F6 Taxation (UK)

BY: AQIL KIRMANI

COMPLIED BY: MIAN SAAD MOHAMMAD

For Candidates Appearing for exams in the period 1 June 2021 to 31

March 2022

FA 2020
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Contents
1. INCOME TAX (IT) ................................................................................................................ 5
Income Tax Computation for 2020 – 2021 ........................................................................ 5

Qualifying Loans: ..................................................................................................................... 6

Close Company: ......................................................................................................................... 6

Personal Allowance: ............................................................................................................... 12

TRANSFERABLE AMOUNT OF PERSONAL ALLOWANCE ........................................ 13

Employment Income: ............................................................................................................. 15

BENEFIT IN KIND: .............................................................................................................. 17

Living Accommodation ........................................................................................................... 17

Car Benefit .............................................................................................................................. 21

Fuel Benefit: ........................................................................................................................... 22

Van Benefit: ............................................................................................................................ 23

Statutory Mileage Allowance: ............................................................................................. 24

Gift of Asset: ......................................................................................................................... 25

Beneficial Loans: .................................................................................................................... 26

EXEMPT BENEFITS Employees:........................................................................................ 28

National Insurance Contribution (NIC): ........................................................................... 30

Trading Profits:...................................................................................................................... 32

Capital Allowances: ................................................................................................................ 40

NIC Class 2 and 4: ................................................................................................................. 50

Basis Period: ............................................................................................................................ 51

TRADING LOSS RELIEFS: ................................................................................................. 54

Terminal Loss Relief: ............................................................................................................ 56

Partnership: ............................................................................................................................. 58

Cash basis of Accounting: .................................................................................................... 60

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Property Business Profit: £ £ ..................................................................................... 61

Furnished Holiday Letting: .................................................................................................. 66

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Individual Savings Accounts (ISAs): ................................................................................ 67

Accrued income .................................................................................................................. 69

PENSIONS.............................................................................................................................. 71

Overseas Aspects of Individuals: ...................................................................................... 80

Income Tax Administration: ............................................................................................... 84

Enquiry Procedure / Compliance Check: ........................................................................... 86

Standard Penalties: ............................................................................................................... 87

Payment of Income tax in instalments: ............................................................................ 88

Payment of NIC:..................................................................................................................... 89
2. CAPITAL GAIN TAX (CGT) .............................................................................................. 92
Chargeable Assets:................................................................................................................ 92

Capital losses: ......................................................................................................................... 93

Calculations of Gain / loss on Single Asset: .................................................................... 95

Exceptional Disposals/Variations to computations: ...................................................... 95

Business Asset Disposal Relief (BR): .............................................................................. 101

Rollover Relief: ..................................................................................................................... 107

Hold over Relief: .................................................................................................................. 109

Hold against Gift / Gift Relief: ........................................................................................ 109

Principal Private Residence Relief (PPR): ....................................................................... 111

Letting Relief: ...................................................................................................................... 113

Payment of Capital Gain Tax: ............................................................................................ 119

Payments On Account For Disposals Of Residential Property (New!) .................... 119

3. INHERITANCE TAX (IHT) ............................................................................................... 120
Exemptions: ........................................................................................................................... 122

Lifetime Calculations on Lifetime Transfers ................................................................ 123

Normal Nil Rate band.......................................................................................................... 125

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If Trustees Paying IHT ..................................................................................................... 125

If Donor Paying IHT ........................................................................................................... 125

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Nil Rate Band £325,000 .................................................................................................... 125

nil % ......................................................................................................................................... 125

nil% .......................................................................................................................................... 125

Above £325,000 .................................................................................................................. 125

If trustees pay..................................................................................................................... 125

20% ......................................................................................................................................... 125

G.C.A ....................................................................................................................................... 125

If donor pays ........................................................................................................................ 125

25% ......................................................................................................................................... 125

N.C.A ....................................................................................................................................... 125

Death Calculations on Lifetime Transfers..................................................................... 126

Tapper Relief: ....................................................................................................................... 126

Proforma Death Estate Computation: ............................................................................. 127

Will Planning: ......................................................................................................................... 129

Residence Nil Rate Band (RNRB) ..................................................................................... 129

Note: The residence nil rate band of £150,000 is available because Sophie’s estate
included a main residence and this was left to her direct descendants. ............... 130

Transfer of unused Nil Rate Band:.................................................................................. 131

4. VAT (VALUE ADDED TAX) ........................................................................................... 135
Types of Supply .................................................................................................................... 136
VAT Accounting .................................................................................................................. 136
Pre-Registration Input VAT: ............................................................................................ 140
VAT REGISTRATION........................................................................................................ 146
VAT Deregistration .............................................................................................................. 147
Overseas Aspects of VAT: ................................................................................................ 148
VAT SCHEMES FOR SMALL BUSINESSES .................................................................. 150
Small Business VAT Schemes ........................................................................................... 153 3
Group VAT Registration: .................................................................................................... 154
5. CORPORATION TAX ....................................................................................................... 155

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CT Administration: .............................................................................................................. 157

Late Return Penalties: ........................................................................................................ 157

Non-trading Loan Relationship Interest Income ......................................................... 161

Trading Loss Reliefs (options): ......................................................................................... 163

Chargeable Gains for Companies: ..................................................................................... 165

Calculation of Gain/Loss for a Single Asset: ................................................................ 165

Share Matching Rules for Companies: ............................................................................ 167

Group of Companies: ............................................................................................................ 170

75% Loss Relief Group: ...................................................................................................... 170

75% Capital Gain Group: ..................................................................................................... 171

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1. INCOME TAX (IT)

Name of the Person

Income Tax Computation for 2020 – 2021

Other Income Savings Dividend Total
& Earned Income
£ £ £ £
Trading Profit xxx xxx
Employment Income xxx xxx
Property Business Profits xxx xxx
Bank Interest xxx xxx
Interest from Government Gilts xxx xxx
Pension Income xxx xxx
Dividends xxx xxx
Total Income xxx xxx xxx xxx
Less Reliefs (xxx) (xxx)
Net Incomes xxx xxx xxx xxx
Less Personal Allowance (12,500) (12,500)
Taxable Income xxx xxx xxx xxx

Tax Liability:
Non Savings £ £
xxx @ % age xxx
Savings
xxx @ % age xxx
Dividend
xxx @ % age xxx
xxx
Add Child allowance charge xxx
Tax Liability xxx
Tax deducted at source (xxx)
Tax Payable / Refund xx / (xx)
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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.

 To invest in close company, residing in UK or European economic area (EEA).

 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 should be directors.

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Gross Net Exempt

 Trading profits  Employment Income is  National Saving
 Property Business received net of PAYE. Bank certificate
profits  Donations under Gift  Return on ISA
 Interest received aid scheme net of 20%  Dividends from VCT
from Banks - into 100/80.  Scholarships
 Dividends  Personal pension  Gambling / bet
 Donations under contribution net of winning
payroll deductions 20% -into 100/80  Lottery / Prize bond
 Pension income (payable). winning
 Occupational pension
contribution
(payable)

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Bands and Rates:

Non Savings Dividends

Savings
Special Nil Rate If If If If Basic If If
Band for Savings& Basic Higher Additional Higher Additional
Dividends £1000 £500 Nil £2000 £2000 £2000
Starting Rate
Band:
If not used by Non 7.5%
20% Nil% Savings
£1 - £5000

Basic Rate Band:

£5,001 - £37,500 20% 20% 7.5%

Higher Rate Band:

£37,501-
40% 40% 32.5%
£150,000

Additional Rate
Band: Above
45% 45% 38.1%
£150,001

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

Note (ACCA Website)

For the savings incomes nil rate band of £1,000 to be available, a taxpayer must
not have any income subject to higher rate tax. Likewise, if the savings income nil
rate band of £500 is instead to be available, then there must be no income subject
to additional rate tax. The detailed rules for establishing whether higher or
additional rate tax is applicable are quite complicated, and therefore are not
examinable. For any question involving the savings income nil rate band it will be 8
quite clear as to which tax rate is applicable.

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EXAMPLE 1
For the tax year 2020–21, Ingrid has a salary of £52,500 and savings income of
£1,800. Calculate her income tax liability. Calculate her income tax liability?

EXAMPLE 2
For the tax year 2020–21, Henri has a salary of £46,500 and savings income of
£10,000. During the year, he made gross personal pension contributions of
£4,000. Calculate her income tax liability?

EXAMPLE 3
For the tax year 2020–21, Ali has pension income of £14,200 and savings income
of £6,000. Calculate his income tax liability is:

EXAMPLE 4
For the tax year 2020–21, Joe has a salary of £46,500, savings income of
£2,000 and dividend income of £6,000. During the year, he paid interest of
£300 which was for a qualifying purpose. Joe’s employer deducted £6,800 in
PAYE from his earnings. Calculate income tax payable by Joe :

EXAMPLE 5
For the tax year 2020–21, Ming has property income of £26,700, savings income
of £700 and dividend income of £1,200. Calculate her Income Tax Payable
Calculate her income tax liability:

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.

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Example:

Mr. A has following incomes and payments for 2020-21. Mr. A is employed at an
annual gross salary of £25,000 out of which PAYE of £3,000 was deducted for
2020-21.
£
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. He paid £8,000 into personal pension and £4,000 as Gift
aid donation during the current tax year. He is also paying mortgage interest of
£4,000 during the tax year 2020-21.

Calculate Income tax payable for 2020-21.

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Example
Ernest is aged 61 has following incomes and expenses for the tax year 2020-21

Incomes £

Trading Profit 15,000

Employment Income 20,000
Property Business Profit 10,000
Bank Interest 12,800
Interest from Ordinary account at National
Saving and Investment Bank 2,000
Interest from ISA 500
UK Dividends 8,800

Expenses

 Ernest paid interest of £2,000 and £2,500 in respect of two different

loans, borrowed in order to purchase a laptop to be used in his employment
and to purchase a car for his son respectively.
 During tax year 2020-21 Ernest Paid £10,000(net) into personal pension and
£400 to a charity under Gift aid scheme.

Georgina, Ernest’s wife aged 67 years is employed with a local electrical

manufacturing company since Aug 2013; she is receiving a salary of £29,000 per
annum.

Other Information

Ernest and Georgina have joint deposit account at Building Society Bank from which
they receive interest of £8,000 in total.

Required: Calculate Income Tax Payable By Both Ernest And Georgina For Tax
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Personal Allowance:

1. If an individual’s ANI is up to £100,000 he/she will be entitled for £12,500

personal allowance.

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

3. If ANI is £125,000 or above, Personal allowance would not be allowable.

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Calculation of 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

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.

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 £1,250 for the tax year 2019–20.
 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 £250 (1,250 at 20%). If the recipient’s tax
liability is less than £250, 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 13
where one spouse or civil partner is not making full use of their personal
allowance.

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 An election in respect of the tax year 2019–20 can be made before 5 April
2024 (four years after the end of the tax year)

EXAMPLE

Paul and Rai are a married couple. For the tax year 2020–21, Rai has a salary of
£38,000 and Paul has a trading profit of £10,000. 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 2020-21.

 Rai’s income tax liability for 2020-21.

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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 taken 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.

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Employment Income:

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

** Under the payroll deduction scheme an employee authorises his employer to

make deductions from his salary and pay the amounts over to specified charities.

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
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 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

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 Date on which employer company account for the bonus on liability

BENEFIT IN KIND:

If employer is paying for

Private of employee Performance of duties

(Taxable benefit) (Exempt)

If employee is paying for

Private of employee Performance of duties

(No treatment) (Allowable deductions)

Living Accommodation

Personal/Private Job Related

(Taxable) (Exempt)

1. If it was
Rented Owned by Employer
necessary for
Taxable performance of
Benefit in Kind Cost duties
will be higher 2. If it was provided
of: Up to as a security
More than £75,000
 Annual rent £75,000 arrangement (if a
Taxable Benefit in kind will be:
paid by Taxable person is
£
employer Benefit controlling
Annual Value xxx
 Annual or in Kind director he cannot
Add (Cost of providing -
rateable will be claim exemption
£75,000) x 2.5% xxx
value of Annual under this point) 17
T.B.I.K xxx
house by Value of
HMRC house

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Cost of Providing:

 Up to 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)

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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 2007 and spent £10,000 on extending
the property on 1 September 2013. Harvey moved into the property on 1 July
2013 when MV was £200,000. The annual value of the house for 2020-21 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
20120-21?

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Example:
Joey Tribbiyani was provided with a living accommodation for personal purposes
from his employer at 1/9/18 when its market value was £185,000. Accommodation
was purchased by employer for £125,000 at 1/7/15.
Enhancement expense of £16,000, £12,000 and £23,000 were incurred at
December 15, January 19 and August 20 respectively.
Annual value of house:
£9,200

a) Calculate taxable benefit in kind for 2020-21.

b) Calculate what would be taxable benefit for 2020-21 if accommodation was
purchased by his employer at 1/07/08 rather than 1/07/15.
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B:

Mr. A was provided with a living accommodation for personal use for which his
employer pay £9,000 as rent from 6 April 2020 to 31 August 2020. As Mr. A
resigned and left the accommodation at 31 August 2020.
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?
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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 Pool Cars
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
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.
4. A 0% percentage applies to electric-powered motor cars with zero CO2
missions.
5. For hybrid-electric motor cars 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 0%

 70 to 129 miles 3%
 40 to 69 miles 6%
 30 to 39 miles 10%
 Less than 30 miles 12%

CO2 emission table:

 51 – 54 g/km 13%

 For cars emitting above 55 g/km, we have to give rise of 1% after every 5
g/km which are above 55 g/km.
 For diesel powered cars which do not meet the real driving emissions 2
(RDE2) standard, an additional 4% is to be added into normal percentage.
 Company diesel cars meeting the RDE2 standard are treated as if they were
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petrol cars
 Either diesel or petrol maximum CO2 emission percentage is restricted to
37%.

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Example:

Ned Stark is employed with Y Ltd since 6 April 20. He was provided with 2000 cc
petrol driven car at 1 August 19. Car was purchased by Y Ltd for £21,000 whereas
official price was £22,500.

Ned Stark contributed £5,900 towards list price and £80 per month towards
private use to his employer.

Car emits CO₂ of 188 g/km.

Calculate TBIK for use of Car during 2020-21 of Ned Stark

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Note:
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 Benefit:

£ 24,500 x CO2 emission percentage

Note: Contribution towards fuel benefit is not deductible.

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Example 1

Ross Geller was provided with a 3000 cc BMW at 1st January 2020 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 171 gm/km and is
petrol driven Car.

Required:

 Taxable Benefit i.r.o Car for tax year 2020-21

 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 £3,490 per annum per van.
 If the same van is provided to more than one employee £3,430 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 £666 per annum per van.

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Statutory Mileage Allowance:

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

More than 2 years

HOME
Private

TEMPORARY PERMANENT
PLACE OF WORK OFFICE
P.O.D

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

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

Cost x 20% = TBIK

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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)
xxx
Example:
Mr. A was provided with furniture costing £40,000 for his personal use by his
employer at 6 April, 2018.
Furniture was later given to Mr. A by his employer at 1 August 2020 when its MV
was £ 17,000.
Mr. A paid £5,000 to his employer in respect of furniture at 1 August, 2020.

Calculate TBIK i.r.o Furniture during 2020-21

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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 2.5% x months due / 12 xxx
Less Actual paid (xxx)
Xxx

 Average method:
Opening balance + Closing Balance / 2 x 2.5% xxx
Less Actual paid (xxx)
xxx

Notes:

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 at 1 June, 20 to purchase his
residence of £120,000. He repaid £40,000 at 1 December, 20.
Calculate TBIK for 2020-21.

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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

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EXEMPT BENEFITS Employees:

 Employer’s contribution to a registered pension scheme (both occupational &

personal)
 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.
 Pensions advice up to £150 per employee per year

 In house subsidised canteen, free canteen

 Provision of work buses, bicycles, subsidies for public transport for travelling
to & from home to office

 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

 Workplace nurseries

 The weekly tax-free allowance that an employer can pay to an employee who
works from home has increased from £4 to £6 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 28

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

insurance

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 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

 A new tax free childcare scheme for working families has been introduced,
with this scheme replacing childcare vouchers. Childcare vouchers are
therefore no longer examinable. The new tax free childcare scheme is not
examinable

 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

29

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National Insurance Contribution (NIC):

Primary / Employee (aged 16 -65 years)

Class 1 - Paid by Employer on behalf

(Employment) Secondary / Employer of Employee
- Exempt benefit for
employee
- Allowable Expense for
Employer (A) employer

Class 2

Self Employed
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
xxx

Primary Rates:

£1 - £9,500 Nil
£9,501 - £50,000 12%
Above £50,000 2% 30

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 31

Secondary Rates (paid by Employer):

£1 - £8,788 Nil
Above £8,789 13.8%

– Employment allowance of £3,000 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 (A):
Payable upon taxable & non cash benefits @ 13.8%

31

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 32

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.

