Course notes

ICAEW Professional Level

Tax Compliance
For exams in 2024

20

M3B

Tutor details
ii Introduction Tax Compliance

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Tax Compliance Introduction iii

1B Contents
Page

1 The ACA qualification and Tax Compliance (TC) vii

2 Accessing the First Intuition online content viii

1: Ethics 1

1 Fundamental principles, threats and standards in tax planning 2

2 Conflict resolution process 3
3 Disclosure of information 3
4 Conflicts of interest 4
5 Client acceptance and regulatory requirements 4
6 Disclosure and correction of errors 5
7 Anti-money laundering 6
8 Tax planning, avoidance and evasion 7
9 Examples of exam scenarios 8

2: Income tax computation 11

1 Charge to income tax 12

2 Computation of taxable income 12
3 Computing tax payable 14
4 Gifts to charity 17
5 Married couples and civil partners 18
6 Devolved taxes 19
7 Child benefit tax charge 19
8 Interest payments 20

3: Property income 23

1 Calculation of property income 24

2 Finance costs (interest) 28
3 Property losses 30
4 Rent a room relief 30

4: Pensions 33

1 Types of pension schemes 34

2 Contributing to a pension scheme 35
3 Receiving benefits from a pension scheme 37

5: Employment income 39

1 Taxation of earnings 40
2 Allowable deductions 41
3 Taxable and exempt benefits 44

6: Trading income (unincorporated businesses) 55

1 Badges of trade 56
2 Overview of the calculation of taxable trading profits 57
3 Adjustments to profits 58
4 Taxable trading profits – basis of assessment 63
iv Introduction Tax Compliance

7: Capital allowances 73

1 Introduction to capital allowances 74

2 Capital allowances on plant and machinery 75
3 Structures and buildings 83

8: Unincorporated trader losses 87

1 Introduction to trading losses 88

2 Loss relief in opening years (s.72) 90
3 Terminal loss relief (s.89) 92
4 Summary of loss relief options 94
5 Restrictions on the use of losses 94

9: Partnerships 97

1 Partnerships 98
2 Limited liability partnerships 101

10: The cash basis 103

1 Cash basis for small businesses 104

2 Cash basis for property businesses 106
3 Starting to use the cash basis 106
4 Ceasing to use the cash basis 108
5 Interaction with other taxes 108

11: Chargeable gains for individuals 111

1 Chargeable and exempt persons, assets and disposals 112

2 Computing a gain or loss 113
3 Capital gains tax payable by individuals 114
4 Relief for trading losses vs. gains 116
5 Married couples/civil partners 117
6 Connected persons 117
7 Disposals of shares and securities by individuals 118
8 Payment of CGT 122

12: Capital gains tax reliefs 125

1 Private residence and letting reliefs 126

2 Rollover relief 129
3 Gift relief for business assets 132
4 Business asset disposal relief / Investors’ relief 135

13: Overseas aspects of income tax and capital gains tax 139

1 Residence and domicile 140

2 Overseas aspects of income tax 142
3 Overseas aspects of capital gains tax 147

14: National insurance and further administrative matters 151

1 Classes and payment of national insurance contributions 152

2 Class 1 NICs 152
3 Class 1A NICs 153
4 Class 2 and Class 4 NICs 154
Tax Compliance Introduction v

5 Net disposable income 156

6 Maximum annual NI contributions 157
7 Class 1B contributions 158
8 Self-assessment payments on account 158
9 Apprenticeship levy 159

15: Inheritance tax – basic principles 161

1 Scope of Inheritance Tax (IHT) 162

2 Exempt transfers 162
3 Lifetime transfers 163

16: Inheritance tax – death estate and valuation 173

1 IHT on the death estate 174

2 Residence nil rate band (RNRB) 179
3 Transfer of nil rate band / residence nil rate band 180
4 Reduced rate for estates leaving 10% or more to charity 181
5 Valuation 183

17: Inheritance tax – reliefs and other aspects 187

1 Business Property Relief (BPR) 188

2 Overseas aspects of IHT 192
3 Administration of IHT 193
4 Interaction of IHT and CGT 194

18: Corporation tax 197

1 The charge to corporation tax 198

2 Calculating taxable total profits (TTP) 199
3 Corporation tax liability 204
4 Payment of corporation tax 207
5 Short accounting periods 209
6 Submission of corporation tax return 210

19: Chargeable gains for companies 213

1 Computing chargeable gains for companies 214

2 Disposals of shares and securities by companies 215
3 Substantial shareholding exemption (SSE) 218
4 Non-resident companies and chargeable gains 219

20: Additional aspects of corporation tax 221

1 Pension contributions 222

2 Research and development expenditure 222
3 Double taxation relief 224

21: Corporation tax losses 229

1 Trading losses 230

2 Non-trading losses 233
3 Carry forward of losses 234
4 Election deadlines 236
vi Introduction Tax Compliance

22: Groups 237

1 Group loss relief 238

2 Chargeable gains groups 242
3 Substantial shareholding exemption for groups 244

23: Value added tax 247

1 VAT: assumed prior knowledge 248

2 Single and multiple supplies 248
3 VAT groups 249
4 Partial exemption 250
5 VAT on property transactions 252
6 Capital goods scheme 253
7 Flat rate scheme – limited cost traders 254
8 Overseas aspects 255

24: Stamp taxes 259

1 Stamp duty 260

2 Stamp duty reserve tax 260
3 Stamp duty land tax 261

Solutions to interactive questions 265

Tax Compliance Introduction vii

1 The ACA qualification and Tax Compliance (TC)

There are 15 modules that can be taken in any order with the exception of the Case Study which you
must be attempt last. You must pass every exam (or receive credit) – there are no options. Once
qualified, all ICAEW Chartered Accountants have a consistent level of knowledge, skills and experience.

Professional Level
The six Professional Level modules build on the fundamentals and test students' understanding and
ability to use technical knowledge in real-life scenarios. Each module has a 2½ – 3 hour exam, which
are available to sit four times per year. These modules are flexible and can be taken in any order. The
Business Planning: Taxation and Business Strategy modules in particular will help students to progress
to the Advanced Level.
You’ll find that knowledge put into place in the Principles of Taxation paper will be revisited again on
the Tax Compliance paper.

Specification grid and Weightings for TC

TC aims to enable you to prepare tax computations for individuals and companies in straightforward
scenarios.
Weighting (%)
1 Ethics and law 5-10
2 Capital taxes 20-30
3 Income tax and NIC 30-40
4 Corporation tax 15-25
5 Indirect taxes 10-15
viii Introduction Tax Compliance

This grid provides guidance on the relative weighting between knowledge and skills:
Weighting (%)
Knowledge 65-75
Skills 25-35

Method of assessment
The Tax Compliance module is assessed as a 2.5 hour computer-based exam.
The exam will test each of the taxes on the syllabus as a discrete topic. Students may use the
permitted text(s) as detailed on the ICAEW website: [Link]/permitted texts.
The exam will consist of five questions:
(1) Ethics and Law (7 marks)
(2) VAT and stamp taxes (13 marks)
(3) CGT and IHT (25 marks)
(4) Corporation tax (20 marks)
(5) Income tax and NIC (35 marks)
The pass mark is 55%

2 Accessing the First Intuition online content

You have access to FIs online course which includes recorded lectures, question debriefs, your mock
exams and step by step guidance to help you succeed in the exam.
A link to FI Learn should have been sent to you by your centre, giving full access to the online content.
When you access the link for the first time you will be prompted to create a password. Please contact
your centre if you have not received the link to access the course.
If you are an online learner, it is important that you log in and listen to the introductory videos in the
getting started pod of the course. These videos explain the TC exam and the resources you have to
help you pass.
Good Luck with your studies!
The FI Team
 1

Ethics

Topics
(1) Fundamental principles, threats and safeguards
(2) Ethical conflict resolution
(3) Confidentiality and disclosure of information
(4) Conflicts of interest
(5) New client procedures and regulatory requirements for tax practices
(6) Disclosure and correction of errors
(7) Anti-money laundering
(8) Tax planning, tax avoidance and tax evasion

Learning Objectives
 Identify the five fundamental principles and guidance given in the IESBA Code of Ethics for
Professional Accountants and the ICAEW Code of Ethics as well as other relevant guidance,
including Professional Conduct in Relation to Taxation (PCRT), in relation to a tax practice with
regard to threats and safeguards, disclosure, conflicts of interest and confidentiality
 Identify the law and the guidance in the ICAEW Code of Ethics as well as other relevant
guidance, including Professional Conduct in Relation to Taxation (PCRT), with regard to new
client procedures, regulatory requirements for tax practices, exchange of client information
with HMRC, HMRC errors, money laundering, tax planning, tax avoidance and tax evasion
 Identify legal and ethical issues arising from tax work undertaken, including disengagement
procedures, and explain the significance of these issues and suggest appropriate actions or
responses
 2 1: Ethics Tax Compliance

1 Fundamental principles, threats and standards in tax planning

1.1 Fundamental principles
Professional accountants have a responsibility to act in the public interest as well as considering their
client or employer. The Codes require professional accountants to comply with the following five
fundamental principles:
Principle Definition
Integrity Being straightforward and honest in all professional and business
relationships, e.g. not promoting a position or opinion to the point
that objectivity may be compromised.
Objectivity Not allowing bias, conflict of interest or the undue influence of others
to override professional or business judgements.
Professional competence and A continuing duty to:
due care  Maintain professional knowledge and skill at the level required
 Act diligently in accordance with applicable technical and
professional standards
Confidentiality A duty to:
 Respect the confidentiality of information acquired as a result of
professional and business relationships;
 Refrain from disclosing such information without proper and
specific authority unless there is a legal or professional right or
duty to disclose; and
 Refrain from using such information for their personal advantage
or the advantage of third parties.
Professional behaviour Complying with relevant laws and regulations and avoid any action
that discredits the profession.

1.2 Threats to fundamental principles

Threat Definition / example
Self Interest A threat to objectivity / professional behaviour / integrity due to potential personal gain
Self-Review The threat to objectivity of the re-evaluation of previous work by the person who
performed the original work
Advocacy The threat to objectivity of advocating for a client (e.g. in a court case)
Familiarity The threat to objectivity of over-familiarity with a particular client
Intimidation The threat to objectivity of intimidation by or threats from a client

1.3 Safeguards
Examples of safeguards which may eliminate threats, or reduce them to an acceptable level, include:

Educational, training and experience requirements Professional or regulatory monitoring and

for entry into the profession disciplinary procedures
Continuing professional development requirements External review
Corporate governance regulations Effective, well publicised complaints systems
Professional standards An explicitly stated duty to report breaches of
ethical requirements
Tax Compliance 1: Ethics 3

1.4 PCRT: Standards for tax planning

Professional conduct in relation to taxation (PCRT) contains five ‘standards for tax planning’ which are
a supplement to (not a substitute for) the five fundamental principles:
Standard Definition
Client specific Planning should be specific to the client (with the client made aware of risks)
Lawful The accountant and client should act lawfully and with integrity – where
there is uncertainty in the law the client should be made aware and advice
should be sought
Disclosure & transparency Disclosures to HMRC should contain all relevant facts
Advising on tax planning Accountants should not be involved in planning arrangements that are
arrangements abusive (benefits not intended by Parliament, or highly artificial and exploit
loopholes)
Professional judgement & Accountants should document the rationale for judgements exercised in the
appropriate giving of planning advice
documentation

2 Conflict resolution process

 When initiating either a formal or informal conflict resolution process, a professional
accountant should consider the following factors (and document details/discussions/decisions):
(i) Relevant facts
(ii) Relevant parties
(iii) Ethical issues involved
(iv) Fundamental principles related to the matter in question
(v) Established internal procedures
(vi) Alternative courses of action
 The professional accountant should, if necessary, consult with:
– Other appropriate persons within the firm for help in obtaining resolution.
– Those charged with governance of the organisation such as the board of directors.
– The relevant professional body or legal advisors.
 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant should, where possible, refuse to remain associated with the matter
creating the conflict.
 The professional accountant may determine that, in the circumstances, it is appropriate to
withdraw from the engagement team or specific assignment, or to resign altogether from the
engagement or the firm.

3 Disclosure of information
3.1 When to disclose
A professional accountant may disclose confidential information if:
 Disclosure is permitted by law and is authorised by the client or the employer
 Disclosure is required by law, for example:
– Production of documents or evidence in the course of legal proceedings, OR
– Disclosure to the appropriate public authorities of infringements of the law (e.g. AML)
 4 1: Ethics Tax Compliance

 There is a professional duty or right to disclose, when not prohibited by law:

– to comply with the quality review of a member body or professional body
– to respond to an inquiry or investigation by a member body or regulatory body
– to protect the professional interests of a professional accountant in legal proceedings
– to comply with technical standards and ethics requirements

4 Conflicts of interest
4.1 Identify the conflict
 Accountants must identify situations that threaten objectivity due to a conflict of interest – e.g.
– A conflict between the firm and client
– A conflict between two clients (divorcing spouses, competing businesses)

4.2 Safeguards
Standard actions Safeguards if we continue to act for both parties
Notifying the client and other relevant parties of the Use of separate teams
conflict
Seeking consent of the relevant parties to act Information barriers + clear guidelines for teams
If consent is refused, ceasing to act for one of the Use of confidentiality agreements and regular
parties review of controls

4.3 Secondment to HMRC

 If a tax professional is seconded to HMRC any potential conflict of interest, actual or perceived,
needs to be carefully managed
 The secondee should serve the interests of HMRC whilst on secondment and steps should be
taken to remove them from any situation where there is scope for a conflict of interest between
HMRC and the seconding organisation.

5 Client acceptance and regulatory requirements

5.1 Steps when accepting a new client
(1) Confirmation of client’s identity and business interests (photo ID, VAT registration,
incorporation details, bank statements)
(2) Consideration of threats to the fundamental principles – e.g.:
– Threats to integrity and prof. behaviour of client’s activities
– Threats to prof. competence if e.g. overseas tax knowledge required
– Potential conflicts of interest
(3) Issuance of an engagement letter detailing:
– Scope of the engagement
– The accountant’s and client’s roles and responsibilities
– Authority to disclose to HMRC
Tax Compliance 1: Ethics 5

– The responsibility of the client for the accuracy of any returns (evidenced by signature
prior to submission)

5.2 Professional indemnity insurance

Every qualified member of the ICAEW who is in public practice and resident in the United Kingdom or
Republic of Ireland is required to have professional indemnity insurance (PII).
The ICAEW’s PII Regulations sets the minimum amount of indemnity as follows:
 Gross fee income < £600,000  2.5 x gross fee income (minimum of £100,000)
 Gross fee income ≥ £600,000  minimum of £1.5 million.
A member ceasing to be in public practice should ensure that cover remains in place for at least two
years. It is recommended that members consider maintaining cover for six years after they cease to
practise.

