shares realising a gain of £175,000
a) Calculate the amount of reinvestment relief that Alex should claim.
b) Explain the capital gains tax consequences of the sale of the EIS shares in the tax year 2022/23
. .
. .
. .
. .

S.E.I.S Exemption:

If an individual disposes any chargeable asset and proceeds were reinvested to subscribe for
qualifying SEIS shares, in this case some of the gain would be exempt.

Gain which could be exempted will be

Lower of

Amount of gain x 50% Amount reinvested into SEIS

Shares x 50%

Reinvestment must take place within one year before or three years after the disposal of asset.

Example:
Mr A Dispose of painting at 1/6/23 at £100,000 its cost was £60,000. He subscribes SEIS shares
at £50,000 at 1/1/24. He is higher rate tax payer.
Calculate gain and how much relief available on subscribing SEIS shares?
. .
. .
.
. .
 63

Principal Private Residence Relief (PPR):

At any time an individual could hold one PPR. Gain arising on PPR will be exempt according to
following:
PPR exemption = Gain x period of occupancy (actual + deemed)
Period of ownership
Deemed Occupancy:
Is that period of absence which is considered as period of occupancy for tax purposes. Following
are the deemed period of occupancy:

1. 3 years for any reason

2. 4 years for working within UK
3. Any period for working abroad (employment)
4. Last 9 months of ownership (unconditional)

Note: It is compulsory for the individual to occupy his/her residence both before and after the
period of absence to claim exemption under first three points above. (At least one month
occupancy)

Performa for calculating PPR exemption:

Dates Reason Exemption Chargeable Total

01.01.03 – 01.01.04 Actual occupancy 12 12
01.01.04 – 01.01.08 3 years for any reason 36 12 48

01.01.05 – 01.06.09 Actual Occupancy 6 6

01.06.09 – 01.06.11 Last 18 months 9 15 24

72 18 90

Test your Understanding From Kaplan

On 1 May 1996 Mr Clint purchased a house in Southampton for £125,000, which he lived in until he
moved to a rented flat on 1 July 1997.
He remained in the flat until 1 October 1999 when he accepted a year’s secondment to his firm’s New
York Office. He returned to the UK on 1 October 2000 and moved into a relative’s house, where he stayed
until he returned to his own home on 31 January 2001.
On 1 July 2011 he moved in with his girlfriend in Newcastle. Here he remained until he sold his
Southampton house on 1 February 2022 for £350,000.
Calculate the chargeable gain, if any, arising on the disposal of the house on 1 February 2022.
 64

. .
. .
.
. .
. .
. .
. .
.
. .

Letting Relief:
1) Letting relief is available where:-

a) The property is let out and

b) Owner of the house is in shared occupancy with the tenant.

2) Letting relief will be

lower of:

£40,000 PPR exemption Gain of qualifying letting portion

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

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

Requirement: Calculate Gain chargeable on sale of House.

 65

Damaged/Lost Destroyed Assets

Completely Partially

Insurance Proceed Insurance Proceed

Received Not Received Received Not Received

• Proceeds will be nil/scrap Reinvested to restore the Exempt Asset

value asset
Not reinvested
• Will always result in loss
• Proceeds will be
insurance proceeds
• May result in gain/loss
Reinvested Not Reinvested:
• Proceeds will be insurance
Reinvested
proceeds
To purchase replacement asset within 12
Less than 95% 95% or above: • Cost will be calculated using
months
If elected: not examinable • If not elected; gain will part disposal rule i.e.
• Gain will be calculated using insurance be calculated using part
disposal rule Total Allowable Cost x A / A + B
proceeds
• All of the gain would be rolled over • If elected; no calculation
of gain/loss as it would A = Insurance proceeds
against the asset thus reducing the B = Market Value of asset after
allowable cost of replacement asset, if be deferred by deducting
insurance proceeds and getting damaged
all of the proceeds were reinvested
• But if all of the proceeds are not adding amount
reinvested, amount not reinvested could reinvested into original
not be deferred allowable cost of the
asset destroyed
• Asset needs not to be business asset/
land/ building/ goodwill, but it must be
replacement of asset destroyed
 66

Example: (Asset partially Damage)

Mr. A purchased an asset and for CGT its cost was £60,000. He receives insurance proceeds of
part which was damage of £20,000. M.V immediately after getting damaged was £55,000.

Calculate gain chargeable on receipt of insurance proceeds?

• If he did not invest insurance proceeds into the asset.

• If he reinvests £19,500 of the insurance proceeds & elected for deferral.
• If he reinvests £25,000 & elect for deferral.
. .
. .
.
. .
. .
. .
. .
.
. .
. .

1. Test Your understanding From Kaplan

(Asset destroyed completely (insurance proceeds not received)

Nadir purchased a capital asset for £15,000 on 1 April 1999 which was destroyed by fire on 31st
July 2019. She received scrap proceeds of £1,000. The asset was not insured.
Calculate the allowable capital loss arising in the tax year 2019/20.
. .
. .
.
. .
. .
 67

2. Test Your understanding From Kaplan

(Asset destroyed Insurance proceeds received and reinvested)
Bill purchased an asset for £25,000 on 1 October 1999 which was destroyed by fire on 30
September 2018. He received scrap proceeds of £1,000 and compensation of £35,000 from his
insurance company on 1 January 2020.
He purchased a replacement asset for £40,000 on 1 February 2019.
Assuming that Bill claims the loss by fire to be a no gain/ no loss disposal, calculate the
allowable expenditure (base cost) of the replacement asset.
. .
. .
.
. .
. .

3. Test Your understanding From Kaplan

(Asset damaged (insuarnce proceeds received but not reinvested.)
Sasha purchased a painting on 1 April 2010 for £10,000. The painting was damaged on 1 May
2019 when it was worth £50,000. After the damage the painting was worth £25,000. On 1 July
2019 insurance proceeds of £30,000 were received, which were not used to restore the painting.
Calculate the gain, arising in respect of the painting.
. .
. .
.
. .
. .

4. Test Your understanding From Kaplan

Asset damaged (>95% of insurance used to restore)
Amy purchased a painting on 1 April 2010 for £10,000. The painting was damaged on 1 May
2019 when it was worth £50,000. After the damage the painting was worth £40,000.On 1 July
2019 insurance proceeds of £8,000 were received. All of the proceeds apart from £300 were used
to restore the painting.
Calculate the revised base cost for CGT purposes of the painting after it has been restored,
assuming Amy elects for the insurance proceeds to be rolled over against the cost of the
painting.
 68

Shares and Securities:

Qualifying Corporate Bond (QCB):

It is an exempt asset for CGT. Any security/loan note which fulfils following conditions will be
considered as QCB;

1. It was issued by the company / acquired by the individual after 13th march 1984.
2. It was issued in £ sterling.
3. Will be redeemable in £ sterling not any other currency.
4. It must not be convertible into ordinary / preference shares.

Share Matching Rule:

If an individual is selling its part of shareholding (not all of shareholding) into any company, in
such case cost should be matched with the proceeds in following order.

• If individual had purchased shares on the same day (Sale date)

• Shares Acquires in next 30 days acquisition
• Share held in the share pool (total value/total number of shares)

Example:

Mr. A sold 15,000 shares of Z Ltd at 1/12/23 for £150,000. Purchased as follows:

01/12/23 Right issue of 2 for 5 at £7 each (took up in full)

01/09/21 3,000 shares at £5 each
18/12/18 Bonus issue of 1 for 2
21/09/15 14,000 shares at £8 each

Calculate gain or allowable loss on the disposal in December 22.

. .
. .
. .
. .
. .
 69

Sale of Right Nil Paid:

When an existing shareholder did not purchase more shares of company in which they already have.
Disposal of this right is called sale of right nil paid.
Criteria for small part disposal of Right Nil Paid:
If proceeds received from the sale of Right Nil Paid is either;
1. Less than or up to 5% of the market value of shares upon which right was issued
OR
2. Amount received was £3000 or less.

Note:

• If the criteria of the small part disposal meets, then no chargeable disposal at the time of the
sale of rights nil paid and sale proceeds received are deducted from the cost of the original
shares thus creating a new base cost of these shares.
BUT
• If the criteria does not meet, then deemed part disposal of original shares held and normal
part disposal computation required using the A/A+B formula.
Where, A = Proceeds
B= MV of the shares after the right issue.

Example:
Mr. A acquired 12,000 shares in Y Ltd for £24,000 at 22/7/2005.
At 13/8/23 there was right issue of 1 for 5 shares at £2.30 per share. MV of shares after right
issue was £2.65 per share. Mr. A did not take up his right rather sold his ‘Right Nil Paid’ for
£1,500 at 25/8/23.
1/1/26 sold all of his shareholding in Y Ltd for £44,000.

Calculate gain if:

a) Elected for small part disposal
b) Not elected for small part disposal.
. .
. .
. .
. .
 70

Negligible Value Claim:

If value of an asset becomes negligible for whatever the reason and taxpayer wants to realise the
capital loss of such an asset without selling it, in this case negligible value claim should be made.
If this claim is made than for tax purposes asset would deemed to be sold and reacquired at its
market value thus realising the capital loss.

The deemed disposal could be treated to be occurring at either of:

1. Date on which claim was made.

2. Any of the previous two tax years but if value of asset was negligible at that time as well.

Example:
Mr A owns an asset its M.V has fallen and is now negligible from previous few tax years. He
originally purchased this asset at cost of 15,000 at 1/1/2016. He does not want to sell this asset.
Calculate if he wants to make negligible value claim in current year or previous year?

10. Special loss relief upon capital losses of EIS/SEIS shares:

If there is any capital loss upon disposal of qualifying EIS shares, this capital loss could be set off
against gains for the tax year just like any other capital loss OR;
This loss could be set off against total incomes of that individual in respect of:

1. Same tax year OR;

2. Previous one tax year OR;
3. Both tax years.

Above said relief would be available if:

1. EIS shares were sold at arm’s length OR;
2. Loss arises due to winding up of the company OR;
3. Loss arises due to making negligible value claims.
 71

Takeover / Reorganisation:
Reorganisation:
A reorganisation involves the exchange of existing shares in a company for other shares of
another class in the same company.

Takeover:
A takeover occurs when a company acquires shares in another by issuing:
• Shares
• Loan notes
• Cash

Consideration Received:

▪ Shares Only
It would be qualifying share for share disposal. Base cost of new shares will be CGT cost of
original shares (new shares comes into the shoes of old shares)

▪ Cash & Shares

In this case we should consider whether the cash proceeds should be considered as small, by
fulfilling any of the following,
If proceeds received are less than or equal to
• £3,000
Or
• 5% M.V of total consideration received

If above criteria fulfils, new base cost will be calculated as follows:

Original cost (of original shares): xxx

Less: Cash Proceeds: (xxx)
New Base Cost xxx
Gain of cash proceeds will in this case be deferred till sale of other considerations
(i.e. ordinary / preference/loan notes).
 72

If criteria does not fulfils

• Gain of cash proceeds will be immediately chargeable in the year of takeover. (P.T.O)

▪ QCBs
An Individual may take QCBs instead of share. If loan notes (QCB) are received in
exchange of old shares, then on their ultimate disposal, gain of loan notes would be
exempt as they qualify as QCB.

But a deemed disposal will occur at the time of takeover and its gain will be frozen at
that time but later on eventual disposal of QCBs, that old gain will crystalize and will be
chargeable.

Example:
Mr. A purchased 10,000 ordinary shares of Old Ltd ltd for £50,000 at 1/1/16.
At 1/6/23 Old ltd was taken over by New Ltd and each shareholder of Old Ltd was offered following
for each share in Old Ltd
1). 2).
1. 2 ordinary shares of New Ltd. i) 2 ordinary shares of New Ltd.
2. 1 preference shares of New Ltd. ii) 1 preference shares of New Ltd.
iii) £1 cash

3). 4).
i. 3 ordinary shares of New Ltd. i. 3 ordinary shares of New Ltd.
ii. 2 preference shares of New Ltd. ii. 1 loan note.
iii. £0.75 Cash iii. £ 2Cash

Immediately after takeover market value of New Ltd’s;

i. Ordinary shares £5
ii. Preference shares £2
iii. Loan note £2.5
Later
1st three scenario: At 1/9/24 Mr. A sold all of his ordinary shares in New Ltd for
£140,000
4th scenario: At 1/9/24 Mr. A sold all of his loan notes in New Ltd for £ 45,000
Requirement : Calculate Gain both at DATE OF TAKEOVER and on sale of ORDINARY SHARES
(LOAN NOTES for 4) of New Ltd.
 73

Example Mixed Consideration from Kaplan

On 26 May 2023, Mike sold 200 £1 ordinary shares in Café plc for £5,500 and all of his loan
notes in Café plc for £9,600.
Mike originally brought 1,500 shares in Joe’s Café Ltd in July 2016 for £1,215 when he started to
work for the business.
Joe’s Café Ltd was taken over by Café plc in August 2018.
For every 20 ordinary shares held in Joe’s Café ltd a shareholder received
• £100 in cash
• 10 ordinary shares in Café plc
• £1 loan notes in Café plc
Immediately after the takeover the value of Café plc’s shares and securities were:
£1 ordinary shares £12
Loan notes £55
Assume joe’s Café Ltd is not Mike’s personal trading company.
Calculate the capital gains arising in the tax years 2018/19 and 23/24.

Payment of Capital Gain Tax:

Without Disposal of Residential Property
Capital Gain tax of any tax year is normally paid by 31st January after the tax year. For 2023/24
31st January 2025.

With Disposal of Residential Property

A payment on account must now be made within 60 days of disposal date of residential
property. A return must be submitted to HMRC at the same time.

The calculation of the payment on account takes into account

• The annual exempt amount,

• Any capital losses incurred in the same tax year, but prior to the disposal of the
residential property,
• Any brought forward capital losses.

But Note that: Any other chargeable gains and those capital losses which were incurred
subsequent to the disposal of the residential property are ignored.
 74

End of the Tax year CGT Computation

• The residential property gain is still included in the taxpayer’s self-assessment capital
gains tax computation following the end of the tax year,
• With the payment on account being deducted from the total capital gains tax
liability.
• Any additional tax is payable on 31 January following the tax year. If a repayment is
due, then this will be claimed when the self-assessment tax return for the tax year is
submitted.
• A payment on account of capital gains tax has nothing to do with the normal self-
assessment payments on account due on 31 January in the tax year, and 31 July
following the tax year.
• The calculation of payments on account where there is more than one residential
property disposal during a tax year is not examinable at TX-UK.

EXAMPLE 28
Zack, a higher rate taxpayer, had the following chargeable gains and capital losses during the
tax year 2023/24:

10 April 2023 Capital loss of £4,600 from the disposal of shares

31 May 2023 Chargeable gain of £28,200 from the disposal of shares

31 August 2023 Chargeable gain of £82,000 from the disposal of residential property

10 March 2024 Capital loss of £14,000 from the disposal of shares

Requirement:
1. Calculate CGT laibilty for 2023/24

2. State how and by when CGT will be paid.

 75

Payments in instalments:

Case 1: If consideration or proceeds received from the sale of an asset will be received in
instalments of more than 18 months, in this case relevant CGT will be paid in shorter of:
1. Eight years.
2. Period during which instalments would be received.

Note: HMRC does not charge any interest because of instalment option.

Case 2: Upon gifts of:

1. Land and share in land
2. Shares of unquoted companies regardless of percentage of holding of donor.
3. Shares of such a quoted company in which individual has control

In this case relevant CGT would be paid in ten equal instalments starting from normal due date.

IHT Deduction against CGT

It will be available on sale of asset by donee if both of the following conditions are fulfilled at the
time of acquisition of asset:

i. Gift relief was claimed in respect of the receipt of asset.

ii. IHT was paid in respect of the receipt of asset.
If above conditions are fulfilled, donee will be allowed to deduct amount of IHT from the gain on
later disposal of the asset.
Example:
Mr A had not made any life time transfer other than following.
He transferred a building used in trade to his daughter Carron 1st January 2022. When its M.V
was £500,000. He acquired this building for £300,000 at 01/07/2021. Gift relief was claimed in
respect of transfer of building.
At 15/12/2023 Mr A died.
At 01/03/2024 Carron sold the building for £600,000.
Calculate gain chargeable upon Carron at 01/03/2024 on sale of building.
. .
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 76

Capital Gains Tax on the Death of an Individual:

CGT is a ‘lifetime tax’. Transfers on the death of an individual are therefore exempt disposals.
The CGT consequences of death are as follows:
• No capital gain or allowable loss arises as a result of the death

• The beneficiaries inherit the assets of the deceased and are deemed to acquire the assets:

o With a base cost equivalent to the market value of the asset at the date of death (i.e. at
probate value)

o On the date of death, regardless of the date they actually receive the asset.

Non UK Residents
Following assets will be chargeable to CGT even if the owner is non-UK resident:

• UK assets used in a trade based in the UK. Gain/loss is calculated normally

• From 6 April 2019, non-UK residents will be subject to CGT on disposals of all UK land
and buildings, not just residential properties.Calculations will be as follows:

1. Residential Properties

Residential properties, the gain will be calculated in the normal way;

2. Commercial/Non residential Properties

a. Non-residential properties acquired before 5 April 2019 and sold after

5th April 2019, the gain will be calculated

i. The gain/loss arrived at by deducting the market value of

the property as at 5 April 2019 from the sale proceeds.

Or

ii. The whole of the gain/loss calculated in the normal way

(by election);

b. Non-residential properties acquired/sold after 5 April 2019, the gain will

be calculated in the normal way.

Implications of Reliefs
 77

1. 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, so holdover is not available).
2. Normally, gift relief is not available where the donee is not resident in the UK.
However, where the asset disposed of is subject to CGT despite the owner being non-
UK resident, gift relief will be available regardless of the resident status of the donee.
 78

CGT IHT
Lifetime • No CGT if asset is an exempt asset • No exempt assets for IHT
gift
• Chargeable gain / allowable loss arises • Diminution in value concept
applies to value of the gift (see
• Calculated in normal way using MV of
below)
the asset gifted as consideration (see
below) • If CLT – IHT payable during
lifetime
• Gift relief may be available
• If PET – no tax payable during
• Applies to gifts of business assets, and
lifetime but IHT payable if
• Gifts of any asset where there is an death within 7 years
immediate charge to IHT (i.e. a CLT, if
• Valued at time of gift
it is CLT, gift relief will always be
available) • Exemptions available on
lifetime gifts
• On the subsequent disposal of the asset by
the donee, IHT relief may be available • BPR / APR lifetime and
(see below) death
• Taper relief available if live
for more than 3 +years after
the gift

CGT IHT
Gift on • No CGT to pay on death • Asset forms part of death
death estate
• Donee of these assets will recognise them
at probate value (Market value at the • IHT payable on the MV of the
date of death) asset at the date of death
unless the asset is
• Covered by reliefs (e.g.
BPR / APR)
• Or is left to an exempt
beneficiary (e.g. spouse /
charity)
• No other exemptions available
on death estate
• Taper relief not available
79
 80

3. INCOME TAX (IT)

Name of the Person
Income Tax Computation for 2023/24

Other Income Savings Dividend Total

& Earned Income
£ £ £ £
Trading Profit xxx xxx
Employment xxx xxx
Property Business Profits xxx xxx
Bank Interest xxx xxx
Interest from Government Gilts xxx xxx
Pension Income xxx xxx
Dividends xxx xxx xxx
Total Income xxx xxx xxx xxx
Less Reliefs (xxx) (xxx)
Net Incomes xxx xxx xxx xxx
Less Personal Allowance (12,570) (12,570)
Taxable Income xxx xxx xxx xxx

Tax Liability:
Non Savings £ £
xxx @ % age xxx
Savings
xxx @ % age xxx
Dividend
xxx @ % age xxx
xxx
Less Tax Reducers
Investment into EIS / VCT x 30% (xxx)
Investment into SEIS x 50% (xxx)
Double Taxation Relief (xxx)
Finance Cost x 20%(basic Rate) (xxx)
Add Child allowance charge xxx
Add Amount contributed above Annual Allowance x Marginal rate xxx
Tax Liability xxx
Tax deducted at source (note) (xxx)
Tax Payable / (Refund) xx / (xx)

Tax deducted at source

• PAYE ( pay as you earn) (paid on salary)
• 45% of gross income from discretionary trust
• 20% / 8.75% of gross income from interest in possession trust
 81

Reliefs

Interest Paid Upon Trading Losses

Qualifying Loans

Qualifying Loans:

A loan would be qualifying if it was borrowed in order to;

• Investment in partnership as capital OR to give loan to the partnership for the purchase of
plant & machinery in which case it would be qualifying for 4 tax years only.
• To invest in close company, residing in UK or European economic area (EEA). (Unless
EIS Reducer @30% was claimed)
• To purchase shares of unquoted employee-controlled company residing in UK or EEA but
by the employee of that company.
• To purchase any equipment to be used in performance of employment duties.
• To pay death liabilities for e.g. IHT of a deceased person in which case loan would be
qualifying for one tax year only.

Close Company:

A company in which there are 5 or less than 5 shareholders with at least 5% shareholding of each
shareholder
OR
If more than 5 shareholders, all of them should be directors.
82
 83

Gross Net Exempt

➢ Trading profits ➢ Employment Income is ➢ National Saving Bank
received net of PAYE certificate interest
➢ Property Business
profits ➢ Patent royalties net of 20% ➢ Return on ISA
- into 100/80
➢ Interests ➢ Dividends from VCT
➢ Income from IIP or IPDI
➢ Dividends ➢ Scholarships
net of 20% - into 100/80
➢ Copy right royalties and if its dividend 8.75% - ➢ Gambling / bet winning
➢ Pension income into 100/91.75 (i.e it would ➢ Lottery / Prize bond
depend upon source of winning
income of IIP or IPDI).
➢ State benefits paid in
➢ Income from discretionary event of sickness illness
trust net of 45% - into disability.
100/55
➢ Child Allowance
➢ Foreign income

Payments
Payments
➢ Donations under
payroll deductions ➢ Donations under Gift aid
scheme net of 20% - into
➢ Occupational pension 100/80
contribution
(payable) ➢ Personal pension
contribution net of 20% -
into 100/80 (payable)
 84

Bands and Rates:

Non Savings Dividends

Savings
Special Nil Rate Band If If Higher If Additional If Basic If If
for Savings & Basic Higher Additional
Dividends
£1000 £500 Nil £1000 £1000 £1000

Starting Rate Band:

If not used by Non 8.75%
£1 - £5000 20% Nil%
Savings

Basic Rate Band:

£5,001 - £37,700 20% 20% 8.75%

Higher Rate Band:

£37,701 - £125,140 40% 40% 33.75%

Additional Rate
Band: Above
£125,140 45% 45% 39.35%

Note Special Nil Rate Bands will not consume starting rate bands but will consume Basic and higher
rate Bands of an individual.
Extension of Basic and Higher Rate Band:

When an individual pays into:

1. Personal Pension Contribution
2. Gift Aid Donations

His/her Basic and higher rate band ending limits would be extended with the gross amounts.
 85

Example:

Mr. A has following incomes and payments for 2023/24. Mr. A is employed at an annual gross
salary of £25,000 out of which PAYE of £3,000 was deducted for 2023/24.
£
Property Business Profit 8,000
Interest from:
National Saving certificate 1,000
Government Gilts 3,000
Bank Interest 12,000
Dividend from UK companies 18,000

Mr. A paid interest of £3,000 in respect of loan borrowed 3 years back to pay IHT liabilities of
his father. Mr A paid £8,000 into personal pension and £4,000 as gift aid donation.
Mr A also subscribed for shares of XYZ Ltd (A qualifying EIS Company) for £5,000.

Calculate Income tax payable for 2023/24.

. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
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 86

Personal Allowance:

1. If an individual’s ANI is up to £100,000 he/she will be entitled for £12,570 personal

allowance.

2. If ANI is above £100,000 and less than £125,140 in this case personal allowance would
be reduced by £1 for every £2 which is above £100,000.