(Striping of assets of cotton mill for the 4th time)

 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 mill-owning 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)

32

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

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 33

 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.

AND

 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.

 Acqusition (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.

 Similar Trading (ST)

If individual commences a transaction that is related to his existing trade, it is difficult

to argue that this is not a trading transaction.
33
Example
It is harder for a property developer to argue that a property was acquired for
investment and not trading purposes than a butcher.

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 34

£
Net Profit/losses xxx/ (xxx)
Less incomes not trading (xxx)
Add disallowed expenses xxx
Tax adjusted trading profit before Capital Allowances xxx
Less expenses allowed but not deducted (e.g. Capital Allowances) (xxx)
Tax Adjusted Trading Profit (TATP) xxx

Period of account profit Tax Year profit

TATP Basis Period Non Savings

34

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 35

Disallowed Expenses:

1. Depreciation & Amortization:

Depreciation disallowed completely.

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 in P&L= Add back profit
 If not adjusted in P&L = 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

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. 35
- Specific provision
Are Allowed

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 36

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 110 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
ii. For recovering trade debts owner of business
iii. For renewal of short lease ii. For recovering loans written
iv. For registering patent off
v. For raising loans iii. For new or initial grant of
vi. For saving title of fixed lease
asset/non-current asset iv. For raising capital
vii. Employees car parking fines v. All other fines

10. Lease Premium

If a property is leased out by paying a amount of Premium for a certain period

of time. In this case all of the premium would not be Allowable and allowable
portion will be calculated as follows:-

51 – D x P / life of lease = Allowable Per Annum

50

Where:

D= Duration

P= Premium

36

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 37

Comprehensive Example
On 1 June 2019 William Wise, aged 38, commenced in self-employment running a
retail clothing shop.

William’s statement of profit or loss for the year ended 31 May 2020:

£ £

Gross profit
139,880

Administration expenses:

Depreciation 4,760

Light and heat (Note 1) 1,525

Motor expenses (Note 2) 4,720

Repairs and renewals (Note 3) 5,660

Rent and rates (Note 1) 3,900

Professional fees (Note 4) 2,300

Wages and salaries (Note 5) 83,825

––––— (106,690)

Other operating expenses (Note 6)

(2,990)

–––––––

Net profit 30,200

–––––––

Notes:
(1) Private accommodation

William and his wife live in a flat that is situated above the clothing shop. Of the
expenditure included in the statement of profit or loss for light, heat, rent and
37
rates, 40% relates to the flat.

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 38

(2) Motor expenses

During the year ended 31 May 2020, William drove a total of 12,000 miles, of which
9,000 were for private journeys.

(3) Repairs and renewals

The figure of £5,660 for repairs and renewals includes £2,200 for decorating the
clothing shop during May 2019, and £1,050 for decorating the private flat during
June 2019. The building was in a usable state when it was purchased.

(4) Professional fees £

Accountancy 700
Legal fees in connection with the purchase of the shop 1,200
Debt collection 400
–––––
2,300
–––––
Included in the figure for accountancy is £250 in respect of capital gains tax work.

(5) Wages and salaries

The figure of £83,825 for wages and salaries includes the annual salary of £15,500
paid to William’s wife. She works in the clothing shop as a sales assistant. The other
sales assistants doing the same job are paid an annual salary of £11,000.

(6) Other operating expenses

The figure of £2,990 for other operating expenses, includes £640 for gifts to
customers of food hampers costing £40 each, £320 for gifts to customers of pens
carrying an advertisement for the clothing shop costing £1.60 each, £100 for a
donation to a national charity, and £40 for a donation to a local charity’s fête. The
fête’s programme carried a free advertisement for the clothing shop.

(7) Goods for own use

During the year ended 31 May 2020, William took clothes out of the shop for his
personal use without paying for them. The cost of these clothes was £460, and
they had a selling price of £650. He has not made any adjustment in the accounts
in respect of this. 38

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 39

(8) Plant and machinery

The capital allowances available for the year ended 31 May 2020 are £13,060.

Requirement:
Calculate William’s tax adjusted trading profit for the year ended 31 May
2020.

Your computation should commence with the net profit figure of £30,200 and
should list all the items referred to in notes 1 to 8, indicating by the use of
a zero (0) any items that do not require adjustment.

39

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 40

Capital Allowances:

Plant & Machinery

AIA FYA WDA SBA

Annual Fist year Written Down Allowance Structures &
Investment Allowance @100% Buildings Allowance
Allowance @ @3%
18% per 6% per
100% up to first Upon purchase of: annum annum
£1,000,000 per 1. Energy saving Upon purchase of:
1. Used low
annum. equipment  Offices,
emission car Cars
Except for: 2. New low retail &
2. Cars with emitting
1. Cars emission car wholesale
50 – 110 above 110
2. Energy saving (up to 50 premises,
g/km g/km
equipment g/km) factories &
warehouses

WDA @ 18%:

 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.

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).
40
2. Balancing Allowance:
When assets are sold for less than their written down value (WDV).

|
 41

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

off:
 Sale Proceeds
 Original Cost

CO2 Description Treatment in

Emission Capital
Allowances
<50g/km Low Emission 100% FYA
51-110g/km Standard WDA @ 18%
Emission
>110 g/km High Emission WDA @ 6%

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 & is only available where a building has been constructed on or after
29 October 2018.
 Offices, retail and wholesale premises, factories and warehouses can all
qualify for the SBA (as can walls, bridges and tunnels).
 Expenditure which qualifies as plant and machinery cannot also qualify for
the SBA. Similarly, expenditure which qualifies for the SBA cannot also
qualify for AIA.
 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 must be used for a qualifying activity such as a trade or
property letting.
 The SBA can only be claimed from when the building is brought into
qualifying use. This means that the SBA will be time apportioned for the
period when first brought into use,
 A separate SBA is given for each building (or structure) qualifying for relief.
 Parts of a building can qualify as plant and machinery for AIA,FYA, and 41
WDAs. SBAs can then be claimed for remaining cost of the building.

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 42

Therefore, it is not possible to claim both plant and machinery capital

allowances and SBAs in respect of the same item of expenditure.

42

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 43

Example:
Mr. A has been a very successful entrepreneur 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 31/12/20 are as follows:

Additions & Disposals:

01/2/20 Car (50 g/km) (new) £18,000
02/2/20 Car (109 g/km) £22,000
18/6/20 Production Plant £75,000
21/9/20 Furniture £20,000
18/10/20 Car (101 g/km) £ (12,000)
29/10/20 Fixtures & Fittings £ (8,000)
09/11/20 Fleet of Delivery Van £ 1,250,000

Original Cost of
i. Car (101 g/km) sold at 18/10/20 was £10,000
ii. Fixtures & Fittings sold at 29/10/20 was £22,000

Required: Calculate capital allowance for y/e 31st December 2020 deductible
from TATP?

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

43

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 44

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.
 As these cars are single asset in its pool, whenever sold balancing adjustment
would be made.

Example:

Example:
Following information relates to Y/E 31st March 2021 for a sole trader Mr. A
£
Opening WDVs
General Pool 40,000
Car 1 20,000
Addition & Disposal:
1/5/20 Car 2 (50 g/km) (new) 10,000
2/5/20 Car 3 (100 g/km) 15,000
3/5/20 Car 4 (200 g/km) 30,000
5/5/20 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 2021?

. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
44
. .

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 45

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 are 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.

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 110 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 all such assets should be at least £100,000 per annum.
For example, ships, aircrafts, threshers, harvesters etc.

3. 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.
4. Balancing adjustment would only be made on cessation of business in SRP.

45

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 46

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 are unrelated separate AIA limit of £1,000,000 for every
business.

Notes relating to sale of noncurrent 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) Is a negative balance due to disposal, in such case it is treated as balancing

charge will be added into TATP (i.e. increasing the TATP),“whether whole
pool is sold or not”.

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

Pre-trading rules:

All these expenses which were incurred seven years before the start of trade are
assumed to be incurred on the first day of trade for tax purpose.

46

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 47

SRP Example:

Ling prepares accounts to 31 March. On 1 April 2020, the tax written down value
of plant and machinery in her main pool was £16,700.

The following transactions took place during the year ended 31 March 2021:

 Motor car (1) purchased on 8 April 2020 has CO2 emissions of 100 grams
per kilometre. This motor car is used by Ling and 20% of the mileage is for
private journeys.
 Motor car (2) purchased on 14 April 2020 and sold on 12 December 2019 has
CO2 emissions of 135 grams per kilometre.
 Motor car (3) purchased on 2 September 2020 has CO2 emissions of 105
grams per kilometre. 47
 Motor car (4) purchased on 19 November 2020 has CO2 emissions of 45
grams per kilometre.

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 48

Calculate the capital allowances available to Ling for the year ended 31
March 2021.

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

48

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Small Pool WDA Example:

Angelina is in business as a sole trader and prepares accounts to 31 May each

year.

During the year ending 31 May 2021 she purchased the following:

15 June 2020 Purchased new office furniture for £980,800.

2 July 2020 Purchased a new car (with CO2 emissions of 154 g/km)
for £12,600 which Angelina will use 20% of the time for
private purposes.

10 July 2020 Installed a new water heating system in her business

premises at a cost of £40,000 and a new lighting system
at a cost of £70,000.

In addition on 1 July 2020 she sold office equipment for £18,700 (original
cost £28,000).

As at 1 June 2020 the TWDV on her main pool was £10,800, and on the
special rate pool was £16,600.

Calculate Angelina’s capital allowances for the y/e 31 May 2021.

. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. . 49

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 50

NIC Class 2 and 4:

 Paid by self employed

NIC 2: If Net profits are above £ 6,475
 Upon trading profit
@ £3.05 / week
for the tax year
(after b/f trading
NIC 4:
loss)
@ £ 1 - £ 9,500 Nil
 If aged 16 – 65 years
£ 9,501 - £ 50,000 9%
Above £ 50,000 2%

50

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 51

Basis Period:

1st tax year rule:

Basis period will start from 1st day of trade till coming 5th of April.

2nd and onward tax years:

Is there any period of account ending in tax year?

Yes No
What is the length of Basis period will be
Period of Account? 6th April to 5th April

12 months less than 12 months more than 12 months

Copy paste Basis period will be first Basis period will be last
12 months of business/trade 12 months of period of account

Examples:

A:
Trade Started at 1st January 2019

1/1/19 – 30/6/20 TATP £36,000

1/7/20 – 30/6/21 TATP £40,000

Calculate Assessable Income for all the Tax Years relevant.

. .
. .
. .
. .
. .
. .
. . 51

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B:

1/3/19 – 31/7/20 TATP £68,000

1/8/20 – 31/7/21 TATP £50,000

Calculate Assessable Income for all the Tax Years relevant.

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

C:

1/1/19 – 31/3/20 TATP £60,000

1/4/20 – 31/3/21 TATP £45,000

Calculate Assessable Income for all the Tax Years relevant.

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

52

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D:

1/6/18 – 31/12/18 TATP £18,000

1/1/19 – 31/12/19 TATP £36,000
1/1/20 – 31/12/20 TATP £40,000

Calculate Assessable Income for all the Tax Years relevant.

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

E:

1/6/18 – 30/4/19 TATP £30,000

1/5/19 – 30/4/20 TATP £24,000
1/5/20 – 30/4/21 TATP £38,000

Calculate Trading income Assessment for all the Tax Years relevant.

. .
. .
. .
. .
. .

Cessation Tax Year Rule:

Basis period will be that period of account or periods of accounts whichever are
ending in cessation tax year.

53
In cessation tax year all of the overlap profits will be deducted (it could even
create loss).

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 54

Example:

Michael ceased trading on 31 March 2021 His tax adjusted trading profits for
the final three periods of trading are as follows:

Year ended 30 April 2019 £40,000

Year ended 30 April 2020 £42,000
Period ended 31 March 2021 £38,000

He has unrelieved overlap profits of £27,000.

Calculate Michael’s final two trading profit assessments.

. .
. .
. .
. .
. .

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
 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. 54

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 55

Set off against Total Income:

1. Against current tax year only OR

2. Previous one tax year only OR
3. 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).

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)

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.

55
Under this option loss is to be set off against total income of previous three tax
years on FIFO basis.

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 56

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 rather than using loss calculated through basis period.

Terminal loss is calculated as follow:

£
1) Loss for last tax year (xx)/NIL
(i.e., 6/4 – date of cessation)

2) Loss for period starting 12 months (xx)/NIL

Before cessation till coming 5th April

3) Less Overlap profits (xxx)

Terminal Loss (xxx)

This terminal loss is set off against trading profits of:

 Previous three tax years on LIFO basis.

Example:

Trade started at 1/1/06.

Overlap profits of £15,000 for 3 months.

1/7/18 – 30/6/19 TATP £30,000

1/7/19 – 30/6/20 TATP £10,500
1/7/20 – 31/3/21 TATL £ (60,000)

Calculate Terminal Loss.

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. .
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. . 56
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. .
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. .
. .
. .

57

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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

Basis Period Basis Basis Basis

Period Period Period

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

58

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Mr. A & Mr. B has been in partnership from 1 August, 2006.

TATP for year ended 31 July, 21 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 October, 20. As at 1 November, 20
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 July 2021.

. .
. .
. .
. .
. .
. .
. .
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. .
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59

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Cash basis of Accounting:

If an unincorporated trade have 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.

60

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Property Business Profit: £ £

Rent xxx
Premium (taxable portion) xxx
xxx
Less expenses:
Repairs & Maintenance (revenue nature) xxx
Council tax xxx
Bills & Rates (paid by landlord) xxx
Agent Fees xxx For
Advertisement Fees xxx tax
Insurance cost xxx year
Interest upon property loan xxx
Employee’s salary xxx
Rent paid xxx
Replacement Furniture Relief (Note 2) xxx (xxx)
Property Business Profit/Loss xx/(xx)

Note1.Mortgage interest
 If the loan is taken, it makes no difference whether the finance was used
to purchase the property or was used to pay for repairs. The interest will
note be allowable expense.

Note2.Replacement furniture relief

Individuals and companies can now deduct the actual cost of replacing furniture
and furnishings when calculating the property income from renting out a residential
property.

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.

There is no relief for the initial cost of furniture and furnishings. There is only
relief when assets are replaced.

The amount of relief is reduced by any proceeds from selling the old asset which 61
has been replaced.

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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.

Replacement furniture relief does not apply to furnished holiday lettings because
the cost of furniture and furnishings in such properties qualifies for capital
allowances.

EXAMPLE 17
on 6 April 2020, 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 2020-21.The property was then let throughout the tax year
2020–21 at a monthly rent of £800.

During April 2020, 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 2020 for £110, and replaced with a similar model costing
£460. The washing machine was scrapped, with nil proceeds, during March 2020.
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 2020–21 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

ii) What will be Fang income tax liability for the tax year 2020-21 if his
salary is £80,000?
iii) What will be Fang income tax liability for the tax year 2020-21 if his
salary is £20,000?

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Solution

i) Fang’s property income is:

£
Rent receivable (800 x 12) 9,600
Replacement furniture relief
Cooker (460 – 110) (350)
Washing machine (360)
Other expenses (1,310)

______
Property income 6,580
______

 No relief is available for the initial cost of the cooker, washing machine and floor coverings.
 Relief for the replacement cooker is reduced by the proceeds of £110 from the sale of the original
cooker.
 No relief is given for that part of the cost of the washer-dryer which represents an improvement
over the original washing machine. Relief is therefore restricted to the cost of a similar washing
machine.

ii) Fang tax liability is

Tax liability of Fang’s 2020-21

Non savings Savings dividends
£ £ £
Salary 80,000 - -
Rental income 6,580 - -
Total income 86,580
Personal Allowance (12,500) - -
Taxable income 73,350 - -

37,500 x 20% 7,500

35,850 x 40% 14,340
21,840
Interest relief
(4,000 x at 20%) (800) 63
Basic rate restriction (Note)
Tax liability 21,040

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 Basic rate restriction

 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.
 This restriction only applies to individuals not to limited companies.

iii) Fang tax liability is

Tax liability of Fang’s 2020-21

Non savings Savings dividends
£ £ £
Salary 20,000 - -
Rental income 6,580 - -
Total income 26,580
Personal Allowance (12,500) - -
Taxable income 14,730 - -

14,730 x 20% 2,946

Interest relief
(2,000 at 20%) (800)
Tax liability 2,146

Calculating premium for Head lease:

Taxable Portion of the Premium =

(51 – d) / 50 x P (taxable in the year of receipt)
d = duration of lease
P = premium

Example:

Mr. A lets out a freehold property at 1/6/20 at an annual rent of £24,000 and he
also received a premium of £40,000 in respect of a lease of 30 years.
64

Calculate taxable portion of premium for 2020/21

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

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

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

Example:

Mr. a lets out a leasehold property at 6 April 20. He received a premium of £20,000
for 7 years and £3,000 per month rent.
He acquired property at 6 April, 20 and paid a premium of £50,000 for 25 years.
He also pays rent of £12,000 per annum.

