ACCA ATX (P6 BPP Course Notes)

Advanced Taxation
(ATX – UK)
(FA 2018)
Course Notes
For exams in June 2019, September 2019,
December 2019 and March 2020
ISBN: 9781509780495
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Advanced Taxation
(ATX – UK)
Taught Phase Study Programme
Page
Introduction to the course........................................................................................................................................ 5
1 Principles of income tax ............................................................................................................................... 13
2 Pensions and other tax efficient investment products .................................................................................. 23
3 Property and other investment income......................................................................................................... 35
4 Employment income..................................................................................................................................... 43
5 Employment income – additional aspects .................................................................................................... 51
6 Trade profits ................................................................................................................................................. 59
7 Capital allowances ....................................................................................................................................... 71
8 Trading losses .............................................................................................................................................. 77
9 Partnerships and limited liability partnerships .............................................................................................. 87
10 Overseas aspects of income tax .................................................................................................................. 93
Achievement Ladder Step 1 ............................................................................................................................. 105
11 Chargeable gains: an outline...................................................................................................................... 109

12 Shares and securities................................................................................................................................. 123
13 Chargeable gains: reliefs............................................................................................................................ 131
14 Chargeable gains: additional aspects......................................................................................................... 151
15 Self assessment for individuals and partnerships ...................................................................................... 163
Achievement Ladder Step 3 ............................................................................................................................. 169
16 An introduction to inheritance tax ............................................................................................................... 171

17 Inheritance tax: valuation, reliefs and the death estate .............................................................................. 187
18 Inheritance tax: additional aspects ............................................................................................................. 201
19 Stamp taxes ............................................................................................................................................... 215

20 Corporation tax computation ...................................................................................................................... 219
21 Chargeable gains for companies................................................................................................................ 231
22 Corporation tax administration.................................................................................................................... 237
23 Administration, winding up, purchase of own shares ................................................................................. 243
24 Losses and deficits on non-trading loan relationships................................................................................ 253
25 Close companies and investment companies ............................................................................................ 261
26 Groups and consortia ................................................................................................................................. 271

27 Overseas aspects of corporate tax............................................................................................................. 291
28 Value added tax 1 ...................................................................................................................................... 299
29 Value added tax 2 ...................................................................................................................................... 315
30 Impact of taxes and tax planning................................................................................................................ 323
31 Answers to lecture examples...................................................................................................................... 339
3
32 Appendix A: Tax tables............................................................................................................................... 387
33 Achievement Ladder Step 4 Questions ...................................................................................................... 393
34 Achievement Ladder Step 6 Questions ...................................................................................................... 399
4
INTRODUCTION
Welcome to Advanced Taxation (ATX – UK)

Our aim is to help you confidently prepare for success in your exam in an effective and efficient
way; allowing you to personalise your learning experience, step by step, whilst being supported by
BPP's team of experts.
These Course Notes are one of the components of your ATX – UK programme, and are one of the
tools you have at your disposal as a student of BPP. They focus primarily on ensuring you acquire
the technical knowledge and understanding required to pass your exam. They have been written
by our subject matter experts and tutors, are will be delivered to you by our expert tutor team, be it
in centre or online.
These course notes play two important roles in your programme:
1. Knowledge – the Course Notes will help you to learn and understand the key knowledge
topics to allow you to progress up the Achievement Ladder.
2. Support – you can revisit specific elements in your Course Notes in the light of feedback
you receive as you attempt each step on the Achievement Ladder.
Remember, the Achievement Ladder is the unique tool to allow you to see your own progression
towards being fully prepared for the real exam.
Computer-based exams
With effect from the March 2020 sitting ACCA have commenced the launch of computer-based
exams (CBEs) for this module with the aim of rolling out into all markets internationally over a short
period. Paper-based examinations (PBE) will be run in parallel while the CBEs are phased in. BPP
materials have been designed to support you, whichever exam option you choose. For more
information on these changes and when they will be implemented, please visit the ACCA website.
Exam duration
The time allowed for both the exam CBE and PBE exams is 3 hours and 15 minutes.
5
INTRODUCTION
Introduction to Advanced Taxation (ATX – UK)
Overall aim of the syllabus

To apply relevant knowledge and skills and exercise professional judgement in providing relevant
information and advice to individuals and businesses on the impact of the major taxes on financial
decisions and situations.
Main capabilities of the syllabus

On successful completion of this exam, candidates should be able to:
 Apply further knowledge and understanding of the UK tax system through the study of more
advanced topics within the taxes studied previously and the study of stamp taxes
 Identify and evaluate the impact of relevant taxes on various situations and courses of
action, including the interaction of taxes
 Provide advice on minimising and/or deferring tax liabilities by the use of standard tax
planning measures
 Communicate with clients, HM Revenue & Customs and other professionals in an
appropriate manner
Links with other examinations
Advanced Taxation –
United Kingdom
(ATX – UK)
Taxation –
United Kingdom
(TX – UK)
The advanced taxation syllabus assumes knowledge acquired in Taxation (TX – UK) and develops
and applies this further and in greater depth.
6
INTRODUCTION
Taught Phase Aims
Achieving ACCA's Study Guide outcomes
A The UK tax system
A1 Income and income tax liabilities in situations involving further overseas Chapters
aspects and in relation to trusts, and the application of additional exemptions 1–10
and reliefs
A2 Chargeable gains and capital gains tax liabilities in situations involving Chapters
further overseas aspects and in relation to closely related persons and 11–15
trusts, and the application of additional exemptions and reliefs
A3 Inheritance tax in situations involving further aspects of the scope of the tax Chapters
and the calculation of the liabilities arising, the principles of valuation and the 16–19
reliefs available, transfers of property to and from trusts, overseas aspects
and further aspects of administration
A4 Corporation tax liabilities in situations involving overseas and further group Chapters
aspects and in relation to special types of company and the application of 20–27
additional exemptions and reliefs
A5 Stamp taxes Chapter 19
A6 Value added tax, tax administration and the UK tax system Chapters 15,
3, 6, 22, 28 &
29
B The impact of relevant taxes on various situations and courses of

action, including the interaction of taxes
B1 Taxes applicable to a given course of action and their impact Chapter

30/Revision
course
B2 Alternative ways of achieving personal or business outcomes may lead to Chapter
different tax consequences 30/Revision
course
B3 Taxation effects of the financial decisions made by businesses (corporate Chapter
and unincorporated) and by individuals 30/Revision
course
B4 Tax advantages and/or disadvantages of alternative courses of action Chapter
30/Revision
course
B5 Statutory obligations imposed in a given situation, including any time limits Chapters
for action and the implications of non-compliance 15 & 22
7
INTRODUCTION
C Standard tax planning measures
C1 Types of investment and other expenditure that will result in a reduction in Chapters
tax liabilities for an individual and/or a business 2 & 20
C2 Legitimate tax planning measures, by which the tax liabilities arising from a Chapter 30
particular situation or course of action can be mitigated
C3 The appropriateness of such investment, expenditure or measures, given a Revision
particular taxpayer's circumstances or stated objectives course
C4 The mitigation of tax in the manner recommended, by reference to numerical Revision
analysis and/or reasoned argument course
C5 Ethical and professional issues arising from the giving of tax planning advice Chapter 30
C6 Current issues in taxation Chapters 11,
13, 2, 26 & 29
D Communicating with clients, HMRC and other professionals
D1 Communication of advice, recommendations and information in the required Revision

format course
D2 Presentation of written information in language appropriate to the purpose of Revision
the communication and the intended recipient course
D3 Conclusions reached with relevant supporting computations Revision
course
D4 Assumptions made or limitations in the analysis provided, together with any Revision
inadequacies in the information available and/or additional information course
required to provide a fuller analysis
D5 Other non-tax factors that should be considered Revision
course
8
INTRODUCTION
Assessment methods and format of the exam

The examination will last 3 hours and 15 minutes and will consist of two sections.
35% Numerical 65% Discussion
40% Knowledge 60% Application
Format of the Exam Marks

Section A Two compulsory questions. 60%
Question 1 will have 35 marks.
Question 2 will have 25 marks.
These will be scenario based questions involving the consideration
of more than one tax together with some elements of planning and
the interaction of taxes. Computations will normally only be required
in support of explanations or advice and not in isolation. These
questions will be broken down into several requirements.
There will be five ethics marks available across this section in
addition to four professional skills marks within Question 1.
Section B Two compulsory 20-mark questions. 40%
Questions will adopt a concise structured style but may cover more
than one tax and involve elements of planning and interaction of
taxes.
Computations will only be required to support the advice given and
no solely numerical questions will be set.
The whole syllabus is examinable throughout. 100%
9
INTRODUCTION
Key to icons
The following icons appear in this set of Course Notes:
Question practice
This is a question we recommend you attempt to reinforce your learning on a
key topic.
Section reference in the Study Text

You could further consolidate your knowledge in this area with additional
reading from the Study Text.
Formula to learn
Formula given in exam
10
SKILLS BANK
Key skills required to pass

Our analysis of the examining team's comments on past exams, together with our experience of preparing students
for this type of exam, suggests that to pass ATX – UK you will need to develop a number of key skills.
1 Effective reading
5 Choosing the and planning to
appropriate understand the
calculations to be contents of the
prepared scenario
2 Accurate analysis
4 Effective and of a question's
professional requirements
communication
3 Disciplined
time management to
ensure that all parts of
the question and all
questions are answered in
the time allowed
Each of these key skills is analysed on the following pages.
11
SKILLS BANK
Skill 1 – Effective reading and planning
We recommend that you spend time at the beginning of your exam carefully reading through all of the questions in
the exam, and each of their requirements. It's important to start the exam positively so make a decision about the
order in which you're going to attempt the questions.
Time should also then be spent at the start of each question identifying the various tax implications and planning
how best to construct your answer. 'Think before you write' is often quoted by the examining team as a rule to
follow.
Skill 2 – Analysis of a question's requirements
In all ATX – UK questions, and particularly in the Section A questions, there are often many requirements to
complete. It is therefore necessary to identify what aspects are required in a question and to find how many tasks
are required so effort can be spent earning marks and time is not wasted. In Section A questions, you will usually
need to look not only at the requirements at the end of the question, but also to indentify the more detailed
instructions within the body of the question. Look for key phrases in the question such as 'I need the following ….'
or 'Please prepare the following for me…'.
Skill 3 – Time management
Like all ACCA examinations, Advanced Taxation (ATX – UK) is fairly time pressured so it is vital to ensure that all
questions are attempted in the time given. Remember 1.95 minutes a mark. Also it is useful in multi-part questions
to identify how long each task should take using the mark allocation as a guide, so sufficient attention is given to
each part. Remember that small overruns of time during the first half of the exam can add up to you being very
short of time towards the end.
Skill 4 – Effective and professional communication
In question one, one of the requirements always states that a report/letter format is to be adopted. You therefore
need to practice constructing your answers in this required manner. It is usually very helpful to use an Appendix for
any calculations which can then be referred to in the body of your answer. Remember there are 4 marks for
professional skills available.
B C Skill 5 – Choosing appropriate calculations
In this exam you will need to decide which calculations are needed to get to the information you need to support
your answer. Preparing standard computations will not always be necessary, so it is important to think about the
best way of finding the answer. This may mean using marginal rates of tax to compute additional tax liabilities
instead of preparing a full tax computation.
12
Principles of income tax
How have the syllabus learning outcomes been examined?

Exam question reference
Syllabus Guide detailed outcomes (Questions in bold in P&R kit)
Remember the material already studied in Taxation (TX – UK) Calisia (6/11)
under the headings: Faure (6/11)
'Property and investment income' Tetra (6/12)
Dana (12/12)
'Comprehensive computation of taxable income and the
Shuttelle (6/13)
income tax liability'
Monisha and Horner (12/13)
'The use of exemptions and reliefs in deferring and minimising Ziti (6/14)
income tax liabilities' Kesme and Soba (6/14)
Bamburg Ltd (6/14)
Kantar (12/14)
Nocturne Ltd (6/15)
Cate and Ravi (6/15)
Jonny (Sep/Dec 15)
Christina (Sep/Dec 15)
Stella and Maris (Sep/Dec 15)
Gail (Mar/Jun 16)
Bex (Mar/Jun 16)
Pippin (Mar/Jun 17)
Sabrina and Adam (Sep/Dec 17)
Florina, Kanzi and Winston
(Sep/Dec 17)
Snowdon (Mar/Jun 18)
Advise on the income tax position of the income of minor John and Maureen Robinson
children (6/08)
13
1: PRINCIPLES OF INCOME TAX

Advise on the tax implications of jointly held assets Monisha and Horner (12/13)
Recognise the tax treatment of savings income paid net of tax
Understand the allocation of the personal allowance to different
categories of income
14
Overview
Income tax
computation
Types of income Personal allowances Qualifying interest
Exempt income Non-savings Savings Dividends
Tax @ Tax @ Tax @

20%/40%/45% 0%/20%/40%/45% 0%/7.5%/32.5%/38.1%
15
1 Income tax computation 2018/19 (TX assumed

knowledge)
1.1
Non-savings Savings Dividend
income (NSI) income (SI) income (DI)
£ £ £
Trading income X
Employment income X
Interest from o/seas securities X
Dividends from o/seas securities X
Bank interest received X
Dividends received X
Discretionary trust income ( 100/55) X
Interest in possession trust income
– From NSI or SI ( 100/80) X X
– From DI ( 100/92.5) X
UK property income X
Total income X X X
Less qualifying interest (X) bal (X) bal (X)
Net income before losses X X X
Losses (X) bal (X) bal (X)
Net income (NI) X X X
Less PA (X) bal (X) bal (X)
Taxable income X X X
Income tax on NSI (20/40/45%) X

Income tax on SI (0/20/40/45%) X
Income tax on DI (0/7.5/32.5/38.1%) X
Annual allowance charge on excess pension X
contributions
Less tax reducers
– EIS/SEIS/VCT, relief for married (X)
couples
Less DTR (X)
IT liability X
Less tax deducted at source (PAYE) (X)
IT payable X
If your assumed knowledge was studied a while ago, remember that:
 Most interest is now received gross of tax. This includes interest from banks, building
societies, NS&I interest, interest from a listed company's loan stock and interest on
gilts.
 Interest from unlisted companies' loan stock and from savings income on non-
discretionary trusts are, however, still received net of 20% tax.
 Dividends on UK shares are now received gross. The 10% tax credit no longer exists.
16
Tax charged
1.2 When calculating the tax due consider:
 The savings income nil rate band which is £1,000 for a basic rate tax payer, £500 for a
higher rate taxpayer and £0 for an additional rate taxpayer. The savings income nil rate
band will still count towards the £34,500 basic rate and £150,000 higher rate limits.
 A dividend nil rate band of £2,000 which is available for all taxpayers. Again, the
dividend nil rate band will count towards the £34,500 basic rate and £150,000 higher
rate limits.
NSI SI DI
45% 45% 38.1%
£150,000
40% 40% 32.5%
£34,500
20% 20% 7.5%
0%*
* The 0% savings starting rate applies to savings income only in the first £5,000 of taxable
income.
Exempt income
1.3 (a) Income from National Savings Certificates
(b) Statutory redundancy money
(c) Winnings
(d) Scholarships
(e) Certain social security benefits eg Child benefit
(f) Interest on damages for personal injuries
(g) Income from investments made through Individual Savings Accounts (ISAs)
2 Personal allowances (TX)

Personal allowance (PA)
2.1 (i) All persons (including children) are entitled to the personal allowance of £11,850
(ii) This is deducted from net income to compute taxable income
(iii) Allowance restricted where adjusted net income is more than £100,000
Restriction = ½ (adjusted net income – 100,000)
(iv) Adjusted net income is net income – gross personal pension contributions
(v) PA can be restricted to nil
17
(vi) The PA should be offset so as to maximise the tax saved. So, for example, if a
taxpayer with low NSI had some PA left, then it would be beneficial to offset this
against DI in priority to SI if the SI would already be covered by the savings starting
rate and savings income nil rate bands, and the dividends exceeded the dividend nil
rate band.
Illustration
In 2018/19 Wayne has trading income from a partnership of £5,000, and receives bank
interest of £8,500 and dividends of £18,100. Calculate Wayne's tax liability for 2018/19.
Non-savings Savings Dividend
income income income Total
£ £ £ £
Trading income 5,000
Bank interest 8,500
Dividends 18,100
Net income 5,000 8,500 18,100 31,600
Less personal allowance (N) (5,000) (2,500) (4,350)
Taxable income 0 6,000 13,750 19,750
Note. Follow these steps to set off the personal allowance correctly.
Step 1 Set off the maximum amount of personal allowance against non-savings
income ie £5,000.
Step 2 Work out how much savings income should be left taxable in order to use the
savings starting rate band and the savings income nil rate band ie £5,000 +
£1,000 (basic rate taxpayer) = £6,000.
Step 3 Work out difference between net savings income and taxable savings income
ie £8,500 – 6,000 = £2,500. This is the amount of the personal allowance to be
set off against savings income.
Step 4 Work out the amount of the remaining personal allowance to be set off against
dividend income ie £11,850 – 5,000 – 2,500 = £4,350.
Income tax £
Savings income
£5,000  0% (starting rate band) 0
£1,000  0% (savings income nil rate band – basic rate taxpayer) 0
Dividend income
£2,000  0% (dividend nil rate band) 0
£11,750 (13,750 – 2,000)  7.5% 881
Tax liability 881
18
Lecture example 1 Technique demonstration
Geraldine has net income of £110,000. She makes a personal pension contribution of £5,000 in
2018/19.
Required
What personal allowance does Geraldine receive for 2018/19?
Solution
Transferable personal allowance

2.2 It is possible to elect to transfer a fixed amount of personal allowance (PA) to a spouse/civil
partner. The transferable amount is £1,190 for 18/19 and is given as a reduction to income
tax liability at 20% tax rather than as an increase to the spouse's own personal allowance.
The tax reduction is therefore £238 (£1,190  20%). This can bring the recipient's tax liability
to nil but can't generate a repayment of tax. The transfer is not permitted if either spouse/
civil partner is a higher or additional rate tax payer and will only be beneficial when one
spouse doesn't use their entire PA.
3 Children
3.1 Children are taxed on any income they receive after allowing for the deduction of their own
personal allowance.
3.2 Income of a minor child received from funds provided by a parent (not grandparents) is
deemed to be the parent's income if the amount exceeds £100 (gross) a year. This includes
income from trusts created by a parent in favour of the child.
19
4 Qualifying interest (TX)

4.1 Interest qualifies for tax relief as a charge if the loan concerned is used for a qualifying
purpose. These include:
(a) Purchase of an interest in a partnership
(b) Purchase of ordinary shares in, or the loan of money to, a close trading company
(includes companies resident in EEA which would be close if resident in the UK)
(c) Purchase by a partner or employee of plant and machinery used in the business or
used in the performance of duties
Lecture example 2 Preparation question
Holly receives £35,000 salary each year (PAYE £4,045). She also received £6,000 dividend
income, and £7,500 bank deposit interest in 2018/19. Her expenses for the year included a
qualifying interest payment of £2,000.
Required
Calculate her income tax payable for 2018/19.
Solution
20
5 Jointly owned assets (TX)

5.1 Income from property owned jointly by spouses and civil partners is split 50:50 unless the
couple make a joint declaration to HMRC specifying the actual proportions they are each
entitled to.
6 Chapter summary
Section Topic Summary
1 Income tax All income except exempt income is aggregated within
computation an income tax computation. Remember to split this
income into non-savings, savings and dividend income
to enable each slice to be taxed at the appropriate
rate.
2 Personal allowances Every individual receives a personal allowance but this
can be restricted to nil if the individual has adjusted net
income in excess of £100,000.
3 Children Income of minor children from funds provided by
parents is treated as parents' income if amount
exceeds £100.
4 Qualifying interest Qualifying interest payments are deducted from total
income.
5 Jointly owned assets Income from jointly owned assets is split 50:50 unless
election made for actual proportions.
21
END OF CHAPTER
22
Pensions and other tax
efficient investment
products

Remember the material covered at Taxation (TX – UK): Dokham (6/10)
'Explain and compute the relief given for contributions to Tetra (6/12)
personal pension schemes and to occupational pension Shutelle (6/13)
schemes'
Jessica (Mar/Jun 18)
Understand and apply the rules relating to investments in the Capstan (6/11)
seed enterprise investment scheme and the enterprise Pescara (12/13)
investment scheme
Pippin (Mar/Jun 17)
Understand and apply the rules relating to investments in Tetra (6/12)
venture capital trusts
23
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
Overview
Pensions
Types Tax relief Limit on contributions Lifetime allowance
Personal Occupational
Tax efficient investment products
EIS/SEIS VCT
Conditions Tax reliefs Conditions Tax reliefs
24
1 Introduction (TX assumed knowledge)

1.1 In order to encourage individuals to save for their retirement rather than relying on the State
pension provision, the government gives tax relief for contributions to pension schemes.
There are two main types of pension scheme: personal pensions (run by financial
institutions such as banks and building societies) and occupational pensions, which are set
up and run by an employer.
1.2 An individual may contribute to a number of different pension arrangements, subject to an

annual limit on contributions attracting tax relief.
2 Method of giving relief – Personal schemes (TX)

2.1 Contributions to personal pension schemes are made net of basic rate tax of 20%. For
example, if the individual wishes £1,000 to reach his pension fund, he need only pay £800,
with the government paying the remaining £200. In this way, basic rate taxpayers get full tax
relief at source.
2.2 Contributions by basic rate taxpayers to personal pension schemes may therefore be
ignored in the personal tax computation.
3 Personal schemes – additional relief for higher and

additional rate taxpayers (TX)
3.1 Higher rate taxpayers obtain additional relief of 20% (40% – 20%) by making a claim to
extend the basic rate limit by the gross amount of the pension contribution.
3.2 Similarly, additional rate taxpayers obtain additional relief of 25% (45% – 20%) by making a
claim to extend the basic rate limit and the higher rate limit by the gross amount of the
pension contribution.
3.3 Adjusted basic rate limit for 2018/19 = £34,500 + (cash contribution  100/80).
3.4 Adjusted higher rate limit for 2018/19 = £150,000 + (cash contribution  100/80).
3.5 Adjusted net income is net income minus gross personal pension scheme contributions.
Adjusted net income is used to determine whether an individual's personal allowance (PA) is
restricted.
25
John earns £200,000 per year. He pays £39,000 to a personal pension scheme in 2018/19. Ignore
the impact of the annual allowance.
Required
(a) What is John's adjusted net income for 2018/19?
(b) What is his adjusted basic rate limit and higher rate limit for 2018/19?
(c) What is his income tax liability for 2018/19?
Solution
4 Occupational schemes (TX)

4.1 Final salary (defined benefit) schemes
(a) Benefits guaranteed by employer
(b) Pension and tax-free lump sum based on 'final salary' and length of service
4.2 Money purchase (defined contribution) schemes

(a) No guarantee of benefits by employer – only funding levels guaranteed
(b) Benefits (which must be within the statutory maxima) dependent on level of
contributions and growth of fund
4.3 Both types of scheme

(a) Employer contributions are not formally capped, but regular reviews are required by
the scheme actuary to ensure scheme not becoming over-funded
(b) Employee may make additional voluntary contributions
26
5 Method of giving relief – Occupational pension

schemes (TX)
5.1 Employees contributing to occupational pension schemes usually get tax relief under 'net
pay arrangements', where the employer deducts the employee's gross pension contributions
before applying PAYE. This gives the employee tax relief at the correct marginal rate of tax,
without making any claims.
6 Employer contributions (TX)

6.1 Employer contributions to any type of pension arrangement are a tax-free benefit for the
employee, and a deductible trading expense in the employer's tax computation.
6.2 Employer's contributions are not limited, but they will however use up part of the annual
allowance (see Section 9 below).
7 Limit on contributions (TX)

7.1 The government caps the amount on which tax relief can be claimed in two main ways:
(a) First, we only allow the individual tax relief on a maximum amount; and
(b) Second, we look at total contributions by everyone into the individual's schemes and if
they exceed the annual allowance that the individual is entitled to then there will be an
annual allowance charge which effectively claws back the tax relief on the excess.
8 Maximum contributions by the individual (TX)

8.1 The maximum gross tax relievable contributions by an individual in a fiscal year are the
higher of:
(a) £3,600
(b) The individual's relevant earnings chargeable to income tax
If more is paid into the scheme then tax relief is capped at the maximum figure.
8.2 Relevant earnings are, broadly, employment income, trading income and income from a
furnished holiday lettings.
9 Total (tax-relievable) contributions in excess of the

annual allowance
9.1 There is an overriding limit called the annual allowance, which total gross (tax-relievable)
contributions (by the individual and the employer) may not exceed in a year; for 2018/19 this
is £40,000 and it has been this figure for the previous three fiscal years.
27
9.2 From 2016/17 individuals who have adjusted income in excess of £150,000 will have a
reduced annual allowance. The annual allowance will be reduced by £1 for every £2 that the
individual's adjusted income exceeds £150,000 subject to a minimum annual allowance of
£10,000. Thus once an individual's adjusted income exceeds £210,000 the minimum
£10,000 allowance is available.
9.3 Adjusted income for the self-employed is the same as net income. Adjusted income for
employees is net income plus pension contributions to occupational schemes under net pay
arrangements plus employer contributions to any type of pension scheme.
9.4 This reduction only applies where an individual's threshold income exceeds £110,000.
Threshold income is usually net income less the individual's gross personal pension
contributions.
Lecture example 2 Preparation
In 2018/19 Eric is an employee with a salary of £130,000. This is his only income in the fiscal year,
during which Eric has made pension contributions to his occupational pension scheme of £9,000
and his employer has made contributions of £21,000. Eric has also made gross personal pension
contributions of £5,000.
What is Eric's annual allowance for 2018/19?
Solution
28
9.5 If the annual allowance is not used in a tax year the unused portion can be carried forward
for three years provided that the individual was a member of a pension scheme in that tax
year.
9.6 The annual allowance for 2018/19 is used first and then the unused allowances from the
three earlier years on a FIFO basis.
9.7 If an individual pays more into their pension scheme, there will be an annual allowance
charge which is subject to income tax at the individual's marginal rate. This is added in in the
bottom half of the income tax computation as the top slice of tax and is taxed at the NSI
rates.
Dev is a sole trader with £100,000 of trade profits in 2018/19. He paid the following gross personal
pension contributions:
2014/15 £28,000
2015/16 £39,000
2016/17 £34,200
2017/18 £36,000
Dev's trade profits in earlier years have always been below £100,000, and he has no other sources
of income.
Required
What is the maximum gross contribution Dev could pay into his pension scheme in 2018/19
without incurring an annual allowance charge?
Solution
29
10 Lifetime allowance
10.1 On retirement there are a number of common ways an individual can receive benefits from
their pension. One common way is to use a flexi-access drawdown where an individual
takes up to 25% of the value of their fund as a tax-free lump sum and the balance is kept by
the pension fund and reinvested to provide taxable pension income as required by the
individual. Historically individuals had to use the balance of the fund to buy an annuity but
this is no longer compulsory if the individual would prefer flexible access.
10.2 However, an individual's pension fund cannot grow beyond a certain value, called the
'lifetime allowance'. This currently stands at £1,030,000. If the fund grows beyond this point,
a charge will be made on the excess value of the fund when the individual retires.
10.3 This charge depends on whether the excess value is taken as a lump sum (tax is at 55%) or
used to provide a pension income (tax is at a lower rate of 25%, because the income will be
taxable on the individual as it's drawn, whereas a lump sum will not).
11 Enterprise investment scheme (EIS)

11.1 An EIS company is a small unlisted trading company which meets a number of conditions.
Section 4
Knowledge of the conditions for a company to qualify as an EIS company are not required
for your ATX exam. You are, however, expected to understand the conditions which need to
be met regarding the investor and the type of shares being invested in.
11.2 The investor must:
 Subscribe for the shares wholly in cash
 Not be connected with the company (connection is broadly through employment or
owning more than 30% of the shares)
 Not hold any other shares in the company at the time the investment is made. There
is an exception to this requirement where existing holdings are EIS or seed enterprise
investment scheme (SEIS) shares
11.3 The shares must be new ordinary shares issued for bona fide commercial reasons. They
must be fully paid up and cannot be redeemable.
11.4 Dividends from an EIS company are fully taxable.
11.5 Three reliefs available for investing in an EIS company

 Income tax (IT) relief
 Capital gains tax (CGT) relief
 Reinvestment relief
11.6 IT relief as a tax reducer is available on subscriptions of up to £1,000,000 in any tax year.
The relief is the lower of:
 30% of the amount subscribed (up to max £1,000,000)
 The individual's income tax liability for the year
30
Investment is in new issues of ordinary shares of an unquoted trading company to

unconnected persons. Investor can claim to have all or some of the shares treated as issued
in the previous tax year.
11.7 The relief is withdrawn if shares are held for less than three years.
(a) Proceeds  30% (or the original rate of relief obtained, if lower) is the amount
withdrawn if the shares are sold at a loss
(b) All the relief is withdrawn if the shares are sold at a gain or the transaction is not at
arm's length
11.8 CGT relief

(a) Gain on sale of shares is exempt if held for three years. The gain is taxed normally if
the shares are sold within three years.
(b) Capital losses are always allowable, but cost is reduced by EIS relief. The loss
may be relieved against general income in the same way as a trading loss (see
Chapter 8).
11.9 Reinvestment relief

(a) A deferral relief is possible where an individual disposes of any chargeable asset and
reinvests in the shares of a qualifying company (see Chapter 13).
(b) Reinvestment period is one year before to three years after disposal.
Enterprise Investment Scheme

Mr Big has earned income for 2018/19 of £51,000. He subscribes £60,000 for 30,000 new £1
ordinary shares in an EIS qualifying company and these shares are issued to him in November
2018. EIS relief is claimed. He sells his shares in January 2020 for their market value of £10,000.
Required
(a) Calculate his 2018/19 IT liability.
(b) Show how much of the previous IT relief is withdrawn in 2019/20.
(c) What is the CGT position in 2019/20?
31
Solution
32
12 Seed Enterprise Investment Scheme (SEIS)

Section 5 12.1 SEIS is available for shares issued by certain very small unquoted trading companies. The
tax reliefs available are as follows:
(a) Income tax reducer of 50% of the amount subscribed (maximum investment
£100,000). All or part of the investment may be treated as though it were made in the
previous year. Relief is withdrawn if the investor sells the shares within three years
(transfers between spouses and civil partners are not treated as a disposal).
(b) The gain on shares is exempt if held for three years and capital losses are always
allowable with cost reduced by SEIS relief. (Same as for EIS shares.)
(c) SEIS reinvestment relief where an individual makes a gain in a tax year and invests in
SEIS shares in the same year (see Chapter 13).
12.2 There are a number of conditions which the company needs to meet for it to qualify as a
SEIS company but knowledge of these conditions is not required in your exam. You are,
however, expected to understand conditions relating to the shares and the investors.
12.3 Conditions for the shares:

(a) Must be subscribed for wholly in cash and be fully paid up
(b) Must be issued to raise money for a qualifying business activity (within three years)
12.4 Conditions for the individuals:

Investors cannot:
(a) Be employees
(b) Hold more than 30% of the ordinary shares, voting power, rights on winding up, or
otherwise be able to control the company
13 Venture capital trusts (VCTs)

Section 6
13.1 These are quoted investment trusts set up to invest in unquoted trading companies.
13.2 Anyone subscribing for shares in a VCT receives a 30% IT credit (up to a subscription limit
of £200,000 per tax year). The relief is withdrawn if the shares are held <5 years, in the
same way as EIS relief.
13.3 Dividend income is free of tax.
13.4 Gains on disposal of both secondary purchases or new issues are free of CGT, losses are
not allowable. No minimum holding period.
33
14 Chapter summary
2 Method of giving relief Contributions to personal pension schemes are made
– personal schemes net of basic rate tax of 20%.
3 Personal schemes – To obtain further relief the basic rate limit and the
additional relief for higher rate limit are extended by the gross amount of
higher and additional the pension contribution.
rate tax payers
4 Occupational schemes Two types of schemes:
 Money purchase
 Final salary
5 Method of giving relief Relief is given under the net pay arrangements.
– occupational pension
schemes
6 Employer contributions These are a tax-free benefit and are deductible in the
employer's tax computation.
7 Limit on contributions Tax relief is only given for the individual on amounts up
to their relevant earnings (or £3,600 if higher).
Total contributions by everyone into the scheme are
compared to the annual allowance to see whether an
annual allowance charge will be imposed.
8 Max contributions by An individual can invest the higher of £3,600 or
an individual relevant earnings into either a personal pension
scheme or occupational scheme and save tax at their
marginal tax rate.
9 Total (tax-relievable) If gross contributions by everyone exceed the annual
contributions in excess allowance of £40,000, a tax charge is made on the
of the annual excess.
allowance Unused annual allowance can be carried forward for
up to three years and if the individual has high income
the annual allowance can be reduced to a minimum of
£10,000.
10 Lifetime allowance Pension fund cannot exceed £1m. Any excess is taxed
at 55% if taken as a lump sum or 25% if used to
provide pension income.
11 Enterprise investment The enterprise investment schemes allow individuals
scheme (EIS) to invest in a company's shares and gain a number of
tax advantages.
12 Seed enterprise The seed enterprise investment schemes allows
investment scheme individuals to invest in a company's shares and gain a
(SEIS) number of tax advantages.
13 Venture capital trusts Venture capital trusts do a similar thing but provide risk
(VCTs) diversification.
END OF CHAPTER
34
Property and other
investment income

(Questions in bold in P&R
Syllabus Guide detailed outcomes kit)
Remember the material already studied in Taxation (TX – UK) Calisia (6/11)
under 'property and investment income' Monisha and Horner (12/13)
Kesme and Soba (6/14)
Hyssop Ltd (Sep/Dec 15)
Understand the income tax position of trust beneficiaries John and Maureen Robinson
(6/08)
Poblano (6/10)
King (6/15)
35
3: PROPERTY AND OTHER INVESTMENT INCOME
Overview
Property income
UK property business FHL Lease premiums Rent a room
Other investment income
Real Estate Investment Trust income

Trusts
36
1 UK property business (TX assumed knowledge)

1.1 (a) From 2017/18 the default basis for the calculation of property income is the cash
basis. Thus property income is calculated as:
Rental income received X
Less allowable expenses paid (X)
Property income X
This gives automatic bad debt relief as rental income is not taxed until it is actually
received by the landlord.
(b) In certain situations, property income is taxed using the accruals basis. Under the
accruals basis relief will be available for bad debts once the rent has been written off
as irrecoverable. The accruals basis will be used when:
 property income receipts for the tax year exceed £150,000; or
 the property business is carried on by a company (see the corporation tax
chapters of these notes); or
 an election is made for the accruals basis to apply. (This election must be
made by 31 January which is 22 months from the end of the tax year
concerned and applies for the year it is made only.)
In your exam, you should assume that the cash basis applies in any situation
covering an individual or partnership unless specifically instructed otherwise.
(c) There continue to be rules which restrict the deductibility of interest and other finance
costs for property businesses carried on by individuals (not companies). These rules
apply regardless of whether the cash or accruals basis is being used and apply not
just for loans taken out to buy rental properties but also on loans to pay for
improvements/ repairs to the property.
The rules restrict the tax relief for these finance costs to the basic rate of tax and are
being phased in over four tax years. For 2018/19 50% of the finance costs are
allowable as the usual deduction in the property income calculation. The remaining
50% of the finance costs multiplied by 20% (the basic rate of tax) are then deducted
as a tax reducer once the income tax has been calculated.
Loans relating to commercial properties or furnished holiday lets (see Section 2) do
not fall within these rules.
(d) If furnished – Replacement furniture relief is available. This means the cost of
replacing any furniture (net of any proceeds from the sale of the original furniture) will
be tax deductible. There is no deduction for the cost of the original furniture. Where a
replacement asset represents an improvement, only the cost of an equivalent item is
deductible.
(e) If furnished holiday let – capital allowances available – not replacement furniture
relief. No restriction for finance costs deducted.
(f) A rental loss can be carried forward to use against future rental profits.
37
Mo lets out a house throughout 2018/19 at a monthly rental of £2,000. His rent due on
31 March 2019 wasn't received until 16 April 2019. He has a mortgage on the house and in
2018/19 makes capital repayments of £5,000 and pays interest of £4,000. He has other allowable
expenses paid of £3,000. Mo's other taxable income (after the deduction of the personal
allowance) is £54,000.
Required
Calculate Mo's income tax liability in respect of his rental income for 2018/19.
Solution
2 Furnished holiday lets (FHL) (TX)

2.1 (a) Accommodation counts as a FHL if the following conditions are met:
(i) The accommodation must be in the EEA and available for commercial letting
to the public for at least 210 days a year
(ii) The accommodation must be actually let for 105 days within the 210 days
(iii) In same occupation for period of >31 days for not more than 5 months
(b) The advantages of having a FHL are that:
(i) Income qualifies as part of relevant earnings for pension relief.
(ii) There is no restriction for the deduction of finance costs.
(iii) Capital costs of furniture are deductible when paid (if using cash basis) or
capital allowances are available (if using accruals basis) rather than using
replacement furniture relief.
(iv) Rollover relief, gift relief and entrepreneurs' relief are all available on disposal
of the property.
(c) Loss relief may only be set against income from the same FHL business.
38
3 Lease premiums on grant of short lease

(50 years or less) (TX)
3.1 (a) A new tenant often pays both annual rental and a one-off premium. If the lease
granted is for less than 50 years, part of the premium is treated as rent received in
advance and increases the landlord's property income assessment for the year in
which the premium falls due.
(b) The rental income assessment is calculated as:
£
Premium A
Less 2%  (n – 1)  A (a)
X
(n = no. of years on lease)
Trading deduction for traders

3.2 Where a trader has paid a premium for the granting of a short lease he may deduct the
following amount against his trading profit, in addition to any rent paid:
Rental assessment on lessor
= p.a.
Life of lease
Mr Nelson grants Boris a lease to a shop on 30.9.18.

Annual rental £3,000 due and received on 1.10.18
Term 15 years
Premium £67,500
Required
Calculate the rental income assessment on Mr Nelson for 2018/19 and show the relief available to
Boris for the premium paid, assuming he has a December year end.
Solution
39
4 Rent a room (TX)

4.1 (a) The first £7,500 p.a. collected from a tenant renting a room in a taxpayer's main
residence will be tax free.
(b) If the rent received exceeds £7,500, the taxpayer can elect for either the assessment
of:
(i) Excess rents over £7,500, but with no deduction for expenses ('alternative'
basis); or
(ii) Total rents received less the normal rental expenses.
5 Real estate investment trusts (REITs)

5.1 Companies holding investment properties can operate as tax exempt real estate investment
trusts (these are outside of the syllabus).
5.2 Any distribution paid by a REIT out of property income is paid net of 20% and is treated as
UK property income rather than dividend income.
40
6 Trust income
6.1 Income from discretionary trusts is received net of 45% tax. Such income is treated as
non-savings income.
6.2 If income from an interest in possession trust is paid out of the trust's non-savings income or
savings income it is received net of 20% tax, and if out of dividend income it is received net
of 7.5% tax.
7 Chapter summary
1 UK property business Income from UK property business is computed on a
cash basis unless property income receipts exceed
£150,000, the business run by a company or an
election is made to use the accruals basis.
For 2018/19, 50% of the finance costs are deducted
from property income with the remaining 50% getting
20% relief as a tax reducer.
2 Furnished holiday lets Furnished holiday lets are special types of rental
property which are assessed in the same way as other
property income but receive a number of tax privileges
as the operation is viewed more as a trading venture
than an investment one.
3 Lease premiums on Part of a lease premium on short leases is treated as
grant of short lease rent in advance.
4 Rent a room First £7,500 pa is tax free.
5 Real estate investment Dividends paid by this trust are paid net of 20% and
trusts (REITs) treated as UK property income.
6 Trust income Income from discretionary trusts is net of 45%. Income
from interest in possession trusts is net of 20%/7.5%
depending from which type of income the payment is
made.
41
END OF CHAPTER
42
Employment income

Remember the material covered in Taxation (TX – UK) under Faure (6/11)
the headings 'income from employment' and 'national Hail (12/11)
insurance' Morice (12/11)
Jerome (6/12)
Dana (12/12)
Shutelle (6/13)
Spike (6/13)
Spetz Ltd Group (12/13)
Pita (6/14)
Bamburg Ltd (6/14)
Jonny (Sep/Dec 15)
Gail (Mar/Jun 16)
Methley (Sep/Dec 16)
Pippin (Mar/Jun 17)
(Sep/Dec 17)
Identify personal service companies and advise on the tax Robusto (12/10)
consequences of providing services via a personal service company Monisha and Horner (12/13)
Eric and Zak (Mar/Jun 16)
43
4: EMPLOYMENT INCOME
Overview
Employment income
Types of income Benefits Personal service

companies
Basis of assessment Allowable deductions
NIC
Class 1 Class 1A
Primary Secondary
44
1 Types of employment income and basis

of assessment (TX assumed knowledge)
Employment income
1.1 Any amounts deriving from an office or employment including:
(a) Salaries and bonuses
(b) Benefits
(c) Pensions
1.2 Standard proforma:
£
Salary X
Bonus X
Benefits X
X
Allowable deductions (X)
Employment income X
Basis of assessment
1.3 Assessed on amount received in the fiscal year.
Section 1.2
2 Allowable deductions (TX)

 Contributions to registered occupational pension schemes
 Subscriptions to professional bodies
 Approved mileage allowance deductions
 Payment to charity under payroll deduction scheme
 Qualifying travel expenses
 Capital allowances on plant and machinery necessarily provided for use in the
performance of those duties
 Other expenses incurred wholly, exclusively and necessarily in the performance of
duties
45
3 Benefits (TX)
3.1 Two general rules will apply when calculating benefits:
(1) Pro rate for part availability

(2) Deduct any employee contribution towards having the benefit. (The exception to this
being private fuel for company cars. If full reimbursement is made there is no taxable
benefit but if a partial reimbursement is made you do not deduct the employee
contribution.)
3.2 Summary of benefits

(a) Accommodation
(i) If job related Nil
(ii) If not job related Greater of:
(i) Annual value; or
(ii) Rent actually paid by employer
+ additional charge if cost of accommodation

> £75,000
= %(official rate of interest)  (cost – £75,000)
(b) Living expenses
(i) If job-related Cost of providing limited to 10% of net earnings
(ii) If not job-related Cost of providing
(c) Use of employer's assets 20% of original value or rental cost if higher
(other than cars, vans, mobile
phones, accommodation)
(d) Asset given to employees Cost or, if used, greater of:
(i) MV on date given
(ii) MV on date of acquisition less benefit
assessed in respect of use
(only (i) applies to cars, vans and bicycles)
(e) Beneficial loans Interest at official rate
Ignore loans < £10,000
(f) Medical insurance Cost of providing
46
(g) Use of car  If motor car has CO2 emission rate of

less than or equal to 50g/km use 13% 
list price, increased by 4% for diesel cars
 If motor car has CO2 emission rate of
between 51 and 75g/km use 16%  list
price, increased by 4% for diesel cars
 If motor car has CO2 emission rate of
between 76 and 94g/km use 19%  list
price, increased by 3% for diesel cars
 If a motor car has CO2 emissions of
95g/km or over use 20% base rate and
build up by 1% for every 5g of carbon
dioxide emitted per kilometre in excess
of 95g/km
 Max 37%  list price
 Diesel cars have 4% supplement added
to the benefit but the maximum % is still
37%
(h) Fuel for private motoring – £23,400 multiplied by the % used in
calculating car benefit
(i) Company van £3,350. No benefit if only private use is for
commuting. If private fuel is provided, an
additional £633 charge
A Vauxhall Vectra petrol car 1.8i has CO2 emission of 148g/km.