3. If ANI is £125,140 or above, Personal allowance would not be allowable.

Calculating Adjusted Net Income:

£
Net Income xxx

Less Personal pension contribution x 100/80 (xxx)

Gift aid donation x 100/80 (xxx)
Adjusted Net Income xxx

TRANSFERABLE AMOUNT OF PERSONAL ALLOWANCE

• It is possible to elect to transfer a fixed amount of the personal allowance to a spouse or

registered civil partner.

• The transferable amount (also known as the marriage allowance or marriage tax
allowance) is £1,260 for the tax year 2023/24, and in subsequent years will be 10% of the
actual personal allowance

• The benefit is given to the recipient as a reduction from their income tax liability at the
basic rate of tax rather than as an actual increase to their own personal allowance.

• The tax reduction is therefore £252 (1,260 at 20%). If the recipient’s tax liability is less
than £252, then the tax reduction is restricted so that the recipient’s tax liability is not
reduced below zero.

• A transfer is not permitted if either spouse or civil partner is a higher or additional rate
taxpayer, and a transfer will generally only be beneficial where one spouse or civil
partner is not making full use of their personal allowance.

• An election in respect of the tax year 2023/24 can be made before 5 April 2028 (four
years after the end of the tax year).
 87

EXAMPLE

Paul and Rai are a married couple. For the tax year 2023/24, Rai has a salary of £35,000 and Paul
has a trading profit of £8,000. They have made an election to transfer the fixed amount of
personal allowance from Paul to Rai.

Requirement:

• What amount of Taxable Income of Paul during 2023/24.

• Rai’s income tax liability for 2023/24.

. .
. .
. .
. .
. .
. .
. .
. .

Test Your Understanding From Kaplan

Katie and Emily are civil partners. Katie is a basic rate taxpayer and her only source of income is from
self-employment. Emily is studying in the tax year 2023/24 and does not utilise her personal allowance.
Emily makes an election to transfer the marriage allowance to Katie.
Calculate Katie and Emily’s income tax liabilities for the tax year 2023/24 assuming they have the
following amounts of income:
Katie Emily
a) £30,000 £nil
b) £12,900 £nil
c) £30,000 £10,410 from part time employment
 88

Child allowance charge / Child benefit charge:

1. If an individual is provided with child benefit from the government of UK, it will be an
exempt income.

2. But those individuals who have ANI of £60,000 or above will add all amount of child
benefit into their tax liability.

3. But if an individual’s ANI is up to or less than £50,000 such individuals would not repay
any child allowance.
4. If an individual’s ANI is above £50,000 and below £60,000 for such individuals 1% of
child benefit will be added into tax liability after every £100 which are above £50,000.

Note: The Parent with the higher income in the couple will pay back the allowance.

Test your understanding From Kaplan

Helen’s only source of income is her salary of £57,000 per year. She pays a personal pension
contribution of £2,000 per year. Her husband, Andy, has no income as he looks after the
couple’s three children. Andy received child benefit of £2,501 during the tax year 2023/24.
Calculate Helen’s income tax liability for the tax year 2023/24.
 89

Employment Income:

Employee vs. Self-employed:

The distinction between employment and self-employment is fundamental:

An employee is taxable under the employment income rules whereas, a self-employed person is
assessed on the profits derived from his trade under the rules of trading income.

HMRC look at various factors, to decide whether an individual is employed or self-employed.

1. Ability to decline the work?

2. Committed to work for fixed number of hours?
3. Level of control being exercised on an individual
4. Who provides resources for performance of duties?
5. Any right to receive regular remuneration, holiday pay, redundancy pay or benefits?
6. How diverse portfolio of customers of an individual holds?
7. Level of risk accepted by an individual.

Interesting Case Laws

1. A civil engineer acted occasionally as an inspector on temporary unplanned appointments.
Decision: there was no office which could be vacated by one person and held by another so the
fees received were was from self-employment not employment.
2. A vision mixer was engaged under a series of short-term contracts.
Decision: the vision mixer was self-employed, not because of any one detail of the case but
because the overall picture was one of self-employment.
 90

Employment Income:
£
Salary / wages xxx
Bonuses / commissions xxx In cash
Golden handshakes / hellos xxx Calculated for a
xxx tax year
6/4 – 5/4
Add Benefit in kind (perks) xxx
Less Allowable deductions (xxx)
Total Employment Income xxx

Allowable deductions:

1. Subscriptions paid to approved professional bodies

2. Contributions into approved occupational pension scheme (always gross)
3. Donations paid under payroll deduction schemes (always gross)
4. Payments of professional liabilities or their insurance cost
5. Any expense incurred wholly, exclusively and necessarily for the purpose of performance
of duties
If employee is paying for

His/Her Private Expenses Performance of duties

(No treatment) (Allowable deductions)
(As these are covered by Personal Allowance)
Bonuses / Commissions:

Earnings will be deemed to be received on the earlier of:

For Employees:
• Payment Date
• Entitlement Date

For Directors:

• Payment Date
• Entitlement Date
• Year-end of employer company (if amount of bonus/commission was decided or
determined before year end of employer)
• Determination Date if it was determined after year end of employer company
• Date on which employer company account for the bonus on liability
 91

Golden Handshakes / Hellos: They are taxed/assessed tax year they are paid in.

BENEFIT IN KIND:

If employer is providing for

Private of employee Performance of

duties
(Taxable benefit) (Exempt)

LIVING ACCOMMODATION

Personal/Private Job Related

(Taxable) (Exempt)

Rented Owned by Employer 1. If it was

necessary for
Taxable Benefit
in Kind will be Cost performance of
higher of: duties
• Annual rent Up to More than £75,000 2. If it was provided
paid by £75,000 Taxable Benefit in kind will be: as a security
employer Taxable £
Benefit in Annual Value xxx
arrangement (if a
• Annual or person is
Kind will Add (Cost of providing - £75,000) x 2.25% xxx
rateables
value of
be Annual T.B.I.K xxx controlling
Value of director he cannot
house by
house claim exemption
HMRC
under this point)

Cost of Providing:
Duration within date of purchase of accommodation by employer until it is provided to
employee. If that is

• Up to or less than 6 years:

Original Cost + Enhancement Expenses (but incurred before start of current tax year)

• More than 6 years:

Market Value (when provided) + Enhancement Expenses (incurred after providing but
before start of current tax year)
 92

Example:
Harvey Specter is provided with a house by his employer, who had acquired the house at a
cost of £130,000 on 1 April 2010 and spent £10,000 on extending the property on 1
September 2017. Harvey moved into the property on 1 July 2017 when MV was £200,000.
The annual value of the house for 2023/24 is £3,250. Harvey pays rent of £300 each month
to his employer for the use of the house.
Required: What is Harvey’s taxable benefit in respect of the house for 2023/24?
. .
. .
. .
. .
. .
. .

Example:
Joey Tribbiyani was provided with a living accommodation for personal purposes from his
employer at 1/9/21 when its market value was £185,000. Accommodation was purchased by
employer for £125,000 at 1/7/18.
Enhancement expense of £16,000, £12,000 and £23,000 were incurred at December 18,
January 22 and August 23 respectively.
Annual value of house:
£9,200

a)Calculate taxable benefit in kind for 2023/24.

b) Calculate what would be taxable benefit for 2022/23 if accommodation was
purchased by his employer at 1/07/11 rather than 1/07/18.
. .
. .
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. .
. .
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 93

B:

Mr. A was provided with a living accommodation for personal use for which his employer
pay £9,000 as rent from 6 April 2023 to 31 August 2023. As Mr. A resigned and left the
accommodation at 31 August 2023.
Annual value of house is £12,000
And
Mr. A is required to contribute £50 per month to his employer.
Calculate Taxable benefit in kind for 2023/24 in respect of private use of living
accommodation.
. .
. .
. .
. .
. .
. .
. .
. .

Car Benefit

For Personal only OR Personal & P.O.D For P.O.D only

T.B.I.K = List price x CO2 emission %age Called as Pool Cars
is Exempt

List Price:

1. Purchase price should be gross of discounts

2. Any additional accessories installed at the cost of employer will be added into
the list price
 94

3. If an employee makes capital contribution or the contribution towards list

price, it would be deducted from the list price but restricted to maximum of
£5,000.
CO2 emission:
Completely Electric Cars

• A 2% percentage applies to electric-powered motor cars with

zero CO2 emissions.

Hybrid-Electric Motor

• With CO2 emissions between 1 and 50 grams per kilometre, the

electric range of a motor car is relevant in determining the car
benefit percentage, as follows:

Electric range

130 miles or more 2%

70 to 129 miles 5%

40 to 69 miles 8%

30 to 39 miles 12%

Less than 30 miles 14%

• For a motor car with a CO2 emission rate of between 51 and 54

grams per kilometer, the percentage is 15%.
• A 16% base percentage applies once CO2 emissions reach a
base level of 55 grams per kilometer.
• The base percentage of 16% rises by 1% for each 5 grams per
km above the base level of 55 grams per km, up to a maximum
of 37%.
• There is a 4% surcharge for diesel motor cars which do not
meet the real driving emissions 2 (RDE2) standard. The
percentage rates (including the lower rate of 13%) are increased
by 4% for diesel cars which do not meet the standard, but not
beyond the maximum percentage rate of 37%.
 95

• Diesel motor cars meeting the RDE2 standard are treated as if

they were petrol motor cars.

Example:

Ned Stark is employed with Y Ltd since 6 April 21. He was provided
with Hybrid car with CO2 emission of 41 gm/km and with an electric
range of 90 miles at 1 August 21. Car was purchased by Y Ltd for
£21,000 whereas official price was £22,500.
Ned Stark contributed £5,900 towards list price and £20 per month
towards private use to his employer.

Required: Calculate TBIK for private use of Car during 2023/24 for Ned Stark
. .
. .
. .
. .

EXAMPLE 14
During the tax year 2023/24, Fashionable plc provided the following employees with
company cars:

Amanda was provided with a hybrid-electric company car throughout the tax year
2023/24. The car has a list price of £32,200, an official CO2 emission rate of 24
grams per kilometre and an electric range of 90 miles.

Betty was provided with a new diesel company car throughout the tax year 2023/24.
The car has a list price of £16,400 and an official CO 2 emission rate of 99 grams per
kilometre. The car meets the RDE2 standard.

Charles was provided with a new diesel company car on 6 August 2023. The car has
a list price of £13,500 and an official CO2 emission rate of 102 grams per kilometre.
The car does not meet the RDE2 standard.

Diana was provided with a new petrol company car throughout the tax year 2023/24.
The car has a list price of £84,600 and an official CO 2 emission rate of 178 grams
per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2023/24 for the
use of the car.
 96

Requirement : Calculate TBIK For all employees in respect of private use of company car for
the tax year 2023/24.

Note: If along with car employee is also provided with: -

• Running costs of cars other than fuel are exempt regardless of car
being used for private purposes or not.

• Parking cost on while P.O.D is exempt, but if parking fines are paid
by employer, amount paid would be taxable benefit for employee.

• Chauffer: Cost paid by employer is taxable if provided on car used for

private purposes.

• FUEL FOR PRIVATE TRAVELLING:

TBIK = £ 27,800 x CO2 emission percentage

Note: Contribution towards fuel benefit is not deductible.

Example 1
Ross Geller was provided with a hybrid BMW at 1st January 2024
by his employer for personal use. Car was purchased by employer
of £32,000 where as published price by BMW was £ 36,000. Ross
contributed £ 3,200 towards List Price of the car at the time of
purchase. BMW emits CO2 of 87 gm/km.
Required:
• Taxable Benefit i.r.o Car for tax year 2023/24
• What difference it would make if Ross contributes £ 40/ month towards private
use of Car to his employer.
• What would be Taxable benefit if Ross was also provided with all the running
costs of car but excluding fuel for private journeys
• What would be Taxable benefit if Ross was also provided with all the running
costs of car but including fuel for private journeys
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VAN BENEFIT:

• If an employee is provided with a van for personal use, taxable benefit in kind will be
£3,960 per annum per van.
• If an employee is provided with a van for personal use and Van is producing Zero CO2
in such case benefit will be exempt.
• If the same van is provided to more than one employee £3,960 will be divided equally.
• If the van is provided only for pick and drop, benefit will be exempt.
• If along with van, van fuel is also provided for private travelling, taxable benefit will be
£757 per annum per van. And there would not be any Van Fuel benefit if van is
emitting zero CO2.

Use of Asset: (Private use of Employer Provided Asset)

Cost x 20% = TBIK

GIFT OF ASSET:
Higher of:

£
1. MV of asset at the date of gift xxx
Less price paid by employee (xxx)
xxx

2. Original Cost xxx

Less Benefit already taxed (cost x 20%) (xxx)
Less price paid by employee (xxx)
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xxx

Example:
Mr. A was provided with furniture costing £40,000 for his personal use by his employer at 6
April, 2021.
Furniture was later given to Mr. A by his employer at 1 August 2023 when its MV was £
17,000.
Mr. A paid £5,000 to his employer in respect of furniture at 1 August 2023.

Calculate TBIK i.r.o Furniture during 2023/24

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BENEFICIAL LOANS:
If an employer provides loan to its employee at an interest rate of less than 2.25 % (official
rate of interest), difference would be taxable benefit.

Taxable Benefit in Kind is lower of:

• Accurate / strict method: £
Amount of loan x 2.25% x months due / 12 xxx
Less Actual paid (xxx)
Xxx

• Average method:
Opening balance + Closing Balance / 2 x 2.25% xxx
Less Actual paid (xxx)
xxx

Notes:
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1. If an employer provided loan is used for any of the qualifying purposes, benefit will be
exempt.
2. If an employer provided loan/loans do not exceed £10,000 in any tax year, benefit will
be exempt.

Example:

Mr. A was provided with an interest free loan from his employer at 1 June 23, in order to
purchase his residence of £120,000. He repaid £40,000 at 1 December 23.

Requirement: Calculate TBIK for 2023/24.

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Test your understanding 6

Daniel was granted a loan of £35,000 by his employer on 31 March 2020, to help finance the
purchase of a Yacht. Interest is payable on the loan at 1% p.a.
On 1 June 2021, Daniel repaid £5,000 and on 1 December 2021, he repaid a further £15,000.
The remaining £15,000 was still outstanding on 5 April 2022. Daniel earns £30,000 p.a.

Calculate the taxable benefit for the tax year 2021/22 using:
a)The average method
b) The precise method
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Scholarships:

1. If scholarship provided to employee or employee was provided with employer funded

trainings, it would be exempt.
2. If scholarship is provided to connected person of employee for e.g. children, amount
paid will be taxable benefit, unless following conditions are fulfilled:
• Person receiving scholarship is a full time student.
• Employer maintains a separate scholarship fund out of which not more than 25%
payments are by the reason of employment.

Ancillary services / Expenses connected with Living Accommodation:

1. Private Accommodation: Taxable benefit in kind is the cost paid by Employer.

2. Job Related Accommodation: taxable benefit in kind will be lower of:
- Cost paid by employer
- 10% x Employment Income excluding ancillary services

EXEMPT BENEFITS EMPLOYEES:

➢ Employer’s contribution to a registered pension scheme (both occupational & personal)

➢ Pensions advice up to £500 per employee per year

➢ In house subsidized canteen, free canteen

➢ Car parking space

➢ Provision of work buses, bicycles, subsidies for public transport for travelling to &
from home to office
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➢ One mobile phone per employee (including smart phones)

➢ Work related training provided by employer

➢ In-house sports and recreational facilities

➢ Staff parties of up to £150 p.a. per employee otherwise de-minimis rules apply

➢ Entertainment from a third party to generate goodwill and gifts from a third party up to
£250 from any one source in a tax year, otherwise deminimis rule applies per source.
➢ Welfare counselling

➢ Workplace nurseries

➢ Contribution towards home worker expenses up to £6 per week or £18 per month
without documentation, more with documentation

➢ Job related accommodation

➢ Relocation and Removal expenses up to £8,000

➢ Overnight expenses up to £5 per night in UK and £10 per night overseas, de-minimis
rule apply

➢ Employer liability insurance, death in service benefits and permanent health insurance

➢ Medical insurance and treatment while working abroad but cost paid by employer will
be taxable benefit if employee is in UK

➢ Medical treatment within UK

An annual £500 exemption per employee has been introduced where an employer pays
for medical treatment. The exemption applies where medical treatment is provided to
an employee to assist them to return to work after a period of absence due to ill-health
or injury.

➢ Eye care tests

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➢ Long service awards up to £50 per year of service to mark employment of 20 years or
more

➢ Loans with a beneficial interest rate, provided the loan is ≤£10,000 throughout the tax
year

➢ An exemption has been introduced for trivial benefits which do not cost more than
£50 per employee provided these benefits are not cash or a cash voucher.

STATUTORY MILEAGE ALLOWANCE:

When an employee uses his own vehicle for performance of duties, basis for claiming
expense would be as follows:

Car/Van 10,000 miles £0.45 per mile

Above 10,000 miles £0.25 per mile

Motor Cycle £0.24 per mile

Cycle £0.20 per mile
Passenger Allowance 5 Pence / Mile

(For passenger allowance, allowable deduction is not allowed in case of less than 5 pence
/mile. If above 5 pence /mile, there will be taxable benefit in kind on the amount above 5
pence)

More than 2 years

HOME
Private

TEMPORARY PERMANENT
PLACE OF WORK OFFICE
P.O.D
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Up to 2 years

Calculating TBIK or Allowable deduction for Mileage allowance:

1. Calculate total miles for performance of duties.
2. Calculate statutory mileage allowance for total miles travelled for POD.
3. If:
• Employer pays nothing/less than SMA = allowable deduction
• Employer pays SMA = Exempt (no treatment)
• Employer pays above than SMA = amount above SMA is TBIK

National Insurance Contribution (NIC):

It is the responsibility of National Insurance Contributions Office (NICO), Which is part of HM Revenue
and customs, to examine employer’s records and procedures, to ensure correct amount of NIC are
collected.
NIC applicable to such individuals which are above 16 years, employed &having earnings.
TYPES OF NIC
Primary / Employee (aged 16 -65 years)

Class 1
- Paid by Employer on behalf of
(Employment) Secondary / Employer Employee
- Exempt benefit for employee
- Allowable Expense for employer

Employer (A)

Payable upon taxable &

non cash benefits @
15.05%

Class 2

Self Employed
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Class 4

Primary & Secondary:

Those benefits which are ‘taxable’ and in the form of ‘cash’ or cash equivalents.
£
Salary / Wages xxx
Bonus / Commissions xxx
Golden handshakes / hellos xxx
Cash vouchers (taxable portion only) xxx
Share options or Share incentives of quoted company xxx
xxx
Employee/Primary NIC Rates:

£1 - £12,570 Nil
£12,571 - £50,270 12%
Above £50,271 2%

Secondary Rates (paid by Employer):

£1 - £9,100 Nil
Above £9,101 13.8%

– Employment allowance of £5,000 on TOTAL SECONDRY NIC paid by employer is

deductible from overall Secondary NIC of all employees (not each individual employee)
– The employment allowance is no longer available to companies where a director is the sole
employee.

Class 1 Primary:
It is payable by employee if his earning is above £12,570. It is applicable to cash benefits only.

Class 1 Secondary:
Employer is liable to pay Class 1 secondary NIC at the rate of 15.05% NIC if employee cash earnings are
above £9,100, which is deductible trade expense for employer and not taxable benefits for employee.
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Class 1A NIC:
Employer Pay class 1A NIC to taxable non cash earnings of an employee.

Example:
An employee, earning a salary of £55,000, is provided with private medical insurance costing
£720 the private use of a 2800cc car costing £26,000 with a benefit charge calculated at 35% and
private use petrol.
Calculate class 1 and 1A contributions payable for 2023/24.

Grant of share options

If a director or an employee is granted an option to acquire shares in future at a price set now,
in such case implications will be depending on option was approved/unapproved from
HMRC’s are as follows:-

SHARE OPTIONS
Grant Exercise Date Disposal
Date
MV at Exercise Date xx Proceeds xx
Less Exercise Price (xx) Less Allowable cost (MV at
Exercise Date) (xx)
Less Cost of Option (xx)
Gain / Loss xx/(xx)
Taxable Benefit xx
Un No Tax
Approved Implicati
• Chargeable to income tax
ons
• Chargeable to primary &
secondary if quoted shares
• Chargeable to Class 1A if
unquoted
Proceeds xx
No Tax Benefit will be Exempt Less Allowable Cost (Exercise
Implicati Price) (xx)
Approved Note: Except for EMI
ons
Cost of Option (xx)
Gain / Loss xx/(xx)
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Approved SHARE OPTIONS schemes are as follows:

Save As You Earn (SAYE) or Saving Related Share Option Plan:

SAYE scheme allows employee to save regular monthly for a fixed period and use the funds
to take up options to buy shares free of income tax and NIC. Alternatively they can simply
take the cash saved.

• The price of shares is fixed at the date when option is granted and it should not be less
than 80% (i.e. discount will not be more than 20%) of the market value at the date of
grant.
• Employees can save a fixed monthly amount up to a maximum of £500. (if more than
£500 then unapproved scheme)
• The investments are made for 3 or 5 years.
• This scheme must be available to all employees and full time directors, on the same
terms.
• A tax free return is added in the employees account by the way of interest/bonus.
• At the time of withdrawal, employee may take the money in cash or he may use it to
buy shares granted to him.

Tax treatment:

As an approved scheme;
✓ No tax implications at Grant date.
✓ No tax implications at Exercise Date. (regardless of employee withdrawing the money
in cash or he using it to buy shares granted to him)
✓ The only tax charge may be the capital gain tax on the gain on these shares when they
are finally sold.
✓ The cost of setting up a SAYE scheme incurred by the company is a deductible
trading expense.
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Company Share Option Plans (CSOP):

CSOP differs from SAYE as:

1. Company is allowed to grant options to selected group of employees, unlike SAYE

participation in the scheme needs not to be extended to all employees.

2. Value of Shares (w.r.t grant date) which could be granted under CSOP is up to £30,000
per Employee (maximum limit).

Conditions are;
• Employees could be either full-time or part-time employees but
• Directors must be either full-time director or if not than should at least be working 25
hours a week for the company.
• Employees already having more than 30% shareholding of the company could not
participate in the scheme.
• Option must be exercised within 3 to 10 years of grant.

Tax treatment:
✓ There is no income tax or NIC on the grant of CSOP option.
✓ There is no income tax or NIC on an exercise date.
✓ Only capital gain tax will apply to the gain/loss of the shares when they are finally
sold.
✓ The cost of setting up a CSOP scheme incurred by the company is a deductible
trading expense.
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Enterprise Management Incentive (EMI):

EMI is the most flexible approved share option as it allows:

1. Company may grant option to selected employee(s) and participation in the scheme
need not to be extended to all employees.

2. Value of Shares (w.r.t grant date) which could be granted under EMI is up to £250,000
per employee. (subject to shares options already granted under CSOP).

Conditions are;
• Total value of EMI is subject to maximum of £3 million in total. (at any time not more
than 3 million)
• Company must have less than 250 full time employees, with gross assets up to 30
million and should not be dealing in Property development business or any other
excluded activity.
• Employee must be working for at least 25 hours per week or if less than at least 75% of
his working time should be engaged with the company. (for e.g. if an employee works
20 hours in a week then at least 15 hours (i.e. 75%) are with that company in order to
qualify for the scheme)
• Option must be exercised within 10 years of grant.
• Option could be granted at discount or premium.

Tax treatment:

• If the option was at premium (not at discount) with respect to market value at the
date of grant.
No income tax or NIC is chargeable on either of the grant or exercise of the
option, If the option is granted at discount.

• If the option was at discount with respect to market value at the date of grant. In this
case
Benefit in Kind at exercise date = MV at the grant date – Exercise Price

• And if option was granted at discount with respect to grant date for CGT purposes
allowable cost will be MV at Grant Date.
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• Capital Gain tax may apply to the profit on disposal of shares.

Bumper Offers From BADR for EMI Only

• BADR (Business Asset Disposal Relief) is always available on EMI shares regardless
of percentage of holding. (Up to 5% condition don’t need to be met)
• Period of Ownership of two years is not considered from Date of exercise in case of
EMI, as for EMI it would be counted from date of Grant of Option.