Calculate PBP for 2020-21.

. .
. .
. .
65
. .
. .
. .

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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. It should be actually occupied for at least 105 days a year (excluding long
term letting)
4. It should be let on short term letting that is up to 30 days but if let on long
term lettings total of all long term lettings should not exceed 155 days a
year

Benefits of FHL:

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.
 FHL is considered as business asset for all of the CGT reliefs. (Business Asset
Disposal relief will be available on each sale of FHL)
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:

66
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.

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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.

Individual Savings Accounts (ISAs):

A new individual savings account (ISA) can be opened by any individual aged 18 (16
for cash ISAs) or over who is resident in UK.

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 such as 10,000 in cash and 10,000 in shares.
– 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.
67
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.

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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.

The availability of the savings income nil rate band for basic and higher rate
taxpayers means that there is no tax benefit to investing in cash ISAs for many
individuals. However, cash ISAs are advantageous for additional rate taxpayers
and for other individuals where their savings income nil rate band is already
utilised.

The availability of the dividend nil rate band means that there is no tax advantage
to receiving dividend income within a stocks and shares ISA for many individuals.
However, chargeable gains made within a stocks and shares ISA are exempt from
capital gains tax. Stocks and shares ISAs are therefore advantageous where
chargeable gains are made in excess of the annual exempt amount.

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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 purposes so this element of
growth relating to interest escapes tax.

Bond Washing

Scheme applies to marketable securities such as gilts and loan notes.

Interest is paid to the registered holder on a certain date. However, an individual who
sells the security before that date will not receive the interest payment due on that
date as by then it would be no longer owned.

However, the price the vendor receives for selling the security will be inflated to take
account of the fact that the purchaser is due to receive the next interest payment.

By this time the vendor has received a capital receipt in relation to the sale of the
security, and as there is no income paid out, there is no charge to income tax in respect
of the increased selling price.

As gilts and loan notes are exempt from CGT, any gain arsing on the disposal will also
escape capital gains tax. Overall therefore, any interest due to be paid out and
included in the selling price of the security will escape tax.

How above scheme operates

 Under the scheme the interest is deemed to accrue on a daily basis or monthly
basis.
 The purchase price (disposal price of securities) is apportioned between the
income element and the capital element.
 The income element is assessed as interest income.
 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. 69

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Example:

Ahmad sold £15,000 6% loan stock cum interest on 31st October 2020 for proceeds
of £20,000. He originally acquired the loan stock on 1 May 2018. Interest is payable
on 30th June and 31st December each year.

Calculate the amount assessed on Ahmed as interest income for 2020-21.

Solution

Interest income – 2020-21

£
Interest received- 30 June 2020
(£15,000 x 6% x 6/12) 450
Accrued interest included in selling price of loan stock
( from 1 July 2020 – 31st October 2020)
(£15,000 x 6% x 4/12)
300
Total interest assessable to tax 750

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PENSIONS

Occupational Personal
- Amount is paid gross - Amount is paid net of 20%
( i.e. individual now to pay
- Amount paid is deducted from 80% only)
Employment income as
Allowable deduction. - Basic & higher rate bands
will be extended with gross
amounts.

Maximum “tax efficient” contribution, lower of:

Higher of:
1) £3,600
1. Benefits 2) Relevant Earnings:
wali limit - Trading profit
- Employment Income
- FHL profits

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Annual Allowance:

 Annual allowance for the tax year 14/15and onwards

Tax Years is £40,000.(for tapered see below)
2. Additional  An individual can carry forward his/her unused annual
tax wali allowance of previous 3 tax years on FIFO basis if
limit 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 also use annual allowance 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.

Personal Pension:

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___________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
_____________________________________________

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Occupational Pension:

____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
______________________________________________

Annual Allowance:

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____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
______________________________________________

____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
____________________________________________________
_____________________________________________

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Tapered Annual Allowance

 For the tax year 2016–17 onwards, the normal annual allowance of
£40,000 is reduced by £1 for every £2 by which a person’s adjusted
income exceeds £150,000, down to a minimum tapered annual allowance
of £10,000.

 Therefore, a person with adjusted income of £210,000 or more, will only

be entitled to an annual allowance of £10,000 (40,000 – ((210,000 –
150,000)/2) = £10,000).

 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.

 Adjusted Income is net income plus any employee contributions to

occupational pension schemes (these will have been deducted in
calculating net income) plus any employer contributions to either
occupational or personal pension schemes. For the self-employed,
adjusted income will simply be net income.

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_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_________________________________________________

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EXAMPLE:
For the tax year 2020–21, Juliet has a trading profit of £196,000. She has never
previously been a member of a pension scheme.

Juliet’s tapered annual allowance for 2020–21 is £17,000 (40,000 – ((196,000 –

150,000)/2)).

Example:
Mr. A has employment income of £130,000 for 2020-21. 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 2020-21 (6 marks)

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

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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) 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 of
55.

As previously, 25% of the pension fund can be withdrawn as a tax-free lump sum.
The balance of the pension fund can 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.

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Overseas Aspects of Individuals:

All persons resident in the UK for tax purposes are assessed to UK tax on their
worldwide income.

Note: Domiciled can be due to three reasons:-

 By origin,
 By choice,
 By dependency

Automatic not 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 (automatic overseas residency test):

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

It is possible for an individual to satisfy both one of the automatic non-residence

tests and one of the automatic residence tests. If this is the case, the non-
residence test takes priority.

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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 Automatically Not Resident
more)
46 to 90 Resident if 3 UK ties (or Resident if 4 UK ties
more)
91 to 120 Resident if 2 UK ties (or Resident if 3 UK ties (or
more) more)
121 to 182 Resident if 1 UK ties (or Resident if 2 UK ties (or
more) more)
183 or more Automatically Resident Automatically Resident

Procedure to determine residence

Step 1: Check automatic non residence tests

 If satisfy one test = non-resident

 If not = go to Step 2
Step 2: Check automatic residence tests
81
 If satisfy one test = UK resident
 If not = go to Step 3

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Step 3:  Determine how many sufficient ties with the UK exist,

and
 How many days are spent in the UK in the tax year, then
 Use ties tables to decide status

Test your understanding

Explain whether or not the following individuals are resident in the UK in the tax year
2020-21.

1) Dieter was born in Germany. He has lived in his home town in Germany until the tax

year 2018/19 when he came to the UK to visit on 10 June 2019 until 18 January

2021.

2) Simone was born in France. She has lived in her home town in France until the tax

year 2020-21 when she came to the UK to visit for a month.

3) Fred has always spent more than 300 days in the UK and has therefore been UK

resident. He gave up work on 5 April 2020 and on 18 May 2020 he set off on a round

the world holiday. He did not return to the UK until 6 April 2021. Initially he spent

5 weeks in his second home in Portugal but then did not spend more than 10 days in

any other country whilst he was away.

Whilst he was away he kept in touch with his wife and young children who remained

in the family home in the UK.

4) Olga, a housewife, has previously visited the UK on holiday for 30 days in each of

the last five years and was not UK resident in those years.

On 6 April 2020 she purchased a holiday cottage in the UK. In the tax year 2020-21 she

visited the UK for 80 days, staying in her UK home apart from the two weeks when she

stayed with her 17 year old son who had come to study in the UK.

For the remainder of the year she lived in her home in Germany.

. . 82
. .
. .

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. .
. .
. .

MCQ:

Pierre was born in France. He has been working full time in the UK and been UK resident

for tax purposes for the last five years. He plans to return to France in the tax year

2020-21.

Assuming he has two ties with the UK in the tax year 2020-21 what is the

maximum number of days that Pierre could spend in the UK without being treated as

UK resident in the tax year 2020-21?

A. 91 days

B. 90 days

C. 20 days

D. 21 days

Samuel is planning to leave the UK to live overseas, having always previously been resident

in the UK. He will not automatically be treated as either resident in the UK or not resident

in the UK. Samuel has several ties with the UK and will need to visit the UK for 60 days

each tax year. However, he wants to be not resident after he leaves the UK.

For the first two tax years after leaving the UK, what is the maximum number of

ties which Samuel could keep with the UK without being treated as resident in the

UK?

A. One

B. Four

C. Two 83
D. Three

Kit Q#110(a), MTQ Wilson Biazma

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Income Tax Administration:

Filling of the tax return:

Manual/Paper based –

By 31st October after the tax year

i.e. 31st October, 2021 for 2020-21.

Online/Electronic –

By 31st January after the tax year

i.e. 31st January 2022 for 2020-21.

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

1. 1st POA of Current Tax Year (IT + Class 4 NIC) x 50%

2. Balancing Payment of last Tax Year
3. Payment of Class 2 in full i.e. £148.2
4. Payment of CGT Liability (full) of last Tax Year
5. IT Return of last tax year.
6. CGT Return of last tax year.

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

84
6 – 12 months 5% of tax due (Min £300) £1000 + 5% of IT due (Min £300)

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£1000 + 10% of IT due (Min

Above 12
5% of tax due (Min £300) £600)
months
Standard penalties may apply

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 20120/21 (5-4-2021)  (5-10-2021)

The Finance Act 2015

Has introduced a further penalty in respect of offshore matters. This new penalty applies where
one of the penalties set out above has already been charged in respect of a deliberate failure, and
there is a ‘relevant offshore asset move’. A relevant offshore asset move is deemed to take place
where:

 assets have been moved from a country which exchanges information with the UK to one that
does not; or

 the owner of the assets has ceased to be resident in a country which exchanges information
with the UK and become resident in a country that does not.
The new penalty only applies where one of the main purposes of the relevant offshore asset
move was to prevent or delay HM Revenue and Customs from discovering that there has been
a loss of tax revenue.

Note Candidates are expected to know that these additional penalties exist but do not need to
know the precise amounts that may be charged or the categorisation of particular countries.

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Enquiry Procedure / Compliance Check:

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

Tax payer must respond within 30 days of the issue of notice with relevant
information.

Compliance Check

Un-Amended Closure Notice Amended

No Agree Yes

Tax payer can appeal for Re- Compliance Check within 30 1.

1. Pay/Receive
Pay/Receive relevant days of issue of closure notice relevant amount
amount 2. Interest would also
2. payable
be Interest would
at 3%
per annum
3. Standard penalties
may apply

Yes

Re- Compliance Check Outcomes Agree

No Tribunal Court

If the dispute is not resolved at the First-tier level (for basic cases) then the 86
appeal can go to the Upper Tribunal (which deals complex cases).

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Retaining Records:

 Trading individual – keep 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
2027 for 2020-21.

 Non-trading individual – keep record later of:

i. 12 months from filling date (31 January 2023 for 2020-21)
ii. When inquiry is completed
iii. When HMRC right to enquiry lapse

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

Discovery Assessment:

Under 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:
Max % of lost Time limit for issuing discovery
revenue assessment
Genuine mistake Nil As a genuine Up to 4 years
mistake (5 April 2022)
Lack of care 30% As lack of care Up to 4 to 6 years
(5 April 2024)
Deliberate 70% As deliberate Above 6 to 20
understatement understatement years
(5 April 2038)
Deliberate 100%
understatement with
concealment

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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

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 ground for reduction in payment on account.

Payment on account is not required:

1. Payment on account was not required if previous year’s tax payable was less
than £1,000.
2. Whatever the amount of tax payable is, if tax liability was met by tax
deducted at source by more than 80% of previous year then for the current
year no payment on account is required.

Penalty in case of late payment:

 If payment on account is late/underpayment then only interest will be charged

@ 2.75% per annum.
 Interest may be paid by HMRC on any overpayment of tax @ 0.5% 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%

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1. Above said penalties are for balancing payment only.

2. There are no penalties for late and submission of payment on account.
3. But interest would be charged @ 2.75% per annum for both Payment on
Account and Balancing Payment.

£
Balancing Payment xx
Interest of balancing payment xx
Penalty xx
xx

Payment of NIC:

Class 4 NIC:
Same as payment of Income Tax

Class 2 NIC:
 @ 3.05 per week
 Can be paid either by monthly direct debit or in one payment to be made by
31st January after the Tax Year. (NEW) (e.g 2021-21 31-1-22)

PAYE & Class 1 NIC:

Employer must deduct PAYE and NIC out of the monthly salary and should be
submitted to HMRC by 19th (or 22nd) of each month.

As most of the businesses now pay electronically so, are allowed an extra 3 days.
Therefore, usual payday is 22nd of each month.

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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.

Key PAYE forms (for employees only):

FORM: PURPOSE: TIMING:

P45 Provided when they leave Ongoing with staffing changes

P60 Year end summary By 31 May following tax year

P11D Summary of benefits By 6 July following tax year

Procedure to be adopted when an employee leaves

When an employee leaves an employment the PAYE system is interrupted. A form

P45 must be completed for each employee immediately after they leave
employment in order that either:

 a new employer can carry on making PAYE deductions

 the employee can claim a tax repayment (if any).

The employer notifies HMRC by entering the employee's leaving date on the first
RTI submission submitted after they leave.

Procedure to be adopted when an employee joins

The form P45 details of employee will allow the new employer to operate PAYE
for the employee’s pay.

Where form P45 cannot be produced the employee has to provide sufficient
information to enable the employer to work out 90

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91

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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

Chargeable Disposal:
Any asset no longer owned by the owner is a chargeable disposal. Exempt disposals
are;
1. transfer/gifts to charity
2. 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 New Individual Saving Account (NISA)
5. Certain chattels
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

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CGT computations for tax year 20/21: £

Gains for the tax year xxx
Less losses for the tax year (xxx)
Net Gains / (loss) xxx / (xxx)
Less b/f Capital loss (xxx)
Less Annual Exemption (12,300)
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).

CGT percentage:

Taxable gains x Basic and/or Higher = CGT

Bands All Other Assets Residential

Properties
Basic Rate Band £1 - £37,500 10% 18%
Higher Rate Band Above £37,501 20% 28% 93

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EXAMPLE
For the tax year 2020–21, Adam has a salary of £44,000. During the year, he made
net personal pension contributions of £4,400. On 15 June 2020, Adam sold an
antique table and this resulted in a chargeable gain of £21,000.

Calculate his CGT Liability.

For the tax year 2020-21, Bee has a trading profit of £60,000. On 20 August
2020, she sold an antique vase and this resulted in a chargeable gain of £19,800.
Calculate her CGT Liability.

For the tax year 2020-21, Chester has a salary of £43,500. On 25 October 2020,
he sold a residential property and this resulted in a chargeable gain of £47,000.
Calculate his CGT Liability.

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

Adam’s taxable gain of £8,700 (21,000 less the annual exempt amount of 12,300)
is fully within the unused basic rate tax band, so his capital gains tax liability is
therefore £870 (9,000 at 10%).

Bee
Bee’s taxable income is £47,500 (60,000 – 12,500), so all of her basic rate tax
band has been used. The capital gains tax liability on her taxable gain of £7,500
(19,800 – 12,300) is therefore £1,500 (7,500 at 20%).

Chester
Chester’s taxable income is £31,000 (43,500 – 12,500), so £6,500 (37,500 –
31,000) of his basic rate tax band is unused. The capital gains tax liability on
Chester’s taxable gain of £34,700 (47,000 – 12,300) is therefore: 94

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£
6,500 at 18% 1,170
28,200 at 28% 7,896
_____
Tax liability 9,066
_____

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

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 xxx

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 95
 Business partners
 Spouses and relatives of business partners
 Any company in which individual has control

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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 is the allowable cost for donee also known as base
cost.

96

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Example:

Mr. A 1/6/14 Purchase £70,000

1/9/16 Enhancement Expense £15,000
1/1/20 Market Value £160,000

Transfer/sold to daughter for £70,000.

Calculate gain on disposal & base cost.
. .
. .
. .
. ..
.
. .
. .

2. Transfer/Sale within spouses or civil partner: Actual proceeds will be

replaced with allowable cost thus resulting in no gain/no loss.

3. Part Disposal:
Allowable Cost = Total Allowable Cost x A / A + B
Where A = Market Value of portion Sold
B = Market Value of portion Unsold

Example:

1/1/134 Purchased 10 acres of land for £60,000

1/6/19 Sold 2 acres of land for £200,000
1/6/20 MV of remaining 8 acres was £300,000

1/7/22 Sold all remaining 8 acres for £360,000

Calculate gain on disposal as at;

1. 1/6/20
2. 1/7/22.
.
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. ..
.
. .
. .
. ..
.