A BMW 525 diesel has CO2 emission of 157g/km.
Required
Calculate the percentage that will be applied to the list price of the above cars when calculating the
taxable benefit.
Solution
47
4 National insurance contributions (NICs) (TX)

Employed
Employee Employer
suffers suffers
Employee's Class 1 Employer's Class 1A

Class 1
Calculated Cash earnings Cash earnings over £8,424 Benefits

on: over £8,424
Rate 12%  UEL 13.8% 13.8%
2% above UEL
Limits Upper None None
earnings limit
(UEL) £46,350
Paid by Employer Employer Employer
(suffered by Employment allowance of £3,000
employee)
The employment allowance is not
available to companies where a
director is the sole employee.
5 Personal service companies
Top Co Provide
Provide services
services
Fees
paid
Intermediate
Worker Take dividend

instead of salary
Employee – IT
– NIC • EE
• ER
5.1 Anti-avoidance legislation is designed to prevent what HMRC perceives as abuse of the
self-employed v employed rules. This anti-avoidance legislation will apply to those who
have set up companies to offer their services rather than be employed.
48
5.2 Self-employed vs employed decision considers:

 Contract of/ for services  Financial risk
 Control of work  Integral position
 Provision of own equipment  Opportunity to profit
 Hire helpers  Number of employers
5.3 A 'deemed salary' needs to be calculated if an individual would have been employed but for
their intermediaries. The employed vs self-employment rules should be used to determine this.
5.4 Treat payments from client to intermediary company ('relevant engagements') as deemed
salary to the extent it is not paid as salary.
5.5 PROFORMA
£
Income from relevant engagements X
Less statutory 5% deduction (X)
X
Less salary/benefits paid to worker (X)
Less employer's NIC on actual payments (X)
Less expenses allowable under employment income (X)
Gross amount of deemed payment G
Employer's NIC on gross deemed payment
(X)
(G  13.8 )
113.8
Note that the employment allowance (if available) cannot be used to reduce
the employer's NIC on this deemed payment.
Actual deemed payment to worker X
Lecture example 2 Exam standard for 15 marks
Alan is currently employed by Farringdon Ltd and is paid a salary of £70,000 per year. He has no
other income for the tax year.
Alan is planning to resign from Farringdon Ltd and form Alan Ltd (a personal service company).
Alan Ltd will provide services to Farringdon Ltd and to other companies. The services will be
carried out by Alan personally.
All of Alan Ltd's income will be in respect of relevant engagements and therefore subject to the
personal service company (IR35) legislation. Alan will be a director, and the only employee of
Alan Ltd.
Alan Ltd estimated income and outgoings for a full tax year
£
Gross income 80,000
Salary paid to Alan 48,000
Administrative expenses 3,000
Travel expenses reimbursed to Alan 1,500
Dividend paid to Alan 18,000
The travel expenses are those which will be necessarily incurred by Alan in performing the work for
Farringdon Ltd and the other customers of Alan Ltd.
49
Required
Prepare calculations to determine the effect on Alan's annual income, after deduction of all taxes of
working for Alan Ltd rather than Farringdon Ltd.
Solution
6 Chapter summary
1 Types of employment Any amounts deriving from an office or employment are
income and basis of assessed under employment income. Employment
assessment income is assessed in the year of receipt.
2 Allowable deductions To be deductible, expenses must be wholly,
exclusively and necessarily incurred in the
performance of the employment.
3 Benefits Non-monetary benefits are converted into a monetary
amount via specific rules which you need to know.
4 National insurance Class 1 NIC is based on 'cash earnings'. Class 1A is
contributions (NICs) based on benefits but is only suffered by the employer.
5 Personal service The legislation for personal service companies prevents
companies individuals avoiding being treated as employed by
offering their services through the intermediary of a
company.
END OF CHAPTER
50
Employment income –
additional aspects

Advise on the tax treatment of share option and share incentive Dokham (6/10)
schemes Morice (12/11)
Flame plc Group (12/12)
Spike (6/13)
Pita (6/14)
Klubb plc (12/14)
Methley (Sep/Dec 16)
Damiana plc (Sep/Dec 17)
Advise on the tax treatment of lump sum receipts Tetra (6/12)
Dana (12/12)
Pita (6/14)
Klubb plc (12/14)
Bex (Mar/Jun 16)
Traiste Ltd (Mar/Jun 17)
51
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
Overview
Termination payments
Exempt Taxable Partially taxable
Share schemes
Share incentive plan (SIP) Company share option plans
Savings related schemes Enterprise management

(SAYE) incentives (EMI)
52
1 Termination payments
TERMINATION PAYMENTS
 For death, injury and  Pay in lieu of notice Other (ex gratia)
disability 'PILON' (whether  Statutory redundancy pay
contractual/not), ie can
 Approved lump sum on  Genuine compensation
be asked to leave today
retirement for loss of office
and notice period will be
paid  Continued provision of
 Reward for past/future any benefit, eg a
services company car
Exempt First
Fully £30,000
taxable exempt
 Taxed in year of receipt  Excess taxed as specific

as normal employment employment income – IT
income – IT
The rules regarding how NICs are applied to lump sum payments are changing and the ACCA have
stated that they will not currently set requirements requiring knowledge of NIC and lump sum payments.
Ban was made redundant from UpTempo Ltd on 1 May and asked to leave immediately. His
employment contract entitled him to two months' notice or two months' salary in lieu of notice. His
annual salary was £30,000. He was also given £1,300 in statutory redundancy pay and a £34,500
non-contractual lump sum as a gesture of goodwill.
Required
Calculate how much of his termination payment would be taxable.
Solution
53
2 Share schemes
Section 1
2.1 Share schemes are schemes whereby a company gives/sells shares to its employees, often
as part of a remuneration package. This will have tax consequences.
2.2 A typical share scheme will be set up as follows:
 Grant – this is the date that the employee is given the right to buy shares at a future
date at a price set now.
 Exercise – this is the date where the employee decides to take up the rights and buy
the shares.
 Disposal – once the employee owns the shares they can then choose when to go on
and sell the shares.
2.3 The tax at each of these dates will depend on whether the scheme is tax advantaged or not.
A scheme is tax advantaged if it complies with certain conditions. It is therefore less flexible
than a non-advantaged scheme as it is restricted by having to comply with conditions.
However, an advantaged scheme will have a preferential tax treatment.
2.4 This table outlines the normal tax rules which will apply whether a scheme is advantaged or
not, although there follows more information about advantaged share schemes.
Non-advantaged Schemes Advantaged Schemes

Grant No tax No tax
Exercise Income tax (and NIC if listed shares) No tax
MV at exercise X
Exercise price (X)
Taxable X
Disposal CGT CGT
Proceeds X Proceeds X
MV at exercise (X) Cost (X)
Gain X Gain X
2.5 There are four types of advantaged share scheme on the Advanced Taxation (ATX – UK)
syllabus and each one is now considered below in more detail. Note that costs of setting up
an advantaged share scheme are tax deductible for the company.
54
3 Tax-advantaged share schemes

Section 2
3.1 Here a company sets up a trust (SIP) and gives the SIP money. The SIP then buys shares
and holds them on behalf of employees. The income tax treatment depends on how long the
shares are kept in the SIP and then there will be capital gains tax to consider when the
individual eventually sells the shares.
SHARE INCENTIVE PLANS

(SIP)
Award free shares Conditions

up to £3,600 pa
Buy partnership shares up to All employees (full or part

£1,800 (or 10% of salary if time)
lower) from gross salary
(ie IT/NIC relief)
Can be given matching shares –

2 for every partnership share
bought (max)
Held: >5 years no IT/NIC

3–5 years IT/NIC on value at award (or withdrawal if lower)
<3 years IT/NIC on value at withdrawal
CGT on sale on increase in value

since shares came out of SIP
Can buy dividend shares with

dividend income from three
types of share above
Tax-free dividends
if used in this way and held
for three years
Withdraw <3 years, dividends

taxed in year of withdrawal
55
3.2
SAVINGS RELATED SCHEMES
SAYE scheme Conditions

(building society)
All employees
Three or five yrs contributions
Cash buys shares SAYE contract =

at end of contract £5 min/500 max
per month
No IT or NIC on grant or exercise

Max discount at
grant = 20%
CGT on sale of MV of shares
3.3 COMPANY SHARE OPTION PLANS
Conditions
Option granted Selected employees (unless

>30% of shares)
Exercisable between No discount at

3–10 yrs from grant grant of option
(ie option price =
MV at grant)
Option exercised
shares bought at
option price
Value of shares over
which employee
holds options =
No tax on grant or exercise
max £30,000
CGT at sale
56
3.4
ENTERPRISE MANAGEMENT INCENTIVES (EMI)
Max of £250,000 options per Conditions

employee (max £3 million
in total)
EIS/VCT type company's
gross assets <£30m
<250 full time employees
No IT or NIC at grant
No IT or NIC at exercise Key employees must be

unless issued at a discount full time: 25 hrs pw and
when charged on MV at not >30% of shares
grant (or exercise if lower)
minus exercise price
CGT on sale
Fred is granted options over 10,000 shares on XYZ plc at a price of £1.50, their current market
value. They are exercisable in six years' time when the market value of the shares is expected to
be £4. Fred will then dispose of the shares after a further two years, for their new market price of
£5.50.
Required
Show the tax implications if the scheme is either advantaged or non-advantaged.
Solution
57
4 Chapter summary
1 Termination payments Payments made on the termination of employment
may be exempt, partially exempt or fully taxable.
2 Share schemes Schemes where a company gives/sells shares to its
employees. They can be advantaged or non-
advantaged schemes and these have different tax
consequences.
3 Tax-advantaged share If shares or share options are provided to an employee
schemes an income tax charge arises on the benefit. This can
be avoided if various conditions are met.
END OF CHAPTER
58
Trade profits

Remember the contents of Taxation (TX – UK) under the Faure (6/11)
headings 'income from self-employment' and 'national Mirtoon (12/11)
insurance' Jerome (6/12)
Dana (12/12)
Ziti (6/14)
Jonny (Sep/Dec 15)
Ray and Shanira (Mar/Jun 16)
Bex (Mar/Jun 16)
Waverley (Sep/Dec 16)
Juanita (Sep/Dec 16)
Pippin (Mar/Jun 17)
Meg and Laurie (Sep/Dec 17)
Advise on a change of accounting date Piquet and Buraco (12/14)
59
6: TRADE PROFITS
Overview
Trade profits
Badges of trade Adjustment to profit Basis of assessment
CYB Commencement Cessation Change of

accounting date
NIC
Class 2 Class 4
60
6: TRADE PROFITS
1 Badges of trade (TX assumed knowledge)

1.1 The badges of trade used to determine whether or not a trade exists are:
(a) Subject matter
(b) Frequency of transactions
(c) Existence of similar trading transactions or interests
(d) Length of ownership
(e) The organisation of the activity as a trade
(f) Supplementary work and marketing
(g) Profit motive
(h) The way in which the asset sold was acquired
(i) Method of finance
(j) The taxpayer's intentions
2 The computation of trade profits (TX)

Adjustment of profits
2.1 Taxable trading profits are not the same as accounting profits. Profits before tax from the
statement of profit or loss need adjusting to accord with tax legislation as follows:
£
Net profit before tax per accounts X
Add back:
(a) Items charged in the accounts but not deductible for
trading profits purposes X
(b) Income taxable under trading profits which has not
been included in the accounts X
Deduct:
(a) Items included in the accounts but not taxable under
trading profits (X)
(b) Expenditure which is deductible under trading
profits but has not been charged in the accounts (X)
(c) Capital allowances (X)
Adjusted profits for accounting period (AP) X
61
6: TRADE PROFITS
3 Cash basis for small businesses (TX)

3.1 A voluntary cash basis for calculating trading income is available to sole traders and
partnerships if revenue is below £150,000.
3.2 When using a cash basis certain expenses can be calculated on a flat rate basis:
 Use the approved mileage allowance for the deduction of business mileage
 Where business premises are partly used for private purposes, calculate the private
use adjustment on a flat rate basis according to number of occupants
3.3 If cash basis produces a trading loss the only relief available is to carry forward against
future trading profits.
3.4 Only consider the cash basis if it is specifically mentioned in a question.
4 Basis of assessment (TX)

Continuing trade
4.1 The profits taxed in a fiscal year (6 April to 5 April) are the profits of the AP ending in that
fiscal year (current year basis – CYB).
Which fiscal year will the profits of the year ended 30 June 2018 be taxed in?
Solution
Rules for a new business
The first year

4.2 The tax year in which a sole trader starts up in business is the first tax year in which the
profits will be taxed.
4.3 The profits are taxed on an actual basis in the first year, ie the profits accruing from the start
date until the next 5 April.
62
6: TRADE PROFITS
The second year

4.4 The amount taxed in the second year depends on the length of the accounting period
ending in the second tax year.
4.5 (a) Length of accounting period ending in Taxed in second tax year
second tax year
(i) 12 months CYB
(ii) <12 months First 12 months of profits
(iii) 12 months 12m to normal accounting year end
(iv) no accounting period ACTUAL (ie 6 April – 5 April)
(b) Some profits will be taxed more than once – these are called overlap profits. They are
deducted from the final assessment when the business is closed down.
The third year

4.6 (a) Usually normal current year basis (CYB) (ie 12-month period ending in fiscal year).
(b) Otherwise final 12 months of longer AP ending in fiscal year.
Linda starts trading on 1 January 2017. She decides on a 30 June year end and her results are:
£
6m to 30.6.17 18,000
y/e 30.6.18 48,000
Required
What are the assessments for the first three tax years? What are the overlap profits?
Solution
63
6: TRADE PROFITS
Peter begins trading on 1 July 2017. He decides on a December year end but draws up his first
accounts to 31.12.18.
He made £18,000 profits in the 18 months to 31.12.18.
Required
What are his assessments in the first two tax years and what are the overlap profits?
Solution
Agnetha begins trading on 1 December 2017 and draws up her first accounts to 31 May 2019, her
chosen year end. She makes £36,000 of profit in this period.
Required
What are her first three years' assessments? What are her overlap profits?
Solution
64
6: TRADE PROFITS
Trading profits closing year rules

4.7 The final tax year of assessment will be the year which contains the last trading date.
4.8 This final year taxes any profits not yet taxed with a deduction for the overlap profits created
at the start of the business.
4.9 All the preceding years will be on a normal CYB.
4.10 Create the assessments in chronological order.
Albert, who has been trading for some years making up his accounts to 31 December, ceases to
trade on 30 April 2018 with profits as follows:
Adjusted profits
after capital allowances
£
Year to 31.12.17 22,000
4 months to 30.4.18 12,000
The overlap profits arising in the opening years of his trade were £3,500.
65
6: TRADE PROFITS
Required
What are the assessments for 2017/18 and 2018/19?
Solution
Frida closes her business on 31 January 2020. Her adjusted profits after capital allowances
were as follows:
£
y/e 31.12.18 16,000
y/e 31.12.19 12,000
1 month ending 31.01.20 6,000
Required
What are her last two years' assessments? There were no overlap profits.
Solution
66
6: TRADE PROFITS
5 Change of accounting date

Steps:
1 Establish year of change (YOC) (ie first year where CYB isn't possible).
2 All years before YOC
Basis period = 12 months to old year end.
3 All years after YOC
Basis period = 12 months to new year end.
4 Year of change
Basis period = period missed (gap) between (2) and (3) with adjustment.
If 'gap' > 12m, tax the profits of the 'gap' but bring down to 12m by relieving overlap
profits from commencement.
If 'gap' < 12m, create overlap by taxing 12m period to the end of the gap.
5 Conditions
First accounts to new date must be 18 months long and HM Revenue & Customs
(HMRC) must be notified by 31 January following year of change.
Not permitted if previous change of accounting date in last five years (unless genuine
commercial reasons).
(1) Bee makes up accounts to 31 August until changing her accounting date to 31 May. Her
results are as follows:
£
Y/e 31.8.17 20,000
9 months to 31.5.18 15,000
Y/e 31.5.19 30,000
Y/e 31.5.20 40,000
Required
What are Bee's assessments for 2017/18, 2018/19, 2019/20 and 2020/21?
Solution
67
6: TRADE PROFITS
(2) Zoe makes up accounts to 30 June until changing to 31 December. Her results are as
follows:
£
Y/e 30.6.17 25,000
Y/e 30.6.18 30,000
6 months to 31.12.18 15,000
Y/e 31.12.19 35,000
Zoe has nine months of overlap profits totalling £21,000.
Required
What are Zoe's assessments for 2017/18, 2018/19, and 2019/20?
Solution
68
6: TRADE PROFITS
6 National insurance (TX)

Self employed
Suffers
Class 2 Class 4
Calculated on: Flat rate £2.95 pw 9% of profits between

Provided trade profits exceed the £8,424 and £46,350
small profits threshold of £6,205 2% above £46,350
Profits = trading profits less
loss relief against
trading income
Paid by: Sole trader Sole trader
Due: 31 January following the fiscal Payments on account 31 January
year and 31 July with balancing payment
on 31 January
69
6: TRADE PROFITS
7 Chapter summary
1 Badges of trade Badges of trade determine whether an individual is
trading or not.
2 The computation of Net profit is adjusted for disallowable expenditure,
trade profits income not taxable or taxable elsewhere and capital
allowances.
3 Cash basis for small Small businesses can compute trading income on a
business cash as opposed to an accruals basis.
4 Basis of assessment Basis periods are used to link periods of account to
tax years.
Special rules apply when a trade begins, ceases as
the current year basis breaks down in all these
situations.
5 Change of accounting Make sure you know the step-by-step approach to
date deal with this.
6 National insurance Class 2 and Class 4 NICs are paid by the self-
employed.
END OF CHAPTER
70
Capital allowances

Remember the material covered in Taxation (TX – UK) under John and Maureen Robinson
the heading 'income from self employment' (6/08)
Simone (6/09)
Flame plc group (12/12)
Liza (6/13)
FL Partnership (12/13)
Ziti (6/14)
Bamburg Ltd (6/14)
Bond Ltd Group (12/14)
Nocturne Ltd (6/15)
Bex (Mar/Jun 16)
Pippin (Mar/Jun 17)
Advise on the allocation of the annual investment allowance Sank Ltd and Kurt Ltd (6/12)
between related businesses Bond Ltd Group (12/14)
Identify the enhanced capital allowances available in respect of
expenditure on green technologies
71
7: CAPITAL ALLOWANCES
Overview
Capital allowances
Plant & machinery
72
1 Capital allowances (TX assumed knowledge)

Capital expenditure
Function vs setting
Fulfils a function in trade Part of setting in which

trade is carried on
P&M
Not P&M
No
FYA/ECA AIA Allowances
100% 100%
Low emission 8/18% WDA First £200,000

cars/energy on P&M
saving (not cars)
Cars
Based on CO2
emissions
< 50g/km 51-110g/km >110g/km
100% FYA Main pool Special rate

18% WDA pool
8% WDA
Continue to depool if private use by sole trader/partner
73
The following format is recommended for use in the exams, for each accounting period.
Private
Special Short used
Main rate life asset
AIA FYA pool pool assets (40%) Allowances
£ £ £ £ £ £
TWDV b/fwd X X X
Additions X X X X X
Disposal
(proceeds (X) (X)
limited to cost)
AIA (X) X
Tfr to MP/SRP X X X
X X X X
FYA 100% (X) X
–
WDA 18%/8% (X) (X) (X) (X)
 60% X
TWDV cfwd X X X X X
Short life assets (TX)

1.1 Plant and machinery (not cars) that would normally go into main pool and have an expected
life of less than eight years can be the subject of an election to 'depool'. Effect of election:
(a) Asset is dealt with individually.
(b) Balancing allowance or charge arises on disposal.
(c) If still in use more than eight years after the end of the accounting period in which the
expenditure was incurred, the TWDV is transferred to the main pool.
Special rate pool (TX)

1.2 Expenditure on long life assets (25 years or more), plant and machinery integral to a
building and cars with a CO2 emission of >110g/km. Receive WDA of 8% pa.
The annual investment allowance can apply to this expenditure except on cars. The
taxpayer can decide how to allocate the AIA.
The following items of plant and machinery would be treated as integral to building:
 Electrical and lighting systems
 Cold water systems
 Space or water heating systems
 Powered systems of ventilation, cooling or air purification
 Lifts and escalators
74
Allocation of annual investment allowance between related businesses

1.3 Related business are entitled to a single annual investment allowance between the
businesses and may allocate the allowance between them as they think fit.
1.4 Businesses are related if carried on/controlled by same individual/partnership and either:
(a) Engaged in same activity
(b) Share the same premises
Enhanced capital allowances (ECAs)

1.5 Capital expenditure on new energy and water-saving plant and machinery qualifies for
100% ECAs.
1.6 Companies can surrender tax losses attributable to ECAs for a tax credit of 12.67%.
(Two-thirds of the corporation tax rate of 19%).
Note: the maximum payment which a company can claim is the greater of:
 £250,000; and
 its total PAYE & NIC liabilities for the accounting period.
Obama incurs the following transactions in the year ended 31 March 2019.
Additions £
1.5.18 Plant & machinery 200,000
1.7.18 Plant & machinery 120,000
1.8.18 Integral feature 210,000
1.9.18 Car (CO2 emission 100g/km) 24,000
Disposals
1.10.18 Sold short-life asset for 10,000
Tax written-down values on 1.4.18 were as follows:
£
Main pool 180,000
Short-life asset (bought June 2016) 15,000
Van (20% private use) 10,000
Required
Calculate the capital allowances for the year ended 31 March 2019.
75
Solution
2 Chapter summary
1 Capital allowances Plant and machinery is entitled to a 18% writing down
allowance pa. 100% AIA applies to £200,000 spent
on plant and machinery (not cars) in a year. Related
businesses share an AIA. The capital allowance rules
for cars depend on their CO2 emissions. Low
emission cars and energy efficient equipment get
100% FYA.
END OF CHAPTER
76
Trading losses

Remember the material already covered in Taxation (TX – UK) Desiree (6/10)
under the heading 'income from self employment' Faure (6/11)
Mirtoon (12/11)
Dana (12/12)
Spike (6/13)
Kantar (12/14)
Jodie (6/15)
Jonny (Sep/Dec 15)
Pippin (Mar/Jun 17)
Establish the relief for capital losses on shares in unquoted Capstan (6/11)
trading companies
Advise on the relief available for trading losses following the
transfer of a business to a company
77
8: TRADING LOSSES
Overview
Trading losses
Trade loss relief Carry forward Terminal trade Share loss relief
against general loss relief loss relief against general
income income
Trade loss relief Early years trade Trade

against gains loss relief transferred to
company
78
8: TRADING LOSSES
1 What to do with trading losses (TX assumed

knowledge)
Trading income assessment
1.1 If a basis period has a loss, the trading income assessment is nil. Never put in a negative
assessment.
Relieving the loss

1.2 The taxpayer will be able to reduce his taxable income by deducting the loss against income
in accordance with legislation.
2 Continuing trade (TX)

Trade loss relief against general income
2.1 The loss available is the loss of the basis period.
Loss relief is against general income of:
(a) The tax year in which the loss-making accounting period ends ('year of the loss')
(b) The preceding tax year
2.2 If a claim is made the maximum possible loss must be set off (ie personal allowances
cannot be saved); this is because the loss is deducted in calculating the taxpayer's net
income.
Carry forward loss relief

2.3 If no trade loss relief against total income claim is made, or some of the loss is left after such
a claim, then the balance can be relieved under carry forward loss relief. A carried forward
loss is relieved against the first available future trading profits from the same trade.
Set off is automatic and compulsory.
Cap on income tax relief

2.4 If loss relief is claimed against total income the maximum that can be relieved is the higher
of:
(a) £50,000; or
(b) 25% of an individual's adjusted total income.
2.5 Adjusted total income is total income after deducting gross personal pension contributions.
2.6 The cap does not restrict the loss that can be claimed against profits of the same trade for
the preceding tax year. Any remaining loss can be carried forward against future profits from
the same trade.
79
8: TRADING LOSSES
Poppy commenced trading on 1 October 2004 making up her accounts to 30 September 2005 and
annually thereafter. Her recent results and projected results are:
Year ended £
30.9.17 20,000
30.9.18 (140,000)
30.9.19 8,000
30.9.20 4,000
She has received other income as follows:
£
2017/18 80,000
2018/19 120,000
2019/20 70,000
2020/21 60,000
Required
Compute Poppy's net income for 2017/18 to 2020/21, assuming maximum trade loss relief against
general income claims are made.
Solution
80
8: TRADING LOSSES
3 Tax planning (TX)

3.1 To decide on the best option for an individual's trading loss consider:
(a) Marginal rates of tax
(b) Timing of payments/repayments
(c) The possibility of personal allowances, savings income nil rate band and dividend nil
rate band being wasted
4 Trading losses against capital gains (TX)

4.1 A taxpayer when making a trade loss relief against general income claim can extend the
loss relief against chargeable gains for that year.
Offset must be made against total income first. Maximum offset against gains is net gains
less capital losses brought forward.
Mr Cubitt has general income of £15,000 for 2018/19. He also has net capital gains of £28,000 for
2018/19 all arising from assets not qualifying for entrepreneurs' relief. In the year ended
31 December 2018 he incurred a trading loss of £40,000. He also has capital losses brought
forward of £12,000 at 6 April 2018.
Required
Assuming Mr Cubitt relieves his trading loss in the current year, show his taxable income and
chargeable gains for 2018/19.
Solution
81
8: TRADING LOSSES
5 Early years trade loss relief (TX)

Relieving the loss
5.1 The taxpayer has the following reliefs available:
(a) Relief against general income,
(b) Carry forward relief; and
(c) Early years trade loss relief.
Early years trade loss relief

5.2 Available in respect of trading losses incurred in the first four years of a trade. Enables the
loss to be carried back against total income of three preceding tax years on a first in, first out
(FIFO) basis.
5.3 A claim under early trade loss relief applies to all three carryback years. The taxpayer
cannot choose to relieve the loss against just one or two of the years or to relieve only part
of the loss.
5.4 This relief is also capped as explained in Section 2.4
Measuring the loss

5.5 The early trade loss relief is the loss that corresponds to the trading income basis period for
that particular tax year. HM Revenue & Customs (HMRC) ensures relief is only given once
where periods overlap.
Lecture example 3 Preparation question
Micky commenced trading on 1 September 2017. Results are as follows:

£
31.8.18 Loss (36,000)
31.8.19 Profit 20,000
31.8.20 Profit 26,000
31.8.21 Profit 32,000
Required
How could the loss be relieved?
Solution
82
8: TRADING LOSSES
6 Ceasing trade (TX)

Terminal loss relief
6.1 Terminal loss relief allows relief against trading profits of the tax year of cessation and the
three preceding years, on a last in, first out (LIFO) basis.
6.2 The loss of the last accounting period (AP) is increased by any overlap profits.
6.3 Loss under terminal loss relief is the actual loss in last 12 months of trading, constructed as
follows:
(a) Final fiscal year
£
Unrelieved trading loss from 6 April to date of cessation
(increased by overlap profits) X
(b) Penultimate fiscal year
Unrelieved trading loss (if any) arising from a date 12m
before cessation to 5 April X
Terminal loss X
6.4 If either (a) or (b) above yields a profit as opposed to a loss, the profit is regarded as zero for
this purpose.
A business which commenced on 1 May 2005 making up accounts to 30 September each year
ceased trading on 30 June 2019. The most recent results were:
Year 30 September 2016 £8,000 profit
Period to 30 June 2019 £27,000 loss
There were overlap profits brought forward of £2,000.
Required
Show how the loss will be relieved under terminal loss relief.
83
8: TRADING LOSSES
Solution
7 Incorporation relief
7.1 Any unrelieved trading losses of the business are carried forward and set off against the first
available income from the company.
The set off must be made against the first available income from the company, including
dividends, interest and salary. If more than one type of income is received then the loss can
be offset against income in the most tax efficient manner.
7.2 Conditions
The consideration for the sale must be wholly or mainly shares (at least 80%), which must
be retained by the vendor throughout any tax year in which the loss is relieved.
8 Losses on unquoted shares

Capital losses on shares in unquoted companies can be offset against general income for
the year in which the loss arose and/or for the preceding year.
Only shares that satisfy the conditions of the EIS/SEIS scheme can qualify for this relief.
This loss relief is also capped.
84
8: TRADING LOSSES
9 Chapter summary
1 What to do with In accordance with legislation a taxpayer can reduce
trading losses his taxable income by deducting the loss.
2 Continuing trade Trade losses may be relieved against general income,
against capital gains and against future profits of the
same trade. Make sure you know how all the different
options work so you can advise a taxpayer correctly.
3 Tax planning A trader needs to carefully choose the right loss relief
to save tax at the highest marginal rate and ideally as
quickly as possible.
4 Trading losses against Once a loss has been offset against general income for
capital gains a tax year it can also be offset against capital gains in
that year.
5 Early years trade loss In opening years a special relief allows the trade loss to
relief be carried back three years against total income
(FIFO).
6 Ceasing trade Loss of the last 12 months can be set against trade
profits of final year and previous three years (LIFO).
7 Incorporation relief Any unrelieved trade loss can be carried forward
against income from the company.
8 Losses on unquoted Capital losses on certain unquoted shares (EIS/SEIS)
shares can be set against general income of the year of the
loss and/or the preceding year.
85
8: TRADING LOSSES
END OF CHAPTER
86
Partnerships and limited
liability partnerships

Remember the material already covered in Taxation (TX – UK) Simone (6/09)
under the heading 'income from self-employment' Faure (6/11)
Tetra (6/12)
Bex (Mar/Jun 16)
87
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
Overview
Partnerships
Allocation rules for Limited liability

profits/losses partnerships
New partnerships Changes in partnership

commencing personnel
88
1 Partnerships (TX assumed knowledge)

Trading profits
1.1 These are allocated according to the profit share arrangements in force during the
accounting period.
Pro rate if profit share changes.
Eric and Ernie have been a partnership for many years, sharing profits as follows:
Eric Ernie
Salary £2,000 £3,000
Balance – PSR 3 2
On 1 March 2018 the agreement was changed such that profits and losses are shared equally with
no further salary payments.
During y/e 31.8.18 the partnership made a trading profit of £80,000.
Required
Show how this is split between the partners.
Solution
89
Losses
1.2 These are allocated using the same method as for profits. Each partner can then decide on
how to use his/her share of the loss.
2 New partnerships commencing (TX)

2.1 Profits and losses are allocated on the basis of the arrangement in force for the accounting
period when profit or loss arose.
 Profits – assessed by opening year rules
 Losses
– Trade loss relief vs general income in fiscal year in which period ended +/or the
preceding one.
– Early years trade loss relief carried back to the three preceding fiscal years
(FIFO).
– Carry forward loss relief, set loss against first available future trading profits.
3 Changes in partnership personnel (TX)

3.1 The partnership is always treated as continuing but:
 Outgoing partner: Use cessation rules for evaluating his/her share of profits
 Existing partners: Continue on CYB rules
 New partner: Use opening year rules to evaluate his/her share of profits
deemed to commence from date of joining, making up accounts to
the partnership's year end.
90
Hamish and Angus commenced in partnership on 1 January 2013. They produce accounts to
31 December each year and their recent trading profits have been as follows:
£
Y/e 31.12.17 20,000
Y/e 31.12.18 18,000
Y/e 31.12.19 30,000
They share profits as follows:
Hamish Angus
Salary £5,000 –
PSR 60% 40%
On 1 June 2018 they invite Finbar to join the partnership.
It is agreed that Hamish's salary will increase to £6,500 and the profits will then be split equally
between the three partners.
Required
Show the assessments on the partners for the tax years 2017/18 to 2019/20.
Solution
91
4 Limited liability partnerships (TX)

4.1 These are taxed on virtually the same basis as normal partnerships.
5 Chapter summary
1 Partnerships Split profits and losses of a partnership between the
partners according to the profit sharing agreement in
the accounting period. Watch out for changes in this
agreement which will result in the profit/losses being
pro-rated.
2 New partnerships Apply commencement rules to each partner's share of
commencing profits.
3 Changes in Outgoing partner – cessation rules
partnership personnel Existing partners – CYB
New partner – commencement rules
4 Limited liability As per normal partnerships.
partnerships
END OF CHAPTER
92
Overseas aspects of
income tax

Explain and apply the concepts of residence domicile and Sushi (12/10)
deemed domicile and advise on the relevance to income tax Mirtoon (12/11)
Shuttelle (6/13)
Piquet and Buraco (12/14)
Jodie (6/15)
Noah and Dan (Mar/Jun 17)
Max (Mar/Jun 18)
Advise on the availability of the remittance basis to UK resident Shuttelle (6/13)
individuals Piquet and Buraco (12/14)
Methley (Mar/Jun 17)
Advise on the tax position of individuals coming to and leaving Mirtoon (12/11)
the UK Jodie (6/15)
Determine the income tax treatment of overseas income Sushi (12/10)
Mirtoon (12/11)
Shuttelle (6/13)
93
10: OVERSEAS ASPECTS OF INCOME TAX

Understand the relevance of the OECD model double tax treaty
to given situations
Calculate and advise on the double taxation relief available to Boson (12/08)
individuals Grifter (12/09)
94
Overview
Overseas aspects of income tax
OECD agreement
Overseas income Double Taxation Relief (DTR)
Status and effect
Residence Domicile Effect
95
1 Residence (TX assumed knowledge)

1.1 A statutory test of residence is used to determine an individual's residence.
Does the individual satisfy Yes

any of the automatic
overseas tests?
No
Yes Does the individual satisfy

any of the automatic
UK tests?
No
Yes No
Does the individual satisfy
the sufficient ties test?
UK resident Non resident
Automatic overseas tests

1.2 The following will automatically be treated as not UK resident:
 A person who is in the UK for less than 16 days during a tax year and who has been
UK resident for one or more of the previous three tax years
 A person who is in the UK for less than 46 days during a tax year and who has not
been resident during the previous three tax years
 A person who works full time overseas subject to them not being in the UK for more
than 90 days during a tax year.
Automatic UK tests
1.3 The following will automatically be treated as UK resident:
 A person who is in the UK for 183 days or more during a tax year
 A person who is in the UK for 30 days in the tax year and whose only home is in the
UK
 A person who carries out full-time work in the UK during a 365-day period, some of
which falls within the tax year
96
Sufficient ties tests

1.4 If a person's residence cannot be determined by any of the automatic tests their status will
be determined by the number of ties they have with the UK. There are five ties:
 Having close family (spouse/civil partner or minor child) in the UK
 Having a house in the UK which is available for at least 91 days in the tax year and is
made use of during the tax year
 Doing substantive work in the UK, where 40 days or more is viewed as substantive
 Being in the UK for more than 90 days during either of the two previous tax years
 Spending more time in the UK than in any other country in the tax year
The following table, showing the number of ties by reference to the number of days in the
UK, will be provided in the exam.
Days in UK Previously resident Not previously resident

Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties (or more) Automatically not resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or
more)
121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or
more)
183 or more Automatically resident Automatically resident
Days spent in the UK

1.5 A day in the UK is any day in which a person is present in the UK at midnight.
(a) Abbey has been resident in Canada for many years. In the current tax year she came to the
UK on holiday on three occasions, amounting to 40 days in total.
Required
Will Abbey be treated as UK-resident in the current tax year?
(b) Zoe has always lived in the UK and her only home is also in the UK. However, she is only
present in that home for 30 days in the current tax year.
Required
Will Zoe be treated as UK-resident in the current tax year?
(c) Oliver (a widower) has a home in the UK as well as one in Sweden. He was UK resident
(spending at least 10 months of every year) until one year ago when he moved permanently
to Sweden. In the current tax year he spends 100 days in the UK visiting family and friends.
97
The remainder of the year was spent in Sweden. His brother and sister-in-law are his only
family members living in the UK.
Required
Will Oliver be treated as UK-resident in the current tax year?
Solution
Split year treatment (not seen in TX)

1.6 An individual can split the tax year into a UK part (taxable) and an overseas part (not
taxable) if they are UK resident, using the tests above for that year, in a number of
scenarios.
This applies to both income tax (IT) and capital gains tax (CGT).
1.7 The split year treatment applies to individuals leaving the UK where:
 The individual leaves the UK to begin full time work overseas
 The individual's partner (spouse, civil partner or someone with whom the individual
lives) leaves the UK to begin full time work overseas and the individual leaves the UK
in order to continue to live with them
 The individual leaves the UK to live abroad, sells their UK house, spends a minimal
amount of time in the UK and establishes ties with the overseas country
98
1.8 The split year treatment applies to individuals coming to the UK where:
 The individual comes to the UK, acquires a home in the UK and the individual does
not have sufficient ties to the UK in order to be UK resident prior to obtaining the UK
home
 The individual comes to the UK to work full time for a period of at least a year and the
individual does not have sufficient ties to the UK in order to be UK resident before
coming to the UK
 The individual returns to the UK following a period where the individual or partner has
worked full time overseas
2 Domicile and deemed domicile

2.1
Concept of an individual's domicile (D) and deemed domicile (DD)
Domicile Even if not UK D can be

deemed UK domicile if satisfy
one (or both) of two conditions
Domicile of origin Formerly UK Long-term UK residents

- Inherited from father domiciled resident
at birth
Domicile of dependency Individual Individual has been UK resident

- If, while under 16, - was born in UK; and for at least 15 of the 20 tax
father's D changes then - has UK domicile of origin; and years immediately preceeding
D changes with father - is UK resident in the relevant the relevant tax year
tax year
Domicile of choice However, long-term residents
- Established once 16, will not be deemed domiciled if
sever ties with old no tax year beginning after
country and move to 5/4/17 in which they were UK
settle permanently resident
overseas
99
3 Effect of status on income

3.1
Effect of residence and domicile on tax
NR UK R and UK D/UK DD UK R and neither UK D

nor UK DD
UK income tax on UK Arising Basis Remittance basis (RB)*

income only
UK IT on worldwide Pay UK IT on UK
No PA but can claim if a income as it arises income and on
citizen of Europe overseas income only
If UK R, UK DD and if remitted to the UK
unremitted overseas
income and gains
<£2,000 the RB* is used
automatically unless Unremitted overseas
elect to disapply and use income and gains?
arising basis
>£2,000 <£2,000
Use Arising Basis RB applies

UNLESS elect to use RB automatically
Keep UK PA and
AEA
If use Arising Basis If elect to use RB
No RBC
- Keep UK PA and AEA - Lose UK PA and AEA
- Avoid RBC - Pay Remittance Basis

Charge (RBC) of £30,000
- Pay UK IT on if UK R for 7 out of 9
worldwide income preceeding tax years
and gains as they arise
- RBC increases to
£60,000 if UK R for
12 out of Iast 14 years
- Only pay UK IT on
overseas income and
gains if remitted to the UK
3.2 Tax planning

As the remittance basis needs to be claimed each year those eligible will need to decide
whether to claim or not.
100
Claire has been resident for the last nine years but is not UK domiciled and was born overseas.
In 2018/19 Claire has the following income:
£
UK trading income 10,000
Foreign income 80,000
She remits £15,000 of her foreign income to the UK.
Required
Determine whether or not Claire should claim to use the remittance basis in 2018/19.
Solution
101
4 Overseas income
4.1 Taxpayers R and D in the UK are taxed on overseas income on an arising basis. The
overseas income is put into the appropriate column of the IT computation dependent on the
source of overseas income ie rental income or pension income in NS column, interest
income in SI column and dividends in DI column.
4.2 Taxpayers R but neither UK D nor UK DD who are using the remittance basis will put all
remitted overseas income into the non-savings income column (it loses its nature and all
becomes NSI). The benefit of the savings income and dividend nil rate bands is therefore
lost.
5 Double taxation relief (DTR)

The problem
5.1 If employee works abroad, and earnings are not exempt or they receive foreign income, they
could be assessed twice:
(a) In the country where they worked/income arose
(b) In the UK (on the gross earnings)
Double taxation relief

5.2 DTR is always given on a source-by-source basis, as the lower of:
 The foreign tax suffered; or
 The UK income tax charged on the gross foreign income.
5.3 The UK tax is the difference between:
 UK tax before DTR on all income including foreign income; and
 UK tax on all income except foreign income.
5.4 Foreign income is treated as the top slice of a taxpayer's income and, where there is more
than one foreign source, the taxpayer may choose which is to be their top slice of income.
They will choose the foreign source suffering foreign tax at the highest rate.
DTR
Neil has earned income of £35,400 for 2018/19. In addition he has foreign income, the gross
amount taxable in 2018/19 being:
Foreign loan stock interest £6,000 (including foreign tax £920)
Foreign property income £6,500 (including foreign tax £3,250)
Neil is resident and domiciled in the UK.
Required
Calculate his UK income tax liability.
102
Solution
6 OECD model agreement

6.1 The Organisation for Economic Co-operation and Development (OECD) created a tax
treaty which sets out a standard method to establish which country taxes income where
income is earned and is taxable in one country but the individual is resident in another
country.
It forms a starting point for negotiations between countries who will then establish a double
tax treaty between each other and decide which country will tax the profits and whether any
reliefs will be given.
103
7 Chapter summary
1 and 2 Definitions Residence: Apply statutory tests.
Domicile: Your permanent home.
Deemed domicile: if a long term resident and/or a
formerly domiciled resident.
3 Effect of status on A non-resident individual is liable to income tax on their
income UK income only.
An individual who is resident but neither UK domiciled
or UK deemed domicile can use the remittance basis,
which means that they are liable for income tax on their
UK income and foreign income if remitted to UK. If a
claim is made the UK PA and AEA are lost and a RBC
may be due.
An individual who is resident and domiciled/deemed
domiciled is liable to income tax on their worldwide
income on an arising basis.
4 Overseas income Income is included gross of any foreign tax.
5 Double taxation relief DTR is given as a tax credit to reduce the double
(DTR) taxation that foreign income can suffer and is the lower
of foreign tax suffered or UK income tax on that item of
income.
6 Organisation for A tax treaty to use as a standard method for countries
Economic starting to create their own.
Co-operation and
Development (OECD)
model agreement
END OF CHAPTER
104
Achievement Ladder Step 1
You have now covered the Topics that will be assessed in Step 1 of your Achievement Ladder. This
contains short form questions covering the topics below.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
105
Achievement Ladder
106
contains extracts from two real past exams.
You can carefully review the model solution to gain and understanding of the topics covered and to start to
think about what real exam questions might look like. Make sure you take time to look back at your own
solution to think about how you could have improved.
Course Notes
chapter
Pensions and other tax efficient
Income tax
Employment income 4
More income tax
aspects 5
Trade profits 6
Income tax – businesses Capital allowances 7
Trading losses 8
107
Achievement Ladder
108
Chargeable gains:
an outline

Remember the material covered in Taxation (TX – UK) under Capstan (6/11)
the headings 'scope of taxation of capital gains', 'basic Mirtoon (12/11)
principles of computing gains and losses' and 'the computation Una (6/12)
of capital gains tax'
Brad (6/13)
Pescara (12/13)
Ziti (6/14)
Kantar (12/14)
King (6/15)
Advise on the impact of dates of disposal
Evaluate the use of capital losses in the year of death Cada (12/14)
Determine the tax implications of independent taxation and John and Maureen Robinson
transfers between spouses (6/08)
109
11: CHARGEABLE GAINS: AN OUTLINE

Identify the occasions when a capital gain would arise on a
partner in a partnership on the disposal of a partnership asset
Identify connected persons for capital gains tax purposes and FL Partnership (12/13)
advise on the tax implications of transfers between connected
persons
Advise on the tax implications of a part disposal, including small Ash (12/12)
part disposals of land Kantar (12/14)
110
Overview
Chargeable gains
Chargeable persons,
disposals and assets
Capital losses
CGT payable on gains
Computing gain or loss
Part disposals Transfers
To connected persons Between husbands and By partnership

wives
111
1 General (TX assumed knowledge)

1.1 For capital gains tax (CGT) to apply there needs to be a chargeable person, a chargeable
disposal and a chargeable asset.
Persons chargeable
1.2  Individuals
 Partnerships
 Companies
 Trustees
Chargeable disposal
1.3  Sale
 Gift
 Sale at undervalue
 Loss/destruction
Chargeable assets
1.4 All assets are chargeable assets unless they are specifically exempt. The following assets
are exempt:
(a) Cars
(b) UK government stocks (taxable for companies under investment income)
(c) Qualifying corporate bonds (taxable for companies under investment income)
(d) Wasting chattels (greyhounds, racehorses)
(e) Currency for personal use
(f) Medals awarded for valour or inherited (not if purchased)
(g) National Savings certificates
(h) Gambling winnings
(i) Chattels sold at a gain where cost and proceeds <£6,000.
Exempt disposals
1.5 The following disposals are exempt:
(a) Transfers on death; and
(b) Gifts to charities.
Timing of disposals (not seen at TX)

1.6 A chargeable disposal occurs on the date of the contract, (if there is one). This may be
different to date of transfer of asset.
1.7 Timing of disposal should be considered taking into account rates of tax in different years.
112
2 Calculation of the gain (TX)

2.1 BASIC PROFORMA
£
Proceeds X
Less incidental costs of disposal (X)
Cost (including incidental costs of acquisition) (X)
Enhancement expenditure (X)
Gain X
3 Tax payable on gains (TX)

Rates of tax
3.1 CGT is charged on taxable gains which are chargeable gains less the annual exempt
amount of £11,700.
3.2 Taxable gains not qualifying for entrepreneurs' relief nor on residential property, are
chargeable to capital gains tax at the rate of 10% or 20% depending on the individual's
taxable income. Gains on residential property which are not fully exempt under the principal
private residence (PPR) relief are chargeable at 18% or 28% depending on the individual's
taxable income. Note that, if an individual has a mixture of residential property gains and
other gains, the annual exemption is deducted in priority against the residential property
gains.
3.3 The rate of tax on taxable gains not qualifying for entrepreneurs' relief is determined as
follows:
(a) If taxable income ≥basic rate limit (extended by gross personal pension
contributions), gains are taxed at 20% (or 28% if residential property)
(b) If taxable income is <basic rate limit (extended by gross personal pension
contributions), gains are taxed at 10% (or 18% if residential property) up to the limit
less taxable income and 20% (or 28%) thereafter.
3.4 The rate of tax on taxable gains qualifying for entrepreneurs' relief is 10% (see Chapter 13).
Illustration
3.5 Thomas Arne realises a chargeable gain of £28,600 in 2018/19. The gain does not qualify
for entrepreneurs' relief and is not on residential property.
He had taxable income of £24,920 in 2018/19 and made a net personal pension contribution
of £2,400 in December 2018.
His CGT payable for 2018/19 is calculated as follows:
£
Chargeable gain 28,600
Less annual exempt amount (11,700)
Taxable gain 16,900
113
£
Basic rate limit 34,500
Add personal pension contribution £2,400  100/80 3,000
Extended basic rate limit 37,500
CGT payable:
£(37,500 – 24,920) = £12,580 (unused basic rate band)  10% 1,258
£(16,900 – 12,580) = £4,320  20% 864
Total CGT payable 2,122
4 Capital losses (TX)

Current year losses
4.1 Must offset against current year gains as far as possible. Any excess carried forward to
future years.
Capital losses brought forward

4.2 The amount of capital loss brought forward must be offset but the amount used is restricted
to preserve the annual exemption.
In 2018/19, Diane makes a gain on an asset of £48,000 and a gain of £30,000 on another asset.
She also makes an allowable loss of £54,300.
Diane also has capital losses brought forward of £15,000.
None of the assets disposed of qualified for entrepreneurs' relief nor are residential property.
Required
Show Diane's taxable gains for 2018/19, after the annual exempt amount.
Solution
114
Losses in year of death (Not seen in TX)

4.3 Losses (in excess of gains) arising in the year in which an individual dies can be carried
back three years on a last in, first out (LIFO) basis. Losses are utilised so as to reduce
gains for each year to an amount equal to the annual exempt amount.
5 The full computation (TX)

5.1 PROFORMA
Non- Residential
residential property
property
£ £
Proceeds X X
Less incidental costs of disposal (X) (X)
Cost (X) (X)
Enhancement expenditure (X) (X)
Gain X X
CGT reliefs (X) (X)
CY capital losses (X) (2) (X) (1)
Trade losses (individuals) (X) (2) (X) (1)
Capital losses b/fwd (X) (2) (X) (1)
X X
If an individual
Gain X X
AE (Bal) (2) (11,700) (1)
X X
Tax @ 10%/20% or 18%/28% X X
On 30 August 2018 a freehold office building was sold for £260,000. The building had been
purchased in July 1990 for £81,000 and had been extended at a cost of £43,000 in May 2002.
Barbara had incurred legal fees of £3,740 in connection with the disposal. Entrepreneurs' relief is
not available on the disposal and this was Barbara's only disposal in 2018/19. She had taxable
income of £50,000 in 2018/19.
Required
Calculate the after tax sale proceeds arising from this disposal.
115
Solution
Valuing quoted shares and securities (TX)

5.2 Market value must be used. Shares and securities are valued at the lower of the two prices
shown plus one-half of the difference between the two prices. Note that this is different to
how we would value the shares for inheritance tax (IHT) purposes (see Chapter 17).
Mr Brown transferred 1,000 shares in A plc to his son. The prices were 200p–204p.
Required
Calculate the deemed proceeds to be used in the gain calculation.
Solution
116
6 Part disposals (TX)

6.1 The gain is calculated as follows:
£
Proceeds of part disposal A
Less selling costs (X)
X
Less:
A
Original cost 
A B (C)
Gain X
A = MV of the part disposed of
B = MV of the remainder of the asset
An individual bought 10 acres of land for £10,000 in June 1990.