Save As You Earn Company Share

(SAYE) Option Plans (CSOP):
Enterprise Management
SAYE scheme allows CSOP differs from SAYE Incentive (EMI):
employee to save regular as:
monthly for a fixed period and EMI is the most flexible
3. Company is allowed approved share option as it
use the funds to take up
to grant options to allows:
options to buy shares free of
selected group of
income tax and NIC.
employees, unlike
Alternatively they can simply
SAYE participation • Company may grant option to
take the cash saved.
in the scheme needs selected employee(s) and
not to be extended to participation in the scheme
all employees. need not to be extended to all
employees.
Conditions are;
• The price of shares is 4. Value of option
fixed at the date when which could be • Company to grant options up
option is granted and it granted is much to a value of £250,000 per
should not be less than higher as compared to employee.
80% (i.e. discount will SAYE i.e. Up to
£30,000 per Conditions are;
not be more than 20%)
of the market value at Employee (maximum • A qualifying company can
the date of grant. limit). grant each of its employee’s
options over shares worth up
• Employees can save a to £250,000 at the time of
fixed monthly amount Conditions are;
grant (subject to shares
up to a maximum of
• Employees could be options already granted
£500. (if more than under CSOP).
either full-time or
£500 then unapproved
part-time employees
scheme) • Total value of EMI is subject
but
to maximum of £3 million in
• The investments are
• Directors must be total. (at any time not more
made for 3 or 5 years. than 3 million)
either full-time
• This scheme must be director or if not than
• Company must have less
available to all should at least be
than 250 full time
employees and full time working 25 hours a
employees, with gross assets
directors, on the same week for the
up to 30 million and should
terms. company.
not be dealing in Property
• A tax free return is • Employees already development business or any
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added in the employees having more than other excluded activity

account by the way of 30% shareholding of
interest/bonus. the company could
not participate in the • Employee must be working
• At the time of
scheme. for at least 25 hours per week
withdrawal, employee
or if less than at least 75% of
may take the money in • Option must be
his working time should be
cash or he may use it to exercised within 3 to
engaged with the company.
buy shares granted to 10 years of grant.
(for e.g. if an employee works
him.
• The price of the 20 hours in a week then at
• Exercise price must be shares must not be least 15 hours (i.e. 75%) are
materially met by SAYE (materially) less than with that company in order to
fund. their projected market qualify for the scheme)
value at the time of
• Option must be exercised
the exercise of the
within 10 years of grant.
Tax treatment: option.
As an approved scheme; • Option could be granted at
discount or premium.
✓ No tax implications at Tax treatment:
Grant date. • ER (Business Asset Disposal
✓ There is no income Relief) is always available on
✓ No tax implications at tax or NIC on the EMI shares regardless of
Exercise Date. grant of CSOP percentage of holding. (up to
(regardless of employee option. 5% condition don’t need to be
withdrawing the money met)
✓ There is no income
in cash or he using it to
tax or NIC on an
buy shares granted to
exercise date.
him) Qualifying company:
✓ Only capital gain tax
✓ The only tax charge The company can be quoted or
will apply to the
may be the capital gain
gain/loss of the shares unquoted and the company’s
tax on the gain on these gross assets must not exceed
when they are finally
shares when they are £30m. The company must not be
sold.
finally sold.
The cost of setting up a under the control of any other
✓ The cost of setting up a company. The company must
CSOP scheme incurred by
SAYE scheme incurred have less than 250 full-time
the company is a
by the company is a equivalent employees at the time
deductible trading
deductible trading
expense. the options are granted.
expense.

Eligible Employees:
Employees must be employed by
the company for at least 25 hours
a week. If any employee holds
30% of the shares of the
company then they must be
excluded from the scheme.

Tax treatment:
✓ No income tax or NIC is
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chargeable on either of the

grant or exercise of the
option, provided the option
was not provided at
discount with respect to
market value at the date of
grant.
✓ If the option is granted at
discount,
Charge to IT and NIC at
exercise date = MV at the
grant date – Exercise Price
✓ Capital Gain tax may
apply to the profit on
disposal of shares.
✓ And if option was granted
at discount with respect to
grant date for CGT
purposes allowable cost
will be MV at Grant
Date.
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Share Incentives

These are of two types:

1. Approved (e.g. SIP)

2. Unapproved

Unapproved Share Incentives:

Award Date: £ Disposal Date: £

MV at award date xxx Proceeds xxx
Less Price Paid By employee (xxx) less Allowable Cost
Taxable Benefit xxx (MV at award Date) (xxx)
Gain / Loss xx/(xx)

Approved
Share Incentive Plan( SIP)
Under approved or SIP incentive scheme employer may provide each employee/year as follows:-

Free shares:
• Employer may give shares up to a value of £3,600/employee/tax year to their employees.
These are called Free shares.

Partnership Shares:
• Employees may be allowed to buy Partnership shares on maximum up to lower off:
- £1800, and
- 10% of salary
Cost will be allowable deduction against employment income (up to maximum of 10% of
salary) in the tax year in which it is paid.

Free matching Shares:

• Employer may then choose to issue further free shares on 2:1 basis to the partnership
shares purchased by employees. These are referred as Free Matching shares.
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Conditions are:
1. Plan must be available to all employees of the company or group of company.
2. Plan must have no arrangement for loans to employees.
3. For tax free advantage plan shares must be held in the plan for at least 5 years. (means,
remains as class B, C or D but not converted in class A ordinary shares)

Tax Implications for Approved Scheme:

IT and NIC CGT
Shares held for No Income Tax and NIC Proceeds (MV at Disposal)
Implications – Cost (MV at withdrawal
complete 5 years
date)
Amount chargeable to IT and
NIC lower of:
Gain / Loss will be
1. MV at withdrawal calculated as follows:
Shares held for
2. MV at grant date Proceeds – Cost (MV at
at least 3 years but less than
withdrawal date)
5
Amount chargeable to IT and Gain / Loss will be
NIC: calculated as follows:
Shares held for
MV at withdrawal Date Proceeds – Cost (MV at
less than 3 years
withdrawal date)

Choice of Tax Advantaged Scheme:

In order to decide which scheme is most appropriate, the conditions of each scheme should be
compared to the employer’s requirements.
• Does the employer want to reward all employees, or just key employees?

• What size is the employer’s business?

• Does the employer want to award shares or offer share options?

• How much does the employer want to offer?

• What holding period for the shares/options does the employer want to impose?
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Payments on Termination, Resignation, Retirement, Redundancy:

The £30,000 exemption which applies to certain (ex gratia) payments is no longer available in respect
of Payments In Lieu of Notice (PILONs). These payments will now be taxable in full if they are
included in contract.
However, if the payment made exceeds the contractual (decided) payments, the excess will continue
to be exempt under the £30,000 rule. This rule applies to PILONs only.
Remember !! Ex gratia payments which are not PILONs remain eligible for the £30,000 exemption.
Completely Exempt Partially Exempt Completely Taxable
- Tax free cash lump sum - Ex-Gratia payments are - Golden handshakes (if
upon retirement from exempt up to £30,000, but term of employment was
pension this limit is subject to not completed OR
amount already paid under Restrictive Covenants)
- Payments for injury, statutory redundancy
Disability or death. payment - Payments in lieu of notice
- Statutory redundancy
payments (SRP)

Test ur understanding from kaplan

Albert, age 40 years, received an ex gratia lump sum of £80,000 from his employers
following his redundancy in December 2020.
He has other remuneration of £35,000, income from furnished accommodation of £2,745 and
dividends received of £2,000 for 2020/21
Albert also received £5,000 statutory redundancy pay.
Calculate Albert’s income tax liability for 2020/21.
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Property & Investment Incomes:

• Property Business Profit

• R.E.I.T
• I.S.A
• E.I.S
• S.E.I.S Tax Efficient Investment
• VCT
• Pensions

Real Estate Investment Trust:

1. Dividends received from REIT are net of 20% actual deduction

2. Grossed up with 100/80 and treated as non-saving income
3. As deduction at source is actual so it could create tax refund

Property Business Profit:

£ £
Rent xxx
Premium (taxable portion) xxx
xxx
Less expenses:
Repairs & Maintenance (revenue nature) xxx
For
Council tax xxx
Bills & Rates (paid by landlord) xxx tax
Agent Fees xxx year
Advertisement Fees xxx
Insurance cost xxx
Interest upon property loan/Finance cost (see Below) Nil
Employee’s salary xxx
Rent paid xxx
Replacement Furniture Relief (see below) xxx (xxx)
Property Business Profit/Loss xx/(xx)
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Replacement furniture relief

1. Individuals can deduct the actual cost of replacing furniture and furnishings when
calculating the property income from renting out a residential property.
2. The property does not need to be fully furnished for relief to be available. Furnishings
include items such as beds, televisions, fridges and freezers, carpets and floor coverings,
curtains, and crockery and cutlery.
3. There is no relief for the initial cost of furniture and furnishings. There is only relief
when assets are replaced.
4. The amount of relief is reduced by any proceeds from selling the old asset which has
been replaced.
5. Also, relief is not given for any cost which represents an improvement. For example, if a
washing machine is replaced with a washer& dryer, only the cost of an equivalent
washing machine qualifies for relief.
6. Replacement furniture relief does not apply to furnished holiday lettings because the
cost of furniture and furnishings in such properties qualifies for capital allowances.

Financing Costs:

• Finance costs are an NOT allowable deduction from property income

• Tax reducer is allowed on Finance Costs at the basic rate (20%) to be deducted from
the taxpayer’s final income tax liability.

1. Tax relief for finance costs in respect of residential property, such as mortgage
interest, is to be restricted to the basic rate.

2. It makes no difference whether the finance was used to purchase the property or
was used to pay for repairs.

3. The restriction does not apply where finance costs relate to a furnished holiday
letting or to non-residential property such as an office or warehouse.

4. The restriction only applies to individuals and not to limited companies.

5. The restriction has no impact on basic rate taxpayers.

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EXAMPLE 17

On 6 April 2023, Fang purchased a freehold house. He partly financed the purchase of the
property with a repayment mortgage, paying mortgage interest of £4,000 during the tax year
2023/24. The property was then let throughout the tax year 2023/24 at a monthly rent of
£800.

During April 2023, Fang furnished the property with a cooker costing £440, a washing
machine costing £330, and floor coverings costing £2,200. The cooker was sold during
December 2023 for £110, and replaced with a similar model costing £460. The washing
machine was scrapped, with nil proceeds, during March 2024. It was replaced by a washer-
dryer costing £670, although the cost of a similar washing machine would have been £360.
The other expenditure on the property for the tax year 2023/24 amounted to £1,310, and
this is all allowable.
Fang has a salary of £80,000

Required:

i) What will be the fang’s rental income for the tax year 2023/24?
ii) What will be Fang income tax liability for the tax year 2023/24 if his salary is
£80,000?

Calculating premium for Head lease:

Taxable Portion of the Premium = (51 – d) x P (taxable in the year of receipt)

50
d = duration of lease
P = premium

Example:
Mr. A lets out a freehold property at 1/6/23 at and received an annual rent of £24,000 and he also
received a premium of £40,000 in respect of a lease of 30 years.

Calculate taxable portion of premium for the tax year 2023/24.

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Note: In the calculation of premium, duration to be used should always be shorter of:

1. Actual duration of lease contract

2. Duration of right of cancellation of lease

Calculating premium for Sublease: £

Premium Received (51 – d)/50 x P (d & P for sublease) xxx

Less: Allowable portion of Head lease x Duration of Sublease
Duration of Head lease (xxx)
Taxable portion on sublease xxx
Example:

Mr. A let out a leasehold property at 6 April 23. He received a premium of £20,000 for 7 years
and £3,000 per month rent.
He acquired property at 6 April, 23 and paid a premium of £50,000 for 25 years. He also pays
rent of £12,000 per annum.
Calculate Property business profit for 2023/24.
. .
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. .

Furnished Holiday Letting:

A property would be considered as FHL if:

1. It is situated in UK or EEA
2. It is available for commercial letting for at least 210 days a year
3. There should be actual short-term letting (i.e., up to 30 days) of at least 105 days a year.
4. If there are any long-term letting, total of all the long-term lettings should not exceed 155
days per year.
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Benefits of FHL:

• FHL is considered as business asset for all of the CGT reliefs. (Business Asset Disposal
relief will be available on each sale of FHL, as each FHL is considered as a separate trade.)
• FHL is considered as relevant business property for 100% BPR.
• Capital allowances will be available in respect of furniture & equipment in the property
rather than Replacement Furniture Relief.
• FHL profits are considered as relevant earnings for personal pension contributions.

Rent a Room Relief:

1. If an individual lets out a room or rooms out of his or her main residence in such case rent
a room relief of £7,500 per annum will be available.
2. It will be upon tax payers will whether to claim relief or to compute property business
profit normally.
3. Rent a room relief could not create loss.
4. If the rent received from room/rooms is shared within spouses, relief will be £3,750 each.

Property Business Losses:

1. If there are property business losses upon any property, they will be first set off against
profits of other properties in the same tax year.
2. But still there are property losses than these property losses would be carried forward to
set off against first available future property business profit indefinitely unless losses
consumed or property business ceases.

FHL loss:

If there are losses upon any FHL such loss will be carried forward to set off against future profits
of same FHL.
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Tax efficient Investments:

➢ Individual Savings Accounts (ISAs):
An ISA offers the following tax reliefs:
• Income received is exempt from income tax.
• Disposals of investments within an ISA are exempt from CGT.
• There is no minimum holding period, so withdrawals can be made from the account at any
time.
• Subscription limits: Total limit: £ 20,000
– Any combination of cash and shares can be invested, up to the total of £20,000.
– A person can withdraw money from cash ISA and replace it in the same tax year without
this replacement counting towards their ISA investment limit. (NEW)
– Husbands and wives each have their own limits.

An ISA can be made up of either of the following components:

• Cash and cash-like equity products (banks).

16 and 17 years old may only invest cash ISAs.

• Stocks & Shares

Investment is allowed in shares and securities listed on a stock exchange anywhere in the
world.

• Transfer of ISA Allowance to spouse/civil partner on death

A further ISA allowance has been introduced in addition to the standard allowance of £20,000.
This additional allowance is available to the surviving spouse or registered civil partner of a
deceased person who held an ISA at the time of death. The additional allowance is equal to the
value of ISAs which were held by the deceased spouse or partner at the date of death.
This additional allowance enables the surviving member of a couple to maintain an amount of tax
free funds equal to that which had previously been held by couple.
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➢ Accrued income
This scheme is introduced to prevent the practise of bond washing. Interest is normally paid on
securities at regular intervals. As the interest payment date gets nearer, the capital value of the
securities increases as any purchaser is buying the accrued income in addition to the underlying
value
When the securities are sold they are exempt from CGT (e.g gilts and loan notes) purposes so this
element of growth relating to interest escapes tax.

How above scheme operates

• Under the scheme the interest is deemed to accrue on a daily basis or monthly basis.
• The scheme does not apply unless the total nominal value of securities held by an individual
exceeds £5,000 at some time during the year of assessment.
• The scheme does not apply if security transferred at death.

Example:
Ahmad sold £15,000 6% loan stock cum interest on 31st October 2023 for proceeds of £20,000.
He originally acquired the loan stock on 1 May 2021. Interest is payable on 30th June and 31st
December each year.
Calculate the amount assessed on Ahmed as interest income for 2023/24.
Solution
Interest income – 2023/24
£
Interest received- 30 June 2023
(£15,000 x 6% x 6/12) 450
Accrued interest included in selling price of loan stock
( from 1 July 2023 – 31st October 2023)
(£15,000 x 6% x 4/12)
300
Total interest assessable to tax 750

Note:
For CGT purposes the sale proceeds amount is £19,700 (£20,000 - £300). However, any gain
arising is exempt as the loan stock is a qualifying corporate bond (QCB)
 122

Enterprise Investment Scheme (EIS):

The EIS is intended to encourage investors to subscribe for new shares in unquoted trading
companies.

Income tax treatment:

• Income tax relief = 30% x amount subscribed for (not purchased)
✓ Maximum amount that can be subscribed for each tax year = £ 1 million p.a.
✓ Maximum tax reducer = £300,000.
✓ Deduct from the individual’s income tax liability.
✓ Can reduce liability to £Nil, but cannot create a tax repayment.
• An investor may elect to carry back the amount invested to the previous year (only for
1 year), but cannot get relief on more than £ 1 million in any one tax year.
• Dividends received from an EIS investment are taxable in the normal way.
• The income tax relief is withdrawn if the shares are not held for a minimum period of
three years for EIS, if the investor sells the shares within three years of acquisition
date, he/she have to repay amount of income tax reducer to HMRC. (Add in tax
liability)
Capital Gains Tax treatment:
• Capital gains on the disposal of shares in qualifying companies are exempt provided the
shares have been held for three years, but capital losses are allowable.
• EIS deferral relief is available. (means, capital gains are deferred if sale proceeds from
any asset are invested in EIS)
• Election can be made for capital losses arising upon disposal of EIS to relieve against
Total Income. (for current year and carry back to one year only)
Inheritance tax treatment:
• Shares in an EIS scheme qualify for Business Property Relief (BPR) if held for two
years.
Conditions for the company: (not examinable)

For the Investor:

• Must subscribe, in cash, for new ordinary shares.
• Must not be an employee or director of the company.
• Must not have an interest of 30% or more in the company.
• An individual cannot claim EIS relief if they already hold non EIS/SEIS shares in the
company at the time that they make the investment.
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Venture Capital Trusts (VCT):

Relief for investment in VCTs was introduced to encourage individuals to provide capital for
unquoted companies.

(VCT itself is a quoted company that invests in unquoted companies)

Income tax treatment:

• Income tax relief = 30% x the amount subscribed for
✓ Maximum amount that can be subscribed for each tax year = £200,000 p.a.
✓ Deduct from the individuals’ income tax liability
✓ Can reduce liability to NIL, but cannot create a tax repayment.
• No carry back facility
• Dividend income from a VCT = exempt from income tax
• The income tax relief is withdrawn if the shares are not held for a minimum period of 5
years for VCT if the investor sells the VCT shares within 5 years of acquisition date,
he/she have to repay amount of income tax reducer to HMRC. (Add in tax liability).

Capital Gains Tax treatment:

• Capital gains on the disposal of shares in a VCT are exempt.
• There is no relief for capital losses. (so there is no requirement to calculate gain/loss)
• No deferral relief is available.

Inheritance Tax treatment:

• Shares in a VCT do not qualify for business property relief.

Conditions for the Company (not examinable)

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Seed Enterprise Investment Scheme (SEIS):

The SEIS is a new scheme that is similar to EIS and is intended to encourage investment in
small early-stage companies.
Tax treatment:

The individuals who subscribe for SEIS get the following tax reliefs:
• The income tax relief available to an investor is a tax reducer of 50% of the amount
subscribed in cash for new ordinary shares for genuine commercial reasons.
• The relief is subject to a maximum tax reducer of £50,000 (means maximum
investment £100,000).
• The investor may claim to treat the investment as if it had been made in the previous
tax year (carry back up to one year only).

Implications if sold within 3 years

Not at arm’s length At arm’s length
IT relief withdrawn Lower of:
(i.e. amount of IT that All original IT relief given • Original IT relief given
becomes payable)
• 50% of Sale Proceeds received
for shares
CGT relief withdrawn A proportion of gains previously
exempted:
(i.e. previously exempted All the gains previously
gain that becomes exempted Gain exempted x Amount of IT relief
chargeable) withdrawn / Original IT relief given

(For CGT and IHT treatment, EIS = SEIS)

Conditions for the Investor:

• Must subscribe, in cash, for new ordinary shares.

• The investor must not be an employee of the company. However, this condition does
not exclude directors.
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• The investor must not own more than 30% of the company’s ordinary share capital.

Conditions for the Company: (not examinable)

Test your Understanding From Kaplan

Zosia sold an antique vase in June 2019 for £150,000 realising a capital gain of £75,000. In August 2019
she subscribed for qualifying SEIS shares in Browns Ltd.
She has no other capital transactions for 2019/20, but has a capital loss brought forward of £16,000.
a) Calculate Zosia’s taxable gains for the tax year 2019/20 assuming the SEIS shares cost:
i) £60,000
ii) £125,000

b) Explain the capital gains tax consequences If Zosia sells the SEIS shares in 2023.
c) Explain the capital gains tax consequences If Zosia sells the SEIS shares in 2020
iv) To her sister not in an arm’s length transaction.
v) To her friend, in an arm’s length transaction.
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Comparison of all three

Enterprise Investment Venture Capital Seed Enterprise

Scheme (EIS): Trusts (VCT): Investment Scheme
(SEIS):

Company
Objective This scheme is designed to This scheme is designed to This scheme is designed
encourage investors to provide funds to unquoted to encourage investors
purchase shares of unquoted companies through quoted to purchase shares of
trading companies. company. unquoted trading
companies
Risk ˗ It is high risk investment. ˗ It is comparative low ˗ It is high risk
risk investment investment.
Annual limit Max investment is Max investment is Max investment is
£1,000,000 in a tax year. £200,000 in a tax year. £100,000 in a tax year.

Carry back If an individual wants to Not available If an individual wants to

facility invest more than annual limit invest more than annual
then he can invest in previous limit then he can invest in
year but can’t get relief of previous year but can’t
>£1million in any one year. get relief of >£100,000 in
any one year

Dividend Is chargeable Exempt. Is chargeable

BPR Available if shares held more Not Available Available if shares held
than 2 years. more than 2 years.

IT reducer 30% of investments. Can’t 30% of investments. Can’t 50% of investment. Can’t
create tax repayment create tax repayment create tax repayment
As max annual investment is As max annual investment As max annual
£1million so max IT reducer is £200,000 so max IT investment is £100,000 so
is = £300,000. reducer is = £60,000. max IT reducer is =
£50,000.

• Qualifying Trade: Qualifying trades include all trades except dealing in land, shares &
securities, financial activities, legal, shipbuilding, coal and steel production, accountancy services
and properties.
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Disposal Implications:

If sold within or
less than
<3 years <5 years <3years
EIS VCT SEIS
Not At At Arm’s Not At At Arms Length
arm’s Length arms
Length Length
I.T withdrawal Repay full Repay Repay All All original Lower of
income tax lower of the income tax
• Original income tax
reducer original reducer.
• Full IT reducer
income
reducer
tax • 50% of selling
• 30% of reducer. proceeds
sale
proceeds
CGT • Gain is chargeable • Gain All gain Gain exempted
withdrawal on previously ×Amount of I.T relief
• Loss is allowed in exempted withdrawn/original IT
dispos
any case relief given
al of
shares
in
VCT
is
exemp
t.
• No
relief
for
capital
loss.

If Held for >3 years >5 years >3 years

At-least
I.T reducer Will remain available Will remain available Will remain available
CGT relief • Gain is exempt • Gain is exempt • Gain is exempt
• Loss is allowed • Loss is allowed
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PENSIONS

Occupational Personal

˗ Amount is paid net of 20%

˗ Amount is paid gross (i.e. individual now to pay 80% only)
˗ Amount paid is deducted from
Employment income as ˗ Basic & higher rate bands will
Allowable Deduction. Extended with gross amounts.

Occupational Pension
Basic 20% Higher 40% Additional 45%
Contribution

Net payment 20% Net payment 20% Net payment 20%

Personal Pension Band extension Band extension Band extension

Contribution Basic Nil Basic 20% Basic 20%
Higher Nil Higher Nil Higher 5%
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Maximum “Tax Efficient” Contribution, Lower of:

Higher of:
1) £3,600
2) Relevant Earnings:

1. Benefits wali - Trading profit

limit - Employment Income
- FHL profits

Annual Allowance:
• Annual allowance for any Tax Years is £40,000.(see below for
tappered)
• An individual can carry forward his/her unused annual allowance of
previous 3 tax years on FIFO basis if individual was member of
pension in those 3 tax years.
• If employer is also contributing on behalf of employee into
employee’s pension, in this case amount paid by employer would
➢ Additional also use annual allowance limit.
tax wali
limit • If anyone contributes above annual allowance limit he/she will be
charged with additional tax at highest rate applicable upon
amount contributed above the limit.