5.3 Data protection

 Collection and processing of a client’s data must comply with the General Data Protection
Regulation (GDPR):
– Individuals have to opt in
– Privacy notices must be clear
– Data must not be retained for longer than necessary
– Compliance is monitored by the Information Commissioner’s Office (ICO)
– A Data Protection Officer (DPO) must be appointed by an organisation handling data and
they must notify the ICO to be entered onto the register of data controllers
 Precautions must be taken to prevent unauthorised access to client data:

Passwords kept safe from unauthorised use and Unusual activity on the client’s HMRC online
changed regularly account reported immediately
IT equipment kept physically secure Awareness of how to deal with phishing emails
appearing to be from HMRC

 Breaches need to be reported to the ICO within 72 hours and tiered fines up to 4% of annual
global turnover (or €20m if higher) can be levied.

6 Disclosure and correction of errors

If client provides incorrect or misleading information or fails to provide information, leading to an
underpayment of tax, the following steps should be considered:
 Advise client to inform HMRC or request consent to do so on their behalf.
 Explain the consequences of a failure to disclose (the consequences of evasion)
 If the client refuses to co-operate, resign from your position as their adviser and inform HMRC
that you have resigned, but do not tell HMRC the reasons for resignation.
 Consider the need to submit a suspicious activity report to the National Crime Agency (see
money laundering below)
 6 1: Ethics Tax Compliance

7 Anti-money laundering
7.1 Offences and penalties
 Money laundering includes possessing, or in any way dealing with, or concealing, the proceeds
of any crime (including tax evasion).
 Where an accountant suspects that a client is involved in money laundering they should report
this to their Money Laundering Reporting Officer (MLRO) on an internal report or directly to
the National Crime Agency (NCA) in the form of a suspicious activity report (SAR).
 Note: disclosure without reasonable grounds for suspicion could lead to the accountant / the
firm being open to an action for breach of confidentiality
 Money laundering penalties include:
– Up to 14 years for the main offence
– Up to 5 years for failure to disclose
– Up to 2 years for tipping off or contravening systems requirements

7.2 Defences against failure to report

An employee has no suspicion of ML and hasn’t Where the ML is occurring outside the UK in a
received AML training from their employer country where it is not illegal
Where the knowledge or suspicion of ML came in Where there is a reasonable excuse
privileged circumstances (e.g. in discussions
between the client, their solicitor and the
accountant)

7.3 Anti-money laundering procedures

Businesses need to maintain the following procedures, in respect of all relevant business:
(a) Register with an appropriate supervisory authority (e.g. the ICAEW)
(b) Appoint a Money Laundering Reporting Officer (MLRO) and implement internal reporting
procedures
(c) Train staff to ensure that they are aware of the relevant legislation, know how to recognise and
deal with potential money laundering, how to report suspicions to the MLRO, and how to
identify clients
(d) Establish appropriate internal procedures
(e) Carry out customer due diligence on any new client and monitor existing clients
(f) Verify the identity of new clients and maintain evidence of identification and records of any
transactions undertaken for or with the client
(g) Report suspicions of money laundering to the National Crime Agency (NCA), using a suspicious
activity report (SAR)
(h) Records of client identification need to be maintained for five years after the termination of a
client relationship. Records of transactions also need to be maintained for five years.
Tax Compliance 1: Ethics 7

7.4 Economic crime (Anti-Money Laundering) Levy

Regulated entities, such as accountants, solicitors, banks and insurance companies, must pay an
annual fixed fee, based on their UK revenue of the previous accounting period:
Type of entity Annual UK revenue Annual levy
Small <£10.2 million Exempt
Medium £10.2 million-£36 million £10,000
Large £36 million-£1 billion £36,000
Very large >£1 billion £250,000

The levy, which is not deductible for corporation tax purposes, is payable by 30 September each year.

8 Tax planning, avoidance and evasion

Activity Definition Examples
Tax planning Legal tax reduction based on the intended  Making pension contributions
consequence of legislation  Using an ISA
 Claiming relief for R&D spend
Tax avoidance Legal tax reduction involving bending the  Certain loss schemes
rules and obtaining a tax advantage not  Use of circular transactions
intended by Parliament
Tax evasion Illegal reduction of tax by seeking to  Failing to notify HMRC of taxable
mislead HMRC income
 Punishable by penalties, with serious  Understating income / overstating
cases (esp. those involving fraud) expenditure
subject to criminal prosecution
 Falls within the definition of money
laundering (see later)

8.1 Abusive avoidance

The General Anti-Abuse Rule (GAAR) now exists to remove the tax advantages gained from abusive
avoidance. HMRC have several signposts to flag abusive avoidance:
 It sounds too good to be true
 Tax results are out of proportion with the commercial or economic risk or activity
 Artificial or contrived arrangements, or circular money flow
 Offshore entities or tax haven countries are involved for no good reason
 Secrecy or confidentiality agreements exist
 The arrangement has a scheme registration number assigned by HMRC

8.2 Failure to prevent the facilitation of tax evasion

Businesses are required to put prevention procedures in place to mitigate the risk of tax evasion
facilitated by an employee / associate of the business. These include:
(1) Undertaking a risk assessment to identify the risks of facilitation of tax evasion and the potential
gaps in the existing control environment;
 8 1: Ethics Tax Compliance

(2) Introducing any changes necessary to ensure robust procedures are in place preventing
employees and associates from engaging in or facilitating tax evasion;
(3) Securing top level commitment from the company’s board and/ or senior executives about the
risks of exposure to the offences and the need for the business to respond to the offences;
(4) Performing due diligence;
(5) Communicating the offences, including training on tax evasion and the offences; and
(6) Monitoring and reviewing the procedures

8.3 Data analytics and making tax digital for business

 HMRC is increasingly requiring more detailed information to support tax returns. It can subject
this data to advanced analysis to identify potential evasion.
 Examples of this include:
– VAT returns under Making Tax Digital – has reduced tax gap
– Real time information for PAYE – more accurate information available
– Making tax digital for business (MTDfB) – returns pre-populated with info from banks etc
– Making tax digital for income tax (from 2026/27)

9 Examples of exam scenarios

In the exam students will be expected to provide written answers to ethical questions:
No. Ethical issues Topics to include in an exam answer
1 A client’s spouse arrives in the
office and asks for information
about his wife’s tax return as she
does not understand financial
matters
2 A client asks you to massage the
figures in his tax return in
exchange for an ongoing working
relationship

3 You receive a request from

HMRC to disclose information
which you hold about the client

4 HMRC issue a statutory request

for information which you hold
Tax Compliance 1: Ethics 9

No. Ethical issues Topics to include in an exam answer

5 Secondment of a tax practitioner
to HMRC

6 Advising 2 business partners on a

transaction where one proposes
to buy out the interest of the
other

7 Client has received an over

payment from HMRC

8 Client refuses to disclose a

taxable receipt

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you identify the most relevant fundamental principle which applies in a particular
scenario?

Do you know when a professional accountant has a duty to disclose information?

Can you identify a conflict of interest and set out appropriate safeguards which could
be put in place to bring the threat to an acceptable level?

Do you know the procedures to follow before taking on a new client?

Can you list precautions which should be taken to prevent unauthorised access to
client information on computer or online?

Do you know the actions to be taken where HMRC makes an error in a client’s favour?

Can you set out procedures which should be followed to comply with money
laundering regulations?

Can you identify whether an action is tax planning, tax avoidance or tax evasion? Do
you know the consequences?
10 1: Ethics Tax Compliance
 11

Income tax computation

Topics
(1) Charge to income tax
(2) Computation of taxable income
(3) Computing tax payable
(4) Gifts to charity
(5) Married couples and civil partners
(6) Devolved taxes
(7) Child benefit tax charge
(8) Interest payments

Learning Objectives
 Calculate taxable savings, income from property, dividend income, taxed income and
investment income
 Calculate total taxable income and the income tax payable or repayable for employees,
company directors, partners and self-employed individuals
12 2: Income tax computation Tax Compliance

1 Charge to income tax

1.1 Taxable persons
Income tax is charged each year on:
 Individuals
 Personal representatives (executors and administrators)
Children < 18 are taxable persons too, but if the income is generated by a gift from a parent it is
treated as the income of the parent if it exceeds £100 per year.

1.2 Chargeable income

The main types of chargeable income are:
 Income from employment
 Income from trading
 Income from renting out property
 Income from investments such as interest on loans, bank and building society accounts
 Income from investments such as dividends
 Income from other sources (pensions income, some social security benefits, income from casual
work)

1.3 Exempt income

Some income is specifically exempt from income tax including the following:
 Interest on National Savings Certificates
 Income (interest or dividends) from Individual Savings Accounts (ISAs, sometimes called NISAs)
 Betting, competition, lottery and premium bond winnings
 Some social security benefits such as housing benefit and child benefit
 First £7,500 of gross annual rents (rent a room scheme)
 Scholarships
 Income tax repayment interest
 Universal Credit
 Apprenticeship bursaries paid to care leavers
 Payments made under compensation schemes (eg the Windrush Compensation Scheme)

2 Computation of taxable income

2.1 Income taxed at source
 All income must be included in the income tax computation gross of any tax levied at source.
 Relief is then given for tax already suffered by deducting it when calculating tax payable.
Tax Compliance 2: Income tax computation 13

 For the TC exam, the only types of income that may be taxed at source are:
– Employment income (PAYE deducted at source)
– Overseas income (foreign tax potentially deducted at source) – see chapter 13

2.2 Types of income

Income is assigned to one of three categories for income tax purposes (with different tax rates applied
to income in each category):
Non-Savings Income Savings Income Dividend Income
Types of income Employment income Interest income from Dividends from companies
Trading income investments
Property income
Pension income
Miscellaneous income

2.3 Personal allowance

KEY TERM
Net Income: The total chargeable income before deducting the personal allowance.
Taxable income: Net income after deduction of the personal allowance.

 UK resident individuals are entitled to an annual personal allowance (tax-free amount of

income).
 The personal allowance for 2023/24 is £12,570.
 This is set against income in the most tax efficient order  generally vs. non-savings income,
then vs. savings income and then vs. dividend income.
 No carry forward or carry back of unused personal allowance is allowed
 The personal allowance is reduced by £1 for every £2 of income a person’s adjusted net income
exceeds £100,000.
– Hence, a person with adjusted net income of ≥ £125,140 is not entitled to any personal
allowance

KEY TERM
Adjusted net income (ANI): Net income less gross personal pension contributions and gross
Gift Aid contributions

 A blind person's allowance is available which increases the personal allowance by £2,870 in
2023/24. This can be transferred to the taxpayer’s spouse/ civil partner if the recipient cannot
use it.
14 2: Income tax computation Tax Compliance

3 Computing tax payable

3.1 Example Income Tax Schedule
Below is an example 2023/24 income tax calculation for an individual with a variety of different
sources of income:
Non-Savings Savings Dividend Total
£ £ £ £
Trading Income 10,000 10,000
Employment Income 45,000 45,000
Property Income 15,000 15,000
Bank Interest 10,000 10,000
Dividends received 8,000 8,000

(1) Total Income 70,000 10,000 8,000 88,000

Less reliefs:
Qualifying interest payments (Ch. 2) (500) (500)
Trading loss relief (Ch. 8) (2000) (2,000)

(2) Net Income 67,500 10,000 8,000 85,500

Less: Personal Allowance (12,570) (12,570)
(3) Taxable Income 54,930 10,000 8,000 72,930
Taxed @ 20% 37,700 7,540
Taxed @ 40% 17,230 6,892
Taxed @ 0% (Savings NRB) 500 0
Taxed @ 40% 9,500 3,800
Taxed @ 0% (Dividend NRB) 1,000 0
Taxed @ 33.75% 7,000 2,363

(4) Tax Liability 20,595

Less: Taxed at source: PAYE (6,500)
(5) Tax Payable 14,095

3.2 Income tax rates

When calculating the income tax liability, tax on the three types of income, the rates are applied to
cumulative income and must be calculated in the following order:
(1) Non-savings income
(2) Savings income
(3) Dividend income
These three types of income are taxed as follows:

Non-savings income
 The first £37,700 (basic rate band) of taxable income is taxed at 20%.
 Excess income up to £125,140 is taxed at 40% (higher rate band).
 Income over £125,140 is taxed at 45% (additional rate band).
Tax Compliance 2: Income tax computation 15

Savings income
 A starting rate of 0% applies to savings income within the first £5,000 of taxable income.
 In addition, a savings Nil Rate Band applies to basic rate and higher rate taxpayers (this is
applied after the starting rate of 0% described above):
 £1,000 for basic rate taxpayers  £500 for higher rate taxpayers.
 The savings income NRB counts towards the usage of the basic rate and higher rate bands.
 Savings income in excess of the starting rate and savings income NRB is taxed in the same way
as non-savings income (i.e. at 20%/40%/45%).

Dividend income
 There is a £1,000 dividend Nil Rate Band (not impacted by your level of income)
 Dividends above the dividend NRB but in the basic rate band are taxed at 8.75%.
 Excess dividends are taxed at 33.75% (higher rate) or 39.35% (additional rate).
 The dividend NRB counts towards the usage of the basic rate and higher rate bands.

3.3 Summary of income tax rates

Non-Savings Savings Dividends

Additional Rate Band 45% 45% 39.35%

£125,140

Higher Rate Band 40% 40% 33.75%

£37,700
Basic Rate Band 20% 20% 8.75%

3.4 Computing tax payable/repayable

 The final stage of the income tax computation is to calculate tax payable / repayable.
 This is done by deducting any tax paid at source (e.g. PAYE) from the income tax liability.
16 2: Income tax computation Tax Compliance

INTERACTIVE QUESTION: INCOME TAX FOR SOMEONE WITH LITTLE NON-SAVINGS INCOME

Evie receives the following income in 2023/24:

 Property income £13,150
 Building society interest £51,000
Requirement
What is Evie’s income tax liability for 2023/24?
SOLUTION

INTERACTIVE QUESTION: INCOME TAX PAYABLE FOR A HIGH EARNER

Elise receives the following income in 2023/24:

 Employment income £95,876 (PAYE deducted £25,800)
 Bank interest £10,000
 Dividends from UK companies £7,500
Requirement
What is Elise's income tax payable for 2023/24?
SOLUTION
Tax Compliance 2: Income tax computation 17

4 Gifts to charity
4.1 Gift aid
 Income tax relief is given for donations to UK registered charities
 HMRC gross up the donation by 100/80 (by paying the net donation × 20/80 to the charity).
 To obtain higher / additional rate relief, the taxpayer extends the basic rate band by the gross
donation (adding the gross donation to the basic rate band and higher rate band limits)
 An election can be made to carry a gift aid donation back to the prior tax year (the election
deadline is 31st January following the end of the prior tax year).