They sold two acres of land for £6,000 in the current tax year when the remaining eight acres were
worth £36,000.
Required
What is the chargeable gain from selling the two acres and what is the cost that will be used when
the remaining eight acres are sold?
Solution
Land: small part disposal proceeds (Not seen in TX)

6.2 If a small part disposal of land is made then the part disposal can be ignored. Instead the
proceeds are deducted from the cost giving a reduced cost for later disposals.
6.3 Note this is an election and for it to be available two conditions need to be met:
(a) Aggregate proceeds from sales of all land and buildings in the same tax year must not
exceed £20,000; and
(b) Proceeds do not exceed 20% of the market value of the land prior to the disposal.
117
Harvey bought 15 acres of land in June 2000 for £30,000. He sells three acres for £3,000 in the
current tax year. This is his only sale of land in the current tax year although he has made other
gains which have utilised his annual exemption. The market value of the land immediately prior to
the disposal is £40,000.
Required
What is Harvey's CGT position? Assume Harvey makes any relevant election.
Solution
118
7 Transfers between husband and wife/civil partners

(TX)
7.1 Spouses and civil partners are taxed separately. Each has an individual annual exempt
amount which cannot be transferred to the other spouse or civil partner (consider
transferring assets to spouse/civil partner to utilise annual exempt amount).
7.2 (a) Transfers between spouses/civil partners are on a no gain/no loss basis.
(b) Recipient spouse/civil partner is treated as if he or she bought the asset at the
transfer date for a price equal to cost.
Madeleine bought a Ming vase for £9,600 in January 1999. In August 2001 she transferred the
vase to her husband Ultan.
Ultan subsequently sold the vase in the current tax year for £24,000.
Required
What is Ultan's chargeable gain?
Solution
119
8 Transfers to connected persons (not seen in TX)

8.1 (a) Proceeds are deemed to be open market value.
(b) Connected persons for CGT are:
(i) Direct relatives
Parent + Spouses
Brothers/sisters Taxpayer Brothers/sisters

+ + +
Spouses Spouse Spouses
Children + Spouses
Note. Spouse also includes civil partner
(ii) Business relationships:
(1) A partner is connected to fellow partners and their current spouses.
(2) A company is connected to the persons controlling it.
(c) Losses from sales to connected person can only be relieved against current and
future gains on sales to the same person.
9 Business partnerships (not seen in TX)

9.1 Where a partnership disposes of an asset any gain or loss is apportioned to the partners in
their capital profit sharing ratio.
Maria made the following disposals during 2018/19:

(a) A rental property which she had bought in April 1990 for £100,000 and had incurred legal
fees on acquisition of £1,500. She subsequently extended the property in 1995 at a cost of
£24,000 and then sold it at auction for £340,000. Auctioneer's fees amounted to 3% of the
proceeds.
(b) Six hectares of a ten-hectare plot of land. She had acquired the land in 1987 for £250,000
and sold the six hectares for £420,000 incurring legal fees of £3,000. The remaining four
hectares were worth £200,000.
(c) A painting worth £15,000. She had been given it by her husband in 2000 when it was worth
£12,000 and her husband had bought it in 1996 for £10,000.
(d) A necklace for £20,000. She had inherited the necklace on the death of her grandmother
when it was worth £30,000 and her grandmother had paid £2,000 for the necklace many
years ago.
Maria has brought forward capital losses of £5,000 and had taxable income of £42,000.
120
Required
What is Maria's CGT liability for 2018/19?
Solution
121
10 Chapter summary
1 General For capital gains tax to apply you need a chargeable
person making a chargeable disposal of a chargeable
asset.
2 Calculation of the gain A chargeable gain is calculated by deducting cost and
enhancement expenditure (if relevant) from proceeds.
3 Tax payable on gains CGT is a separate tax for individuals. Everyone
receives an annual exempt amount each tax year.
Gains not qualifying for entrepreneurs' relief are taxed
at 18% or 28% if residential property, and 10% or 20%
if not on residential property, depending on taxable
income.
4 Capital losses Current year losses must be offset against current
year gains. Capital losses brought forward can be
restricted to preserve annual exempt amount. Losses
in the year of death can be carried back three years.
5 The full computation A chargeable gain is calculated by deducting cost and
enhancement expenditure (if relevant) from proceeds.
Next relevant reliefs are considered. Any remaining
taxable gain will have CY and b/f capital losses offset
before the annual exempt amount is deducted and tax
calculated.
6 Part disposal On a part disposal the cost of the original asset needs
to be split between part sold and part retained, using
A/A + B.
7 Transfers between Spouses/civil partners are treated as separate people.
husband and wife/civil Transfers between spouses/civil partners are at no
partners gain/no loss. Each spouse/civil partner receives an
annual exempt amount but this cannot be transferred
to the other spouse/civil partner.
8 Transfers to connected Proceeds are deemed to be open market value.
partners
9 Business partnerships If a partnership disposes of any asset, the gain or loss
is split using capital profit sharing ratio.
END OF CHAPTER
122
Shares and securities

Remember the material already covered in Taxation (TX – UK) Pescara (12/13)
under the heading 'gains and losses on the disposal of shares
and securities'
Extend the explanation of the treatment of rights issues to
include the small part disposal rules applicable to rights issues
Define a qualifying corporate bond (QCB), and understand what Capstan (6/11)
makes a corporate bond non-qualifying. Understand the capital
gains tax (CGT) implications of the disposal of QCBs in
exchange for cash or shares
Apply the rules relating to reorganisations, reconstructions and Capstan (6/11)
amalgamations and advise on the most tax efficient options Banger Ltd and Candle Ltd
available in given circumstances (12/12)
123
12: SHARES AND SECURITIES
Overview
Shares and
securities
Matching rules Takeovers/reorganisations
Bonus and rights issues Gilts and QCBs
124
1 Shares and securities (TX assumed knowledge)

Matching rules for individuals
1.1 Disposals are matched with acquisitions in the following order:
 Acquisitions on same day
 Acquisitions in next 30 days
 Share pool
1.2 The share pool aggregates all purchases except for those made on the same day as the
disposal or within the following 30 days.
Mel had the following transactions in the shares of Gibbon plc:

1 September 1994 Bought 3,000 shares for £8,000
1 May 2002 Bought 1,500 shares for £7,500
10 August 2018 Sold 4,000 shares for £32,000
20 August 2018 Bought 500 shares for £2,800
Required
Calculate Mel's gain.
Solution
125
2 Bonus and rights issues (TX)

2.1 Treat as acquired at same date as underlying shares.
Sale of rights nil paid (not seen in TX)

2.2 If a shareholder does not take up his rights but sells them to a third party, a part disposal
occurs.
Use A/A+B
Where A = proceeds from sale of rights
B = market value of the shares retained
If however the proceeds are less than the higher of £3,000 and 5% of the value of the
shareholding at the time of the issue, no gain arises. Instead the proceeds are deducted
from original cost. Note that this treatment will automatically apply unless the shareholder
elects to be taxed on a part disposal.
Henry bought 7,000 £1 shares in Tristan Ltd for £7,000 (ie at par) on 1.1.2000. The company
made a 1:2 rights issue in the current tax year. Henry did not take up his rights, instead he
received £4,000. The market value of the shares retained were worth £50,000.
Required
Calculate Henry's chargeable gain.
Solution
126
3 Gilts and qualifying corporate bonds (QCBs) (TX)

3.1 Exempt from CGT for individuals
3.2 A QCB is a security which:

 Is a normal commercial loan;
 Is expressed in sterling;
 Is acquired after 13.3.84; and
 Has no provisions for conversion to or redemption in other currencies.
4 Takeovers/reorganisations (introduced at TX)

4.1 If the offer is 'paper for paper' there is no CGT liability, ie new holding assumes base cost
of old holding.
4.2 (a) If there is a cash element then this represents a disposal for CGT purposes and
original cost needs to be apportioned between the cash and new shares received.
(b) Cash element treated as proceeds of a part disposal and A/A + B rule applied to cost,
where:
A = cash element
B = value of non-cash element ie market value at date of takeover.
(c) If cash element is less than the higher of 5% of the value of the total holding
post- takeover and £3,000 then no disposal has taken place. Instead the cash is
deducted from the base cost for future disposals. This treatment is automatic unless
the shareholder elects to be taxed on the part disposal.
4.3 Paper-for-paper transactions are only treated as not giving rise to any immediate CGT
liability if the transactions are entered into for bona fide commercial reasons and not for tax
avoidance.
4.4 The acquiring company must obtain clearance from HMRC to ensure the above condition
has been met.
4.5 If QCBs are given in exchange for the original shares, a gain arises on the shares using
market value of QCBs at takeover. However, this gain is deferred until the QCBs are sold.
4.6 Thus on disposal of the QCB while the gain (or loss) on the QCB itself is exempt, the
deferred gain from the original share sale will be taxed.
127
Amanda plans to start up a new business and will need to raise £310,000 to do so.
She is planning to sell 34,080 shares in Granada plc for £83,496 and £20,000 6% Granada plc
non-convertible loan stock for £23,920 to raise some of the funds, with the balance being obtained
via a bank loan on 1 February 2019.
The shares and loan stock were acquired as follows:
(a) Amanda was given 11,360 Forte plc shares by her uncle on 1 May 2008. At that time they
were worth £70,432.
(b) On 1 September 2012 Forte plc was taken over by Granada plc. Amanda received 34,080
shares in Granada, £8,000 in cash and £20,000 6% Granada non-convertible loan stock (a
qualifying corporate bond) in exchange for the shares in Forte plc.
The shares and loan stock were worth £78,344 and £22,720 respectively on 1 September 2012.
Amanda has taxable income of £60,000 in 2018/19. Entrepreneurs' relief does not apply on any of
the disposals.
Required
Calculate how much external finance Amanda will need to raise.
Solution
128
5 Chapter summary
1 Shares and securities Share-matching rules are used to determine the
appropriate cost of the shares sold.
2 Bonus and rights issues Treat as acquired at same date as underlying
shares.
Sale of rights nil paid is treated as a part disposal.
3 Gilts and qualifying Exempt for individuals.
corporate bonds
4 Takeovers/reorganisations On a takeover only the receipt of cash will cause a
gain to arise. For a paper-for-paper exchange the
new holding is treated as having been acquired on
the same date and for the same amount as the
original holding.
129
END OF CHAPTER
130
Chargeable gains:
reliefs

Remember the material already covered in Taxation (TX – UK) Capstan (6/11)
under the headings 'gains and losses on the disposal of Mirtoon (12/11)
movable and immovable property', 'the computations of capital Una (6/12)
gains tax' and 'use of exemptions and reliefs in deferring and Dana (12/12)
minimising tax liabilities arising on the disposal of capital assets'
Brad (6/13)
Ziti (6/14)
Bamburg Ltd (6/14)
Jodie (6/15)
(Sep/Dec 17)
Max (Mar/Jun 18)
131
13: CHARGEABLE GAINS: RELIEFS

Advise on the availability of entrepreneurs' relief in relation to Calisia (6/11)
associated disposals Ash (12/12)
Understand and apply the relief that is available on the transfer FL Partnership (12/13)
of an unincorporated business to a limited company Waverley (Sep/Dec 16)
Understand and apply enterprise investment scheme (EIS) Pescara (12/13)
reinvestment relief Pippin (Mar/Jun 17)
Understand and apply seed enterprise investment scheme
(SEIS) reinvestment relief
132
Overview
CGT reliefs
Gift relief EIS reinvestment relief
Entrepreneurs' relief
Replacement of business Incorporation relief

asset relief
Principal private residence SEIS reinvestment relief

relief
133
1 Principal private residence (PPR) relief (TX assumed

knowledge)
General principles
1.1 The gain on one's PPR is exempt from capital gains tax (CGT) provided that it is occupied
fully by the owner throughout the ownership period. There are special rules if the residence
is in a country other than one in which the individual (or spouse/civil partner) is resident –
these are discussed in the overseas section in the next chapter. The residence includes a
garden of up to half a hectare. If the owner is absent, they may still be deemed to be
occupying the residence for CGT purposes.
The last 18 months

1.2 The last 18 months are always deemed occupation in full provided it was the taxpayer's
PPR at some point.
Deemed occupation
1.3 The period of occupation includes the following deemed periods provided they are preceded
and followed at some time by genuine occupation:
(a) Up to three years for any reason
(b) Any period where required by employment to work abroad
(c) Up to four years, if required to live elsewhere in the UK by reason of their work or was
self-employed and forced to work away from home (UK and overseas)
Part occupation
1.4 If any part of the residence is not occupied by the owner for residence purposes, PPR relief
will be proportionately withdrawn.
More than one residence

1.5 The taxpayer may choose which home is to be their PPR, provided that each has been
occupied at some point.
If the owner is unable to occupy their own home because they are required to occupy
job-related accommodation, their own home will be deemed to be their main residence,
provided that they intends to occupy it at some point.
The letting exemption

1.6 If part of the main residence is let out, a gain may arise on the part let out.
For residential lets, this gain may be covered by letting relief, which is the lowest of:
(a) The gain arising in the letting period not covered by PPR relief;
(b) £40,000; or
(c) The PPR relief already given.
134
On 30 September 2018 Bob sold his house for £145,000. The house had been bought on 1 April
1999 for £45,000. Bob occupied the house as his main residence until 30 September 2001 when
he went to live with his sister. The house remained empty for four years but has been rented out
since then.
Required
Calculate Bob's gains after all exemptions.
Solution
135
2 Entrepreneurs' relief (TX)

2.1 An individual can claim entrepreneurs' relief on the following disposals:
(a) Qualifying businesses (whole or part thereof):
(i) Sole trader
(ii) Partnership interest
(iii) Furnished holiday lettings
Relief is only available in respect of gains on business assets (investments do not qualify).
Note that goodwill is no longer eligible for entrepreneurs' relief if it is transferred by an
individual to a close company where the individual and close company are related.
Close companies are covered in more detail in Chapter 25 and an individual is related
to a company if he is a shareholder of the company. Thus this restriction will apply in
the relatively common situation where a sole trader incorporates his business.
The restriction regarding goodwill not qualifying was relaxed in Finance Act 2016 such
that goodwill does still qualify if the individual holds <5% of the shares or holds ≥5%
and sells all their shares to another company within 28 days. This was designed to
cover the situation where an individual might choose to incorporate his business to
facilitate its sale.
(b) The disposal of shares in a trading company where an individual has a ≥5%
shareholding in the company (personal company) and is also an officer (eg director)
or employee of the company (no restriction for investments held by company).
(c) Shares acquired via enterprise management incentive (EMI) share options have
some special rules:
(i) The requirement to own 5% of the shares is waived.
(ii) The ownership period is calculated from the date of grant.
2.2 Business/shares must have been owned throughout period of one year before disposal.
2.3 On sale of business, the whole or part of the business must be disposed of as going concern.
2.4 If business has ceased, business must have been owned throughout period of one year
before disposal and disposal was within three years after cessation – can cover disposal of
individual assets.
Operation of relief
2.5 Disposal of assets qualifying for entrepreneurs' relief are treated as a single chargeable gain
(net off gains and losses).
This chargeable gain is taxed at 10%.
2.6 If the taxpayer has disposals of assets not qualifying for entrepreneurs' relief in the tax year:
(a) Set off losses and the annual exempt amount against gains not qualifying for
entrepreneurs' relief first
(b) Deduct gains qualifying for entrepreneurs' relief from amount of basic rate band
available for gains not qualifying for entrepreneurs' relief.
136
2.7 Relief covers the first £10 million of chargeable gains.

This is a lifetime limit so can apply to successive disposals.
2.8 Claim must be made by first anniversary of 31 January following tax year of sale.
Associated disposal (not seen in TX)

2.9 Entrepreneurs' relief is also available where an individual disposes of either:
(a) Whole or part of partnership business; or
(b) Shares in a qualifying company
and at the same time disposes of a separate asset that had been used in the partnership
where they are partner or in the company's trade.
2.10 If market value rent is received for the asset no entrepreneurs' relief is available. If rent is
below market value, entrepreneurs' relief is proportionately withdrawn.
Gerald sold his sole trader business, which he had run since 2002, in August 2018. Gains and
losses arose on chargeable assets as follows:
£
Offices 25,000
Warehouse (7,500)
Investments 22,300
Gerald has taxable income of £18,000 in 2018/19. He has no other chargeable assets.
Required
Calculate Gerald's CGT liability for 2018/19. He has not previously made a claim for entrepreneurs'
relief.
Solution
137
3 Investors' relief
3.1 This relief was introduced in Finance Act 2016 and means that an individual disposing of
qualifying shares in unlisted trading companies in which they are not an officer or
employee will be able to claim investors' relief to qualify for a 10% tax rate on their gain.
The shares will need to have been held for three years and so consequently it will not be
until disposals in 2019/20 that investors will be able to benefit from this relief. Consequently,
while you need to be aware of the advantages of this relief, you will not see this tested
computationally.
4 Gift relief (TX)

The relief
4.1 (a) Disposals by way of gift or sale at undervalue are chargeable to CGT, with proceeds
deemed to be market value.
(b) Under certain circumstances a gift relief claim can be made jointly by donor and
recipient to defer the gain.
(c) Always be aware a gift may also have inheritance tax (IHT) implications.
Conditions
4.2 (a) The disposal must be made to an individual who is UK resident or to a trust and be a
disposal of qualifying assets.
(b) Qualifying assets:
(i) Business assets used in donor's trade (see paragraph c below)
(ii) Agricultural property
(iii) Unquoted shares in a trading company
(iv) Quoted shares in a personal trading company (≥5%)
(v) Gifts subject to an immediate IHT charge (ie assets into a trust).
(c) For business assets used in donor's trade this covers a sole trader disposing of one
or more asset(s) and also covers an individual disposing of an asset where the asset
is used in the trade of their personal trading company.
Also note that if the asset is used in the trade for only part of the ownership period
then the gain must be apportioned.
Taxed now
4.3 Provided the gift is for no consideration then the whole gain is deferred by reducing the base
cost of the gifted asset.
138
There are two potential complications which you need to be able to consider:
(1) Partial consideration (sale at undervalue)
(a) The excess of actual proceeds received over cost is taxed immediately.
(b) The balance is rolled over into the base cost for a subsequent disposal of the
asset.
(c) Entrepreneurs' relief may apply to gain taxed immediately if conditions
satisfied.
(2) Gift of qualifying shares
(a) Gain on gift of shares may not all be eligible for relief where a personal
company has investments in its net assets.
(b) Gain eligible for relief will be:
MVCBA
Total gain 
MVCA
Where CA = chargeable assets
CBA = chargeable business assets (CA except investments)
(c) Entrepreneurs' relief may be available on remaining gain if conditions satisfied.
Bronwen gives her 100% shareholding in Red Dragon Ltd, a trading company, to her daughter
Maria in December 2018. The shares had cost her £100,000 in 1997 when Bronwen also became
a director of the company. At the date of disposal the company held the following assets:
£
Factory 400,000
Office premises 500,000
Goodwill 300,000
Investments in quoted shares 100,000
Plant and machinery (cost and MV < £6,000) 150,000
Other current assets 550,000
2,000,000
Required
Calculate Bronwen's liability to CGT for 2018/19 if this is Bronwen's only disposal in the year, if
Bronwen and her daughter jointly elect for gift relief, and Bronwen claims entrepreneurs' relief. She
has not previously made a claim for entrepreneurs' relief.
Solution
139
Anti-avoidance rules (not seen in TX)

4.4 If the transferee ceases to be resident within six years from the end of the tax year of the
disposal, the gain held-over will be assessed on the transferee immediately before he
changes residence.
5 Replacement of business assets (rollover) (TX)
The relief
5.1 (a) Allows the taxpayer to delay CGT liability to the extent that proceeds from sale of a
business asset are reinvested in new business assets.
(b) Original and replacement asset must both be used in a trade of the taxpayer.
Qualifying assets
5.2 Both the old and new assets must be one of the following:
(a) Land and buildings;
(b) Fixed plant and machinery;
(c) Goodwill (individuals only); or
(d) Ships, aircraft, hovercraft.
Timing
5.3 Purchase of replacement may be up to 12 months before disposal of old asset and
36 months after disposal of old asset.
140
Taxed now
5.4 Any proceeds not reinvested in a qualifying asset are deducted from the gain to be rolled
over and are taxed immediately.
Groups
5.5 A 75% group is treated as one unit for rollover relief.
In September 1997 Kaye bought a freehold property for £168,000 which was used in her trade. In
October 2018 she sold it for £300,000, reinvesting £260,000 of the proceeds in a new freehold
property for use 100% in this trade.
Required
Calculate the chargeable gain and the base cost of the new asset.
Solution
141
Depreciating assets
5.6 Definition
(a) Asset with expected life 60 years
(b) Fixed plant and machinery
5.7 Effect
If new asset is a depreciating asset:
(a) Gain deferred is not deducted from cost of new asset
(b) Instead it is postponed until the earliest of:
(i) Disposal of new asset;
(ii) Date new asset ceases to be used in the trade; or
(iii) 10 years after new asset was acquired.
Lecture example 5 Comprehensive question based on TX past exam questions
Mick disposed of the following assets during the tax year 2018/19:
(1) On 19 May 2018, Mick sold a freehold warehouse for £522,000. The warehouse was
purchased on 6 August 2003 for £258,000, and was extended at a cost of £99,000 during
April 2005. In January 2009, the floor of the warehouse was damaged by flooding and had
to be replaced at a cost of £63,000. The warehouse was sold because it was surplus to the
business's requirements as a result of Mick purchasing a newly built warehouse in
December 2017 for £500,000. Both warehouses have always been used for business
purposes in a wholesale business run by Mick as a sole trader.
(2) On 24 September 2018, Mick sold 700,000 £1 ordinary shares in Rolling Ltd, an unquoted
trading company, for £3,675,000. Rolling Ltd has 10,000,000 shares in issue. He had
originally purchased 500,000 shares in Rolling Ltd on 2 June 2007 for £960,000. On
1 December 2012, Rolling Ltd made a 3-for-2 bonus issue. Mick has been a director of
Rolling Ltd since 1 January 2007.
(3) On 30 June 2018, Mick sold a house for £308,000. The house had been purchased on
1 January 2001 for £93,000. On 10 June 2008, Mick had incurred legal fees of £5,000 in
relation to a boundary dispute with his neighbour. Throughout the 210 months of ownership
the house had been occupied by Mick as follows:
Months
34 Occupied
18 Unoccupied – Travelling overseas
24 Unoccupied – Required to work overseas by his employer
106 Occupied
12 Unoccupied – Required to work overseas by his employer
13 Unoccupied – Travelling overseas
3 Unoccupied – Lived with sister
210
Mick let the house out during all of the periods when he did not occupy it personally.
Throughout the period 1 January 2001 to 30 June 2018 Mick did not have any other main
residence.
142
(4) On 24 June 2018, Mick 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 2006 for £39,000. On
24 June 2018, the market value of Reward Ltd's chargeable assets was £540,000, of which
£460,000 was in respect of chargeable business assets. Mick has never been employed by
Reward Ltd.
Mick has capital losses brought forward of £25,000.
Required
Calculate Mick's CGT liability for 2018/19 assuming all beneficial claims are made.
Solution
143
144
6 Incorporation relief
6.1 Incorporation is a sale of assets to a company. Incorporation results in chargeable gains (or
losses) on the disposal of chargeable assets which are taxable.
6.2 Incorporation relief allows these gains to be deferred into the base cost of any shares
received as consideration from the company.
Relief under incorporation relief is automatically available. However, individuals can elect
that incorporation relief should not apply.
6.3 The election must be made within two years of 31 January following the end of the tax year
in which the business was incorporated.
6.4 Conditions
 Must transfer all assets (except cash) to company
 The business must be transferred as a going concern
 The consideration must be wholly or partly in shares
6.5 The relief

MV of shares received
Gain deferred = Gain 
MV of total consideration
6.6 Entrepreneurs' relief may be available on remaining gain if conditions satisfied.
Brian transfers his lawnmower business (started in 1994) in September 2018 to a company in
exchange for £650,000 ordinary £1 shares (to be issued at par) and £150,000 cash. The following
gains arose at the date of transfer:
£
Freehold building 75,000
Goodwill 90,000
Leasehold building 52,500
Plant and machinery (all assets worth <£6,000) 60,000
Brian intends to keep his shares for the foreseeable future.
Required
Calculate Brian's CGT liability for 2018/19 assuming that he is a higher rate taxpayer, does not
have any other chargeable assets and has not made any claims for entrepreneurs' relief. Show the
base cost of the shares.
145
Solution
7 EIS reinvestment relief

7.1 If an individual sells any chargeable asset and invests in EIS shares the gain can be
deferred.
7.2 Maximum deferral is the lower of:

(a) Amount subscribed for the EIS shares; and
(b) The gain.
A lower amount can be claimed if desired. (For example, to utilise the annual exemption.)
7.3 Deferred gain will crystallise if:

 Shares disposed of
 Taxpayer becomes NR within three years of share issue
 Shares cease to be eligible for relief
7.4 Note that if the original gain qualified for entrepreneurs' relief when it was deferred it will
continue to qualify for entrepreneurs' relief when the deferred gain is taxed.
7.5 Shares must be issued between one year before and three years after the gain arose.
146
Alan disposed of a painting for £300,000 in November 2018, giving a chargeable gain of £60,000.
This is his only disposal in 2018/19.
He subscribed £70,000 in a company which qualified under the EIS rules in September 2018.
Required
What will be the deferred gain, assuming Alan makes the most tax-efficient claim?
Solution
8 SEIS reinvestment relief

8.1 This relief is available if an individual disposes of any chargeable asset and subscribes for
qualifying SEIS shares in the same year.
8.2 SEIS reinvestment relief is the lower of:

 50% of the gain invested in SEIS shares (up to a maximum of 50% of £100,000); and
 The amount specified in the claim.
8.3 Note that, in contrast to EIS reinvestment relief, SEIS reinvestment relief exempts the gain
rather than defers it.
8.4 It is possible to claim to obtain relief in respect of gains in the preceding tax year.
147
Withdrawal of relief
8.5 SEIS reinvestment relief is withdrawn or reduced if the shares are sold within three years of
acquisition.
8.6 If the shares are not sold at arm's length all of the SEIS income tax relief and all of the CGT
SEIS reinvestment relief will be withdrawn in respect of those shares.
8.7 If the shares are sold at arm's length the amount of SEIS income tax relief withdrawn is
restricted to a maximum of 50% of the consideration received and the same proportion of
CGT SEIS reinvestment relief will also be withdrawn.
Ciaran disposed of a statue realising a chargeable gain of £65,000 during 2018/19. He subscribed
£70,000 for shares in Octopus Ltd (a qualifying SEIS company) in the same tax year. His income
tax liability for 2018/19 was sufficient to obtain full income tax relief.
Ciaran sold the shares in Octopus Ltd on 6 September 2020 for £55,000 (an arm's length value).
Required
(a) Compute the maximum amount of SEIS reinvestment relief Ciaran could obtain in 2018/19.
(b) Explain how much SEIS reinvestment relief would be withdrawn on the disposal of the
shares in 2020/21.
Solution
148
9 Chapter summary
1 Principal private Disposal of your principal private residence is exempt
residence (PPR) relief from CGT. The exemption may however be restricted
due to periods of non-occupation or business use.
2 Entrepreneurs' relief Relief for first £10m of net gains on disposal of whole
or part of business or qualifying shares and securities.
Rate of tax is 10%.
3 Investors' relief 10% tax rate will be available to a non-employee
shareholder selling qualifying shares from 2019/20.
Historically, for shares to qualify for 10% tax the
individual needed to be an employee of the company.
4 Gift relief Gift relief is available for gifts and sales at an
undervalue but only in respect of certain qualifying
assets.
5 Replacement of If a business replaces a business asset the gain can
business assets be deferred, but only if full proceeds are reinvested.
6 Incorporation relief On incorporation, gains can be deducted from the cost
of the shares received unless there is a non-share
element in the consideration which causes a part
disposal.
7 EIS reinvestment relief Gains can be deferred if an individual invests in shares
of a enterprise investment scheme (EIS) company.
8 SEIS reinvestment Gains can be exempted if an individual invests in
relief shares of a seed enterprise investment scheme (SEIS)
company.
149
END OF CHAPTER
150
Chargeable gains:
additional aspects

Remember the material already covered in Taxation (TX – UK) Sakura (12/10)
under the headings 'scope of the taxation of capital gains' and Mirtoon (12/11)
'gains and losses on the disposal of moveable and immovable
property'
Nocturne Ltd (6/15)
Identify the concepts of residence, domicile and deemed domicile Mirtoon (12/11)
and determine their relevance to capital gains tax (CGT) Brad (6/13)
Jodie (6/15)
Max (Mar/Jun 18)
Advise on the availability of the remittance basis to non-UK Capstan (12/10)
domiciled individuals Cate and Ravi (6/15)
Determine the UK taxation of foreign gains, including double Mirtoon (12/11)
taxation relief Cate and Ravi (6/15)
Conclude on the CGT position of individuals coming to and leaving Mirtoon (12/11)
the UK Brad (6/13)
Jodie (6/15)
Max (Mar/Jun 18)
151
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS

Advise on the UK taxation of gains on the disposal of UK Waverley (Sep/Dec 16)
residential property owned by non-residents Noah and Dan (Mar/Jun 17)
Advise of the CGT implications of transfers of property into trust Surfe (12/11)
King (6/15)
Advise on the capital gains tax implications of transfers of property Surfe (12/11)
passing absolutely from a trust to a beneficiary
Determine the gain on the disposal of leases and wasting assets Ash (12/12)
Establish the tax effect of capital sums received in respect of the Sakura (12/10)
loss, damage or destruction of an asset Eric and Zak (Mar/Jun 16)
Advise on the tax effect of making negligible value claims Cada (12/14)
Understand the CGT implications of the variation of wills Cada (12/14)
152
Overview
Chattels and wasting assets Overseas aspects
CGT – additional aspects
Leases Trusts
Negligible value claims Compensation for loss,

damage, destruction
153
1 Chattels and wasting assets (TX assumed

Sections 1 & 2
knowledge)
1.1 Chattel = tangible moveable property and can be 'wasting' or 'non-wasting'.
Non-wasting chattels have an expected life from date of disposal >50 years.
1.2 The special rules that apply when cost and/or proceeds are £6,000 are outside of the
syllabus. However, the exemption for proceeds and cost less than £6,000 is still examinable.
1.3 Non-wasting chattels are chargeable to CGT in the normal way.
1.4 Wasting chattels have an expected life on disposal 50 years.
1.5 Such assets are exempt from CGT, unless they are plant and machinery qualifying for
capital allowances in the owner's hand. If sold for less than cost, no allowable loss as relief
for fall in value given via capital allowances.
1.6 Other wasting assets (eg copyrights) – cost is written down on a straight line basis.
2 Leases
2.1 There are two types of lease transaction that are examinable:
(a) Assignment of a lease with more than 50 years to run (long lease); and
(b) Assignment of a lease with 50 years or less to run (short lease).
2.2 Grant of lease is outside of the syllabus.
Assignment of long lease

2.3 Normal CGT computation.
Assignment of short lease

2.4 The cost must be depreciated using the lease depreciation tables. This reflects the fact
that this type of lease is losing value so only the cost that relates to the period left can be
deducted.
154
Hugo acquired a 30-year lease on 30 September 2012 for £35,000. He sold it on

30 September 2018 for £40,000.
Required
What is Hugo's gain?
Lease % for 24 yrs = 79.622
Lease % for 30 yrs = 87.330
Solution
3 Compensation or insurance monies

General principle (TX – UK – para 3.1 – 3.3)
3.1 If an asset is damaged and compensation or insurance money is received, this is treated as
a part disposal.
A
3.2 applies where
A B
A = compensation received
B = unrestored value of asset
155
Mr James bought a holiday cottage for £40,000 in August 1991. In August of the current tax year
the cottage was damaged in a fire. An insurance claim was made and £33,000 received in
September of the current tax year. The cottage was valued at £45,000 after the fire.
Required
Calculate the gains arising.
Solution
3.3 If all or part of the compensation is applied in restoring the asset, this is treated as
enhancement expenditure on a subsequent disposal.
3.4 A capital sum received can be deducted from the cost of the asset if the sum is either:
(a) Wholly used to repair asset
(b) Partly used to repair asset and unused part is 'small' (higher of 5% of capital sum and
£3,000)
(c) 'Small' compared to value of asset (higher of 5% of value of asset and £3,000). If
amount not used in restoring asset is not small, taxpayer can elect for amount used in
restoration to be deducted from the cost; the balance will continue to be treated as a
part disposal.
Assets destroyed (TX)

3.5 If an asset is completely destroyed, there is a 'full' disposal and compensation monies are
wholly charged to CGT.
3.6 If the compensation receipts are reinvested in a replacement asset within 12 months, a
form of 'rollover' relief is available.
3.7 The 'replacement' asset must be of a similar function and type to the original.
156
Lester bought a painting for £30,000 in May 2000. It was destroyed in July of the current tax year.
An insurance claim was made and £45,000 was received in October of the current tax year. Lester
spent £40,000 on a replacement asset one month after receiving the insurance.
Required
Compute Lester's chargeable gain and the base cost of the replacement asset.
Solution
4 Negligible value claims

4.1 If a chargeable asset becomes negligible in value the taxpayer can claim to treat the asset
as if it were sold and then immediately reacquired at the value stated in the claim. This
gives rise to an allowable loss.
5 Variation of a will
5.1 If within two years of death the terms of a will are changed by a variation of the will or by a
disclaimer, the change will not be a disposal for the original beneficiary for CGT purposes.
The assets are treated as being acquired by the new beneficiary at probate value (ie at
death) and not at their value when the change is made.
157
6 CGT and trusts

6.1
Settlor To beneficiary
Gains (MV)
Alive RPT
Gains (MV)
 Gift relief  Gift relief
(as immediate IHT (as immediate IHT
charge) * charge)
Settlor CGT exempt

Dead
* If the gift is to a settlor-interested trust then no gift relief is available.
158
7 Overseas aspects of CGT

7.1
Resident (R)in the UK?
UK R NR
Domiciled (D) or Deemed Gains not taxable even if

Domiciled (DD) in UK? UK assets (unless disposing
of UK residential property or
temporary non-resident
see later)
UK R + UK UK R +
D/UK DD ND/NDD
Arising Remittance (RB)

Auto if unremitted income
+ gains <£2,000; or
Taxed on worldwide Claim
gains + relief for
worldwide losses
Taxed on UK gains + overseas
If UK DD and unremitted
gains IF proceeds remitted to UK
income + gains <£2,000
can use RB despite If claim RB then can only use
being UK DD overseas capital losses if
election made
If claim remittance basis

Lose AE
Remittance basis charge of
£30k/£60k as for income tax
Double tax relief

7.2 If an individual suffers tax on an overseas asset both in the UK and abroad, double tax relief
(DTR) is available as a deduction against the UK CGT liability.
DTR = lower of
(a) UK CGT on overseas asset
(b) Overseas tax on same asset
159
Non-UK resident disposing of UK residential property

7.3 Usually a NR individual will pay no UK CGT even on UK assets. From 6 April 2015 the rules
have changed where a NR individual disposes of a UK-situated residential property.
7.4 In general only the gain/loss accruing since 6 April 2015 is chargeable. If a property was
acquired pre April 2015 then the default method of calculating the gain is:
Proceeds X
Less: MV at 5 April 2015 (X)
Enhancement post 5 April 2015 (X)
Gain/loss X
7.5 An election can be made to use either of the following alternatives:

(a) Straight line time apportionment of the full gain based on period of ownership with the
proportion relating to post 5 April 2015 being chargeable; or
(b) Whole gain/loss (this would be useful if a loss were made allowing the whole loss to
be tax deductible rather than just the post 5 April 2015 proportion).
7.6 The non-resident individual would, in this circumstance, be entitled to an annual exemption
and would pay CGT at a rate dependent on their UK taxable income and gains.
Interaction with PPR
7.7 Of course, with a portion of the gain now being taxable when a non-resident disposes of a
UK residential property, it's worth noting that PPR relief may be available for the period of
ownership post 5 April 2015 if the individual has had actual occupation. However, actual
occupation after 5 April 2015 is not taken into account unless the individual (or spouse/CP)
was UK-resident in the tax year or stayed overnight at the property for at least 90 days in the
tax year. Note the last 18 months of ownership are always treated as a period of occupation
provided the individual has had actual occupation at some point.
160
Michaela bought a UK house on 6 April 2012. She lived in the house until 5 April 2016 when she
left the UK to live in Utopia in her sister's house and ceased to be UK tax resident on that date.
Michaela did not stay overnight in the house between leaving it and selling it on 5 April 2022. Her
gain since 6 April 2015 on the sale was £126,000.
Calculate Michaela's taxable gain for 2021/22, assuming that the tax rules and allowances in
2018/19 continue to apply.
Solution
Temporary absence
7.8 If a UK resident leaves the UK for less than five years they will remain subject to CGT in
respect of assets acquired before leaving the UK.
7.9 For the temporary non residence rules to apply the individual must have been UK resident
for at least four of the seven previous tax year before the tax year in which they become non
resident.
7.10 Gains made during the year of departure are taxed in that year.
7.11 Gains made subsequently will be chargeable in the tax year of return.
Leave UK Less than five years Return UK
1.2.18 30.6.20
6.4.18
Gain before 6.4.18 Gain after 6.4.18

Taxed in 17/18 Taxed in year of return ie 20/21
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8 Chapter summary
1 Chattels and wasting Gains on wasting chattels are exempt and losses are
assets not allowable. These rules are modified if the asset is
eligible for capital allowances.
2 Leases Disposal of a short lease requires the cost to be
depreciated using lease percentage tables as it is a
depreciating asset.
3 Compensation or Damaged assets are treated as a part disposal.
insurance monies Destroyed assets constitute a full disposal with the
possibility of rollover if a replacement asset is
acquired.
4 Negligible value claims To treat asset as sold and immediately reacquired to
create an allowable loss.
5 Variation of will Variation not disposal for the original beneficiary for
CGT. New beneficiary takes assets at probate value.
6 CGT and trusts CGT if set up while settlor is alive but usually gift relief
is available due to immediate IHT charge. No CGT if
set up on death.
Also CGT as assets pass out of the trust to
beneficiaries and again usually gift relief available.
7 Overseas aspects of CGT applies to individuals resident in the UK but the
CGT domicile/deemed domicile of the individual determines
which assets they are liable to tax on.
END OF CHAPTER
162
Self assessment
for individuals and
partnerships

Remember the material already covered in Taxation (TX – UK) Ava (12/09)
under the headings: Sakura (12/10)
'Systems for self-assessment and the making of returns' Ash (12/12)
'The time limits for submission of information, claims and Cuthbert (12/12)
payment of tax including payments on account'
Kantar (12/14)
'The procedures relating to compliance checks, appeals and
disputes'; and 'penalties for non-compliance'.
Advise on the increased penalties which apply in relation to
offshore matters
163
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
Overview
Self assessment
Notification of Compliance
chargeability checks
Returns and Payment dates

penalties
164
1 Notification of liability to income tax and capital

gains tax (CGT) (TX assumed knowledge)
1.1 By 5 October following end of year of assessment, unless taxpayer has received a notice to
file a return.
Tax returns and penalties for late filing

1.2 Paper returns must usually be submitted by 31 October following end of tax year.
Electronically delivered returns must usually be filed by 31 January following year of
assessment.
1.3 Penalty date for filing later return is day after due date.
Penalties for filing on or after penalty date
0–3 months £100
3–6 months Further penalty: £10 per day (maximum 90 days)
6–12 months Further penalty: greater of 5% of unpaid tax and £300
12 months + Further penalty: greater of % of unpaid tax (conduct based)
and £300
Penalties for errors

1.4 Common penalty regime applies to incorrect self assessment tax returns, self assessment
corporation tax returns and misdeclarations on a value added tax (VAT) return.
Amount of penalty is based on tax understated and is calculated as follows:
 No penalty if taxpayer simply made a mistake
 Up to 30% of understated tax where taxpayer fails to take reasonable care
 Up to 70% of understated tax if error is deliberate
 Up to 100% of understated tax if error is deliberate and there is concealment
Penalties can be reduced if taxpayer makes disclosure and are more generous if disclosure
is unprompted. Details are given in the tax tables you have access to in the exam.
Penalties for late notification of new sources of income

1.5 Common penalty regime applies for failure to notify chargeability to, or liability to register for
income tax, national insurance contributions (NICs), CGT, corporation tax and VAT.
 No penalty if taxpayer has a reasonable excuse for late notification
 Up to 30% of tax unpaid if non-deliberate failure to notify
 Up to 70% of tax unpaid if deliberate failure to notify, increased to 100% if also
concealment
Penalties can be reduced if taxpayer makes disclosure and are more generous if disclosure
is unprompted.
165
Penalties for offshore non-compliance

1.6 There may be increased penalties for offshore non-compliance and an additional penalty
where there is a relevant offshore asset move intended to prevent or delay HMRC from
discovering a potential loss of revenue. Penalties may also be imposed on those who
enable offshore non-compliance.
2 Payment dates (TX)

Income tax
2.1 Two equal payments on account on 31 January (during year of assessment) and 31 July
(following year of assessment). Each instalment is equal to 50% of the previous year's
income tax and Class 4 NIC liability. 31 January after year of assessment for any balancing
payment (which will also include Class 2 NIC).
CGT
2.2 31 January following the end of the year of assessment.
Interest
2.3 Interest is chargeable on late payment of payments on account and balancing payments
from due date until day before actual payment date.
Penalties for late paid tax

2.4 Where balancing payment and CGT is paid late, the penalty date is 30 days after the due
date. The following penalties apply:
On or before penalty date 0%
Not more than 5 months after penalty date 5% of unpaid tax
Between 5 months and 11 months after 10% of unpaid tax
penalty date
More than 11 months after penalty date 15% of unpaid tax
Repayment supplement
2.5 Runs from original date of payment until day before repayment of tax is made.
Compliance checks
2.6 HM Revenue & Customs (HMRC) must give notice by the first anniversary of actual filing
date if the return is filed on or before filing date.
If the return is filed after the filing date, HMRC must give notice by the quarter day following
the first anniversary of the actual filing date. The quarter days are 31 January, 30 April,
31 July and 31 October.
166
3 Chapter summary
1 Notification liability to By 5 October following end of year of assessment.

income tax and CGT
2 Payment dates Two payments on account and a final balancing
payment of income tax and Class 4 NIC is due. Class
2 NIC will also be paid with the balancing payment.
CGT is due on 31 January following the end of the tax
year.
167
END OF CHAPTER
168
You have now covered the Topics that will be assessed in Step 3 of your Achievement Ladder.
Approximately half of the questions will focus on the shaded topics below but the remainder contains
some recap questions on earlier topics.
Course Notes
chapter
Pensions and other tax-efficient
Income tax
Employment income 4
More income tax
aspects 5
Trade profits 6
Trading losses 8
169
Achievement Ladder
Course Notes
chapter
Partnerships and limited liability
Capital gains tax and partnerships 9
partnerships Chargeable gains: an outline 11
Shares and securities 12
Chargeable gains: reliefs 13
Chargeable gains: additional aspects 14
More capital gains tax
Self assessment for individuals and
partnerships 15
170
An introduction to
inheritance tax (TX – UK)

Remember the material covered in Taxation (TX – UK) under Surfe (12/11)
the headings 'scope of inheritance tax, basic principles of Una (6/12)
computing transfers of value, the liabilities arising on
Dana (12/12)
chargeable lifetime transfers and on the death of an individual,
the use of exemptions in deferring and minimising inheritance Cuthbert (12/12)
tax liabilities' Brad (6/13)
Pescara (12/13)
Ziti (6/14)
Cada (12/14)
Kantar (12/14)
Jonny (Sep/Dec 15)
Pippin (Mar/Jun 17)
Identify excluded property Sushi (12/10)
Advise on the tax implications of chargeable lifetime transfers FL Partnership (12/13)
Pescara (12/13)
171
16: AN INTRODUCTION TO INHERITANCE TAX

Advise on the tax implications of transfers within seven years of FL Partnership (12/13)
death Pescara (12/13)
Cada (12/14)
Pippin (Mar/Jun 17)
Max (Mar/Jun 18)
Identify exempt transfers Dokham (6/10)
Calisia (6/11)
Surfe (12/11)
Una (6/12)
Dana (12/12)
Kantar (12/14)
Jonny (Sep/Dec 15)
Advise on the tax liability arising on a death estate Surfe (12/11)
Una (6/12)
Cuthbert (12/12)
Cada (12/14)
Jonny (Sep/Dec 15)
Advise on the use of reliefs and exemptions to minimise Calisia (6/11)
inheritance tax liabilities Brad (6/13)
Ziti (6/14)
Cada (12/14)
172
Overview
An introduction to IHT
Basic principles Death estate
Transfer of value Types of lifetime transfers

and exemptions
Lifetime tax Death tax

Exempt transfers
173
1 Basic principles (TX assumed knowledge)

When does a charge to inheritance tax (IHT) arise?
1.1 IHT is a tax on gifts or 'transfers of value'. There are two main chargeable occasions:
(a) Lifetime transfers; and
(b) Death estate, ie gifts made on death (eg in will).
Who is liable to IHT?