Example:
Mr. A has employment income of £130,000 for 2023/24. He contributed £70,000 gross into
personal pension. He has been contributing £30,000 per annum in all of previous 8 years and his
employer also contributes £5,000 per annum on his behalf.
Calculate Income tax payable by Mr. A for 2023/24
. .
 130

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Tapered Annual Allowance:

• The normal annual allowance is of £40,000 but if a person’s adjusted income does not
exceed £240,000
• The normal annual allowance of £40,000 is reduced by £1 for every £2 by which a
person’s adjusted income exceeds £240,000, down to a minimum tapered annual
allowance of £4,000.

• Therefore, a person with adjusted income of £312,000 or more, will only be entitled to an
annual allowance of £4,000 (40,000 – ((312,000 – 240,000)/2) = £4,000).
• Tapering applies on a tax year basis, so a taxpayer with variable income might find
themselves entitled to the full £40,000 annual allowance for some years, and a tapered
annual allowance in other years.
• The maximum reduction to the annual allowance is £36,000, which means that the
minimum allowance an individual will be entitled to is £4,000 i.e. (£40,000 - £36,000)

Adjusted Income (AI)

o For the Self-Employed,

Adjusted income will simply be net income as they don’t

have any employee or employer contribution.

o For Employed

Net income (from the income tax computation) x

Plus: Individual employee’s occupational pension contributions x
Employer’s contributions into any scheme for that individual x

Adjusted income x
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If threshold income is < £240,000 The AA for the tax year is £40,000
If threshold income is > £240,000 The AA for the tax year must be reduced by
(AI – £312,000) × 50%
and adjusted income < £312,000:
If threshold income is > £312,000 The AA for the tax year must be £4,000
(minimum)

Retirement 65 years (+- 10 years)

Pension

Pension Income per annum Lump sum amount (one off)

EXEMPT

Gross lower of:

1. Value of pension fund x

Taxable 25%

2. Life time allowance

Non Savings (£1,073,100 M) x 25%

In case of Death:
• If a person dies, the pension will be received by the spouse.
• If the person dies, and he/she has no spouse, the pension will be received by the children
under age 23 till they turn 23 years old.
Pension flexibility
Individuals with personal pension schemes now have complete flexibility as regards how they can
access their pension fund upon reaching the minimum pension age.

The balance of the pension fund can now be withdrawn as income whenever the individual
wishes, with withdrawals treated as income and subject to the normal rates of income tax.

Previously, individuals were generally restricted to using the balance of their pension fund to
purchase a pension annuity.
 132

Trading Profits:

Badges of Trade: (Trading Profit Vs Capital Gains)

The badges of trade which are used to determine if an activity is in the nature. Can be
remembered by using two mnemonics 'SOFIRM', and 'FAST'

➢ Subject Matter of Transaction (S)

An asset is said to have been acquired for one of three reasons:
• An investment (No Income Tax)
• Goods for private use (No Income Tax)
• Trade inventory (Subject to Income Tax)
Example
When an individual acquired 1,000,000 rolls of toilet paper and resold them at a profit, he
was held not to have acquired them for private use, or as an investment and consequently
was judged to have made a trading profit.

➢ Length of Ownership (O)

The longer the period between acquisition and disposal, the more likely the
transaction will not be treated as trading.

➢ Frequency of transaction (F)

A single transaction may be regarded as trading. However, usually the more often
similar transactions are entered into, the more likely they will be regarded as trading
activities.
Example
A taxpayer was engaged in buying the shares of radio companies and then selling the
assets of the companies (asset stripping). One transaction of this kind might have been
regarded as capital, but when he had done the same thing four times, he was held to be
trading.

➢ Supplementary work, Improvements & Promotion (I)

 133

The purchase of brandy in bulk and subsequent blending and re-casking before resale was
held to be a trade.

➢ Finance (F)
When someone takes a loan to fund the purchase of an asset and it is expected that the
loan will only be repaid when the asset is sold this is an indication of trading.
Example
An individual who took a loan to buy silver at a high interest rate and in circumstances where
it was clear that he would need to sell the silver in the short term to repay the loan. The loan
was considered trading.

➢ Method of Acquisition (A)

It is harder to argue that a trade exists where an asset is acquired by gift or inheritance
than if the taxpayer purchases it.
➢ Reason of Sale (R)

A 'forced sale' where an asset is sold as a due to unforeseen circumstances, e.g. sudden
need for funds, then it is unlikely to be treated as a trading activity.

➢ Motive (M)
The more obvious an individual’s intention to earn a profit from a transaction, the
more likely it is that it will be viewed as trading.

Example
An individual purchased a large quantity of silver as a hedge against the devaluation of
sterling. The profit from its resale was regarded as a trading profit, on the basis that the
motive for the transaction was to make a profit in sterling terms.
 134

Calculation of TATP (for the period of account)

£
Net Profit xxx
Less incomes not trading (xxx)
Add disallowed expenses xxx
Tax adjusted trading profit before Capital Allowances xxx
Less expenses allowed but not deducted (xxx)
Capital Allowances
Plant and Machinery (xxx)
SBA (Structure and Building Allowance) (xxx)
Tax Adjusted Trading Profit (TATP) xxx
 135

Disallowed Expenses:
1. Depreciation & Amortization:

Depreciation disallowed completely.

Amortization of patents and copyrights is allowed.
Allowable portion of lease premium to be deducted from trading profit:

51 – d x P / life of lease = allowable per annum

50

2. Capital Expenses: are Disallowed

3. Drawings: are Disallowed

- Private expenses of owner paid by business
- Excessive salaries of connected person of owner
- Salary of owner
- Stock drawings:
• If adjusted = Add back profit
• If not adjusted = Add back selling price

4. Donations: will be allowed if:

- Paid to local charity
- For trading purposes e.g. advertisement
- Not to political party

5. Entertainment Expense:
For employees/staff is allowed
For customer & supplier is disallowed
 136

6. Gifts:
For employees/staff is allowed
For customer & suppliers, will be allowed if:
- It is not food, drink, tobacco or vouchers exchangeable for goods.
- It should not cost more than £50 per person.
- It must carry advertisement for the business.

7. Irrecoverable/Impair Debt:
Trading: Non-Trading:
- Bad debts/debt written off - Loan written off to anyone
General provision Is disallowed.
- Specific provision
Are Allowed

8. Lease Rental/Hire of lease/Leasing cost:

Lease Rental of any asset used in trade is allowable unless it is such a car which emits
above 50 gm/km, for such cars 15% of rent will be disallowed expense.

9. Legal & Professional Expenses:

Allowed: Disallowed:
i. Accountancy & audit fee i. Personal consultancies of owner
ii. For recovering trade debts of business
iii. For renewal of short lease ii. For recovering loans written off
iv. For registering patent iii. For new or initial grant of lease
v. For raising loans iv. For raising capital
vi. For saving title of fixed v. All other fines
asset/non-current asset
vii. Employees car parking fines
 137

Capital Allowance:

Plant & Machinery Structures and

Building Used in
Trade

AIA FYA WDA

Written Down Allowance
Annual Investment Fist year Allowance
Allowance @ @100%
100% up to first
£1,000,000 per Upon purchase of: 18% per 6% per
annum. 1. Energy saving annum annum
Except for: equipment 1. Used electric
1. Cars 2. New electric car cars Cars emitting
2. Energy saving (with 0 g/km 2. Cars with 1 – above 50 g/km
equipment CO2 emission) 50 g/km

Note: false ceiling is considered as settings to non-current assets so no capital allowances

will be available on them.

Written Down allowance (WDA):

• To claim WDA @ 18% a column called general pool is to be maintained.
• Any qualifying additions will increase and any disposals will decrease the value of
general pool.
• After adding additions and deducting disposals WDA @ 18% reducing balance method
will be claimed upon closing balance.
• Allowance is claimed on the policy of full allowance in year of purchase and no
allowance in year of sale.
• As WDA @ 18% is per annum, so it will be time apportioned if period of account is of
less than or more than 12 months.
 138

Balancing Adjustment:

Whenever all the assets in a pool are sold balancing adjustment would be made rather than
claiming WDA. Balancing adjustment would result in:

1. Balancing Charge:
When assets are sold more than their written down value (WDV).

2. Balancing Allowance:
When assets are sold for less than their written down value (WDV).

Note: In calculation of capital allowance value of disposal to be used will be lower off:

• Sale Proceeds
• Original Cost
Example:
Mr. A has been a very successful Business Asset Disposal running a sole trader and a long-
standing client of our firm. He has been preparing account to Y/E 31st of December, Opening
written down value in the General Pool £30,000. His capital transactions during Y/E 31-3-24
are as follows:
Additions & Disposals:
01-04-23 Electric Powered Car £18,000
02-04-23 Car (42 g/km) £22,000
18-06-23 Production Plant £775,000
22-09-23 Furniture £200,000
18-10-23 Car (34 g/km) £(12,000)
29-10-23 Fixtures & Fittings £(8,000)
09-11-23 Fleet of Delivery Van £125,000

Original Cost of
i. Car (34 g/km) sold at 18-10-23 was £10,000
ii. Fixtures & Fittings sold at 29-10-23 was £22,000

Required: Calculate capital allowance for y/e 31st March 2024 deductible from TATP?
. .
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 139

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. .
. .
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. .
. .

Apportionment required or not

Rate of WDA 18/6% (p.a)
Rate of AIA 100%
Rate of FYA 100%
Limit of AIA i.e. 1,000,000 (p.a)

Private used car (by owner of business):

• If a car is used partially for private purposes by owner of the business, we will maintain
a separate pool for every such car.
• Allowance will be calculated and deducted in full from its pool but claim with the
proportion of business usage only.
Note:
As these cars are single asset in its pool, whenever sold balancing adjustment would be made.

Example:
Following information relates to Y/E 31st March 2024 for a sole trader Mr. A
£
Opening WDVs
General Pool 40,000
Car 1 20,000
Addition & Disposal:

01-05-24 Electric Powered Car 10,000

02-05-24 Car 3 (33 g/km) 15,000
03-05-24 Car 4 (69 g/km) 30,000
05-05-24 Car 1 (12,000)

In all of above cars there was private use of owner of business of 40%.
Required: Calculate Capital allowance for Mr. A to be deducted from TATP for the
year ended 31st March 2024?
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Short life Asset (SLA):

❖ Any asset with a useful life of up to 8 years (excluding cars) could be considered as
short life asset.
❖ A separate pool is required for every short life asset.
❖ As short life asset is normal plant & machinery so will qualify for AIA as well as WDA
@ 18% but to claim maximum possible capital allowances as early as possible, short
life asset should be pooled as last asset in AIA pool.

Note: SLA is beneficial if sold at balancing allowance.

 141

Special Rate Pool (WDA @ 6%):

1. One special rate pool is to be maintained for all special rate pool assets.
2. Assets which belong to special rate pool are:
i) Cars emitting above 50 g/km
ii) Plant & machinery integrated into building
- Electrical & lightning system
- Hot & cold-water system
- Central heating & air conditioning system
- Ventilation & air purification system
- Lifts & elevators
- Accelerators & moving walk ways
- External solar shadings/panelling
- Thermal insulation of building

iii) Long life assets – any asset with a useful life of 25 years or above and running
costs upon such assets should be at least £100,000 per annum. For example, ships,
aircrafts, threshers, harvesters etc.

Except for cars all special rate pool assets qualify for AIA and then WDA @ 6% but for
claiming maximum possible capital allowances as early as possible, these assets must be
pooled at top of AIA pool.
 142

Notes relating to sale of Non- current assets or Plant and Machinery:

If a trader sold some plant & machinery during the Period of Account and after dealing with
the disposal value in the pool, we are left with: -

i) If negative balance due to disposal then balancing charge will be charged (i.e.
increasing the TATP), whether whole pool is sold or not.

ii) If there is a positive balance (of more than £1,000) Balancing Allowance will not be
available, rather WDA @ 18% will be claimed as whole pool is not sold.

iii) If positive balance is less than £1,000 due to disposal then balancing allowance
will be available whether whole pool is sold or not, called “Small Pool WDA”.

Beneficial Election for Capital Allowances

1. P & M will be transferred at WDV
2. Thus, no balancing charge/allowance on disposing company
3. And no FYA & AIA for acquiring company
Note: Above treatment is applicable within connected persons (individuals) & connected
companies even without this particular situation.

Limit of AIA for related business:

If an individual is running more than one business:

• Those businesses are related for e.g., restaurant & catering, construction and
consultancy services etc., there will be one AIA limit of £1,000,000 for all related
business.

• But if business is unrelated separate AIA limit of £1,000,000 for every business.
 143

Structures and buildings allowance

A new type of capital allowance has been introduced, known as the structures and buildings
allowance (SBA). Relief is given as an annual straight-line allowance of 3% over a 33⅓ year
period (33 years and four months).

The SBA is only available where a building (or structure) has been constructed on or after 6
April 2020 (1 April 2020 for limited companies).

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

EXAMPLE See Excel sheet (Updtd)

Sale of Structures and Building

• Unlike plant and machinery, there is no balancing charge or balancing allowance

when a building (or structure) that has qualified for the SBA is sold.
• Instead, the purchaser simply continues to claim the 3% allowance for the remainder
of the 33⅓ year period based on original cost.

• Capital Gains
On a disposal, the allowances that have been claimed are effectively clawed back by
adding them to the sales proceeds in order to determine the chargeable gain or
allowable loss arising.
 144

TRADING LOSS RELIEFS:

• Carry forward against future trading profits
• Set off against total income (S-64) then if any loss left set off against capital gains.
• Opening/Earlier tax year’s loss relief
• Incorporation relief
• Terminal loss relief

Carry forward against future trading profits:

Under this option loss will be carried forward against first available future trading profits of
same trade only.
Loss will be set off and carried forward indefinitely unless loss is consumed or trade is
ceased.

Set off against Total Income: (S-64)

1. Against total income of CURRENT TAX YEAR only OR.

2. PREVIOUS total income of ONE tax year only OR.
3. Total Income of BOTH.

Set off against Capital Gains:

This option is only applicable in that tax year in which set off against total income has
already been applied (under section-64).
 145

Maximum Deduction of Loss against Total Income:

If there are tax adjusted trading losses and these losses are set off against total income (under
any loss relief), maximum loss that could be deducted (Against Total Income Other than
Trading Profits) will be higher off:

i. £50,000
ii. 25% of adjusted Total Income (ATI)
£
Total Income xxx
Personal Pension Contribution (x 100/80) (xxx)
Adjusted Total Income xxx

Restriction applies against total incomes (but excluding trading profit)

 146

Opening/Earlier Tax years Loss Relief:

If there is trading loss in any of the first four tax years of trade earlier year loss relief will
be available.
Under this option loss is to be set off against total income of previous three tax years on
FIFO basis.
Incorporation Relief:
If an unincorporated trade is incorporated into a company and there were trading losses in the
year of conversion into company, against such loss’s incorporation relief will be available but
only if consideration received in respect of transfer of business asset to company was at
least 80% in form of shares.

Under this option loss is carried forward to set off against first available incomes coming
from the company only (no other incomes), losses should be carried forward indefinitely
unless loss is consumed or company ceases to trade or individual sells its shareholding in the
company.

Time apportions the incomes if the incorporation has occurred during the years e.g. salary
from the newly formed company etc.

__________________________________________________________________________________
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 147

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 148

Terminal Loss Relief:

This option is only available in respect of trading loss arising at cessation.
But to claim terminal loss relief a separate working is required to calculate amount of
terminal loss. But as examination team has confirmed ACCA candidates would not be
required to calculate this amount of terminal loss as it would be given by examiner.

This given amount of Terminal Loss is set off against trading profits of:
1. Same tax year
2. Previous three tax years on LIFO basis.
 149

Partnership:
£
Net Profit xxx
Add: Disallowed expense xxx
Less: Income not trading (xxx)
TATP before capital allowance xxx
Less: Capital allowance (xxx)
TATP xxx

Sole Trader Partnership

Appropriate within Partners

A B C

I N C O M E T A X C O M P U T A T I O N S

Example:
 150

Mr. A & Mr. B has been in partnership from 1 August, 2010.

TATP for year ended 31 March, 24 was £90,000. Profits have always been shared in ratio of
3:2 to A:B but after salaries of £8,000 per annum and £ 12,000 per annum to A & B and
interest on capital of 5% per annum of £50,000 and £30,000 to A & B respectively.
Above sharing agreement was applicable till 30 November 23. As at 1 December 2023 Mr. C
joined partnership. New sharing agreement was as follows:

A B C

Salaries (per annum) 10,000 12,000 9,000

Further capital NIL NIL 60,000
Interest on capital 5% 5% 5%
Sharing Ratio 40% 40% 20%

Calculate taxable Trading Profits for each partner for Y/E 31st March 2024.

. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
 151

. .
 152

NIC Class 2 and 4:

✓ Paid by self employed NIC 2: If profits are above £ 12,570
✓ Upon trading profit for
@ £3.45 / week
the tax year (after b/f
trading loss)
✓ If aged 16 – 65 years NIC 4:
£ 1 - £ 12,570 Nil
£ 12,571 - £ 50,270 9%
Above £ 50,271 2%

Example:
Peter makes profits of £58,000 a year as a sole trader. Calculate his NIC for the tax year
2023/24.

Solution:
 153

Cash basis of Accounting:

If an unincorporated trade has never exceeded turnover of £150,000 per annum, such a
trade is allowed to join cash basis of accounting.

But after joining cash basis turnover should not exceed £300,000 per annum, if exceed
trader must leave cash basis.

Implications of cash basis accounting:

• Trader must account for all the receipts regardless of being revenue or capital in nature.
• Business must account for all the payments regardless of being revenue or capital in
nature except for cars, running cost of the cars and amount relating to personal use of
commercial property.
• If cash basis is elected a trader is not allowed to claim capital allowances in respect of
purchase of any plant and machinery.
• Purchase cost of car or cars and its running cost will be replaced with statutory
mileage allowance but in respect of business mileage only.
• If there is any private use by owner of the business in commercial property, cost
allocate able to private usage will not be calculated using percentage of private use,
rather it will be given in your exams depending upon number of occupants occupying
commercial property.
• If there are trading losses for a trader who uses cash basis of accounting, the only loss
relief option will be to carry forward against future trading profits.
 154

Test your Understanding from Kaplan

Rosemarie opened a bed and breakfast on 1 August 2022 and has prepared her first set of accounts to
5 April 2023.
Her accountant prepared her statement of profit or loss for the period ended 5 April 2023 as follows:

Notes £ £
Revenue (1) 48035
Less: cost of sales (food and utilities) (2) 15,670
Gross profit 32,365
Depreciation (3) 2,500
Motor expenses (4) 4,200
Other expenses (all allowable) (5) 14,500
(21,200)
Net profit 11,165

1) Revenue includes £6,575 which is still receivable at 5 April 2023.

2) Rosemarie paid for 80% of her purchases by 5 April 2023 and the remainder in June 2023. There
is no closing inventory at 5 April 2023. There is no closing inventory at 5 April 2023. Rosemarie
lives with her husband at the bed and breakfast, and £4,900 of the costs relate to their personal
use.
3) The depreciation charge relates to the fixtures, fittings and equipment bought in the period for
£9,000 and a motor car purchased on 1 August 2022. Rosemarie purchased the motor car with co2
emissions of 128g/km for £9,600 and she uses the car 70% for business purposes.
4) The motor expenses of £4,200 relate to Rosemarie’s car and in the period, she drove 11,000
business miles.
5) The other expenses are all allowable for tax purposes, however Rosemarie paid for £460 of the
expenses in June 2022.
The cash basis private use adjustment for two occupants in a business premises for 8 months is £4,000
Calculate Rosemarie’s tax adjusted trading profit for the year ended 5 April 2023 Assuming
a) She uses the normal accruals basis of accounting
b) She uses the cash basis
 155

Overseas Aspects of Individuals:

1. Non-Resident

2. Resident

3. Domiciled / Resident Domiciled

4. Not Resident Domiciled

Note: Domiciled can be due to three reasons: -

• By origin,
• By choice,
• By dependency
• Deemed Domicile
Deemed Domicile Status – NEW!!
1. Under the new rule, individuals are deemed UK domiciled where they:
- Have been resident in the UK for at least 15 out of the 20 tax years immediately preceding
the relevant tax year. However, residents will not be deemed domiciled if there is no tax year
out of those 15 tax years is beginning after 5 April 2017.
- This rule is announced in finance act 2017 and therefore, if an individual who would become
deemed domiciled due to 15-year rule, but has not been resident since 6 April 2017, will not
actually become deemed domicile unless they come back to UK and become UK resident
again.
(As the rule was not announced in FA17, therefore application of this cannot be imposed
until he becomes UK Resident after April 2017)

Incomes

Earned From

UK Overseas
1. Taxable regardless of status of Non-resident: Exempt
individual
2. But personal allowance will be Resident (non-domiciled):
available if: ✓ Taxable on arising basis is
✓ Individual is domiciled in: automatic
UK, EEA, Ireland, Isle of Man, ✓ But can claim for remittance basis
Channel Island
3. Personal allowance will be available Resident Domiciled:
if an individual is resident in UK. ✓ Taxable on arising basis
✓ DTR may be available
 156

Automatic not Residency Test (automatic overseas residency test):

Present in UK:

1. Not more than 15 days and has been resident for any of previous 3 tax years.
2. Not more than 45 days and has not been resident for any of previous 3 tax years.
3. Not more than 90 days and went for working abroad.

Automatic Residency Test:

Present in UK:
1. For 183 days or above in any tax year.
2. 30 days in a tax year if his only home in UK.
3. Continuous 365 days & working full time in UK (tax year in which you leave).

Sufficient ties tests:

1) Family Has close family (a spouse/civil partner or minor children) in
the UK that are UK resident
2) Accommodation Has a house in UK which is made use of during the tax year and
is available for at least 91 consecutive days during the tax year
3) Work Does substantive work in the UK (i.e., at least 40 days)
4) Days in UK Has spent more than 90 days in the UK in either, or both, of the
previous two tax years
5) Country Spends more time in UK than in any other country in the tax
year

Ties Wala Table

Days in the 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
 157

Consequences of Being Resident and Non-UK

domiciled:
R but ND in UK

UK Income Overseas Income

Always taxable whatever Taxable but depends on amount of

the status of the individual unremitted overseas income & gains
Arising Basis

Less than or up to £2,000 More than £2,000

• Remittance basis will b • Arising basis will be automatic

available automatically. • Personal allowance will be available
• Personal allowance will But;
be available • Can elect for Remittance Basis
(decision is to be made each tax
year)

If elect:
• Personal allowance will not be
available
• Possible remittance basis charge
(RBC) of £30,000/£60,000

If taxed on a remittance basis:

All overseas income = taxed as non-savings income (including
interest and dividends) (i.e. taxed at 20%/40%/45%)
DTR available
 158

Test Your Understanding from Kaplan

Ewe Scott, a polish national, has been resident in the UK for the last two years. She has her
own self-employed hairdressing business and earns £25,000 in the UK. She also has £3,000
(gross) property income from Polish property that she does not remit to the UK.
Calculate Ewe’s income tax liability for the tax year 2019/20 assuming that the election
for the remittance basis.
a) Is not made
b) Is made

Remittance Basis Charge:

RBC will apply if:
1. Individual is aged 18 years or above in current tax year.
2. Individual is resident but not domiciled.
3. Unremitted overseas incomes are more than £2,000.
4. Has elect for remittance basis.
5. Individual was resident for 7 out of previous 9 tax years, in this case RBC will be
£30,000 per tax year.
6. If individual was resident for 12 out of 14 tax years, in this case RBC will be £60,000
per tax year.
7. RBC is considered as advance and final tax in respect of nominated unremitted income
and so whenever this nominated unremitted income will be remitted to UK it would be
tax free.
8. RBC is paid in respect of every tax year in which such individual claims for remittance
basis and only one RBC could be paid for the tax year.
 159

Splitting a tax year:

✓ The split year basis (SYB) applies automatically if conditions are satisfied; there is no
claim to be made.
✓ It is not possible to dis-apply the SYB.
✓ If an individual is non-UK resident for the tax year under the automatic tests or
sufficient ties tests:
➢ The SYB cannot apply to that year.
➢ The individual is non-UK resident for the whole year.
Accordingly, for the SYB to apply, the individual must be UK resident in the tax year
under the automatic tests or the sufficient ties tests.