INTERACTIVE QUESTION: GIFT AID

In 2023/24, Roz has property income of £170,000 and makes a cash donation of £1,600 to charity
under the Gift Aid Scheme.
Requirement
What is Roz's income tax liability for 2023/24?
SOLUTION

4.2 Gifts of assets to charity

 A deduction is given vs total income if the whole of a shareholder’s interest in qualifying shares
and securities is given / sold at undervalue to a charity.
 The value of the deduction = market value of the shares + costs of disposal less consideration
paid by the charity.
 Qualifying shares and securities include:

Shares / securities listed/dealt on stock exchanges Shares in an open-ended investment company

Units in a unit trust Holdings in foreign collective investment
schemes
18 2: Income tax computation Tax Compliance

4.3 Payroll giving scheme

 Employees can donate to charity through their employer’s payroll giving scheme.
 The employer deducts the donation directly from the employee's income, and income tax is
then calculated on the remaining employment income, which provides tax relief at the
employee's highest tax rate.

5 Married couples and civil partners

5.1 Independent taxation and joint ownership
 Every individual is treated as a separate taxable person who is liable to income tax on their own
income.
 Income from jointly owned property (e.g. a jointly owned property which is rented out) is
shared equally between the spouses for tax purposes by default.
 A declaration must be made for the taxation of income from jointly held property to be based
on actual % ownership.
 Notice of the declaration must be sent to HMRC within 60 days of the declaration. A declaration
cannot be made in respect of a jointly owned bank or building society account.

5.2 Marriage allowance

 In 2023/24 a spouse or civil partner may elect to transfer up to £1,260 of their personal
allowance to their spouse/civil partner. This is only possible if both:
(i) The transferor spouse has no tax liability or is a basic rate taxpayer after the reduction
(ii) The recipient spouse is a basic rate taxpayer
 Relief is given by reducing the tax liability of the recipient at the basic rate.

INTERACTIVE QUESTION: MARRIAGE ALLOWANCE

Sally and her civil partner, Josie are both 40. In 2023/24 Sally has a part-time job earning £5,000 and
no other income. Sally made a marriage allowance election. In 2023/24 Josie had employment income
of £20,000.
Requirement
What is Josie’s income tax liability for 2023/24?
SOLUTION
Tax Compliance 2: Income tax computation 19

6 Devolved taxes
 Tax rates and bands for savings and dividend income are the same across the UK.
 The Scottish Parliament has the power to set its own rates and bands for income tax and,
although Scottish income tax has different bands and rates for non-savings income, it has the
same personal allowance as England.
 In addition, the Welsh Government has the power to set the income tax rates payable by Welsh
citizens, but in 2023/24 the rates and bands are the same as for English taxpayers.
 Only an awareness of devolved taxation is examinable – calculations are not required.

7 Child benefit tax charge

The child benefit rate is £1,248 p.a. for the eldest (or only) child and £827 p.a. for each other child.
 An income tax charge will apply if a taxpayer in receipt of Child Benefit has adjusted net income
> £50,000 in a tax year.
 The charge will be 1% of the Child Benefit amount for each £100 of income between £50,000
and £60,000  if ANI ≥ £60,000 the tax charge is 100% of the benefit!
 If both partners have income over £50,000, the partner with the higher income is liable for the
charge.
 The tax charge is added in at arriving at income tax liability.

WORKED EXAMPLE: CHILD BENEFIT TAX CHARGE

Sara and Terry Evans have two children and receive Child Benefit. Sara is a stay at home mum with
minimal income, while Terry runs his own business. His net income during 2023/24 was £57,589, and
he made gross Gift Aid donations of £400 in the year.
Requirement
What is the Child Benefit tax charge on Terry?
SOLUTION
£ £
Child benefit: £1,248 + £827 2,075

Adjusted net income (£57,589 - £400) 57,189

Less: threshold (50,000)
Excess 7,189

÷ £100 (round down) 71

Charge: 71%× £2,075 1,473 This will be added to Terry’s
2023/24 income tax liability
20 2: Income tax computation Tax Compliance

8 Interest payments
Interest payments made during a tax year on loans taken out by a taxpayer for the following purposes
are deductible from their total income:

To buy plant or machinery for a partnership (i) To invest in or lend to a partnership

To buy plant or machinery for employment To buy shares in or lend money to a co-operative (if
purposes (i) you are an employee)
To buy an interest in: To pay inheritance tax (iii)
 A close company (ii)
 An employee-controlled company

(i) Interest qualifies for 3 years after the tax year the loan was taken out
(ii) A close company is controlled by ≤ 5 shareholders or by shareholder-directors. The
taxpayer must be a manager or director of the company or own ≥ 5% of its shares
(iii) Interest paid by the personal representatives qualifies for 12 months

WORKED EXAMPLE: INTEREST PAYMENTS

Arthur had the following income and payments for 2023/24:

£
Salary 52,800
Dividends received 750
Gift Aid paid 912
Interest paid 3,500
The interest paid of £3,500 is made up of £3,000 on the loan to purchase Arthur's house, and £500 to
purchase shares in Marco Ltd, an employee controlled company.
Requirement
Compute Arthur's income tax liability for 2023/24.
SOLUTION
Non-savings Dividend
income income
£ £
Employment income 52,800
Dividends 750
52,800 750
Qualifying interest payment (500)
Net income 52,300 750
Less: PA (12,570)
Taxable income 39,730 750
Tax Compliance 2: Income tax computation 21

Tax
£ £
38,840 × 20% (W1) 7,768
890 × 40% 356
39,730
750 × 0 % (dividend nil rate band) 0
40,480

Tax liability 8,124

Note: A loan to purchase a house is not a qualifying purpose so the interest payment of £3,000 is not
deductible.
WORKINGS
The basic rate band is extended by the amount of the gross Gift Aid payments.
£
Basic rate band 37,700
Gift aid paid (£912 × 100/80) 1,140
Revised basic rate band 38,840

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know which types of income are chargeable and which are exempt?

Do you know the income tax computation pro forma?

Do you understand how tax relief is obtained on gifts to charity via gift aid and the
payroll giving scheme?

Can you identify which types of interest payments qualify for a deduction from total
income?

Do you know how a married couple’s/ civil partners’ joint income is split? Can you
identify when a marriage allowance election should be made?
22 2: Income tax computation Tax Compliance
 23

Property income

Topics
(1) Property income
(2) Finance costs
(3) Property losses
(4) Rent a room relief

Learning Objectives
 Describe and calculate the principal aspects of the taxation of property income, including:
– Interest relief
– Rent-a-room relief
– The application of the cash basis
24 3: Property income Tax Compliance

1 Calculation of property income

The main type of property income for individuals is rental income from furnished and unfurnished
property.
Property income can be calculated in one of three ways:
(1) Rental income less the property allowance
(2) Rental income received less allowable expenditure paid (cash basis)
(3) Rental income receivable less allowable expenditure payable (accruals basis)

1.1 The property allowance

 An individual has a property allowance of £1,000 per tax year.
– If the property allowance is used, the first £1,000 of rental receipts in the tax year are tax
free, but no relief is available for allowable expenditure or finance costs
– If the property allowance is not used, the taxpayer is taxed on rental receipts less
allowable expenses paid.
Rental income ≤ £1,000 Rental income > £1,000
Property allowance used No taxable property income Rental receipts X
Property allowance (1,000)
Property income X
Property allowance not used Rental receipts X
Allowable expenditure (X)
Property income / loss X / (X)

 Consequently, taxpayers with allowable expenditure > £1,000 or > their rental income should
not use the property allowance

EXAM SMART
In the exam, you should assume that the property allowance will be used if a taxpayer has
property receipts ≤ £1,000.
If property receipts exceed £1,000 you do not need to prepare both calculations, but you
should state that you have considered which treatment will give the favourable tax
position if you decide to use the property allowance.
Tax Compliance 3: Property income 25

WORKED EXAMPLE: PROPERTY ALLOWANCE

Romesh let out a caravan he owned for 24 weeks during 2023/24 for £100 per week. His allowable
property expenses for the year were £525.
Requirement
Calculate Romesh’s taxable property income.
SOLUTION
Romesh’s taxable property income will be:
£
Rent received £100 × 24 2,400
Less: allowable property expenses (525)
Taxable property income 1,875

As Romesh’s allowable rental expenses (£525) are less than £1,000 he should elect to deduct an
amount equal to the property allowance of £1,000.
£
Rent received £100 × 24 2,400
Less property allowance (1,000)
Taxable property income 1,400

1.2 The cash basis

 A property business with property receipts not exceeding £150,000 in a tax year will use the
cash basis as the default method of calculation of the property income.
Rental receipts X
Allowable expenditure paid (X)
Property income / loss X / (X)

 Income tax is therefore payable on rental income received during the tax year less allowable
rental expenses actually paid during the year.
 An election can be made to use the accruals basis if desired. This election has to be made each
year.

EXAM SMART
For the purpose of the examination, where property receipts do not exceed £150,000
assume the cash basis applies unless you are specifically told otherwise.

Allowable expenses
Allowable expenses include the following:
 Legal, professional and administrative costs
 Interest paid eg on loans to buy or improve non-residential property
 Rates and taxes paid by the landlord eg council tax, water rates
 Ancillary services provided by the landlord eg cleaning, gardening
26 3: Property income Tax Compliance

 Insurance for the property

 Replacement of domestic items such as furniture and furnishings – see later
 Repairs and maintenance eg painting, redecoration
 Fixed rate reductions for motor vehicles used in the property business (£0.45/mile for the first
10,000 miles and £0.25/mile thereafter). If this is claimed, then no other deduction can be made
in respect of motor expenses.
 If a property is partly owner-occupied and partly let, expenses relating to periods of owner-
occupation are not allowable.

1.3 The accruals basis

 Property businesses with receipts > £150,000 will use the accruals basis to calculate their
property income (rental income receivable during the tax year less allowable rental expenses
accrued)

Rent receivable X
Allowable expenditure payable (X)
Property income / loss X / (X)

INTERACTIVE QUESTION: PROPERTY INCOME – CASH/ ACCRUALS BASIS

Susan rents out a house. Until 30 June 2023, rent is £1,250 per calendar month, payable in arrears on
the last day of each month. Thereafter the rent is increased to £1,500 per month. The rent is usually
paid promptly, but the payment due on 31 March 2024 was not received until 10 April 2024.
Susan paid an insurance premium of £1,600 on 1 January 2023 for the year to 31 December 2023 and
an insurance premium of £1,800 on 1 January 2024 for the year to 31 December 2024.
Susan had other allowable expenses of £6,020 accrued and paid in 2023/24.
Requirement
(a) Calculate Susan's taxable property income for 2023/24 assuming that no election is made.
(b) What would Susan’s taxable property income be if she elected to use the accruals basis?
SOLUTION
Tax Compliance 3: Property income 27

If more than one property is let, all income and expenditure is pooled to calculate a single amount of
taxable property income.

Starting / ceasing to use the cash basis

If an individual starts or ceases to use the cash basis, their property income calculation will require
adjustments to ensure that receipts / payments are only taxed / deducted once for tax purposes. This
is covered in more detail in Chapter 10.

Bad debt relief

 If the cash basis is being used to calculate the taxable property income then rental income is not
taxed until a tenant actually pays giving automatic bad debt relief.
 If, however, the rental income is being taxed on an accruals basis then if a tenant does not pay
the rent, the income is still taxable. If the debt remains unpaid and the debt is written off by the
landlord, relief is given for the amount written off.

1.4 Capital expenditure

Capital allowances
 Capital allowances are only available on the cost of plant and machinery used for the repair or
maintenance of the property.

Domestic items – replacement relief

 The landlord of a residential property can treat the cost of replacing domestic items, to be used
solely by the tenant, as an allowable expense.
 Such items include furniture, furnishings, household appliances (eg washing machines) and
kitchenware.
 Only the cost of a replacement is allowed, not the purchase of the original item  the amount
of the deduction is:
– The amount spent on the replacement item, but not including amounts that represent an
improvement (unless due to technological advancement), LESS
– Proceeds from the sale of the old item PLUS
– Costs of disposal of the old item
 Fixtures which are integral to the property and not normally removed if sold (eg baths,
washbasins, toilets, fitted kitchen units) and also boilers do not qualify for this specific relief, but
the replacement cost for these items would be deductible in any case as a repair to the property
itself.
28 3: Property income Tax Compliance

INTERACTIVE QUESTION: ALLOWABLE EXPENDITURE

Lee owns a flat which he lets out for the whole tax year, at a weekly rental of £125.
Lee had the following expenditure during the year:
£
Repairs 460
Washer-dryer machine (note) 400
Council tax 680
Water rates 255
Redecoration 500
Insurance 240
Gardening and cleaning 440
Advertising for new tenant 25
The washer-dryer machine replaced a washing machine which was scrapped. Lee paid the delivery
company £10 to remove the old washing machine, which is not included in the above expenditure. Lee
could have purchased a similar machine for washing only, for £300.
Requirement
Calculate Lee's taxable property income.
SOLUTION

2 Finance costs (interest)

 Relief for finance costs on letting of residential properties is restricted to the basic rate of
income tax.
 This applies to mortgage interest, interest on loans to buy furnishings and fees incurred when
taking out or repaying mortgages or loans.
– Note: If a taxpayer receives relief for finance costs under this restriction, the property
allowance will not be available.
 In 2023/24 relief is given as a tax reducer at 20% of the lower of:
– The finance costs for the year plus any finance costs brought forward
– Property income for the tax year (after using any brought forward property losses)
– Adjusted total income = taxable non-savings income
 The tax reduction can't be used to create a refund.
 If the deduction is limited by the property income or adjusted total income then the remaining
finance costs not utilised are carried forward to calculate the basic rate reduction in the
following years.
Tax Compliance 3: Property income 29

WORKED EXAMPLE: PROPERTY INCOME – FINANCE COSTS (INTEREST)

Frederico has employment income of £24,000 and rental income of £10,000 in 2023/24. He pays
mortgage interest of £8,000 and also has £3,000 of other allowable property expenses.
Requirement
Calculate Frederico’s income tax due for 2023/24.
SOLUTION

£
Employment income 24,000
Property income (W1) 7,000
31,000
Less: PA (12,570)
Taxable income 18,430

Tax
£
18,430 × 20% 3,686
Less 20% tax reduction for finance costs (W2)
20% × £7,000 (1,400)
Income tax due 2,286

W1
Rental income 10,000
Allowable expenses (3,000)
Property income 7,000

W2
The tax reduction is 20% of the lower of:
 The finance costs for the year plus any finance costs brought forward (£8,000)
 Property income for the tax year (after using any brought forward property losses) (£7,000)
 Adjusted total income – taxable non-savings income (£31,000 – £12,570 = £18,430)
A balance of £1,000 (£8,000 – £7,000) finance costs will be carried forward and added to the
proportion of the finance costs in 2024/25 entitled to 20% tax reduction
30 3: Property income Tax Compliance

3 Property losses
 If a loss arises, there is no taxable property income in that tax year.
 The loss is carried forward and set, as far as possible, against the first available future property
income.