1.2 Chargeable persons include individuals and trustees.
Excluded property
1.3 Some property is excluded from the charge to IHT. The most important example is foreign
assets owned by individuals who are not UK domiciled (see Chapter 18).
2 Transfers of value (TX)

Diminution in value
2.1 The value of the asset transferred is always measured as the diminution in value of the
donor's wealth ('loss to estate'), not the amount gained by the donee.
Mr Jones owns 75% of an unquoted investment company. He gives 30% to his son.
Shareholdings on this date were valued at:
Shareholding
£
75% 370,000
45% 200,000
30% 105,000
Required
Calculate the value transferred for IHT purposes and calculate the value to be used for proceeds in
the capital gains tax computation.
Solution
174
3 Exempt transfers (TX)

Exempt transfers during lifetime and on death
3.1 Gifts to the following parties are exempt during lifetime as well as on death:
(a) Gifts between spouses, or partners in a civil partnership (limited to £325,000 if donee
is not UK domiciled)
(b) Gifts to UK charities
(c) Gifts to qualifying political parties
(d) Gifts for national purpose
(e) Gifts of land to a housing association
Exempt transfers during lifetime only
Small gifts exemption

3.2  Up to £250 per donee per fiscal year
 Cannot apply to gifts exceeding £250 in total to the same donee
Normal expenditure out of income

3.3  Cash gifts which are habitual are exempt if made out of income.
 The gift must not result in a reduced standard of living of the donor.
Gifts in consideration of marriage

3.4 (a) The first £5,000 given by a parent is exempt.
(b) The amount is lower for gifts by other parties:
(i) £2,500 by a lineal ancestor, or one party of the marriage to the other
(ii) £1,000 by any other person
Annual exemption
3.5 (a) First £3,000 of value (not covered by any other relief or exemption) transferred in any
tax year is exempt.
(b) Any unused annual exemption (or part thereof) may be carried forward for one year
only for use in the following tax year after that year's own annual exemption.
(c) The exemption is given in priority to the earlier gifts made in the tax year.
175
4 Types of lifetime transfers (TX)

Chargeable lifetime transfers (CLTs)
4.1 (a) CLTs are gifts into a trust.
(b) These are chargeable at the time of the gift.
(c) If tax is paid by the donor – charge at 20 80 (¼) or 20% if paid by the trust.
(d) If the donor dies within seven years of making a CLT, additional tax may become
payable on death.
Potentially exempt transfers (PETs)

4.2 (a) Any other gifts, ie to individuals
(b) PET treated as exempt during donor's lifetime
(c) If donor dies seven years or more after the PET is made, PET is exempt transfer
(d) If donor dies within seven years after PET is made, PET becomes chargeable transfer
and tax may be payable on it.
5 Tax payable during lifetime (TX)

IHT payable during lifetime
5.1 Prepare a timeline and mark on PETs and CLTs.
5.2 Value each gift

 Diminution in value
5.3 Deduct reliefs and exemptions

 Marriage exemption
 Annual exemption(s)
5.4 Life tax need only be calculated on CLTs. A separate calculation will need to be made for
each separate CLT.
5.5 Deduct available nil band – nil rate band (NRB) at the date of the gift less any CLTs in the
seven years before that gift. Previous year's nil rate bands are given in your tax tables.
5.6 Tax excess at 25% (¼) if donor pays or 20% if trust pays. If the question is silent, assume
the donor pays it.
5.7 Gross value of gift ('gross chargeable transfer')

= Gift (after all reliefs and exemptions) plus tax if donor pays
= Just gift (after all reliefs and exemptions) if trust pays
176
Mr Fist put £264,000 into a trust on 13 August 2018, having already put £110,000 into a trust three
years earlier (the gross chargeable transfer was £104,000). He also made a gift of £4,000 to his
son on 15 April 2018.
Required
Calculate the IHT payable when the trust is set up and the gross chargeable transfer to carry
forward for future calculations assuming:
(a) The trust agrees to pay the tax
(b) Mr Fist pays the tax
Solution
177
6 Tax payable on death (TX)

6.1 IHT is charged on PETs/CLTs made within seven years of death.
Death tax is payable by the donee.
Working out the tax on death

6.2 (a) Delete all PETs more than seven years before death. These are now exempt.
(b) Delete any exempt gifts within the question.
(c) Start with the earliest gift within seven years of death.
(d) Death tax will be charged on the value of the gift after reliefs and exemptions.
(e) Deduct any available nil band. Available nil band is £325,000 if death in 2018/19, less
previous chargeable transfers in seven years prior to gift.
Previous chargeable transfers = CLTs and PETs that have become chargeable.
(f) Tax excess over nil band at 40%.
(g) Deduct any taper relief (see below).
(h) Deduct any life tax paid (only for CLTs).
7 Taper relief (TX)

7.1 If gifts are made between three and seven years of death the death tax is reduced by taper
relief.
7.2 The percentage reduction depends on the period between date of gift (PET/CLT) and death.
Period Percentage reduction
0–3 0%
3–4 20%
4–5 40%
5–6 60%
6–7 80%
Mr Arm made the following gifts during his lifetime:

£
13 May 2014 Gift to daughter of shares in unquoted investment company 310,000
23 August 2014 Gift into a trust 337,000
He died on 7 June 2018.
Required
Calculate any IHT payable during life and on death on the above gifts.
178
Solution
179
Mr Wrist made the following gifts during his lifetime:

£
15 September 2008 Gift to a trust 355,000
23 August 2015 Gift to daughter on her wedding 201,000
He died on 23 November 2018.
Required
Calculate any IHT payable by the daughter.
Solution
180
8 Death estate (TX)

Proforma death estate
8.1 Set out below is the layout of a standard death estate computation.
X DECEASED
DATE OF DEATH ......
FREE ESTATE
£ £
Freehold property X
Less mortgages and accrued interest (X)
X
Stocks and shares X
Insurance policy proceeds X
Leasehold property X
Cars X
Personal chattels X
Debts due to deceased X
Cash (including accrued bank deposit interest) X
X
Less: Debts due by deceased X
Funeral expenses X (X)
X
Less: Exempt transfers (X)
Gifts with reservation (see Chapter 18) X
CHARGEABLE ESTATE X
9 Tax on the death estate

Residence nil rate band
9.1 A residence nil rate band (RNRB), which is an additional nil rate band, is now available only
in calculating the death tax due on the death estate if:
(a) The individual dies on or after 6 April 2017;
(b) The person owned a home (main residence) in which they lived which forms part of
their death estate; and
(c) The home passes to the individual's direct descendent(s). A direct descendant
includes children or grandchildren. It does not include nieces, nephews or siblings.
9.2 The RNRB available is the lower of:

(a) £125,000 for 2018/19 plus any transferred RNRB from a spouse/ civil partner (see
below); and
(b) The value of the main residence passing to direct descendent(s). Note this would be
after deducting any mortgage secured on the property.
181
9.3 The RNRB is tapered if an individual's net estate exceeds £2 million. The net estate is
calculated as the value of all assets less liabilities but is before the deduction of any
exemptions such as the spouse or charity exemption and any reliefs such as agricultural
property relief (APR) or business property relief (BPR). (See Chapter 17 for APR and BPR).
The RNRB is tapered by £1 for every £2 the net estate exceeds £2 million. Consequently
once the net estate exceeds £2.25 million the RNRB will have been tapered to nil.
9.4 The RNRB is deducted from the value of the death estate rather than directly from the value
of the main residence in the death estate and is deducted before considering the nil rate
band.
9.5 The ACCA have stated that a question will make it clear if the RNRB is available. Thus if
there is no mention of a main residence do not consider a RNRB.
Pietr died on 31 August 2018 leaving a main residence worth £600,000, on which there was a
secured mortgage of £520,000, and cash and other assets worth £2,100,000. Debts and funeral
expenses amounted to £25,000. Pietr left cash and jewellery worth £500,000 to his wife and the
remainder of his estate to his son.
Required
What is the available RNRB for use in calculating the IHT due on Pietr's death estate?
Solution
Nil rate band (TX)

9.6 Once any RNRB has been deducted, any remaining nil rate band (NRB) is then deducted.
Work out the available nil band, £325,000 for deaths in 2018/19 less chargeable value of
previous transfers in previous seven years. This is deducted from the value of the death
estate.
9.7 Tax the excess at 40%.
182
10 Spouses and civil partners (TX)

10.1 If a spouse/civil partner dies without fully using the nil rate band or residence nil rate band, a
claim can be made to transfer this to the other spouse/civil partner on death of the survivor
to enhance the survivor's nil bands on death.
Nil rate band

10.2 Enhanced nil band is available to be used against lifetime transfers and the death estate.
10.3 If the nil rate band has increased since the death of the first spouse/civil partner, uprate the
unused nil band proportionately.
Residence nil rate band

10.4 Provided the surviving spouse dies on or after 6 April 2017 leaving their main residence to
direct descendant(s), the RNRB will need to be calculated and can be uprated by any
unused RNRB from the first spouse. If the first spouse died prior to 6 April 2017 they are
deemed to have had a £125,000 RNRB, all of which will be available for transfer to the
surviving spouse. If some of the RNRB had been used on the death of the first spouse it is
the unused percentage which is transferred to the surviving spouse.
183
George died on 1 June 2007 leaving an estate valued at £400,000. He left £300,000 of his estate,
including his main residence, to his wife Mildred and the balance to his son.
Required
Assuming Mildred dies on 1 September 2018, what nil rate band(s) will be available to her?
Assume that she leaves her estate, including the main residence, to her son.
Solution
184
Lecture example 7 Past TX exam question
James died on 22 January 2019. He had made the following gifts during his lifetime:
(1) On 9 October 2011, a cash gift of £235,000 to a trust. No lifetime IHT was payable in
respect of this gift.
(2) On 14 May 2015, a cash gift of £420,000 to his daughter.
(3) On 2 August 2017, a gift of a property valued at £260,000 to his son. By the time of James'
death on 22 January 2019, the property had increased in value to £310,000.
On 22 January 2019, James' estate consisted of the following assets:
(1) A main residence valued at £660,000. This had an outstanding mortgage of £94,300.
(2) A portfolio of ordinary shares valued at £192,600.
(3) A motor car valued at £21,900.
James owed £9,400 in respect of credit card debts, and had also verbally promised to pay the
£4,600 medical costs of a friend. The cost of James' funeral amounted to £5,800.
Under the terms of his will, James left his entire estate to his children.
The nil rate band of James' wife was 40% utilised when she died 10 years ago.
Required
Calculate the IHT which will be payable as a result of James' death, and state who will be
responsible for paying the tax.
Solution
185
11 Chapter summary
1 Basic principles IHT applies to transfers of wealth.
2 Transfers of value IHT is charged on what the donor loses, not what the
donee gains.
3 Exempt transfers Gifts to spouses/civil partners, UK charities, political
parties etc are exempt in lifetime and at death. Some
exemptions apply to lifetime gifts only, eg annual
exemption, small gifts exemption, marriage exemption.
4 Types of lifetime CLTs are chargeable to tax in lifetime. PETs are
transfers exempt during the lifetime of the donor.
5 Tax payable during Life tax is paid on chargeable lifetime transfers eg gifts
lifetime into a trust. Take care to determine who will pay this
life tax.
6 Tax payable on death Death tax is paid on all gifts within seven years of
death and the death estate.
7 Taper relief Taper relief is available to reduce the death tax on gifts
made within three to seven years of death.
8 Death estate The death estate includes all assets that exist at
death. Unlike CGT, few assets are exempt. Any debt
and funeral expenses are deducted before the value of
any exempt transfers such as to a spouse or charity.
9 Tax on the death Any residence nil rate band is first deducted from the
estate value of the death estate before any remaining nil rate
band and finally any balance is taxed at 40%.
10 Spouses and civil Any unused nil rate band and residence nil rate band
partners on the death of the first spouse/civil partner can be
transferred to remaining spouse/civil partner.
END OF CHAPTER
186
Inheritance tax:
valuation, reliefs and the
death estate

Advise on the relief for the fall in value of lifetime gifts Poblano (6/10)
Advise on the operation of quick succession relief Eric and Zac (Mar/Jun 16)
Advise on the principles of valuation Brad (6/13)
Advise on the availability of business property relief (BPR) and Calisia (6/11)
agricultural property relief (APR) Una (6/12)
Brad (6/13)
Pescara (12/13)
Ziti (6/14)
Eric and Zac (Mar/Jun 16)
Advise on the use of reliefs and exemptions to minimise Calisia (6/11)
inheritance tax (IHT) liabilities Una (6/12)
Brad (6/13)
Ziti (6/14)
Cada (12/14)
(Sep/Dec 17)
187
17: INHERITANCE TAX: VALUATION, RELIEFS AND THE DEATH ESTATE
Overview
Foreign property
Valuation rules
Jointly owned property
Quoted shares and securities Related property valuations
Fall in value (FIV) relief
Reliefs
BPR APR
Death estate
Chargeable estate QSR
Tax payable
188
1 Relief for fall in value (FIV) of lifetime gifts

1.1 If asset gifted during lifetime is either sold for less than original value, or market value (MV)
at death is lower, then the donee can make a claim that the death tax is based on the lower
value.
1.2 When calculating the available nil band on other gifts the original value has to be used.
Mark made a gift of some property to his daughter for £230,000 on 1 March 2014. He then gave a
cash gift to his son of £210,000 on 2 October 2017. Mark's only other lifetime transfer was a gift to
a trust on 14 August 2010, which resulted in a gross chargeable transfer of £105,000.
Mark died on 21 August 2018. At his death, the value of the property given to his daughter had
fallen to £200,000.
Required
Calculate the IHT liabilities on these gifts arising on Mark's death.
Solution
189
2 Valuation rules
Quoted shares and securities (TX)
2.1 (a) Shares are valued at the lower of:
(i) '¼ up': the lower (bid) of the two closing prices + ¼ of the difference between
this and the higher (offer) price; or
(ii) Average of highest and lowest marked bargains.
(b) These rules are different to the rules used for CGT purposes which are simply to use
the lower of the two prices shown plus one-half of the difference between the two
prices (Chapter 11).
(c) An adjustment is needed for any 'ex-div/ex-int' quotations for shares in the death
estate. The full net amount of the next dividend/interest payment needs to be included
in the death estate. No adjustment is needed for gifts during lifetime.
Unit trusts
2.2 Unit trusts are valued at the lower of two published prices.
3 Related property valuations

3.1 The rules exist to reduce the IHT saving which could be obtained by making a transfer
piecemeal, partly via an exempt transfer.
Effect of the rules

3.2 Where an individual transfers an interest in a property where there is also related property,
the effect of the rules is to consider the individual's share in the whole of the property when
valuing the transfer.
3.3 The valuation used should be the higher of:

 The value using the normal rules (ie ignoring the related property); and
 The related share (ie including the related property).
What is related property?

3.4 Property is related if it is owned by:
(a) Transferor's spouse/civil partner
(b) A charity, charitable trust, political party or national heritage body, given on an exempt
transfer by either spouse and owned by the body within the last five years
190
Mike holds 55% of the shares in a family investment company. His wife holds 25%. The balance of
the share capital is held by other members of Mike's family.
Mike wants to gift his entire shareholding to a friend.
The following share values have been agreed at the date of the gift.
80% £400,000
60% £270,000
55% £240,000
45% £135,000
35% £90,000
20% £50,000
10% £20,000
Required
Calculate the value of the shares to be transferred to his friend.
Solution
4 Jointly owned property

4.1 Who inherits the half share?
 Tenants in common – passes under will or intestacy.
 Joint tenants – passes automatically to other joint tenant.
4.2 In either case, part of death estate.
5 Foreign property
5.1 Foreign property is converted into sterling at the exchange rate that gives the lowest sterling
valuation.
5.2 Administrative expenses in relation to administering and realising the foreign property are
deductible up to a maximum of 5% of the value of that property.
191
6 Reliefs against asset valuation

Business property relief (BPR)
General
6.1 When business property is transferred, relief is given against the value of the asset and is
calculated as either 50% or 100% of the value. BPR is available on both lifetime gifts and
those in the death estate.
6.2 For lifetime gifts:

(a) BPR is available against the value of lifetime gifts and is given before annual
exemptions.
(b) When calculating the death tax due on a lifetime gift, BPR is only available if the
donee still owns the property at the date of the donor's death.
Rates of relief
6.3 The rates of relief for business property are:
(a) Sole proprietor's business or partnership share 100%
(b) Shares in an unquoted trading company 100%
(c) Quoted shares or securities in company of which
transferor had voting control 50%
(d) Land, buildings, plant and machinery owned by individual
and used either in a partnership in which they are a
partner, or a company which they control 50%
When measuring the percentage of voting rights held or determining whether control
applies, include votes held by persons holding related property.
6.4 Shares do not qualify if the company is an investment company or a company dealing in
stocks and shares or land and buildings.
Minimum period of ownership

6.5 (a) The donor must have owned the original property for two years preceding the
transfer.
(b) Alternatively, together with a replacement property, the donor must have owned the
property for at least two years out of the last five years.
Excepted assets
6.6 (a) No BPR is available on excepted assets.
(b) An excepted asset is an asset that:
(i) Has not been used wholly in the business in the last two years; and
(ii) Is not required for future use in the business.
192
(c) Examples could include:

(i) Large cash balances
(ii) Investments
(iii) Private use assets
Henry gifted 3,200 shares in Henry Ltd to his daughter. This represented 16% of the company's
share capital which he had held for the last 5 years and was worth £100,000.
The company's net assets at that date were:
£
Freehold 400,000
Plant and machinery 80,000
Goodwill 150,000
Investments 170,000
Net current assets 200,000
1,000,000
Required
Show the IHT valuation of the shares gifted.
What would happen to the valuation if Henry died within seven years of the gift and his daughter
no longer held the shares?
Solution
193
Agricultural property relief (APR)

General
6.7 (a) Relief is available against the agricultural value of agricultural property.
(b) It applies to property situated in European Economic Area (EEA).
(c) The rate of relief is 100%.
Minimum period of ownership

6.8 The property must have:
(a) Been owned and farmed by transferor for two years immediately before the transfer;
or
(b) Been owned by transferor for seven years prior to transfer and farmed throughout that
time by someone else.
6.9 In simple terms, an owner-occupier qualifies for relief after two years of ownership while a
landlord must wait seven years.
Shares/securities in farming companies

6.10 (a) Relief may be given where a person transfers shares or securities, part of the value of
which may be attributed to the agricultural value of agricultural property forming part
of the company's assets.
(b) The transferor must have control (including related property) of the company
immediately before the transfer.
(c) Relief is given as if the company's interest in the land was the controlling
shareholder's.
APR/BPR interaction
6.11 (a) APR takes priority over BPR.
(b) Any value which has been relieved by APR cannot be relieved by BPR. However, full
open market value is chargeable – relieve agricultural value with APR, relieve
remaining value with BPR if BPR rules satisfied.
194
Mrs Moore died. Her estate included the following assets:

(1) A farm that she has owned for eight years. The farm has been tenanted throughout this
period. The farm is valued at £180,000 and the agricultural value is agreed as £95,000.
(2) Shares in an unlisted farming company which she controlled were valued at £175,000. The
company owns land which it has farmed for four years. The agricultural value is 20% of the
company's net assets at the date of her death. Mrs Moore had owned the shares for five
years.
Required
Calculate the value of these assets to be included in the estate.
Solution
195
Mr Digit made the following gifts during his life:

(1) 20 March 2010: Cash gift to his daughter of £40,000
(2) 3 June 2013: A gift to his nephew of half of his 10% shareholding in Grandstand Ltd, an
unquoted investment company. Mrs Digit has a 20% holding and they have both owned
these shares for many years.
The value of the shareholdings have been agreed as follows:
5% £100,000
10% £230,000
25% £750,000
30% £1,050,000
(3) 14 October 2013: A 4% shareholding in Davies plc to his son. It is a quoted trading company
which he has owned for five years. The 4% holding represents 170,000 shares.
The closing prices were £2.00–£2.10 and marked bargains for the day were £1.98 and
£2.06.
(4) 9 June 2014: A gift of £200 to each of his five grandchildren
(5) 23 November 2014: Gift to a trust of £335,000.
He died on 13 September 2018.
Required
Calculate the IHT payable on the gifts as a result of his death, assuming all non-cash gifts are still
held by the donees at that date (assume trustees pay any lifetime tax).
Solution
196
7 Death estate
7.1 As seen earlier, the death estate is a list of the assets net of liabilities for the deceased.
From this any exempt legacies are deducted to come down to the chargeable estate. Any
RNRB and remaining NRB are then deducted and the balance is usually taxed at 40%.
However, if a large gift to charity has been made, a 36% rate of IHT may apply.
Reduced rate of inheritance tax

7.2 The estate is taxed at 36% if at least 10% of an individual's net estate has been left to a
charity (ignoring the deduction available in respect of legacies to charities).
7.3 Net estate is the assets owned reduced by liabilities, exemptions, reliefs and the available
nil rate band but with no deduction for the charitable donation nor any residence nil rate
band.
This reduced rate is given in addition to the exemption available to charitable legacies.
Fiona died, leaving an estate valued at £1.4 million (this was before deducting any exempt
transfers).
In her will she wished to leave £200,000 to the RSPCA, with the balance, including her main
residence worth £600,000, going to her son.
Fiona has made no lifetime gifts. She is a divorcee.
Required
Calculate the IHT payable on her estate.
Solution
197
Who pays the tax on the estate?

7.4
Paid by Suffered by
UK free estate Executor Residuary legatee
Foreign free estate Executor Beneficiary
Gift with reservation (see Chapter 18) Donee of property Donee of property
James died on 13 November 2018.

On this date he owned the following assets:
£
UK main residence 168,000
Shares 10,000
Villa in Spain 40,000
Cash 30,000
Funeral expenses totalled £1,000.
Required
What is the tax on the lifetime transfers and the chargeable estate, assuming that the villa is left to
his daughter and everything else is left to his son? James' other gifts were as follows:
15 January 2009 Gift to son, cash on occasion of his marriage £144,000
10 June 2014 Gift to his daughter, cash £307,000
Show clearly who pays and who suffers the tax.
Solution
198
8 Quick succession relief (QSR)

Basic idea
8.1 QSR is given if an asset/estate is taxed twice in a period of five years.
Rate of relief
8.2
Period between Percentage of first

transfers tax charge credited
0–1 years 100%
> 1–2 years 80%
> 2–3 years 60%
> 3–4 years 40%
> 4–5 years 20%
Amount of tax credit
Percentage as × Net value of gift/legacy IHT paid on
8.3 determined above × original transfer
Gross value of gift/legacy
Mr K transferred shares to Mr L on his death on 4 March 2014. The chargeable (ie gross) value of
the transfer was £48,531 including IHT of £8,420 paid by Mr K's estate.
On 8 May 2018 Mr L died, leaving a chargeable estate valued at £330,000. He had made no
lifetime transfers.
Required
Show the tax liability on Mr L's estate.
Solution
199
9 Chapter summary
1 Relief for fall in value If asset gifted in lifetime has fallen in value at death, can
(FIV) of lifetime gifts use death value to calculate the tax.
2 Valuation rules Quoted shares and securities are valued at the lower of:
(1) ¼ up; or
(2) average of highest and lowest marked bargains.
This is different to the rules for CGT (Chapter 11).
3 Related property Watch out for related property valuation rules if shares
valuations are also held by the spouse.
4 Jointly owned Joint tenants – property passes automatically to other
property joint tenant.
Tenants in common – property passes according to will.
5 Foreign property Deduct administrative expenses up to maximum of 5%
of value of property.
6 Reliefs against asset BPR and APR can reduce the value of assets by 100%
valuation or 50% but they are only available on certain assets.
7 Death estate The death estate includes all assets that exist at death.
Unlike CGT few assets are exempt.
8 Quick succession A tax credit if asset is taxed twice in a five-year period.
relief (QSR)
END OF CHAPTER
200
Inheritance tax:
additional aspects

Remember the contents of Taxation (TX – UK) under the FL Partnership (12/13)
heading 'payment of inheritance tax'
Explain the concepts of domicile and deemed domicile and Sushi (12/10)
understand the application of these concepts to inheritance tax Calisia (6/11)
(IHT)
Cuthbert (12/12)
Identify and advise on the tax implications of the location of Sushi (12/10)
assets Calisia (6/11)
Cuthbert (12/12)
Identify and advise on gifts with reservation of benefit Poblano (12/10)
Mirtoon (12/11)
Pescara (12/13)
Pippin (Mar/Jun 17)
201
18: INHERITANCE TAX: ADDITIONAL ASPECTS

Advise on the operation of double tax relief for IHT Calisia (6/11)
Una (6/12)
Cuthbert (12/12)
Advise on the IHT effects and advantages of the variation of Sushi (12/10)
wills Cada (12/14)
Define a trust
Distinguish between different types of trust
Advise on the IHT implications of transfers of property into trust Capstan (6/11)
King (6/15)
Advise on inheritance tax implications of property passing
absolutely from a trust to a beneficiary
Identify the occasions on which IHT is payable by trustees Surfe (12/11)
Identify the occasions on which IHT may be paid by instalments Grifter (12/09)
Advise on the due dates, interest and penalties for IHT Capstan (6/11)
purposes Cuthbert (12/12)
202
Overview
IHT – additional aspects
Overseas aspects
Payment of tax and
instalment option
Domicile DTR
Location of assets
GWRB Deeds of variation
Trusts
Types IHT aspects of trusts
Interest in Discretionary
possession
203
1 Overseas aspects
1.1 Chargeable persons who are UK domiciled are taxed on all gifts of wealth that they make.
Non-UK domiciled persons are taxed on gifts of UK assets only.
Domicile
1.2 The country regarded as the person's permanent home. (Note. Born with father's domicile
but may change it as an adult by 'severing all ties' with the country of old domicile.)
1.3 A person is also deemed to be domiciled in the UK for IHT purposes at the time a transfer is
made if they satisfy any one of three conditions:
(1) They were domiciled in the UK within the 3 years immediately preceding that time.
(2) The individual is a formerly UK domiciled individual. This is an individual who:
 Was born in the UK; and
 Has a UK domicile of origin; and
 Is UK resident in the relevant tax year; and
 Was UK resident in at least 1 of the 2 tax years immediately before the relevant
tax year.
(3) The individual is UK resident:
 For at least 15 of the 20 tax years immediately preceding the relevant tax year;
and
 For at least 1 of the 4 tax years ending with the relevant tax year.
The rules on deemed domicile for IHT are similar to those covered earlier for income tax and
capital gains tax but not quite the same. Make sure you know the differences.
1.4 A non-domiciled person is taxed on UK assets only, so the location of assets is important.
(a) Land and buildings are located in the country where they are physically located.
(b) A debt is in the country of residence of the debtor.
(c) Life policies are in the country where proceeds are payable.
(d) Registered shares and securities are in the country where they are registered.
(e) Bearer securities are where the certificate of title is located.
(f) Bank accounts are at the branch where the account is kept.
(g) An interest in a partnership is where the business is carried on.
(h) Goodwill is where the business is carried on.
(i) Tangible property is at its physical location.
(j) Property held in trust follows the above rules.
1.5 A non-UK domiciled individual can elect to be treated as UK domiciled for the purposes of
IHT if their spouse or civil partner is UK domiciled.
The election can be made while the UK domiciled spouse or civil partner is alive or it can be
made in the two years following the death of the UK-domiciled spouse or civil partner.
It is irrevocable but will lapse if the individual is non-UK resident for four consecutive years.
204

2.1 Where the estate consists of foreign assets it may attract both UK and foreign capital taxes.
Relief is available against the UK tax for the foreign tax levied.
2.2 The relief is the lower of:

(a) Foreign tax suffered
(b) UK tax attributable to the foreign asset
2.3 The latter is found by applying the average rate of IHT suffered by the estate to the value of
the foreign property.
UK IHT (after QSR)
The average rate =
Value of chargeable estate
Susan died leaving a chargeable estate of £360,000. This included a villa in Spain worth £40,000
in respect of which Spanish death duties of £10,000 were paid. Susan made no gifts during her
lifetime. She is UK domiciled and left her estate to her niece.
Required
Calculate the IHT payable as a result of Susan's death.
Solution
205
3 Gifts with reservation

3.1 (a) This means that a gift is made but some reservation of benefit is retained by the
donor.
(b) For example, gifting property but continuing to live in it rent free.
(c) Where a gift with reservation is made, it is treated in the same way as any other gift at
the time it is made.
Reservation existing on death

3.2 (a) The asset may be included in the donor's estate at its value at that time and therefore
be entitled to the residential nil rate band, rather than being treated as a potentially
exempt transfer (PET) which has become chargeable.
(b) Alternatively, it may be treated as a PET which can become chargeable and ignored
in the death estate.
(c) HM Revenue & Customs (HMRC) will treat it in whichever way produces the higher
total tax liability (ie taking account of the effect of these two alternatives on all other
gifts).
Reservation released within seven years of death

3.3 (a) Rather than the original gift being a PET, the gift may instead be taxed on the basis of
it being a PET at the time the reservation ceased, the IHT charged being based on its
value at the time of the release. (Note annual exemptions (AEs) not usable on 'PET'
when reservation ceases.)
(b) Again, HMRC will treat it in whichever way produces the higher total tax liability.
3.4 The gift with reservation rules will not be applied:

(a) If full consideration is given for any right of occupation or enjoyment retained or
assumed by the donor.
(b) If the reason for the reservation is for the care and maintenance of an elderly or infirm
relative and the situation was not foreseen when the gift was originally made by that
relative.
4 Deeds of variation
4.1 (a) The terms of a deceased's will can be altered by use of a deed of variation.
(b) The main reasons for wishing to do this are:
(i) To include someone who has been left out of the will
(ii) To implement tax planning to reduce IHT; for example, to leave the main
residence to direct descendants and thus become entitled to the residential nil
rate band
4.2 It must be effected within two years of death by an instrument in writing.
206
4.3 The effect of a deed of variation is to treat the rewritten will as if it had been the original will.
4.4 A variation will automatically apply both for IHT purposes and for capital gains tax (CGT)
purposes if the people making the variation specify in the variation that it is to have that
effect.
5 Definition of a trust
General
5.1 Property is held by one person (trustee), ie the legal owner, and applied for the benefit of
another (beneficiary).
It is the legal separation of ownership and benefits.
Trusts fall into two main types

5.2 (1) Those where an interest in possession exists.
(2) Those with no interest in possession – generally referred to as discretionary trusts.
Interest in possession trusts

5.3 The person(s) having the interest has the immediate right to any income as the income
arises.
The person(s) having the interest in possession is often referred to as the life tenant. The
person to whom the property will pass on the death of the life tenant is often referred to as
the remainderman and is said to have a reversionary interest in the trust property.
Illustration
5.4 Mr A dies and leaves his house and property in trust for his son. His wife, Mrs A, is the life
tenant. She is entitled to live in the house and would receive any income arising from the
property. On the death of Mrs A the house and property pass automatically to the son.
Mrs A = life tenant
Son = remainderman
Discretionary trusts
5.5 Nobody has an entitlement to any income of the trust. Income will be paid out to
beneficiaries at the discretion of the trustees.
There does not have to be a specific remainderman with a vested (ie certain) interest. The
trustees could also have discretion over the distribution of the capital when the trust ends.
207
6 Inheritance tax aspects

6.1 For ATX exam purposes the IHT treatment of both types of trust is the same and is set out
below:
Settlor CLT
RPT Exit charge
Alive (max 6%)
Death
Dead
estate
Principal charge
10-yearly charge
(max 6%)
7 Payment of tax
Section 5 Lifetime transfers
7.1 If a chargeable lifetime transfer (CLT) is made between 6 April – 30 September, tax is due
30 April following, otherwise tax is due six months from end of month of transfer.
Death tax
7.2 On lifetime gifts – six months from end of month of death.
On estate – six months from end of month of death or on delivery of account if earlier.
8 Instalment option
8.1 Tax may be paid in ten equal annual instalments on certain assets:
(a) Transferred on death
(b) Charged during lifetime where donee pays the tax
8.2 The instalment option applies to:

(a) Land
(b) All shares where donor had control
(c) Unquoted shares if:
(i) Tax cannot be paid without undue hardship
(ii) Value is >£20,000 and the nominal value of the shares is at least 10% of all the
shares in the company, or, if the shares are ordinary shares, at least 10% of
the ordinary shares
(d) Business or an interest in a business
208
8.3 The first instalment is due for payment

(a) On death transfers and liabilities arising as a result of death, six months after the end
of the month in which death occurred
(b) On CLTs, on the normal due date of payment
If the property is sold, all outstanding tax must then be paid.
9 Comprehensive example
Stephen owns the following assets:

£
Main residence 800,000
Cash 220,000
E-type Jaguar 18,000
Investment (10%) in Aardvak Ltd, a trading company, which holds approximately 400,000
15% of its total balance sheet and its chargeable assets as investments and cost
Stephen £100,000
Other chattels 39,000
Total 1,477,000
Stephen has made no lifetime gifts, is 65 years of age and in good health. Stephen has a healthy
pension from his previous employment which is more than sufficient for his day to day living needs
and is therefore interested in passing down all of the above assets in the most tax-efficient manner
to various members of his family. Stephen is a higher rate taxpayer.
Stephen's wife, Sarah, died in a road traffic accident in 2010 and the half-share in the main
residence passed to Stephen at that time when it had a market value of £350,000. The main
residence had originally cost £100,000 in 1984. Sarah had made no lifetime gifts before her death
and had no other assets at the date of her death.
Required
Discuss the relative advantages and disadvantages of giving the above assets in either life or on
death to his family. Assume current rates and allowances continue to apply.
Solution
209
210
10 Chapter summary
1 Overseas aspects UK domiciled (or deemed domiciled) individuals are
liable to IHT on worldwide assets. Non-UK domiciled
individuals are liable to IHT only on UK assets.
2 Double tax relief (DTR) DTR is available to reduce IHT on assets also taxed
overseas.
3 Gifts with reservation Gifts with reservation of benefit rules prevent IHT
being avoided by enabling HMRC the option of taxing
the gift when it was made or when the reservation was
released.
4 Deeds of variation A variation or disclaimer can be used to vary a will
after death, enabling an estate to be distributed more
tax-efficiently.
5 Definition of a trust There are two types of trusts:
 Those with an interest in possession
 Those without, generally referred to as
discretionary trusts
6 Inheritance tax aspects If created at death all treated as part of death estate.
If created in lifetime a CLT.
Principal and Exit Charges also apply
7 Payment of tax Normally six months from the end of the month
following gift or death.
8 Instalment option Tax on certain assets can be paid via ten equal
annual instalments.
211
END OF CHAPTER
212
contains two longer exam-style questions. The first focusses on income tax and capital gains tax and
the second on inheritance tax. As a reminder, Step 4 must be completed and submitted in order to be able
to qualify for Pass Assurance. It is Written Assessment 1 and can also be found at the back of these
course notes.
Course Notes
chapter
Income tax
Employment income 4
More income tax
aspects 5
Trade profits 6
Income tax - businesses Capital allowances 7
Trading losses 8
213
Achievement Ladder
Course Notes
chapter
partnerships 15
An introduction to inheritance tax 16
Inheritance tax: valuation, reliefs and
Inheritance tax
the death estate 17
Inheritance tax: additional aspects 18
214
Stamp taxes

Identify the property in respect of which stamp taxes are Grifter (12/09)
payable
Advise on the stamp taxes payable on transfers of shares and Calisia (6/11)
securities Brad (6/13)
Advise on the stamp duty land tax payable on transfers of land Calisia (6/11)
Una (6/13)
Identify transfers involving no consideration Calisia (6/11)
Brad (6/13)
Advise on group transactions Helm Ltd group (6/15)
Heyer Ltd group (Mar/Jun 17)
Harrow Tan Ltd (Sep/Dec 17)
215
19: STAMP TAXES
Overview
Stamp duty
Rates Exemptions
Stamp duty land tax
Rates Exemptions
216
19: STAMP TAXES
1 Stamp duty
1.1 Stamp duty applies to transfers of shares.
1.2 It is payable by the purchaser
1.3 Stamp duty is charged at 0.5% of the consideration.
1.4 Exemptions:
 Gifts
 Changes in trustees
 Divorce arrangements
 Variation of wills
2 Stamp duty reserve tax (SDRT)

2.1 SDRT applies to transfers of shares and securities which are effected by an electronic
paperless transaction (CREST system).
2.2 It is payable by the purchaser.
2.3 SDRT is charged at 0.5% of the consideration unless if falls under one of the exemptions
mentioned above in 1.4.
2.4 Securities traded on AIM are no longer chargeable securities for the purpose of stamp duty
and stamp duty reserve tax. No stamp taxes are therefore charged on such transactions.
3 Stamp duty land tax (SDLT)

3.1 SDLT applies to the transfer of land, or an interest in or right over land.
3.2 It is paid by the purchaser as a percentage of consideration paid.
3.3 Exemptions:
 Gifts of land
 Transfer on divorce/separation
 Variation of will
 Transfers to charities
217
19: STAMP TAXES
3.4 Rates
Non-residential properties (banded)
Up to 150,000 0%
150,001 – 250,000 2%
250,001 + 5%
Note that stamp duty on residential properties will not be examined in ATX.
4 Transfers of stampable property between group

companies
4.1 Such transfers are exempt from stamp duty if the companies are 'associated'.
4.2 Associate = 75% direct ownership and 75% effective interest.
4.3 Exemption must be adjudicated by HM Revenue & Customs (HMRC).
4.4 If the recipient company leaves the group <3 years, SDLT will be payable on the market
value at the date of original transfer.
5 Chapter summary
1 Stamp duty 0.5% on transfers of shares.
2 Stamp duty reserve tax 0.5% on electronic transfers of shares and securities.
(SDRT)
3 Stamp duty land tax Applies to sales of land or rights over land.
(SDLT)
4 Transfer of stampable Exempt if part of 75% group.
property between
group companies
END OF CHAPTER
218
Corporation tax
computation

Remember the material already covered at Taxation (TX – UK) Poblano (6/10)
under the headings: Petzold (6/11)
'The scope of corporation tax' Flame plc Group (12/12)
'Taxable total profits' Forti Ltd Group (12/13)
'The comprehensive computation of corporation tax liability' Bond Ltd Group (12/14)
'The use of exemptions and reliefs in deferring and minimising Helm Ltd Group (6/15)
corporation tax liabilities' Christina (Sep/Dec 15)
Gail (Mar/Jun 16)
Achiote Ltd, Borage Ltd and
Caraway Ltd (Mar/Jun 17)
Identify qualifying research and development expenditure, both Poblano (6/10)
capital and revenue, and determine the reliefs available by Sank Ltd and Kurt Ltd (6/12)
reference to the size of the company/group Bond Ltd Group (12/14)
Cinnabar Ltd (Sep/Dec 15)
Set Ltd group (Mar/Jun 18)
Identify the enhanced capital allowances available in respect of
expenditure in respect of green technologies, including the tax
credit available in the case of a loss-making company
219
20: CORPORATION TAX COMPUTATION

Recognise the alternative tax treatments of intangible assets Janus plc (6/12)
and conclude on the best treatment for a given company Maria and Granada Ltd
(Mar/Jun 16)
Advise on the impact of transfer pricing and thin capitalisation
rules on companies
220
Overview
CT computation Loan relationships Long periods of account
Computing corporation tax payable
Intellectual property Research and development
Transfer pricing
221
1 General (TX assumed knowledge)

Persons chargeable
1.1 (a) Companies resident in the UK are chargeable to corporation tax (CT) in the UK on
their worldwide profits.
(b) Non-resident companies are liable to UK CT on any UK income and gains if they are
trading in the UK through a branch or agency.
Accounting periods
1.2 (a) CT liabilities are calculated for a company's accounting periods.
(b) The tax is calculated by reference to financial years (running from 1.4 to 31.3).
Proforma corporation tax computation

1.3 A LTD
CORPORATION TAX COMPUTATION
FOR THE X MONTHS TO ....
£ £
Adjusted profits X
Less capital allowances (X)
Trading profit X
Investment income X
Overseas income X
Miscellaneous income X
UK rental income X
Chargeable gains (deduct capital losses b/f) X
Total profits X
Less qualifying charitable donations (paid basis): (X)
Taxable total profits (TTP) X
Corporation Tax: 19%  TTP X

The rate of corporation tax is 19% for Financial Year 17 (y/e 31 March 18) and Financial
Year 18 (y/e 31 March 19). It was 20% in Financial Year 16 which is given in your tax tables
and if an accounting period straddles into FY16 a hybrid corporation tax rate would need to
be calculated.
Augmented profits = taxable total profits plus non-group dividends received.
Note that augmented profits are needed for determining the size of the company and
therefore when tax is paid.
222
2 Loan relationships (TX)

2.1
Trading Non-trading
To buy P&M, To purchase investment property

To provide working capital, To purchase shares in another company
To purchase a trading property, An employee loan written off
Overdraft interest on business bank a/c Gains/losses on sale of loan stock or Gov’t stock
Most interest income
Income = Trading income (unlikely) Income = Investment income (credit)

Expense = Trading expense Expense = Investment expense (debit)
(Accruals)
Usual trading income rules apply If credits > debits – NTLR income
If debits > credits – NTLR deficit (see later)
Incidental costs of loan finance (debits) will also be deductible under the loan relationship
rules. This includes costs directly related to varying the terms of the loan relationship and
abortive loan relationship costs (ie where the loan relationship is not actually taken out).
3 Long periods of account (TX)