Leaving the UK
SYB applies in the current tax year if the individual:
• Is UK resident in previous year, and
• Is UK resident in the current tax year, and
• Is not UK resident in the following year, and
• Leaves the UK part way through the current tax year for one of three reasons below.
Individual leaves the UK and: Overseas part starts from:

1. Begins working abroad: Date starts overseas work

- Full time overseas.

2. Accompanies or later joins their partner Later of Date

abroad to continue to live with them: ✓ Partner starts overseas work
- As their partner leaves the UK and ✓ Joins partner
satisfies the full time working abroad
situation 2 above in the current year or
previous year

3. Ceases to have any UK home: Date ceases to have a UK home

- And move abroad permanently.
Note: where the SYB can apply under more than one of the above situations, priority is given
in the order above (i.e. situation 1, 2 and 3).
 160

Arriving in the UK
SYB applies in the current tax year if the individual:
• Is not UK resident in the previous year, and
• Is UK resident in the current tax year
• Arrives in the UK part way through the current tax year for one of the reasons
below.
Individual arrives in the UK and: UK part starts from:
1. Acquires a UK home: Date acquires UK home
- Did not have sufficient ties in the UK
to be UK resident prior to acquiring a
UK home
2. Begins working in the UK: Date starts work in UK
- Full time
- For ≥365 days continuous days.

3. Ceases work abroad and returns to Date individual stops working overseas
the UK:
- Is resident in the UK in the following
tax year
4. Accompanies or later joins their Later of date
partner in UK to continue to live
✓ Partner stops overseas work
with them:
✓ Joins partner in UK
- The partner is spouse, civil partner or
person with whom they have lived as if
married/civil partners at some point
during the current or previous tax year
- Is resident in the UK in the following
tax year

Note: where the SYB can apply under more than one of the above situations, priority is given
to the situation which results in the smallest ‘overseas part’.
 161

Split year rule

Example no 1:-
Mr. A who has been UK resident and domiciled since birth is planning to leave UK at 1
December, 2019 to start a full time working contract at Australia on an annual salary of
£45,000. He will be coming back at UK after completing his employment contract at 31
august 2022. Mr. A owns following two residential rental properties.
1). At Germany, which is let out £24,000 per anum.
2). At UK, let at an annual rent of £18,000 per anum.
While his stay at Australia he will be coming to UK every year for 3 weeks.
Required:-
Calculate taxable income of Mr. A for all the tax year from 19/20 to 22/23?
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
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 162

Test your Understanding from Kaplan

Bjorn has been working for his employer in Sweden for many years but on 1 July 2019 he
came to the UK in search of alternative employment. He had no UK ties and has not been
resident in the UK in the past.
In the UK he temporarily stayed with a friend until he secured a full-time three-year contract
of employment and a house to rent in Nottingham. He signed a three-year lease agreement,
moved into the house on 1 August 2019 and started work on 22 August 2019.
Explain whether the split year basis will apply in the tax year 2019/ 20 and if so, define
the UK part and overseas part of the tax year.

. .
. .
. .
. .
. .
. .
. .
. .
. .
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. .
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 163

Calculation of Overseas Income:

Source of Overseas Basis of Assessment
Income
Dividends, rental income ✓ Income grossed up for overseas tax suffered
and interest ✓ UK residents owing shares in an overseas company will
treat the grossed up overseas dividends like UK
dividends
✓ DTR may be available
Trading Income from ✓ Calculate trading income as in the UK
business wholly abroad ✓ Special rules apply for travelling expenses
(For trading & employment income “) travelling cost of
up to two return trips for the family of an individual
(either trading or working abroad) gap of at least 60 days
is allowed to be deducted from relevant income. i.e.
allowable expense for trading/ allowable deduction in
employment.
✓ Income grossed up for overseas tax suffered
✓ DTR may be available
Pensions ✓ Overseas Pension income is taxable.
(Non -saving) ✓ Income grossed up for overseas tax suffered.
✓ DTR may be available
Employment Income ✓ Assessment rules are basically the same as for other
overseas income
✓ Some exceptions to the rule
✓
Note: he will become not resident & income will be
exempt
 164

Overseas Aspects of Capital Gains:

Disposal of Overseas Assets:

Non-Resident Resident Domiciled

• Exempt • Gain chargeable and

• See exceptions losses allowable
• DTR may be available

Resident Only
Unremitted proceeds

Less or equal to £2,000 More than £2,000

• Automatic remittance basis • Arising basis automatic
• Annual exemptions • Could elect for remittance
available If elected:
• Losses allowable - Annual exemption not available
- Gain taxable @ 28%/ 20%
- RBC may apply

Example from Kaplan

Jason sold a commercial investment property in Spain for £500,000 on 16 February 2024.
Half of the proceeds were paid into his Spanish bank account and the other half into his UK
bank account. The gain on disposal is £278,850. Jason purchased the property in August 2000
Explain the CGT position assuming Jason is:
a) UK resident and domiciled in the UK
b) UK resident for the previous 5 tax years but not UK domiciled and elected for
the remittance basis.
c) UK resident for the previous 10 years but not UK domiciled and elected for the
remittance basis.
d) Not UK resident but UK domiciled
 165

Disposal of UK Assets:

• If UK resident only or resident, domiciled than chargeable.

• If Non-UK resident, then exempt. (unless following exceptions apply).

Exceptions;

i) If a UK asset used in a trade based in the UK. Gain/loss is calculated normally

ii) From 6 April 2019, non-UK residents will be subject to CGT on disposals of all UK
land and buildings, not just residential properties. Calculations will be as follows:

a. Residential Properties
Residential properties, the gain will be calculated in the
normal way;

b. Commercial/Nonresidential Properties

i. Non-residential properties acquired before 5 April 2019

and sold after 5th April 2019, the gain will be calculated
▪ The gain/loss arrived at by deducting the
market value of the property as at 5 April 2019
from the sale proceeds.
Or
▪ The whole of the gain/loss calculated in the
normal way (by election);

ii. Non-residential properties acquired/sold after 5 April

2019; the gain will be calculated in the normal way.
iii) This exception will apply if both of the following conditions are fulfilled:

(1) If an individual has been UK resident for 4 out of previous 7 tax years before
departure.
&
(2) Has been Non-UK resident for up to or less than 5 years (temporary not
residency),
In this case all the disposals while the period of non-residency of
assets owned before departure would become chargeable in the tax year of
arrival (rule applies to both UK & overseas assets)
But assets purchased & sold while the period of non-residency will still be
exempt.
166
 167

Stamp Duty
Upon purchases of:

Land & Building Shares & Securities

Stamp duty land tax (see rates)

@ 0.5%
Commercial land and building (in Bands)
1. Amount should be rounded up
£1 - £150,000 Nil
to next multiple of 5.
£150,001 - £250,000 2%
2. Will be exempt if amount is up
£250,001 and Above 5%
to £1,000.
Residential Property (in Bands)
£1 -£125,000 Nil
£125,001
Stamp- £250,000
duty will be 2% exempt
£250,001 - £925,000 5%
£925,001 - £1,500,000 10%
£1,500,001 and Above
If asset was acquired: 12%

Stamp Duty will be waived or exempt on the following acquisitions: -

Instances Assets

• Through gift. • Upon acquisition of government

• Through variation of will. Gilts/securities.
• Due to takeover/reconstruction. • Upon acquisition of QCB.
• Due to divorce arrangement. • Upon acquisition of units of unit
• Due to transfers with in spouses Trust.
And civil partners. • Upon transfers within 75% gain
Group companies.
 168

Example 1
Harry made the following purchases in the tax year 2021/22.
a) 5,000 shares in a quoted company for £10,000
b) £8,000 8% convertible loan stock of a quoted company for £12,000
c) £10,000 5% treasury stock 2020 for £9,000
d) 5,000 units in Growing unit trust for £6,250
e) 10,000 £1 ordinary shares in an unquoted company for £75,000 the shares had a
market value of £250,000 at that time.
Show how much stamp duty is payable by Harry on each of these transactions.
Example 2
Peter Robinson purchased the following in September 2021.
a) A terraced house costing £110,000
b) A town house costing £275,000. Peter will use this house as his main residence

c) A retail shop costing £140,000

d) A office building costing £200,000
Calculate the amount of stamp duty land tax payable
 169

Income Tax Administration:

1. Notification of Chargeability
2. Tax Returns
3. Records
4. Compliance check
5. Discovery assessment
6. Payment of tax & PAYE
7. Late payment Penalties

1. Notification of chargeability:
Notification of chargeability must be filled within 6 months of the end of the tax year in
which individual become chargeable.
Standard penalties may apply if individual fails to do so.
E.g. for 2023/24 (5-4-2024) → (5-10-2024).

2. Tax Returns:
Filling of the tax return:
Manual/Paper based – Online/Electronic –

By 31st October after the tax year By 31st January after the tax year
i.e. 31st October, 2024 for 2023/24. i.e. 31st January 2025 for 2023/24.

Late Filling Penalties:

More – Up to Total

0 – 3 months £100 £100

3 – 6 months £10/day (Max 90 days) £100 + £10*90 days = £1000

6 – 12 months 5% of tax due (Min £300) £1000 + 5% of IT due (Min £300)

Above 12 £1000 + 10% of IT due (Min £600)

5% of tax due (Min £300)
months Standard penalties may also apply

Note: Late filling penalties can be waived off in case of genuine reasons (severe illness)
 170

3. Retaining records:

• Trading individual – keeps record for the 5 years from the filling date that is 31st
January after the tax year relevant to all the incomes i.e. 31st January 2030 for
2023/24.

• Non-trading individual – keep record later of:

i. 12 months from filling date (31 January 2026 for 2023/24)
ii. If the return is under compliance check then till the date it is completed
iii. Date by which HMRC’s right to raise compliance check lapses

• There is a penalty of up to max of £3,000 if individual not maintain records

 171

1. Compliance Check:
HMRC may raise compliance within 12 months of actual filling date, requiring the
information.

Tax payer (individual/ company) must respond within 30 days of the issue of notice with
relevant information.

Compliance check Procedure

Un-Amended Closure Notice Amended

No Agree Yes

1. Pay/Receive relevant
amount
Tax payer can appeal for Re-compliance check 1. Pay/Receive
2. Interest would also be
Within relevant 30 days of issue of closure notice payable at 3.25% per
annum
2. Interest would
3. Standard penalties
may apply

Yes

Re-compliance Outcomes Agree

No Tribunal Court
If the dispute is not resolved at the First-tier level (for basic cases) then the appeal can go to
the Upper Tribunal (which deals complex cases).
 172

2. Discovery Assessment:

HMRC has a right to identify and penalise errors & misstatements within four, six or up to
twenty years from the end of tax year.

Standard Penalties:

Genuine mistake Nil

Lack of care 30%
Deliberate understatement 70%
Deliberate understatement 100%
with concealment

Of tax which would have been lost if error goes un-discovered.

Note: whenever HMRC was entitled to any information but it was

delayed, omitted, under/overstated, standard penalties may apply.
 173

3. Payment of IT & NIC

Payment of Income tax in instalments:

Income tax is paid in three instalments;

i. 31st January within the tax year → 1st Payment on Account

ii. 31st July after the tax year → 2nd Payment on Account
iii. 31st January after the tax year → Balancing Payment

Payment on account can be estimated tax or the tax of previous year.

Reduction in payment on account:

• Payment on account could be reduced by making an election by 31st January -

following the tax year.
• Claim must state grounds for reduction in payment on account.

Payment on account is not required: in current tax year if:-

1. If in previous tax year amount of tax payable was less than £1,000.
2. If in previous tax year whatever the amount of tax payable was but, the tax liability was
met by tax deducted at source by more than 80% .

Payments to be made on 31st January each Tax Year:

1. 1st POA of Current Tax Year (IT + Class 4 NIC) x 50% of last year
2. Balancing Payment of last Tax Year
3. Payment of Class 2 in full i.e. £156
4. Payment of CGT Liability (full) of last Tax Year
5. IT Return of last tax year.
6. CGT Return of last tax year.
 174

Payment of NIC:

Class 4 NIC:
Same as payment of Income Tax

Class 2 NIC:
✓ @ £3.45 per week
✓ Can be paid either by monthly direct debit or in one payment to be made by 31 st
January after the Tax Year. (NEW)

PAYE & Class 1 NIC:

Employer must deduct PAYE and NIC out of the monthly salary and should be submitted to
HMRC by 22nd of each month.
PAYE – Real Time Information (RTI) reporting late filing penalty
with Real Time Information (RTI)reporting, employers submit income tax and NIC
information to HM Revenue and Customs electronically every time employees are paid.
Penalties are now imposed on a monthly basis if these submissions are made late. There is no
penalty for the first month in a tax year for which submissions are late, but thereafter a
monthly late filing penalty of between £100 and £400 is charged depending on the number of
employees. An additional penalty of 5% of the tax and NIC due can be charged where a
submission is more than three months late.

4. Late payment penalties

Penalty in case of late payment:

• If payment on account is late/underpayment then only interest will be charged @ 6.5%

per annum.
• Interest may be paid by HMRC on any overpayment of tax @ 3 % which will run from
later of the date when tax was due or the date HMRC actually received tax.
If balancing payment is late then interest and penalty both has been charged.
More – Up to Penalty Total
1 – 6 months 5% 5%
6 to 12 months +5% 10%
Above 12 months +5% 15%

1. Above said penalties are for balancing payment only.

 175

2. There are no penalties for late and submission of payment on account.

3. But interest would be charged @ 6.5 % per annum for both Payment on Account and
Balancing Payment.

£
Balancing Payment xx
Interest of balancing payment xx
Penalty xx

Dishonest conduct of tax agents:

1. There is a civil penalty of up to £50,000 for dishonest conduct by a tax agent.

2. If the amount of penalty being imposed is exceeding £5,000 HMRC have a right to
publish details of penalised dishonest tax agent.
3. With agreement of tax tribunal HMRC could also access working papers of dishonest
agent.
 176

Ethics

Every ATX (P6) exam will include an ethical component for five marks in (Section A) i.e.
Q1 or Q2. The questions on ethics will be confined to one of the areas show in the above
diagram.
It will normally be worth of 5 marks.

1. Prospective clients
In this type, we will be having a new client and the requirement will be that what factors we
should consider before accepting this potential client?
The factors need to be considered as follows:
• We must obtain evidence of client’s identity.
• The primary business address and registered office of each of the client.
• Proof of incorporation.
• Details of the directors and shareholders and the identities of those persons
instructing the firm on behalf of the client.
Moreover,
• We must have regard to the fundamental principles of professional ethics. This
requires us to consider whether becoming tax advisers to prospective client
would create any threats to compliance with these principles. For example:
- Integrity: we must consider the appropriateness of client’s attitude to
complying with the laws and the disclosure of information to HM
Revenue and Customs (HMRC).
 177

- Professional competence: we must ensure that we have the skills and

competence necessary to be able to deal with the matters which may
arise in connection with prospective client.
If any such threats are identified, we should not accept the appointment unless the threats can
be reduced to an acceptable level via the implementation of safeguards.
• We should contact client’s existing tax adviser(s) in order to ensure that there has
been no action by client which would prevent the acceptance of the appointment on
ethical grounds.
• We must carry out a review in order to satisfy ourselves that client is not carrying on
any activities which may be regarded as money laundering.

2. Conflicts of interest
Conflicts can occur in the following situations:
• Where a member acts for a client and is then asked to act for another party in a
transaction
• Acting for both parties in a divorce acting for the employer and their employees
• Where the advisor may benefit from the transaction.
It may be acceptable to act for both parties, as long as the following safeguards are put in
place:
• The potential conflict should be pointed out to all of the relevant parties
• Consent should be obtained to act for them
• The firm must have clear guidelines in relation to confidentiality; and
• Should consider the need to use separate teams for each client.
Alternatively, the firm may consider acting for just one party, or not acting for either party.

3. HMRC Errors or Tax irregularities

If a member becomes aware that the client has committed a tax irregularity:
• They must discuss it with the client, and
• Ensure that proper disclosure is made.
Examples would include:
 178

• Not declaring income that is taxable

• Claiming reliefs to which they are not entitled
• Not notifying HMRC where they have made a mistake giving rise to an underpayment
of tax, or an increased repayment.
Where a client has made an error, it will be necessary to decide whether it was a genuine
error or a deliberate or fraudulent act.
Once an error has been discovered, the member should explain to the client, the
requirement to notify HMRC as soon as possible, and the implications of their not doing
so.
If the client still refuses to make a full disclosure, the member:
• should cease to act for the client
• must then also write to HMRC informing them that they have ceased to act for the
client, but without disclosing the reason why
• must then consider their position under the Money Laundering Regulations.

4. Tax avoidance or Tax evasion

• Tax evasion is unlawful. A taxpayer who dishonestly withholds or falsifies
information for tax evasion purposes may be subject to criminal proceedings or suffer
civil penalties.
• Tax avoidance is the use of legitimate means to reduce the incidence of tax. However,
the courts are wary of schemes or arrangements the sole purpose of which is to avoid
tax.

5. Money laundering
• All businesses within regulated sectors must appoint a Money Laundering Reporting
Officer (MLRO) within the firm.
• Where a report is made the client should not be informed as this may amount to
‘tipping off’, which is an offence.
 179

(GAAR):
• (GAAR) A General Anti-Abuse Rule are made by HMRC to combat tax advantages
arising from ‘abusive tax’ arrangements.
• Arrangements are 'abusive' where they cannot be regarded as a reasonable course of
action, for example, where they include artificial steps or are intended to take
advantage of deficiencies in the tax legislation.
• If the GAAR applies, HMRC may respond by increasing the taxpayer’s liability,
accelerate tax payments or delay refunds and ignore artificial steps in an abusive
scheme.
• A penalty of 60% of the tax advantage obtained through the GAAR can be charged.

Dishonest conduct of tax agents

• There is a civil penalty of up to £50,000 for dishonest conduct of tax agents.
• In cases where the penalty exceeds £5,000, HMRC may publish details of the
penalised tax agent.
• With agreement of the Tax Tribunal, HMRC can access the working papers of a
dishonest agent.
 180

CORPORATION TAX
Corporation Tax:

Corporation tax is a tax payable by UK resident company on incomes and gains of an

accounting period.

UK Resident Companies:
A company could be UK resident because of any of the following:

1. If it is registered in UK
2. If it is not registered in UK but controlled and managed from UK, i.e. either its
director reside in UK or head office is in UK or board meetings are held in UK.

Accounting Period:

It Starts:
- First accounting period starts when company starts to trade.
- Subsequently it starts from the next day where previous ends.

It Ends:
On the earlier of:
- When it is 12 months to it start.
- When period of account ends.
- When arrangements to start cessation are in place.

Example: 1
AB Ltd was incorporated on 15 July 2020 and commenced to trade on 1 September 2021.
The company chose 30 June as its accounting year end and prepared its first financial
statements to 30th June 2021 and then for the twelve months to 30th June 2022.
State the dates of AB Ltd’s first two CAPs.
 181

Company Name
Corporation Tax computation for Y/E or P/E xx/xx/xx
£
Trading Profit xxx
Property Business Profit xxx
Interest Income (set off payable & receivable) xxx
Chargeable Gains xxx
Total Profits xxx
Less: Losses (xxx)
Less: Qualifying Charitable Donation (QCD) (xxx)
Taxable Total Profits (TTP) xxx
Add Non-Group Dividends xxx
Augmented Profits (AP) xxx
£
Taxable Total Profit x % xxx
Less Marginal Relief (if applicable) (xx)
Less: DTR (if overseas taxes on overseas incomes) (xxx)
Corporation Tax Payable xxx

Marginal Relief = ( UP-AP ) x 3/200 x TTP/AP

Where: -
UP = Upper Limit
AP = Augmented Profits
TTP = Taxable Total Profits

Qualifying Charitable Donation:

Could be any donations other than:
1. Political donation.
2. Those donations which are allowed under trading profit rules (local charities).
 182

Financial Year:

It is a period for which rates, allowance and limits of CT are announced by HMRC.

It runs from 1st April – 31st March. E.g. FY 23 = 1/4/23 – 31/3/24

Rates of Corporation Tax

FY23 FY 22 FY 21
£1 – £50,000
(lower Limit) 19%
Small Profits Rates 19% 19%
£50,001 – £250,000 25%
(upper Limit)
(with Marginal 19%
Marginal Rate Relief) 19%
Above £250,000
Main Rate 25% 19% 19%

Example
For the year ended 31 March 2024, Simplified Ltd has taxable total profits of £600,000.
Simplified Ltd’s corporation tax liability??

Example
For the year ended 31 March 2024, Simplified Ltd has taxable total profits of £185,000.
Simplified Ltd’s corporation tax liability??

Example
For the year ended 31 March 2024, Simplified Ltd has taxable total profits of £185,000 also earned a
non-group dividend of £15,000.
Simplified Ltd’s corporation tax liability??

Example
For the year ended 31 December 2023, Simplified Ltd has taxable total profits of £450,000 also
earned a non-group dividend of £15,000.
Simplified Ltd’s corporation tax liability??

Example
For the year ended 31 December 2023, Simplified Ltd has taxable total profits of £100,000 also
earned a non-group dividend of £25,000.
Simplified Ltd’s corporation tax liability??
 183

Administration:

Corporation tax return:

1. Return must be submitted within 12 months of the end of accounting period;

Notification of Chargeability:

1. Must be filed within 3 months of the start of first accounting period; OR

Late Return Penalties:

More – Up to Total
0 – 3 months £100 £100
3 – 6 months + £100 £200
6 – 12 months + 10% of Corporation tax £200 + 10% of CT
Above 12 months + 10% of Corporation tax £200 + 20% of CT
Standard penalties may also apply

Persistence Penalties:
If a tax payer submitted previous two returns late and this continues and it is 3rd late filling, in
this case fixed penalties of £100 will be replaced with persistence penalties of £500.

Retaining Record:
Records must be retained for at least 6 years from the end of accounting period otherwise a
penalty of up to maximum £3,000 could apply.
 184

5. Compliance Check: (same as Individuals)

HMRC may raise compliance within 12 months of actual filling date, requiring the
information.

Tax payer (individual/ company) must respond within 30 days of the issue of notice with
relevant information.

Compliance check Procedure

Un-Amended Closure Notice Amended

No Agree Yes

4. Pay/Receive relevant
amount
Tax payer can appeal for Re-compliance check 1. Pay/Receive
5. Interest would also be
Within relevant 30 days of issue of closure notice payable at 6.5% per
annum
2. Interest would
6. Standard penalties
may apply

Yes

Re-compliance Outcomes Agree

No Tribunal Court
If the dispute is not resolved at the First-tier level (for basic cases) then the appeal can go to
the Upper Tribunal (which deals complex cases).
 185

6. Discovery Assessment:

HMRC has a right to identify and penalise errors & misstatements within four, six or up to
twenty years from the end of Accounting Period.

Standard Penalties:

Genuine mistake Nil

Lack of care 30%
Deliberate understatement 70%
Deliberate understatement 100%
with concealment

Of tax which would have been lost if error goes un-discovered.

Note: whenever HMRC was entitled to any information but it was

delayed, omitted, under/overstated, standard penalties may apply.
 186

Payment of Corporation Tax

Companies with Augmented Profits up Companies with Augmented Profits of More than
to or less than CT Profits Threshold CT Profits Threshold (Main Co.)

All of the CT liabilities must be submitted In Equal Quarterly Instalments from start of
within coming 9 Months And One Day accounting period:
from end of accounting period.
1. By 14th of 7th month 3/12 POA
2. By 14th of 10th month 3/12 POA
3. By 14th of 13th month 3/12 POA
4. By 14th of 16th month 3/12 BP

Note: 3/12 is used for 12 months accounting

period. It would be 3/9 e.g for 9 months
accounting period.