4 Rent a room relief

Rent a room relief is available if an individual lets out part of their home furnished.

Rental income ≤ £7,500 per tax year:

 The income and expenses arising in relation to the letting are ignored for income tax;
 Similarly, no property losses arise unless the taxpayer elects to set aside the rent a room rules
for a particular tax year and so claim a property loss.

Rental income > £7,500 per tax year:

 The normal property income rules usually apply;
 Alternatively, the taxpayer can elect to be assessed under the rent a room rules on the gross
rents in excess of the rent a room limit of £7,500.
Rent a room relief used Rent a room relief not used
Rental receipts X Rental receipts X
RARR (7,500) Allowable expenditure (X)
Property income X Property income / loss X / (X)

EXAM SMART
For the purpose of the examination, where there are two possible treatments you do not
need to prepare two calculations, but you should state you have considered which option
gives the most favourable tax position.

 Where two or more people share a home, each has rent a room relief of £3,750 (£7,500/2). The
limit is always halved like this for each co-owner, even if there are three or more co-owners.
 If an individual receives income eligible for rent a room relief then this income is treated as a
separate rental business and the individual cannot also claim the property allowance on this
rental income. The income eligible for rent a room relief will also not be included in the rental
income figure used to determine if the income exceeds the property allowance.
Tax Compliance 3: Property income 31

WORKED EXAMPLE: RENT A ROOM RELIEF

Gina let out a room in her house at a rent of £250 a week throughout the tax year. Her allowable
expenses for the year were £8,350.
Requirement
Show the tax position for Gina if:
(a) the normal property income rules apply; or
(b) she has previously made an election to use the rent a room rules.
Based on your computations, what advice would you give to Gina?
SOLUTION
(a) Normal property income rules
£
Rent received £250 × 52 13,000
Less: expenses (8,350)
Taxable property income 4,650

(b) Rent a room rules

£
Gross rents 13,000
Less: rent a room limit (7,500)
Taxable property income 5,500

Gina should withdraw her election to use the rent a room rules, as the normal property income rules
give a lower taxable amount of property income.

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you identify when to calculate property income using the property allowance,
cash basis or accruals basis and do you understand what these are?

Do you know how tax relief is obtained for finance costs?

Do you know how tax relief is obtained for capital expenditure on rental properties?

Can you deal with a property loss?

Do you know how rent a room relief works?

32 3: Property income Tax Compliance
 33

Pensions

Topics
(1) Pension schemes
(2) Contributing to a pension scheme
(3) Receiving benefits from a pension scheme

Learning Objectives
 Explain the alternative ways in which an individual can provide for retirement
 Calculate the tax relief available on pension contributions
34 4: Pensions Tax Compliance

1 Types of pension schemes

1.1 Pensions overview
It is important to understand the overview of the tax implications at the different phases of saving for
retirement via a pension scheme:
Phase Tax implications
(1) Contributions are made into an Tax relief is available when the contributions are made
individual’s pension fund
(2) The money in the fund is invested Income and gains in the pension fund are exempt from
in assets taxation
(3) Benefits are accessed from the Individuals are taxed when they access benefits from the
pension fund pension fund upon retirement

1.2 Types of pension scheme

In the TC exam you will meet two different types of pension scheme:
Occupational schemes Personal schemes
Description Pension scheme run by an employer for a group of A pension scheme run by a pension
employees provider and open to any individual to
join
Types of Defined contribution (money purchase) Only defined contribution schemes
scheme Pension benefits linked to value of investments are available
made with the pension contributions
Defined benefit
Pension benefits linked to level of earnings of the
scheme member (e.g. final salary pension schemes)
– very rare now.

1.3 Automatic enrolment

Employers must automatically enrol all eligible jobholders in a qualifying pension scheme.
Eligible jobholders are those who:
– Work in the UK
– Are not already in a suitable workplace pension scheme
– Are ≥ 22 years old and under State Pension age
– Earn > £10,000 per year
If an individual earns between £6,240 and £10,000 they can ask to join the scheme in which case the
employer cannot refuse and must make contributions on the employee’s behalf.
The minimum level of pension contributions under auto enrolment is 8% of qualifying earnings, of
which the employer’s contribution must be at least 3%. The employee and employer can choose to pay
more than the minimum contribution.
Qualifying earnings are those between the lower and upper earnings limits (£6,396 and £50,270
respectively for 2023/24).
Tax Compliance 4: Pensions 35

INTERACTIVE QUESTION: AUTO ENROLMENT

Dandelion Ltd (D Ltd), a company based in England, takes on three new employees in May 2024:
 Julie is 20 and is employed as a junior manager at the head office on a salary of £24,000 a year.
 Pavel is 43 and employed as a sales rep in North-West England on a salary of £30,000 with
additional commission of 5% on any sales over a target level.
 Lolita is 58 and employed as a part-time call handler in the head office on a salary of £6,000.
Requirement
Which of these employees must be automatically enrolled in a qualifying pension scheme?
SOLUTION

2 Contributing to a pension scheme

2.1 Who can make contributions attracting tax relief?
An individual, who is an active member of a pension scheme registered with HMRC and under the age
of 75, is entitled to tax relief on their contributions to the scheme.

2.2 Tax treatment of pension contributions

The treatment of pension contributions made into a pension scheme is dependent on 2 things:
– The type of scheme (occupational or personal)
– Who is making the contribution (the individual or their employer)
Occupational Scheme Personal Scheme
Relief for  Net pay arrangement (contribution  HMRC pay in an extra 20% (gross up
individual’s deducted from employment income contribution by 100/80) – this is called
contributions before income tax calculated) ‘relief at source’
 The contribution also reduces  The individual’s income tax bands are
adjusted net income extended by the grossed-up
contribution  this saves an extra
20/25% of tax for higher/additional
rate taxpayers
Treatment of  The employer contributions are exempt benefits for the employee
employer  The employer contribution will be deductible from the trading profits of the
contributions employer (see chapter 6)
36 4: Pensions Tax Compliance

Occupational Scheme Personal Scheme

Limit on The maximum amount of annual tax-relievable contributions by an individual is the
individual’s higher of:
gross  £3,600
contributions  Relevant earnings of the individual (employment income + trading profits)
No relief is given for contributions in excess of these limits (and they do not count
towards the annual allowance limit – see later)

WORKED EXAMPLE: TAX TREATMENT OF PENSION CONTRIBUTIONS

Tabitha has earnings of £70,000 in 2023/24. She is a member of both an occupational and personal
pension scheme. She makes a contribution of £3,500 into her occupational pension scheme and pays a
personal pension contribution of £7,200 (net). Her employer makes a contribution of £2,100 into her
occupational scheme. She has no other chargeable income.
Requirement
Calculate Tabitha's tax liability for 2023/24.
SOLUTION
Income tax liability
£
Employment income (W1) 66,500
Less: Personal Allowance (12,570)
Taxable income 53,930

Tax
£ £
37,700 × 20% 7,540
9,000 (W2) × 20% 1,800
7,230 × 40% 2,892
53,930
Tax liability 12,232

W1
Tabitha’s employment income is reduced by her occupational scheme contribution to £66,500 (£70k -
£3.5k). The employer contribution is not taxable.
W2
Tabitha’s basic rate band and higher rate band limits are increased by the gross personal pension
contribution of £9k (£7.2k × 100/80) to £46,700 and £134,140 respectively.

2.3 Annual allowance

 The annual allowance is the overall limit on gross tax-relievable contributions into an
individual’s pension fund per tax year.
 The amount of the annual allowance is £60,000 per annum (£40,000 before 2023/24) and
unused annual allowance can be carried forward for three tax years.
 If the individual is a high earner, then their annual allowance entitlement is reduced.
Tax Compliance 4: Pensions 37

 If the total gross individual + employer contributions made exceed the available annual
allowance, an annual allowance charge arises which taxes the excess contribution as additional
income in the individual’s income tax computation.

EXAM SMART
For the purpose of the examination, you are expected to have an awareness of the annual
allowance charge but you will not be tested on this numerically.

3 Receiving benefits from a pension scheme

3.1 Drawing a pension
When an individual retires (minimum age 55, rising to 57 from 6 April 2028), they can access their
pension fund and use (‘vest’) the funds to:
 Take out a cash lump sum
 Provide pension income (annuity / drawdown)
The individual may alternatively decide to leave the funds in the pension scheme and withdraw cash
amounts when they need them.

3.2 Taxation of pension benefits

When the amounts are vested, the taxpayer is taxed as follows:
Pension fund
Tax free amount  25% of lower of fund value & Lifetime allowance of £1,073,100
 Maximum = £268,275
Balance  Taxed as non-savings income at individual’s marginal rates of tax
when received

EXAM SMART
For the purpose of the examination, you are expected to have an awareness of the lifetime
allowance but will not be tested on it computationally.
38 4: Pensions Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know how to calculate the maximum contribution an individual can make into
a pension in a tax year attracting tax relief?

If the contribution is made to a personal pensions scheme, can you explain how the
individual will receive tax relief? Can you prepare the income tax computation to show
this?

Could you do the same for an occupational pension contribution?

Do you understand how an employer pension contribution affects an individual’s tax

position?

Can you explain how an individual is taxed when they come to draw their pension?
 39

Employment income

Topics
(1) Charge to tax on employment income
(2) Allowable deductions
(3) Taxable and exempt benefits

Learning Objectives
 Calculate assessable employment income for an employee or director, taking into account:
– Expenses
– Allowable deductions
– Assessable benefits
40 5: Employment income Tax Compliance

1 Taxation of earnings

KEY TERM
General earnings: any salary, wages or fee, any gratuity or other profit or incidental benefit
of any kind obtained by an employee consisting of money or money’s worth, and anything
else constituting an emolument of the employment, together with anything treated under
any statutory provision as earnings (eg, benefits)

A typical employment income calculation (for income tax) looks like this:
Money earnings X
Benefits in kind X
Less: allowable deductions (X)
Employment Income X

We therefore need to determine when money earnings and benefits in kind will be included in the
employment income computation for a particular tax year:

1.1 Money earnings (salaries, bonuses etc.)

 Individuals are normally taxed on their money earnings at the earlier of
– The date of receipt
– The date when the employee becomes entitled to payment
 Directors become taxable on their money earnings at the earliest of:
– The payment date
– The date when they became entitled to payment
– The date the earnings were accrued in the company’s accounts
– The end of a period of account if earnings for that period are determined before the
period ends
– The date earnings are determined if the amount is not determined until after the end of
the period of account
 All money earnings that become taxable during the tax year (e.g. between 6/4/23 and 5/4/24
for tax year 2023/24) will be included in the income tax return.

1.2 Employee benefits in kind

 Employee benefits are typically taxed based on the period of time during the tax year that the
benefit was available to the employee.
 Hence, if a company provides e.g. a company car to an employee for the first time on 6th
January, the taxable benefit will be 3/12 × full year benefit for that tax year.
Tax Compliance 5: Employment income 41

INTERACTIVE QUESTION: RECEIPT OF GENERAL EARNINGS

Jordan became a director of Y Ltd on 1 November 2023. He does not own any shares in the company.
He is entitled to a salary of £36,000 per year payable in equal instalments on the last day of each
month.
Jordan is also entitled to a bonus related to Y Ltd’s profits for its period of account. Y Ltd prepared
accounts to 31 March 2024 and Jordan’s bonus for this period of account is £6,000. This was
determined on 1 April 2024, credited in the company’s accounts on 10 April 2024 and paid with his
April salary on 30 April 2024.
Requirement
What are the taxable earnings of Jordan for 2023/24?
SOLUTION

2 Allowable deductions
2.1 Expenses allowable against employment income
The following items are generally allowable as deductions from employment income
 Employee contributions into occupational pension schemes
 Relevant professional subscriptions, if paid by employee
 Allowable travel costs paid by the employee (see below)
 Deficits on mileage allowances (see below)
 Charitable payments under the payroll deduction scheme (‘Give as you earn’)
 Any other expenses incurred wholly, exclusively and necessarily for purposes of employment

Reimbursed expenses
Reimbursed expenses are not included in the employment income calculation at all if the expenses
would be allowable deductions per the above)
42 5: Employment income Tax Compliance

2.2 Entertaining expenses

Special rules apply for expenditure incurred by an employee relating to client entertaining.
Entertainment Specific entertaining Round sum allowance
expenditure reimbursed allowance (general allowance)
Treatment Disallowed expenditure – Disallowed expenditure – not Allowable expenditure
for employer not deductible from deductible from trading profits (salary), deductible from
trading profits trading profits
Treatment Exempt Specific allowance x Taxed on the RSA (can only
for employee Actual expenses incurred (x) deduct expenditure that
Taxed on net amount x would be otherwise allowable
– e.g. business travel)

2.3 Travel costs

 An employee may deduct travelling and subsistence expenses from general earnings if:
– The expenses were necessarily incurred in the performance of the duties
– The expenses are not expenses of ordinary commuting (defined as home to permanent
workplace)
 In general, travelling between home and work is not allowable. However, there are some
exceptions to this rule, as follows:
– Where an employee has no normal place of work ('site-based' employee), travel from
home to work will be allowable;
– Where it can be shown that a taxpayer's home is his work location, travel from one work
location (home) to another work location will be allowable;
– Where an employee works at a temporary workplace for no more than 24 months, travel
from home to the temporary workplace during that period will be allowable.