3.1 No AP can exceed 12 months for CT purposes. If a company has a period of account >12
months it must be split into 2 APs:
(a) First, lasting 12 months
(b) Second, for the remaining months
Splitting income and expenditure
Trading income Time apportioned
CAs Two separate computations
Property income Time apportioned
Investment income Accruals
Gains Date of disposal
Other income
(including non-group dividends) Date of receipt
Qualifying charitable donations paid Date of payment
223
Lecture example 1 Past TX exam question
Lucky Ltd was incorporated on 20 July 2017, and commenced trading on 1 December 2017. The
following information is available for the five-month period 1 December 2017 to 30 April 2018:
(1) The operating profit for the five-month period ended 30 April 2018 is £432,600. Advertising
expenditure of £4,700 (incurred during September 2017), depreciation of £14,700, and
amortisation on a lease of £9,000 have been deducted in arriving at this figure.
The amortisation relates to a premium which was paid on 1 December 2017 to acquire a
leasehold warehouse on a 12-year lease. The amount of premium assessed on the landlord
as income was £46,800. The warehouse was used for business purposes by Lucky Ltd
throughout the period ended 30 April 2018.
(2) Lucky Ltd purchased the following assets during the period 20 July 2017 to 30 April 2018:
£
19 August 2017 Computer 6,300
22 January 2018 Integral features 41,200
31 January 2018 Office equipment 52,900
17 March 2018 Motor car 12,800
The integral features of £41,200 are in respect of expenditure on electrical systems, a
ventilation system and lifts which are integral to a freehold office building owned by Lucky Ltd.
The motor car has a CO2 emission rate of 49 grams per kilometre.
(3) Lucky Ltd made a loan to another company for non-trading purposes on 1 February 2018.
Loan interest income of £700 was accrued at 30 April 2018.
Required
Calculate Lucky Ltd's corporation tax liability for the five-month period ended 30 April 2018.
(9 marks)
Solution
224
4 Intangible property rules

Introduction
4.1 Separate rules exist to cover the tax treatment of intangible non-current assets which
include patents, copyrights, goodwill, trademarks and customer-related intangibles. There
are two potential tax treatments, dependent on the type of intangible asset.
Patents and most other intangibles

4.2 (a) Amounts shown in the statement of profit or loss are allowed for tax purposes.
(b) For example, royalty payments debited to the statement of profit or loss on an
accruals basis are allowed for tax purposes.
4.3 Amortisation. There are two methods for calculating amortisation to be included in the tax
computation:
(1) Accounts basis. Where the debits and credits are for trade purposes they will be
treated as trading expenses or receipts of the trade. Thus no adjustment to the
accounting profit is required.
(2) 4% straight line basis. The company can elect to have the cost of the patent written
off for tax at 4% straight line rather than claim the amount charged to the statement
of profit or loss. If a rate of less than 4% is used in the accounts, then you should
elect to use the 4% rate.
4.4 When a patent is sold, the difference between the proceeds and tax written down value will
be taxed as a trade profit or loss. Tax written down value will be net book value (NBV)
unless the 4% alternate deduction has been claimed.
225
Goodwill and customer-related intangibles

4.5 Amortisation on goodwill is not tax deductible and therefore any expense should be added
back in an adjustment to profit.
4.6 On disposal, the company is taxed on the difference between proceeds and cost. A profit is
taxed as trade income and a loss is treated as a non-trading loss; it can be offset against
total profits of the current year, group relieved or carried forward.
Rollover relief
4.7 (a) It is also possible to rollover the gain on disposal of an intangible non-current asset.
(b) The maximum income gain eligible for rollover is calculated as the sale proceeds
less original cost, not NBV.
4.8 To be able to make a rollover claim the company needs to buy a new intangible non-current
asset in the period 12 months before to three years after disposal of the original
intangible non-current asset.
4.9 (a) For full rollover relief of the eligible gain to be available, all the proceeds must be
reinvested into another intangible non-current asset.
(b) If they are not, then the proceeds not reinvested become taxable now (in addition to
the amortisation charged to date) and the balance can be rolled over as for traditional
rollover relief.
In June 2018 Sun Ltd sells patent rights which it acquired in May 2006.
Sale proceeds £3,000,000
Original cost £1,800,000
NBV in accounts £890,000
Sun Ltd acquires another patent in June 2019.
Required
Calculate:
(i) The amount of gain that is available for rollover
(ii) The amount taxable as trading income
(iii) The base cost of the patent
assuming the new patent cost is:
(a) £3,500,000
(b) £2,500,000
226
Solution
5 Transfer pricing
5.1 Anti-avoidance legislation exists to prevent companies under common control structuring
their transactions to shift profits (or losses) from one company to another.
Illustration
5.2 If H bought goods for £10,000 and sold them to a third party for £20,000, a profit of £10,000
would arise in H.
However, the transaction could be rearranged as follows:
Sell to subsidiary for £14,000
Subsidiary sells to third party for £20,000.
Only £4,000 profit arises in H.
The legislation requires profit to be computed as if the transaction had arisen at arm's
length.
5.3 The same rules apply where a company makes non-commercial loans (or at non-
commercial rates) to another connected company, so that profits can be shifted via the
payment of interest (aka 'Thin Capitalisation').
Again, profits are adjusted to the arm's length amounts.
227
5.4 Small and medium-sized enterprises (SMEs) are normally exempt from transfer pricing
requirements unless one of the parties is resident in a non-qualifying territory (eg one
without a double tax treaty with the UK).
6 Research and development (R&D)

Section 7 Deduction for R&D expenditure for SMEs
6.1 A small or medium-sized enterprise (SME) can obtain a 230% deduction for qualifying R&D
expenditure.
'Qualifying' R&D is revenue expenditure on, for example, staff costs, consumables and
software. Rent is not qualifying R&D expenditure. Note that 100% FYA can be claimed for
capital expenditure on R&D.
It will be stated whether or not a company is a SME for R&D purposes in exam questions.
R&D tax credits

6.2 If a SME makes a trading loss it can claim a tax credit resulting in an immediate repayment.
The credit is 14.5% of the lower of:
 Unrelieved trading loss
 230% of qualifying R&D expenditure
Deduction for R&D expenditure for a large company

6.3 A large company can claim an 'above-the-line' (ATL) tax credit of 12% of costs incurred.
6.4 The ATL tax credit has two effects:

(a) It is treated as taxable income and therefore increases the company's taxable income.
(b) It reduces the company's corporation tax liability.
If the tax credit is greater than the corporation tax liability any excess can be paid to the
company up to a maximum of the company's PAYE/NIC liability in respect of those
employees involved in R&D activities for the relevant accounting period.
Any remaining balance can be carried forward and offset against the corporation tax liability
of the future accounting periods or surrendered to another member of the group.
228
7 Chapter summary
1 General Taxable total profits are the total profits less qualifying
charitable donations of each accounting period.
Corporation tax is 19%  TTP.
2 Loan relationships Interest on trading loans is included in trading income.
Interest on non-trading loans is part of investment
income.
3 Long periods of A long period of account must be split into two
account separate chargeable accounting periods.
4 Intangible property Patents are recognised for tax purposes on the same
rules basis as they are recognised in the accounts.
Amortisation on goodwill is not tax deductible but on
disposal any profit is taxed as trade income (loss
deducted as non-trading loss).
Rollover relief is available on disposal where there is a
disposal of an intangible asset and a new intangible
asset is acquired.
5 Transfer pricing The transfer pricing legislation prevents manipulation
of profits between group members not buying and
selling at market price.
6 Research and R&D expenditure entitles companies to a deduction of
development (R&D) 230% if small or medium- sized and an above-the-line
tax credit if large.
229
END OF CHAPTER
230
Chargeable gains for
companies

Syllabus Guide detailed Exam question reference (Questions in bold in
outcomes P&R kit)
Remember the material already Petzold (6/11)
covered in Taxation (TX – UK) Janus plc (6/12)
under the heading 'chargeable
Flame plc Group (12/12)
gains for companies'
Banger Ltd and Candle Ltd (12/12)
Liza (6/13)
Forti Ltd Group (12/13)
Gail (Mar/Jun 16)
Hahn Ltd group (Sep/Dec 16)
Determine the application of the Hail Ltd (12/11)
substantial shareholding exemption Opus (6/14)
Helm Ltd Group (6/15)
Cinnabar (Sep/Dec 15)
Acryl Ltd and Cresco Ltd (Sep/Dec 16)
Achiote Ltd, Borage Ltd and Caraway Ltd (Mar/Jun 17)
231
21: CHARGEABLE GAINS FOR COMPANIES
Overview
Chargeable gains for

companies
Computing gains or Shares and securities Replacement of

losses business asset relief
Indexation allowance Substantial

shareholding
exemption
232
1 Corporation tax on chargeable gains (TX assumed

knowledge)
1.1 Companies do not pay capital gains tax (CGT). Their gains are included in the taxable total
profits and are charged to corporation tax.
1.2 They also do not get an annual exempt amount.
1.3 The calculation of the gain/loss is similar to that of an individual, except there is a relief for
inflation called indexation allowance.
Proceeds X
Cost
(including incidental costs of acquisition) (X)
Unindexed gain X
Indexation allowance
Cost  Indexation Factor (to 3 d.p.) (X)
Indexed gain X
1.4 The indexation allowance is designed to give companies relief for inflation over their period
of ownership of an asset however, indexation was frozen in December 2017 and so relief for
inflation after this date will no longer be given.
1.5 The indexation factor (IF) is calculated by reference to movements in the retail price index
(RPI) between the date of acquisition of an asset and the earlier of the date of disposal and
December 2017. In your exam you will be given the relevant IF in the question and you will
not be expected to calculate it from RPIs.
1.6 In your exam you may be given the IF from the date of acquisition to the date of disposal
and from the date of acquisition to December 2017. Remember that if disposal is after
December 2017 you must use the IF up to December 2017.
1.7 Indexation is also given separately on any capital enhancement expenditure incurred prior to
January 2018.
1.8 Remember that the indexation allowance cannot increase or create a loss.
2 Shares and securities (TX)

2.1 Different matching rules apply to companies. Shares should be matched in the following
order:
(1) Acquisitions on the same day
(2) Acquisitions in previous nine days
(3) FA 85 pool (an indexed pool) (no detailed question will be set on this)
2.2 In the Advanced Taxation (ATX – UK) examination where you see a company disposing of
shares you must first consider whether the substantial shareholding exemption might apply
(see later in this chapter). If the substantial shareholding exemption does not apply then a
gain must be calculated using the standard gain proforma.
233
3 Replacement of business asset relief (TX)

3.1 This is the only relief available to companies. It enables a gain on the sale of a qualifying
asset to be rolled over into the cost of a replacement asset.
3.2 For companies the indexed gain is deferred.
3.3 The relief operates in the same way as for individuals, except goodwill is not a qualifying
asset.
4 Substantial shareholdings – exemption

Section 4
4.1 Any gain on the disposal of all or part of a substantial shareholding is exempt and any loss
is not allowable.
Substantial shareholding – definition

4.2 A shareholding is substantial if the investing company:
 Holds at least 10% of the ordinary share capital
 Is entitled to at least 10% of the profits available for distribution; and
 Is entitled to at least 10% of the assets on a winding up.
The interests of other group companies may be aggregated (a group includes 51%
subsidiaries for these purposes).
4.3 The substantial shareholding must have been held for a continuous 12-month period during
the six years prior to the disposal.
This qualifying 12-month period can include the time when the assets owned by the
company being sold were used within a trade carried on by the group, before being
transferred to the company being sold.
4.4 The company invested in must be a trading company or the holding company of a
trading group at the time of disposal however it is not usually necessary for the company
invested in to continue to be a trading company after disposal.
Orange Ltd is considering disposing of a 7% shareholding in Lemon Ltd for £500,000. Orange Ltd
acquired an 11% holding in Lemon Ltd in May 2018 for £260,000 and Lemon Ltd is a trading
company. Orange Ltd prepares its accounts to 31 March.
Required
Calculate Orange Ltd's after-tax proceeds if the sale occurs in March 2019. What advice might you
give the directors of Orange Ltd?
The indexation factor from May 2018 to March 2019 is 0.028.
234
Solution
235
5 Chapter summary
1 Corporation tax on No annual exempt amount. Deduct indexation
chargeable gains allowance from date of purchase to date of sale or
December 2017 if earlier.
2 Shares and securities Matching rules (different from individuals) apply when
a company sells shares.
3 Replacement of Only deferral relief available to companies.
business asset relief
4 Substantial If a company sells shares from a substantial
shareholdings - shareholding the gain is exempt or the loss is not
exemption allowable.
END OF CHAPTER
236
Corporation tax
administration

Remember the material already covered in Taxation (TX – UK) Sank Ltd and Kurt Ltd (6/12)
under the headings: Flame plc Group (12/12)
'Systems for self assessment and making of returns' Epon Ltd Group (6/13)
'Time limits for the submission of information, claims and Forti Ltd Group (12/13)
payment of tax'
Opus Ltd Group (6/14)
'Procedures relating to compliance checks, appeals and
disputes' and
Klubb plc (12/14)
'Penalties for non-compliance'
237
22: CORPORATION TAX ADMINISTRATION
Overview
Corporation tax administration
Returns and payment dates

(CTSA)
238
1 Choice of business structure
Lecture example 1 Exam standard 12 marks
Hamish has a business idea, which he thinks will give rise to trading profits of £60,000 per annum.
All of his expenses are tax deductible. He intends to start trading on 6 April 2019.
Hamish enjoys a lavish lifestyle and has significant expenses, so he wants to maximise his income
from the business.
Advise Hamish on how he should structure his business to best meet his needs. If he set up as a
company he will pay himself a salary of £8,424 and take the balance as a dividend.
(Assume FA 2018 rates continue to apply, and that Hamish will have no other taxable income in
2019/20.)
Solution
239
2 Corporation tax self assessment (TX assumed

knowledge)
2.1 Unless 'large', company calculates and pays corporation tax (CT) liability nine months and
one day after accounting period (AP).
2.2 Interest charged on tax paid >9 months and one day after end of AP.
2.3 All companies must file their return electronically and include a self assessment of any tax
payable within 12 months after end of period of account. Companies are also required to file
electronically a copy of their accounts in inline eXtensible Business Reporting Language
(iXBRL).
2.4 Penalties arise for late filing (£100 if up to three months late, £200 thereafter).
2.5 The common penalty regime, as explained in Chapter 15, applies to errors on the return and
late notification of new sources of income.
2.6 Interest on tax paid late is a deductible expense, interest received on overpaid tax is
taxable.
2.7 If HM Revenue & Customs (HMRC) does not make a compliance check into the return
within 12 months of the due filing date, it will be treated as finalised.
3 Quarterly instalments for large companies (TX)

3.1 Large = a company whose augmented profits exceed £1,500,000. Note augmented profits
are TTP plus dividends received from non-51% group companies. The £1,500,000 threshold
is reduced in two circumstances:
(1) The limit is scaled down for a short AP
(2) The limit is divided by the number of related 51% group companies including the
company itself. A 51% link must be established through companies and dormant
companies are excluded.
3.2 Four quarterly instalments due in months 7, 10, 13 and 16 following the start of the AP, due
on 14th of each month.
3.3 Instalments are based on expected current AP tax liability.
3.4 Transitional relief for companies becoming large in an AP. No quarterly payments if:
(i) Augmented profits  £10m; and
(ii) Not large in previous year.
240
Short accounting periods

3.5 Each of first and interim instalments =
CT
3
n
[n = no. of months in AP]
Final instalment (balance of CT liability) always due by 14th of the fourth month following
end of AP.
B plc has a ten-month accounts period to 31.10.18.

Required
When will the corporation tax be due if the total liability is expected to be £4 million?
Solution
241
4 Chapter summary
1 Choice of business In ATX you need to be able to compare and contrast
structure an unincorporated business with an incorporated one.
2 Corporation tax self Tax returns must be submitted within 12 months of
assessment end of period account.
3 Quarterly instalments Large companies pay their corporation tax in four
for large companies quarterly instalments. Others pay nine months and
one day after the end of the accounting period.
END OF CHAPTER
242
Administration,
winding up, purchase of
own shares

Exam question reference (Questions
Syllabus Guide detailed outcomes in bold in P&R kit)
Identify and evaluate the significance of accounting Acryl Ltd and Cresco Ltd (Sep/Dec 16)
periods on administration or winding-up
Conclude on the tax treatment of returns to Banger Ltd and Candle Ltd (12/12)
shareholders after winding up has commenced Acryl Ltd and Cresco Ltd (Sep/Dec 16)
Advise on the tax implications of a purchase by a Trifles Ltd (12/10)
company of its own shares Epon Ltd Group (6/13)
Maria and Granada Ltd (Mar/Jun 16)
243
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Overview
Administration,
winding up
Accounting periods Distributions
Pre-liquidation dividend Distributions after winding up
Company purchase of
own shares
Distribution method Capital method
244
1 Liquidations ('winding up')

1.1 Tax planning after liquidation proceedings commence is limited. Companies in voluntary
liquidation should use the pre-liquidation period for tax planning. Companies in compulsory
liquidation will not be able to do this.
Accounting periods – Administration

1.2 (a) An accounting period ends and a new one begins when a company goes into
administration.
(b) Then future tax accounting periods follow the original accounting dates.
Accounting periods – Liquidation

1.3 (a) An accounting period ends and a new one begins when winding up commences ie
upon the appointment of a liquidator.
(b) Then an accounting period ends only every 12 months until winding up is complete.
Note that a cessation of trade and a set of accounts being prepared after the
company has gone into liquidation do not trigger the end of a tax accounting period.
During liquidation
1.4 A company has to pay corporation tax on the profits arising during the winding up. All assets
will be disposed of, including chargeable assets and trading assets such as stock and
machinery. Therefore trading profits/ (losses) and chargeable gains may arise. Any assets
passed up to the shareholders as a 'distribution in specie' are deemed to be sold at market
value.
1.5 (a) Land and buildings – Chargeable gains when sold

(b) Inventory – Trading income on sale
(c) Plant and machinery – Balancing charges/allowances created on cessation of
trade
(d) Trade losses – No carry forward (ceased trade)
– Terminal loss relief available (carry back loss up to three
years)
– Sell assets before liquidation to use trade losses (while
CY claim vs total profits is still available)
245
Taylor Ltd has a December year end and ceased trading 5 July 2018.
The members passed a resolution to wind up the company on 18 October 2018 and the winding up
was completed 2 February 2020.
Required
Show the accounting periods from 1.1.18 to completion of winding up.
Solution
Distributions
1.6 Distributions made after liquidation has started are treated as capital disposals of shares for
the shareholder.
Individuals will suffer tax at their marginal rate. However, if they had held their shares, which
qualified for entrepreneurs' relief, for one year before the company ceased to trade and the
shares are then being sold within three years of cessation of trade then entrepreneurs' relief
will be available to tax the gain at 10%.
Companies will pay corporation tax on the gain at 19% if the substantial shareholding
exemption (SSE) does not apply.
1.7 A pre-liquidation distribution would be treated as a dividend ie taxable on an individual once

exceeding the dividend nil rate band up to a maximum of 38.1% and tax-free for a company.
246
Bruce Ltd is a family-run business owned by father and son. The father wishes to retire and the
son does not want to continue in business. They both want to realise cash from the company, so it
was put into liquidation with net assets as follows:
£
Building 150,000
Inventory, cash, receivables 80,000
230,000
Payables (35,000)
195,000
The share capital is split as follows:
Father holds 75,000 shares costing £37,500 in July 1987
Son holds 25,000 shares costing £20,000 in September 1992
In December 2018 net assets are distributed to father (an additional rate taxpayer) and son (a
higher rate tax payer).
Required
(a) Calculate the gains arising on both father and son.
(b) Discuss whether a pre-liquidation dividend may be beneficial.
(c) What difference would it make if the 25,000 shares held by the son were instead held by a
company?
Indexation factors:
Sept 92 – Dec 17 = 0.995
Sept 92 – Dec 18 = 1.057
247
Solution
248
2 Company purchase of own shares

Introduction
2.1 Where a company buys back its own shares HM Revenue & Customs (HMRC) can treat this
as a:
(a) Distribution
(b) Capital transaction (always this method for corporate shareholders)
Distribution method
2.2 (a) Used for individuals unless 'capital gain' treatment conditions satisfied
(b) Distribution = amount paid by company less original subscription price when shares
issued
(c) If shareholder is an individual  dividend income
(d) An amount equal to the original subscription price of the shares is treated as disposal
proceeds in a capital gains calculation
Capital method
2.3 (a) Only applied if all of the following are satisfied:
(i) Company unquoted trading company (or holding company of trading group)
(ii) Redemption benefits trade (buy out disruptive shareholder, shareholder dies,
external investor withdrawing)
(iii) Vendor resident in UK
(iv) Vendor owned shares 5 years (3 years if inherited)
(v) Vendor's interest reduced by 25%
(vi) Vendor holds 30% after repurchase.
(b) Shareholder treated as receiving full proceeds for sale of shares
Clearance
2.4 Obtain clearance from HMRC of how it will treat transaction
249
Greg owns 16,000 of the 40,000 shares in Thomas Ltd. Greg subscribed for the shares at £3.40
each in May 2002. He is not an officer or employee of Thomas Ltd.
Greg has always lived in the UK; has taxable income of £124,000 in 2018/19 which includes
£17,000 dividend income; and uses his annual exempt amount every year.
On 31 July 2018 he sells his shares to the company for £38.60 per share.
Required
Advise Greg on the tax treatment of the proceeds he will receive in respect of the sale of his
shares to Thomas Ltd.
Prepare a calculation of the net (after tax) proceeds from the sale based on your conclusions.
Solution
250
3 Chapter summary
1 Liquidations A new accounting period begins when a winding up
commences.
Distributions made during a winding up are capital,
whereas distributions before are treated as a
dividend.
2 Company purchase of A company's purchase of own shares may be treated
own shares as an income distribution or capital distribution but
only if a set of conditions are satisfied.
251
END OF CHAPTER
252
Losses and deficits on
non-trading loan
relationships

Remember the material already covered in Taxation (TX – UK) Loriod plc Group (6/11)
under the heading 'the use of exemptions and reliefs in Hail Ltd (12/11)
deferring and minimising corporation tax liabilities'
Janus plc (6/12)
Epon Ltd Group (6/13)
Acryl Ltd and Cresco Ltd
(Sep/Dec 16)
Determine the tax treatment of non-trading deficits on loan Sperry Ltd (12/11)
relationships Banger Ltd and Candle Ltd
(12/12)
Advise on the restriction of the use of losses on a change in Bond Ltd Group (12/14)
ownership of a company Maria and Granada
(Mar/Jun 16)
253
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
Overview
Trading losses
Current year and Carry forward relief Change of ownership

carry back relief
Other losses
Property Non-trading deficits Capital losses
254
1 Trading losses (TX assumed knowledge)

Introduction
1.1 The following reliefs are available for trading losses:
(a) Current year and carry back against total profits; and
(b) Carry forward usually against total profits.
1.2 (a) Trading loss is always after deducting capital allowances (consider restricted claim to
capital allowances if loss relief not tax efficient).
(b) The trading income assessment for the loss-making period is nil.
1.3 The rules regarding the carry forward of trading losses changed with effect from 1 April 2017
and you will only be examined on the rules applying to trading losses incurred post
1 April 2017.
Current year and carry back

1.4 (a) Claim relief against the total profits (before qualifying charitable donations
(QCDs)) of the loss-making period.
(b) Further claim, if required, to set against total profits (before QCDs) of previous
12 months.
(c) Each claim is all or nothing so QCDs can become unrelieved.
(d) Claim within two years of end of loss-making period.
(e) Cannot carry back if have not made current year claim (unless no profit in current
year).
1.5 Where an accounting period only falls partly in the preceding 12 months, time-apportioned
to find profit available.
Carry back relief in the final 12 months of trading

1.6 (a) The carry back period is extended to 36 months for losses incurred in the 12 months
prior to the cessation of trading.
(b) Carry back is on a last in, first out (LIFO) basis.
Carry forward relief

1.7 (a) If no current or carry back claims are made or if losses remain after claims then any
carried forward losses will automatically be carried forward to the next accounting
period.
(b) A claim can then be made to deduct all/part of the trade loss from the total profits of
that accounting period. Unlike a current year or carry back claim, a partial claim can
therefore be made to preserve QCDs.
255
(c) If the loss is not fully relieved it continues to be automatically carried forward and
available for offset until it is fully relieved.
(d) The claim to offset the carried forward trade loss must be made within two years of
the end of the accounting period in which the loss is relieved.
(e) Trade losses carried forward can also be relieved via group and consortia relief.
Carry forward relief – potential restrictions

1.8 (a) A restriction applies to the use of trade losses carried forward against total profits in
excess of a deductions allowance which is £5 million. A company's profits (after the
deduction of current year reliefs (including group relief) and the deductions allowance)
can only be reduced by 50% using losses carried forward. You are only expected to
have an awareness of this restriction and will not need to apply this in your exam.
(b) If a company's trade becomes small or negligible in an accounting period in which a
trading loss arose or from which as a loss is carried forward, trading losses carried
forward to future periods will automatically be offset against future profits of the same
trade rather than against total profits.
(c) If a company's trade ceases then its trading losses cannot be carried forward against
any future income.
Excess qualifying charitable donations (QCDs)

1.9 Unrelieved QCDs are lost (unless they can be group relieved; see Chapter 26).
Bat Ltd had the following results in recent years:
Y/e Y/e Y/e

30.6.18 30.6.19 30.6.20
£ £ £
Trading profit/(loss) 15,000 (53,000) 20,000
Investment income 5,000 5,000 5,000
Capital gain/(loss) 3,000 (10,000) 7,000
QCD (1,000) (1,000) (1,000)
Required
Show how Bat Ltd will utilise the loss, assuming it will make claims to utilise losses as early as
possible, and show clearly any losses to carry forward.
256
Solution
2 Other losses
Property losses (TX)
2.1 All profits and losses on properties are pooled to give a property profit or loss (note that
interest would be dealt with under the loan relationship rules).
2.2 A property loss can be set off against:

(a) Current year total profits (automatic and to fullest extent possible)
(b) Total profits of other group companies through group relief (claim – see Chapter 26)
(c) Any property loss not utilised in the above two claims is automatically carried forward
to the next accounting period and a claim can be made to offset some/all of the loss
against total profits of the next accounting period. Can restrict to preserve QCDs.
Deficits on non-trading loan relationships

2.3 A deficit can be:
(a) Offset against total profits of the current year (whole/partial claim possible)
(b) Offset against investment income in previous 12 months (whole/partial claim
possible and no requirement to offset in current year first as for a trade loss)
257
(c) Group relieved against taxable total profits (TTP) of other group companies (see
Chapter 26)
(d) Any NTLR deficit left after any claims above is automatically carried forward into the
next accounting period and a claim can be made to offset the some/all of the deficit
against the next period's total profits. The deficit continues to be carried forward until
it is fully utilised.
Capital losses (TX)

2.4 Capital losses are automatically offset against first available gains to the fullest extent
possible. They cannot be used against any other form of income and can never be carried
back.
2.5 Any unutilised capital losses are then automatically carried forward to be offset against
gains of the next accounting period.
2.6 If in a gains group consideration can be given to group allocation of gains and losses (See
Chapter 26).
3 Loss Planning
3.1 In a single company loss question, the best use of losses will involve consideration of:
 Timing of the loss offset and thus cashflow advantage
 Avoiding any qualifying charitable donations (QCDs) being wasted
3.2 If the scenario involves a corporate group then loss planning becomes more complicated.
Another key consideration will be trying to minimise the companies in the group paying their
tax in quarterly instalments. This is considered in more detail in Chapter 26.
4 Change of ownership
4.1 Trading losses cannot be carried forward (or carried back) if there is a change in ownership
and either:
(a) A major change in the nature or conduct of the trade (MCINOCOT) within any 5 year
period (that begins no later than the change of ownership and no earlier than 3 years
before the change of ownership); or
(b) After the change in ownership there is a revival of activities which at the time of the
change had been small or negligible.
258
4.2 For example, if a company changes its ownership on 1 July 2020 and there is a MCINOCOT
between 1 July 2017 and 30 June 2025 the carry back and carry forward of losses are
restricted.
loss carry back

loss carry forward
1.7.17 3 yrs 1.7.20 5 yrs 30.6.25

Change in
ownership
(a) major change in nature or conduct of trade

or
(b) Revival in company's trade
4.3 Examples of a MCINOCOT include:

 Change in nature of goods/services
 Change in customers
 Change in outlets or markets
259
5 Chapter summary
1 Trading losses Trading losses may be relieved against current total
profits, against total profits of previous 12 months or
carried forward and offset against future total profits.
The decision as to how to best use the loss will be
based on timing and whether QCDs are lost.
Questions may also want consideration of group
relieving losses to minimise companies in the group
paying tax via quarterly instalments.
2 Other losses Be careful to know the different rules that apply to
other losses.
3 Loss planning The decision as to how to best use the loss will be
based on timing and whether QCDs are lost.
Questions may also want consideration of group
relieving losses to minimise companies in the group
paying tax via quarterly instalments.
3 Change of ownership If there is a change in ownership the carry forward of
losses is restricted if there is also a major change in
the nature or conduct of the trade within any period of
five years (beginning no later than the change in
ownership and no earlier than three years before the
change in ownership).
END OF CHAPTER
260
Close companies and
investment companies

Identify and calculate corporation tax for companies with Banger Ltd and Candle Ltd
investment business (12/12)
Apply the definition of a close company to given situations Fedora (12/09)
Trifles Ltd (12/10)
Banger Ltd and Candle Ltd
(12/12)
Methley Ltd (Sep/Dec 16)
Conclude on the tax implications of a company being a close Trifles Ltd (12/10)
company or a close investment holding company Hail Ltd (12/11)
Banger Ltd and Candle Ltd
(12/12)
Bamburg Ltd (6/14)
Nocturne Ltd (6/15)
Methley Ltd (Sep/Dec 16)
261
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
Overview
Close companies and investment
companies
Investment companies
Definition Tax implications
Close companies
Definition Benefits provided to Loans to shareholders

shareholders
262
1 Close companies
Identifying a close company
Definition
1.1 (a) UK resident company controlled by either:
(i) Five or fewer shareholders; or
(ii) Any number of shareholding directors.
(b) Applies to most private companies (eg where a married couple own all the shares)
(c) Include associates in working out 'control'
Associates
1.2 An associate includes:
(a) Relatives (no in-laws)
Parents and
remoter forebears
Brothers and Shareholder Spouse

sisters (including civil partners)
Children and
remoter issue
(b) Business partners
(c) Trustee(s) of any settlement if shareholder or relative (living or dead) was creator
(d) Nominees of shareholder or relative
Exceptions
1.3 Subsidiaries are only close if the parent company is close.
263
Nelson Ltd is owned by the following:

%
Paul 18
Sarah (Paul's wife) 3
Holly 8
Guy 7
Joe 7
Matthew 7
Shaun (Matthew's brother-in-law) 6
Jacky 5
Josh (Jacky's son) 4
Other shareholders (1% each) 35
100
Paul, Holly, Guy and Joe are directors.
Required
Comment on whether Nelson Ltd is a close company.
Solution
2 Implications of being a close company

Loans made to shareholders (or associates)
2.1 Loans advanced to a shareholder will create a penalty tax liability on the company at 32.5%
of the loan.
264
2.2 The tax is due on the normal due date(s) for payment of CT for the accounting period, eg for
companies which are not large nine months and one day after end of the accounting period,
but need not be paid if the loan has been repaid by this date.
2.3 Penalty tax does not apply where:

(a) The loan is less than £15,000;
(b) It is made to a full-time director or employee; and
(c) The borrower (together with associates) does not own more than 5% of the ordinary
shares.
Repayment of the loan

2.4 Where the loan is repaid, the penalty tax is repayable. The repayment is due nine months
and one day following the end of the accounting period in which the loan is repaid.
Waiver of a loan
2.5 (a) If the loan is written off the company will receive a repayment of any penalty tax paid.
Therefore it is only a cash flow issue for the company.
(b) The shareholder is deemed to receive a dividend equal to the loan written off.
Hoddle Ltd (a close company) makes a loan at commercial rates to Glen (a shareholder in the
company) of £65,000 on 1 May 2016. On 1 May 2017 Glen repays £20,000. On 1 May 2018 the
company waives the balance. Hoddle Ltd has a 31 December year end and is not a large
company. Assume Glen has taxable income of £40,000 in 2018/19 which includes £1,000 of
dividend income. Also assume that the rules and rates for 2018/19 have always applied.
Required
What are the tax implications for both Hoddle Ltd and Glen?
Solution
265
Other items treated as a distribution

2.6 Where a benefit is provided to a shareholder or one of their associates and it is not caught
under the normal employment income benefit rules, it will be treated as a distribution, ie
disallowed in the corporation tax computation and taxed on the shareholder as dividends.
Dash and Violet are both shareholders of Incredibles Ltd, a close company. Dash is an employee
of the company but Violet is not.
They are both provided with identical company cars, both with a list price of £20,000, petrol
engines and CO2 emissions of 187g/km.
Required
Calculate the amounts Dash and Violet will be taxed on for their cars, and explain the implications
on Incredibles Ltd for the expenses incurred.
Solution
3 Investment companies
Sections 1 Definition
3.1 An investment company is a company whose business consists wholly or mainly in making
investments, and gets the principal part of its income from investments.
Tax implications
3.2 Rules are identical to trading companies except that expenses incurred in managing the
investments are deducted from total income. Interest on a loan taken out by an individual to
invest in a close investment holding company is not qualifying loan interest for the purpose
of the interest being deductible in the income tax computation (see Chapter 1).
266
Management expenses
3.3 Common expenses include:
(a) Commissions
(b) CAs on plant used for purpose of management of investment activities unless
otherwise available (eg against rental income)
(c) Reasonable salaries and redundancy payments
(d) Unavoidable expenses of management, eg rent, audit fees
3.4 Expenses relievable elsewhere, eg rental expenses are not included as management
expenses.
3.5 Interest paid on loans taken out to fund investment activities is relieved as a debit on a non-
trading loan in the normal way.
3.6 To the extent that management expenses cannot be relieved against income of the current
accounting period the excess may be carried forward and a claim can be made to offset
some/all of the expenses against the total profits of that next accounting period.
3.7 Alternatively, excess management expenses can be used within a group relief claim.
267
4 Chapter summary
1 Close companies A close company is one that is controlled by five or
fewer shareholders or any number of directors.
2 Implications of being a Special rules apply to loans and benefits made by
close company close companies. They are designed to avoid
shareholders extracting wealth from their company
without paying tax.
3 Investment companies Investment companies do not trade. Their
management expenses are deductible from the
income they make from investments and can be
carried forward or group relieved.
END OF CHAPTER
268
You have now covered the Topics that will be assessed in Step 5 in your Achievement Ladder. This
consists of 30 short questions, about a third of which focus on the shaded topics below with the
remainder being recap questions on earlier topics.
Course Notes
chapter
Income tax
Employment income 4
More income tax
aspects 5
Trade profits 6
Trading losses 8
269
Achievement Ladder
Course Notes
chapter
partnerships 15
Inheritance tax
the death estate 17
Corporation tax computation 20
Corporation tax Chargeable gains for companies 21
Corporation tax administration 22
Administration, winding up, purchase
of own shares 23
Losses and deficits on non-trading loan
More corporation tax
relationships 24
companies 25
270
Groups and consortia

Remember the material already covered in Taxation (TX – UK) Petzold (6/11)
under the heading of 'the effect of a group structure for Hail Ltd (12/11)
corporation tax purposes'
Sperry Ltd (12/11)
Janus (6/12)
Liza (6/13)
Gail (Mar/Jun 16)
Advise on the allocation of the annual investment allowance Sank Ltd and Kurt Ltd (6/12)
between group or related companies Bond Ltd Group (12/14)
271
26: GROUPS AND CONSORTIA

Advise on the tax consequences of a transfer of intangible Cinnabar Ltd (Sep/Dec 15)
assets
Advise on the tax consequences of a transfer of a trade and Loriod Plc Group (6/11)
assets where there is common control Flame plc Group (12/12)
Achiote Ltd, Boraway Ltd
and Caraway Ltd (Mar/Jun 17)
Understand the meaning of consortium-owned company and Opus Ltd Group (6/14)
consortium member
Advise on the operation of consortium relief Janus plc (6/12)
Determine pre-entry losses and understand their tax treatment Helm Ltd Group (6/15)
Determine the degrouping charge where a company leaves a Hail Ltd (12/11)
group within six years of receiving an asset by way of a no Flame plc Group (12/12)
gain/no loss transfer
Determine the effects of the anti-avoidance provisions, where Forti Ltd Group (12/13)
arrangements exist for a company to leave a group
272
Overview
Transfers of trade/sale of
company
Groups
Allocation of a single AIA Consortia
Group relief groups Capital gains groups
273
1 Groups
1.1 A group exists for taxation purposes where one company is a subsidiary of another.
Different tax consequences exist dependent upon the degree of control that exists between
the companies.
There are four types of relationship:
(a) Common control for allocation of annual investment allowance (AIA)
(b) 75% groups for group loss relief
(c) Consortia – not examined in Taxation (TX – UK)
(d) 75% groups for capital gains
2 Allocation of AIA
2.1 A group of companies receive a single AIA. However, this can be allocated between them in
whatever manner is most tax efficient.
2.2 A group is defined in relation to a parent and will include subsidiaries where the parent has
voting control at the end of the subsidiary's chargeable accounting period.
3 Group relief
Principle (TX)
3.1 (a) Allows companies in 75% group to transfer current accounting period and brought
forward losses to each other
(b) Must be UK resident
75% group (TX)

3.2 (a) One company is 75% subsidiary of another
(b) Both companies are 75% subsidiaries of same parent
3.3 Parent must:

(a) Own 75% of share capital
(b) Be entitled to 75% of subsidiary's assets on winding up; and
(c) Be entitled to 75% of subsidiary's income on a distribution.
Sub-subsidiaries (TX)
3.4 Only include if ultimate parent owns 75%
Current period group relief (TX)

3.5 A company with a current period loss may transfer all or part of this loss to another member
of the 75% group.
3.6 The company with the loss is referred to as the surrendering company
274
3.7 The surrender can transfer current period:

(a) Trade losses
(b) Non-trading deficits on loan relationships
(c) Excess qualifying charitable donations *
(d) Excess management expenses (investment companies) *
(e) Excess property losses *
3.8 (a) Any amount of loss can be surrendered

(b) No need to offset against own income first (unless required to *)
3.9 The company receiving the loss is referred to as the claimant company.
The claimant sets the loss against its taxable total profits of same period as surrendering
company's loss-making period.
These taxable total profits must be reduced by its own current period losses and losses
brought forward, even if it does not claim loss relief against total profits for those losses.
Group relief is given before relief for any losses carried back.
Carry forward group relief (TX)

3.10 A company with a loss carried forward may transfer all or part of this loss to another
member of the 75% group.
3.11 A company can surrender a maximum of carried forward:

 Trading losses;
 Property losses;
 NTLR deficits; and
 Management expenses
to other group companies under carry forward group relief. However, unlike current period
group relief, these can only be surrendered if the company cannot deduct them from its own
total profits for the current period.
3.12 The claimant company must use its own losses to the fullest extent possible in working out
the available taxable total profits to receive the carry forward group relief. Carry forward
group relief is given after all other reliefs for the current period but before any relief for any
losses carried back.
Exam approach (TX)

3.13 (a) Identify what group relationships exist in the group structure
(b) Set out income/qualifying charitable donations (QCDs) of each company
(c) Leave gaps for loss reliefs (current year and carry back, carry forward, group relief)
(d) Put losses/excess qualifying charitable donations in loss memo
(e) Discuss options for loss
275
Consider:
(i) Removing companies from the quarterly instalment regime to improve the
group cash flow position
(ii) Using the loss as early as possible (cash flow advantage)
(iii) Avoiding loss of QCDs
Lecture example 1
K plc has one 75% subsidiary, L plc. The results for the group are as follows:
Y/e 31/3/19 Y/e 31/3/18
K plc L plc L plc
£ £ £
Trading profit/(loss) (4,000) (20,700) 0
Non-trading loan relationship income 10,000 2,900 6,200
Chargeable gain 15,000 0 15,000
QCDs (2,000) (3,200) (1,000)
Required
What are the options for L plc to use its loss assuming it does not want to carry the loss forward
and consider which option would be most beneficial?
Solution
276
Lecture example 2
X plc has one 75% subsidiary, Y plc. The results for the group for the year ended 31 March 2019
are as follows:
X plc Y plc
£ £
Trading profit 45,000 62,000
Trading loss carried forward at 1 April 2018 (4,000) (150,000)
Non-trading loan relationship income 5,000 6,000
Non-trading loan relationship debit brought forward at
1 April 2018 (500) (4,000)
Chargeable gain 15,000 20,000
Required
What is the maximum carry forward group relief that X plc can claim from Y plc?
Solution
277
Non-coterminous year ends (TX)

3.14 If the accounting period of a surrendering company and a claimant company are
non-coterminous, both profits and loss must be time-apportioned, so that only the results of
the corresponding period may be offset.
Y/e 31.12.18
Loss = (20,000)
H Ltd
Y/e 31.3.19
S Ltd
Profit = 30,000
Group relief in overlap period = Lower of 9/12  (20,000)

and 9/12  30,000
ie £15,000
Note. The remaining £5,000 loss could be surrendered to S Ltd in its y/e 31.3.18.
3.15 Company joining a group

In the year of acquisition group relief is only available after the date of joining the group.
Y/e 31.12.18
H
S(new)
S joins on 1.5.18
Group relief only available for period S is a 75% subsidiary, ie post 1.5.18.
278
3.16 Company leaving a group

In the year of sale can only group relieve until 'arrangements in place' to sell the subsidiary.
Y/e 31.12.18
H
S
Arrangements S leaves on 1.5.18
for sale made
on 1.3.18
Group relief only available to date S leaves group, or to the date that arrangements for sale
come into effect, if earlier.
3.17 Restriction on carry forward group relief following change of ownership

There is a restriction on the use of carry forward group relief where there has been a change
in ownership of a company (Company A) such that Company A joins a group relief group.
Company A's carried forward losses arising before it joined the group cannot be surrendered
to other group companies, broadly for five years following the change in ownership. There
is, however, no restriction on other group companies surrendering losses to Company A.
Overseas companies
3.18 75% UK subsidiaries of a holding company that is resident anywhere in the world can
transfer trading losses to each other.
3.19 Group relief extends to UK branches of overseas companies and to group companies
resident in the EEA. Such companies can surrender losses to UK companies but only where
there is no alternative relief available in that country. Questions will indicate if a country is in
the EEA.
4 Consortia
Definition
4.1 (a) Two or more companies together own 75% of another company's share capital
(b) Each owns 5%; and
(c) No one company owns 75%
S Ltd V Ltd
60% 40%
T Ltd
S Ltd and V Ltd are consortium members. T Ltd is the consortium-owned company.
279
Loss relief
A and B are the consortium

members (CM) A B
60% 40%
C is the consortium
C
owned company (CC) Consortium
4.2 Max consortium relief is lower of:

– CMs 'result'; and
– CMs% of the CCs 'result'
4.3 The losses which can be offset through consortium relief are the same as those which can
be group relieved and this includes carried forward losses.
4.4 If the CC makes a loss it must first be relieved in the CC (even if no claim actually made)
before any remaining loss can be consortium relieved up to a CM.
A Ltd B Ltd C Ltd D Ltd

30% 30% 20% 20%
S Ltd
S Ltd has a trading loss of £1 million. A Ltd has profits of £500,000.
Required
What is the maximum consortium relief claim possible by A Ltd?
Solution
280
Same structure as above but:

S Ltd has a trading profit of £500,000
A Ltd has a trading loss of £100,000
Required
What is the maximum consortium relief claim?
Solution
5 Chargeable gains groups

Definition (TX)
5.1 UK companies
 A parent company owns 75% of subsidiary's share capital
 Two subsidiaries 75% owned by same parent
Chargeable gains groups can be established through companies resident anywhere in the
world. It is also extended to UK branches of overseas companies (if the asset remains in the
UK tax net).
Sub-subsidiaries (TX)
5.2 Part of ultimate parent's group if:
 75% owned by immediate holding company
 >50% owned by ultimate parent.
281
Implications (TX)
5.3 (a) Capital assets automatically transferred between group members at a no gain/no
loss price (NGNL) (ie indexed cost).
See Lecture Example 5(a).
(b) Gains and losses can be transferred between group companies. The election must be
made within two years of end of accounting period.
(c) Group treated as one unit for rollover relief
ie: (i) One company sells asset Gain can be rolled over
(ii) Another buys an asset within three years
Advantages (TX)
5.4  Can make use of group's capital losses
 More chance of rollover relief being available
Sale by company after intra-group transfer

5.5  Proceeds compared to base cost
 Indexation given as normal
See Lecture Example 5(b)
De-grouping charges on sale of subsidiary