1) Augmented Profits
Taxable Total Profits + Dividends from non-group companies

2) Threshold Limit
Generally, it is £1,500,000 unless any of the following

i) Short Accounting Period:

If accounting period is less than 12 months:-

(i) Corporation tax Profits Threshold (i.e £1,500,000) will be

apportioned to scale down according to the length of short accounting
period.
(ii) Corporation tax rates Upper and Lower Limit (i.e £50,000 and
£250,000) will also be apportioned to scale down according to the
length of short accounting period.

ii) Connected or Group Companies:

(a) When one company controls another company, such companies are called
connected companies.
(b) Dividend received from connected companies is not added in Taxable Total
Profits or anywhere in tax Performa.
(c) Corporation tax Profits Threshold (i.e £1,500,000) is divided equally with the
total number of connected companies.
(d) Corporation tax rates Upper And Lower Limit (i.e £50,000 and £250,000) are
also divided equally with the total number of connected companies.
 187

3). Exception to the Rule

Companies with Augmented Profits of More than CT Profits Threshold will pay
their corporation tax in 9 months and one day if:

a) It was below threshold limit in immediate previous accounting period and Augmented
Profit in current accounting period does not exceed £10 million.

OR

b) Those companies which are above threshold limit but corporation tax liability is
below £10,000 (in case of connected company, limits are divided)

Late submission of Balancing Payments: Would result in following panelties

1 – 6 months 5%
6 – 12 months +5%
12 above +5%
 188

Non-trading Loan Relationship Interest Income

Candidates will now be expected to be able to identify whether loan interest payable is for
trading or for non-trading purposes.

Trade purposes include loans used to:

• Purchase plant and machinery.

• Provide working capital.
• Purchase property used for trading purposes such as an office, warehouse or factory.

Non-trade purposes include loans used to:

• Purchase property which is then let out.

• Acquire the share capital of another company.

£
Non-trading interest received (accrual basis) xxx
Less Non-trading interest paid (accrual basis) (xxx)
Interest Income/Deficit xx/(xx)
(If deficit than NIL in Performa)

Interest Deficit:

Could be relieved by using either or all of following options:

1) Against total profits before QCD of current accounting period OR;

2) Carried back against interest income only for previous 12 months (36 months if
cessation) OR;
3) Carried forward against Total Profits before QCD.

For all of above partial claim is allowed.

 189

Property Business Profits:

Following are the main differences between Income tax and Corporation tax:

1. Unlike individuals Companies are required to calculate PBP on Accrual basis rather
than cash basis.
2. All the calculations will be for an accounting period rather than tax year.
3. Unlike individuals there is no restriction of claiming a tax reducer at basic rate upon
interest of property loan as for companies it should be deducted from interest income.
4. Rent a room relief and FHL is not applicable for companies.
5. Property business losses in case of companies is set off against total profits before QCD
of:
- Current accounting period.
- Future accounting period.

Trading Profits: £
Profit before Tax xxx
Add: Disallowed expenses xxx
Less: Income not allowed (xxx)
Less: Capital allowances (for an accounting period)
1. Plant and Machinery (xxx)
2. SBA (xxx)
TATP xxx

AIA (Additional Points):

1. If an individual owns more than one company:

a) With unrelated business, in this case there will be separate AIA limits for every
company owned.
b) With related business there will be only one AIA limit available to all such
companies.
2. If a company owns or controls other companies in this case regardless of business being
related or unrelated there will be always one AIA limit for whole group of companies.
 190

Special Rate Pool Assets – Additional Points:

Applicable to individuals and company both:

If a company incur expenses upon special rate pool asset which is:
a) More than 50% of its replacement cost
OR
b) If it was less than 50% but further spending on same asset in next 12 months become
50% or more in total of its replacement cost

For both of above expenditure should be capitalized and will qualify for capital allowance
(AIA) rather than it been considered as revenue expense.

ENHANCED CAPITAL ALLOWANCES FOR COMPANIES ONLY

For a two-year period from 1 April 2021 to 31 March 2023, companies can benefit
from enhanced capital allowances when they purchase new plant and machinery:

• For expenditure which would fall into the main pool, there is a 130% super deduction.
This means that for every £100 of expenditure, a first year allowance of £130 is
available.
• For expenditure which would fall into the special rate pool, there is a 50% first year
allowance.

Good News
As two-year qualifying period having ended on 31 March 2023. Therefore, a question will no longer
be set involving an initial claim for enhanced capital allowances.
Bad News
However, a disposal of plant and machinery on which enhanced capital allowances have been claimed
could be examined as follows:
• For expenditure which fell into the main pool, a 130% super deduction was available. When
plant and machinery (on which the 130% super deduction has been claimed) is subsequently
sold after 31 March 2023, the sale proceeds are not deducted from the main pool. Instead,
the proceeds are brought in as a balancing charge.
• For expenditure which fell into the special rate pool, a 50% first year allowance was
available. When plant and machinery (on which the 50% first year allowance has been
claimed) is subsequently sold after 31 March 2023,
o 50% of the sale proceeds are deducted from the special rate pool,
o With the other 50% brought in as a balancing charge. The deduction from the special
rate pool could of course also result in a balancing charge.
 191

Example

Hance Ltd has an accounting reference date of 31 March. The tax written down value of Hance Ltd’s
main pool as at 1 April 2023 is £0. The tax written down value of the special rate pool is £28,200.
During the year ended 31 March 2024,

Hance Ltd sold:

• Equipment for proceeds of £42,600 on which the 130% super deduction had been claimed (the
sale proceeds are less than the original cost).

• Equipment for proceeds of £72,000 on which the 50% first year allowance had been claimed (the
sale proceeds are less than the original cost).

Solution

Hance Ltd’s overall balancing charge for the year ended 31 March 2024 is:

Super deduction (42,600)

First year allowance (72,000 x 50%) (36,000)

Special rate pool (28,200 - (72,000 x 50%)) (7,800)

Overall balancing charge (86,400)

Example

Lollipop Ltd has an accounting reference date of 31 March. The tax written down value of Lollipop
Ltd’s special rate pool as at 1 April 2023 is £425,000.

During the year ended 31 March 2024, Lollipop Ltd sold equipment for £350,000. This equipment
was originally purchased for £1,400,000, with Lollipop Ltd claiming the annual investment allowance
on £1,000,000 of the expenditure, and the 50% first year allowance on the remaining £400,000.
 192

Solution

The proportion of the sale proceeds on which the 50% first year allowance was claimed is:

350,000 x 400,000/1,400,000 = £100,000

Lollipop Ltd’s overall balancing charge for the year ended 31 March 2024 is therefore:

Trading Loss Reliefs (options):

1) Carry-forward of trading loss
2) Set off against total profits (before QCD)
3) Terminal loss relief

1. Carry-forward of trading loss (Partial claim is allowed)

Trading Losses if carried forward be relieved against total profits (before QCD) of future periods,
rather than just specific types of income (for example, profits of the same trade as in income tax).
Note: Losses carried forward can now also be relieved via both group relief and/or consortium relief.

2. Set-off against total profits (before QCD):

Under this option loss is to be set off against total profit of:
• Current accounting period
• Previous 12 months
 193

Further rules in respect of trading losses carried forward (NEW!)

Company’s trade becomes small or negligible

If a company’s trade becomes small or negligible in an accounting period in which it realises

trading loss, in this case if loss is carried forward, trading losses carried forward to future periods,
can only be offset against future trading profits of the same trade rather than total profits.
Restriction on the use of losses carried forward (Mukhtasir Mager Jamye note likhay)

Terminal Loss: (Set-off basis)

1. Terminal loss will be tax adjusted trading loss in the year of cessation
2. This terminal loss will be set off against total profits before QCD of:
a) Current accounting period
b) Previous 36 months

Restriction on Trading Losses:

If:
• Ownership of a company changes (that is change hands) and more than 50% shares
• Within 5 years of change of ownership, there is a major change in either nature or
conduct of trade

In this case company would not be allowed to:

➢ Carry forward its Pre-Acquisition losses against Post Acquisition Total Profits.
➢ Carry back its Post-Acquisition Losses against Pre-Acquisition Total Profits.
 194

Intangible Assets

Capital Expenditure Revenue Expenditure

1. Patent Rights 1. Patent Royalties
2. Copy right 2. Cost in respect of
3. Goodwill generating internally

Allowable Expense
Treatment for Capital Expenditure

As according to financial A company is allowed to

accounting: write off its intangible
• Other than goodwill assets at 4% per annum
all such assets are (WDA) or straight-line
amortized on basis i.e. useful life 25
straight line basis
OR years.
• For Goodwill see
Below Balancing adjustment is
also required in year of
sale

Acquisition of Goodwill:

Amortisation or impairment losses relating to goodwill are not allowable for tax purposes.

Disposals of Goodwill

• On disposal of goodwill, the proceeds from sale of Goodwill are compared with cost.

• Where there is a loss on the sale of the goodwill, it will be set against the total profits of
the current year and/or carried forward (against total profit) and/or group relieved.
• Where there is a Profit on the sale of the goodwill, this profit will be added into trading
income of the company.
 195

Transfer Pricing Legislation:

(Applies to all heads of income)
Whenever there is a transaction within connected companies under transfer pricing legislation
all of the undervalued transaction should be adjusted to make them arm’s length transactions.

This legislation is applicable upon all heads of income of a company. Legislation applies as
follows:

Size of Company

Large SME

Selling/Buying from
Selling/Buying
Any company
If a connected Connected
company reside in company is either
a country with in UK (SME) or
whom HMRC (UK) such a country
did not have any with which HMRC
double taxation (UK) has a double
treaty taxation treaty
Transfer
pricing
legislation Transfer pricing does not apply
applies
 196

Test Your Understanding from Kaplan

Transaction A Ltd Subsidiary

( B Ltd)

1) A Ltd sells 5,000 units to B UK company Overseas company

Ltd at £1.50 each when the
(large)
MV = £3 each

2) As for (1) UK company (medium UK company

/ small) (medium/small)

3) As for (1) UK company (large) UK company

4) A Ltd makes a loan of UK company (large) Overseas company

£200,000 to B Ltd and charges
interest at 2% when the
commercial rate is 8%

5) As for (4) UK company (medium/small) UK company

(medium/small)

6) As for (4) UK company (large) UK company

Explain the effect of the transfer pricing legislation on each transaction.

 197

Research & Development Expenditure:

SME:
In case of SME all of the revenue expenses incurred upon R&D (including cost of developing
or buying software for purpose of R&D only) would be allowed to be deducted from trading
profits.

If any expenses qualify for “enhanced relief” than extra 86% of these expenses will be
allowed to be deducted from trading profits.

Expenses which will qualify for enhanced relief are as follow:

i. All direct costs; material, fuel, power, water & staff cost including employee NIC of
that staff (but excluding cost of benefits in kind)

ii. Software either purchased or developed to be used for R&D only

iii. 65% of the payment made to subcontractors if any (i.e. 130% of 65%)

Notes:
1. If payments made to independent party, e.g. Research body, amount paid would be
allowable to be deducted from trading profits but would not qualify for Enhanced relief.

2. Expenses which are covered under grant or subsidies will be allowed trading expenses
but would not qualify for enhanced relief.

3. If loss arises due to enhanced relief and it is relieved in such a manner that it creates
refund (if loss is carried back). In this case only 10% of amount surrendered would be
paid to the company as a refund regardless of actual applicable corporation tax rate.
 198

Example
Dax plc is a profitable company manufacturing audio visual equipment. Dax pic is a small
enterprise for the purposes of R&D.

The company has recently decided to investigate the market for a radically new type of
classroom projection equipment and has spent the following amounts in the year ended 31
December 2022 on the project:
£
Market research (was conducted before start of this 8,000
R&D)
Staff directly involved in researching the project 20.000
Administrative support for the R&D department (was 5,000
allocation of existing Admin cost)
Heat and light in the R&D department 9,000
New software 4,000
Payment to an agency for temporary R&D staff 10,000
Advise the company of Total Tax Allowable amount which could be deducted in respect
of R&D against Trading profits of Dax Plc.

Thin Capitalization: If a company borrows a loan from any of its connected company
and the amount of loan is above its borrowing capacity, in this case
interest paid would be only allowable in respect of amount of loan which was up to its
borrowing capacity.
Test Your Understanding from Kaplan
Archer plc is a wholly owned subsidiary of Berry Inc, a company resident in Babylonia.
Archer borrows £100,000 from Berry Inc paying a market rate of interest of 8%. Archer had
to borrow from Berry Inc as their UK bankers were not prepared to lend them more than
£60,000.
Advise Archer plc of how much loan interest they are likely to have relieved for tax
purposes.
. .
. .
. .
. .
. .
 199

. .
Management Expenses of Non-Trading Companies:

If a company is either not involved in trading activities or if there are any, than the scale of
activities is quite negligible, such companies are considered as a non-trading or investment
companies.

a) All of the management expenses of such companies are deducted from total profits
before QCD of the company.
b) If there are any unrelieved expenses from the current accounting period they could be
carried forward against future total profits.

Test your understanding from Kaplan

Cheetah Ltd has the following results for the year ended 31st March 2022:
£
Rental income 70,000
Deposit account interest receivable 20,000
Chargeable gains 3,000
Management expenses:
Property management 35,000
Other expenses 60,000
Related to property business 2,300
Loan stock interest payable (gross) 2,000
Director’s remuneration 3,000
Required:
Calculate Cheetah Ltd’s CT liability for the year ended 31st March 2022
. .
. .
. .
. .
. .
. .
. .
. .
. .
 200

. .
 201

Chargeable Gains for Companies:

£
Gains for Accounting Period (Indexed) xxx
Less: Losses for Accounting Period (Unindexed) (xxx)
Net Gain / (Loss) xx/(xx)
Less: B/f Capital Losses (xxx)
Chargeable Gains xx/Nil

Corporation Tax Computation

Calculation of Gain/Loss for a Single Asset:

£ £
Proceeds xxx
Less: Incidental Cost of Disposal (xxx)
Net Proceeds xxx
Less: Allowable Cost:
Original Cost
(purchase cost + incidental cost of purchase) xxx
Enhanced Expense xxx (xxx)
Un-indexed Gain/Loss xx/(xx)
Less: Indexation Allowance: (Upto december 2017)
Original Cost x Indexation Factor xxx
Enhanced Expense x Indexation Factor xxx (xxx)
Indexed Gain/Nil xx/Nil
 202

Example
A Ltd sold a building for £ 600,000 at 1st July 17 building was purchase for £ 180,000 at 1st Sept 98
and E. Expense of £ 40,000 was incurred at 1st July 06.
Legal cost of £ 4,000 & £ 2,000 were paid at the time of sale & purchase respectively

Relevant indexation factors are:-

Sep 98 - July 17 0.945

Sep 98 - July 06 0.273
July 06 - July 17 0.528

Required: Calculate Indexed Gain of A Ltd.

New!
An indexation allowance is given when calculating chargeable gains for a limited company. However,
the indexation allowance has been frozen at December 2017. This means that:
When an asset is purchased prior to December 2017 and subsequently sold, then the indexation
allowance will be given from the month of acquisition up to December 2017.
When an asset is purchased from January 2018 onwards and subsequently sold, then no indexation
allowance will be available.
EXAMPLE FROM ARTICLE:
Delta Ltd sold a factory on 15 February 2024 for £420,000. The factory was purchased on 24
October 1995 for £164,000, and was extended at a cost of £37,000 during March 2018.
Indexation factors are as follows:
October 1995 to December 2017 0.856
October 1995 to February 2024 1.462
March 2018 to February 2024 0.069
Solution:
£
Disposal Proceeds 420,000
Cost (164,000)
Enhancement Exp. (37,000)
219,000
Indexation allowance (164,000 x 0.856) (140,384)
Chargeable Gain 78,616
 203

Rollover & Holdover:

➢ Not on Goodwill, Patent Rights & Copyrights because they will be treated in trading
profits in case of companies.
➢ In companies indexed gain will be deferred.

Share Matching Rules for Companies:

✓ Same day acquisition
✓ Previous 9 days
✓ Share pool

Example
A Ltd sold 9,000 shares of Y Ltd for £ 162,000 at 10 March 2024. Shares were purchased as
follows: -
– 18 Oct 2016 8000 shares @ £7 each
– 21 may 2017 2 for 4 Right Issue @£ 4 each
– 8 march 2021 3,000 shares @ £12 each

Indexation Factors
May 2017 - Dec 2017 0.361
May 2017 - March 2024 1.212
Oct 2017 - March 2024 1.199
Oct 2016 – Dec 2017 0.491
.________________________________________________________________________.
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.________________________________________________________________________.
.________________________________________________________________________.
.________________________________________________________________________.
.________________________________________________________________________.
 204

Substantial Shareholding Exemption:

1) If a company owns substantial shareholding that is 10% or more of a company for at

least 12 months out of previous 6 YEARS from the date of disposal, in this case
substantial shareholding applies.
2) In deciding whether the shareholding is substantial or not, shareholding of the whole
group of companies should be considered.
3) If there is a share for share exchange in this case ownership criteria should be fulfilled
with respect to ownership period of both shares (12 months).
4) If the shares being disposed are of a new company (which is at least 75% or more
subsidiary) and not held for qualifying period, SSE will still be available if
- Trade & asset of that company have been transferred to it, from another 75%
subsidiary.
and
- That subsidiary had owned this trade & asset for at least 12 months.

Totka for Point 1: When ownership of a company is sold in such a way that remaining
shareholding is not substantial, SSE will still be applicable if that remaining holding is sold
within 5 years.

Test your understanding from Kaplan

Omega Ltd owns 15% of the shares issued by Epsilon Ltd, a shareholding qualifying for the
substantial shareholding exemption (SSE). The shares were acquired on 1 January 2014.
On 30th June 2020 Omega Ltd disposed of a 10% holding in Epsilon Ltd. The remaining 5%
holding was disposed of on 31st December 2021.

For each disposal, explain whether the SSE applies.

 205

Close Company
(5 or less than 5 shareholders, if more than 5, all of them should be directors):

• Shareholder Only:

If an individual is only shareholder and not director of the close company and he or she
is provided with benefits from its company (e.g. living accommodation, car) in this case
amount taxable on the shareholder will be calculated using rules of employment
income;
AND
Then this amount will be considered as Dividend for the shareholder and Dividend
Distribution for the Close Company.

Example:
List price of Car x CO2 Emission %age = dividend

• Provision of Loans to (Shareholder & Director Shareholder):

If a company provides loan to its shareholder, in this case 33.75% of amount of loan
should be submitted to HMRC along with next Corporation Tax Liability by the close
company.

This 33.75% payment would be repaid to the company on either of when:

i) Loan is repaid by shareholder to company.

OR
ii) When loan is written off by the company in the favour of owner.

If following conditions are fulfilled, 33.75% of the loan needs not to be paid to
HMRC;

i) If an individual owns less than 5% shareholding and:

ii) Is a full-time working director/employee and;
iii) Amount of loan is borrowed up to £15,000
Note: If any part of the loan is repaid before payment date then the tax charge is reduced accordingly.
206
 207

• Personal Service Company (IR35):

In the absence of close company, (owner or) shareholder of the close company would
be caught under employee vs self-employment rules.
HMRC may apply implication of IR35 that is close company would be called as
personal service company and, in this case, Notional Salary will be calculated and
would be taxable upon the shareholder for both income tax and NIC for the
shareholder.
Amount of Notional Salary is calculated as follows: (chargeable to IT & NIC)
£
Total fee received by PSC (Sales) xxx
Less:
Statutory deduction (5%of total fee) (xxx)
Actual Salary (xxx)
NIC Secondary on actual salary (xxx)
Pension contribution by PSC on behalf of individual (xxx)
Any Allowable deduction in the absence of PSC (xxx)
Notional/Deemed Salary (gross of NIC) xxx

Secondary NIC: Deemed salary x 13.8/113.8 (xxx)

Notional/Deemed Salary xxx

For Owner of PSC

Deemed salary would be considered as additional salary resulting in additional income tax
and Employee NIC

For PSC
Deemed salary and related Employer 1 NIC would become allowable expense and so will be
deducted from PSC’s TATP.
208
 209

Question
Charles and Jane Miro, aged 31 and 34 years respectively have been married for ten years and have
two children aged six and eight years. Charles is a teacher but for the last five years he stayed at home
to look after their children. Jane Miro works as translator for Speak write Ltd. Speak write Ltd was
formed and began trading on 1 April 2023. It provides translation services to universities. Jane, who
ceased employment with Albert University to found the company owns 100% of its ordinary share
capital and is its only employee.
Speak write Ltd has translated documents for four different universities since it began trading. Its
biggest client is Albert University which represent (70%) of the company’s gross income. It is
estimated that company’s gross fee income for its first 12 months of trading will be £110,000. Speak
write Ltd usually agrees fixed fee in advance with its clients although it charges for some project by
reference to the number of days taken to do the work. None of the university makes any payment to
Speak write Ltd in respect of Jane Miro being on holiday or sick.
All of the universities insist that Jane Miro does the work herself. Jane Miro carries out the work for
three of the universities in her office at home using a computer and specialized software owned by
Speak write Ltd. The work she does for Albert University is done in the university’s library on one of
its computers as the documents concerned are too delicate to move.
The first of accounts for Speak write Ltd will be drawn up for the year ending 31 March 2024. It is
estimated that company’s tax adjusted trading profit for this period will be £52,500. This figure is
after deducting Jane’s salary of £4,500 per month and the related national Insurance Contributions but
before adjustment required by the application of the personal service companies. The company has no
other sources of income or capital gains.
Required
a) Write a letter to Jane as at 1 September 2023 Setting out:
i. The arguments that HMRC could put forward, based only the fact set out above, in
support of applying personal service companies’ legislation IR 35 to Speak write Ltd;

(6 marks)
ii. The additional income tax and national insurance contributions that would be
payable by Jane Miro, if HMRC applied the personal service Companies legislation
to all of the company’s income.

(7 marks)
b) Compute the corporation tax liability of Speak write Ltd for its first trading period on the
assumption that the personal service Companies legislation applies to all of its income.

(2 marks)
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 210

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Summary of Differences:

Sole trader Company

Taxation of Trading profit assessed on a current Corporation tax on taxable total

Profits year basis under income tax rules. profits – after the individual has
paid themselves a salary.

Adjustments for private use.

No adjustments for private use
Capital allowances with private use
when calculating trading profit –
adjustments.
instead the individual is taxed on
benefits received.
Personal allowance.
Capital allowance is full (no
Tax at: private use adjustments).

20%/40%/45%
No personal allowance.
Class 4 NICs = 9% of profits and 2% .
Tax at:
 211

Class 2 NICs = £3.45 per week. 19%

Sole trader Company

Relief for Relief available against personal Loss relieved against company’s
losses income of individual. profits only.

Opening years relief – loss in any of Current year – set against total
first four tax years, set against total profits (income and gains) of
income of 3 preceding tax years current CAP.
(FIFO).

Profit year – set against total

Relief against total income of profits (income and gains) of
current/previous tax year. previous 12 months.

Extension against chargeable gains in C/f – against future trading

same years. profits of same trade.

C/f against trading profit of same trade.

Sole trader Company
Withdrawal No tax Implications – all profits already Salary/Bonus:
of funds assessed to tax on the individual as
• Employment income for
trading profit.
individual.
• Allowable deduction for the
company.
• Class 1 primary NIC for
employee.
• Class 1 secondary NIC for
company (allowable
deduction).
Dividend
Taxable at
1,000 nil rate band
8.75% if basic
33.75% if Higher
39.35% if additional
VAT Individual registers Company registers
 212

Disposal of Gains on individual chargeable assets: Gain on shares:

Business
• Gains are business assets: • Shares in an unquoted
trading company will
- For gift relief usually be business assets.
- For Business Asset • Gift relief if shares gifted.
Disposals’ relief if disposal
of the entire business. • Business Asset Disposals’
relief on disposal.
• IHT – 100% BPR on gift/legacy.
• IHT – 100% BPR on
gift/legacy.