INTERACTIVE QUESTION: ALLOWABLE DEDUCTIONS

State if, and to what extent, the following expenses incurred by an employee are allowable deductions:

Expense Amount to include in employment income

£10 train ticket from home to normal place of work
£50 a month subscription to health club (many
clients also use club)
£500 for smart clothes suitable for office work
£320 annual ICAEW subscription by an accountant
£50 a month specific entertainment allowance of
which £45 used on actual entertaining
£25 train ticket from home to temporary workplace
for six-month secondment
£500 general round sum allowance of which £300
used on actual entertaining and £50 spent on travel to
visit clients.
Tax Compliance 5: Employment income 43

2.4 Statutory approved mileage allowances

 If an employee makes business journeys in their own vehicle, the employer can pay a tax-free
allowance of up to a statutory amount (see table below):
 In addition, an employer can pay up to 5p per mile for each fellow employee on the same trip.
 If payments received (if any) are less than the statutory amount, an allowable deduction is
available on the shortfall. An allowable deduction is not available in respect of passenger
payments if the employer rate is less than 5p per mile.
 If payments received exceed the statutory amount, the employee is taxable on the surplus.
Cars Motor cycles Bicycles
45 pence per mile (up to 10,000 24 pence per mile 20 pence per mile
miles)
25 pence per mile (on miles in
excess of 10,000)

 For Class 1 NIC purposes a flat rate of 45p per mile is used irrespective of actual mileage.

WORKED EXAMPLE: STATUTORY MILEAGE RATE SCHEME

Graham, Hetty and Irene are employees of J plc. They receive the following payments:
Mileage Business
Vehicle allowance miles
Graham Motorcycle 35p 5,000
Hetty Car 28p 4,000
Irene Van 48p 12,000
Hetty took a fellow employee with her to a business meeting and received an additional £32 for the
320 mile journey.
Requirement
Explain the employment income consequences for each employee.
SOLUTION
44 5: Employment income Tax Compliance

Graham
£
Amount reimbursed 5,000 × 35p 1,750
Less: statutory allowance 5,000 × 24p (1,200)
Taxable benefit 550

Hetty
Car
£
Amount reimbursed 4,000 × 28p 1,120
Less: statutory allowance 4,000 × 45p (1,800)
Allowable deduction (680)

Passenger
£
Amount reimbursed 32
Less: statutory allowance 320 × 5p (16)
Taxable benefit 16

Irene
£
Amount reimbursed 12,000 × 48p 5,760
Less: statutory allowance
10,000 × 45p (4,500)
2,000 × 25p (500)
Taxable benefit 760

3 Taxable and exempt benefits

3.1 The benefits code
Taxable benefits are set down in legislation called the benefits code.
 Employees are subject to tax on benefits under the PAYE system, giving details of their taxable
benefits, including:
– Vouchers
– Living accommodation
– Cars and fuel for private use
– Vans provided for private use
– Assets made available for private use
– Employment-related loans
– Any other non-monetary benefit provided by reason of the employment
 There are also several benefits which are exempt from taxation (see later).

2 general rules to help later:

(1) Time apportion the benefit value (on a monthly basis) if it was not available for full tax year
(2) Deduct contributions made by the employee from the taxable benefit (except for private fuel)
Taxable benefits can be reduced to nil if the employee pays the full monetary value of the benefit to
the employer on or before 6 July following the tax year.
Tax Compliance 5: Employment income 45

3.2 Vouchers
Employees are taxable on the provision of:
 Cash vouchers (vouchers exchangeable for cash) – the taxable amount is the sum of money for
which the voucher is capable of being exchanged
 Credit tokens (e.g. a credit card) used to obtain money, goods or services – the taxable amount
is the cost to the employer of providing the benefit, less any amount paid by the employee
 Vouchers exchangeable for goods and services (e.g. book tokens) taxable amount is the cost to
the employer of providing the benefit, less any amount paid by the employee

3.3 Living accommodation

3.3.1 Job-related accommodation
Accommodation is NOT a taxable benefit if it is job related, i.e.:
 Necessary (e.g. caretaker) or
 Improves performance and customary to provide, e.g. nurse, or police officer
 Provided for personal security (e.g. Government Minister).
Directors can only claim the first two exemptions above if
(1) They do not have more than a 5% interest in the company
(2) Either they are full time working directors or the company is non-profit making or a charity.

3.3.2 Non job-related accommodation

If the accommodation is not job related, a taxable benefit will arise:
 If the employer OWNS the property:

Taxable benefit = Annual value + (Cost – 75k) × 2.25% – employee contributions

 (Cost – 75k) × 2.25% addition is only made if ‘cost’ > £75k

 ‘Cost’ = purchase price + capital improvements made before start of current tax year
 ‘Cost’ is replaced with Market Value when the employee first moved in (+ subsequent
improvements) if the property was acquired > 6 years before its first use by the employee
 If employer RENTS the property from a 3rd party:

Taxable benefit = higher of (annual value, rent paid) – employee contributions

Note: the accommodation benefit does not cover living expenses (see living expenses) or furniture
(see assets for private use).

3.3.3 Living expenses (electricity, phone, TV licence etc. AND repairs, decoration)
 All are taxable benefits, with decorating taxable in the year the work is done
 If the accommodation is job related, the benefit is restricted to a maximum of 10% of the
employee’s earnings and other, non-accommodation benefits.
46 5: Employment income Tax Compliance

WORKED EXAMPLE: ACCOMMODATION

Xygon Ltd has provided Peter with living accommodation since February 2014. The property was
purchased in June 2006 for £150,000 and was valued at £250,000 in February 2014. Xygon Ltd spent
£10,000 on improvements in December 2022 and £1,200 on utilities bills for the accommodation for
2023/24. It has an annual value of £14,000. Peter moved out of the property on 5 January 2024. Peter
paid rent of £100 per month. The official rate of interest is 2.25%.
Peter’s taxable benefit for 2023/24 is:
£
Annual value 14,000
Additional benefit
2.25% (£250,000 (MV as acquired > 6 years before first occupation) + £10,000
improvement – £75,000) 4,163
Utilities bills 1,200
Total annual benefit 19,363
Scale by 9/12 14,522
Less: rent paid – £100 × 9 (900)
Taxable benefit in kind 13,622

3.4 Cars for private use

There is a taxable benefit on the provision of a car which is available for private use by the employee
(private use includes home-to-work travel).

Taxable benefit = (List price – capital contribution) × CO2 % – running cost contribution

 The capital contributions deduction is capped at £5k

 The CO2% depends on the car’s CO2 emissions:
Emissions Electric battery range CO2%
Zero emissions N/A 2%
1–50g/km > 130 miles 2%
70–129 miles 5%
40–69 miles 8%
30–39 miles 12%
< 30 miles 14%
51–54g/km N/A 15%
55–59g/km 16%
60–64g/km 17%
65–69g/km 18%
70–74g/km 19%
75–79g/km 20%
– 1% increase for every additional whole 5g/km over 75g/km
– Add a further 4% for diesel cars not certified to the Real Driving Emissions 2 standard
– Max percentage = 37% (for both petrol & diesel)
Tax Compliance 5: Employment income 47

 Time apportion the benefit for less than 12 months’ availability including being unavailable for
more than 30 days continuously
 Insurance, repairs, vehicle excise duty etc. are covered by the benefit above, so these costs are
tax-free and should be ignored in questions

3.5 Private fuel

Employees provided with private fuel are assessed on an additional taxable benefit:

Taxable benefit = £27,800 × CO2 %

 Time apportion benefit for less than 12 months availability (as for cars)
 Unlike all other benefits, any partial employee contribution toward the cost of fuel does
NOT reduce the taxable amount

3.6 Company vans

Taxable benefit = £3,960 or £0 if zero-emission
Additional private fuel benefit = £757

 Incidental private use of the van is ignored (e.g. taking it home overnight)

WORKED EXAMPLE: CARS

XF Ltd provided Simon with a diesel powered car on 6 June 2023 (registered in January 2023). Its list
price was £52,000, but it only cost XF Ltd £49,500. It has an official CO2 emission rate of 137 grams per
kilometre and doesn’t meet the RDE2 standard. XF Ltd also paid for all of Simon’s fuel. Simon paid a
contribution towards the car running costs of £50 per month and a partial contribution towards the
fuel cost of £30 per month
Simon’s taxable benefit for 2023/24 will be:
Car benefit £
CO2%: (137 –75) = 60  60/5 = 12.4  round down to 12
Taxable percentage is 20 + 12 + 4 (Diesel) = 36%
Car Benefit 36% × £52,000 × 10 / 12 (as Simon had the car for 10 months in the tax year) 15,600
Less: Running cost contribution (£50 × 10) (500)
Car Benefit 15,100
Fuel Benefit 36% × £27,800 × 10/12 (ignore the partial contribution) 8,340
Total taxable benefit arising from the vehicle 23,440

3.7 Assets available for private use

Taxable benefit = 20% of the market value (MV) when first provided

 If the employee subsequently acquires the asset, the additional taxable benefit is the greater of
– Market value at the time of employee acquisition, OR
– The original market value less the cumulative taxable benefit to date for the employee
 The benefit is reduced by any employee contribution.
 There is no taxable benefit if there is insignificant private use, if there is significant private use
the benefit is multiplied by the private use %.
48 5: Employment income Tax Compliance

INTERACTIVE QUESTION: PRIVATE USE ASSETS

Maria is provided with the following assets by her employer which are available for private use:
Television (provided on 6 October 2023) costing £1,100
Computer (provided on 6 April 2023) costing £2,700 and used 75% for business.
Maria makes a contribution of £10 a month for private use of the television. Maria needs the
computer for her work when visiting clients’ sites and uses it to help her children research their
homework on the internet.
Requirement
(a) What are the benefits taxable on Maria for 2023/24 for private use of these assets?
(b) Would the position have been different if the computer had 45% (significant) private use?
SOLUTION

INTERACTIVE QUESTION: ASSET TRANSFERRED TO EMPLOYEE

On 6 April 2022, Naomi was provided with furniture available for her private use at a cost of £4,000.
She made no contribution to her employer for use of the furniture.
On 5 January 2024, Naomi bought the furniture from her employer for £700 when its market value
was £1,000.
Requirement
Compute the taxable benefits for Naomi for 2023/24 in respect of the furniture.
SOLUTION
Tax Compliance 5: Employment income 49

3.8 Employment related loans

Employees are taxed on a benefit in kind in two different situations regarding loans from their
employers:
(i) If they pay less than the official rate of interest on the loan (‘cheap loans’)
(ii) If any part of the loan is written off

Cheap loan benefit in kind

Taxable benefit = loan value × 2.25% – actual interest paid

 Calculation of ‘loan value’ can be done following two different methods:

– Strict method: calculate interest @ 2.25% month by month on the outstanding balance
– Average method: ‘loan value’ = (opening loan balance + closing loan balance)/2 (time
apportion if the loan was only outstanding for part of the year).
 You should calculate the taxable benefit using both methods and choose the lower, as HMRC
will only challenge use of the average method if it gives a materially different result.
 There is no taxable benefit if the loan is ≤ £10,000 throughout the tax year. If the loan exceeds
£10,000 at any time in the tax year, the whole benefit (not just the amount in excess of
£10,000) is taxable.

Loan write-off
If part of a loan is written-off, then the value written off taxable as employment income, regardless of
the size of the loan or the write-off.

INTERACTIVE QUESTION: EMPLOYMENT RELATED LOANS

Fennella has the following employment related loans:

(1) Interest free loan of £1,300
(2) Loan of £50,000 on which interest is payable at 1% by Fennella
(3) Interest free loan of £100,000
All of the loans were granted before 6 April 2023. Fennella repaid £200 of the first loan on 6 March
2024 and £70,000 of the third loan on 5 July 2023. The official rate of interest throughout 2023/24 is
2.25%.
Requirement
Compute the taxable benefits arising to Fennella in respect of the loans.
SOLUTION
50 5: Employment income Tax Compliance

3.9 Optional remuneration arrangements (salary sacrifice)

Some employers offer salary sacrifice schemes where an employee takes a reduced salary, instead
receiving certain benefits such as employer pension contributions or use of a company car.
 Historically this would result in reduced income tax and national insurance.
 From 6 April 2017 these tax advantages have largely been withdrawn.
 The taxable value of benefits where cash has been sacrificed is the higher of:
– the taxable value (using the benefits code); and
– the value of the cash sacrificed.
 The taxable amount is treated as a benefit and subject to Class 1A NICs.
Certain benefits are excluded from these rules, including salary sacrifice in return for pension
contributions, pension advice, childcare provision, cycle to work and ultra-low emission cars.

3.10 Other benefits

In most other situations, the taxable benefit is the cost to the employer of providing the benefit less
any amount paid by the employee for the benefit. Where benefits are provided in-house, the cost of
the benefit is the marginal cost (e.g. private school place to children of employees).

INTERACTIVE QUESTION: MARGINAL COST

Leonard is a teacher at a public school. He pays a reduced fee of £2,000 in 2023/24 for his son to
attend the school. In 2023/24 the following figures relate to students attending the school.
Normal fee payable per student £3,500
Average cost per student, including a proportion of fixed overheads £2,800
Additional cost of an extra student, including extra writing books, food etc £1,500
Leonard's son is taking up a place that would otherwise not be filled.
Requirement
What is the taxable benefit for Leonard for 2023/24 in respect of the school place?
SOLUTION
Tax Compliance 5: Employment income 51

3.11 Exempt benefits

There are a number of benefits which are specifically exempt from the charge on employment income.
Exempt benefits include:
 Contributions by an employer to a registered pension scheme
 A trivial benefit, i.e. a benefit costing less than £50 to provide, which is not cash or a cash
voucher, and which is provided for non-work reasons eg a birthday. There is an annual cap of
£300 in respect of such benefits when provided to certain directors
 Pension advice and associated tax planning available to all employees up to £500 per tax year
(above which the full amount is taxable)
 Counselling and outplacement services and retraining courses on termination of employment
 Childcare facilities run by or on behalf of an employer
 One mobile telephone (including smartphones) available for private use by an employee,
including all calls
 Free or subsidised meals in a canteen where such meals are available to all staff (and there is no
contractual entitlement)
 Social events paid for by the employer up to £150 per head per tax year. If one event costs more
than £150, the total cost of the event is taxable. If there is more than one event in a tax year
and the total costs exceed £150, the events totalling up to £150 are exempt and the cost of the
other events are taxed in full
 Entertainment provided by a third party (e.g. seats at sporting/cultural events)
 Non-cash gifts from third parties up to £250 per tax year from the same donor
 Provision of a parking space at or near the employee's place of work
 Awards of up to £5,000 made under a staff suggestion scheme
 Work-related training courses
 Sports and recreation facilities available to employees generally but not to the general public
 Payments towards the additional costs of an employee working from home (up to £6 per week
more with documentary evidence)
 Personal incidental expenses (e.g. cost of telephone calls home) whilst the employee is required
to stay away overnight on business up to £5 per night in the UK, £10 per night abroad
 Overseas medical treatment and insurance when employee is working abroad
 Works buses and subsidies to public bus services
 Travel expenses when public transport disrupted, late night journeys and where car sharing
arrangements break down
 Use of bicycles or cyclists’ safety equipment if made available to all employees
 Provision of vehicle battery charging at or near workplace for an employee who uses the vehicle
(even if as a passenger). The facilities must be made available generally to the employer’s
employees at that workplace.
 Reasonable removal expenses (maximum £8,000) paid for by an employer for a new
employment position or on relocation
 Non-cash long service awards in respect of at least 20 years’ service, not exceeding £50 per year
of service
52 5: Employment income Tax Compliance

 Eye tests and glasses provided for employees who use VDU equipment
 Health-screening assessment or medical check-up provided for an employee, by the employer
(maximum of one of each per tax year)
 Cost of officially recommended medical treatment to facilitate return to work after absence due
to injury or ill-health (£500 per employee per annum)

INTERACTIVE QUESTION: EMPLOYMENT INCOME

Amanda is employed by Luton Ltd and receives the following remuneration package:
 A salary of £55,000
 A hybrid petrol company car with emissions of 41g/km, a battery range of 91 miles and a list
price of £29,000. The car was first registered in August 2022 and was made available for use
from 6 November 2023.
 Private medical insurance worth £3,000 p.a. (costing the employer £2,500)
 A season ticket loan of £6,000
 Membership of Luton Ltd’s occupational pension scheme. Luton ltd pays in employer pension
contributions of 3% of her salary and Amanda pays in 5%.
 An annual festive hamper, costing £200
Requirement
Calculate Amanda’s taxable employment income for 2023/24.
Tax Compliance 5: Employment income 53

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you work out which tax year a bonus will be taxed in?