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4. Chattels:

Business Plant &

Machinery
Personal (Except for heavy,
(Tangible, movable property) immovable, industrial
P & Machinery)

Case 1 = Proceeds & Cost < £6000 Exempt Asset  Sold at Gain:
Case 1, 2 or 4
 Sold at Loss:
Reduced to Nil
Case 2 = Proceeds more than and Cost less than £6000,
Gain in this case will be lower of:-

i) Normal Gain
ii) 5/3 × (Gross Proceeds - £6000)

Case 3 = Proceeds Less than and Cost more than £6000

Loss in this case will be restricted by replacing
Actual proceeds with £6000.

Case 4 = Proceeds & Cost > £6000 Normal Calculation

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5. Wasting Assets(life upto or less than 50 years)

Chattels Other wasting assets

- Heavy, Immovable
Industrial P & M
Wasting chattels Non Wasting - Patent Rights
Up to 50 years Chattels - Copy Rights
More than 50 years - Short Leases
- Jewellery
- Antique
Live chattels Plant & - Painting
Boats Machinery
Caravans

Exempt

Allowable cost for other wasting assets (heavy P & M + Patent Rights + Copy rights):

Total Allowable Cost x Remaining useful life / Total life

If there is scrap value then;

£ £
Proceeds xxx
Cost xxx
Cost – Scrap value x Remaining life / total life (xxx) (xxx)
(NBV)
Gain / loss xxx

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Example:

1/1/18 purchased patent rights of 20 years for £40,000

1/1/21 sold them for £35,000

Calculate gain.

. .
. .
. .
. .

All types of Reliefs and Exemptions:

Upon sale of Business Asset Disposal Relief

Investors’ relief
Business Rollover Relief Deferral
Assets Holdover Relief
Gift Relief/Hold against Gift Relief
Principal Private Property

Exemptions
Private Personal Use Letting Relief

Business Asset Disposal Relief (BR):

Business Asset Disposals’ relief has been renamed as business asset disposal relief.

1. Gain qualifying BR will be taxed at 10% regardless of level of incomes of an

individual.
2. For the tax year 2020-21, the lifetime qualifying limit has been reduced
from £10 million to £1 million
3. Any available basic rate band will be used or consumed by gains qualifying
for BR first and then to those gains which do not qualify, if any.
4. BR will be available upon Disposal of following if;
 Shares & Securities; If a person of such company in which individual 101
hold at least 5% shareholding and also employee of that company.

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 Property, Plant, Equipment, Goodwill (Any asset other than

shares);
If sold as a result of cessation of complete or major part of the trade.
 For both of the above either shares or asset must be held for at least
12 months before sale.
 It will always be tax efficient to deduct losses and annual exemption from
the gains not qualifying for BR first and then from qualifying gains.
5. If there are losses which qualify for Business Asset Disposal relief such
losses would be set off against gains qualifying for BR only and if still there
is any unrelieved loss it would be carried forward against such future gains
which qualify for BR.
*Cessation means any of the following condition:

1. Liquidation
2. Sale of business on Going Concern Basis
3. Transfer of Business to connected person

*Major part of trade means profit centre which has its own cost and revenue.

Example:

On 25 January 2021, Michael sold a 30% shareholding in Green Ltd, an unquoted

trading company. The disposal resulted in a chargeable gain of £800,000. Michael
had owned the shares since 1 March 2014 and was an employee of the company
from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2020-21.

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Example:

On 30 September 2020, Mika sold a business which she had run as a sole trader
since 1 January 2014. The sale resulted in the following chargeable gains:

Business Asset Disposal Relief £

Goodwill 260,000

Freehold office building 370,000

170,000
Freehold warehouse _______

800,000
_______

The assets were all owned for more than one year prior to the date of disposal.
The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £8,000 for the tax year 2020–21. She has unused
capital losses of £28,000 brought forward from the tax year 2019–20.

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Solution

Mika’s capital gains tax liability is:

Gains qualifying for Business Asset Disposal Relief £

Goodwill 260,000

Freehold office building 370,000

_______

630,000
_______

Other gains

Freehold warehouse 170,000

Capital losses brought forward (28,000)

_______

142,000

Annual exempt amount (12,300)

_______

129,700
_______

Capital gains tax:

630,000 at 10% 63,000
129,700 at 20% 25,940
_______

88,940
Tax liability _______

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On 10 December 2020, Raj sold a 45% shareholding in Splash Ltd, an unquoted

trading company. The disposal resulted in a chargeable gain of £1,300,000 which
qualifies for business asset disposal relief. Raj is a higher rate taxpayer and has
not made any previous disposals qualifying for relief.

Calculate Raj’s capital gains tax liability.

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Investors’ relief

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.

Relief has now been extended to external investors in trading companies which are
not listed (unlisted) on a stock exchange. This investors’ relief has its own separate
£10 million lifetime limit, with qualifying gains being taxed at a rate of 10%. To
qualify for investors’ relief, shares must be:

 Newly issued shares acquired by subscription.

 Owned for at least three years after 6 April 2016.

Investors’ relief was introduced by the Finance Act 2016, but is only now available
because of the three-year holding period requirement.

With certain exceptions (such as being an unremunerated director) the investor

must not be an employee or a director of the company whilst owning the shares at
that time that relief is available.

Example

On 20 June 2016, Winnie subscribed for 150,000 £1 ordinary shares (a 2%

shareholding) in Unquote Ltd, an unquoted trading company, at their par value.

She has never been an employee or director of the company. Winnie sold the
150,000 shares in Unquote Ltd for £760,000 on 15 December 2020.

Winnie’s shareholding in Unquote Ltd does not qualify for Business Asset Disposals’
relief because the 5% shareholding condition is not met and she was not an
employee or director of the company. However, the conditions for investors’ relief
are met, including the three-year holding period requirement. 106

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Calculate Winnie’s Capital Gains Tax Liability

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

Rollover Relief:
When qualifying business asset is sold and proceeds are reinvested to purchase
another qualifying business asset. Qualifying business assets are; Land, Building
and Goodwill.

1. Replacement asset must be purchased within one year before or three year
after the sale of original asset.
2. 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.
3. If the asset sold/purchased is used partially for non-business purposes,
gains relevant to business proportions would only be qualifying for the relief.
4. 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 2020. Building was
purchased for £320,000 at 15th April 2015 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 2020-
107
21 other than the building sold at 1st May 2017 although he purchased a warehouse
to be used completely for trading purposes at 1st Feb 2020 for £350,000

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Required: Calculate CGT payable for the Tax year 2020-21 assuming all
beneficial claims will be made.

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

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Hold over Relief:

Whenever land, building, goodwill is sold and proceeds are reinvested to purchase
any other wasting asset (copy rights, patent rights, lease hold building, immovable
plant & machinery. 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:

1. When it is 10 years of gain being holdover

2. When replacement asset is sold
3. When replacement asset becomes non business asset

Remaining points are same as rollover relief.

Hold against Gift / Gift 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 the asset transfer was:

1. Property, plant & equipment goodwill used in trade carried out by the donor.
2. Shares of unquoted company or such a quoted company in which individual
holds at least 5% shareholding.
3. 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.
4. It the actual proceeds received by the donor are up to or less than original
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.

If shares were transferred and company is having business and non-business assets
than:

Hold against Gift Relief = Gain x chargeable business assets

Total chargeable assets
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Market Value of quoted shares

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).

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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. The final period of ownership of a main residence is always treated as a
period of ownership. This period of exemption has been reduced from 18
months to nine months. (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)

Proforma 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
01.01.08 – 01.06.09 Actual Occupancy 6 6
01.06.09 – 01.06.11 Last 18 months 18 6 24
72 18 90
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Example:

On 30 September 2020 Hue sold a house for £381,900. The house had been
purchased on 1 October 2000 for £141,900.
Hue occupied the house as her main residence from the date of purchase until 31
March 2004. The house was then unoccupied between 1 April 2004 and 31
December 2007 due to Hue being required by her employer to work elsewhere in
the UK.
From 1 January 2008 until 31 December 2014 Hue, again occupied the house as her
main residence. The house was then unoccupied until it was sold on 30 September
2020.

Calculate chargeable gain on the house

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

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Letting Relief:

Letting relief is available upon that period of absence which do not qualify for PPR
exemption (chargeable period) and house was let out during that period.
Letting relief lower of:

 £40,000
 PPR exemption
 Gain of letting period

Previously, letting relief extended private residence relief where a property was
let out during a period which did not otherwise qualify for exemption.

However, letting relief is now only available where a property is let out and the
property owner is in shared occupancy with the tenant. This means that there is
no longer any relief where the whole property is let out.

EXAMPLE
On 30 September 2020 Mae sold a house for £326,000. The property had been
purchased on 1 October 2006 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.

Calculate chargeable gain on the house:

. .
. .
. .
. .
. .
. .
. .
. .
. .
. . 113
. .

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6 Damaged/Lost Destroyed Assets

Completely Partially

Insurance Proceed Insurance Proceed

Received Not Received Received Not Received

 Proceeds will be Reinvested to restore Exempt Asset

nil/scrap value the asset
Not reinvested
 Proceeds will be  Will always result in loss
insurance proceeds
 May result in gain/loss Reinvested Not Reinvested:
 Proceeds will be
Reinvested 95% or above: insurance proceeds
To purchase replacement asset within 12  Cost will be calculated
 If not elected; gain
months
will be calculated using using part disposal
If elected:
part disposal rule rule i.e. total allowable
 Gain will be calculated using insurance
 If elected; no cost x A / A + B
proceeds
 All of the gain would be rolled over calculation of gain/loss A = Insurance
against the asset thus reducing the as it would be deferred proceeds
allowable cost of replacement asset, if by deducting insurance B = Market Value of
all of the proceeds were reinvested proceeds and adding asset after getting
 But if all of the proceeds are not amount reinvested into damaged
reinvested, amount not reinvested could original allowable cost
not be deferred
of the asset destroyed
 Asset needs not to be business asset/
land/ building/ goodwill, but it must be 114
replacement of asset destroyed

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7.Shares and Securities:

Share Matching Rule:

 Same day acquisition (Sale date)

 Next 30 days acquisition
 Share pool (total value/total number of shares)

Example:

Mr. A sold 15,000 shares of Z Ltd at 1/12/20 for £150,000. Purchased as follows:

01/12/18 Right issue of 2 for 5 at £7 each (took up in full)

01/09/16 3,000 shares at £5 each
18/12/13 Bonus issue of 1 for 2
21/9/10 14,000 shares at £8 each

Calculate gain.
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .
. .

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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)

Different Class of shares

The cost of original shares will be allocated between the different classes of shares
by reference to the market values of the new shares.

Cash and shares

If takeover consideration involves a cash element
 There is part disposal of original shares
 A gain arises on the cash element of the consideration on the date the cash
is received.

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Examples:
Mr A purchased 10,000 ordinary shares of Y ltd for £60,000 at 1/1/12 .
At 1/6/18 Y ltd was taken over by Z ltd and each shareholder of Y ltd was offered
following for each share in Y Ltd

1)
i. 2 ordinary shares of Z Ltd.
ii. 1 preference shares of Z Ltd.

2)
i. 2 ordinary shares of Z Ltd.
ii. 1 preference shares of Z Ltd.
iii. £1 cash

3)

i. 3 ordinary shares of Z Ltd.

ii. 2 preference shares of Z Ltd.
iii. £0.75 Cash

Immediately after takeover market value of Z Ltd’s;

i. Ordinary shares £5
ii. Preference shares £2
Later
ju
 At 1/9/20 Mr. A sold all of his ordinary shares in Z Ltd for £140,000
Required: Calculate chargeable gain of Mr A.
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. .
. .
. .
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. .
. .
. .
. .
. .
. .

Consideration received
Summary of Takeovers

Shares only Cash& shares

˗ NO CGT
˗ Cost of original shares will be
- Base cost of new shares
 Calculate gain for cash proceeds
&
 Base cost for shares

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Payment of Capital Gain Tax:

Capital Gain tax of any tax year is normally paid by 31st January after the tax year.
For example for 2020-21, it is payable by 31st January 2021.

Payments On Account For Disposals Of Residential Property (New!)

A payment on account must now be made within 30 days where CGT is payable in
respect of a disposal of residential property.

A return must be submitted to HMRC at the same time.

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.

POA will be calculated as follows:

£
Gains on Residential Property xxx
Less losses for the tax year (xxx)
Net Gains / (loss) xxx / (xxx)
Less b/f Capital loss (xxx)
Less Annual Exemption (12,300)
Taxable Gains / Nil xxx / Nil

119

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3. INHERITANCE TAX (IHT)

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

Chargeable person; Individual and trusts.

Chargeable property;
1. For a UK domiciled individual worldwide property will be chargeable.

Types of Lifetime Gifts:

Exempt Transfers Potentially Exempt Chargeable Lifetime

Transfers (PETs) Transfers (CLTs)
Definition
A gift that is A gift by an individual No definition = residual
specifically deemed to  To another individual category (i.e. a gift which
be exempt from IHT  Into certain old trusts is not exempt nor a PET)
(not examinable) Main example: gifts into
trusts (except a
charitable trust and those
treated as PETs)
During Lifetime
No IHT payable No IHT payable, only gross IHT to pay calculated
chargeable amount is to be using the lifetime rates of
calculated tax
If Donor lives 7 years
No IHT payable No IHT payable No further IHT payable
Gift becomes Exempt
If Donor dies within 7 years
120
No IHT payable The PET becomes chargeable IHT, calculated using the
on death for the first time death rates of tax, and
life time Tax is deductible.

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Transfer of Value:
Mr. A owned 4 chairs, one is owned by his brother and he wants to transfer two
Chairs to his Son. Value of chairs for IHT purposes as follows:

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

Calculate Transfer of Value for the gift made by Mr. A.

Transfer of Value:

Mr. A owned three shops; he transferred one shop to his daughter. Values of shops
are as follows:

1 Shop £40,000
2 Shops £100,000
3 Shops £190,000

Calculate transfer of value for gift made by Mr.A.

. .
. .
. .
. .
. .

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Example

Sansa Stark owns 6000 shares in Lanisters Ltd and unquoted Investment company
(representing 60% shareholding). She transferred 2000 shares to his Brother Rob
Stark at 15/7/19.

Shareholding of Lanisters Ltd at 15/7/19 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 for transfer of 2000 shares by Sansa.

Exemptions:

1. Small gift exemption;

If an individual makes a transfer of up to £250 per person per tax year, such
gifts will be exempt but on de-minimis rule.

2. Transfer within spouses and civil partners;

Any amount transferred within Spouses or Civil Partners will be exempt.

3. Marriage exemption; 122

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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 £5000
 Grandparent £2500
 Anyone else £1000
 Fiancé to fiancé £2500 (On the condition marriage takes place)

4. 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.

5. Annual exemption;

It is £3,000 per tax year and if there is any unused annual exemption, of any
tax year it could be carried forward, but for one tax year only.

Lifetime Calculations on Lifetime Transfers

For PETs £

Value of estate before transfer xxx

Value of estate after transfer (xxx)

Transfer of Value xxx

123
Less: Exemptions (xx )

Chargeable Amount xxx

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For CLTs £

Value of estate before transfer xxx

Value of estate After transfer (xxx)

Transfer of Value xxx

Less: Exemptions (xx )

Chargeable Amount xxx

Calculate Lifetime Tax Using Life time Rates as well

Additional Nil Rate £175,000

It is available where a main residence is inherited on death
band
by direct descendants
(Children and grandchildren).

Note:
The residence nil rate band is available Where an individual dies on or after 6 April
2017

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Life time Rates For CLTs

Steps to Calculate 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 have already been made to deduct
from current NRB and remaining will be available NRB for current transfer.
2. Any part of the CLT covered by the nil rate band is taxed at 0%. Any part of the
CLT not covered by the nil rate

Normal Nil Rate band

If Trustees Paying IHT If Donor Paying IHT

Nil Rate Band £325,000 nil % nil%

Above £325,000 If trustees pay If donor pays

20% 25%
G.C.A N.C.A

IF DONOR PAY’S TAX:

1. Look back seven years from the date of the transfer to identify (Gross)
chargeable amounts of chargeable transfers have already been made to deduct
from current NRB and remaining will be available NRB for current transfer.
2. Any part of the CLT covered by the nil rate band is taxed at 0%. Any part of the
CLT not covered by the nil rate band is charged at 25%.
3. Calculate Gross chargeable amount (NCA+ Tax= GCA).

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Payment of lifetime IHT:

Will be dependent upon whether the transfer was made in;

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

2. In last six months of the tax year (that is after 30th September of the tax
year of transfer) In this case relevant IHT must be paid within six months
from the end of the month of transfer.