Withdrawal of Investment from Company:

1) Sale of share
2) Share buy back
3) Liquidation
4) Winding up

1. Sale of Shares
• If an individual who is selling shares is also the employee of that company and holds
at least 5% for 2 years BADR will be available unless other-wise.
• In case of company: SSE may be applicable if conditions are met.

2. Share Buy Back:

In this case amount received by the shareholder from the company will be considered as
either;
i. Income distribution (i.e. Dividends)
ii. Capital Proceeds

If the shareholder is a company, it will be treated as Capital Proceeds (Substantial

Shareholding Exemption may apply).
 213

For Individual Shareholder: -

Consideration received will be Capital Proceeds if following conditions are fulfilled:

➢ Company must be Unquoted Trading Company in UK.

➢ Shareholder must be resident in UK.
➢ Shares must be owned for at least 5 years (3 years if inherited). (note)
➢ After buy back individual must not be able to exercise more than 30% control of the
company.
➢ At least 25% of his/her shareholding must be bought back.
➢ Share Buy Back must be for the Benefit of Trade.

If any of the above condition is not fulfilled amount received by the individual will be
considered as dividend and calculated as follows:

Amount received – cost (subscription amount) = Dividend

Note: Combined/ joint period of ownership should be considered in case of spouse

Test your understanding from Kaplan

You act as tax advisor of Bliss Ltd (which operates a successful marriage bureau) and its
managing director Mr Crippen.
The company has made tax adjusted trading profits in excess of £250,000 p.a. over the
previous five years. It has now built up a substantial reserve of cash, since its policy has been
not to pay out any dividends. The company has not made any chargeable gains in recent years
and has always prepared accounts to 30th April.
Mr Crippen informs you that he and Mr Bluebeard, his fellow shareholder, are in serious
disagreement about the future strategy of the company and that this is having a very harmful
effect on the running of the business.
It has therefore been decided that Mr Bluebeard should no longer be involved in the
management of the company and that the company will purchase all of his shares from him.
Further relevant information
1) Mr Bluebeard has worked in the company as a full time director since it was
incorporated on 1 June 2006, when he acquired 10% of the ordinary shares for
£3,000.
 214

2) Mr Bluebeard has taxable income of £50,000 per annum after deducting his personal
allowance. He received no other income in the tax year.
3) The company has agreed to buy back Mr Bluebeard’s shares at market value of
£600,000 on 1 April 2019.
4) All of Bliss Ltd’s assets are in use for the purposes of the trade.
Set out the tax implications for Mr Bluebeard if the:
a) Income treatment applies
b) Capital treatment applies
. .
. .
. .
. .

3. Liquidation:

In the case of liquidation amount received from the company by the shareholder would be
considered as Dividend or Capital Proceeds it would be dependent on:

1) Dividend distribution if amount was received before the appointment of Liquidator

than:
Amount Received – Cost (subscription amount) = dividend

2) Capital Proceeds if received after the appointment of Liquidator

Test Your Understanding

Simon set up an unquoted trading company on 1 July 2011, and acquired 100% of the shares
for £1,000.
The business has been successful but he has decided that now is the time to retire.
A liquidator will be appointed on 1 January 2019, to oversee the disposal of assets and the
winding-up of the company.
It is anticipated that after the assets have been sold the statement of financial position will be
as follows:
 215

a) £180,000 before the liquidation commences, with the remaining £540,000 paid
on 1 April 2019.
b) The whole £720,000 is paid out on 1 April 2019.
. .
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 216

4. Winding Up:
Closure of company without appointment of liquidator (in case of small companies)
In this case consideration received will be considered as capital proceeds, if all of the
following conditions are fulfilled:

a) Shareholder was paid, when company has been wound up.

b) All of the liabilities have been agreed and paid.
c) Total payment is not more than £25,000 (if the consideration is more than £25,000 de-
Minimis rule applies).

If any of the above condition is not fulfilled amount received would be considered as
Dividend Distribution.
 217

Groups of Companies:
i. Connected/Group companies
ii. 75% Loss Relief Group
iii. Consortia
iv. 75% Capital Gain Group
v. VAT Group
vi. Transfer of Trade within 75% Common Control Companies

Group or connected Companies:

Exists if :-
• If holding at every level (i.e. every parent company to every subsidiary) should be
more than 50%. And
• Effective holding of Ultimate Parent Company in to sub-subsidiaries should also be
more than 50%

➢ Dividend received from connected companies is not added in Taxable Total Profits or
anywhere in tax Performa.
➢ CT Threshold Limit of 1,500,000 is divided equally among the total number of group
Companies.
➢ Corporation tax rates Upper And Lower Limit (i.e £50,000 and £250,000) are also
divided equally with the total number of connected/group companies.
➢ There will be only one AIA limit for all group companies regardless of their trades be
related or unrelated to each other.
➢ If a company is acquiring another company by more 50% in any accounting period. Such
a company would not affect corporation tax threshold in that accounting period in which
it is acquired rather it would be counted as group company from the next accounting
period in which it was acquired.
➢ Sold more than 50% in any accounting period. It would still be included in connected
company and will affect corporation tax threshold. Limit in the accounting period in
which it been sold but it would not from next accounting period.
Totka (Baicha aur khareeda aglay saal say count ho ga)
 218

75% Capital Gain Group:

At least:
• If holding at every level (i.e., every parent company to every subsidiary) should be at
least 75%. And
• Effective holding of Ultimate Parent Company in to sub-subsidiaries should also be
more than 50%
Implication of Gain Group:

1) If an asset is sold or transferred within gain group member, it would be deemed to be

transferred at indexed cost thus resulting in No Gain No Loss (unless de-grouping
charge applies).
2) Notional Transfer of Assets is allowed within gain group members so that they could
match their Capital Gain and Capital Losses to reduce corporation tax of the overall
Group. To claim this Notional Transfer, election must be made within two years of end
of accounting period in which asset was sold (unless restriction of pre-entry loss
applies).
3) For Rollover and Holdover Relief purposes all of the Gain Group Members are
considered as one company (i.e. if asset is sold by one group member company and
purchased by another group member, still Rollover and Holdover relief will be
available).
4) If there is a sale of any intangible assets within gain group members it would be
transfered at WDV thus resulting in No Balancing Charge and No Balancing
Allowance for the selling member. Acquiring member would be claiming allowance on
WDV in respect of remaining useful life.(see degrouping charge)

Test Your Understanding From Kaplan

Green Ltd acquired an office building on 1 April 1996 for £100,000. The office building is
transferred to Jade Ltd, a wholly owned subsidiary on 1 October 2006 for £80,000, when it
was worth £180,000.
On 1 December 2023 Jade Ltd sells the office building outside the group for £350,000.

Assume the relevant indexation factors are as follows:

April 1996- December 2017 0.776
October 2006- December 2017 0.369
April 1996- October 2006 0.297

Calculate gain chargable on Jade Ltd at 1 December 2023 on sale of office building.
. .
 219

De-Grouping Charge:
(For Land and buildings)
De-grouping charge applies if a;
• Group Members shareholding is been sold in such a way that it no longer remains
Group Member and
• Had received an asset at NGNL from another group member within 6 years of being de-
grouped and
• Asset is still owned at the date of De-grouping.

De-grouping charge is calculated as follows:

£
Proceeds (MV at the date of transfer) xxx
Less: Allowable Cost (xxx)
Indexation Allowance (till date of transfer) (xxx)
De-grouping charge (or Original Gain) xxx

De-grouping charge will be added into the Sale Proceeds received in respect of sale of shares
of the company being de-grouped. (Chargeable on parent company)
Note:
If De grouping charge has been applied, M.V will be the new base cost of that Asset and if it
wasn’t applied indexed cost will be the cost.
Stamp Duty:
If a company is de-grouping within 3 years of receiving NGNL transfer, stamp duty would
also become payable. (paid by De- grouping company)

For Transfer of intangible assets

1. If Intangible assets are transferred between members of a capital gains group on a tax
neutral basis,
2. Where the transferee company leaves the group within six years of acquiring the
asset,
3. Whilst still owning it,
4. In such case there will be Balancing Allowance/Charge in the company which is
leaving the group and is to be calculated if it would have been an arm’s length
transaction(i.e. using MV at the date of TAX Neutral transfer).

Note that such a charge/allowance is not applicable where SSE applies on sale of
shareholding of such member company
 220

De Grouping Charge Example: -

A

90% 80% 100%

B C D

A Ltd Sold its 80 % shareholding in C ltd for £2.5M at 1st January 2024. Indexed Cost(up-till December
2017) of this 80% shareholding was £1.8M and was acquired by A ltd at 1 st Aug 2010.

At 1st September 2021 B ltd sold an office building to C ltd for £250000 , which was Valued at
£400000 at that time. B ltd had acquired this building for £185000 at 1 st July 2017.

At 1 January 2024 C ltd still owns the building when its shareholding was sold by A ltd.

Indexation Factor

July 17 – Dec 17 0.121

July 17 – Sep 21 0.450

Requirement Calculate gain chargeable on A ltd on sale of its 80% shareholding in C ltd.

Pre entry capital losses

Pre entry capital losses are those losses which were realized upon sale of assets before joining
the group. These losses could not be settled against gains arising in other group members
through No Gain No Loss transfer for a period of 5 years from of joining the group, rather
these losses will be deducted in respect of gains arising upon disposal made by joining
member of any of following:
i) Assets acquired before joining the group
ii) Acquired after joining the group but from third party not from any gain group
member.
 221

Example no :- (Pre – Entry Capital Loss)

A

90% 80% 100%

B C D
A ltd sold an office building which resulted in an indexed gain of £240,000 at 1 August 2023.
None of other companies in the group have sold any asset during year end 31/3/24. Although
D ltd have brought forward capital losses of £190,000 realized on the sale of investment
property at 1st January 2021.
A ltd acquired it’s 100% shareholding in D ltd at
1). 1 June 2016.
2). 1 June 2022.
Requirement: Explain whether Altd group could utilise b/f capital loss of D ltd against
gains realised in each case.
 222

75% Loss Relief Group:

Exists: -

• If holding at every level (i.e. every parent company to every subsidiary) should be
atleast 75%. And
• Effective holding of Ultimate Parent Company in to sub-subsidiaries should also be at
least 75%

Note: Non trading company could be member of loss relief group unless it is ultimate holding co (parent co)

• Parent company should not be non-trading

• Subsidiary could be non-trading

If all of above conditions are fulfilled such companies will be called as Loss Group Members.
Transfer of losses within loss relief members could be any of the following:

• Trading loss
• Property Business Loss
• Interest Deficits
• Un-relieved QCDs
• Un-relieved management expenses of non-trading or investment company.
• Losses carried forward can now also be relieved via both group relief and/or
consortium relief.

Operation of relief:

➢ One member could surrender any amount of current year’s Loss to any other Group
member against its corresponding Taxable Total Profits.
➢ The company which is giving its loss to other member is called Surrendering and the
other company is considered as Claimant Company.
➢ In order to generate maximum CT savings group loss must be surrendered in to the
claimant members in following order:
o To companies falling in marginal relief rate upto the extent that it become
small profit rate company
o Than to those companies which are Upper rate of 25% upto the extent that it
become small profit rate company
Note
Candidates should secondarily consider such loss group member companies in
order to change the payment method from quarterly instalments to 9 months
one day.
 223

Non-coterminous – 3 situations can arise:

If surrendering and claimant companies have;

i. Different year end

Or
ii. Acquired during the year
Or
iii. Disposed during the year

Maximum loss that can be surrendered/ claimed will be:

Lower of:

i. Loss (i.r.o coterminous period) of surrendering company.

ii. TTP (i.r.o coterminous period) of claimant company.

Example:-
A

80% 90% 100%

B C D

All companies prepare these accounts to 31st March every year. During year ending 31/3/23
at 1/12/22 Altd acquired 80% shareholding in B ltd. During year ending 31/3/23 B ltd
realized tax adjusted trading loss of £200,000.
Required:-
Maximum loss which could be claimed by A ltd and C ltd if:-
1).Taxable total profits of A ltd are £65,000.
2). Taxable total profits of C ltd are £170,000.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
 224

Example:-
A

90% 80% 100%

B C D

All companies prepare their accounts to 31st March every year except for D ltd as D ltd
prepares its accounts to 31st December every year.
Tax adjusted trading loss of D ltd for year-end 31st December 22 was £280,000.
Taxable total profits of A ltd for:-
Year Ended 31/3/22 £225,000.
Year Ended 31/3/23 £350,000.
Required:-
Maximum loss which could surrendered by D ltd to A ltd?
__________________________________________________________________________________
__________________________________________________________________________________
Carried forward/ brought forward losses:

Surrendering company can surrender its B/F losses to another Group Member but only
upto matching period of:-

• The accounting period to which the surrendering company has carried

forward the losses.
• The accounting period in which the claimant company intends to offset the
loss claimed.
The ability of a company to surrender carried forward losses to other group members is
subject to the following restrictions:
• Losses can only be surrendered if they are offset against the surrendering company’s
own total profits first and
• The claimant company must use its own carried forward losses first, before claiming
losses from another company.
 225

Example (from article):

Q Ltd and R Ltd are members of the same group relief group.
Q Ltd has losses carried forward at the start of its 12-month period ended 31 March 2021.The
losses were created in the year ended 31 March 2020.
R Ltd will claim losses from Q Ltd in respect of its nine month period ending 30 September
2021.

The overlapping (same) period is the three months from:

1 January 2021 to 31 March 2021.
Accordingly, 3/12 of the losses carried forward can be surrendered to R Ltd in respect of its
nine-month period.

Change In Ownership (restriction)

If there are any (pre acq) b/f losses at the time of acquisition of new group member company,
these losses could not be surrendered to any group member for a period of five years from the
date of the change in ownership.
This restriction operates in one direction only – i.e. there is no restriction on the transfer of losses
carried forward to this company from the companies in its new group. (Other can surrender loss
to it but it cannot surrender its pre-acquisition losses to other companies for 5 years)
Note: there is no restriction on the new member for surrendering its post-Acquisition losses to
fellow group members.

Loss Relief Overseas Group Members:

A group member company which is non-UK resident is considered as group member but loss
could not be surrendered as a claim from such member.
Unless it’s an overseas subsidiary suffering losses and resident in European Economic Area
(EEA) in such case this overseas subsidiary could surrender loss to UK parent only (not to
and from any other member).
OSUP = Overseas Subsidiary (EEA) to UK Parent (only)
 226

Consortia:

Consortia will exist if:

1. When one company is owned by two or more companies

and
2. Their combined holding is at least 75%.
and
3. Each company must own at least 5% but not more than 74% individually.

In this case investing company is called Consortium Member and Investee Company is called
Consortium Company (not for individual).

Surrendering downwards:

If there are losses in consortium member, these could be surrendered downwards to

Consortium Company but only up to the percentage of its holding in Consortium Company
against its taxable total profits.

There is no restriction upon consortium member to set off losses against its own profits first.

Surrendering Upwards:

If there are losses in Consortium Company these losses could be surrendered upwards
against Taxable Total Profits of consortium member but maximum loss that could be
surrendered to consortium member would be up to percentage of holding of consortium
member. (Apply % on the figure of Consortium Company)

It is compulsory for Consortium Company to set off its losses against its own total profits
first.

Note:
This relief is now available for losses carried forward and not just those losses incurred in a
same accounting period. But it is always available for the overlapping (same) months of
accounting period of both companies. Same as for Loss Relief Group.
 227

Example no 3:-
Tax adjusted trading loss realized by Y ltd during year end 31/3/24 was £280,000.
Total profits of Y ltd for year end 31/3/24 were £80,000.
Taxable total profits of A ltd for year end 31/3/24 were £310,000.
Required:-
Maximum loss which could be surrendered by Y ltd to A ltd (upwards)?

_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
Example no 4:-
Tax adjusted trading loss suffered by A ltd during year ending 31/12/23 was £215,000.
Total profits(before Losses and QCD) of A ltd for year ending 31/12/23 were £160,000.
Taxable total profits of Y ltd for year ending 31/12/23 are £340,000.
Required:-
Calculate maximum loss which could be surrendered downwards to Y ltd by A ltd?

_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
 228

Sale of Trade & Assets without Change of

Ownership (at least 75%):

In the following both cases, there is transfer of trade & assets from Y Ltd to Z Ltd:
Case 1: Case 2:
Mr. A A Ltd

75% 75% 75% 75%

Y Ltd Z Ltd Y Ltd Z Ltd

For Capital Gains/Loss Purposes:

For Case 1: For Case 2:

• Arm’s length • NGNL
• Resulting in gains/losses • Gain Group
in Y Ltd

For Stamp Duty

Case 1: Z Ltd would have to pay Case 2: As 75% Gain Groups, Z ltd
Stampduties on acquisition of would not pay any stamp duties
assets upon acquisition of assets.

Special Rule

Capital Allowances
Trading Losses
For both Case 1 & 2
For both Case 1 & 2
✓ P & M will be transferred at WDV
✓ Thus no balancing charge/allowance on
✓ Will be transferred (or
disposing company
carried forward)
✓ And no FYA & AIA for acquiring
against future trading
company
profits only for 5
Note: Above treatment is applicable within
years of Z Ltd. connected persons (individuals) & connected
✓ Cannot be surrendered companies even without this particular
to any other group situation.
member.
 Overseas Aspects of Companies 229

Overseas Dividends from

Connected Company Unconnected Company

➢ CT Payment Threshold limit will not be
divided with such overseas subsidiary.
➢ CT payment Threshold limit will be
divided with overseas connected ➢ Un-connected /Non-Group overseas
company as well. dividend will be added in TTP to find
augmented profits, in order to compare
➢ Connected dividends are not included with Threshold limit.
anywhere (even overseas)

Overseas

Interest Rent Trading Profits

• Grossed up with actual tax deduction at overseas.
• Then included in relevant UK income heads.
• DTR may be available.
 230

Example

A Plc is a UK resident company also operating at Indonesian through some investments

Results for year ended 31 March 24 are as follows:

Trading Profits (UK) £600,000

P.B.P (UK) £100,000
Rent from Indonesian Property £111,000
(after 26% tax)
Interest on debenture of £42,500
Y Inc (after 15% tax)
Dividends
Y inc (after 18% tax) £30,000
Z in (after 18% tax) £27,000

Both Y & Z INC are Indonesian resident companies and A Ltd owns 80% & 15% of Y &
Z INC respectively. Qualifying charitable donation of £10,000 was paid by A Ltd in UK.

Required: - Calculate CT payable by A Plc for Y/E 31st March 2024.

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Overseas Branch (Permanent Overseas Subsidiary

Establishment)
Scope and • Extension of UK operations • Overseas profits not assessed
basis of charge in UK if left in overseas
• All profits arising assessed on
subsidiary
UK company
• Profits remitted to UK parent
- Its trading profit is added to company may be chargeable
UK trading profit. when received:
- And available for relief of - Dividends not assessable
trading losses.
- Interest income from loan
- For C/F of such loss trade to overseas subsidiary is
must be same. assessable
• DTR available
• Can elect for profits to be exempt

Trading loss • Can relieve trading losses of • UK trading loss:

Relief overseas PE against UK profits:
- Cannot be surrendered to
- Unless the loss can be overseas subsidiary
relieved in the country in
• Overseas loss from 75%
which it arose
subsidiary in EEA:
• UK losses can be relieved against
overseas PE profits - Can be surrendered to UK
parent if no alternative
• No relief if election for branch relief in overseas country
exemption made
Capital • Available on overseas located • Not available under UK tax
Allowances assets purchased and used by rules
overseas branch, unless election
for branch exemption made
Chargeable • Capital gains computed using UK • Not assessed in UK
Gains rules
• Rollover relief is available on
reinvestment
• Capital losses can be utilized
• No capital gains or utilization of
capital losses if branch exemption
election made
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Impact on • None (as not a separate entity) • As an associated company,

Threshold Thrush-hold limit will be
limit divided.

Election for Exemption of Overseas Branch(s):

1. If a UK resident company makes this election, its worldwide branches would become
exempt. That is:
- Trading profits
- Interest
- Rents
- Chargeable gains
Of overseas branches will be exempt from UK tax.
2. Losses of overseas branches would not be allowed against UK income.
Note:
1. This election is irrevocable.
2. This election can be made at any time and it will be effective from the start of
accounting period in which election was made.
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Controlled Foreign Company

(CFC):
An overseas company will be considered as CFC if:

• It is controlled by UK resident Companies and (or) Individuals.

• Has been incorporated or taken over for diverting profits from UK.

In this case this overseas company will be considered as CFC and UK Company which owns
its shares (at least 25%) will be subject to CFC charge. CFC charge is not applicable on
individual shareholders of UK.

CFC charge which is applicable on UK Company and will be as follows:

✓ UK companies share of profit in CFC @UK CT RATE
✓ But DTR will be available

Although an Overseas Resident Company would not be considered as CFC if any of these
following satisfies:

i. Overseas Company does not hold any asset or bear any risk which intends to reduce
UK tax
ii. It does not hold any asset or bear any risk that are managed in UK
iii. It would continue its business if UK management of its asset were to cease.

Exemption of CFC charge:

A CFC may have chargeable profits: however, the CFC charge will in fact be rare because of
the many exemptions and restrictions on the profits apportioned.

The CFC charge is not applied if any one of the following exemptions applies:
 234

1. Exempt Period:

The first 12 months of the overseas company coming under the control of UK residents will
be exempt from a CFC charge provided:

➢ They continue to be a CFC in the following accounting period, and

➢ Are not subject to a CFC charge.

This is intended to provide a period of time to companies to restructure to avoid the charge
applying.

2. Excluded Territories

HMRC provide a list of approved territories where rates of tax are sufficiently high to avoid a
CFC charge arising.
If the CFC is resident in an excluded territory, no CFC charge arises.
3. Low Profits

The CFC’s TTP are:

- £500,000or less
- Of which no more than £50,000 comprises non-trading profits

4. Low Profit Margin

The CFC’s accounting profits no more than 10% of relevant operating expenditure.

5. Tax Exemption

The tax paid in the overseas country is at least 75% of the UK corporation tax which
would be due if the CFC were a UK resident company.
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Test Your Understanding from Kaplan

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5. Value Added Tax

Introduction: VAT is charged by taxable person on their taxable supplies.
Taxable person:
Person who should be register for VAT because they make taxable supplies.
Taxable Supplies:
Any supply which is not exempt or outside the scope of VAT. It can be goods and services.
OUTPUT VAT (on Sale) INPUT VAT (on Purchases)
 237

Types of Supply

Exempt Taxable

Exempt supplies include: Zero rated supplies Standard rated

• Insurance include: supplies:
• Financial services • Non-luxury food Everything else.
• Postal services • Books and newspapers The standard rate is
• Land including rents • Public transport (not 20%.
taxis)
Traders making exempt • Children’s clothing
supplies only cannot register • Medicines
for VAT and cannot reclaim • Exports outside the EU
input tax.
 238

Land and Buildings

Zero Rated: Standard Rated: Exempt:

✓ Lease rental of ✓ Commercial ✓ Lease of up to 21
more than 21 buildings (new) (i.e. years if residential
years. within 3 years of & charitable
completion of building
✓ Sale of: construction).
- Residential ✓ Commercial
building ✓ Commercial building after 3
- Charitable building after 3 years (if not opted
building years if opted to tax. to tax).

• All other supplies of COMMERCIAL LAND & BUILDING tax payer has two
options.
Option 1: Exempt
Option 2: Opt to tax / waiving the tax exemption.

Opting to tax (waive the tax exemption):

Conditions:
• Election must be filed within 30 days of signing.
• Can be withdrawn within initial 6-month cooling-off period or after 20 years,
otherwise irrevocable.
• Election cannot be made for a part of a building, although the election can be made
separately for each property owned.