Do you understand the rules relating to whether or not an expense is deductible in the
calculation of employment income?

Can you work out the taxable/deductible amount if an individual uses their own car to
do business mileage?

Do you understand how to work out the value of the main taxable benefits? (Living
accommodation, cars, fuel, assets for private use and employment related loans)

Can you spot exempt benefits?

54 5: Employment income Tax Compliance
 55

Trading income
(unincorporated businesses)

Topics
(1) Badges of trade
(2) Overview of the calculation of taxable profits
(3) Adjustment of profits
(4) Taxable trading profits – basis of assessment

Learning Objectives
 Explain the relevance of the distinction between revenue and capital for both receipts and
expenses and apply the distinction in a given scenario
 Recognise the effect on trading profits of the treatment of provisions, capitalised revenue
expenditure and intangible assets
 Calculate trading profits or losses after adjustments and allowable deductions (including capital
allowances on plant and machinery) using either the accruals basis or cash basis of accounting
 Calculate the assessable trading profits or losses for an unincorporated business which is
commencing, continuing or ceasing to trade
 Calculate total taxable income for self-employed individuals
56 6: Trading income (unincorporated businesses) Tax Compliance

1 Badges of trade
The application of the badges of trade determines whether a sale by an individual has resulted in:
– Trading profits (subject to income tax and national insurance)
– A capital gain (subject to capital gains tax)
A trade is defined in tax legislation as 'every trade, manufacture, adventure or concern in the nature of
trade'. (Not very helpful!)
 It has therefore been left to the courts to interpret this definition and there are a number of
decided cases identifying a number of key factors in deciding whether an activity constitutes a
trade  these are known as the badges of trade.
 You will be expected to know the badges of trade and the facts of the cases described below.
No one factor is conclusive on its own.
The case names are not examinable.

Buy and sell goods at a

profit

Is it a trading profit?

Apply the Badges of Trade

Trading Profit Capital Gain

Income tax Capital gains tax (unless
Class 2 + 4 NIC exempt) (Chapter 11)

Badges of trade Explanation

Intention to make a profit Purchasing with the intention to sell at a profit suggests trading
Number of similar transactions A high number of transactions similar to this sale suggests trading
Nature of the asset There are three reasons for purchasing an asset:
(1) For personal use (capital)
(2) As an investment (capital)
(3) For resale at a profit (trading)
Connection with existing trade A connection between this sale and an existing business suggests trading
(e.g. a car mechanic selling a car)
Changes to the asset Changes made to the asset to enhance its marketability suggests trading
Reasons for sale A person who is forced to sell an asset due to financial problems is
unlikely to be trading.
Source of finance Borrowing to buy the goods suggests trading
Period of ownership A shorter period suggests trading
Method of acquisition Acquisition by inheritance or gift, suggests a capital transaction
Tax Compliance 6: Trading income (unincorporated businesses) 57

2 Overview of the calculation of taxable trading profits

Once the badges of trade have determined that a trade is being carried on, we must take the following
steps to identify the trading profit that the sole trader or partners will be taxed in the tax year (the
taxable trading profit):

2.1 Summary of steps to find taxable trading profits

The following steps must be taken to find the assessable trading profits for a tax year, having been
given the profit per accounts (on an accruals basis):
£
(1) Net profit per accounts (given in the exam question) X
(2) Adjustments to profits
Add: Disallowed expenditure X
Add: Income taxable as trading profits, not included in P&L X
Less: Profits in accounts not taxable as trading profits (X)
Less: Deductible expenditure not included in accounts (X)
Adjusted profit X
(3) Less: capital allowances (Ch.7) (X)
Taxable profit X
(4) Allocate taxable trading profits to the appropriate tax year X

2.2 Trading allowance

 A trading allowance of £1,000 is available to individuals who carry on a trade (similar to the
property allowance seen in chapter 3).
– If trading receipts for an individual (not partner) for a tax year are ≤ £1,000, those
receipts are not taxable.
– If the receipts are > £1,000 the individual can choose between:
(1) Calculating their taxable trading income using the accruals basis (shown above) or
(2) Using the trading allowance (by deducting £1,000 from the receipts with no
further reduction for actual expenses)
 In the TC exam, the trading allowance is usually used when an individual has a small
side-business (e.g. someone employed as an accountancy tutor who also marks exams for the
ICAEW!)

EXAM SMART
In the exam always assume that the trading allowance applies if the receipts do not exceed
£1,000, but if the receipts exceed £1,000 you should assume that no election to use the
trading allowance has been made, unless told otherwise.

For the rest of this chapter we will assume that the trading allowance is not being used and will
instead follow the steps in section 2.1.
58 6: Trading income (unincorporated businesses) Tax Compliance

3 Adjustments to profits
3.1 Allowable and disallowed items of expenditure
Generally, items of expenditure are allowable as deductions vs. trading profits if they are wholly and
exclusively for the purposes of trade.
 When there is partial private use of an item by the sole trade / partner, HMRC will allow a
reasonable apportionment between private use (disallowed) and business use (allowable)
 Other important rules regarding allowable / disallowed expenditure are shown below:
Item Disallowed: Allowable:
Capital New capital expenditure Only repairs to and maintenance of capital
expenditure Profits / losses on disposal items (revenue expenditure)
Depreciation All depreciation is disallowed Nothing
Appropriation Sole trader drawings Non-excessive element of pay to family /
of profit Partner salaries / interest friends
Excessive element of pay to family / friends
Provisions for General provisions Specific provisions for trade bad debts
bad debts Provisions for non-trade bad debts
Entertainment Client entertaining Staff entertaining
Gifts All except those listed on the right: Gifts to employees
Gifts of trade samples
Gifts to customers if:
 Conspicuous advert AND
 Not food/drink/tobacco/vouchers AND
 Cost ≤ £50 per customer
Donations and All except those listed on the right: Small donations to local charities
subscriptions Stock / plant gifted to charities / schools
Subscriptions to professional associations
Fines and All except those listed on the right: Parking fines incurred by employees in the
penalties course of business
Interest on All interest on late paid tax Nothing
late paid tax
Legal and All except those listed on the right: Legal costs on renewing short leases (<50yrs)
Professional Costs of registering patents / copyright
fees relating to Incidental costs of raising debt finance
CAPEX
Irrecoverable Irrecoverable VAT on disallowed Irrecoverable VAT on allowable expenditure
VAT expenditure
Employment Redundancy payments on cessation of Other payments to staff, Class 1 Secondary
payments trade in excess of 4 x statutory redundancy and Class 1A NICs and employer pension
pay contributions paid in the accounting period
Car leasing  Any element relating to private use by Everything aside from disallowed amounts
and rental sole trader / partner (see list on the left)
costs  15% of lease cost if > 50g/km
(110g/km if leased pre-1 April 2021)
Tax Compliance 6: Trading income (unincorporated businesses) 59

3.2 Other adjustments to profits

Additionally, the following rules apply:
 The trader is taxed on the selling price of goods taken for own use:
– If nothing has been recorded in the accounts, then add back the selling price
– If the cost amount has been included in revenue, then add back the profit
 Expenditure incurred in the 7 years before commencement of trade is allowable: treat as an
expense incurred on day 1 of trade
 Non-trading income (such as rental income or interest income) should be removed from the
trading profit (by deducting it)

WORKED EXAMPLE: LEASED CAR AND PRIVATE USE BY SOLE TRADER

Jane leases a car with a retail price of £16,000 and CO2 emissions of 200g/km on 1 May 2023. The
annual leasing cost is £1,600 (for the period 1.5.23 – 30.4.24).
Jane uses the car partly for business and partly for private purposes. Business usage of 60% has been
agreed with HMRC.
Jane has included the full £1,600 cost in her accounts for y/e 31.12.23.
Requirement
What is the disallowed amount which needs to be added back to Jayne’s profits for y/e 31.12.23?
SOLUTION
Allowable expenses: 85% × £1,600 × 60% (business use) × 8/12 = £544
Disallowable expenses: £1,600 – £544= £1,056

WORKED EXAMPLE: GOODS TAKEN FOR OWN USE

Max took some goods from his business with a selling price of £160.
The cost of the goods was £90.
Requirement
What adjustments are required if:
(i) the transaction is not recorded in the accounts: or
(ii) revenue of £90 has been recorded in the accounts?
SOLUTION
(i) Add back selling price of £160
(ii) Add back profit (£160-£90) = £70
60 6: Trading income (unincorporated businesses) Tax Compliance

INTERACTIVE QUESTION: ADJUSTMENT OF PROFIT

Dean is a sole trader, carrying on a manufacturing trade. His profit and loss account for the year shows
the following:
Note £ £
Gross profit for year 1 168,000
Add: interest receivable 3,000
171,000
Less: wages and NICs 2 61,355
rent and rates 29,460
repairs and renewals 3 3,490
miscellaneous expenses 4 1,025
Dean's income tax 15,590
bad debts 5 820
legal/professional expenses 6 2,310
depreciation 630
lease rental on car 7 2,400
charitable donations 8 80
transport costs 3,250
interest 9 990
Dean's car expenses 10 5,600
lighting and heating 1,250
sundry expenses 11 3,750 (132,000)
Net profit 39,000

Notes
(1) Sales include £500 reimbursed by Dean for stock taken for personal use representing cost price.
The selling price of the stock would have been £625.
(2) Included in wages are Dean's drawings of £50 per week, his Class 2 NICs of £179, wages and
NICs of £11,750 for his wife's part-time employment in the business (similar to wages which
would have been paid to any employee doing that work) and wages of £1,000 for his son who
did not perform any work.
(3) Repairs and renewals are:
£
Decoration of premises 400
New heating system 3,000
Boiler maintenance fee 90
3,490

(4) Miscellaneous expenses are:

£
Political donation to Green Party 260
Gifts to customers of 20 T-shirts with Dean's logo 201
Dean's private medical insurance premium 564
1,025
Tax Compliance 6: Trading income (unincorporated businesses) 61

(5) Bad debts are:

£ £
Trade debt written off 420
Loan to former employee written off 250
General provision for bad debts 600
Less: opening provision (450) 150
820

(6) Legal and professional expenses are:

£
Defending action for alleged faulty goods 330
Fees relating to renewal of short lease 250
Fees relating to acquisition of machinery 200
Fees on defence against Dean's motoring offence 190
Debt collection and accountancy fees 1,340
2,310

(7) Lease car rental relates to the car provided to an employee which has a retail price of £30,000
and CO2 emissions of 145g/km.
(8) Two charitable donations made: one of £50 to a local charity and one of £30 to Oxfam.
(9) Interest consists of £860 bank overdraft interest and £130 interest on overdue tax.
(10) One third of Dean's mileage was for private purposes and Dean's motor car expenses are:
£
Servicing and repairs 1,560
Fuel 3,255
Vehicle excise duty 160
Motoring offence: speeding fine 625
(The speeding fine was incurred when Dean was late for a business meeting.) 5,600

(11) Sundry expenses are:

£
Entertaining customers 850
Staff party 120
Gift to employee on exam success 100
Subscription to trade association 310
Other expenses (all allowable) 2,370
3,750

Requirement
Prepare a statement of taxable trading income (before capital allowances).
62 6: Trading income (unincorporated businesses) Tax Compliance

SOLUTION
Dean
Taxable trading income (before capital allowances)
£
Net profit per accounts
Add: Disallowable expenditure

Trading income not shown in accounts

Less: Non-trading income

Taxable trading income (before capital allowances)

Tax Compliance 6: Trading income (unincorporated businesses) 63

3.3 Fixed Rate expenses

Unincorporated businesses can elect to deduct business expenses at a fixed rate instead of following
the rules outlined above.
Fixed rate deductions can be claimed in respect of:
 expenditure on motor vehicles
 use of home for business purposes
 business premises partly used as trader's home

Motor vehicles
 Applies to purchases, lease or hire of a car, motorcycle, or goods vehicle used in trade.
 The fixed rate deduction is made using the approved mileage allowances (see as per chapter 5)
rather than the actual expenditure
Cars Motorcycles Bicycles
45 pence per mile (up to 10,000 miles) 24 pence per mile 20 pence per mile
25 pence per mile (on miles in excess of 10,000)

Use of home for business purposes

 Available where the trader or their employees use part of the trader’s home for business
purposes (≥ 25 hours per month).
 Hours must be wholly and exclusively for the purposes of the trade
 Increase the allowable costs of the business premises by the figures in the following table
Numbers of hours worked Monthly adjustment
25-50 £10
51-100 £18
101 or more per month £26

Use of business premises as a home

 For example a guesthouse which is partly occupied as a home by the owners
 Reduce the allowable costs of the business premises by the figures in the following table
Number of occupants Monthly adjustment
1 £350
2 £500
3 or more £650

4 Taxable trading profits – basis of assessment

4.1 Allocating profits and losses to tax years
The fundamental problem facing a sole trader (and partnerships) is that a tax return must be prepared
for a tax year (6 April to 5 April) while their Profit and Loss Account may have been prepared for a
different period.
64 6: Trading income (unincorporated businesses) Tax Compliance

Hence, rules are required to work out the taxable trading income for a particular tax year, which can
then be included in that tax year’s tax return.
From 2024/25, all sole traders are taxed on the ‘tax year basis’, i.e. on profits arising in the tax year.
Until 2022/23 the ‘basis period’ rules applied, where generally the profits of the accounting period
that ended in the tax year were taxed in that tax year (the ‘current year basis’ (CYB)).
2023/24 is a transitional year with special rules to assist existing businesses with the shift from the
current year basis to the tax year basis.
In this chapter we will cover how these rules apply in the following situations:
– Continuing businesses
– Starting to trade
– Closing years (businesses ceasing to trade)
NOTE: Remember! Profits for an accounting period must first be adjusted for tax and have capital
allowances (chapter 7) deducted from them before they can be allocated to the particular tax year.