Death Calculations on Lifetime Transfers

 Identify which transfers became chargeable on death by identifying a date

which will be 7 years prior to death date
 Find available NRB (using 7 years accumulation principle) upon chargeable
transfers and 40% upon above amount.
 Deduct Taper Relief.
 Deduct life time tax if CLT. Outsourcing

Tapper Relief:

Will be dependent upon duration within date of transfer and date of death. Relief
will be as follows;

More – up to % of death IHT

0 – 3 years Nil
3 – 4 years 20
4 – 5 years 40 126
5 – 6 years 60
6 – 7 years 80
Above 7 years 100

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Proforma Death Estate Computation:

£ £

Freehold Property x
Less: Mortgage (except endowment mortgage) (x) x

Business owned by Sole Trader / Partnership x

Farms x
Stocks and shares (including NISAs) 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 NISAs) x

Less: Debts due by the deceased (x)

Outstanding taxes (e.g. IT, CGT due) (x)
Funeral Expenses (x) (x)
x
Less: Exempt legacies (e.g. spouse,) (x)
Gross Chargeable Estate x
IHT on estate value is calculated as follows:

IHT on chargeable estate .X .

IHT payable GCE × %age x.

127

Due Date for IHT: Earlier of;

 Six months after end of month of death

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 On delivery of estate accounts to HMRC

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Will Planning:

 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

Residence Nil Rate Band (RNRB)

Residence Nil Rate Band £175,000

(RNRB)
It is available where a main residence is
inherited on death by direct descendants

(Children and grandchildren).

 The residence nil rate band is available where an individual dies on or after 6
April 2017.

 If the amount of the property is less than 175,000, than RNRB is restricted
to that amount

 Always deduct the mortgage amount from property.

 The residence nil rate band is also transferable. It does not matter when the
first spouse died.

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Example:
Sophie died on 26 May 2020 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.
Required: Calculate Inheritance tax liability

Solution
£
Chargeable estate 850,000
IHT liability
£500,000 (£325,000 + £175,000Note) at nil % 0
350,000 at 40% 140,000
140,000

Note: The residence nil rate band of £150,000 is available because Sophie’s estate
included a main residence and this was left to her direct descendants.

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Transfer of unused Nil Rate Band:

Unused nil rate band 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.

Example:
Timothy died on 19 June 2020 leaving an estate valued at £850,000. Under the
terms of his will, Timothy’s estate was left to his children. The estate included a
main residence valued at £450,000.

Timothy’s wife died on 5 May 2008. She used all of her nil rate band of £325,000.

Timothy’s IHT liability is:

Solution

£
850,000
Chargeable estate 131

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IHT liability
- 625,000 (325,000 + 350,000Note) at nil% 0
- 175,000 at 40% 70,000
70,000

Note:
 Timothy’s personal representatives can claim the wife’s unused residence nil
rate band of £175,000.
 The amount of residence nil rate band is therefore £350,000 (175,000 +
175,000)
The value of the main residence is after deducting any repayment mortgage or
interest- only mortgage secured on that property.

 If a main residence is valued at less than the available residence nil rate band,
then the residence nil rate band is reduced to the value of the residence.

Example:
Una died on 10 July 2020 leaving an estate valued at £625,000. Under the terms of
her will, Una’s estate was left to her children. The estate included a main residence
valued at £225,000 on which there was an outstanding interest-only mortgage of
£130,000.

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Una’s IHT liability is:

Solution £

625,000
Chargeable estate _______

IHT liability
- 420,000 (325,000 + 95,000) at nil% 0
- 205,000 at 40% 82,000
_______

82,000
_______

The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence
nil rate band is restricted to this amount.

The residence nil rate band does not apply to lifetime transfers becoming chargeable
as a result of the donor’s death within seven years.

Example:
Maud died on 22 April 2020 leaving an estate valued at £775,000. Under the terms
of her will, Maud’s estate was left to her grandchildren. The state included a main
residence valued at £435,000.
On 30th April 2017, Maud had made a potentially exempt transfer of £400,000 to
her son.

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Calculate her IHT liabilities.

Solution

Potentially exempt transfer £

400,000
Potentially exempt transfer _______

IHT liability
- 325,000 at nil% 0
- 75,000 at 40% 30,000
_______

30,000
_______

Death estate
Chargeable estate 775,000
IHT liability
-175,000 at nil % 0
-600,000 at 40% 240,000
240,000

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4. VAT (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)

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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 The standard
 Land including rents
newspapers rate is 20%.
 Public transport
Traders making exempt
(not taxis)
supplies only cannot
 Children’s clothing
register for VAT and
 Medicines
cannot reclaim input tax.
 Exports outside the
EU

VAT Accounting

1. OUT PUT VAT:

Output VAT is normally based on price charged by supplier.

 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. 136
 Ignore gifts of trade samples and gifts of services, whether to an employee
or customer.

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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.

 Motor Expenses:
- Input VAT recoverable on all car running costs even if private use of car.
- Business pays for all fuel costs and can recover all input VAT, but if there
is some private use of car:

 Output VAT is payable on scale charge (given in exams).

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Tax Point

The date at which the output Vat is accounted for i.e., the time of supply.

Basic Tax Point

 The basic tax point is the date when the goods are delivered or
collected by the customer.
 In case of services, when the services are performed.

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Amendments to Basic Tax Point

Tax point is amended in two situations where:

 Tax invoice is issued or payment is received before the basic tax point.
 Where the invoice is issued within 14 days of sale, date of invoice is
considered as tax point.

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Goods on sale or return basis

If goods are delivered on sale or return basis, tax point is the date which is earlier
of

 12 months after the delivery.

 The goods are actually sold by the customer.

In case of Continuous Supply of Goods, tax point is the date of invoice. E.g.
Electricity, Accountancy Services

Tax Point will be:

 Tax invoice being issued.

 Payment received.

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.

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.

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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:

From 1st April 2012 the requirement to file VAT online and pay any VAT that is due
electronically is extended to all businesses.

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
2013, a business will have until 7 November 2013 to file its VAT return online and
pay any VAT that is due.

Making tax digital

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

VAT returns still have to be filed within one month and seven days of the end of
the relevant quarter. Any VAT payable is due at the same time, and must be paid
electronically.

Late Returns (Default Surcharge):

 Late returns (irrespective of any tax liability) can attract default surcharge.
 Default surcharge arise if, following 3 late submission, a taxable person makes
another late submission during the Surcharge Liability Notice (SLN) period of 141
12 months. The SLN period runs from the end of the tax period/Quarter in
which the late submission occurs.

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Penalties Arising: Amount:

First default 2% of VAT payable
Second default 5% of VAT payable
Third default 10% of VAT payable
Fourth default 15% of VAT payable

 Surcharge assessment/Penalties at the rates of 2% and 5% are not made for

amount less than £400.

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 Where rate of surcharge/Penalties are 10% or 15%, a surcharge penalty will be

higher of;

- £ 30 or
- Actual amount of the calculated surcharge.

 The surcharge liability period only ends when a trader submits 4 consecutive
quarterly returns on time and pays any tax due on time.
 Every time a late submission is made in SLN (even if no tax owed) the SLN
period is renewed for a further 12 months from the end of tax period of
default.

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-minimus level and voluntarily disclosed,
default interest will not be charged.

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Detailed VAT invoice:

Less detailed VAT invoices:

VAT registered businesses can provide UK customers with an invoice which is less
detailed than normal, if the consideration for the supply is £250 (VAT inclusive) or
less.
This less detailed invoice must show the following information:
 The supplier's name, address and VAT registration number.
 The date of supply.
 A description of the goods or services supplied.
 The consideration for the supply.
 The rate of VAT in force at the time of supply. 144

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ERRORS

Found by Trader and Disclosed Found by HMRC

Voluntarily ISSUE ASSESSMENT
De-minimis limit of error is WITHIN 4 YEARS OF
greater of: RELEVANT VAT PERIOD
1. £10,000 (increase to 20 years if
2. 1% of turnover, (maximum deliberate error)
limit £50,000)

NET ERROR NET ERROR TAX PAYER

≤ de minimis limit: › de minimis limit: Option to request
Include on next Separate review of decision
VAT return notification* by HMRC review
officer

DEFAULT INTEREST
APPEAL TO
TRIBUNAL
(within 30 days)

STANDARD PENALTY
For submission of an
incorrect VAT return

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VAT REGISTRATION
1. Compulsory:
1. Future Test 2. Historic test
Taxable supplies in next 30 days Taxable supplies in last 12 months (or since
expected to exceed registration limit business commenced if shorter) exceeds
(i.e. £85,000). registration limit of £85,000.
Notify HMRC – before end of 30 day Notify HMRC – within 30 days of end of
period. month in which limit exceeded.
Registration effective from – start of Registered with effect from – first day of
30 day period. the second month after the taxable
supplies exceed the threshold.

2. Voluntarily:

A trader making taxable supplies may apply for VAT registration on voluntary basis
Even his taxable supplies falls below the threshold limit of £85,000.
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
 Disguises size of business which increase prices for non
 If prices can be increased due to VAT registered customers
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 When business ceases to make taxable
next twelve months will not exceed supplies.
£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
business/trade
input VAT 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:

 The business will be transferred as going concern basis
business as going
 There is no significance breaks between cessation and
concern 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.
147
(Both the transferor and the transferee may make a joint
election, for the transferor’s registration to be transferred
to the transferee. Where this is done, the transferee

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assumes all rights and obligations in respect of the

registration, including the liability to pay any outstanding
VAT. Therefore, this may not be a good commercial decision.)

Overseas Aspects of VAT:

Outside European Union

Sales / Exports Zero Rated (Input VAT claimable, Output VAT zero)
Purchases / Purchases x 20% = Input VAT (Re-claimable)
Imports

Within European Union

Transaction
Sales / Exports Sale will be zero-rated in country.

Purchases /
Imports (a) Supplier does not account for output VAT
- As Supply would be zero-rated.

(b) Customer must account for output VAT on their VAT return
at the Standard Rate.
(c) VAT suffered by customer could be reclaimed (by them) as
Input VAT in the appropriate quarter.

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Duty Defferment Scheme: (Only for Outside the EU)

VAT is charged on goods imported from outside the EU as if it were a customs duty.
It is normally collected direct from the importer at the place of importation, such
as a port or airport. If the imported goods are immediately placed in a bonded
warehouse or free zone, then VAT is postponed until the goods are removed from
the warehouse or zone.

Approved traders can pay all of their VAT on imports through the duty deferment
system. In order to set up an account with HMRC the trader will need to arrange a
bank guarantee. This allows all VAT on imports to be paid on the 15th of the month
following the month of importation.

This assists the trader’s cash flow and is more convenient than having to be paid at
the point of import.

The Impact Of The Uk Leaving The European Union (Eu)

Although the UK officially left the EU on 31 January 2020, the VAT treatment of
acquisitions from the EU will remain unchanged throughout the Brexit transition
period which is due to come to an end on 31 December 2020.

Once the Brexit transition period comes to end, goods acquired from the EU will be
treated the same for VAT purposes as goods which are currently imported from
outside the EU.

However, for exams in the period 1 June 2021 to 31 March 2022, it will be assumed
that the EU acquisition rules continue to apply.

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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.

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 there ae irrecoverable debts no
VAT is payable until the money is
received therefore automatic
relief for bad debt is obtained.
 Input tax cannot be claimed until
the invoice is paid. This delays
recovery of input VATS

 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.
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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
 Easier administration
This VAT scheme is not really beneficial
to those that claim back VAT on a
regular basis. This is mainly because the
business owner can only claim repayment
once a year.

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:

 Taxable turnover (excluding VAT) ≤ £ 150,000

 A trader may stay in the scheme until their total VAT inclusive turnover
(taxable & exempt supplies) for the previous 12 months exceeds £230,000 151

Consequences of the scheme:

 Under the flat rate scheme the VAT liability due to HMRC is calculated as ;

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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 cash paid/ receipts basis.

Advantages:
 No need to calculate & record detailed output & input VAT information.
 Reduced administrative burden

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Small Business VAT Schemes

Cash Accounting: Annual Accounting: Flat Rate Scheme:

 Account on cash  One VAT return  VAT payment =
paid/cash received for a year, to be (fixed %age x VAT
basis, not accruals submitted within inclusive total
 Advantages two months of the turnover)
 Automatic end of VAT year.  Flat Rate % age =
irrecoverable  Pay regularly by VAT payable to
debt relief standing order or HMRC / VAT
 Easier electronically: Inclusive Sales x 100
administration - 9 monthly  Conditions:
instalments of  Taxable turnover
10%, (excluding VAT)
Conditions: - Plus Balancing ≤ £ 150,000
 Annual taxable payment2 months  Leave scheme if
turnover after VAT year taxable sales
(excluding capital) end along with the revenue more
≤ £1,350,000 return than £230,000
 Up to date with  Advantages:  Advantages:
returns and  Regular cash  No need for
payments outflows detailed records
 Leave scheme if  Easier  Easier
taxable turnover administration administration
more than
£1,600,000

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Group VAT 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.

Advantages of Group VAT registration are:

 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.

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5. 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 company ceases to trade.
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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 xxx

£
Taxable Total Profit x 19% xxx
Less: DTR (if overseas taxes on overseas incomes) (xxx)
Corporation Tax Payable xxx

Qualifying Charitable Donation: could be any donations other than:

1. Political donation.
2. Those donations which are allowed under trading profit rules (local charities).

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. Example FY 19 = 1/4/19 – 31/3/20 156

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But for P6 candidates Financial Year is of no importance with respect to Exams as

According to Finance Act 2015 there is flat 20% rate applicable and rates according
to any previous Finance Act are not Examinable.

FY 20 FY 19 FY 18
Limits

£1 - £1,500,000 19% 19% 19%

Above Profits Threshold

£1,500,000 19% 19% 19%

CT 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;

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 157
Above 12 months + 10% of Corporation tax £200 + 20% of CT
Standard penalties may also apply

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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.

Compliance Check (enquiry procedure): Same as Individual’s.

Discovery assessment:
Same as individual but from end of accounting period.

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Payment of Corporation Tax

Companies with Augmented Companies with Augmented Profits of More

Profits upto or less than CT than CT Profits Threshold (Main Co.)
Profits Threshold
In 4 equal quarterly instalments from start
All of the CT liabilities must be of accounting period:
submitted within coming 9
months and one day from end of 1. By 14th of 7th month 25% POA
accounting period. 2. By 14th of 10th month 25% POA
3. By 14th of 13th month 25% POA
4. By 14th of 16th month 25% BP

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:

(a) If accounting period is less than 12 months corporation tax Profits

Threshold (i.e £1,500,000) will 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 or two or more 159
companies are under common control such companies are called

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associated or connected companies and effective holding should also

be more than 50%.

(b) Corporation tax Profits Threshold (i.e £1,500,000) is divided

equally with the total number of connected companies. See payment
of CT

(c) Dividend received from connected companies is not added in Taxable

Total Profits or anywhere in tax Performa.
(d) If a company is
 Acquiring another company more than 50% in any accounting
period. Such a company would not affect CT threshold limit in
that accounting period in which it’s acquired, rather it would
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 companies and will effect CT threshold
limit in the accounting period in which its been sold. But it
would not from next accounting period.

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 not a above threshold limit company 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 Balancing Payments:

160
1 – 6 months 5%
6 – 12 months +5%
12 above +5%

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 161

Calculation of Incomes and gains for companies

Non-trading Loan Relationship Interest Income

£
Non-trading interest received (accrual basis) xxx
Less Non-trading interest paid (accrual basis) (xxx)
Interest Income xxx

Note
(Deficit not examinable)

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.

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Property Business Profits:

Following are the main differences between Income tax and Corporation tax:

1. Interest upon property loan is not deducted from property income as for
companies it should be deducted from interest income

2. All the calculations will be for an accounting period rather than tax year

3. Rent a room relief is not applicable for companies

4. Property business losses in case of companies is set off against total profits
before QCD of:

- Current accounting period

- Future accounting period

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Trading Profits: £

Profit before Tax xxx

Add: Disallowed expenses xxx
Less: Income not allowed (xxx)
Less: Capital allowance (for an accounting period) (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 units 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.

Trading Loss Reliefs (options):

-
1) Carried forward against future trading profits
2) Set off against total profits (before QCD)
3) Terminal loss relief

Set off against total profits (before QCD):

Under this option loss is to be set off against total profit of current accounting 163
period and then carried back against total profits of previous 12 months.

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 164

Terminal Loss:

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

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 165

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:
Original Cost x Indexation Factor xxx
Enhanced Expense x Indexation Factor xxx (xxx)
Indexed Gain/Nil xx/Nil

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Indexation allowance

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

Delta Ltd sold a factory on 15 February 2020 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 2019 0.899
March 2018 to February 2020 0.029

. .
. .
. .
. .
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166
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 167

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

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Example
Amber Ltd sold 2,600 shares in Pearl Ltd in December 2017 for
£30,000. Amber Ltd originally acquired 3,000 shares in Pearl Ltd in June 2001
for £11,500.
In December 2008 Amber Ltd took up its entitlement to a 1 for 4 rights issue at
£3 per share.

Calculate the chargeable gain arising on disposal of the shares, in

December 2017.