Tax implications/ Impacts:

• Supply of land & building will become taxable
• If building is rented then rent received from building will become liable to VAT @
standard rate of 20%.
• Land lord can recover any input tax on the purchase and running cost of the building.
• The new owner (purchaser) has once again has both options exempt & option to tax
Note: opting to tax is particularly useful for landlords letting out commercial
property which would normally be an exempt supply.
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Partially Exempt Business

Businesses engaged with both types of supplies taxable & exempt. All input VAT is not
recoverable because some of input vat is related to exempt supplies:
• Input VAT Directly/Indirectly attributable to taxable supplies is fully recoverable.
• Input VAT Directly attributable to exempt supplies is fully irrecoverable
• Whereas Input VAT Indirectly attributable (e.g overheads.) to ALL supplies is
Partially recoverable. Proportion of recoverable input VAT is as follows:

Taxable Sales / Total Sales x 100 = Round up%

Table for working of Claimable & Non-claimable VAT:

Claimable Non-claimable Total

Directly attributable
Standard Rated xxx xxx
Zero Rated xxx xxx
Exempt xxx xxx
xxx *b xxx xxx
Overheads (Un attributable) xxx xxx xxx
xxx xxx*c xxx*a

De-minimis Limits:
Non-claimable input VAT in the above table, will become claimable if following conditions
are fulfilled:

1. Exempt supplies are ≤ 50% of the total sales

AND
2. Any of the following condition satisfied;
a) Total input VAT (*a) is ≤ £625 per month on average
Or
b) Total input VAT (*a) – input VAT directly attributable to taxable supplies (*b) is
≤ £625 per month on average

Or
C) Total non-claimable input VAT (*c) is ≤ £625 per month on average
 240

Annual test:

The business can apply the de minimis tests once a year rather than every return period if:

– the business was de minimis in the previous year, and

– the annual test is applied consistently throughout the current year, and

– the input VAT for the current year is not expected to exceed £1 million.

This means that the business can provisionally recover all input VAT relating to exempt
supplies in each return period without having to perform de minimis calculations.

At the end of the accounting period, the de minimis status must be reviewed based on the
year as a whole and an annual adjustment
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 243

Capital goods Scheme:

It is available for partially exempt business upon purchase of:

Value Adjustment
Period
Land & Building £ 250,000 or Above 10 years
Computer & Computer Equipment £ 50,000 or Above 5 years

For Adjustment Period:

Total Input VAT x (%age in Year 1 (TUB) - %age in Current Year (Ab)) x 1/10

Deduction of Input VAT

In year of Input VAT recoverable= (exclusive of VAT COST of purchase

purchase x 20%) x ( % use in Year 1 “Tub”)

In subsequent
Years Input VAT (recoverable) or payable =
(exclusive of VAT COST of purchase x 20%) x ( % use in Year 1 “Tub” -
% use in current year “Ab”) x ( 1/10)

In the year of Opt to Input VAT recoverable or payable =

disposal tax (100% - % use in Year 1” Tub”) x (no of remaining years/10)

Not opt Input VAT recoverable or payable =

to tax (0% - % use in Year 1” Tub”) x (no of remaining years/10)
 244

Example 1:
Mr. A purchased commercial building exclusive of VAT and it was new building for
£800,000 (exclusive of VAT) to be used in all aspects of its business at 1/9/22. It has taxable
supplies from year 1 to year 9 as follows:

Supplies Taxable : Exempt In Y8 MR A dispose of the building

Y1 - Y3 70% : 30% • Opted for tax
Y4 to Y5 60% : 40% • Not opted
Y6 70% : 30%
Y7 90% : 10%

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Example: 2 from Kaplan

Confusion plc is a company that buys a new freehold building for £5,250,000 including VAT.
40% of building is used in making exempt supplies and 60% taxable supplies. After 7 years
this changes to 50%: 50%.

Required: Explain how Confusion plc can recover input VAT on the purchase of the
building.
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Example 3 from Kaplan

Dalta Plc is a partially exempt trader and makes 30% exempt and 70% taxable supplies. On
1st March 2021 Dalta plc buys a new freehold building for £2million including VAT, which
used in the same proportion. After 2 years Dalta plc’s percentage and use of the building
change to 40% exempt and 60% taxable supplies. After a further three years Dalta plc ceases
the exempt trade and makes only taxable supplies from thereon.

Required: Calculate the input VAT relief that can be obtained by Delta plc.

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Example 4 from Kaplan

Facts as in Example 3, except that Delta plc sells the building in year 6 for £2.5 million.
Calculate the adjustment for year 6 assuming that:
(a) Delta plc does not opt to tax the sale
(b) Delta plc opts to tax the sale.
Solution:
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 246

Overseas Aspects of VAT

Sales / Exports Zero Rated

(Input VAT claimable, Output VAT zero)
Purchases / Imports 1. Supplier does not account for output VAT as
it will be Supply zero-rated.
2. Customer must account for output VAT=
Purchases x 20% (UK) On their VAT return
at the rate in force in customer’s country.
3. Than this VAT suffered by customer will
also become Input VAT (Re-claimable)
depending upon whether purchases were for
• Taxable or
• Exempt or
• Both types of supplies.
Note That,
This procedure of Recognising Output and then
Input VAT on same return is called “Reverse
charge procedure”.

Services outside UK
UK Business Accounting for VAT
Supplies services Overseas business • Place of supply is overseas
to customer (B2B)
• Outside the scope of UK VAT
Overseas non- • Place of supply is UK
business customer
• Output VAT charged at standard UK rate
Receives services Overseas Business • Place of supply is UK
from (B2B)
• Reverse charge procedure:
- UK business accounts for ‘output VAT’ at
standard UK rate on VAT return.
- This VAT can then be reclaimed as input
VAT depending upon types of supplies of
business (same as for goods purchased
from within EU)
 247

1. Group Registration
˗ Two or more companies can register as a group for VAT purposes if they are under
common control (such as a parent company and its subsidiary companies) and each of
them is resident in the UK. A VAT group is treated for VAT purposes as if it was a
single company registered for VAT on its own.
- Group VAT registration is made in the name of a representative member, and this
company is then responsible for completing and submitting a single VAT Return and
paying VAT on behalf of the group. However, all the companies in the VAT group
remain jointly and severally liable for any VAT liabilities
- NEW

Until 31 October 2019, the controller of the group of companies could not be a
member of the VAT group unless it was also a company. This rule has been changed.

Under the new rules, the controller of a group of companies can be a member of the
VAT group if it is:

• a company (as before)

• a sole trader, or
• a partnership.
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The controlling entity must carry on a trade in the UK (as before). ‘Control’
requires the ownership of more than 50% of a company’s ordinary share
capital (as before).

Advantages:
• There is no need to account for VAT on goods and services supplied between group
members, such supplies are simply outside the scope of VAT.
• It is only necessary to complete one VAT return for the whole group, so there should
be a saving in administrative costs. However, various limits, such as those for the cash
and annual accounting schemes, will apply to the VAT group as a whole rather than
on an individual basis.
• When a connected/group company which makes Exempt supplies is brought into
group VAT registration, its un-attributable input VAT would become partially
claimable while Input VAT indirectly attributable to taxable supplies will also
become non- claimable.
• Similarly if that connected company has zero-rated supplies, cash flow position of the
whole group will be improved due to the requirement of preparing single VAT return,
by which their VAT payable and receivable will be net of, whereas company with
zero rated supplies would not be able to reclaim it input VAT as they will be settled
against payable VATs of other members.

VAT REGISTRATION
1. Compulsory:
1. Future Test 2. Historic test
Taxable supplies in next 30 days expected to Taxable supplies in last 12 months (or since
exceed registration limit (i.e £85,000). business commenced if shorter) exceeds
registration limit of £85,000.
Notify HMRC – before end of 30 day period.
Notify HMRC – within 30 days of end of month
Registration effective from – start of 30 day
in which limit exceeded.
period.
Registered with effect from – end of month
following that in which limit exceeded.

2. Voluntarily:
A trader making taxable supplies may apply for VAT registration on voluntary basis
Even his taxable supplies fall below the threshold limit of £85,000.
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It is beneficial if Trader is making zero-rated supplies or supplies to VAT registered

customer. However, it is not beneficial when business is making supplies to non-VAT
registered customer.

Advantages Dis- advantages

• Avoid penalties for late registration • Administration burden
• Allows recovery of input VAT • Output VAT must be charged which
increase prices for non-VAT
• Disguises size of business
registered customers
• If prices can be increased due to VAT,
getting registered would increase the
profits with the amount of VAT
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VAT Deregistration

1. Voluntarily 2. Compulsory
• Allowed if evidence that supplies in next When business ceases to make taxable supplies.
twelve months will not exceed £83,000.
• Registration cancelled from – date of • Notify HMRC – within 30 days.
request or agreed later date.
• Registration cancelled from – date of
cessation.

Implications of VAT De-registration

On Liquidation of 1. Output VAT must be accounted for on replacement value of

inventory and non-current assets (on which input VAT
business/trade
reclaimed) on hand at the date of deregistration.
2. Charge waived if VAT liability ≤ £1,000.
Not levied if registration transferred.

Transfer of Final VAT charge need not to be levied if:

business as going • The business will be transferred as going concern basis
concern • There is no significance breaks between cessation and
subsequent start of trade
• The nature of trade has not changed
• New owner is VAT register or will be VAT register as soon as
possible.
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VAT Accounting

1. OUT PUT VAT:

Normally based on price charged by supplier.
• Must deduct maximum discount allowed from price before calculating VAT except
for Early Settlement or Cash discount, as it would only be deducted if availed by the
Customer.

• Output VAT is charged on:

- Replacement value of goods taken for own use by sole trader or partner in
partnership business.
- Replacement value of inventory or non-current assets gifted, unless total gifts to
same person are below £50 in cost in 12 months.
• Ignore gifts of trade samples and gifts of services, whether to an employee or
customer.

There are four instances in which there would be no sale but Output VAT need to be
charged:
1) Reverse charge Procedures
2) Drawings
3) Gifts costing more than £50
4) Fuel Expenses:
• If reimbursed by employee = Output VAT payable on reimbursed amount
• If not reimbursed= Output VAT is payable on a scale charge

2. INPUT VAT
Cannot be recovered on following items:

• Input VAT on entertainment expenses incurred for employees and overseas customers
is recoverable. However, Input VAT on entertainment expenses incurred for suppliers
and UK customers is irrecoverable.
• Cars, unless 100% used for business (e.g. pool cars)
• 50% of car leasing charges where there is private use of car
• VAT on non- business items passed through the business accounts is irrecoverable.
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Motor Expenses:
• Input VAT recoverable on all car running costs even if private use of car.

Bad debt / Impair relief:

Will be available if following conditions are fulfilled:

1. Output VAT relevant to bad debt has been accounted for & paid.
2. Bad debt has been written off in the accounts as well.
3. At least six months has been passed from the due payment date and not more than
four years.

Pre-Registration Input VAT:

Will be claimable upon:

1. Non-current assets/stock purchased within 4 years before the date of registration and
still owned at the date of registration.
2. Upon all the services purchased within 6 months before date of registration.

VAT SCHEMES FOR SMALL BUSINESSES

➢ Cash accounting scheme
➢ Annual Accounting Scheme
➢ Flat rate accounting 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.
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Conditions to join Cash Accounting Scheme:

• Annual taxable turnover (including zero rated sales) excluding VAT & sales of capital
assets must not exceed £1,350,000 p.a
• Up to date with VAT returns and must have committed no VAT offences in previous
12 months.
• Leave scheme if taxable turnover more than £1,600,000 p.a

Advantages: Disadvantages:

• Where customers are slow payers or • Input tax cannot be claimed until the
their ae irrecoverable debts no VAT is invoice is paid. This delays recovery
payable until the money is received of input VATS
therefore automatic relief for bad debt
is obtained.

• The information for the VAT return can

be taken from the cash book and no
detailed cut-off procedures are required
thus reducing administrative cost.

Example:
State which of the following businesses would benefit from joining the cash accounting
scheme:
(1) JB Ltd, which operates a retail shop selling directly to the public (standard rated supplies).
All sales are for cash.
(2) Amber and Co, which manufactures and sells computer printers to other businesses
(standard rated supplies).
(3) John Smith, who manufactures children’s shoes and sells them to retailers (zero rated
supplies).
Solution:
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Annual Accounting Scheme

Single VAT return for a 12 month period (Normally accounting period of the business) is
filed within two months from end of the period. VAT is paid in nine equal instalments each
will be 10% of previous year’s VAT liability and one balancing payment. Instalments are
payable at the end of month 4 to 12 of accounting period. Balancing payment (or repayment)
is made when the return is filled.

Conditions to join:
• These are same as Cash accounting scheme

Advantages: Dis- Advantages:

• Regular cash outflows This VAT scheme is not really beneficial to
those that claim back VAT on a regular basis.
• Easier administration This is mainly because the business owner can
only claim repayment once a year.

Example:
Jump Ltd applies to use the annual accounting scheme from 1 February 2017. The company’s net
VAT liability for the y/e 31 January 2017, was £3,600. The actual net VAT liability for the y/e 31
January 2018, is £3,821.
Explain the returns and payments Jump Ltd must make for the y/e 31 January 2018.
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Flat rate accounting 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. (Flat rate % will be given in exam).

➢ Conditions to join:

• Expected Taxable turnover (excluding VAT) in coming 12 months should not exceed £
150,000.
• A trader may stay in the scheme until their total VAT inclusive turnover (taxable &
exempt supplies) for the previous 12 months exceeds £230,000

➢ Consequences of the scheme:

• Under the flat rate scheme, the VAT liability due to HMRC is calculated as;

VAT Liability = Total VAT inclusive sales X flat rate %.

Flat rate percentage will be calculated as follows if required:

Flat rate % = VAT liability/Total VAT inclusive sales
• No input VAT is recovered (although a claim can be made to recover VAT on
purchases of capital assets that cost more than £2,000
• The % varies according to the type of trade in which the business is involved.
• The flat rate scheme is only used to calculate the VAT due to HMRC. In other respects,
VAT is dealt with in the normal way;
˗ A VAT invoice must still be issued to customers and VAT charged at the appropriate
rate ( 20% for standard rated supplies).
˗ A VAT account must still be maintained.
• In the first year in which a trader is registered for VAT, a 1% discount on the normal
% is given.
• The flat rate scheme can be used together with the annual accounting scheme.
• It is not possible to join both the flat ate scheme and the cash accounting scheme,
however it is possible to request that the flat rate scheme calculations are performed on
a cash paid/ receipts basis.
Advantages:
• No need to calculate & record detailed output & input VAT information.
• Reduced administrative burden
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Example:
In the y/e 31 December 2017, Apple Ltd has annual sales of £90,500, all of which are
standard rated and to the general public. The company incurs standard rated expenses of
£4,500 p.a. These figures are inclusive of VAT.

Calculate Apple Ltd.’s VAT liability using:

(1) The normal method.

(2) The flat rate schemes.

Assume a relevant flat rate percentage for Apple Ltd.’s trade of 10%.

Solution:
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VAT ADMINISTRATION
A VAT return shows the total output and input VAT for the VAT period to which it relates.

Online Filing:
The deadline for online filing and electronic payment is one month and seven days after the
end of the VAT quarter.
For example, for the quarter ended 30 September 2022, a business will have until 7
November 2022 to file its VAT return online and pay any VAT that is due.

PENALTIES FOR LATE PAYMENT AND LATE FILING

New penalties for the late payment of VAT and the late filing (submission) of VAT returns have been
introduced.
The new penalties for VAT replace the default surcharge system, and will only be examined in the
context of quarterly VAT returns.
Default surcharges are no longer examinable.
The default surcharge system applied to both late payments of VAT liabilities and late filing
(submission) of VAT returns. There are now two separate sets of penalties for each type of lateness.

• Late filing penalty (points based)

• Late payment penalty
There is also

• Late payment interest

LATE FILING (SUBMISSION) PENALTIES

Under a points-based system, a business incurs a penalty point each time a quarterly VAT return is
submitted late.

• If a penalty threshold of four points is reached, a £200 penalty is then charged.

• Thereafter, subsequent late VAT returns also incur a £200 penalty.
• Penalty points normally expire after two years. However, they do not expire once the penalty
threshold has been reached.
• Once the penalty threshold has been reached, a business has to submit VAT returns on time over a
period of twelve months (so four quarterly returns) for their penalty points total to be reset to zero.

LATE PAYMENT PENALTIES

Each late payment is considered separately.

• No penalty is charged if the VAT liability is paid within 15 days of the due date.
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• A 2% penalty is charged if the VAT liability is paid within 16 and 30 days of the due date.
• The penalty is increased to 4% if the VAT liability is paid later than 30 days of the due date.
• In addition, where the VAT liability is paid more than 30 days late, a daily penalty at an annual rate
of 4% is charged beginning after the initial 30-day period

• Regardless of whether any late payment penalties are incurred, late payment interest is charged from
the due date until the date that the VAT liability is paid.

These late payment penalties can be summarised as follows:

Up to 15 days late 16 to 30 days late More than 30 days late

Penalty none 2% 4%
Daily penalty no no yes
Interest yes yes yes
Two aspects of the new late payment penalty regime are not examinable. These are time to pay
arrangements, and the soft touch approach applied by HM Revenue and Customs during the first year
of the new regime.
LATE PAYMENT INTEREST
Late payment interest for VAT has been aligned with the way interest is charged on other taxes.
Penalties for late payment and late filing
New penalties for the late payment of VAT and the late filing (submission) of VAT returns have been
introduced.
The new penalties for VAT replace the default surcharge system, and will only be examined in the
context of quarterly VAT returns.
Default surcharges are no longer examinable.
The default surcharge system applied to both late payments of VAT liabilities and late filing
(submission) of VAT returns. There are now two separate sets of penalties for each type of lateness.
• Late filing penalty (points based)
• Late payment penalty
There is also
• Late payment interest

Late filing (submission) penalties

Under a points-based system, a business incurs a penalty point each time a quarterly VAT return is
submitted late.
• If a penalty threshold of four points is reached, a £200 penalty is then charged.
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• Thereafter, subsequent late VAT returns also incur a £200 penalty.

• Penalty points normally expire after two years. However, they do not expire once the penalty
threshold has been reached.
• Once the penalty threshold has been reached, a business has to submit VAT returns on time
over a period of twelve months (so four quarterly returns) for their penalty points total to be reset to
zero.
Late payment penalties
Each late payment is considered separately.
• No penalty is charged if the VAT liability is paid within 15 days of the due date.
• A 2% penalty is charged if the VAT liability is paid within 16 and 30 days of the due date.
• The penalty is increased to 4% if the VAT liability is paid later than 30 days of the due date.
• In addition, where the VAT liability is paid more than 30 days late, a daily penalty at an
annual rate of 4% is charged beginning after the initial 30-day period
• Regardless of whether any late payment penalties are incurred, late payment interest is
charged from the due date until the date that the VAT liability is paid.

These late payment penalties can be summarised as follows:

Up to 15 days late 16 to 30 days late More than 30 days late
Penalty none 2% 4%
Daily penalty no no yes
Interest yes yes yes
Two aspects of the new late payment penalty regime are not examinable. These are time to pay
arrangements, and the soft touch approach applied by HM Revenue and Customs during the first year
of the new regime.
Late payment interest
Late payment interest for VAT has been aligned with the way interest is charged on other taxes.
 260

Example
Pen was late in submitting her VAT returns and paying the related VAT liabilities as follows:
Quarter ended VAT due Days late
£
30 June 2023 32,000 10
30 September 2023 36,000 50
31 December 2023 41,000 18
31 March 2024 29,000 8
Quarter ended 30 June 2023
• No penalty because the VAT liability was paid within 15 days of the due date.
• One penalty point incurred for late submission.
• Late payment interest is £57 (32,000 x 6.5% x 10/365).
Quarter ended 30 September 2023
• A 4% penalty charged (36,000 x 4% = £1,440) because the VAT liability was paid more than
30 days late. • There is also a daily penalty for 20 days (50 days less the initial 30 days). This amounts
to £79 (36,000 x 4% x 20/365).
• A further penalty point incurred, making two cumulatively.
• Late payment interest is £321

Quarter ended 31 December 2023

• A 2% penalty charged (41,000 x 2% = £820) because the VAT liability was paid within 16
and 30 days of the due date.
• A further penalty point incurred, making three cumulatively.
Quarter ended 31 March 2024
• No penalty because the VAT liability was paid within 15 days of the due date.
• A further penalty point incurred. Since the penalty threshold of four points has been reached,
a £200 penalty is charged.
• Late payment interest is £41 (29,000 x 6.5% x 8/365).
Late payment and late submission penalties will not be charged if a business has a reasonable excuse
for the late payment or the late submission. For example, an unexpected stay in hospital should count
as a reasonable excuse for either late payment or late submission. However, having insufficient funds
will not normally be accepted by HM Revenue and Customs as a reasonable excuse for late payment.
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The following late VAT payment penalty information will be given in the tax rates and allowances
section of the examination:
Penalties for late VAT payments Days late Penalty
Up to 15 days none
16 to 30 days 2%
More than 30 days 4% plus a 4% daily penalty Pen was late in submitting her VAT returns and
paying the related VAT liabilities as follows:

QUARTER ENDED VAT DUE DAYS LATE

£
30 June 2023 32,000 10

30 September 2023 36,000 50

31 December 2023 41,000 18

31 March 2024 29,000 8
QUARTER ENDED 30 JUNE 2023
• No penalty because the VAT liability was paid within 15 days of the due date.
• One penalty point incurred for late submission.
• Late payment interest is £57 (32,000 x 6.5% x 10/365).
QUARTER ENDED 30 SEPTEMBER 2023
• A 4% penalty charged (36,000 x 4% = £1,440) because the VAT liability was paid more than 30
days late. • There is also a daily penalty for 20 days (50 days less the initial 30 days). This amounts
to £79 (36,000 x 4% x 20/365).

• A further penalty point incurred, making two cumulatively.

• Late payment interest is £321

QUARTER ENDED 31 DECEMBER 2023

• A 2% penalty charged (41,000 x 2% = £820) because the VAT liability was paid within 16 and 30
days of the due date.
• A further penalty point incurred, making three cumulatively.
QUARTER ENDED 31 MARCH 2024
• No penalty because the VAT liability was paid within 15 days of the due date.
• A further penalty point incurred. Since the penalty threshold of four points has been reached, a £200
penalty is charged.

• Late payment interest is £41 (29,000 x 6.5% x 8/365).

Late payment and late submission penalties will not be charged if a business has a reasonable excuse
for the late payment or the late submission. For example, an unexpected stay in hospital should count
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as a reasonable excuse for either late payment or late submission. However, having insufficient funds
will not normally be accepted by HM Revenue and Customs as a reasonable excuse for late payment.
The following late VAT payment penalty information will be given in the tax rates and allowances
section of the examination:

PENALTIES FOR LATE VAT PAYMENTS DAYS LATE PENALTY

Up to 15 days none
16 to 30 days 2%
More than 30 days 4% plus a 4% daily penalty

Errors on earlier VAT returns:

• If a trader realises that there is an error this may lead to a standard penalty as there has
been a submission of an incorrect VAT return.
• However, if the error is below the de-minimis level and voluntarily disclosed, default
interest will not be charged.
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ERRORS

Found by Trader and Disclosed Found by HMRC

Voluntarily ISSUE ASSESSMENT WITHIN
De-minimis limit of error is greater of: 4 YEARS OF RELEVANT VAT
1. £10,000 PERIOD (increase to 20 years if
2. 1% of turnover, (maximum limit deliberate error)
£50,000)

NET ERROR NET ERROR TAX PAYER

≤ de minimis limit: › de minimis limit: Option to request
Include on next Separate notification review of decision
VAT return * by HMRC review
officer

DEFAULT INTEREST
APPEAL TO
TRIBUNAL
(within 30 days)

STANDARD PENALTY
For submission of an
incorrect VAT return

* That is error must be informed and paid as soon as possible not with next VAT return
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(Gooooooooood Luck ☺ Guys and

Girls...your best friend now is Exam Kit)
 265

Professional writing
➢ REPORT / MEMORANDUM / BRIEFING PAPER

To, . .

By / From. .

Title / about. .

Date. .

1 Introduction
. .

. .

. .

2 Paragraph 2 title

. .

. .

. .

3 Paragraph 3 title

. .

. .

. .

6 Conclusion / recommendations / further action

. .

. .

. .
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