4.2 Tax year basis

4.2.1 Tax year basis for continuing trades
Under the ‘tax year basis’ (TYB) if the business’s accounting period corresponds with the tax year
(i.e. the business has a 31 March or 5 April year end), the assessable amount is simply the profits of
that accounting period.
However, if the accounting period does not align with the tax year, the profits must be split so that the
profits arising in the tax year, i.e. from 6 April to 5 April, are taxed in that particular tax year.

EXAM SMART
In the exam, the allocation of profits to tax years is done based on the number of whole
months.

WORKED EXAMPLE: TAX YEAR BASIS FOR CONTINUING TRADE

Rico prepares accounts to 31 December each year. His tax adjusted trading profits for the year ended
31 December 2024 are £30,000 and for the year ended 31 December 2025 are £36,000.
Requirement
Calculate Rico’s taxable trading profit for 2024/25.
SOLUTION
Using the tax year basis, Rico will be taxed on his profits from 6 April 2024 to 5 April 2025.
2024/25 trade profits £
6.4.24 – 31.12.24 = 9/12 × £30,000 22,500
1.1.25 – 5.4.25 = 3/12 × £36,000 9,000
31,500
Tax Compliance 6: Trading income (unincorporated businesses) 65

4.2.2 Tax year basis for new businesses

Where an individual starts trading on or after 6 April 2023 they are taxed on the profits arising from
the start of trading to the end of the tax year.

INTERACTIVE QUESTION: TAX YEAR BASIS ON COMMENCEMENT OF TRADE

Lolita starts to trade on 1 October 2025 and prepares her first set of accounts for the 12 months to
30 September 2026 which show a profit of £12,200. Her second set of accounts to the 30 September
2027 show a profit of £16,100.
Requirement
Calculate Lolita’s trade profits for her first two tax years of trade.
SOLUTION

4.2.3 Tax year basis for ceasing trades

Where a business that started on or after 6 April 2023 ceases to trade, under TYB the profits from
6 April until the date of cessation are taxed in the tax year of cessation.
For example, a business which started in 2023/24 that ceases on 31 December 2026 will cease to trade
in the 2026/27 tax year. The assessable profits in that final tax year will be those from 6 April 2026 to
the date of cessation, i.e. 31 December 2026.
However, in the exam you will only be tested on a trade ceasing during 2023/24 and for trades ceasing
in 2023/24 the old ‘basis period’ rules are used.
These rules, as set out below, are the ones on which you will be tested.

4.3 Old ‘basis period’ rules

4.3.1 Basis period rules for continuing trades
Under the old basis period rules, a trader who had been trading for many years, always making up
accounts to the same year end, applied the current year basis (CYB) to find their taxable trading
profits for a tax year.
CYB taxed the profits of the 12 month accounting period ending in the tax year.
So, for example, a trader drawing up accounts to 31 December would be taxable in 2022/23 on the
profits of the year ended 31 December 2022.
66 6: Trading income (unincorporated businesses) Tax Compliance

EXAM SMART
You will not be tested on the CYB rules directly but you need an understanding of these rules
to be able to calculate the profits to be taxed when a trade ceases in 2023/24.

4.3.2 Basis period rules for new businesses

Under the old basis period rules, a trader who began trading had to apply the ‘opening year’ rules
which could lead to trading profits being taxed twice.
The profits that were taxed twice were known as ‘overlap profits’ and they can be deducted in
2023/24 either:
 If the business ceases to trade in 2023/24; or
 Under the transitional rules.

EXAM SMART
You will not be tested on the opening year rules directly, but you must understand that
overlap profits may have arisen under the old basis period rules which can be relieved in
2023/24.

4.3.3 Basis period rules for ceasing trades

The last tax year for a business is the tax year in which the business ceases to trade.
Where a trader ceases to trade in 2023/24, special basis period rules apply:
 Usually the current year basis (CYB) applies for the penultimate tax year, i.e. the 12-month
period of account ending in 2022/23
 The basis period for the final tax year, 2023/24, then runs from the end of the basis period for
2022/23 to the date of cessation, i.e. tax anything that has not been taxed yet!
 However, if there was no period of account ending in 2022/23 (because the final period of
account is >12 months), the basis period for 2022/23 is the 12 months to the normal year end
falling in that tax year
 Deduct overlap profits from the 2023/24 profits

WORKED EXAMPLE: CLOSING YEAR RULES AND OVERLAP PROFIT

Muriel started trading in 1985, making up accounts to 31 January each year. Muriel has overlap profits
of £3,000.
Muriel ceased trading on 30 April 2023 and made up her final set of accounts for the 15-month period
to that date. Those accounts showed taxable trading income of £21,000.
Requirement
Calculate the taxable trading income for the last two years of trading, showing relief for overlap
profits.
Tax Compliance 6: Trading income (unincorporated businesses) 67

SOLUTION
As Muriel ceased trading on 30 April 2023, her last tax year of trade is 2023/24
Penultimate tax year (2022/23)
No 12-month period of account in this tax year as last drew up 12-month accounts to 31 January 2022,
i.e. tax year 2021/22
Therefore the profits of the 12 months to the normal year end are assessable:
1.2.22 – 31.1.23
12/15 × £21,000 £16,800

Last tax year (2023/24)

End of previous basis period to cessation
1.2.23 – 30.4.23 £ £
3/15 × £21,000 4,200
Less: overlap profits (3,000)
Assessable in 2023/24 1,200

4.4 Transitional rules in 2023/24

4.4.1 Transitional rules
To assist existing businesses with the shift from the current year basis to the tax year basis, special
transitional rules apply in 2023/24.
The basis period for existing businesses for 2023/24 starts the day after the 2022/23 basis period ends
and runs to 5 April 2024.
Where the basis period is > 12 months, there are two components:
(1) The standard part – the first 12 months of the basis period
(2) The transition part – period that runs from the end of the standard part to 5 April 2024

WORKED EXAMPLE: TRANSITIONAL RULES (1)

Theo prepares accounts to 31 December each year.

Requirement
Identify which profits will be taxed in 2022/23 to 2024/25.
SOLUTION
Theo will be taxed as follows:
Tax year Basis Profits taxed
2022/23 CYB Y/e 31.12.22
2023/24 Transitional rules:
(1) Standard part 1.1.23 to 31.12.23 (12m)
(2) Transition part 1.1.24 to 5.4.24 (3m)
2024/25 Tax year basis 6.4.24 to 5.4.25
68 6: Trading income (unincorporated businesses) Tax Compliance

4.4.2 Six-step process for 2023/24

Where the 2023/24 basis period has both a standard and transitional part, use the following six step
process to calculate the taxable profit:
Step 1: Calculate the profit/loss of the standard part of the basis period
Step 2: Calculate the profit/loss of the transition part of the basis period
Step 3: Deduct overlap profits from Step 2 (the transition part)
Step 4: Add together the results from Steps 1 and 3
– If Step 3 and/or 4 results in nil, or a loss, this is the total profit/loss for the basis
period
– Otherwise continue to Step 5
Step 5: Calculate the total transition profit, which is the lower of:
– The Step 3 amount
– The Step 4 amount
Usually 20% of the total transition profit will be assessable as it is spread equally over five
tax years starting with 2023/24 (unless an election is made to accelerate the charge)
Step 6: 2023/24 taxable profit is:
– Step 5, if Step 1 gave nil or a loss
– Step 1 + 5, if Step 1 gave a profit

WORKED EXAMPLE: TRANSITIONAL YEAR RULES (1)

Danielle has the following results:

Her adjusted trading profits are:
£
Y/e 30 September 2023 12,000
Y/e 30 September 2024 6,000
She has overlap profits of £1,000.
Requirement
Calculate Danielle’s taxable trading profits for 2023/24.
SOLUTION
The 2023/24 basis period runs from 1.10.22 – 5.4.24. As this is >12 months, we need to use the
six-step process:
Step 1: Profit of the standard part £ £
12m/e 30.9.23 12,000

Step 2: Profit of the transition part

Profit for the period 1.10.23 – 5.4.24
6/12 x £6,000 3,000

Step 3: Step 2 less overlap profit 3,000

(1,000)
2,000
Tax Compliance 6: Trading income (unincorporated businesses) 69

Step 4: Step 1 plus Step 3 12,000

2,000
– Not a loss so continue to Step 5 14,000

Step 5: Lower of Step 3 and Step 4

i.e. lower of £2,000 or £14,000
Transition profits £2,000 @ 20% 400

Step 6: Step 1 gave a profit

Step 1 12,000
Step 5 400
Assessable 2023/24 12,400

INTERACTIVE QUESTION: TRANSITIONAL YEAR RULES (2)

Gustav prepares his accounts to 30 June and has the following adjusted trading profits:
£
y/e 30 June 2022 8,000
y/e 30 June 2023 12,000
y/e 30 June 2024 16,000
Gustav has £1,000 unrelieved overlap profits.
Requirement
Calculate Gustav’s taxable trading profits for 2023/24.
SOLUTION
70 6: Trading income (unincorporated businesses) Tax Compliance

WORKED EXAMPLE: TRANSITIONAL YEAR RULES (3)

Wayne prepares a 12-month set of accounts to 30 June 2023 showing a loss of £23,000. Following a
change of accounting date, his next set of accounts cover the 9 months from 1 July 2023 to 31 March
2024 and show a profit of £42,000. He has overlap profits of £8,000.
Requirement
Calculate Wayne’s taxable trading profits for 2023/24.
SOLUTION
The 2023/24 basis period runs from 1.7.22 – 5.4.24. As this is >12 months, we need to use the six-step
process:
Step 1: Profit of the standard part £ £
12m/e 30.6.23 (23,000)

Step 2: Profit of the transition part

Profit for the period 1.7.23 – 31.3.24 42,000

Step 3: Step 2 less overlap profit 42,000

(8,000)
34,000
Step 4: Step 1 plus Step 3 (23,000)
34,000
– Not a loss so continue to Step 5 11,000

Step 5: Lower of Step 3 and Step 4

i.e. lower of £34,000 or £11,000
Transition profits: £11,000 @ 20% 2,200

Step 6: Step 1 gave a loss

Step 5 only
Assessable 2023/24 2,200

4.4.3 Taxing the transition profit

Income tax on the transition profit is calculated separately and added to the individual’s tax liability as
follows:
 Calculate the income tax liability on the individual’s net income excluding the transition profits
(Amount A)
Tax Compliance 6: Trading income (unincorporated businesses) 71

 Calculate the income tax liability on their income including the transition profits (Amount B)
 Amount B less Amount A = income tax liability relating to the transition profits (Amount C)
 Total income tax liability = Amount A + Amount C

WORKED EXAMPLE: TAXING THE TRANSITION PROFIT

Flavia has standard profits of £96,000 and transition profits of £24,000 in 2023/24. She has no other
income.
Requirement
Calculate Flavia’s income tax liability for 2023/24.
SOLUTION
The amount of transition profits treated as arising in each of the tax years from 2023/24 onwards is
£4,800 (£24,000 × 20%).
We start by calculating amount A , i.e. preparing an income tax computation excluding the transition
profits from net income:
£
Trade income 96,000
Net income 96,000
Less PA (12,570)
Taxable income 83,430

Tax:
£37,700 @ 20% 7,540
£45,730 @ 40% 18,292
Tax liability (Amount A) 25,832

Next we calculate amount B , i.e. include transitional profits:

£
Trade income (£96,000 + £4,800) 100,800
Net income 100,800
Less PA
£12,570 – ½ × (£100,800 - £100,000) (12,170)
Taxable income 88,630

Tax:
£37,700 @ 20% 7,540
£50,930 @ 40% 20,372
Tax liability (Amount B) 27,912

Tax due on transitional profits:

Amount B 27,912
Less: Amount A (25,832)
Amount C 2,080

Total IT liability
£25,832 + £2,080 27,912
72 6: Trading income (unincorporated businesses) Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know the badges of trade?

Can you adjust a sole trader’s profits for tax purposes?

Do you know the rules determining how we fit the tax adjusted profits for a trader’s
periods of account into tax years? Do you understand the rules for a trade starting,
ceasing or continuing?
 73

Capital allowances

Topics
(1) Introduction to capital allowances
(2) The plant and machinery allowances available
(3) Structures and buildings allowance

Learning Objectives
 Identify whether items of expenditure qualify as plant and machinery
 Understand the effect of VAT in the calculation of capital allowances
 Calculate plant and machinery capital allowances with particular emphasis on the special rate
pool, short-life assets and pre-trading expenditure
 Calculate the structures and buildings allowance available to a business
74 7: Capital allowances Tax Compliance

1 Introduction to capital allowances

1.1 What are capital allowances?
 Capital allowances are a form of tax allowable depreciation and are deducted from adjusted
trading profits.
 There are two main forms of capital allowance:
Capital allowances on plant and Structures and buildings
machinery allowance
Qualifying assets Assets which perform a function in a Commercial buildings (e.g. offices,
business – common examples include: shops, warehouses, factories) and
– Vehicles structures (e.g. roads, walls,
– Computer equipment bridges, tunnels) built after
– Machinery 29/10/18
– Office furniture
– Lighting / heating systems
Non-qualifying Buildings and their walls, floors, ceilings The cost of the land on which the
assets and windows do not qualify as they building / structure is built
merely form part of the setting in which
the business is carried out Residential properties
Form of relief WDA / AIA / FYA 3% straight-line allowance

1.2 Who is entitled to capital allowances?

 Capital allowances are available to sole traders, partnerships and companies (this chapter will
focus on unincorporated businesses – differences when calculating capital allowances for
companies will be covered in chapter 18)
 Capital allowances are calculated for each period of account (not each tax year) and must be
claimed by the taxpayer who can decide how much to claim up to the maximum (in the TC exam
we will assume that the trader will claim the maximum capital allowances available).