5.6 Possible de-grouping charge:
(a) If subsidiary received intra-group asset in past six years
(b) Subsidiary still owns asset
(c) Charge = gain avoided on intra-group transfer because of no gain/no loss rule
(d) Charge will be added to the consideration received by the vendor company. This will
increase the gain arising on the sale of the subsidiary's shares. However, this gain
may be exempt under the substantial shareholding exemption
See Lecture Example 5(c).
282
Ibiza Ltd owns 90% of Benidorm Ltd. These shares were purchased for £300,000 in February
2008. In June 2013 Ibiza Ltd transferred a building to Benidorm Ltd for £100,000. On this date its
market value was £360,000 and it had cost Ibiza Ltd £150,000 in April 2000.
Assume the following indexation factors:
April 00 to June 13 is 0.468
June 13 to December 17 is 0.114
June 13 to July 18 is 0.127
February 08 to December 17 is 0.316
February 08 to July 18 is 0.332
Required
(a) What are the tax implications of this transfer?
(b) If Benidorm Ltd sells the building for £400,000 to a third party in July 2018 what is the capital
gain arising?
(c) Or if Ibiza Ltd sold its shares in Benidorm Ltd in July 2018 for £500,000, what are the tax
implications?
Solution
283
Pre-entry capital losses

5.7 If a subsidiary is acquired which has capital losses brought forward, such losses cannot be
used to shelter gains on assets transferred from other group companies and then sold to
crystallise a gain.
Pre-entry trading losses

5.8 If a subsidiary (Company A) is acquired which has trading losses carried forward which
could be offset against total profits then use of these 'pre-entry' losses is restricted where
there has been a change in ownership of the company, A, and a chargeable gain is
transferred to company A by another gains group company (either by NGNL transfer with A
then selling the asset or by electing to transfer the gain to A).
5.9 If the gain accrues in A within 5 years of the change in ownership then A cannot relieve the
gain by using its own trading losses carried forward at the date of change in ownership. This
is similar to the rules that we saw earlier for carried forward trade losses and group relief
(See 3.17).
Intangible property
5.10 Rules are similar to capital assets:
 Rollover relief can be claimed if an intangible asset is sold by one group company and
another reinvests in a replacement intangible asset.
 Transfer of intangible assets between group members is at a value such that no profit
or loss is taxed.
 If a company leaves the group having had an intangible asset transferred to it from
another group member in the last six years, then the income gain avoided at transfer
is included in trading profits. This degrouping charge may be transferred to another
group company.
6 Group loss question exam technique

6.1 A scenario with a corporate group and multiple different types of losses to deal with can be a
daunting examination question. The method below may help you structure your answer.
(a) Draw out a group structure and work out the number of related 51% group companies
as well as identifying any group relief and gains groups. Note any non-coterminous
year ends or any companies being bought or sold during the year as these will all
need more careful consideration when deciding how any losses can be used.
(b) Divide the £1,500,000 (quarterly instalment threshold) by the number of related 51%
group companies.
(c) Set out a table with a column for each company within the group and enter the results
from the question. Remember that capital losses brought forward have lost any
flexibility and must now remain in the same company. The capital losses carried
forward can only be offset against net gains in that same company.
284
(d) Next any brought forward losses need to be identified and considered in addition to
any current year losses. This is where a neatly presented loss memo will help
maximise your marks. When thinking about how to use losses the following points can
help you to score marks:
(i) Any capital losses within companies can only be offset against capital gains.
Thus, consider moving current year capital losses and gains around the group
to match the losses and gains together. Think about which companies the net
gains should be left to arise in.
(ii) If any companies within the group are currently paying tax through quarterly
instalments, consider transferring any net gains to other group companies or
allocating group trade losses through group relief to these companies in order
to bring their TTP down to below the threshold and remove them from the
quarterly instalment paying regime.
(iii) If you are given information about prior years do remember to consider a
current year and 12-month carry back trade loss claim – remember a carry
back claim generates a cashflow advantage.
(iv) If any claims waste QCDs ensure you note this in your answer as some of your
loss claim will now not be saving tax.
(v) Generally it is easier to consider allocating capital gains and losses around the
group before considering any group relief claims and then finally dealing with
any consortium relief claims at the end of the question. While this may not give
you a perfect solution every time the structure will give you a process to follow
and will allow you to access the easier marks rather than getting caught up in
the tougher areas such as consortium relief.
(e) Finally, do try to make a reasoned recommendation as to how the losses can best be
utilised. Only quantify the tax saving if the question requires it.
285
7 Transfers of trade/sale of company

Sale of a company Sale of a Transfer of a
to a third party company's trade company's trade
to a third party within a 75% group
1 Possible 1 Sale of No gain/no loss rules
degrouping individual will apply to capital
charge chargeable assets
Gains arising
2 Possible gain on assets
sale of shares by 2 Possible relief if
parent (unless proceeds
substantial reinvested in
shareholding) qualifying assets
C/fwd in company  Transferred with
sold unless new the trade and c/f
owner makes major trade loss reliefs
Unrelieved trade Lost
changes to nature/ can be used (eg to
losses
conduct of trade (eg offset vs acquirer's
customer base, total profits or
geographic location, group relieved.)
type of business)  If selling company
has had
(1) a CoO; and
(2) sells its trade
within 3 yrs
before or 5 yrs
after CoO
then for a 5 yr
period from CoO
the acquirer can
only use sellers c/f
losses vs profits of
trade transferred
(not total profits)
and can't group
relieve them
Unrelieved C/fwd in company Remain with Remain with transferor
capital losses sold = pre-entry for transferor
new group
Capital No effect – company Transferred at MV Automatically
allowances is continuing (BC may arise) transferred at WDV
286
Sale of a company Sale of a Transfer of a

to a third party company's trade company's trade
to a third party within a 75% group
VAT Exempt supply Transfer of Transfer of business
business as a going as a going concern –
concern – outside outside scope if
scope if transferee transferee is/becomes
is/becomes registered
registered
Stamp duty ½% on value of Up to 5% on value No stamp duty with
consideration paid by of land and transfers in a 75%
the purchaser buildings paid by group (unless
purchaser transferee sold within
three years of
transfer)
Skye Ltd has owned 100% of Moonshine Ltd for a number of years.
Skye Ltd has been approached with two separate offers for the sale of Moonshine Ltd as follows:
Offer 1 – Sale of shares, we have been offered £520,000 for the whole share capital
Offer 2 – Sale of trade and assets of the business
We have been offered £616,000 for the company's trade and assets as follows:
Offer Cost TWDV
£ £ £
Premises 483,200 392,000 N/A
Plant and machinery 36,800 64,000 52,000
Goodwill 96,000 Nil
616,000
This will leave Moonshine Ltd with net current liabilities of £20,000 which it will pay out of the sale
proceeds.
Both companies are trading companies.
Required
Calculate the after tax proceeds in respect of each of the two offers. Assume indexation allowance
on premises is £50,930.
287
Solution
288
8 Chapter summary
1 Groups Make sure you understand the different types of
group relationship which exist for corporate tax
purposes.
2 Allocation of the annual A group of companies share a single AIA which can
investment allowance be allocated across the group in whatever manner is
(AIA) most tax efficient.
3 Group relief Companies in a group relief group can surrender
certain types of losses to other companies within the
group subject to each claimant company being able to
accept only up to its TTP (after any CY loss claim of
the claimants own trade loss).
4 Consortia A consortium exists where two or more companies
together own 75% of another company's share
capital with each company owning 5% but no one
company owning 75%.
Consortium relief allows the same types of losses as
for group relief to be surrendered between a
consortium member and the consortium company in
any direction but not between consortium members.
The maximum consortium relief is the lower of the
consortium member's result and the consortium
member's % of the consortium company's result.
5 Chargeable gains Advantages of being in a gains group include
groups allocation of CY gains and losses around the gains
group, NGNL transfer of capital assets within the
gains group and availability of group rollover relief.
Watch out for a NGNL transfer of an asset around a
group with the company receiving the asset being
sold within six years of the NGNL transfer.
6 Group loss question Group loss exam questions can be daunting
exam technique questions and good approach is essential for ensuring
you pick up the easy marks. Make sure you have an
approach to handling these types of questions should
they come up in your exam.
7 Transfers of trade/sale Exam questions will often deal with a sale of trade
of company and assets or sale of a company – make sure you
understand the difference between these two sale
mechanisms and how they work for tax purposes.
Also ensure you understand that if the transfer of
trade and assets is within companies in a 75% group
that there are different tax consequences.
289
END OF CHAPTER
290
Overseas aspects of
corporate tax

Assess the impact of the OECD model double tax treaty on
corporation tax
Evaluate the meaning and implications of a permanent Loriod plc Group (6/11)
establishment
Identify and advise on the tax implications of controlled foreign Klubb plc (12/14)
companies Set Ltd group (Mar/Jun 18)
Advise on the tax position of overseas companies trading in the Loriod plc Group (6/11)
UK Spetz Ltd Group (12/13)
Calculate double taxation relief Loriod plc Group (6/11)
Banger and Candle Ltd
(12/12)
Advise on the tax treatment of an overseas branch Loriod plc Group (6/11)
291
27: OVERSEAS ASPECTS OF CORPORATE TAX
Overview
Overseas aspects of corporate

tax
Residence Double tax relief Controlled foreign

companies
Structure of overseas Transfer pricing

operations
Branch Subsidiary
292
1 Residence
Definition
1.1 Company is UK resident if:
(a) Incorporated in UK
(b) Controlled and managed from UK (on day to day basis)
Implications
1.2 UK resident companies taxable on worldwide income.
1.3 Non-UK resident companies not liable to UK tax (unless trading through a UK permanent
establishment  profits of permanent establishment are taxable).
1.4 Only UK resident group companies can surrender losses to each other.
Permanent establishments
1.5 A company may be subject to foreign tax and UK tax if it has a permanent establishment in
Section 5 a foreign country.
2 The structure of overseas operations

Branch/permanent establishment
2.1 (a) Branch profit chargeable in UK company (trading income)
(b) UK capital allowances available
(c) Branch losses available for set off as trade losses, since they are losses of the UK
company
(d) However, UK companies can make an irrevocable election to exempt from
corporation tax the profits and losses of all their overseas branches; this election will
not be beneficial if a company has a loss-making overseas branch as the election will
prevent this loss being eligible for relief
Non-resident subsidiary
2.2 (a) Profits are not charged to UK CT. The non-resident subsidiary will pay foreign tax and
remit its profits to the UK parent by way of dividends. Overseas dividends are not
taxable for the UK parent (see Section 3).
(b) Losses not available to set against UK profits since the losses arose in a non-UK
company.
293
3 Calculating corporation tax for a UK resident

company with overseas income
3.1 Overseas income of a UK company is grossed up for any overseas tax suffered and is
assessed as overseas income.
3.2 Most overseas dividends received are exempt from corporation tax. Taxable overseas
dividends will not be examined at ATX.
3.3 Taxable total profits and corporation tax are calculated as normal and then double taxation
relief is deducted.

4.1 Relief for foreign tax can be given in one of three ways:
(a) Exemption method – under a treaty between UK and the overseas country, income is
only taxed in one country.
(b) Unilateral credit relief – income is taxed in both but a tax credit is given in the UK.
(c) Unilateral expense relief (outside of syllabus).
Only (a) and (b) are used under the OECD treaty.
Calculation
4.2 (a) DTR restricted to lower of:
(i) Foreign tax suffered on the overseas income
(ii) UK corporation tax on the overseas income
(b) Source by source basis
Allocation of qualifying charitable donations and losses

4.3 For the purpose of calculating DTR, qualifying charitable donations and losses can be offset
in the way that is most beneficial to the company.
(a) Set off against UK income first
(b) Any remaining qualifying charitable donations/losses should be allocated to foreign
source which suffers lowest rate of foreign tax
294
Lecture example 1 Exam standard
Sherman Ltd, a UK resident company which is part of a large group of companies, has trading
profits of £850,000 for y/e 31 March 2019.
Sherman received £150,000 from a foreign property subject to 18% withholding tax.
Sherman also paid a qualifying charitable donation of £100,000.
Required
Calculate the maximum loss that can be surrendered to Sherman Ltd by the other group
companies if relief in respect of the tax suffered overseas is not wasted.
Solution
5 Transfer pricing
5.1 Anti-avoidance rules prevent a UK company from reducing its taxable total profits by selling
to an overseas subsidiary at below market value, or buying from an overseas subsidiary at
above market value.
5.2 Adjustments will be made to the UK taxable total profits to reinstate amounts to a fair market
value.
5.3 Any transfer pricing adjustments must be made by the company in its self assessment tax
return.
5.4 These rules apply to transactions between UK connected companies.
295
6 Controlled foreign companies

Section 4 Definition
6.1 A controlled foreign company (CFC) is a company which:
(a) Is resident outside the UK; and
(b) Is controlled by persons resident in the UK.
Implications
6.2 Chargeable profits of a CFC are apportioned to UK resident companies (not individuals)
entitled to at least 25% of those profits.
6.3 Chargeable profits are those income profits (not gains) of the CFC which have been
artificially diverted from the UK.
6.4 The apportioned profit does not form part of taxable total profits and so the tax is shown
separately to the tax on TTP. Corporation tax will be due on the apportioned profit at 19%
and a deduction for DTR will be available.
Illustration
A Ltd B Ltd Individuals (UK)
40% 5% 10%
40%  1m = £400k
C Inc
CFC 45%
Extra tax
A Ltd CT = <¾  UK level
£400k  19% = £76k Profit = £1m
Exceptions
6.5 Profits do not need to be apportioned if:
(a) Exempt period exemption – a 12-month exemption from the CFC charge applies
when a non-UK resident company is acquired by a UK resident person.
(b) Tax exemption – the local tax paid is at least 75% of the amount of tax the CFC would
have paid in the UK if it were UK resident.
(c) Excluded territories exemption – the CFC is resident in one of the territories specified.
(d) Low profits exemption – CFC's profits <£500,000 and its non-trading income
<£50,000.
(e) Low profit margin exemption – CFC's accounting profits are no more than 10% of its
expenditure.
296
7 Chapter Summary
1 Residence UK resident companies are liable to corporation tax on
worldwide income.
Non UK resident companies are only liable to
corporation tax if they carry on a trade in the UK
through a permanent establishment.
2 The structure of The choice is between a branch (extension of yourself)
overseas operations or a subsidiary (separate legal entity)
3 Calculating corporation Overseas income is grossed up for overseas tax
tax for a UK resident suffered. It is included within taxable total profits and
company with taxed as normal and then double tax relief is given.
overseas income
4 Double tax relief A tax credit to relieve the effects of double taxation.
5 Transfer pricing If transactions with overseas subsidiaries are not at
arm's length, taxable total profits must be adjusted to
market value.
6 Controlled foreign Profits of a CFC are apportioned to UK resident
companies (CFC) companies entitled to at least 25% of those profits.
297
END OF CHAPTER
298
Value added tax 1 –
TX – UK assumed
knowledge

Remember the material already covered in Taxation (TX – UK) Desiree (6/10)
under the headings: Petzold (6/11)
'Scope of VAT' Mirtoon (12/11)
'VAT registration requirements' Hail (12/11)
'The computation of VAT liabilities'; and Sperry (12/11)
'Effect of special schemes' Jerome (6/12)
Janus plc (6/12)
Ash (12/12)
Liza (6/13)
Kantar (12/14)
Bamburg Ltd (6/14)
Ziti (6/14)
Jodie (6/15)
Acryl Ltd and Cresco Ltd
(Sep/Dec 16)
299
28: VALUE ADDED TAX 1

300
Overview
Compulsory Voluntary Deregistration Group
General VAT rate Registration
Cash
Special Annual
Value added tax 1
schemes
Flat rate
Deduction of Administration and Value of Import, exports,

input VAT penalties supplies acquisition and
dispatches
Private Impairment Pre-registration Private

fuel losses expenses use
301
1 General
What is value added tax (VAT) charged on?
1.1 VAT is charged on taxable supplies of goods and services in the UK by taxable persons in
the course of their trade.
1.2 A taxable supply is either standard, reduced or zero rated.
2 VAT rate
2.1 The following items are:
 Standard rated 20% – Most goods/services
 Zero rated – Non-luxury food
– Books
– Children's clothing
– Sale of new dwellings
– Export of goods
 Reduced rate 5% – Domestic fuel
 Exempt – Burial and cremation services
– Postal/health services
– Non-profit making education
– Land where sold/leased, hired
 Many items are outside the scope of VAT, eg dividends, salaries.
3 Registration
Who must register?
3.1 (a) Registration is compulsory if at the end of any month taxable supplies over the
previous 12 months have exceeded £85,000 (historic test), or in the next 30 days,
taxable supplies are expected to exceed £85,000 (future test).
(b) This requirement may be waived if you can satisfy HM Revenue & Customs (HMRC)
that taxable supplies in the following 12-month period will be less than £83,000.
(c) 'Taxable supplies' are the VAT-exclusive value of all zero rated and standard rated
supplies.
(d) 30 days to notify HMRC.
(e) Registration effective from:
(i) End of month following the end of the 12-month period (historic)
(ii) Start of 30 days period if future 30-day test applies
302
Jack commenced trading as a window cleaner on 1 January 2018. His quarterly turnover (spread
evenly over the quarter) is as follows:
Quarter ended Turnover
£
31 March 2018 9,000
30 June 2018 12,000
30 September 2018 13,000
31 December 2018 24,000
31 March 2019 44,000
30 June 2019 46,000
Required
By what date is he required to notify HMRC that he is liable to register for VAT?
Solution
Deregistration
3.2 If the business ceases to make taxable supplies it must deregister. If in the next year VAT
exclusive taxable supplies will be below £83,000, the business may deregister.
3.3 On deregistration a final VAT return must be prepared. The business must work out what
VAT would be charged if it were to sell all its assets where input VAT has been reclaimed at
market value and, if this VAT exceeds £1,000, then it must be paid over to HMRC.
303
Voluntary registration
3.4 This enables input tax to be reclaimed but may not be advantageous if most customers
cannot recover the VAT they are then charged.
Implications of registration
3.5 (a) Traders making standard or zero rated supplies must charge VAT on all taxable
supplies using tax invoices.
(b) These traders can recover related input tax suffered.
(c) However, input tax is not recoverable on:
(i) Cars (if used privately)
(ii) Entertaining UK clients
(iii) Non-business purchases
(d) Exempt traders (eg insurance company):
(i) Cannot register (as they make no taxable supplies)
(ii) Cannot recover input VAT suffered
4 Deduction of input tax

VAT on private fuel
4.1 If private fuel is provided, the business has two options for dealing with the VAT:
(a) Claim all the input VAT back and then account for output VAT using the scale charge
(b) If the employee is charged for the full cost of the fuel provided then claim all the input
VAT and account for output VAT on the charge to the employee
4.2 The ATX exam will normally use the fuel scale charge.
Impairment losses
4.3 (a) Can claim refund of output tax previously paid if it was a sale of goods originally
supplied but it remains unpaid six months after the original due date for payment and
the liability has been written off in the taxpayer's books.
(b) Issuing a credit note purely to reverse output VAT is ineffective.
304
Stanley Ltd, which is registered for VAT, incurred the following expenditure (including VAT) during
the quarter to 31 December.
£
New car for salesmen (private use) 25,800
3 new motor vans 57,960
Second-hand container lorry 60,375
Entertaining – UK customers 8,500
– employees 12,075
Required
How much VAT can be reclaimed in respect of the above?
Solution
305
Pre-registration expenses: recovery of input tax

4.4 Input tax on (a), (b) and (c) is recoverable in the first return period:
(a) Fixed assets bought in the four years prior to registration but in use post registration
(b) Services supplied within the six months prior to registration
(c) Purchases still held in inventory at date of registration
James commenced trading on 1 August 2018 and applied to register for VAT with effect from
1 October 2018.
Prior to registration, he had incurred VAT on the following VAT-exclusive amounts:
£
Accountancy fees – invoice dated 10 March 2018 7,000
Van purchased new on 23 June 2018 9,000
Held in inventory:
Spare parts as on 30 September 2018 14,000
Required
What input VAT can James claim in respect of these items?
Solution
306
Private use
4.5 (a) If an asset is used for private and business use, only the input tax relating to business
use is recoverable.
(b) However, if it is a car accessory invoiced separately from the original car purchase,
then all of the input tax suffered on the accessory is recoverable.
On 14 April Minx Ltd acquired a new BMW motor car costing £28,200 (including VAT) for the
managing director. Subsequently the company purchased a stereo for the car costing £940
(including VAT). The car was used 80% for business purposes.
Required
What is the maximum input VAT recoverable?
Solution
5 Group registration
Effect of group registration
5.1 (a) Allows group companies to nominate one company in the group to prepare VAT
returns for companies within the registration (the 'representative member').
(b) Intra-group transactions are disregarded for VAT purposes.
(c) Administratively much easier. Any VAT balances from individual companies are
adjusted through inter-company accounts.
(d) All members of group registration are jointly and severally liable for VAT liability.
307
Who can form a group?

5.2 To be included in group registration, holding company must control subsidiaries (ie by voting
power) and the companies within the group registration must have a fixed establishment in
the UK.
5.3 Subsidiaries under common control of an overseas company may also apply for group
registration.
5.4 The inclusion of an exempt company in the group VAT registration results in the group being
partially exempt.
Election needed
5.5 Companies must elect to form a VAT group, it is not automatic.
6 Administration and penalties

6.1 Appeal is to Tax Tribunal, but all tax must be paid prior to hearing.
6.2 The following provisions carry penalties:

(a) Common penalty regime for incorrect returns (see Chapter 15).
(b) Default interest which applies where tax shown on a return has been understated.
(c) Default surcharge which applies where either a return or the tax is submitted late
twice in five consecutive return periods:
(i) Written notification of a default (surcharge liability notice) will be given to a
taxpayer after the first default (ie first late payment or return).
(ii) Once issued it remains in force until the taxpayer has not been in default for
12 months.
(iii) While the notice is in force the taxpayer will be liable to a surcharge each time
he defaults – this will only be for late payment of tax, no penalty exists for
submission of late return provided the tax was paid on time. However, the late
return will extend the notice period.
(iv) The surcharge is a percentage of the unpaid VAT. The percentage increases
as there are more defaults – 2% for the first default, 5% for the second, 10% for
the third and 15% for fourth or more. No assessments will be issued for sums
less than £400 where a 2% or 5% penalty applies.
6.3 Records should be kept for up to six years.
6.4 HMRC has the right to raise an assessment for up to 20 years if due to fraud.
308
Tax periods
6.5 The following return periods are possible:
(a) Quarterly returns
(b) Monthly returns – repayment traders may elect for monthly returns
(c) Annual accounting – option available if taxable supplies below £1,350,000 per annum
Note. Payments on account – taxable persons whose annual liability exceeds £2.3 million
must make monthly payments on account of their liability.
All VAT-registered businesses must submit their VAT returns and payments electronically.
The deadline for filing and electronic payment is one month and seven days after the end of
the VAT quarter.
7 Value of supplies
Discounts
7.1 VAT is calculated on the invoice price less all trade discounts. However, if a prompt
payment discount is offered then VAT must be calculated on the actual amount received.
The trader must provide details of the discount on the invoice or must invoice for the full
amount and then issue a credit note if the discount is taken up.
Mixed supplies and composite supplies (Not seen at TX)

7.2 A 'mixed supply' is where different goods and services are invoiced together at an 'inclusive'
price, eg river cruise including a buffet. VAT must be accounted for separately on each
element.
A 'composite' supply is where the supply cannot be split into different goods and services eg
flight including an in-flight meal. One VAT rate is applied to the whole supply.
Goods for private use (Not seen at TX)

7.3 Goods taken out of business for own use will give rise to output tax based on market value.
Gifts (Not seen at TX)

7.4 (a) Of services – no VAT.
(b) Of goods – usually VAT on MV, except:
(i) No VAT if <£50 (including food, drink, tobacco)
(ii) No VAT on gifts of samples
309
8 Imports, exports, acquisitions and dispatches

8.1 Outside European Union (EU)
Sale of goods
UK = Export USA
Zero rated
Purchase of goods
UK = Import USA
HMRC holds goods at point of entry into UK
Input VAT paid on value of goods imported
Input VAT deductible on next VAT return
8.2 There are special rules for accounting for output VAT on imports where the trader is
approved under the duty deferment scheme or the goods are held in an HMRC warehouse.
 Under the duty deferment scheme deferred charges are calculated for imports for
each calendar month and must be paid in one sum by direct debit on the 15th of the
month following the month of importation. This defers payment and simplifies
administration.
 If the goods are imported into an HMRC warehouse then the import is disregarded
and output VAT is accounted for either when the goods are removed from the
warehouse or under the duty deferment scheme if the trader is approved.
310
8.3 Dispatches within EU

Until the UK has ceased its membership of Europe, European Union rules will continue to apply to
the UK and these should continue to be assumed in your exam.
Supply of goods
UK = Dispatch EU state
If UK supplier has VAT no. of EU recipient If UK supplier does not have VAT no. of EU
and has evidence goods delivered to recipient or does not have evidence goods
another EU state delivered to another EU state
Zero rated Charge local (ie UK VAT rate)

Known as ‘distance selling’
8.4 Acquisitions within EU
Supply of goods
UK Acquisition EU state
UK trader accounts for output VAT at point of acquisition
Treated as input VAT
VAT neutral
8.5 Supplies of services

If a UK VAT-registered business is supplied with services from within the European Union,
or where a UK VAT-registered business supplies services to another VAT-registered
European Union business, the VAT treatment is generally the same as for a supply of
goods.
If a UK VAT-registered business is supplied with services from outside the European Union,
the VAT treatment is generally the same as for a supply of goods.
Supplies of services by a UK business to outside the EU are outside the scope of VAT.
311
9 Special schemes
9.1 Cash accounting
(a) Who can apply for it?
A trader whose annual taxable revenue (exclusive of VAT) is not expected to exceed
£1,350,000 in the following 12 months.
(b) Effect?
VAT can be accounted for on the basis of cash paid and received, thus giving
automatic impairment loss relief.
(c) A business must cease using the cash accounting scheme as soon as revenue is
expected to exceed £1,600,000 in the following 12 months.
(d) Business will be allowed to continue bringing outstanding VAT into account on a cash
basis for a further six months after leaving the scheme.
9.2 Annual accounting

(a) Available if taxable supplies are not expected to exceed £1,350,000 in the next
12 months.
(b) Pay 90% of previous year's VAT liability in nine equal instalments (months 4–12).
(c) One annual return (with balancing payment) within two months of year end.
9.3 Flat rate scheme

(a) An optional flat rate scheme is available aimed at simplifying the way in which small
businesses calculate their VAT liability.
(b) The scheme can be used if tax-exclusive taxable revenue for the next 12 months
does not exceed £150,000.
(c) Must leave scheme if total value of its tax-inclusive supplies in the year (excluding
sales of capital assets) is more than £230,000.
(d) To calculate the VAT liability, simply apply a flat-rate percentage to total (tax-
inclusive) revenue.
(e) The percentage will depend upon the trade sector into which the business falls.
(f) No input tax is recovered.
(g) The scheme removes the need to calculate and record output and input VAT.
However, VAT at 20% is still treated as being charged where a supply is made to a
registered business, and therefore a VAT invoice must still be issued.
(h) A 1% reduction from the flat rate % can be made by businesses in their first year of
VAT registration.
(i) Finance Act 2017 introduced a flat rate of 16.5% for businesses which have no, or
only a limited amount of, purchases of goods. In an exam question you will not be
expected to determine whether the 16.5% rate is applicable but a question could be
set where this rate applies.
312
Cool Kids Ltd has annual revenue of £95,000. 85% of the sales are standard rated and 15% are
zero rated. Standard rated expenses are £15,800.
All figures are inclusive of VAT.
The relevant percentage for Cool Kids Ltd trade is 12.5%.
Required
Show the VAT liability if:
(a) Cool Kids Ltd does not use the flat rate scheme
(b) Cool Kids Ltd opts to use the scheme
Solution
313
10 Chapter summary
1 General VAT is charged on taxable supplies of goods and
services made by a taxable person in the course of
their trade.
2 VAT rate Some supplies are taxable, others are exempt. Make
sure you understand the VAT implications of this
distinction.
3 Registration Registration is compulsory if turnover exceeds the
registration limit. However, businesses can voluntarily
register for VAT if the benefits outweigh the costs.
4 Deduction of input tax Input VAT is not always deductible for a VAT
registered trader on certain items of expenditure.
5 Group registration Companies under common control can choose to file
one return as a VAT group. The return is filed by the
representative member and intra-group supplies are
disregarded for VAT purposes.
6 Administration and Various penalties exist if a business breaches the VAT
penalties legislation.
7 Value of supplies VAT is charged on the VAT-exclusive price.
Where a discount is offered, VAT is chargeable on the
amount after deducting a trade discount and after a
prompt payment discount if this is taken by the
customer.
8 Imports, exports, Imports from outside the EU are subject to VAT and
acquisitions and exports outside the EU are zero rated.
dispatches Taxable acquisitions from EU states are treated as a
sale and a purchase by the UK business.
Sales to EU states are zero rated.
9 Special schemes Special schemes exist to make VAT accounting easier
for certain types of business. Make sure you know how
annual accounting, cash accounting and the flat rate
scheme work.
END OF CHAPTER
314
Value added tax 2 –
Topics new at ATX – UK

Advise on the value added tax (VAT) implications of the supply Jerome (6/12)
of land and buildings in the UK Flame plc Group (12/12)
Maria and Granada Ltd
(Mar/Jun 16)
Advise on the VAT implications of partial exemption Robusto Ltd (12/10)
Petzold (6/11)
Ash (12/12)
Spetz Ltd Group (12/13)
Nocturne (6/15)
Advise on the application of the capital goods scheme Janus plc (6/12)
Advise on a transfer of a going concern Ziti (6/14)
Maria and Granada Ltd
(Mar/Jun 16)
315
Overview
Partial exemption Land and buildings
Value added tax 2
Transfer of a going concern Capital goods scheme
316
1 Partial exemption
1.1 (a) Some traders make both exempt and taxable outputs.
(b) They charge VAT on taxable outputs only and recover input VAT based on the partial
exemption rules:
Partial exemption
Always recoverable
Input VAT
re taxable supplies
Taxable supplies
Unallocated Business
input VAT
Exempt supplies
Input VAT
re exempt supplies
May be recoverable if below de minimis
If the business passes one of three tests, it can recover all its input VAT:
(1) (i) Total input VAT ≤£625/month; and
(ii) Exempt supplies ≤50% of total supplies
OR
(2) (i) Total input VAT – input VAT re taxable supplies ≤£625/month and
(ii) Exempt supplies ≤50% of total supplies.
OR
(3)  
Recover Recover
Input VAT re taxable supplies X
Input VAT re exempt supplies X
Unallocated input VAT
taxable supplies
Input VAT  X X
total supplies
X X
Round up to nearest %.
If ≤£625/month and
≤50%  total input VAT
can recover all input VAT!!
(c) Businesses may opt to apply the de minimis tests for an annual period (subject to
conditions eg reasonable grounds for not expecting to incur more than £1 million input
tax during year). During period all the input tax is recoverable. Repayment is made
after the end of the period if de minimis tests are not satisfied.
317
(d) Otherwise businesses must use de minimis tests for each VAT period. Businesses
may use actual % for period or % for previous year. Year end adjustment is made to
convert quarterly basis to annual basis.
For the quarter ended 30 June, Jim has allocated his input tax suffered between taxable and
exempt supplies but a balance remains unallocated.
Exempt Taxable Unallocated Total Input Tax
£700 £20,000 £3,200 £23,900
His total (VAT-exclusive) turnover for the quarter was £135,429, of which taxable supplies
amounted to £101,572.
Required
How much of the £23,900 input tax suffered is recoverable by Jim?
Solution
318
2 Land and buildings

2.1 Sale of a freehold of new commercial building (<3 years old) is standard rated.
2.2 Construction of a new building for residential or charitable purposes is zero rated.
2.3 Most other transactions in commercial property (eg sale of an old commercial property or
rent/ lease of a property) are exempt, unless the owner/landlord gives notice to waive
exemption (opt to tax).
2.4 If the landlord has opted to tax, then all supplies (renting or selling) are taxable at the
standard rate.
2.5 Advantage to landlord is that he may recover input tax.
2.6 VAT status of tenants is important – if they are exempt/not registered for VAT they will not
be able to reclaim the VAT paid on the rental income.
Builder L/lord
< 3yrs
20%
Commercial
property L/lord can't Tenant
recover Rent +
20%
Is tenant
Unless OTT registered?
• recover input tax
3 Transfer of a going concern

3.1 When the assets of a VAT-registered business are sold, each asset will be subject to VAT at
the appropriate rate.
3.2 When, however, the business is sold as a going concern then the supply of assets is outside
the scope of VAT and no VAT is chargeable.
3.3 There are conditions for the transfer of a going concern (TOGC) to apply:
 The purchaser of the business must also be VAT registered
 The same kind of a business will be carried on
 There is no significant break in trading
3.4 Where land and buildings are included in the transfer and ordinarily they would be standard
rated, VAT must be applied to these assets. This can be avoided, however, if the purchaser
opts to tax the building.
319
4 Capital goods scheme

4.1 Scheme mainly affects partially exempt traders and is designed to ensure VAT claimed
reflects taxable use of asset over time.
It applies to:
(a) Computers costing >£50,000 and which are dealt with over five VAT years
(b) Land and buildings costing >£250,000 and which are dealt with over ten VAT years
4.2 In VAT year of purchase, input VAT is recovered based on use of asset for the quarter of
purchase, adjusted at end of VAT year. For each subsequent VAT year over the recovery
period of five or ten years, an adjustment is made to the VAT recovery.
4.3 Adjustment is equal to difference in % use between first VAT year and VAT year now  1/5
(for computers) or  1/10 (for land and buildings)  input VAT.
Adjustment is made in the second VAT return following end of VAT year.
Lecture example 2
R Ltd buys a computer on 1 April 2018 for £60,000 + VAT and uses it 68% for taxable use in the
quarter of purchase and 70% for taxable purposes in the first year to 31 March 2019. In the
following year taxable use falls to 60%.
Required
Calculate the input tax recovery for the first year and the adjustment required in the second year.
Solution
320
4.4 If the capital item is sold within the adjustment period, two adjustments are made:
(a) The normal adjustment as if the item was used for the whole year
(b) A further adjustment for each remaining VAT year of recovery calculated, assuming
100% use for taxable supplies; this cannot exceed VAT charged on sale item
321
5 Chapter summary
1 Partial exemption A partially exempt trader may be unable to recover all
of his input tax unless the amounts attributable to
exempt supplies are below certain de minimis limits.
2 Commercial property Transaction in land may be zero rated, standard rated
or exempt.
3 Transfer of a going Normally outside the scope of VAT.
concern (TOGC)
4 Capital goods scheme Scheme is designed to ensure VAT claimed on
purchase accurately reflects taxable usage of asset.
END OF CHAPTER
322
Impact of taxes and
tax planning

Identify and advise on the taxes applicable to a given course of FL Partnership (12/13)
action and their impact Forti Ltd Group (12/13)
Ziti (6/14)
King (6/15)
Gail (Mar/Jun 16)
(Sep/Dec 17)
Identify and understand that the alternative ways of achieving Epon Ltd Group (6/13)
personal or business outcomes may lead to different tax Brad (6/13)
consequences Christina (Sep/Dec 15)
Pippin (Mar/Jun 17)
Advise how taxation can affect the financial decisions made by FL Partnership (12/13)
businesses (corporate and unincorporated) and individuals Forti Ltd Group (12/13)
Ziti (6/14)
Bamburg Ltd (6/14)
Gail (Mar/Jun 16)
Pippin (Mar/Jun 17)
323
30: IMPACT OF TAXES AND TAX PLANNING

(Sep/Dec 17)
Sabrina and Adam
(Sep/Dec 17)
Assess the tax advantages and disadvantages of alternative Robusto Ltd (12/10)
courses of action Capstan (6/11)
Pippin (Mar/Jun 17)
Sabrina and Adam
(Sep/Dec 17)
Understand the statutory obligations imposed in a given Petzold (6/11)
situation including any time limits for action and advise on the Sperry Ltd (12/11)
implications of non-compliance
Gail (Mar/Jun 16)
Identify and advise on the types of investment and other Ray and Shanira (Mar/Jun 16)
expenditure that will result in a reduction in tax liabilities for an Pippin (Mar/Jun 17)
individual and/or a business
Sabrina and Adam
(Sep/Dec 17)
Advise on legitimate tax planning measures by which the tax FL Partnership (12/13)
liabilities arising from a particular situation or course of action Forti Ltd Group (12/13)
can be mitigated Cinnabar Ltd (Sep/Dec 15)
Advise on the appropriateness of such investment, expenditure Calisia (6/11)
or measures given a particular taxpayer's circumstances or Sperry Ltd (12/11)
stated objectives Sabrina and Adam
(Sep/Dec 17)
Advise on the mitigation of tax in the manner recommended by Epon Ltd Group (6/13)
reference to numerical analysis and/or reasoned argument Brad (6/13)
Gail (Mar/Jun 16)
(Sep/Dec 17)
Be aware of the ethical and professional issues arising from Petzold (6/11)
the giving of tax planning advice Hail Ltd (12/11)
Una (6/12)
Flame Plc Group (12/12)
324

Kantar (12/14)
Jonny (Sep/Dec 15)
Gail (Mar/Jun 16)
(Sep/Dec 17)
Be aware of and give advice on current issues in taxation Poblano (6/10)
Communicate advice, recommendations and information in the FL Partnership (12/13)
required format. For example the use of: Epon Ltd Group (6/13)
– Reports – Memoranda Hahn Ltd group (Sep/Dec 16)
– Letters – Meeting notes Pippin (Mar/Jun 17)
Present written information, in language appropriate to the Epon Ltd Group (6/13)
purpose of the communication and the intended recipient FL Partnership (12/13)
Communicate conclusions reached, together where necessary Epon Ltd Group (6/13)
with relevant supporting computations FL Partnership (12/13)
State and explain assumptions made or limitations in the Poblano (6/10)
analysis provided, together with any inadequacies in the Calisia (6/11)
information available and/or additional information required to Capstan (6/11)
provide a further analysis
Identify and explain other non-tax factors that should be
considered
325
Overview
Ethics General Anti-Abuse Rule
Personal and corporate

financial management
Investment products Tax efficient investments
Sources of personal finance

Sources of business finance
ISAs Venture capital

schemes
326
Employment/self Remuneration packages

Choice of business medium
employment
Tax planning
Incorporation of a business Tax efficient profit extraction
Tax efficient exit routes Corporate growth

Group tax minimisation
strategies
327
1 Ethics
1.1 There will always be five marks within the paper on ethics. These should always be
Section 5 considered in a question even if not expressly mentioned in the requirements.
1.2 The ACCA Code of Ethics and Conduct details the following fundamental principles which
should underlie all members' professional behaviour:
(a) Integrity
(b) Objectivity
(c) Professional competence and due care
(d) Confidentiality
(e) Professional behaviour
1.3 The examining team has identified the following areas within ATX when ethics should be
considered:
(a) Prospective clients
Before accepting a new client, members should consider whether acceptance of the
client or the particular engagement would create any threats to compliance with the
fundamental principles.
They should contact the existing tax advisers to ascertain if there are any matters
they should be aware of when deciding whether to accept the appointment or not.
(b) Conflicts of interest
A member should take reasonable steps to identify circumstances that could pose a
conflict of interest. For example, acting for both husband and wife in a divorce
settlement.
Members should obtain consent of the relevant parties to act. If consent is refused
then the member must not continue to act for the parties in the matter that has given
rise to the conflict of interest.
(c) Disclosure of information
A member may disclose confidential information if:
(i) Disclosure is permitted by law and is authorised by the client
(ii) Disclosure is required by law
(iii) There is a professional duty or right to disclose
(d) Money laundering
Members are bound by legislation to implement preventative measures and to report
suspicions to the appropriate authority. Failure to follow these legislative requirements
is a criminal offence, which could lead to a fine and/or imprisonment.
If members know or suspect that funds are directly or indirectly the proceeds of crime
they should report their suspicions to the National Crime Agency.
328
(e) Tax irregularities

The evasion or attempted evasion of tax may be the subject of criminal charges under
both tax law and money laundering legislation.
The member has the following responsibilities:
(i) If the client fails to provide any information requested by the member, for
example in preparing returns or computations, the member needs to consider
whether they can continue to act for the client.
(ii) The member should advise clients to make full disclosures to HM Revenue &
Customs (HMRC), or to authorise the member to do so if errors exist in
information already submitted to HMRC. If the client refuses then the member
can no longer act for them. The member must inform HMRC that they are no
longer acting for the client but are not under an obligation to explain why as this
would be a breach of confidentiality.
Whether or not the member feels able to continue to act for the client, they are still
under a professional duty to ensure the client understands the seriousness of
offences against HMRC.
2 General anti-abuse rule (GAAR)

2.1 The aim of the GAAR is to deter taxpayers from entering into abusive 'tax arrangements'
and to deter would-be promoters from promoting such arrangements. The main purpose of
'tax arrangements' is to obtain a tax advantage.
2.2 An example of an abusive tax arrangement would be one that significantly reduces income,
profits or gains and therefore results in a tax advantage, ie a reduction in tax.
2.3 HMRC can counteract tax advantages by simply increasing the taxpayer's liability, on a just
and reasonable basis. A penalty will also be imposed if the taxpayer enters into
arrangements which are countered by the GAAR. The penalty would be 60% of the tax
advantage gained.
3 Personal financial management

3.1 All individuals during their lifetime need to consider their financial needs. This will depend
both on age and individual circumstances.
3.2 In this chapter we will look at both sources of personal finance and means for investment for
individuals before considering the situation for businesses.
4 Sources of personal finance

4.1 The following sources of finance are available for individuals:
 Bank overdrafts
 Unsecured bank loans
 Mortgages
329
 Credit cards
 HP facilities
4.2 Tax relief on borrowings is only available in limited circumstances if the loan is qualifying, for
example investing in close companies or partnerships.
5 Investment products
5.1
Savings and Investments
Deposit Fixed Tax-efficient

based interest investments
 Bank/BS  Gilts  ISAs

 NS  UK govt  EIS
products/  Corp bonds  SEIS
certificates  VCT
 Income
(tax free) taxable
 CGT
exempt
6 Individual savings account (ISAs)

 UK resident
 Over 18
 Tax-free investment
 £20,000 max investment pa
 Can be invested in cash, stocks and shares or a combination of the two
 If over 16 only a cash ISA available
 Exempt income tax (IT) and capital gains tax (CGT)
7 Venture capital schemes

7.1 Objective of schemes to encourage investment in unlisted trading companies.
Enterprise investment scheme (EIS)
 IT relief: 30%
 CGT-exempt (loss allowable)
 Deferral relief – any asset – 12m before
– 36m after
330
Conditions
 Subscriptions (max £1m pa)
 Keep three years
 Cannot be connected (but this does not apply to deferral relief)
Seed enterprise investment scheme (SEIS)
 50% tax reducer, maximum tax reducer £50,000
Venture capital trusts (VCT)
 Quoted investment trusts – invest in unquoted trading companies
 IT relief @ 30%
 CGT-exempt (losses not allowed and no minimum holding period)
 Dividends tax-free
Conditions
 Subscription (max £200k pa)
 Keep five years (IT relief)
8 Business finance
8.1 Sources of finance:
 Owner's own capital
 Bank overdrafts
 Bank loans
 Loans secured by mortgages of land
 Leasing and HP arrangements
 Sale and leaseback arrangements
 Loans from private individuals
 Share issues
 Loan stock issues
 Venture capital institutions
9 Tax implications of equity finance and loan finance

Equity finance
9.1 Dividends paid to shareholders are not deductible for the business.
Legal fees in connection with issuing shares are disallowed.
Loan finance
9.2 If raised for trading purposes, interest is deductible for trading income; otherwise it is
deducted from investment income.
331
10 Tax Planning
Section 4 Employment vs self-employment
10.1 Factors which may be of importance:
(a) Control over how work is done
(b) Whether provides own equipment
(c) Whether hires own helpers
(d) What degree of financial risk is taken
(e) What degree of responsibility for investment and management worker has
(f) Whether and how far there is an opportunity for profiting from sound management
(g) How many people does worker work for
Contracts
It has been held that:
 Employment is a contract of service
 Self-employment is a contract for service
Income tax and National Insurance consequences of being employed or self-employed:
Employed Self-employed
(a) Pensions: personal/occupational Personal
(b) NICs: Class 1 Classes 2, 4
(c) Expenses: wholly, exclusively and Wholly and exclusively
necessarily
(d) Basis of assessment: taxed under Taxed as trading income on CYB
employment income on amounts
received in the tax year
(e) Payment dates: tax is collected under Payments on account will be due on
PAYE at the time of receipt of 31 January in the tax year and 31 July
remuneration following the tax year, with a final
payment on 31 January after the year
of assessment
332
Remuneration packages
10.2 Factors to consider when deciding whether to provide an individual with a benefit or cash
alternative:
Individual Company
(a) Benefit Taxable? Deductible expense?
Class 1A NIC
(b) Cash Extra tax payable Deductible
Class 1 NIC Class 1 NIC
(primary contribution) (secondary contribution)
Choice of business medium