Indexation Factors
Jun 01 – Dec 17 0.580
Jun 01 – Dec 08 0.221
Dec 08 – Dec 17 0.295

. .
. .
. .
. .
. .

Example
Spencer Ltd sold 2,000 ordinary shares out of a holding of 5,000 shares in Plumb
Ltd, on 30 September 2017, for £15,400.

Spencer Ltd prepares accounts every year to 31 March. The holding of shares in
plumb Ltd had been built up as follows:

Date acquired Number of shares Cost

May 1999 4,000 7,000

March 2010 – Bonus issue 1 for 4 1,000 0
168

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 169

Assume the Indexation Factors are:

May 99 – Mar 10 0.333

May 99 – Sep 17 0.652

Compute the chargeable gain arising on the sale of shares, in the y/e 31 March
2018.

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

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Group of Companies:

i. Associated/Connected companies
ii. 75% Loss Relief Group
iii. 75% Capital Gain Group
iv. VAT Group

75% Loss Relief Group:

At least:

1) 75% holding at every level

2) Effective holding should also be at least 75%

If both 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
 Un-relieved QCDs

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.
 Surrendering company cannot surrender B/F losses to any Group Members.

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Non-coterminous – 3 situations can arise:

If surrendering and claimant companies have;

i. Different year end

Or
ii. Acquire in during the year
Or
iii. Dispose in during the year

75% Capital Gain Group:

At least:

i. 75% holding at every level

And
ii. More than 50% effective holding is also required

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.
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.
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).

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Example:
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 £120,000, when it was worth £180,000.

On 1 December 2017 Jade Ltd sells the office building outside the group for
£350,000.
Assume the Indexation Factors are as follows:

Apr 96 – Dec 17 0.806

Apr 96 - Oct 06 0.313
Oct 06 – Dec 17 0.375

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

(Gooooooooood Luck  Guys and Girls...your

best friend is now Exam Kit)

172

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 Practice to Pass
ACCA Webinar: June 2021 exams
List of Questions Day Wise Plan

Day 1 (Income Tax):

 Array Ltd (Dec 16) Practice Test # 2

 Danh (Mar-Jun18)
 Ashura (Sep 16) Practice Test # 1
 Jack (Dec 16) Practice Test # 2

Day 2 (Capital Gains Tax):

 2 x OTQ Of CGT
 JEROME (Mar/Jun 16)
 RUBY (Sep/Dec 15)
 DALJEET

Day 3 (IHT):

 2 x OTQ OF IHT

IHT QUESTIONS

 JAMES (Mar/Jun 16)

 MARCUS
 DEMBE
Day 4 (VAT):

 2 x OTQ OF VAT

VAT QUESTIONS

 GARFIELD (Mar/Jun 16)

 SMART LTD (Sep/Dec 15)
 KAGAN (Sep/Dec19)

Day 5 (Corporation Tax):

 SOLO Ltd. (Mar/Jun 18)

 Ash Ltd (Sep/Dec 18)
 Wretched Ltd (Dec 16) Practice Test # 2
 Tenth & Eleventh Ltd (Sep 16) Practice Test # 1
SOLO Ltd. (Mar/Jun 18)
Solo Ltd’s results for the previous two periods of trading are:

Year ended Three-month

31 December 2019 period ended
31 March 2020
£ £
Trading profit 35,900 12,300
Property business income 12,100 4,200
Chargeable gains/(capital losses) (3,300) (2,100)
Qualifying charitable donations (1,200) (1,600)

The following information is available in respect of the year ended 31 March 2021:
Trading loss
The tax-adjusted trading loss based on the draft statement of profit or loss for the year ended 31 March 2021 is £151,300.
This figure is before making any adjustments required for:
(1) A premium which was paid to acquire a leasehold office building on an eight-year lease.
(2) Capital allowances.
Premium paid to acquire leasehold office building
On 1 April 2020, Solo Ltd acquired a leasehold office building, paying a premium of £20,000 for the grant of an eight-year
lease. The office building was used for business purposes by Solo Ltd throughout the year ended 31 March 2021.
Plant and machinery
The tax written down value of the plant and machinery main pool as at 1 April 2020 was £0. During the year ended 31 March
2021, Solo Ltd sold equipment for £4,300. The equipment was originally purchased during the year ended 31 March 2016 for
£22,400, with this expenditure qualifying for the 100% annual investment allowance.
Property business income
Solo Ltd lets out a warehouse which is surplus to requirements. The building was empty from 1 April to 31 July 2017, but
was let from 1 August 2017 onwards. The following income and expenditure was received or incurred during the year ended
31 March 2018:
Date received/paid £
1 April 2020 Insurance for the year ended 31 March 2021 (920)
1 August 2020 Rent for the six months ended 31January 2021 7,800
1 August 2020 Security deposit equal to two months’ rent 2,600
1 March 2021 Rent for the six months ended 31 July 2021 7,800

Disposal of shareholding in Multiple plc

On 12 December 2020, Solo Ltd sold 6,500 £1 ordinary shares in Multiple plc for £31,200. Solo Ltd had originally purchased
20,000 shares (less than a 1% shareholding) in Multiple plc on 18 June 2007 for £27,000, and purchased a further 1,000
shares on 8 December 2020 for £4,600. Indexation Factors:
June 2007 to December 2017 0.342
June 2007 to December 2020 0.444
Required:
(a) Calculate Solo Ltd’s revised tax-adjusted trading loss for the year ended 31 March 2021.
Note: You should assume that the company claims the maximum available capital allowances. (3 marks)

(b) On the basis that Solo Ltd claims relief for its trading loss against its total profits for the year ended 31 March
2021, prepare a corporation tax computation for this year showing taxable total profits. (8 marks)

(c) On the basis that Solo Ltd claims relief for the remainder of its trading loss as early as possible, calculate the company’s taxable
total profits for the year ended 31 December 2019 and the three-month period ended 31 March 2020. (4 marks)

(15 marks)
Ash Ltd (Sep/Dec 18)
You are a trainee chartered certified accountant assisting your manager with the tax affairs of three unconnected limited
companies, Ash Ltd, Beech Ltd and Cedar Ltd.
Ash Ltd
Ash Ltd was incorporated in the UK on 1 December 2018 and immediately opened a non-interest bearing bank account.
The company commenced trading on 1 February 2016, preparing its first accounts for the 14-month period ended 31 March
2020. Accounts were then prepared for the year ended 31 March 2021.
At the date of incorporation, all three of Ash Ltd’s directors (who each own one-third of the company’s ordinary share capital) were based
in the UK. However, on 1 October 2020, two of the directors moved overseas. The directors have always held Ash Ltd’s board meetings
in the UK, and will continue to do so despite two of them moving overseas.

Beech Ltd
Beech Ltd’s summarised statement of profit or loss for the year ended 31 January 2021 is as follows:
Note £
Gross profit 565,800
Operating expenses
Depreciation (14,700)
Gifts and donations 1 (4,600)
Impairment loss 2 (3,700)
Leasing costs 3 (12,600)
Other expenses 4 (217,700)
Finance costs
Interest payable 5 (7,000)
––––––––
Profit before taxation 305,500
––––––––
Note 1 – Gifts and donations
Gifts and donations of £4,600 comprise:
£
Gifts to customers (pens costing £70 each and displaying Beech Ltd’s name) 3,500
Qualifying charitable donations 1,100
––––––
4,600
––––––
Note 2 – Impairment loss
On 31 January 2018, Beech Ltd wrote off an impairment loss of £3,700 relating to a trade debt. This was in respect of an
invoice which had been due for payment on 15 October 2020.
Note 3 – Leasing costs
The leasing costs of £12,600 are in respect of four motor car leases which commenced on 1 February 2020. Each of the four
leased motor cars has CO2 emissions of 160 grams per kilometer.
Note 4 – Other expenses
The other expenses of £217,700 include a fine of £6,400 for a breach of data protection law, and legal fees of £5,700 in connection
with the renewal of a 15-year property lease. The remaining expenses are all fully allowable.
Note 5 – Interest payable
The interest payable of £7,000 is in respect of the company’s 4% loan notes which were issued on 1 July 2020. Interest of
£6,000 was paid on 31 December 2020, with an accrual of £1,000 provided for at 31 January 2018. The loan notes were
issued in order to finance the company’s trading activities.
Capital allowances
No capital allowances are available for the year ended 31 January 2021.
Cedar Ltd
Cedar Ltd is a 100% subsidiary company of Timber Ltd. The following information is available in respect of the two
companies for the year ended 31 March 2021:
(1) For the year ended 31 March 2021, Cedar Ltd made a trading loss of £19,700.

(2) On 28 December 2020, Cedar Ltd sold its entire shareholding of 25,000 £1 ordinary shares in Forest plc for £6·00
per share. Cedar Ltd had originally purchased 20,000 shares in Forest plc on 1 July 2010 for £24,800. On 20 July 2010,
Forest plc made a 1 for 4 rights issue. Cedar Ltd took up its allocation under the rights issue in full, paying £1·15 for each
new share issued. The indexation factor from July 2010 to December 2017 is 0·244.
(3) For the year ended 31 March 2021, Timber Ltd made:
£
Trading loss 20,800
Capital loss 8,800
There is no possibility of Cedar Ltd or Timber Ltd offsetting their trading losses against prior year profits. The
group has a policy of utilising losses at the earliest opportunity.

Required:
(a) (i) Identify Ash Ltd’s accounting periods throughout the period 1 December 2018 to 31 March 2021.
(2 marks)
(ii) Explain Ash Ltd’s residence status throughout the period 1 December 2015 to 31 March 2021.
(2 marks)

(b) Calculate Beech Ltd’s corporation tax liability for the year ended 31 January 2021.
Note: Your computation should commence with the profit before taxation figure of £305,500, and should also list all
of the items referred to in notes (1) to (5), indicating by the use of zero (0) any items which do not require
adjustment.
(6 marks)

(c) On the basis that all available claims and elections are made, calculate Cedar Ltd’s taxable total profits for the
year ended 31 March 2021.
(5 marks)

(15 marks)
VAT QUESTIONS
GARFIELD (Mar/Jun 16)

Garfield has been registered for valued added tax (VAT) since 1 April 2014. Garfield has previously
completed his VAT returns himself, but for the quarter ended 31 March 2021 there are some items for which
he is unsure of the correct VAT treatment.
Garfield’s partly completed VAT computation for the quarter ended 31 March 2021 is shown below. All of
the completed sections of the computation are correct, with the omissions marked as outstanding (O/S).

Note £
Output VAT
Sales (all standard rated) 22,500
Discounted sale 1 O/S
Equipment 2 O/S
Fuel scale charge 60

Input VAT
Purchases (all standard rated) (11,200)
Motor car (purchased on 1 January 2021) 0
Equipment 2 O/S
Impairment losses 3 O/S
Entertaining – UK customers 0
– Overseas customers 4 O/S
Motor expenses 5 O/S
––––
VAT payable O/S
––––
Unless otherwise stated, all of the figures in the following notes are stated exclusive of VAT.

Note 1 – Discounted sale

On 10 February 2021, a sales invoice for £4,300 was issued by Garfield in respect of a standard rated supply.
To encourage this previously late paying customer to pay promptly, Garfield offered a 10% discount for
payment within 14 days of the date of the sales invoice. The customer paid within the 14‐day period.
This invoice has not been taken into account in calculating the output VAT figure of £22,500, and this is
the only sale for which Garfield has offered a prompt payment discount.
Note 2 – Equipment
During the quarter ended 31 March 2021, Garfield acquired some new equipment at a cost of £12,400 from a
VAT registered supplier situated in the European Union.
Note 3 – Impairment losses
On 31 March 2021, Garfield wrote off three impairment losses. Details are as follows:

Amount Invoice date Payment due date

£1,400 30 July 2020 29 August 2020
£2,700 12 September 2020 12 October 2020
£1,900 4 October 2020 3 November 2020
Note 4 – Entertaining
During the quarter ended 31 March 2020, Garfield spent £960 on entertaining overseas customers. This
figure is inclusive of VAT.
Note 5 – Motor expenses
The motor car purchased on 1 January 2021 is used by Garfield 60% for business mileage. During the
quarter ended 31 March 2018, Garfield spent £1,008 on repairs to the motor car and £660 on fuel for both
his business and private mileage. Both of these figures are inclusive of VAT.
Additional information
Garfield does not use the cash accounting scheme, the annual accounting scheme or the flat rate scheme,
but has read that the use of these schemes can be beneficial for small businesses such as his.
Garfield would like some information on Making Tax Digital (MTD). He is aware the system has been
implemented by HMRC and would he like to know more about it and whether it is relevant to small
businesses.

Required:
(a) Calculate the amount of value added tax (VAT) payable by Garfield for the quarter
ended 31 March 2021. (7 marks)
(b) Give a brief explanation if Making Tax Digital (MTD) and state whether it applies to Garfield’s
business.
(3 marks)
(Total: 10 marks)
SMART LTD (Sep/Dec 15)

Smart Ltd commenced trading on 1 September 2020. The company’s sales for the first four months
of trading were as follows:
£
2020 September 26,000
October 47,000
November 134,000
December 113,000
On 1 November 2020, the company signed a contract valued at £86,000 for completion during
November 2020.
All of the above figures are stated exclusive of value added tax (VAT). Smart Ltd only supplies
services and all of the company’s supplies are standard rated.
Smart Ltd allows its customers 60 days credit when paying for services, and it is concerned that some
customers will default on the payment of their debts. The company pays its purchase invoices as soon
as they are received.
Smart Ltd does not use either the VAT cash accounting scheme or the annual accounting scheme.

Required:
(a) State, giving reasons, the date from which Smart Ltd was required to register for
value added tax (VAT), and by when it was required to notify HM Revenue and
Customs (HMRC) of the registration. (3 marks)
(b) State how and when Smart Ltd will have to submit its quarterly VAT
returns and pay any related VAT liability.
Note: You are not expected to cover substantial traders or the election for monthly
returns. (2 marks)
(c) State the circumstances when a VAT registered business like Smart Ltd, which is not
using the VAT cash accounting scheme, would still have to account for output VAT
at the time that payment is received from a customer. (2 marks)
(d) Advise Smart Ltd as to why it should be beneficial for the company to use the VAT
cash accounting scheme. (3 marks)
(Total: 10 marks)
You should assume that today’s date is 25 April 2021.

Thidar commenced trading as a builder on 1 January 2020. She voluntarily registered for value added tax (VAT) on
1 January 2020.
Sales
Thidar’s sales for the first 15 months of trading have been:
Month Standard rated Zero rated Month Standard rated Zero rated
£ £ £ £
1 3,400 0 9 8,800 6,300
2 0 1,900 10 2,900 7,300
3 5,700 2,100 11 0 0
4 6,800 0 12 0 2,600
5 9,500 1,200 13 2,800 900
6 7,900 2,200 14 3,200 1,700
7 0 3,700 15 22,200 3,600
8 12,100 0
Pre-registration expenditure
Thidar paid for the following standard rated services prior to registering for VAT on 1 January 2020:
Date Cost of service Description
£
10 June 2019 1,800 Advertisement for the building business
8 December 2019 300 Advertisement for the building business
Both figures are exclusive of VAT. Thidar paid for the advertisement of £300 by cash, and she does not have any evidence
of this transaction (such as a VAT invoice).
VAT return for the quarter ended 30 September 2020
Thidar’s VAT return for the quarter ended 30 September 2020 was filed by the submission deadline of 7 November 2020
and the related VAT liability was paid on time.
However, on 15 February 2021, Thidar discovered that the amount of VAT paid was understated by £1,200 as a result of
incorrectly treating a standard rated sale as zero rated. Given that the underpayment does not exceed £10,000, Thidar is
permitted to correct this error on her VAT return for the quarter ended 31 March 2021, and this is what she will do. Thidar
will file this VAT return by the submission deadline of 7 May 2021 and pay the related VAT liability (including the underpaid
£1,200) on time.
VAT return for the quarter ended 31 March 2021
Thidar is currently completing her VAT return for the quarter ended 31 March 2021 and is unsure as to how much input
VAT is non-deductible in respect of two items:
(1) During the quarter ended 31 March 2021, Thidar spent £800 on entertaining UK customers.
(2) During the quarter ended 31 March 2021, Thidar leased a motor car at a cost of £700. The motor car is used by Thidar
and 75% of the mileage is for private journeys.
Both figures are exclusive of VAT.