10.3 Factors to consider when deciding how to set up a business.
Sole trader Company

Profits Pay income tax Pay corporation tax at 19%
 Rates?
 Limits?
Opening year rules
 Overlap profit
Payment of tax Payments on account 9 months and 1 day
Losses Relief vs general income Current and carry back relief
Carry forward relief Carry forward relief
Early year loss relief
Extract cash Drawings Salary
Dividends
 Consider implications to both
company and individual
NIC Classes 2 and 4 Class 1 – Employee
– Employer
333
Incorporation of a business
10.4 Sale of assets to a company by a sole trader.
Why incorporate?
Advantages Disadvantages
Limited liability to shareholders Potential double capital gains charge on
assets
Company has a more respectable image Trading losses restricted to set off against
than a sole trader or partnership? corporate profits
Retained profit subject to only CT not IT or No carry back of trading losses in opening
NIC years
Easier to dispose of shares than interest in a Statutory requirement for audits, keeping
business books, filing accounts. Increased disclosure
due to published accounts
More generous pension provisions Tax payment dates for a company and its
employees are generally in advance of those
for self-employed
Easier to obtain loan finance
Tax implications of incorporating
VAT PROFITS LOSSES CGT

TOGC not a Overlap relief Carry forward of Incorporation
suppply for recoverable on losses against income relief (defer gain
VAT cessation from company ie on sale of assets)
Transfer/cancel salary/dividend
VAT registration
number
Tax-efficient profit extraction

10.5
Method Company Individual
Remuneration
 Salary Deductible/Class 1 NICs Taxable/Class 1 NIC
 Benefits Deductible /Class 1A NICs Taxable
Dividends Not deductible No tax if within dividend nil rate
band. If in excess, tax at
7.5%/32.5% or 38.1% dependent
on other taxable income
No NICs
334
Method Company Individual

Loan interest Deductible on accruals basis Taxable as savings income if
exceeds savings income nil rate
band
Rental income Deductible Taxable as non-savings income
Pension contributions
 Registered Deductible Tax free
 Non-registered Deductible/Class 1 NICs Taxable/Class 1 NICs
Tax-efficient exit routes

10.6
Sole trader
Capital gains IHT if gift IT VAT

 Individual assets  BPR  Closing year rules  De-registration
 CGT reliefs  PET  Terminal loss relief
Company
Capital gains Pre sale VAT

• Sale of shares dividend • No VAT
• Reliefs on sale of
shares
Planning for corporate growth

10.7 New company:
 Close?
 EIS investment
 VAT registration
Expansion
In UK
 Subsidiary/branch
 Acquisition of company
Overseas
 Permanent establishment
 Overseas subsidiary
335
Group tax minimisation strategies

10.8
Restrict minority One unit Vat group Capital

interest to enable for rollover – avoids VAT losses
group relief relief on inter co
transactions
11 Chapter summary
1 Ethics The fundamental principles of ethics should underlie
all members' professional behaviour.
2 General Anti-Abuse The primary objective of the GAAR is to deter
Rule (GAAR) taxpayers from entering into abusive arrangements
that result in a tax advantage for the taxpayer and a
loss of revenue for HMRC. HMRC can make a just and
reasonable adjustment to counteract advantage.
3 Personal financial Every individual needs to consider their financial
management needs during their lifetime.
4 Sources of personal There are many sources of finance available, long or
finance short term, secured or unsecured.
5 Investment products Deposit-based investments are low risk with a low rate
of interest.
Equities are high risk investments with neither income
or capital secure.
6 Individual savings ISAs offer tax-free interest.
account (ISAs)
7 Venture capital EIS scheme offers tax incentives for the investor as
schemes well as helping high risk, unlisted trading companies
raise finance.
8 Business finance There are various forms of business finance.
9 Tax implications of Equity finance returns (dividends) are disallowed.
equity finance and loan Loan finance interest is an allowable expense.
finance
10 Tax planning Various situations offer tax planning opportunities.
END OF CHAPTER
336
In the final run up to your exam, you should attempt Step 6 as the final check that you are fully prepared to
move on to the revision phase of your studies. As a reminder, Step 6 must be completed and submitted in
order to be able to qualify for Pass Assurance. It is Written Assessment 2 and can also be found at the
back of these Course Notes.
It covers all the Topics in your course. As ever, you will receive feedback on your performance, and you
can use the wide range of online resources to help address any final areas where you need to fine tune
your knowledge or technique.
Course Notes
chapter
Income tax
Employment income 4
More income tax
aspects 5
Trade profits 6
Trading losses 8
partnerships 15
337
Achievement Ladder
Course Notes
chapter
Inheritance tax
the death estate 17
Corporation tax computation 20
Corporation tax Chargeable gains for companies 21
Corporation tax administration 22
Administration, winding up, purchase
of own shares 23
Losses and deficits on non-trading loan
More corporation tax
relationships 24
companies 25
Groups and consortia 26
Groups and overseas aspects
Overseas aspects of corporate tax 27
of corporate tax
Stamp taxes 19
Value added tax 1 28
VAT and impact of taxes Value added tax 2 29
Impact of taxes and tax planning 30
338
Answers to
Lecture Examples
339
31: ANSWERS TO LECTURE EXAMPLES
340
Chapter 1
Answer to Lecture Example 1
Personal allowance
£
Geraldine PA 11,850
½ (103,750 (W) – 100,000) (1,875)
9,975
Working Net income 110,000

Pension 5,000  100/80 (6,250)
103,750

Non-savings Savings
income income Dividends
£ £ £
Employment income 35,000
Bank interest 7,500
Dividends 6,000
Less
Interest (2,000)
Net income 33,000 7,500 6,000
PA (note) (11,850)
Taxable income 21,150 7,500 6,000
Tax
NSI 21,150 @ 20% = 4,230
SI 500 @ 0% savings income nil rate band 0
(HRTP)
7,000 @ 20% = 1,400
DI 2,000 @ 0% dividend nil rate band 0
3,850 @ 7.5% = 289
34,500
150 @ 32.5% = 49
Income tax liability 5,968
Less tax @ source
PAYE (4,045)
Income tax payable 1,923
341
Chapter 2
(a) Adjusted net income 200,000 – (39,000  100 80 ) = £151,250
(b) Basic rate band limit 34,500 + (39,000  100 80 ) = £83,250
Higher rate band limit 150,000 + (39,000  100 80 ) = £198,750
(c)
£
Earnings/Net income (no PA as adjusted net income > £123,700) 200,000
Income tax liability
£
83,250  20% 16,650
115,500  40% 46,200
1,250  45% 562
200,000 –
63,412

We start by working out Eric's net income.
Non-savings
income
£
Salary 130,000
Less: employee pension contribution (9,000)
Employment income/net income 121,000
We now need to compute Eric's adjusted income.
£
Net income 121,000
Add: employee pension contributions 9,000
employer pension contributions 21,000
Adjusted income 151,000
We also need to compute Eric's threshold income.
£
Net income 121,000
Less: gross personal pension contributions (5,000)
Threshold income 116,000
Since Eric's adjusted income exceeds £150,000 and his threshold income exceeds £110,000, his annual
allowance will be reduced as follows:
£
Adjusted income 151,000
Less threshold (150,000)
Excess 1,000
Annual allowance 40,000

Less half excess £1,000  ½ (500)
Reduced annual allowance 39,500
342

£
2018/19 40,000
Unused allowances from the previous three tax years
2015/16 £40,000 – £39,000 1,000

2016/17 £40,000 – £34,200 5,800
2017/18 £40,000 – £36,000 4,000
50,800

(a) 2018/19 Income Tax Liability
Non-savings
income
£
Less PA (11,850)
39,150
Tax thereon:
34,500  20% 6,900
4,650  40% 1,860
39,150 8,760
Less tax reducers

EIS relief
60,000  30% = 18,000 (8,760) (restricted to tax liability)
IT liability Nil
Note. A claim could be made to have the remaining £9,240 of relief in the previous tax year. (The rest of
the answer assumes this claim has not been made).
(b) Shares sold at a loss within 3 years.
Relief is withdrawn if shares sold <3 years to the extent that proceeds are received.
Clawback of IT relief
8,760
Original rate of EIS relief = = 14.6%
60,000
Clawback = sale proceeds  effective rate of IT relief originally received = £10,000  14.6% =
£1,460.
(c) Shares sold at a loss within 3 years.
CGT position
Base cost reduced by IT relief not clawed back.
£
Proceeds 10,000
Cost 60,000
(8,760 – 1,460) (7,300)
(52,700)
Allowable loss (42,700)
343
Chapter 3
Mo
Cash basis as property income does not exceed £150,000. £
Rental income (£2,000  11) 22,000
Less 50% finance costs (50%  £4,000) (2,000)
Less other allowable expenses (3,000)
Property income 17,000
Income tax liability on property income
£17,000  40% (higher rate taxpayer) 6,800
Less property finance cost tax reducer
£4,000  50%  20% (400)
Income tax liability in respect to rental income 6,400
Note. There is no deduction for the capital repayments on the mortgage.

Mr Nelson
£
Premium 67,500
Less 2%  (15 – 1)  67,500 (18,900)
48,600
Rent (cash basis) 3,000
Property income assessment 51,600
Boris
£48,600 3
Relief available = = £3,240 × 12
= £810
15
344
Chapter 4
£
Vauxhall Vectra g/km 148
Less baseline (95)
53/5 = 10.6
Round down = 10%

Percentage = 20 + 10 = 30%
BMW diesel g/km 157

Less baseline (95)
62/5 = 12.4
Round down = 12%
Percentage = 20 + 12 + 4 (as diesel) = 36%

Effect on Alan's income if he works for Alan Ltd instead of Farringdon Ltd
£
Reduction in salary (£70,000 – £48,000) (22,000)
Add
IT on salary not payable (40%  £22,000) 8,800
NIC on salary not payable (2%  £22,000) 440
Additional dividend receivable 18,000
Less
Tax on dividend (Note) 0
Tax on deemed employment income (W) (7,382)
NIC on deemed employment income (W) (369)
Net decrease in Alan's annual income (2,511)
Working:
Income from relevant engagements 80,000
Less 5% statutory deduction (4,000)
Less travel expenses (1,500)
Less salary (48,000)
Less employer's NIC on actual salary (£48,000 – £8,424)  13.8%) (5,461)
(no employment allowance as Alan is sole employee of company)
21,039
Less employers' NIC on deemed payment 13.8%/113.8%  £21,039 (2,551)
Deemed employment income 18,488
Income tax on deemed employment income 40%  £18,488 7,395

NIC on deemed employment income 2%  £18,488 370
Note. Because Alan is treated as receiving deemed employment income from the company the dividend
received from the company is not also subject to income tax.
345
Chapter 5
£
PILON 2/
12  30,000
5,000
Lump sum (34,500 + 1,300 – 30,000) 5,800
10,800

Non-advantaged Advantaged
Benefit on exercise Nil
MV 4.00
Cost (1.50)
2.50
 10,000 = £25,000
Capital gain on disposal
Proceeds 5.50 Proceeds 5.50
MV (exercise) (4.00) Cost (1.50)
1.50 4.00
 10,000 = £15,000  10,000 = £40,000
Chapter 6
30 June 2018 – falls into 2018/19
 taxed in 2018/19

£
2016/17 Actual
1.1.17 – 5.4.17 3/6  18,000 9,000
2017/18 Short AP ending in 17/18

 1st 12 months
1.1.17 – 31.12.17
18,000 + 6/12  48,000 42,000
2018/19 CYB y/e 30.6.18 48,000

Overlap profits
1.1.17 – 5.4.17 3/6  18,000 9,000
1.7.17 – 31.12.17 6/12  48,000 24,000
33,000
346

£
2017/18 1.7.17 – 5.4.18
9/18  18,000 9,000
2018/19 Long AP ending in 18/19

 12 months to 31.12.18
12/18  18,000 12,000
Overlap profits
1.1.18 – 5.4.18 3/18  18,000 3,000

£
2017/18 1.12.17 – 5.4.18
4/18  36,000 8,000
2018/19 No AP ending in 18/19

Actual basis
6.4.18 – 5.4.19 12/18  36,000 24,000
2019/20 Long AP ending in 19/20

 12 months to 31.5.19
12/18  36,000 24,000
Overlap profits
1.6.18 – 5.4.19 10/18  36,000 20,000

Final year 2018/19
£
2017/18 y/e 31.12.17 22,000
2018/19 4 months to 30.4.18 12,000

Less overlap relief (3,500)
8,500

Final year 2019/20
£
2018/19 y/e 31.12.18 16,000
2019/20 y/e 31.12.19 12,000

1 month to 31.1.20 6,000
18,000
347

(1) Year of change 2018/19
£
2017/18 y/e 31.8.17 20,000
2018/19 Gap 9 months to 31.5.18

 12 months to 31.5.18
3/12  20,000 + 15,000 20,000
2019/20 y/e 31.5.19 30,000
2020/21 y/e 31.5.20 40,000
Creates overlap profits

1.6.17 – 31.8.17 3/12  20,000 5,000
(2) Year of change 2018/19
£
2017/18 y/e 30.6.17 25,000
2018/19 Gap 18 months to 31.12.18 (£30,000 + £15,000) 45,000

Less 6/9  21,000 (14,000)
31,000
2019/20 y/e 31.12.19 35,000
Chapter 7
Private
SR use
AIA Main Pool pool SLA (80%) Total
£ £ £ £ £ £
Y/e 31.3.19
TWDV b/f 180,000 15,000 10,000
Purchase 1.5.18 200,000
Purchase 1.7.18 120,000
Purchase 1.8.18 210,000
Purchase 1.9.18 24,000
Disposals 1.10.18 (10,000)

524,000 5,000
AIA* (200,000) 200,000
To SR pool 10,000
WDA 18% (94,320) (1,800) 95,760
 80%
WDA 8% (800) 800
BA (5,000) 5,000
– 301,560
TWDV c/f 429,680 9,200 8,200
* AIA allocated to additions qualifying for 8% rate of WDA in priority to those qualifying for the 18% rate
of WDA
348
Chapter 8
2017/18 2018/19 2019/20 2020/21
£ £ £ £
Trading income 20,000 – 8,000 4,000
Carry forward relief (3) (8,000) (4) (4,000)
Property income 80,000 120,000 70,000 60,000
Relief against general income (1) (70,000) (2) (50,000)
Net income 30,000 70,000 70,000 60,000
Loss memorandum
Y/e 30.9.18 (2018/19) 140,000
General income PY 17/18 (1) (70,000) (20,000 +
50,000*)
CY 18/19 (2) (50,000)
20,000
Carry forward 19/20 (3) (8,000)
20/21 (4) (4,000)
8,000
* Note. The amount offset against trading income is unrestricted (£20,000) but the amount used against property
income is restricted to the higher of £50,000 or 25% of £100,000, ie £50,000.

£
General income 2018/19 15,000
Loss relief against general income (1) (15,000)
–
Gains 28,000
Loss relief against gains (W1) (2) (16,000)
12,000
Capital losses b/fwd
(restricted) (300)
11,700
AE (11,700)
–
Working:
Maximum offset lower of:
(1) Loss remaining 40,000 – 15,000 = 25,000
(2) Gains less capital losses b/fwd
28,000 – 12,000 16,000
Loss memorandum
Y/e 31.12.18 40,000
Relief against general income (1) (15,000)
Relief against gains (2) (16,000)
Trade loss left 9,000
Capital loss c/fwd 12,000 – 300 = £11,700
349

£
Trading income 2017/18–2021/22
2017/18 1.9.17–5.4.18 –
2018/19 y/e 31.8.18 –
2019/20 y/e 31.8.19 20,000
2020/21 y/e 31.8.20 26,000
2021/22 y/e 31.8.21 32,000
Loss of 2017/18
2017/18 7/12  36,000 = 21,000
Relief against general income (+ gains) in 2017/18 +/or 2016/17
Early years loss relief 2014/15 + 2015/16 + 2016/17
C/fwd to 2019/20 (as no trade profits to offset against in 2018/19)
Loss of 2018/19
2018/19 y/e 31.8.18 36,000
Less relieved in 17/18 (21,000)
15,000
Relief against general income (+ gains) in 2018/19 +/or 2017/18
Early years relief in 2015/16 + 2016/17 + 2017/18
Carried forward to 19/20, 20/21 etc

2016/17 2017/18 2018/19 2019/20
£ £ £ £
Trading income 8,000 10,000 4,000 –
Terminal loss relief (3) (8,000) (2) (10,000) (1) (4,000)
Terminal loss calculation

2019/20 6.4.19 – 30.6.19
3/  27,000 9,000
9
Overlap profits 2,000
2018/19 1.7.18 – 5.4.19

12  4,000 + /9  (27,000) 17,000
3/ 6
28,000
Terminal loss relief
18/19 (1) (4,000)
17/18 (2) (10,000)
16/17 (3) (8,000)
Loss remaining 6,000
Chapter 9
Total Eric Ernie
£ £ £
1.9.17 – 28.2.18
Salary 6/12 2,500 1,000 1,500
Balance 3 : 2 37,500 22,500 15,000
6/  80,000 40,000 23,500 16,500
12
1.3.18 – 31.8.18
1: 1 40,000 20,000 20,000
6/  80,000 80,000 43,500 36,500
12
350

Allocation of trading income
H A F
£ £ £
Y/e 31.12.17
Salary 5,000 –
Balance 60 : 40 9,000 6,000
14,000 6,000
Y/e 31.12.18
To 31.5.18
Salary 5/12 2,083 –
Bal 60 : 40 3,250 2,167
5/  18,000 5,333 2,167
12
To 31.12.18
Salary 7/12 3,792
Balance 1 : 1 : 1 2,236 2,236 2,236
11,361 4,403 2,236
Y/e 31.12.19
Salary 6,500
Balance 1: 1 : 1 7,833 7,833 7,834
14,333 7,833 7,834
Assessments
Hamish and Angus, continuing partners  CYB
H A
£ £
2017/18
Y/e 31.12.17 14,000 6,000
2018/19
Y/e 31.12.18 11,361 4,403
2019/20
Y/e 31.12.19 14,333 7,833
Finbar commencement
2018/19 1.6.18 – 5.4.19
1.6.18 – 31.12.18 2,236
1.1.19 – 5.4.19 3/12  7,834 1,958
4,194
2019/20 y/e 31.12.19 7,834
Overlap profits
1.1.19 – 5.4.19 3/12  7,834 1,958
351
Chapter 10
(a) No, Abbey will not be treated as UK-resident under the second automatic overseas test. She was not
resident in any of the three previous years and spends less than 46 days in the UK in the current tax year.
(b) Yes, Zoe meets the second automatic UK test, so will be treated as UK-resident in the current tax year.
(c) Yes, Oliver will be treated as UK-resident in the current tax year. He has been resident in the UK for one
of the previous three years so would only need two ties to be resident, as he has been in the UK for 91 to
120 days.
He has an accommodation tie and has spent more than 90 days in the UK in one of the previous two tax
years (no family tie, no country tie, no UK work tie).

Claim to use remittance basis
Non-savings
income
£
Foreign income (remitted) 15,000
Taxable income (no personal allowance) 25,000
IT liability
25,000  20% 5,000
Annual tax charge on unremitted income 30,000
Income tax liability if remittance basis claimed 35,000
No claim to use remittance basis (tax on arising basis on worldwide income)
Non-savings
income
£
Foreign income 80,000
Net income 90,000
Less PA (11,850)
Taxable income 78,150
IT liability
34,500  20% 6,900
43,650  40% 17,460
78,150 24,360
Therefore, Claire should not claim the remittance basis.
352

Non-savings Savings
Income Income
£ £
Property income 6,500
Interest 6,000
41,900 6,000
PA (11,850)
30,050 6,000
IT:
NSI 30,050  20% 6,010
SI 500  0% (HRTP) 0
3,950  20% 790
34,500
1,550  40% 620
7,420
Less DTR (W1) (2,630)
IT liability 4,790
Working:
Exclude property income first as it suffers highest rate of foreign tax.
Non-savings Savings
Income income
£ £
Interest 6,000
Net income 35,400 6,000
PA (11,850)
Taxable income 23,550 6,000
IT: 23,550  20% 4,710

1,000  0% (BRTP) 0
5,000  20% 1,000
5,710
DTR lower of:
(i) Foreign tax £3,250
(ii) UK tax (7,420 – 5,710) £1,710
 £1,710
Now exclude loan stock interest.
Non-savings
income
£
Employment income/net income 35,400
PA (11,850)
IT: 23,550  20% 4,710
DTR lower of:
(i) Foreign tax £920
(ii) UK tax (5,710 – 4,710) = £1,000
 920
Total DTR = 1,710 + 920 = £2,630
353
Chapter 11
£
Gains (48,000 + 30,000) 78,000
Less loss (54,300)
23,700
Less capital loss b/f (restricted) (12,000)
11,700
Taxable gains –
Capital loss left to c/f = 15,000 – 12,000 = £3,000

£
Proceeds 260,000
Less selling expenses (3,740)
Less cost (81,000)
Less enhancement (43,000)
Taxable gain 120,560
Tax @ 20% (taxable income ≥ basic rate limit) 24,112

After-tax sale proceeds
Proceeds 260,000
Less selling expenses (3,740)
Less tax on gain (24,112)
232,148

Value at 200 + ½ (204-200) = 202
... Value of transfer
1,000  202p = £2,020

Part disposal:
£
Proceeds 6,000
6 (1,429)
Cost  10,000
6  36
Gain 4,571
Cost of remaining land for future CGT calculations:
= 10,000 – 1,429
= 8,571
354

The proceeds of £3,000 is less than 20% of market value of land prior to sale (20%  40,000 = £8,000).
No chargeable disposal occurs.
Allowable cost of land remaining
£
Cost of 15 acres 30,000
Less proceeds from part disposal (3,000)
27,000

Transfer Madeleine –--> Ultan: proceeds = cost
£
ie Cost 9,600
Deemed proceeds 9,600
Note. No gain arises on transfer.
Disposal by Ultan: £
Proceeds 24,000
Less cost (deemed proceeds) (9,600)

Rental property (residential property)
£
Proceeds (340,000  97%) 329,800
Cost (101,500)
Enhancement (24,000)
Gain 204,300
Part disposal
£
Proceeds (420,000 – 3000) 417,000
420k
Cost  250,000
420k  200k (169,355)
Painting
Proceeds 15,000
Less cost (deemed cost to her husband due to NGNL transfer) (10,000)
Necklace
Proceeds 20,000
Less cost (probate value) (30,000)
Chargeable gain/ (loss) (10,000)
355
Residential
Normal rates property
£ £
Gain on residential property 204,300
Gain on part disposal of land 247,645
Gain on painting 5,000
CY capital loss (10,000)
b/f capital loss (5,000)
AE (11,700)
Taxable gains 252,645 177,600
Rate of tax (HRTP) 20% 28%
CGT 50,529 49,728
Chapter 12
Match with acquisition 20 August 2018
£
Proceeds
(32,000/4,000  500) 4,000
Cost (2,800)
Gain 1,200
Match with share pool
£
Proceeds
(32,000/4,000  3,500) 28,000
Cost (12,056)
Gain 15,944
Share pool No. Cost
£
1 September 1994 3,000 8,000
1 May 2002 1,500 7,500
4,500 15,500
Disposal (3,500) (12,056)
1,000 3,444
Gain
Total gains = 1,200 + 15,944
= £17,144

Treat as part disposal.
£
Proceeds 4,000
4,000
Cost  7,000 (518)
4,000  50,000
3,482
This is not a small part disposal as proceeds are greater than the higher of £3,000 and 5%  £50,000.
356

On 1 September 2012
Cash element creates part disposal at takeover. Shares and loan stock do not. However, the gain on the
acquisition of the loan stock is calculated up to the date of the takeover.
MV at
takeover Cost
£ £
Cash 8,000 5,166
Shares 78,344 50,594
Loan stock 22,720 14,672
109,064 70,432
Frozen gain on Granada plc loan stock (QCB)
MV at takeover 22,720
Cost (14,672)
Frozen gain 8,048
On 1 February 2019
Gain on sale of Granada plc shares
Proceeds 83,496
Cost (see above) (50,594)
32,902
On sale of Granada plc loan stock
No gain arises on sale of loan stock because it is a QCB.
However, the frozen gain on takeover will now become chargeable.
£
Gains (32,902 + 8,048) 40,950
AE (11,700)
29,250
CGT payable @ 20% (taxable income ≥ basic rate limit) 5,850
£ £
Total cost of project 310,000
Sale proceeds of shares 83,496
Sale proceeds of loan stock 23,920
Less CGT on sales (5,850)
(101,566)
External finance required 208,434
Chapter 13
£
Proceeds 145,000
Less cost (45,000)
100,000
Less PPR exemption (W1) (20,513)
Less letting relief (W2) (20,513)
357
Workings
1
Exempt Letting Other
months months months
1.4.99 – 30.9.01 30
1.10.01 – 30.9.05 48
1.10.05 – 31.3.17 138
1.4.17 – 30.9.18 18
48 138 48
PPR exemption 48/234  100,000 = 20,513
2 Letting relief is the lowest of:
(i) PPR exemption 20,513
(ii) maximum exemption 40,000
(iii) gain in letting period
138  100,000 58,974
234
= 20,513

£ £
Net gain on business assets (25,000 – 7,500) 17,500
CGT @ 10% 1,750
Gain on non business asset 22,300
Taxable gain 10,600
CGT
(34,500 – 18,000 – 17,500) = No BR band remaining, therefore:
10,600 @ 20% 2,120
Total CGT 2018/19 3,870

£
Proceeds 2,000,000
Cost (100,000)
1,900,000
Less gift relief
1,900,000 1.2m/1.3m (1,753,846)
Gain chargeable after gift relief 146,154
AE (11,700)
Taxable gain 134,454
CGT @ 10% (entrepreneurs' relief rate) 13,445
358

£
Proceeds 300,000
Cost (168,000)
132,000
Proceeds not reinvested 300,000 – 260,000 = chargeable gain (40,000)
Rollover relief 92,000
Base cost of new asset: £

Cost 260,000
Less gain rolled over (92,000)
Base cost 168,000

Mick – chargeable gains 2018/19
Gains Gains not
qualifying for qualifying for
entrepreneurs' entrepreneurs'
relief relief
£ £
Warehouse (W1) 22,000
Rolling shares (W2) 3,137,400
House (W3) 0
Reward shares (W6) 8,800
Chargeable gains 3,137,400 30,800
Brought forward capital losses (25,000)
Less annual exempt amount (5,900) (5,800)
Taxable gains 3,131,500 0
Rate of tax 10% 20%
CGT 313,150 0
Workings
1 Freehold warehouse
£ £
Disposal proceeds 522,000
Less: cost 258,000
enhancement expenditure: extension 99,000
enhancement expenditure: floor 0
(357,000)
Rollover relief (143,000)
Taxable now 22,000
Proceeds 522,000
Reinvested (500,000)
22,000
Tutorial note. The cost of replacing the warehouse floor is revenue expenditure as the floor is a
subsidiary part of the property.
The base cost of the replacement factory is £357,000 (500,000 – 143,000).
Entrepreneurs' relief is not available on the gain as this is a disposal of an asset, not all or part of a sole
trader business.
359
2 Shares in Rolling Ltd

£
Disposal proceeds 3,675,000
Less cost (W) (537,600)
Chargeable gain 3,137,400
As Mick is an employee with >5% holding in Rolling Ltd which is a trading company and he has held his
shares for more than one year, the gain will be eligible for entrepreneurs' relief thus being taxed at 10%.
Working: Share pool
Number Cost
£
Purchase June 2007 500,000 960,000
Bonus issue December 2012
500,000  3/2 750,000 0
Disposal September 2018 1,250,000 960,000
960,000  700,000/1,250,000 (700,000) (537,600)
Balance carried forward 550,000 422,400
3 House
£
Proceeds 308,000
Less cost (93,000)
Less enhancement expenditure (defending title to property) (5,000)
Gain 210,000
Less: principal private residence exemption (W4) (200,000)
letting exemption (W5) (10,000)
Gain after exemptions 0
4 Principal private residence exemption

Exempt Chargeable Total
months months months
Actual occupation 34 34
Deemed occupation – up to 3 years any reason 18 18
Deemed occupation – any time employed overseas 24 24
Actual occupation 106 106
Working overseas (no deemed occupation as no 10 10
actual occupation after) (12 – [18 – 3 – 13]) = 10
chargeable
Last 18 months – always treated as period of
occupation 18 18
Totals 200 10 210
Principal private residence exemption £210,000  200/210 £200,000
Tutorial note. In calculating the principal private residence exemption, any periods of absence while
working overseas, a maximum of four years' absence while working elsewhere in the UK, and a
maximum of three years' absence for any reason, are treated as deemed occupation, usually provided
that they are preceded and followed by a period of actual occupation. The second period working
overseas is therefore not a period of deemed occupation as it was not followed by a period of actual
occupation.
360
5 Letting exemption
Lowest of:
(i) Gain in letting period £210,000 × 10/210 £10,000
(ii) Gain exempt under PPR (W2) £200,000
(iii) Maximum exemption £40,000
Therefore letting exemption is £10,000
6 Reward shares
£
Deemed proceeds 98,400
Less cost (39,000)
Gain before hold over relief 59,400
Gift relief (59,400  460,000/540,000) (50,600)
Taxable now 8,800
Hold over relief is restricted to £50,600 (£59,400  460,000/540,000), being the proportion of chargeable
business assets to chargeable assets. Entrepreneurs' relief is not available, as Mick is not an employee.

Gains Gains
qualifying not qualifying
ER ER
£ £
Gains on chargeable assets:
Building 75,000
Goodwill (no ER as >5% of shares) 90,000
Leasehold 52,500
127,500 90,000
Less incorporation relief
650,000  127,500/90,000
(103,594) (73,125)
800,000
Taxable now 23,906 16,875

AE (11,700)
Taxable gain 23,906 5,175
CGT % 10% 20%
CGT 2,391 1,035
£
MV of shares acquired 650,000
Less incorporation relief
(103,594 + 73,125) (176,719)
Base cost of shares 473,281

A claim can be made to defer £48,300.
£
Gain before relief 60,000
Less EIS reinvestment relief (48,300)
Gain 11,700
Taxable gain –
361

(a) SEIS income tax relief would be 50%  £70,000 = £35,000.
As Ciaran invested 100% of the chargeable gain in the shares he can claim a maximum of 50% of the
gain.
50%  £65,000 = £32,500
(b) Sale of shares within three years at arm's length
Income tax relief withdrawn is:
50%  £55,000 = £27,500
This is 27,500/35,000 = 78.57% of original income tax relief
Therefore reinvestment relief is reduced by this same proportion ie 78.57%  £32,500 = £25,536
Chapter 14
£
Proceeds 40,000
% 24 yrs
Cost 35,000 
% 30 yrs
79.622
35,000  (31,911)
87.330

£
Proceeds 33,000
Less cost
33,000 (16,923)
40,000 
33,000 + 45,000

£
Proceeds 45,000
Cost (30,000)
15,000
Taxable now (compensation monies not reinvested 45,000 – 40,000) (5,000)
Deferred gain 10,000
Base cost of new asset = 40,000 – 10,000

= £30,000
362

£
Gain before PPR exemption 126,000
Less PPR exemption (W)
£126,000  30 (45,000)
84
Gain 69,300
Working:
Total
ownership Exempt Chargeable
Period Period months months months
6.4.15–5.4.16 Actual occupation, UK resident 12 12 0
6.4.16–5.10.20 Absent 54 0 54
6.10.20–5.4.22 Last 18 months 18 18 0
84 30 54
Chapter 15
No lecture examples
Chapter 16
£
Before transfer (75%) 370,000
After transfer (45%) (200,000)
IHT value 170,000
MV for CGT = gift of 30% holding = £105,000

(a) Trust pays:
£ £ £
CLT (Aug 18) Gift 264,000
AE – 2018/19
W1 Balance
– 2017/18 b/f (2,000)
Gross chargeable transfer 262,000
Less available nil band:
Nil band at date of transfer 325,000
Gross chargeable transfers in
seven years before 13.8.18 (104,000)
Available nil band (221,000)
41,000  20% = 8,200
Life tax of £8,200 payable on gross chargeable transfer of £262,000
363
(b) Mr Fist pays:

£ £ £
CLT (Aug 18 – net transfer) Gift 264,000
AE – 2018/19
(W) Balance
– 2017/18 b/f (2,000)
Net transfer 262,000
Less nil band 325,000
Gross chargeable transfers in
seven years before (104,000)
13.8.18
41,000  20/80 = £10,250
Gross chargeable transfer = 262,000 + 10,250 = £272,250
Working:
15.4.18 Gift 4,000
AE 2018/19 (3,000)
2017/18 b/f (1,000)
PET Nil
Balance to allocate to CLT
AE 2017/18 3,000 – 1,000 2,000

Life tax (must assume Mr Arm pays the tax)
£ £
1 CLT (Aug 14) Gift 337,000
(No AEs as already allocated to PET –
earlier in same tax year)
CLT 337,000
Less available nil band at date of
transfer* (325,000)
12,000  20/80 = 3,000
Gross chargeable transfer 337,000 + 3,000 = 340,000
* First chargeable transfer during life therefore none of the nil band has been used.
Death tax
£
1 PET (May 14) Gift 310,000
AE – 2014/15 (3,000)
2013/14 b/f (3,000)
PET 304,000
No tax payable – covered by nil band at death of £325,000.
£ £
2 CLT (Aug 14) – gross chargeable transfer 340,000
Nil band at death 325,000
Less chargeable transfers in previous seven years (304,000)
319,000
Tax @ 40% 127,600
Less taper relief (3–4 yrs) 20% (25,520)
Less life tax (3,000)
Additional tax on death 99,080 payable by trustees
364

Life tax
£
1 CLT(Sept 08) Gift 355,000
AE 2008/09 (3,000)
2007/08 b/f (3,000)
Net chargeable transfer 349,000
Less nil band at date of transfer* (312,000)
37,000
Lifetime tax 37,000  20/80 9,250

Gross chargeable transfer 349,000 + 9,250 = 358,250
* First chargeable transfer during life therefore none of the nil band has been used.
Death tax
£ £
(1) CLT (Sept 08)
No tax due as > seven years
(2) PET (Aug 15) Gift 201,000

Marriage exemption (5,000)
AE 2015/16 (3,000)
2014/15 b/f (3,000)
PET 190,000
Less chargeable transfers in previous (358,250)
seven years
Available nil band –
190,000
Death tax @ 40% 76,000

Taper (3-4 years) 20% (15,200)
Death tax 60,800

Pietr's net estate (before reliefs and exemptions) is:
£
Main residence (600,000 – 520,000) 80,000
Cash and other assets 2,100,000
Less debts and funeral expenses (25,000)
Chargeable estate 2,155,000
As this exceeds £2 million the RNRB will be tapered:

£
RNRB 125,000
Less ½ (2,155,000 – 2,000,000) (77,500)
Tapered RNRB 47,500
Pietr's available RNRB will be the lower of:
Available RNRB 47,500
Value of the main residence passing to direct descendants 80,000
Thus the RNRB available to offset against Pietr's death estate will be £47,500.
Note that as Pietr's wife is still alive there is no need to consider any transfer of unused nil rate band(s).
365

£
1 June 2007 George's estate 400,000
Less exempt transfer to Mildred (300,000)
Chargeable estate 100,000
Nil band on death 300,000

Less used against estate (100,000)
Unused nil band for transfer to Mildred on her death 200,000
Thus the proportion of unused NRB to be passed to Mildred is 2/3

Note that as George's death is prior to 6 April 2017 the RNRB would not have been available.
On Mildred's death in September 2018

As Mildred died after 6 April 2017 owning a main residence left to a direct descendant the RNRB will be
available. On George's death no RNRB would have been used as it was not available so Mildred will be
entitled to an additional 100% RNRB.
RNRB (including 100% from George) (200%  £125,000) 250,000
Nil rate band available (including 67% from George) (167%  325,000) 542,750
Note that whilst the £542,750 NRB will be available to Mildred on both death tax on transfers within seven years
of death and on the death tax on the death estate the RNRB of £250,000 is only available on calculation of the
death tax on Mildred's death estate. The RNRB which is then claimed would also depend on the value of the
main residence being left to the son. Assuming the main residence was worth more than £250,000 the full RNRB
of £250,000 could be deducted.

James – Inheritance tax arising on death
Lifetime transfers within seven years of death
14 May 2015
£
Gift 420,000
Less: annual exemption 2015/16 (3,000)
annual exemption 2014/15 b/f (3,000)
Potentially exempt transfer 414,000
Inheritance tax liability £291,000 (W) @ 0% 0

£123,000 @ 40% 49,200
Taper (3–4 yrs) 20% (9,840)
39,360
James' daughter will be responsible for paying the inheritance tax of £39,360.
2 August 2017
£
PET (2  AE available) 260,000
annual exemption 2016/17 b/f (3,000)
254,000
Inheritance tax liability £254,000 @ 40% (no NRB available) 101,600
366
The son will be responsible for paying the inheritance tax of £101,600.
Death estate £
Main residence 660,000
Less outstanding mortgage (94,300)
Shares 192,600
Car 21,900
Less credit card debt (not verbal debt) (9,400)
Less funeral expenses (5,800)
RNRB (including 100% unused RNRB from wife) (250,000))
No NRB remaining.
515,000
Inheritance tax liability £515,000 @ 40% 206,000
The personal representatives of James' estate will be responsible for paying the inheritance tax of £206,000.
Working: Available nil rate band

£ £
Nil rate band at date of death including spouse's unused NRB 520,000
160%  £325,000
Gift 9 October 2011 235,000
annual exemption 2010/11 b/f (3,000) (229,000)
Nil rate band available 291,000
Chapter 17
Death tax
£
(1) CLT 14.8.10 – no additional tax since >7 yrs before death
(2) PET 1.3.14 Gift 230,000

AE 2013/14 (3,000)
2012/13 b/f (3,000)
Original PET 224,000
Less fall in value (30,000)
Revised PET 194,000
No tax payable since covered by remaining nil band of 325,000 – 105,000 = 220,000
£ £
(3) PET 2.10.17 Gift 210,000
AE 2017/18 (3,000)
2016/17 b/f (3,000)
PET 204,000
Nil band at date of death 325,000
Less chargeable transfer <7 years (original
value) (224,000)
103,000
Death tax @ 40% 41,200

No taper relief since < 3 yrs
367

Related property valuation:
55%
× 400,000 = £275,000
55% + 25%
Unrelated valuation = £240,000

Therefore the £275,000 valuation will be used in the IHT computation.

£
Value of shares 100,000
Less BPR (exclude excepted assets)
(83,000)
 1,000  170 
100,000     83,000  100%
 1,000 
17,000
If Henry died and his daughter no longer held the shares, BPR would not be available.
Value of shares would therefore be £100,000.

Mrs Moore
£
(i) Value of farm 180,000
Less APR (100%  £95,000) (95,000)
85,000
No BPR because the farm is an investment
£
(ii) Shares in farming company 175,000
Less: APR 100% (20%  £175,000) (35,000)
BPR 100% (80%  £175,000) (140,000)
–

Lifetime tax:
23 November 2014 – CLT
£ £
Gift 335,000
AE: 2014/15 (3,000)
2013/14 (used by June 13 PET) –
Nil rate band at date of transfer 325,000
Less chargeable transfers in seven years –
7,000
IHT @ 20% 1,400
368
Death Tax:
20 March 2010 – PET
Outside seven years – Exempt
3 June 2013 – PET
£
Value before: 10/30  1,050,000 350,000
Value after: 5/25  750,000 (150,000)
Fall in value 200,000
AE 2013/14 (3,000)
2012/13 b/f (3,000)
194,000
Nil rate band at death (325,000)
No death tax
14 October 2013 – PET
Valuation rules
Lower of: £ £
2.00 + 1/4 (2.10 – 2.00) = £2.025
½ (1.98 + 2.06) = 2.02
170,000  2.02 343,400
No BPR (quoted with no control)
343,400
212,400
IHT @ 40% 84,960
Less taper relief four to five years, 40% (33,984)
IHT payable 50,976
9 June 2014
All gifts covered by small gift exemption.
23 November 2014 – CLT
£
Gift 335,000
A/E: 20014/15 (3,000)
2013/14 (used by PET) –
332,000
(194,000 + 343,400) –
332,000
IHT @ 40% 132,800
Less taper relief three to four years, 20% (26,560)
Less lifetime tax (1,400)
IHT payable 104,840

Fiona's net estate is £1,075,000 (£1,400,000 – £325,000)
Therefore the reduced rate is available as the charitable donation is more than 10%  £1,075,000 =
£107,500.
The IHT liability on the estate will be:
36%  (1,400,000 – 200,000 – 125,000 – 325,000) = £270,000
369

Death Tax
PET 15 January 2009 – outside seven years – exempt
PET 10 June 2014
£ £
Gift to daughter 307,000
AE – 2014/15 (3,000)
AE – 2013/14 b/f (3,000)
Chargeable transfers in previous seven years –
Nil
No tax payable as covered by nil band
Death Estate
£
UK main residence 168,000
Shares 10,000
Cash 30,000
Less funeral expenses (1,000)
UK free estate 207,000
Foreign free estate: villa in Spain 40,000

Tax on estate
40%  (247,000 – 125,000 – (325,000 – 301,000)) 39,200
39,200
Average rate = 15.8704%
247,000
Tax on UK free estate
£
207,000  15.8704% 32,852
– paid by executors
– borne by residuary legatee (son)
Tax on foreign free estate
40,000  15.8704% 6,348
– paid by executors
– borne by beneficiary (daughter)

Mr L
Chargeable estate £330,000
£
IHT (330,000 – 325,000)  40% 2,000
Less QSR (4 to 5 years)
40,111 (1,392)
8,420   20%
48,531
IHT payable on estate 608
370
Chapter 18
£ £
IHT payable
(360,000 – 325,000)  40% 14,000
Less DTR lower of

(1) Foreign tax 10,000
(2) UK IHT
14,000
 40,000 1,556 (1,556)
360,000
12,444
Note that no RNRB needs to be considered as Susan did not leave a main residence to a direct descendant.