21 In which month did Thidar exceed the VAT threshold for compulsory registration?
A Month 14
B Month 15
C Month 13
D Not yet exceeded
22 What amount of pre-registration input VAT was Thidar able to recover in respect of expenditure incurred prior to
registering for VAT on 1 January 2020?
A £360
B £60
C £420
D £0

23 Within what period must Thidar issue a VAT invoice after making a standard rated supply, and for how long must
these VAT invoices then normally be retained by Thidar?
VAT invoices Retention
A Within 14 days Four years
B Within 30 days Six years
C Within 30 days Four years
D Within 14 days Six years

24 Why will VAT default (or penalty) interest not be charged on Thidar’s underpayment of VAT of £1,200 for the
quarter ended 30 September 2020?
A Because Thidar corrected the error within 12 months
B Because the error was not deliberate
C Because separate disclosure of the VAT underpayment was not required
D Because Thidar paid the underpayment of £1,200 by the submission deadline of 7 May 2020

25 For the quarter ended 31 March 2021, what is the amount of non-deductible input VAT in respect of entertaining
UK customers and the leasing cost of the motor car?
Entertaining Leasing
UK customers cost
A £0 £105
B £160 £105
C £160 £70
D £0 £70
OTQ OF VAT
The following scenario relates to questions 1-5.
Alisa commenced trading on 1 January 2020. Her sales since commencement have been as follows:
January to April 2020 £7,500 per month
May to August 2020 £10,000 per month
September to December 2020 £15,500 per month
The above figures are stated exclusive of value added tax (VAT). Alisa only supplies services, and these are all standard rated
for VAT purposes. Alisa notified her liability to compulsorily register for VAT by the appropriate deadline.
For each of the eight months prior to the date on which she registered for VAT, Alisa paid £240 per month (inclusive of VAT)
for website design services and £180 per month (exclusive of VAT) for advertising. Both of these supplies are standard rated
for VAT purposes and relate to Alisa’s business activity after the date from when she registered for VAT.
After registering for VAT, Alisa purchased a motor car on 1 January 2021. The motor car is used 60% for business mileage.
During the quarter ended 31 March 2021, Alisa spent £456 on repairs to the motor car and £624 on fuel for both her business
and private mileage. The relevant quarterly scale charge is £290. All of these figures are inclusive of VAT.
All of Alisa’s customers are registered for VAT, so she appreciates that she has to issue VAT invoices when services are
supplied.

1 From what date would Alisa have been required to be compulsorily registered for VAT and therefore have had to
charge output VAT on her supplies of services?
A 30 September 2020
B 1 November 2020
C 1 October 2020
D 30 October 2020

2 What amount of pre-registration input VAT would Alisa have been able to recover in respect of inputs incurred
prior to the date on which she registered for VAT?
A £468
B £608
C£536
D £456

3 What is the maximum amount of input VAT which Alisa can reclaim in respect of her motor expenses for the
quarter ended 31 March 2021?

4 How and by when does Alisa have to pay any VAT liability for the quarter ended 31 March 2021?
A Using any payment method by 30 April 2021
B Electronically by 7 May 2021
C Electronically by 30 April 2021
D Using any payment method by 7 May 2021
5 Which of the following items of information is Alisa NOT required to include on a valid VAT invoice?

A The customer’s VAT registration number

B An invoice number
C The customer’s address
D A description of the services supplied
KAGAN (SEP-DEC19)
This scenario relates to four requirements.

You should assume that today’s date is 4 April 2020.

On 2 April 2020, Kagan inherited some quoted ordinary shares valued at £510,000 following the death of
his aunt. Kagan is unsure whether to retain the shares or sell some of them in order to make some
alternative investments.

Kagan is aged 61 and is an additional rate taxpayer. Prior to the inheritance, his taxable income, consisting
entirely of employment income, for the tax year 2020-21 would have been £400,000. The income tax
liability on this income for the tax year 2020-21 would have been £165,600.

Prior to receiving the inheritance, Kagan’s chargeable estate for inheritance tax (IHT) purposes was valued
at £1,700,000. IHT of £550,000 would be payable were he to die in the near future.

Retain the inherited shares

If Kagan simply retains the inherited shares, then he will receive dividend income of £15,300 during the
tax year 2020-21. This is in addition to his employment income of £400,000.

Sell some inherited shares and make four alternative investments

Kagan is considering selling some of his inherited shares (for which there has only been a minimal increase
in value since he inherited them) to fund the following four investments, all of which will be made at the
start of the tax year 2020-21:

(1) Kagan will make a gross personal pension contribution of £100,000. Kagan is a member of a pension
scheme, but has not made any contributions in recent years because his income has been
substantially lower than it is for the tax year 2020-21. He therefore has sufficient unused annual
allowances to cover a pension contribution of £100,000. Kagan will immediately withdraw £25,000
of the pension fund tax-free. This is the permitted 25% tax-free lump sum. However, no pension will
be taken during the tax year 2020-21.
(2) Kagan will invest £50,000 in premium bonds. The expected amount of premium bond prizes which
will be received during the tax year 2020-21 is £700.
(3) Kagan will invest the maximum permitted amount of £20,000 in a cash individual savings account
(ISA). The ISA will pay interest of £400 during the tax year 2020-21.
(4) Kagan will purchase a freehold property for £295,000 (including all costs of purchase). The property
will be let out unfurnished, with Kagan receiving property income of £9,600 during the tax year
2020-21.

After making these four investments, Kagan will be left with £65,000 of inherited shares, on which he will
receive dividend income of £1,950 during the tax year 2020-21. He will also have his employment income
of £400,000.

Kagan will not make any other disposals during the tax year 2020-21.
(a) Calculate Kagan’s revised income tax liability for the tax year 2018-19 if he retains the
inherited shares.
(1 mark)

(b)(i) Explain why little or no capital gains tax (CGT) will be payable if Kagan sells some of his
inherited shares.
(1 mark)

(ii) Calculate Kagan’s revised income tax liability for the tax year 2018-19 if he sells some of
his inherited shares and makes the four alternative investments.

Notes:
1. For this part of the question, you are expected to produce a full income tax computation.
2. You should indicate by the use of zero (0) any items which are not taxable
(6 marks)
JAMES (Mar/Jun 16)

James died on 22 January 2021. He had made the following gifts during his lifetime:
(1) On 9 October 2013, a cash gift of £35,000 to a trust. No lifetime inheritance tax was payable in
respect of this gift.
(2) On 14 May 2019, a cash gift of £420,000 to his daughter.
(3) On 2 August 2019, a gift of a property valued at £260,000 to a trust. No lifetime inheritance tax was
payable in respect of this gift because it was covered by the nil rate band. By the time of James’ death on
22 January 2021, the property had increased in value to £310,000.
On 22 January 2021, James’ estate was valued at £870,000. Under the terms of his will, James left his
entire estate to his children.
The nil rate band of James’ wife was fully utilised when she died ten years ago.
The nil rate band for the tax years 2013/14 and 2020/21 is £325,000.

Required:
(a) Calculate the inheritance tax which will be payable as a result of James’ death, and
state who will be responsible for paying the tax. (6 marks)
(b) Explain why it might have been beneficial for inheritance tax purposes if James had left a
portion of his estate to his grandchildren rather than to his children. (2 marks)

(c) Explain why it might be advantageous for inheritance tax purposes for a person to make
lifetime gifts even when such gifts are made within seven years of death.

Notes:

1 Your answer should include a calculation of James’ inheritance tax saving from
making the gift of property to the trust on 2 August 2019 rather than retaining
the property until his death.

2 You are not expected to consider lifetime exemptions in this part of the question.
(2 marks)

(Total: 10 marks)
MARCUS

(a) Inheritance tax legislation does not actually contain a definition of who is, and who is not, a
chargeable person.

Required:
(1) Explain whether or not a married couple is treated as a chargeable person for
inheritance tax purposes. (1 mark)
(2) State the special inheritance tax measures which are applicable to married
couples. (2 marks)
(b) Marcus died on 31 December 2020. He had made the following gifts during his lifetime:
(1) On 14 January 2009, Marcus made a chargeable lifetime transfer of £315,000 to a trust. The
trustees paid the lifetime inheritance tax of £600 which arose in respect of this gift.
(2) On 3 December 2015, Marcus made a chargeable lifetime transfer of £395,000 to another
trust. In addition to the gift, Marcus paid the related lifetime inheritance tax of £96,250 on this gift.
(3) On 1 January 2016, Marcus made a gift (a potentially exempt transfer) of 30,000 £1 ordinary
shares in Scarum Ltd, an unquoted investment company, to his daughter.
Before the transfer, Marcus owned all of Scarum Ltd’s issued share capital of 100,000 £1
ordinary shares. On 1 January 2016, Scarum Ltd’s shares were worth £5 each for a holding of
30%, £9 each for a holding of 70%, and £12 each for a holding of 100%.
The nil rate band for the tax year 2008/09 is £312,000, and for the tax year 2015/16 it is £325,000.
Under the terms of his will, Marcus left his entire estate to his wife.

Required:
Calculate the inheritance tax which will be payable as a result of Marcus’s death.
Note: You should ignore the inheritance tax annual exemption. (7 marks)
(Total: 10 marks)
OTQ OF IHT

The following scenario relates to questions 1–5.

Adana died on 17 March 2021, and inheritance tax (IHT) of £566,000 is payable in respect of her chargeable estate.
Under the terms of her will, Adana left her entire estate, which does not include a main residence, to her children.
At the date of her death, Adana had the following debts and liabilities:
(1) An outstanding interest-only mortgage of £220,000.
(2) Income tax of £43,700 payable in respect of the tax year 2020–21.
(3) Legal fees of £4,600 incurred by Adana’s sister which Adana had verbally promised to pay.
Adana’s husband had died on 28 May 2006, and only 20% of his inheritance tax nil rate band was used on his death.
The nil rate band for the tax year 2006–07 was £285,000.
On 22 April 2009, Adana had made a chargeable lifetime transfer of shares valued at £500,000 to a trust. Adana paid the lifetime
IHT of £52,250 arising from this gift. If Adana had not made this gift, her chargeable estate at the time of her death would have
been £650,000 higher than it otherwise was. This was because of the subsequent increase in the value of the gifted shares.

1 What is the maximum nil rate band which will have been available when calculating the IHT of £566,000 payable
in respect of Adana’s chargeable estate?
A £325,000
B £553,000
C £390,000
D £585,000

2 What is the total amount of deductions which would have been permitted in calculating Adana’s chargeable estate
for IHT purposes?
A £263,700
B £268,300
C £43,700
D £220,000

3 Who will be responsible for paying the IHT of £566,000 in respect of Adana’s chargeable estate, and what is the
due date for the payment of this liability?
A The beneficiaries of Adana’s estate (her children) on 30 September 2021
B The beneficiaries of Adana’s estate (her children) on 17 September 2021
C The personal representatives of Adana’s estate on 30 September 2021
DThe personal representatives of Adana’s estate on 17 September 2021

4 How much of the IHT payable in respect of Adana’s estate would have been saved if, under the terms of her will,
Adana had made specific gifts of £400,000 to a trust and £200,000 to her grandchildren, instead of leaving her entire
estate to her children?
A £240,000
B £160,000
C £0
D £80,000
5 How much IHT did Adana save by making the chargeable lifetime transfer of £500,000 to a trust on 22 April 2009,
rather than retaining the gifted investments until her death?

£
You should assume that today’s date is 1 March 2021.

Lebna and Lulu were a married couple, but, unfortunately, Lulu died on 24 January 2017.
Lulu
Lulu left an estate valued at £210,000 for inheritance tax (IHT) purposes. The estate did not include a main residence.
Under the terms of her will, Lulu left a specific legacy of £40,000 to her brother, with the residue of the estate to her
husband, Lebna. Lulu had made the following lifetime transfers:
Date Type of transfer Amount
£
13 February 2009 Chargeable lifetime transfer 50,000
21 June 2015 Potentially exempt transfer 80,000
Both of these transfers are after taking account of all available exemptions.
The nil rate band for the tax year 2016-17 is £325,000.
Lebna’s chargeable estate
Lebna has a chargeable estate valued at £980,000. His estate includes a main residence valued at £340,000 on which
there is an outstanding interest-only mortgage of £152,000.
Under the terms of his will, Lebna has left his entire estate to his son.
Gift to son on 22 February 2016
On 22 February 2016, Lebna made a gift of 60,000 £1 ordinary shares in Blean Ltd, an unquoted investment company,
to his son. Before the transfer, Lebna owned all of Blean Ltd’s share capital of 100,000 ordinary shares. The market value
of Blean Ltd’s ordinary shares on 22 February 2016 was as follows:
Holding Market value per share
40% £4·20
60% £6·30
100% £7·10
Lebna had not made any previous lifetime gifts.
Gifts to friends during October 2020
Lebna made cash gifts of £85, £225, £190 and £490 to various friends during October 2020. The gifts of £85 and £190
were to the same friend.

26 If Lebna were to die today, 1 March 2021, how much of Lulu’s nil rate band will the personal representatives of
Lebna’s estate be able to claim when calculating the IHT payable on his chargeable estate?
A £155,000
B £205,000
C £35,000
D £285,000

27 If Lebna were to die today, 1 March 2021, what is the total amount of residence nil rate band which will be
available when calculating the IHT payable on his chargeable estate?
A £175,000
B £350,000
C £340,000
D £188,000
28 What is the amount of the potentially exempt transfer which Lebna has made to his son on 22 February 2016 (the
gift of 60,000 shares in Blean Ltd) after deducting any available exemptions?
A £542,000
B £536,000
C £372,000
D £378,000

29 If Lebna were to die today, 1 March 2021, what taper relief percentage reduction would be available when
calculating the IHT payable on the potentially exempt transfer which he made to his son on 22 February 2014 (the
gift of 60,000 shares in Blean Ltd), and when would this IHT be due?
Taper relief Due date
reduction
A 60% 30 September 2021
B 60% 1 September 2021
C 40% 1 September 2021
D 40% 30 September 2021

30 What amount of the cash gifts made by Lebna to his friends during October 2020 is covered by the small gifts
exemption?
A £500
B £990
C £225
D £275

(30 marks)
You should assume that today’s date is 15 February 2021.

You are a trainee chartered certified accountant dealing with the tax affairs of Dembe and her husband Kato.
Personal pension contribution
Dembe is self-employed and her trading profit for the year ended 31 December 2020 is £130,000. She will not have
any other income or outgoings for the tax year 2020-21.
Dembe is planning to make a personal pension contribution of £32,000 (net) before 5 April 2021, and would like to
know the amount of income tax and national insurance contributions (NICs) which she will save as a result of making
the pension contribution.
Sale of residential property
During March 2021, Dembe is going to sell a residential property and this will result in a chargeable gain of £67,000
if she makes the disposal.
Dembe wants to know whether it would be beneficial to transfer the property to Kato, her husband, as a no gain/no
loss transfer prior to it being sold during March 2021. The transfer from Dembe to Kato will cost £2,000 in additional
legal fees, and this cost will reduce the chargeable gain to £65,000 if the disposal is made by Kato.
Dembe has already made other disposals during the tax year 2020-21 which have utilised her annual exempt amount.
Kato, however, has not yet made any disposals.
Kato’s taxable income for the tax year 2020-21 is £21,150.
Inheritance tax
Dembe, who knows nothing about inheritance tax (IHT), is concerned about the amount of IHT which will be payable
when she and Kato die. The couple’s combined chargeable estate is valued at £880,000 for IHT purposes. The estate
includes a main residence valued at £360,000.
Under the terms of their wills, Dembe and Kato have initially left their entire estates to each other. Then when the
second of them dies, the total estate of £880,000 will be left to the couple’s children.
The couple are not sure whether to change the terms of their wills so that assets worth £325,000 are left to their
children when the first of them dies.
Neither Dembe nor Kato have made any lifetime gifts.

Required:
(a) Calculate the reduction in Dembe’s income tax liability and NICs for the tax year 2020-21 if she makes the
personal pension contribution of £32,000 (net) before 5 April 2021.
Note: You are not expected to prepare full tax computations. (4 marks)

(b) Calculate the couple’s overall saving for the tax year 2020-21, after taking account of the additional legal fees
of £2,000, if the residential property is transferred to Kato and sold by him, rather than the property being
sold by Dembe. (3 marks)

(c) Calculate the amount of IHT payable, if any, were Dembe and Kato to both die in the near future, and explain
whether or not it might be beneficial to leave assets worth £325,000 to their children when the first of them
dies.
Note: You should assume that the IHT rates and thresholds remain unchanged. (3 marks)

(10 marks)
JEROME (Mar/Jun 16)

Jerome made the following gifts to family members during the tax year 2020/21:
(1) On 28 May 2020, Jerome made a gift of a house valued at £187,000 to his wife. Jerome’s uncle had
originally purchased the house on 14 July 1999 for £45,900. The uncle died on 12 June 2008, and the house
was inherited by Jerome. On that date, the house was valued at £112,800. Jerome has never occupied the
house as his main residence.
(2) On 24 June 2020, Jerome made a gift of his entire 12% holding of 12,000 £1 ordinary shares in
Reward Ltd, an unquoted trading company, to his son. The market value of the shares on that date was
£98,400. The shares had been purchased on 15 March 2010 for £39,000. On 24 June 2020, the market
value of Reward Ltd’s chargeable assets was £540,000, of which £460,000 was in respect of chargeable
business assets. Jerome and his son have elected to hold over the gain on this gift of a business asset.
(3) On 7 November 2020, Jerome made a gift of an antique bracelet valued at £12,200 to his
granddaughter. The antique bracelet had been purchased on 1 September 2005 for £2,100.

(4) On 29 January 2021, Jerome made a gift of nine acres of land valued at £78,400 to his brother. He had
originally purchased ten acres of land on 3 November 2009 for £37,800. The market value of the unsold acre
of land as at 29 January 2017 was £33,600. The land has never been used for business purposes.

Required:
(a) Calculate Jerome’s chargeable gains for the tax year 2020/21.
Note: You should ignore inheritance tax. (7 marks)
(b) For each of the four recipients of assets (1) to (4) gifted from Jerome, state their
respective base cost for capital gains tax purposes. (3 marks)
(Total: 10 marks)
RUBY (Sep/Dec 15)

You should assume that today’s date is 1 March 2018.

(a) On 27 August 2020, Ruby disposed of a residential investment property, and this resulted in a
chargeable gain of £47,800.
For the tax year 2020/21, Ruby has taxable income of £14,185.

Required:
Calculate Ruby’s capital gains tax liability for the tax year 2020/21 if this is her only
disposal in that tax year. (2 marks)

(b) In addition to the disposal already made on 27 August 2020, Ruby is going to make one further disposal
during the tax year 2020/21. This disposal will be of either Ruby’s holding of £1 ordinary shares in
Pola Ltd, or her holding of 50p ordinary shares in Aplo plc.

Shareholding in Pola Ltd

Pola Ltd is an unquoted trading company, in which Ruby has a 10% shareholding. The shareholding
was purchased on 14 July 2011 for could be sold at a gain of £37,300. Ruby has been an employee
of Pola Ltd since 2009.
Shareholding in Aplo plc
Aplo plc is a quoted trading company, in which Ruby has a shareholding of 40,000 50p ordinary
shares. Ruby received the shareholding as a gift from her father on 27 May 2014. On that date, the
shares were quoted on the stock exchange at £2.12– £2.24. The shareholding could be sold for
£59,000.
Neither Business Asset Disposal Relief’ relief nor holdover relief is available in respect of this
disposal.

Required:
Calculate Ruby’s revised capital gains tax liability for the tax year 2020/21 if, during March
2021, she also disposes of either (1) her shareholding in Pola Ltd, or alternatively (2) her
shareholding in Aplo plc.
Note ‐ the following mark allocation is provided as guidance for this requirement:
Pola Ltd (4.5 marks)
Aplo plc (3.5 marks) (8 marks)
(Total: 10 marks)
DALJEET

Please assume today’s date is 5 April 2020.

Daljeet wishes to sell personal assets to generate funds to pay his daughter’s university fees and he has
selected two assets that he is willing to sell. He will sell one of the assets to a third party on 31 December
2020 and will make his decision based on the asset that will generate the highest amount of net proceeds.
The assets Daljeet has identified as potential disposals are as follows:
1000 shares in ABC Ltd
Daljeet acquired 1,000 shares in ABC Ltd, a trading company, on 7 June 2015 for £60,000 when he became
an employee of the company. On 7 June 2016 ABC Ltd underwent a rights issue, offering shareholders the
opportunity to purchase 2 shares for every 5 shares already held for £50 per share. Daljeet purchased the
maximum amount of shares.
ABC Ltd has 20,000 shares in issue.
If Daljeet sells the ABC Ltd shares, he will sell 1,000 shares worth £100,000 on 31 December 2020.
Holiday cottage
The cottage is currently worth £110,000 and legal fees in respect of the disposal are expected to be £1,000.
Repairs costing £3,500 were made to the cottage roof in December 2019 following damage caused by a
storm.
Daljeet originally bought the cottage in May 2011 at a cost of £64,700. It has always been let out and Daljeet
has never occupied the property as his principal private residence.

Other information
Daljeet will be a higher rate taxpayer and will make no other disposals in the tax year 2019/20.

Required:
(a) Calculate which of the above asset disposals will result in the highest amount of proceeds,
after deducting tax and any costs of sale.
You should assume that Daljeet will claim any relevant reliefs where possible and
has not previously claimed any capital gains tax reliefs. (8 marks)
(b) Briefly explain why the disposal of either the ABC Ltd shares or the holiday cottage
will not be subject to inheritance tax. (2 marks)
(Total: 10 marks)
You should assume that the tax allowances for the tax year 2020-21 applied in previous tax years.

Hali and Goma are a married couple.

Capital losses brought forward
Hali had capital losses of £39,300 for the tax year 2018–19. He had chargeable gains of £16,300 for the tax year
2019–20.
Goma had capital losses of £9,100 and chargeable gains of £6,900 for the tax year 2019–20. She did not have any capital
losses for the tax year 2018–19.
Ordinary shares in Lima Ltd
On 24 July 2020, Hali sold 5,000 £1 ordinary shares in Lima Ltd, for £4·95 per share. Lima Ltd’s shares have recently
been selling for £5·30 per share, but Hali sold them at the lower price because he needed a quick sale.
Goma, Hali’s wife, had originally subscribed for 30,000 ordinary shares in Lima Ltd at their par value of £1 per share on
28 July 2009. On 18 August 2018, she gave 8,000 ordinary shares to Hali. On that date, the market value for 8,000
shares was £23,200.
Hali and Goma will both dispose of their remaining shareholdings in Lima Ltd during the tax year 2021–22. However, they
are unsure as to whether these disposals will qualify for Business Asset Disposal relief.
Antique table
On 11 October 2020, an antique table owned by Hali was destroyed in a fire. The table had been purchased on 3 June
2011 for £44,000. Hali received insurance proceeds of £62,000 on 12 December 2020, and on 6 January 2021, he
purchased a replacement antique table for £63,600. Hali will make a claim to roll over the gain arising from the receipt of
the insurance proceeds.
Disposals by Goma during the tax year 2020–21
Goma disposed of the following assets during the tax year 2020-21, all of which resulted in gains:
(1) Qualifying corporate bonds sold for £38,300
(2) A motor car (suitable for private use) sold for £11,600
(3) An antique vase sold for £6,200
(4) A copyright (with an unexpired life of eight years when purchased) sold for £5,400
(5) Quoted shares held within an individual savings account (ISA) sold for £24,700

16 What amount of unused capital losses do Hali and Goma have brought forward to the tax year 2018–19?
Hali Goma
A £23,000 £9,100
B £23,000 £2,200
C £35,300 £9,100
D £35,300 £2,200
17 What cost figure and what value per share (disposal value) will be used in calculating the chargeable gain on Hali’s
sale of 5,000 ordinary shares in Lima Ltd?
Cost figure Value per share
A £5,000 £4·95
B £14,500 £4·95
C £14,500 £5·30
D £5,000 £5·30

18 In deciding whether Hali and Goma’s future disposals of their shareholdings in Lima Ltd will qualify for Business Asset
Disposal relief, which one of the following statements is correct?
A Hali and Goma must be directors of Lima Ltd
B Lima Ltd must be a trading company
C Hali and Goma must have shareholdings of at least 10% each in Lima Ltd
D The qualifying conditions must be met for a period of three years prior to the date of disposal

19 What is the base cost of Hali’s replacement antique table for capital gains tax (CGT) purposes?
A £62,000
B £63,600
C £45,600
D £44,000

20 How many of the five assets disposed of by Goma during the tax year 2020-21 are exempt assets for the purposes
of capital gains tax (CGT)?
A Three
B Five
C Two
D Four
OTQ 1 Of CGT
The following scenario relates to questions 1–5.

Kat is the controlling shareholder in Kat Ltd, an unquoted trading company.

Kat Ltd
Kat Ltd sold a freehold factory on 30 November 2020 for £394,000, which resulted in a chargeable gain of £131,530 in the
company’s year ended 31st March 2021 (after the deduction of indexation and professional fee). The factory was purchased on
1 October 2005 for £138,600, and further capital improvements were immediately made at a cost of £23,400 during the month
of purchase. Further improvements to the factory were made during the month of disposal. The relevant Indexation Factors are
as follows:
October 2005 to December 2017 0.439
October 2005 to November 2020 0.545
December 2017 to November 2020 0.074
Kat Ltd is unsure how to reinvest the proceeds from the sale of the factory. The company is considering either purchasing a
freehold warehouse for £302,000, or acquiring a leasehold office building on a 40-year lease for a premium of £370,000. If
either reinvestment is made, it will take place on 30 September 2021.
All of the above buildings have been, or will be, used for the purposes of Kat Ltd’s trade.
Kat
Kitten sold 20,000 £1 ordinary shares in Kat Ltd on 5 October 2017, which resulted in a chargeable gain of £142,200.
This disposal qualified for entrepreneurs’ relief.
Kitten had originally subscribed for 90,000 shares in Kat Ltd on 7 July 2009 at their par value. On 22 September 2012, Kat Ltd
made a 2 for 3 rights issue. Kitten took up her allocation under the rights issue in full, paying £6·40 for each new share issued.
Kitten also sold an antique vase on 16 January 2018, which resulted in a chargeable gain of £28,100.
For the tax year 2017–18, Kitten had taxable income of £12,000.

21 What amount of indexation allowance will have been deducted in calculating the chargeable gain of £131,530 on
the disposal of Kat Ltd’s factory?
A £60.845
B £75,537
C £77.269
D £62,577

22 If Kat Ltd decides to purchase the freehold warehouse and makes a claim to roll over the chargeable gain on the
factory under the rollover relief rules, Which of the following statements are true?
True False
The base cost of the warehouse for chargeable gains purposes will be
£170,470
The claim for rollover relief against the warehouse must be made by 31st
March
A further claim for rollover relief must be made if another qualifying asset is
acquired by 31st March 2024
23 If Kat Ltd decides to acquire the leasehold office building and makes a claim to hold over the chargeable gain on
the factory under the rollover relief rules, what is the latest date by which the held-over gain will crystallise?
A Ten years from 30 November 2020
B The date when the office building is sold
C 40 years from 30 September 2021
D Ten years from 30 September 2021

24 What cost figure will have been used in calculating the chargeable gain on Kitten’s disposal of 20,000 ordinary
shares in Kat Ltd?
£

25 What is Kitten’s capital gains tax (CGT) liability for the tax year 2020–21?
A £15,900
B £19,840
C £18,780
D £17,580
 DANH (MAR-JUN18)
Up to and including the tax year 2017-18, Danh was always automatically treated as not resident in the UK, spending
fewer than 46 days in the UK each year. Danh knows that for the tax year 2018-19, he will automatically be treated
as resident in the UK, but is unsure of his residence status for the tax years 2018-19 and 2019-20. For these two tax
years, Danh was neither automatically not resident in the UK nor automatically resident. For both of these tax years,
Danh spent 100 days in the UK, with the remainder of each tax year spent in the same overseas country. Throughout
both tax years, Danh had a property in the UK and stayed there on the 100 days which he spent in the UK. Danh also
did substantive work in the UK during both tax years. He does not have any close family in the UK.
On 6 August 2020, Danh commenced self-employment as a sole trader. The following information is available for
the tax year 2020-21:
Self-employment
(1) Danh’s statement of profit or loss for the eight-month period ended 5 April 2021 is:
Note £
Income 96,400
Expenses
Depreciation (2,300)
Motor expenses 2 (3,300)
Professional fees 3 (1,800)
Other expenses (all allowable) (18,800)
––––––––
Net profit 70,200
––––––––
(2) During the eight-month period ended 5 April 2021, Danh drove a total of 12,000 miles, of which 4,000 were for
private journeys.
(3) The figure for professional fees consists of £340 for accountancy and £1,460 for legal fees in connection with the
grant of a new five-year lease for business premises.
(4) Danh runs his business using one of the six rooms in his private house as an office. The total running costs of the
house for the eight-month period ended 5 April 2021 were £4,200. No deduction has been made for the cost of
using the office in calculating the net profit of £70,200.
(5) The only item of plant and machinery owned by Danh is his motor car. This was purchased on 6 August 2020 for
£14,800, and has a CO2 emission rate of 110 grams per kilometre.
Partnership loss
(1) On 6 September 2020, Danh joined an exsisting Partnership run by Ebele and Fai. For the year ended 5
April 2021, the partnership made a tax-adjusted trading loss of £12,600. Until 5 September 2020, profits
and losses were shared 60% to Ebele and 40% to Fai. Since 6 September 2017, profits and losses have
been shared 20% to Danh, 50% to Ebele and 30% to Fai.
(2) Danh will claim to relieve his share of the partnership’s loss against his total income for the tax year 2020-21.
(3) During the tax year 2020-21, Danh paid interest of £875 (gross) on a personal loan taken out to purchase his
share in the partnership.
Property income
(1) On 6 April 2020, Danh purchased a freehold house which was then let out. The total amount of rent receivable
during the tax year 2020-21 was £13,150.
(2) Danh partly financed the purchase of the property with a repayment mortgage, paying mortgage interest of
£5,000 during the tax year 2020-21.
(3) The other expenditure on the property for the tax year 2020-21 amounted to £1,480, and this is all allowable.
Required:
(a) Explain whether Danh was treated as resident or not resident in the UK for each of the tax years 2018–19
and 2019–20. (3 marks)

(b) Calculate Danh’s income tax liability for the tax year 2020–21.
Note: When calculating Danh’s trading profit from self-employment for the eight-month period ended 5 April
2021, your computation should commence with the net profit figure of £70,200, indicating by the use of
zero (0) any items which do not require adjustment. (12 marks)

(15 marks)
DILL (SEP-DEC17)
Up to and including the tax year 2018-19, Dill was always resident in the United Kingdom (UK), being in the UK for
more than 300 days each tax year. She was also resident in the UK for the tax year 2020-21. However, during the
tax year 2019-20, Dill was overseas for 305 days, spending just 60 days in the UK. Dill has a house in the UK and
stayed there on the 60 days which she spent in the UK. She also has a house overseas. For the tax year 2019–20,
Dill did not have any close family in the UK, did not do any work in the UK and was not treated as working full-time
overseas.
On 6 April 2020, Dill returned to the UK and commenced employment with Herb plc as the IT manager. She also
set up a small technology business which she ran on a self-employed basis, but this business failed and Dill ceased
self-employment on 5 April 2021. The following information is available for the tax year 2020-21:
Employment
(1) During the tax year 2020–21, Dill was paid a gross annual salary of £290,000.
(2) In addition to her salary, Dill has been paid the following bonuses by Herb plc:
Amount Date of payment Date of entitlement In respect of the four-month
£ period ended
16,200 31 December 2020 1 November 2020 31 July 2020
29,300 30 April 2021 1 March 2021 30 November 2020
(3) Throughout the tax year 2020-21, Dill had the use of Herb plc’s company gym which is only open to employees
of the company. The cost to Herb plc of providing this benefit was £780.
(4) Throughout the tax year 2020-21, Herb plc provided Dill with a home entertainment system for her personal use.
The home entertainment system cost Herb plc £5,900 on 6 April 2020.
(5) During the tax year 2020-21, Dill’s three-year-old son was provided with a place at Herb plc’s workplace nursery.
The total cost to the company of providing this nursery place was £7,200 (240 days at £30 per day).
(6) On 1 June 2020, Herb plc provided Dill with an interest-free loan of £80,000 which she used to renovate her
main residence. No loan repayments were made before 5 April 2021.
(7) On 25 January 2021, Herb plc paid a health club membership fee of £990 for the benefit of Dill.
(8) During the tax year 2020-21, Dill used her private motor car for both private and business journeys. The total
mileage driven by Dill throughout the tax year was 16,000 miles, with all of this mileage reimbursed by Herb plc
at the rate of 25p per mile. However, only 14,500 miles were in the performance of Dill’s duties for Herb plc.
(9) During the tax year 2020-21, Dill contributed the maximum possible tax relievable amount into Herb plc’s HM
Revenue and Customs’ (HMRC) registered money purchase occupational pension scheme. The company also
contributed £9000 on her behalf. Dill first become member of a pension scheme in the tax year 2019-20 and
had unused annual allowance brought forward of £19.000.
Self-employment
For the tax year 2020–21, Dill’s self-employed business made a tax adjusted trading loss of £58,000. Dill will claim
relief for this loss against her total income for the tax year 2020-21.
Other income
(1) On 1 November 2020, Dill received a premium bond prize of £1,000.
(2) On 28 February 2021, Dill received interest of £1,840 on the maturity of savings certificates from NS&I (National
Savings and Investments).

Required:
(a) Explain why Dill was treated as not resident in the United Kingdom for the tax year 2019-20. (3 marks)

(b) Calculate Dill’s taxable income for the tax year 2020-21.
Note: You should indicate by the use of zero (0) any items which are not taxable or deductible. (12 marks)

(15 marks)