Because when Sarah died she had not made any lifetime gifts, 100% of the nil band will be available to offset
against the inheritance tax liability when Stephen dies (effectively doubling the nil band from £325,000 to
£650,000 using current rates). Sarah would also not have used any residence nil rate band (RNRB) as her death
was prior to its introduction and so, if the main residence is left on Stephen's death to direct descendants, then
there will be a £250,000 RNRB available to offset against the death estate in the death tax calculation.
Main residence
The main residence is the most significant asset in Stephen's estate. If it were gifted in lifetime the capital gains
tax (CGT) liability would be nil, as the entire gain would be covered by the principal private residence exemption.
The value transferred will be a potentially exempt transfer for inheritance tax (IHT) purposes, and would not be
subject to inheritance tax unless Stephen died within the next seven years.
However, Stephen would still need somewhere to live so it is unlikely to be practical to gift the main residence in
lifetime. Gifting the main residence in lifetime while continuing to live in the residence would be ineffective for
inheritance tax purposes as it would be a gift with reservation of benefit, unless a market rental is paid.
Ordinarily, this means that giving the main residence away but continuing to live in it is not particularly good
inheritance tax planning, but as Stephen appears to have a significant amount of cash which he wants to pass to
family members anyway, he could gift the house in lifetime and use the cash balance to pay the rent, which
would then mean that the gift with reservation of benefit rules would not apply and there would be no IHT liability
as long as he lived for another seven years. However, the rent paid by Stephen would be liable to income tax on
the recipient.
If the main residence is gifted through the death estate, there will be an automatic CGT uplift to market value,
and the residence will be included in the death estate at its market value at that time. As mentioned above, an
additional £250,000 RNRB would become available to reduce the IHT on the death estate provided Stephen left
the main residence to direct descendants, ie children/grandchildren. Thus, it is recommended that Stephen retain
the residence until his death in order to access the additional RNRB which would not be available on a lifetime
transfer. This would save £100,000 (2  £125,000  40%).
Cash
The cash is not a chargeable asset for capital gains tax purposes so can be given in lifetime without any capital
gains tax effect. A lifetime gift of cash would be a potentially exempt transfer for IHT purposes, and would
therefore be completely exempt from IHT if Stephen survived the gift by at least seven years. Additionally, the
cash can be given in small amounts to maximise the benefit of the annual exemption. It is recommended that the
cash is given in lifetime to minimise the overall IHT liability (although this is subject to the point above, regarding
the gift of the house in lifetime).
371
Jaguar
The E-type Jaguar is not a chargeable asset for CGT purposes, so again can be given in lifetime without any
capital gains tax effect. The gift would again be a potentially exempt transfer for IHT purposes and, subject to the
practical difficulties that may arise if Stephen does not actually have a car, a gift in lifetime would be most
effective.
Aardvark Shares
The disposal of the shares in Aardvark Ltd in lifetime would be a market value disposal for capital gains tax
purposes and a potentially exempt transfer for IHT purposes. A gain of £300,000 (400,000 – 100,000) will arise if
Stephen gives the shares away in lifetime, but, because this is an unquoted trading company, gift relief will be
available to defer part of the gain. The part of the gain that relates to the investment activities in Aardvark Ltd
cannot be deferred under the gift relief provisions. This means a gain of £45,000 (W1) will arise and, assuming a
full annual exempt amount is available, a CGT liability of £6,660 will arise for Stephen.
If Stephen is a director or employee of Aardvark Ltd, the capital gain of £45,000 may qualify for entrepreneurs'
relief. If entrepreneurs' relief is available, the CGT liability would be £3,330 (W2).
If the potentially exempt transfer becomes chargeable for IHT purposes (because Stephen dies within seven
years) business property relief (BPR) is potentially available, but again this relief is restricted to the business (not
investment) activities so 15% of the potentially exempt transfer will be subject to IHT on death. This is, however,
subject to the condition that the recipient still owns the shares when the potentially exempt transfer becomes
chargeable.
If the shares are gifted through the death estate, there is an automatic capital gains tax uplift to market value
(which removes the CGT liability of £6,660 above) but the shares will be included in the death estate at their
current market value, although BPR will again be available to restrict the amount chargeable with the 15% of the
company value that relates to investments.
If the shares are given through the death estate, this is a significantly better result for CGT purposes (as the gift
relief option is merely a deferral, rather than an exemption from CGT). It means that the recipient of the shares
could sell them immediately without triggering any CGT liability.
Chattels
Chattels are generally not subject to capital gains tax on a disposal in lifetime, so these assets could be given
away without any CGT liability arising. Such a gift would be a potentially exempt transfer, but could be covered
by the use of lifetime exemption such as the annual exemption or, possibly, the marriage exemption if
appropriate.
Workings
£
1 Proceeds 400,000
Cost (100,000)
300,000
Less gift relief (85%) (255,000)
45,000
33,300 @ 20% = 6,660
2 Gain 33,300 @ 10% = 3,330
372
Chapter 19
No lecture examples.
Chapter 20
Lucky Ltd corporation tax computation for the five-month period ended 30 April 2018
£
Operating profit 432,600
Advertising 0
Depreciation 14,700
Amortisation 9,000
Deduction for lease premium £46,800/12  5/12 (1,625)
Capital allowances (W1) (97,413)
Trading profit 357,262
Interest income 700
Taxable total profits 357,962
Corporation tax £357,962 @ 19% 68,013

Workings
1 Capital allowances
Main Special
pool rate pool Allowances
£ £ £ £
Additions qualifying for AIA
Integral features 41,200
AIA (41,200) 41,200
Transfer balance to special rate pool 0
Computer 6,300
Office equipment 52,900
59,200
AIA (W2) (42,133) 42,133
Transfer balance to main pool 17,067
WDA 18%  5/12 (1,280) 1,280
Addition qualifying for FYA
Motor car 12,800
FYA 100% (12,800) 12,800
Transfer balance to main pool 0
WDV carried forward 15,787 0
Total allowances 97,413
2 Annual investment allowances (AIA)
The AIA is reduced to £83,333 (£200,000  5/12) because Lucky Ltd's accounting period is five months
long.
Tutorial notes
1 The expenditure which is integral to the building is included in the special rate pool.
2 It is beneficial to claim the annual investment allowance of £83,333 initially against this integral features
expenditure, as it would otherwise only qualify for writing down allowance at the rate of 8%.
3 The computer purchased on 19 August 2017 is pre-trading and is treated as incurred on 1 December 2017.
373
4 The motor car has CO2 emissions up to 50 grams per kilometre and therefore qualifies for the 100% first
year allowance.

Profit per accounts on sale of patent rights:
£
Sale proceeds 3,000,000
NBV (890,000)
Accounting profit 2,110,000
(a) All proceeds reinvested
maximum rollover relief available
Income gain eligible for rollover: Amount taxable:

£
Proceeds 3,000,000
Original cost (1,800,000)
Rollover relief 1,200,000
Remaining accounting profit £910,000

Base cost of new patent:
£
Actual cost 3,500,000
Less income gain rolled over (1,200,000)
2,300,000
(b) Accounting profit
£
On sale of patent rights £2,110,000
(as before)
Full proceeds not reinvested
Gain eligible for rollover: Amount taxable:

£
Actual gain (proceeds – cost) 1,200,000
Tax now proceeds not
reinvested (3m – 2.5m) (500,000)
Rollover relief £700,000*
Remaining accounting profit £1,410,000
* This is equal to the amount that the cost of the new asset exceeds the cost of the original asset (2.5m –
1.8m).
Base cost of new patent £
Cost 2,500,000
Less income gain rolled over (700,000)
1,800,000
374
Chapter 21
The disposal does not meet the conditions for the substantial shareholding exemption as Orange Ltd has not had a
10% holding in Lemon Ltd for a continuous 12-month period in the last six years. Consequently a gain will arise.
£
Proceeds 500,000
Cost (7/11  260,000) (165,455)
Unindexed gain 334,545
Less indexation allowance
- none as acquisition is post December 2017 -
Gain 334,545
Corporation tax at 19%  334,545 63,564
After tax proceeds (500,000 – 63,564) 436,436
Orange Ltd should wait until after May 2019 to dispose of the shares. The conditions for the substantial
shareholding exemption would then be met and Orange Ltd would keep the full £500,000 disposal proceeds.
Chapter 22
Option 1 – Hamish as sole trader
£
Trading profit 60,000
Less: Income tax on trade profits (W1) (12,360)
Class 2 NIC (W2) (153)
Class 4 NIC (W2) (3,686)
Net income from business 43,801
(W1) Income tax calculation
NSI
£
Trade profits 60,000
PA (11,850)
Tax: 34,500 @ 20% 6,900
13,650 @ 40% 5,460
48,150 12,360
(W2) NIC liabilities
Class 2 NIC = 52  £2.95 153
Class 4 NIC
(46,350 – 8,424) @ 9% 3,413
(60,000 – 46,350) @ 2% 273
3,686
Option 2 – Hamish forms a company ('Hamish Ltd') and pays himself a salary of £8,424 and the residue as a dividend
Hamish Ltd £
Hamish Ltd profits 60,000
Salary to Hamish (8,424)
Employer NIC on salary (below threshold) Nil
CT liability in Hamish Ltd £51,576  19% (9,799)
Maximum dividend payable to Hamish 41,777
375
Hamish £
Salary received 8,424
Dividend received 41,777
Less: Income tax (W3) (3,688)
NIC on salary (below threshold) Nil
NIC on dividend (N/A) Nil
Net income from business 46,513
(W3) Income tax calculation NSI Divs

£ £
Salary 8,424
Dividend received 41,777
PA (8,424) (3,426)
Taxable income Nil 38,351
Tax:
2,000 @ 0% (dividend nil rate band) 0
32,500 @ 7.5% 2,437
3,851 @ 32.5% 1,251
38,351
Income tax payable 3,688
Summary: £
Option 1 43,801
Option 2 46,513
Option 2 – Hamish should set up a company as this leaves him with £2,712 more money after tax than if he was
a sole trader (£46,513 - £43,801).

£4m
Each instalment = 3  = £1.2m
10
£(m)
14.7.18 1.2
14.10.18 1.2
14.1.19 1.2
3.6
14.2.19 (balance) 0.4 (4th month after AP end)
4.0
Chapter 23
1.1.18 – 5.7.18 To the date trade ceased
6.7.18 – 17.10.18 Commencement of winding up brings an AP to an end
18.10.18 – 17.10.19 AP cannot exceed 12 months
18.10.19 – 2.2.20 AP ends when winding up complete
376

(a) Father Son
£ £
Gains on disposal of shares
Consideration 195k  75%/25% 146,250 48,750
Cost (37,500) (20,000)
108,750 28,750
Less AE (11,700) (11,700)
Taxable gains 97,050 17,050
Both will be taxed at 10% CGT due to
availability of entrepreneurs' relief
(b) Pre-liquidation dividend
 Dividends will be taxable on both individuals on dividend in excess of the £2,000 nil rate band
(assuming no other dividends currently received).
– Father will be taxed at 38.1%
– Son will be taxed at 32.5%
 Thus it is not tax efficient to take a dividend.
(c) If a company owned 25,000 shares rather than the son then the substantial shareholding exemption
would be available as Bruce Ltd had been a trading company and the investing 'company' has held more
than 10% of the shares for a continuous 12 month period in the last six years. Consequently there would
be no corporation tax.
Pre-liquidation dividend would not be taxable on company and so either option would be tax free.
If the conditions for the SSE were not met (for example a 12 month ownership period did not exist/<10%
shares held/Bruce Ltd was not a trading company) then a pre-liquidation dividend would be preferable to
avoid paying corporation tax on the gain.

Distribution method £
Proceeds 16,000  £38.60 617,600
Less subscription cost 16,000  £3.40 (54,400)
Net distribution 563,200
Tax on £(150,000 – 124,000) = £26,000 @ 32.5% 8,450

Tax on £(563,200 – 26,000) = £537,200 @ 38.1% 204,673
213,123
Net cash 617,600 – 213,123 = £404,477
An amount equal to original subscription price is proceeds in a gains calculation:
Proceeds 54,400
Less cost (54,400)
Gain 0
The above is the case unless shareholder satisfies a number of conditions to allow sale to be treated as capital
gain. It is uncertain from the information in the question whether Thomas Ltd is a trading company, and if so,
whether the repurchase of Greg's shares benefits the trade. If these conditions are met:
Capital method £
Proceeds 617,600
Less cost (54,400)
563,200
CGT @ 20% (already used AE and entrepreneurs' relief not available) 112,640
Net cash 617,600 – 112,640 = £504,960
377
Chapter 24
Bat Ltd
Y/end Y/end Y/end
30.6.18 30.6.19 30.6.20
Trading profit 15,000 Nil 20,000
Interest income 5,000 5,000 5,000
Gains 3,000 – –
Total profits 23,000 5,000 25,000
Less current and carry back relief (23,000) (5,000) –
Less carry forward relief (24,000)
Less QCD – – (1,000)
Taxable total profits – – –
Wasted QCD's 1,000 1,000
Loss memorandum
£
Loss for y/end 30.6.19 53,000
Current year relief y/e 30.6.19 (5,000)
Carry back relief y/e 30.6.18 (23,000)
25,000
Carry forward relief y/e 30.6.20 (24,000)
Trade loss to carry forward 1,000
Capital loss
Loss for y/end 30.6.19 10,000
Used in y/end 30.6.20 (7,000)
Capital loss to carry forward 3,000
Chapter 25
The five largest shareholders and their associates are:
%
Paul and wife (18 + 3) 21
Jacky and son (5 + 4) 9
Holly 8
Guy (or Matthew) 7
Joe 7
Total 52
Company is controlled by five shareholders so Nelson Ltd is a close company.

Penalty tax due by Hoddle Ltd based on the loan outstanding on 1 October 2017 : £45,000
ie £45,000  32.5% = £14,625 due 1.10.17.
Waiver on 1.5.18:
The penalty tax of £14,625 will be refunded to the company on 1.10.2019 (nine months and one day following
end of AP of waiver).
378
Glen will be deemed to receive a dividend in 2018/19 of £45,000.

Taxed as dividend income.
£
Dividend 45,000
Dividend nil rate band (2,000- 1000) = 1,000  0% 0

£44,000  32.5% 14,300
Higher rate tax due 31.1.20 14,300

Working: Car benefit – CO2 emissions 177
Less baseline (95)
82  5 = 16.4
Round down = 16 + basic 20% = 36%
Dash will be taxed under employment income as a taxable benefit of 20,000  36% = £7,200. Violet will be taxed
on £7,200 as above, but this will be treated as a dividend received.
Incredibles Ltd will get no CAs or running costs as allowable expense on Violet's car as she is not an employee.
Incredibles will pay Class 1A NIC on Dash's benefit at 13.8% which will be corporation tax deductible. This will
not be required on Violet's car.
Input VAT on both cars will not be recoverable due to the private use.
Chapter 26
L plc can either (1) make a current year and 12-month carry back claim to use the loss itself or (2) can group
relieve the loss to K plc in the current year.
(1) L plc can make a current year and 12-month carry back claim to use the loss itself.
Y/e 31/3/19 £
Trade profit 0
Non-trading loan relationship income 2,900
Total profits 2,900
Less current year trade loss relief (2,900)
Qualifying charitable donations (£3,200 wasted) (0)
Taxable total profits 0
Trade loss left to carry back £17,800 (20,700 – 2,900).
There would also be £300 of excess QCDs in y/e 31/3/19 which could be group relieved to K to generate
a tax saving of £57 (300  19%).
Y/e 31/3/18 £
Trade profit 0
Gains 15,000
Total profits 21,200
Less trade loss carried back (17,800)
Less qualifying charitable donations (1,000)
Taxable total profits 2,400
379
Remaining trade loss £0 (17,800 – 17,800).

This will generate a tax rebate of £3,382 (17,800  19%).
Total tax saving is £3,439 (£57 + £3,382)
(2) L plc can surrender losses under group relief as follows:
£
Current year trading loss 20,700
Excess qualifying charitable donations £(3,200 – 2,900) 300
Total losses available for group relief 21,000
K plc has the following available taxable total profits:
£
25,000
Less current year trading loss (4,000)
21,000
Less qualifying charitable donations (2,000)
Available taxable total profits 19,000
Maximum group relief that K plc can claim from L Ltd (lower of £21,000 and £19,000) 19,000
K plc must take account of its current year trading loss in working out available taxable total profits, even
if it does not actually make a claim for current year relief.
The group relief claim will save £3,610 (19,000  19%) of corporation tax this year.
Conclusion
The immediate tax savings are better if the group makes a group relief claim from L plc to K plc. This also
has the advantage that not all of the trade loss is utilised in this claim leaving £2,000 of trade loss
(assuming the QCDs are group relieved first) to carry forward to be utilised in the next accounting period
achieving further tax savings. It does, however, not have the cash flow advantage of the tax rebate from
the carry back claim.

Y plc can surrender its carried forward trading loss and its non-trading loan relationship debit under carry forward
group relief as follows:
£
Carried forward trading loss 150,000
Carried forward non-trading loan relationship debit 4,000
Less: could be used against own current period total profits £(62,000 + 6,000 + 20,000) (88,000)
Loss available for carry forward group relief 66,000
X plc has the following available taxable total profits:
£
65,000
Less: carried forward trading loss (4,000)
Carried forward non-trading loan relationship debit (500)
Available taxable total profits 60,500
Maximum group relief that X plc can claim from Y plc (lower of £66,000 and £60,500) 60,500
380

Lower of: (i) A Ltd's profit ie 500,000
(ii) 30%  S Ltd's loss ie 300,000

Lower of: (i) A Ltd's loss ie 100,000
(ii) 30%  S Ltd's profit ie 150,000

(a) Building automatically transferred at no gain/no loss = cost + indexation to date of transfer
ie 150,000 + 0.468  150,000 = £220,200
Benidorm Ltd has a base cost for the building of £220,200 for a future disposal.
(b) A gain arising when building is sold to a third party outside the 75% group.
£
Proceeds 400,000
Cost (from (a)) (220,200)
Indexation allowance
0. 114  £220,200
(25,103)
Gain 154,697
(c) Degrouping charge as Benidorm Ltd leaves the group within six years of the original transfer.
£
Proceeds (MV at date of transfer) 360,000
Cost (150,000)
Indexation allowance 0.468  150,000 (70,200)
Degrouping charge 139,800
This is added to the consideration Ibiza receives on the sale of Benidorm Ltd, giving rise to a capital gain of:
£
Proceeds 500,000
Degrouping charge 139,800
Less cost (300,000)
Less indexation allowance
0.316  £300,000
(94,800)
245,000
Assuming Benidorm Ltd is trading, this gain on the sale of shares will be exempt under the substantial
shareholdings rules.

Sale of share capital:
Due to substantial shareholding exemption gain on disposal of shares will be exempt.
After-tax proceeds will be £520,000
Sale of trade and assets: £
Sale proceeds 616,000
Less: corporation tax (W1) (23,003)
repayment of liabilities (20,000)
After-tax proceeds 572,997
381
Workings
1 Corporation tax £
Gain on sale of premises (W2) 40,270
Balancing allowance on plant and machinery (36,800 – 52,000) (15,200)
Profit on sale of goodwill 96,000
121,070
CT @ 19% 23,003
2 Gain on sale of premises £

Proceeds 483,200
Cost (392,000)
IA (50,930)
40,270
No capital loss on plant and machinery due to balancing allowance.
382
Chapter 27
Corporation tax computation for y/e 31.3.2019
Overseas
Total UK income
£ £ £
Trading profit 850,000 850,000
Overseas income (150,000  100/82) 182,927 182,927
Less qualifying charitable donation (100,000) (100,000)
Taxable total profits 932,927 750,000 182,927
DTR is the lower of:
(1) Foreign tax 18%  £182,927 = £32,927
(2) UK tax on overseas income 19%  £182,927 = £34,756
Therefore in order not to waste the double tax relief the UK tax on the overseas income must be at least £32,927.
Sherman Ltd can choose to offset the qualifying charitable donation and the group relief in the most tax efficient
manner. Accordingly the qualifying charitable donation and group relief will be deducted first from the UK profits,
reducing these to zero. It should then be used to reduce the overseas income to the amount that results in the
UK corporation tax being equal to the tax suffered overseas.
The overseas income should not be restricted to below £173,300 (£32,927/19%).
The maximum loss that should be surrendered to Sherman Ltd is:
£
UK profits less qualifying charitable donation 750,000
Overseas income (£182,927 – £173,300) 9,627
Maximum loss to be surrendered to Sherman Ltd 759,627
Chapter 28
As his annual turnover does not exceed £85,000 until 31 March 2019 (on a month-by-month basis) he has not
become liable until then. He must then notify within 30 days, ie by 30 April 2019. He is then registered from
1 May 2019 or an earlier date by mutual agreement.

VAT £
Vans (57,960  1/6) 9,660

Lorry (60,375  1/6) 10,062
Entertaining (12,075  1/6) 2,012
21,734
383

£
Van – in use post registration 1,800
Inventory – still held at date of registration 2,800
Note. VAT on accountancy fees are not recoverable as >6 months prior to registration.

Input tax on car is not recoverable.
Input tax on stereo is all allowed if invoiced separately.
20
... 940   157
120

(a) £
Output VAT 95,000  85%  20/120 13,458
Input VAT 15,800  20/120 (2,633)
10,825
(b) Using the flat rate scheme
95,000  12.5% 11,875
Chapter 29
Partial exemption
Test 1
Total input tax is £23,900/3 = £7,967 > £625 per month.
Value of exempt supplies is £135,429 – £101,572 = £33,857 <50% of total supplies
Test failed (both conditions need to be satisfied)
Test 2
Input tax directly attributable to taxable supplies is £20,000/3 = £6,667. Total input tax less input tax directly
attributable to taxable supplies is £7,967 – £6,667 = £1,300 >625 per month.
Value of exempt supplies is <50% of total supplies (as above)
Test failed (both conditions need to be satisfied)
Test 3
Taxable supplies £
– directly allocated 20,000
– indirectly allocated
101,572 2,432
3,200  (76%)
135,429
Recoverable 22,432
384
Exempt supplies £
– directly allocated 700
– indirectly allocated
(3,200 – 2,432) 768
1,468
Monthly amount = 1,468/3
= £489
This is ≤£625 per month and <50% of input tax relates to exempt supplies. Both conditions satisfied. Test
passed.
... all of the £1,468 is recoverable, in addition to the £22,432 relating to taxable supplies.

Input VAT = 60,000  20% = 12,000
For the first year the recovery (after the annual p/e adjustment) is 8,400 (ie 70% rate is used).
For the second year the CGS adjustment is (70% – 60%) 10%  1
5  12,000 = £240 payable to HMRC.
Chapter 30
No lecture examples.
385
END OF ANSWERS TO LECTURE EXAMPLES
386
Appendix A:
Tax tables
387
32: APPENDIX A: TAX TABLES
388
SUPPLEMENTARY INSTRUCTIONS
1. You should assume that the tax rates and allowances for the tax year 2018/19 and for the financial year
to 31 March 2019 will continue to apply for the foreseeable future unless you are instructed otherwise.
2. Calculations and workings need only be made to the nearest £.
3. All apportionments may be made to the nearest month.
4. All workings should be shown.
TAX RATES AND ALLOWANCES
The following tax rates and allowances are to be used in answering the questions.
Income tax
Normal rates Dividend rates
Basic rate £1 – £34,500 20% 7.5%
Higher rate £34,501 – £150,000 40% 32.5%
Additional rate £150,001 and over 45% 38.1%
Savings income nil rate band -Basic rate taxpayers £1,000

-Higher rate taxpayers £500
Dividend nil rate band £2,000
A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.
Personal allowances
Personal allowance £11,850

Transferable amount £1,190
Income limit £100,000
Where adjusted net income is £123,700 or more, the personal allowance is reduced to zero.
Residence status
Days in UK Previously resident Not previously resident
Less than 16 Automatically not resident Automatically not resident
16 to 45 Resident if 4 UK ties (or more) Automatically not resident
46 to 90 Resident if 3 UK ties (or more) Resident if 4 UK ties
91 to 120 Resident if 2 UK ties (or more) Resident if 3 UK ties (or more)
121 to 182 Resident if 1 UK tie (or more) Resident if 2 UK ties (or more)
183 or more Automatically resident Automatically resident
Remittance basis charge

UK resident for Charge
7 out of the last 9 years £30,000
12 out of the last 14 years £60,000
Car benefit percentage
The base level of CO2 emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars with CO2 emissions up to this level are:
50 grams per kilometre or less 13%
51 grams to 75 grams per kilometre 16%
76 grams to 94 grams per kilometre 19%
95 grams per kilometre 20%
Car fuel benefit
The base figure for calculating the car fuel benefit is £23,400.
Individual savings accounts (ISAs)
The overall investment limit is £20,000.
389
Property income
Basic rate restriction applies to 50% of finance costs.
Pension scheme limits
Annual allowance £40,000
Minimum allowance £10,000
Threshold income limit £110,000
Income limit £150,000
Lifetime allowance £1,030,000

The maximum contribution that can qualify for tax relief without any earnings is £3,600.
Authorised mileage allowances: cars
Up to 10,000 miles 45p
Over 10,000 miles 25p
Capital allowances: rates of allowance
Plant and machinery
Main pool 18%
Special rate pool 8%
Motor cars
New cars with CO2 emissions up to 50 grams per kilometre 100%
CO2 emissions between 51 and 110 grams per kilometre 18%
CO2 emissions over 110 grams per kilometre 8%
Annual investment allowance
Rate of allowance 100%
Expenditure limit £200,000
Cash basis
Revenue limit £150,000
Cap on income tax reliefs
Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.
Corporation tax
Rate of tax – Financial year 2018 19%
– Financial year 2017 19%
– Financial year 2016 20%
Profit threshold £1,500,000
Value Added Tax (VAT)

Standard rate 20%
Registration limit £85,000
Deregistration limit £83,000
390
Inheritance tax
£
Nil rate band
6 April 2018 to 5 April 2019 325,000
6 April 2017 to 5 April 2018 325,000
6 April 2016 to 5 April 2017 325,000
6 April 2015 to 5 April 2016 325,000
6 April 2014 to 5 April 2015 325,000
6 April 2013 to 5 April 2014 325,000
6 April 2012 to 5 April 2013 325,000
6 April 2011 to 5 April 2012 325,000
6 April 2010 to 5 April 2011 325,000
6 April 2009 to 5 April 2010 325,000
6 April 2008 to 5 April 2009 312,000
6 April 2007 to 5 April 2008 300,000
6 April 2006 to 5 April 2007 285,000
6 April 2005 to 5 April 2006 275,000
6 April 2004 to 5 April 2005 263,000
Residence nil rate band 125,000
Rate of tax on excess over nil rate band – Lifetime rate 20%
– Death rate 40%
Inheritance tax: taper relief
Years before death Percentage
reduction
Over 3 but less than 4 years 20%
Capital gains tax
Normal Residential
rates property
Rates of tax Lower rate 10% 18%
Higher rate 20% 28%
Annual exempt amount £11,700
Entrepreneurs' relief Lifetime limit £10,000,000
Rate of tax 10%
National insurance (not contracted out rates)
Class 1 Employee £1 – £8,424 per year Nil
£8,425 – £46,350 per year 12.0%
£46,351 and above per year 2.0%
Class 1 Employer £1 – £8,424 per year Nil
Employment allowance £3,000
Class 1A 13.8%
Class 2 £2.95 per week
Small profits threshold £6,205
Class 4 £1 – £8,424 per year Nil
£8,425 – £46,350 per year 9.0%
391
Rates of Interest (assumed)

Official rate of interest 2.50%
Rate of interest on underpaid tax 3.00%
Rate of interest on overpaid tax 0.50%
Standard penalties for errors
Taxpayer behaviour Maximum penalty Minimum penalty – Minimum penalty –

unprompted disclosure prompted disclosure
Deliberate and concealed 100% 30% 50%
Deliberate but not
concealed 70% 20% 35%
Careless 30% 0% 15%
Stamp duty land tax

Non-residential properties Rate
£150,000 or less 0%
£150,001 to £250,000 2%
£250,001 and above 5%
Stamp duty
Shares 0.5%
END OF APPENDIX A
392
ACCA Advanced Taxation
(ATX – UK) FA 2018
Achievement Ladder
Step 4 Questions
Questions
Time allowed: 1 hour and 38 mins
ALL questions are compulsory and MUST be attempted
JUNE 19/SEPT19/DEC 19/MAR 20 393

ACHIEVEMENT LADDER STEP 4 QUESTIONS
394
1 William 59 mins
William is a widower who is in good health. He will be made redundant from Acute Ltd on
31 March 2019.
His remuneration package for the year ended 5 April 2019 is as follows:
Salary £36,000 (PAYE £5,990)
Ford Focus car, list price £19,000
2 CO emissions 112 g/km
All diesel fuel, monthly contribution towards total £20
Free meals in the company canteen, cost to Acute Ltd £800
On William's redundancy he will be given the car as an ex gratia gift; at that time its market value
will be £5,000.
His only other income for the year is dividends of £7,000 from his portfolio of shares, and interest
of £600 on his ISA account.
In order to raise finance to buy a seaside apartment, William plans to make the following disposals
on 31 March 2019:
Anfield plc shares 6,000 shares to be sold for £18,500. 8,000 shares were purchased for
£8,000 in February 1992. There was a 1 for 2 rights issue in June 2005 at
£2 per share and William took up all his rights.
William has never worked for Anfield plc.
Painting Collector's item. Will be sold for £21,200. Purchased in July 1991 for
£11,400.
Vintage motor car Sale proceeds expected to be £15,000. He bought the car as an investment
in May 2001 for £5,000.
William has agreed to carry out consultancy work, following his retirement, for Acute Ltd and two of
its clients. He will commence this work on 1 June 2019, and has prepared the following statement
of budgeted income and expenditure for his first period of account.
STATEMENT OF INCOME AND EXPENDITURE
FOR THE PERIOD 1 JUNE 2019 TO 31 AUGUST 2020
Income £ £
From Acute Ltd 40,625
From clients of Acute Ltd 21,875 62,500
Expenditure £ £
General (all deductible for tax) 15,500
Motor (Note) 5,000
(20,500)
42,000
Net income
Note. Motor expenses are for William's own motor car with CO2 emissions of 152 g/km, for which
he charges 25p per mile for business journeys.
395
Required
Prepare a report for William. The report should be in two sections, addressing the issues set out
below, and should, where appropriate, include supporting calculations.
(a) 2018/19 income tax and capital gains tax liabilities
Advise William how much income tax he needs to pay for 2018/19.
Provide an estimate of the capital gains tax payable on the planned disposals on 31 March 2019.
Advise William how the planned disposals could be made to minimise the capital gains tax
payable, and calculate the tax saved. (13 marks)
(b) Consultancy income
Advise William of the factors that will be considered in deciding whether he will be treated
asself-employed or as an employee in respect of his consultancy income and state with
reasons the likely tax treatment.
For each alternative treatment of the consultancy income, advise William:
(i) What taxes might be chargeable on the consultancy profits
(ii) How his assessable income will be calculated for 2019/20 and 2020/21.
Briefly identify the key taxation issues which William should consider if he were to
contemplate incorporating his consultancy business. Outline the differences in taxation
treatment of an unincorporated business compared to an incorporated business. (15 marks)
Appropriateness of the format and presentation of the report and the effectiveness with which its
advice is communicated. (2 marks)
You may assume that the tax rates and allowances for the tax year 2018/19 and the Financial Year
to 31 March 2019 will continue to apply for the foreseeable future.
(Total = 30 marks)
396
2 Jane Macbeth 39 mins

Jane Macbeth, aged 61, died on 20 November 2018.
The following information has been extracted from client files and from meetings with Jane.
Jane Macbeth:
 Husband, Duncan, is wealthy in his own right
 Has three children
Assets owned at date of death:
(a) Main residence valued at £235,000 with outstanding repayment mortgage of £40,000
(b) Building society deposits of £87,000
(c) 10,000 £1 ordinary shares in Banquo plc. On 20 November 2018 the shares were quoted at
945–957, with bargains on that day of 937, 961 and 939. Had been inherited as a specific
gift on the death of her sister on 10 August 2016 when they were valued at £68,000. The
sister's executor's paid inheritance tax (IHT) of £54,000 on an estate valued at £360,000
(d) Life assurance policy on her own life. Immediately prior to the date of Jane's death, open market
value of the policy was £86,000; proceeds of £104,000 were received following her death
(e) Agricultural land valued at £168,000, with agricultural value of £110,000. Purchased during
2001, and it has always been let to tenant farmers; the most recent tenancy commenced on
1 January 2017
Lifetime gifts:
(a) 28 November 2010: £96,000 cash gift to a discretionary trust.
(b 15 April 2014: Gift of 50,000 shares in Shakespeare Ltd, an unquoted trading company, to
her son as a wedding gift, valued at £232,500. She had purchased the shares in 2002. Her
son still owned the shares on 20 November 2018. Shakespeare Ltd has 20% of the value of
its total assets invested in quoted shares.
(c) 10 March 2015: £248,000 cash gift to a discretionary trust. (d) Jane paid any IHT arising.
Distribution of Jane's estate:
 Specific gift of £100,000 to her brother
 Residue of the estate left to her children
Required
(a) Calculate the IHT that will be payable as a result of Jane's death. (14 marks)
(b) State who is primarily liable for the tax, the due dates of the IHT liabilities, the amount of IHT
that can be paid under the instalment option and the amount of inheritance that will be
received by Jane's children. (6 marks)
(Total = 20 marks)
397
398
ACCA Advanced Taxation
(ATX – UK) FA 2018
Achievement Ladder
Step 6 Questions
Questions
Time allowed: 2 hours and 36 minutes
ALL questions are compulsory and MUST be attempted
JUNE 19/SEPT19/DEC 19/MAR 20 399

400
1 Adam 68 mins
Your manager has had a meeting with Adam Snook and has sent you a copy of the following
memorandum.
To The Files
From Tax manager
Date 1 December 2018
Subject Adam Snook
Adam Snook has been entertaining children at parties as a hobby for the last two years. On
1 June 2018 his aunt gave him shares in Brill plc, a quoted company, worth £88,040. As a result
Adam intends to give up his job on 31 December 2018 (he is a regional sales manager with
Rheims Ltd) and purchase a small theatre from which he will carry on a business of providing
entertainment for children's parties.
The business
Adam will begin advertising and charging for attending children's parties on 1 January 2019. He
estimates that his net profit for the first five months (until the theatre opens) will only be £400 per month.
Accordingly he has agreed to work part-time for his existing employer from 1 January 2019 until
31 May 2019 for a salary of £1,050 per month.
Adam will purchase the theatre on 1 April 2019. He estimates that it will take six weeks or so to
renovate the theatre such that is should be ready for business by 1 June 2019 at the latest. Adam
will seek to rent out the theatre for the days when it is not required for his business.
We agreed that the business should prepare accounts to 31 March each year. Adam does not wish
to form a limited company.
The supply of entertainment at the theatre will be standard rated for the purposes of value added
tax (VAT) and Adam will register for VAT on 1 June 2019.
The finance required
The costs of establishing the business, exclusive of recoverable VAT, are set out below.
£
Purchase price of the theatre 215,000
Renovation of the theatre 45,000
Equipment and other costs 50,000
Finance required 310,000
The finance available
Adam sold 42,600 shares in Snapper plc for £104,870 on 1 December 2018 and intends to sell
£25,000 6% Snapper plc non-convertible loan stock next week for £29,900. He will use the net
proceeds of these sales to finance the business and obtain the balance of the funds required via a
bank overdraft at an annual interest rate of 15%.
The shares and loan stock in Snapper plc were acquired as follows:
Adam was given 14,200 shares in Brill plc by his aunt on 1 June 2017. At that time the shares
were worth £88,040.
401
On 1 November 2017 Brill plc was acquired by Snapper plc. Both Brill plc and Snapper plc are UK
resident trading companies.
Adam received 42,600 shares in Snapper plc together with £25,000 6% Snapper plc non-
convertible loan stock (a qualifying corporate bond) in exchange for his shares in Brill plc.
The shares and the loan stock were worth £97,980 and £28,400 respectively as at 1 November 2017.
Other background information
Adam is 35 years old. His full time salary with Rheims Ltd is £23,333 per annum. He is provided
with a diesel company car which had a list price when new of £13,950 and a CO2 emission rate of
132 grams per kilometre.
He is not provided with free fuel. He will return the car to the company on 31 December 2018.
Adam's aunt is 71 years old and is domiciled in the UK. This is the first substantial gift that she has
made to Adam although he suspects that she has made similar gifts to other relatives in the past.
Tax manager
An extract from an email from your manager is set out below.
Please prepare a memorandum for me, incorporating the following:

(a) Explanations of the following matters:
(i) Adam's liability to income tax in 2018/19.
(ii) Adam's liability to Class 2 and Class 4 national insurance contributions (NICs) in
2018/19.
(iii) The income tax relief available in respect of both the cost of purchasing and
renovating the theatre.
(iv) For value added tax (VAT) purposes, the effect of renting out the theatre on Adam's
ability to recover input tax, the implications of opting to tax the theatre and the factors
affecting the decision to opt to tax.
(b) (i) Calculations to support the amount of external finance required by Adam including a
note of any assumptions made. Don't forget to take his capital gains tax liability into
account but ignore any possible inheritance tax liability.
(ii) A proposal which will increase the after tax proceeds from the sale of the Snapper plc
loan stock together with the amount of the increase.
A reasoned recommendation of a more appropriate form of external finance for the business.
(c) An explanation of the inheritance tax payable by Adam in respect of the gift from his aunt
depending on when his aunt dies.
We will be under significant fee pressure on this job so please don't do any unnecessary work –
I'm sure that time spent thinking about what needs to be done before you start will save you time in
the long run.
Tax manager
402
Required
Prepare the memorandum required by your manager.
Marks are available for the components of the memorandum as follows:
(a) Explanations of the various matters. (16 marks)
(b) (i) Calculations to support the amount of external finance required. You should state any
assumptions you have made in preparing the calculations. (7 marks)
(ii) A proposal which will increase the after tax proceeds from the sale of the Snapper plc
loan stock and a reasoned recommendation of a more appropriate form of external
finance. (4 marks)
(c) The inheritance tax payable by Adam in respect of the gift from his aunt. (4 marks)
Additional marks will be awarded for the appropriateness of the format and presentation of the
memorandum and the effectiveness with which the information is communicated. (4 marks)
Note. You should assume that the tax rates and allowances for the tax year 2018/19 will continue
to apply for the foreseeable future.
(Total = 35 marks)
403
2 Sirene 49 mins
An extract from an email from your manager is set out below.
I have forwarded to you an email I received from Sirene yesterday.

Automatic Ltd, the manufacturing company that Sirene incorporated in the UK in 2016, is doing
well and she is now finalising the purchase of the trade and assets of Chase Ltd, another profitable
company. This acquisition, referred to by Sirene as the 'Chase deal', will be carried out in January
2020 by a new company, Falcon Ltd, which she will incorporate for this purpose. There are likely to
be further acquisitions of shares and/or businesses in the future.
I want you to write paragraphs, for inclusion in a letter that I will write later this week, addressing
each of the matters raised in Sirene's email. Please include an amended calculation of the
budgeted corporation tax payable by Automatic Ltd for the year ending 31 March 2020 together
with brief explanations where necessary. This calculation should begin with Sirene's figure for
taxable total profits of £280,000 and incorporate any adjustments that need to be made.
Sirene is reasonably knowledgeable about corporation tax and I am happy to assume that her
figures for the income and the capital gain are correct. However, I believe that it would be
advantageous for Falcon Ltd to be owned by Automatic Ltd rather than Sirene. Accordingly, please
include the corporation tax advantages (and any disadvantages) of Automatic Ltd owning Falcon
Ltd and amend the budgeted corporation tax computation on the assumption that the deal is
structured in this manner and that all beneficial claims are made.
Thank you,
Bogard
An extract from the email from Sirene is set out below.
The Chase deal

I have decided to set up a new company, Falcon Ltd, because I want to keep the Chase business
separate from Automatic Ltd. I will own the whole of Falcon Ltd personally (just as I do Automatic
Ltd). Please confirm that this approach is effective from a corporation tax point of view?
As part of the deal, Falcon Ltd will pay Chase Ltd £320,000 for the purchase of the building it uses
for its administrative head office. Am I correct in thinking that this cost will not give rise to tax
deductions from trading income?
Degrouping charges
It is my understanding that on the purchase of a company or a business it is possible for certain
assets to be regarded as having been sold such that chargeable gains, often called degrouping
charges, arise. However, I'm not sure how to determine whether or not the Chase deal, or any
future deals, will result in such a charge. Please let me have a summary of the circumstances
giving rise to such a charge, an explanation of how the charge is calculated and how it is subject to
tax.
VAT (Value added tax)
The management of Chase Ltd have told me that they must charge VAT on the sale of the
building, machinery and equipment. Are they correct?
404
AUTOMATIC LTD – BUDGETED CORPORATION TAX COMPUTATION FOR THE YEAR

ENDING 31 MARCH 2020
£
Tax adjusted trading profit 240,000
Bank interest 6,000
Taxable total profits (note 2) 280,000
Corporation tax at 19% 53,200
Notes
1 The chargeable gain will arise on the sale of a small building in March 2020 for £138,000.
Automatic Ltd uses the building for storage purposes and will rent storage space in the
future. I do not anticipate the company buying any assets qualifying for rollover relief within
the qualifying period.
2 Automatic Ltd subscribed for 12,000 shares (a 6% shareholding) in Rye Ltd in September
2019. Automatic Ltd has subsequently received a dividend of £2,160 in respect of these
shares. I have excluded these dividends when calculating the taxable total profits of
Automatic Ltd. Please confirm that this treatment is correct.
3 Automatic Ltd will have also made an investment in some German bonds and will have
£50,000 of interest receivable in the y/e 31 March 2020. This will be received net of 15%
withholding tax. I have not included this in my corporation tax calculation as I was not sure
what to do with overseas income and so ignored it.
Required
Prepare the paragraphs for inclusion in your manager's letter as requested in his email, together
with the amended corporation tax computation. The following marks are available:
(i) The Chase deal (5 marks)
(ii) Degrouping charges (8 marks)
(iii) VAT (value added tax) (6 marks)
(iv) Automatic Ltd – amended budgeted corporation tax computation, together with brief
explanations, for the year ending 31 March 2020 (6 marks)
You should assume that the tax rates and allowances for the Financial Year to 31 March 2019 will
continue to apply for the foreseeable future.
(Total = 25 marks)
405
3 Fedora 39 mins
Fedora wants to improve the overall financial position of his family and his company, Smoke Ltd.
He is considering three possibilities: repaying a loan to the company, employing his wife, Wanda,
in the business, and selling a piece of land owned by the company.
The following information has been obtained from a telephone conversation with Fedora and from
client files.
Fedora:
 Fedora's only income is his annual salary of £80,000 from Smoke Ltd together with annual
taxable benefits of £6,600.
Smoke Ltd:
 Is wholly owned by Fedora
 Manufactures precision engineering tools
 Has a year end of 31 March
Fedora's plans:
 Repay an interest-free loan of £18,400 made to him by Smoke Ltd in February 2013
 Smoke Ltd to employ Wanda
 Smoke Ltd to sell part of the land surrounding its factory
Smoke Ltd to employ Wanda:
 Wanda would carry out duties currently performed by Fedora and would be paid an annual
salary of £20,000.
 Wanda's salary would represent an arm's length price for the work that she would perform.
 Fedora's salary would be reduced by £20,000 to reflect the reduction in the level of his duties.
 Wanda's only income is bank interest of £2,100 per year.
Smoke Ltd to sell land:
 The land is currently used by Smoke Ltd for parking vehicles.
 The land was purchased together with the factory on 1 April 2002 for £174,000.
 The land would be sold on 1 February 2020 for £22,000.
 The value of the factory together with the remaining unsold land on 1 February 2020 will be
£491,000.
 Smoke Ltd will use £19,000 of the sales proceeds to acquire engineering machinery in
March 2020.
Required
(a) Explain, with the aid of supporting calculations, the tax implications for both Fedora and
Smoke Ltd of the proposed repayment by Fedora of the loan from Smoke Ltd. (4 marks)
(b) Calculate the annual net effect on the total of the tax liabilities of Fedora, Wanda and Smoke
Ltd of Smoke Ltd employing Wanda under the arrangements set out above. (7 marks)
406
(c) Calculate the taxable gain arising on the sale of the land in the year ending 31 March 2020
on the assumption that any beneficial claim available is made. Explain in detail the beneficial
claim available, state the amount of the gain relieved and the manner in which any deferred
part of the gain will be charged in the future. (9 marks)
You should assume that the tax rules and rates for 2018/19 and Financial Year 2018 continue to
apply in subsequent years.
(Total = 20 marks)
Note. The following indexation factors should be used (where applicable);
April 2002 to February 2020 0.701
April 2002 to December 2017 0.583
An official rate of interest of 2.5% should be used.
407
408
409
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ACCA ATX (P6 BPP Course Notes)

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Advanced Taxation

Achievement Ladder Step 1 ............................................................................................................................. 105

Achievement Ladder Step 2 ............................................................................................................................. 107

11 Chargeable gains: an outline...................................................................................................................... 109

Achievement Ladder Step 3 ............................................................................................................................. 169

16 An introduction to inheritance tax ............................................................................................................... 171

Achievement Ladder Step 4 ............................................................................................................................. 213

19 Stamp taxes ............................................................................................................................................... 215

Achievement Ladder Step 5 ............................................................................................................................. 269

26 Groups and consortia ................................................................................................................................. 271

Achievement Ladder Step 6 ............................................................................................................................. 337

31 Answers to lecture examples...................................................................................................................... 339

Welcome to Advanced Taxation (ATX – UK)

Introduction to Advanced Taxation (ATX – UK)

Overall aim of the syllabus

Main capabilities of the syllabus

Links with other examinations

Taught Phase Aims

Achieving ACCA's Study Guide outcomes

A The UK tax system

B The impact of relevant taxes on various situations and courses of

B1 Taxes applicable to a given course of action and their impact Chapter

C Standard tax planning measures

D Communicating with clients, HMRC and other professionals

D1 Communication of advice, recommendations and information in the required Revision

Assessment methods and format of the exam

40% Knowledge 60% Application

Format of the Exam Marks

Section reference in the Study Text

Formula given in exam

Key skills required to pass

Each of these key skills is analysed on the following pages.

Skill 1 – Effective reading and planning

Skill 2 – Analysis of a question's requirements

Skill 3 – Time management

Skill 4 – Effective and professional communication

B C Skill 5 – Choosing appropriate calculations

How have the syllabus learning outcomes been examined?

Exam question reference

Types of income Personal allowances Qualifying interest

Exempt income Non-savings Savings Dividends

Tax @ Tax @ Tax @

1 Income tax computation 2018/19 (TX assumed

Income tax on NSI (20/40/45%) X

2 Personal allowances (TX)

Lecture example 1 Technique demonstration

Transferable personal allowance

4 Qualifying interest (TX)

Lecture example 2 Preparation question

5 Jointly owned assets (TX)

How have the syllabus learning outcomes been examined?

Types Tax relief Limit on contributions Lifetime allowance

Tax efficient investment products

Conditions Tax reliefs Conditions Tax reliefs

1 Introduction (TX assumed knowledge)

1.2 An individual may contribute to a number of different pension arrangements, subject to an

2 Method of giving relief – Personal schemes (TX)

3 Personal schemes – additional relief for higher and

Lecture example 1 Technique demonstration

4 Occupational schemes (TX)

4.2 Money purchase (defined contribution) schemes

4.3 Both types of scheme

5 Method of giving relief – Occupational pension