1.3 Acquisition cost and disposal value

 In the capital allowance computation we will need to determine the amount to include in
respect of items purchased in the period and items disposed of in the period:
Acquisition cost Disposal value
 Purchases should be recorded at their  The disposal value to be deducted in the
purchase price net of recoverable VAT capital allowance computation is the lower of:
 If VAT on the purchase is irrecoverable – Disposal proceeds
(e.g. cars with private use), then the VAT – Original cost
inclusive price is used  If the asset is given away or sold for less than
 If the trader brings a personally-owned market value, then the disposal value will be
asset into use in the business, the cost is market value on date of disposal
determined to be market value when
brought into the business
Tax Compliance 7: Capital allowances 75

1.4 Purchase of fixtures

The availability of capital allowances on the purchase of fixtures (plant and machinery installed in or
fixed to a building) as part of the acquisition of a building (from a seller who used them in their trade)
is conditional on the following:
 The seller having either claimed first year allowances on the fixtures or allocated them to a
capital allowance pool prior to the date of sale.
 The value of the fixtures must be formally fixed, in most cases by a joint election by the seller
and the purchaser which specifies the amount of the sale proceeds to be allocated to the
fixtures (can’t exceed their original cost).
If these conditions are not satisfied then no capital allowances will be available to the purchaser.

2 Capital allowances on plant and machinery

Example capital allowance computation (one per accounting period)

Special Private
FYA Main Pool rate pool use asset Allowances
£ £ £ £ £
TWDV b/f X X
Acquisitions X X X X
FYA (X) X
AIA (X) (X) X
Disposals (X) (X)
X X
WDA 18%/6% (X) (X) (X) x Bus % X
TWDV c/f X X X X

STEPS
Step 1: Identify how many columns you need
Step 2: Identify the periods of account required (note any short period of account)
Step 3: Add in tax written down value brought forward
Step 4: Record acquisitions and disposals:
 remember to restrict disposal proceeds to acquisition cost
 consider carefully whether to apply AIA or FYA
Step 5: Calculate WDA remembering to restrict for
 short periods of account and
 private use assets.
Step 6: Add capital allowances into the adjustment to profits computation
76 7: Capital allowances Tax Compliance

2.1 Annual Investment Allowance

An Annual Investment Allowance (AIA) of £1,000,000 is available to a sole trader, partnership or
company on the purchase price of qualifying plant and machinery (but not cars!) purchased in a period
of account.

EXAM SMART
The AIA has, at times, been an amount other than £1,000,000. Those amounts are not
examinable in the tax compliance exam.

 For accounting periods longer than / shorter than 12 months the AIA is scaled up / down.
 Rest of expenditure on which AIA is not given receives the relevant WDA.

2.2 The main pool

Assets qualifying for the main pool include:

All machinery, fixtures and fittings and equipment 2nd hand zero emission cars
Vans, forklift trucks, lorries, motorcycles Cars with CO2 emissions of 1 - 50g/km

 An 18% writing down allowance (WDA) is given on the balance of the main pool at the end of
the period of account.
 For accounting periods longer than / shorter than 12 months the WDA is scaled up / down.

2.3 The special rate pool

Assets qualifying for the special rate pool include:

Long life assets (Not cars, useful life when new ≥ 25 Integral features to a building (e.g. electrical
years and > £100k spent on this kind of asset in a systems, cold water systems, heating systems,
12m accounting period) ventilation and air cooling systems, lifts, escalators)
Thermal insulation and Solar panels Cars with CO2 emissions > 50g/km

 A 6% writing down allowance (WDA) is given on the balance of the special rate pool at the end
of the period of account.
 For accounting periods longer than / shorter than 12 months the WDA is scaled up / down.
 AIA should be allocated vs. assets in the special rate pool (which would otherwise get 6% WDA)
in priority to assets in the main pool (which would otherwise get 18% WDA)
Tax Compliance 7: Capital allowances 77

2.4 100% First Year Allowances (FYA)

 There is a 100% FYA is available in the period of account in which a qualifying asset is
purchased.
 Qualifying assets include:

New electric cars or cars with emissions of 0g/km Electrical charge-point equipment purchased
purchased pre-1/4/25 pre-6/4/25 (1/4/25 for companies)
New zero emissions goods vehicles purchased Purchase of new plant and machinery to use in a
pre-6/4/25 (1/4/25 for companies) designated enterprise zone (for companies – see
Research & Development capital expenditure (for Chapter 18)
companies – see chapter 20)

 The FYA is never scaled up or down for long / short periods of account

2.5 Cars – summary

Emissions Treatment
CO2 = 0g/km 100% FYA
1g/km < CO2 ≤ 50 g/km Main pool (18% WDA)
CO2 > 50g/km Special rate pool (6% WDA)

2.6 WDA for small pools

 If the main pool or special rate pool balance is less than £1,000 (after purchases, disposals, AIA
and FYA, but before WDA), it can be written off (take the whole balance as WDA).
 The £1,000 limit is scaled up / down for long / short periods of account.

2.7 Assets with private use by sole trader or partner

 Each asset which is partly used privately by a sole trader or partner is kept in its own column in
the capital allowance computation.
 The AIA / FYA / WDA is calculated in full in the private use asset column, but the allowance in
the allowance column is scaled by the % of business use.

INTERACTIVE QUESTION: CAPITAL ALLOWANCES

Vaneesha makes up accounts to 31 March. The tax written down value of the main pool b/f was £22,000
and the tax written down value of a car at the start of the period was £19,000, CO2 emissions for this
car are 35g, it is used 70% for business.
The following transactions took place in the year to 31 March 2024.
£
5 May 2023 Purchased a lift system for the office 535,000
1 June 2023 Purchased car 1 (45g) 25,000
5 September 2023 Purchased car 2 (0g) 13,000
10 October 2023 Purchased car 3 (155g) 10,100
31 December 2023 Purchased equipment 265,000
5 February 2024 Sold a lorry (original cost £20,000) (8,000)
Requirement
Calculate the maximum capital allowances Vaneesha can claim for y/e 31 March 2024.
78 7: Capital allowances Tax Compliance

SOLUTION

INTERACTIVE QUESTION: SHORT PERIODS

Yasir typically makes up accounts to the 31 March each year, but decides to change his year end and
makes up a set up accounts for the 6 months to 30 September 2023. The tax written down value of the
main pool b/f was £12,000 and the tax written down value b/f of the special rate pool was £15,000.
The following transactions took place in the period to 30 September 2023.
£
1 April 2023 Purchased charge-point equipment for his electric van 5,000
1 July 2023 Purchased thermal insulation for his office 510,000
Requirement
Calculate the maximum capital allowances Yasir can claim for the period ended 30 September 2023.
SOLUTION
Tax Compliance 7: Capital allowances 79

2.8 Balancing adjustments

Sometimes a balancing adjustment is required to correct a situation where:
 Too many capital allowances have been given on an asset and it is sold for > its tax written
down value (here a balancing charge is needed)
 Too few capital allowances have been given on an asset and it is sold for < its tax written down
value (here a balancing allowance may be given)

Balancing allowances and charges

TWDV b/f X
Disposal (proceeds limited to cost) (X)
X/(X)
Balancing allowance/(charge) (X)/X

Balancing Allowances Balancing Charges

80 7: Capital allowances Tax Compliance

Definition Extra capital allowances given if sales Negative capital allowances which
proceeds < TWDV of the pool arise at any time when sale proceeds
(eliminates remaining balance on pool) exceed the TWDV of the pool
When they arise in the Only upon cessation of trade (if sales Whenever sales proceeds > TWDV of
main / special rate pools proceeds < TWDV of the pool) pool
When they arise on non- If assets disposed of for proceeds < If assets disposed of for proceeds >
pool assets (private use / TWDV TWDV
short life assets)

2.9 Short life assets

 Fast depreciating assets, (e.g. computer equipment), can be kept out of the main pool by
making an irrevocable de-pooling election by 31 January after the end of the tax year.
 Most assets can be de-pooled, except for cars, assets with any non-business use and assets in
the special rate pool.
 The benefit of the election is that the trader obtains a balancing adjustment on sale 
assuming disposal proceeds are less than TWDV this will be a balancing allowance.
 Short life assets qualify for the AIA, hence this is only beneficial to elect if the AIA is fully utilised
for the period of purchase
 If held for more than eight years after the end of the accounting period in which it was
purchased, the trader transfers the remaining tax written down value into the main pool.

2.10 Pre-trading expenditure

 Capital expenditure incurred before a business starts is eligible for capital allowances.
 In general, the capital expenditure is treated as incurred on the first day of trading and so
included in the capital allowances computation for the first accounting period.
 However, the rate of allowances available is determined by the actual date of the expenditure.

WORKED EXAMPLE: BALANCING ADJUSTMENTS

Gisala is a sole trader making up accounts to 31 August. She is not registered for VAT. The main pool at
1 September 2022 had a tax written down value of £9,500. Gisala also had a Jaguar car, purchased two
years ago with 20% private use with a tax written down value of £15,000.
On 12 March 2023, Gisala sold machinery for £11,000 (original cost £12,000).
On 15 July 2023, Gisala traded in her Jaguar for an Audi with CO2 emissions of 40g/km. The trade in
value was £13,000 and she paid £7,000 in cash. The Audi also has 20% private use.
Requirements
(a) Compute the capital allowances available for Gisala for the year ended 31 August 2023.
(b) Show the maximum capital allowances in the main pool for the year ending 31 August 2023
assuming that the machinery was sold on 12 March 2023 for only £8,700.
Tax Compliance 7: Capital allowances 81

SOLUTION
(a)
Main pool Jaguar Audi Allowances
Period of account £ £ £ £
1.9.22 to 31.8.23
TWDV b/f 9,500 15,000
Acquisition (no AIA)
15.7.23 Car (<50g/km CO2)
(£13,000 + £7,000) 20,000
Disposals
12.3.23 (11,000)
(1,500)
Balancing Charge 1,500 (1,500)
15.7.23 (13,000)
2,000
Balancing Allowance (2,000) 1,600
× 80%
WDA @ 18% (3,600)
× 80% 2,880
TWDV c/f nil nil 16,400
Allowances 2,980

(b)
Main pool Allowances
£ £
Period of account
1.9.22 to 31.8.23
TWDV b/f 9,500
Disposals
12.3.23 (8,700)
800
WDA (small pool) (800) 800
–

2.11 Allowances on cessation

On the cessation of trade, all the plant and machinery in the business are disposed of or deemed to
have been disposed of.
Capital allowances for the final period of account are computed as follows:
 Any items acquired in the final period are added to TWDV b/f;
 No WDAs or FYAs or AIAs are given for the final period of account;
 The disposal value of the assets in each pool is deducted from the balance, giving rise to
balancing allowances or balancing charges;
 Any assets taken over personally by the owner are treated as sold for market value.
82 7: Capital allowances Tax Compliance

INTERACTIVE QUESTION: CESSATION OF BUSINESS

Ted is a sole trader, making up accounts to 31 December each year. The TWDV of his plant and
machinery at 31 December 2022 were:
£
Main pool 24,285
Car with CO2 emissions of 154g/km purchased in 2021 (30% private use by Ted) 23,750
Ted ceased trading on 30 September 2023. He made up his final set of accounts for the nine month
accounting period to 30 September 2023.
His taxable trading income before capital allowances for the period was £9,000. He had unused
overlap profits of £2,000.
His purchases and sales of plant and machinery in the period to 30 September 2023 are:
£
14 May 2023 Bought office furniture 1,850
30 September 2023 Sold all main pool items (all less than cost) 26,590
30 September 2023 Sold car 19,680
Requirement
Calculate Ted's taxable trading income for the final tax year of the business. Ignore VAT
SOLUTION
Tax Compliance 7: Capital allowances 83

3 Structures and buildings

3.1 Structures and buildings
As mentioned earlier in this chapter, if a business incurs qualifying expenditure on new commercial
structures and buildings where the contract to build it was entered into on or after 29 October 2018
and the first use of the building or structure is non-residential use then a structures and buildings
allowance (SBA) is available.
Qualifying structures Qualifying buildings
 Roads  Offices
 Walls  Shops
 Bridges  Warehouses
 Tunnels  Factories
 Hotels and care homes

3.2 Structures and buildings allowances (SBA)

 Each commercial building or structure will be treated separately.
 SBA is 3% p.a. of the cost of the structure or building on a straight-line basis.
 The allowance is scaled up / down for long / short periods of account.
 The ‘cost’ is the construction cost of the structure / building (incl. costs of demolition / land
alterations during construction and direct costs required to bring the asset into existence).
 If bought from a developer, the 3% is based on the acquisition cost (excluding land).
 The claimant must have an interest in the structure or building and the allowance can only be
claimed once the building first comes into use. If brought into use part way through an
accounting period then 3% is time apportioned.
 The allowance is available to the person with the interest in the land whether the asset is used
in a trade/profession or owned for rental.
 If a structure or building is divided into separate parts, some of which qualify, an appropriate
proportion of expenditure will qualify for relief.
 If items of plant and machinery bought with the structure or building then plant and machinery
capital allowances should be claimed on these items.

3.3 SBAs on sale of the asset

In the period in which an asset qualifying for the SBA is sold then the relief will need to be apportioned
between the seller and the new owner.

Seller
 The seller will time apportion their relief up to the date of disposal  there are no balancing
adjustments on disposal.
 The seller will need to increase their proceeds on disposal by the SBA claimed to date for the
purposes of calculating the chargeable gain on disposal.

Buyer
 The new owner takes over the remaining allowances over the remainder of 331/3-year period.
84 7: Capital allowances Tax Compliance

 Their relief continues to be based on 3% of the original cost of the asset and there is no uplift
for any increase in value.

WORKED EXAMPLE: SBA – SALE AND SUBSEQUENT OWNERSHIP

Tree Ltd entered into a construction contract in November 2021 and spent fifteen months building a
factory for £2 million, including £600,000 for the land. Tree Ltd started using it for the purposes of its
trade as soon as it was completed on 1 March 2023. It prepares its accounts to the 30 April.
On 31 July 2023, Tree Ltd sold the factory to Branch Ltd for £3 million, including £1 million for the land.
Branch Ltd also prepares its accounts to the 30 April and immediately started using the factory within
its trade.
Requirements
Calculate Tree Ltd’s SBA available for the year ended 30 April 2023 and year ended 30 April 2024 and
calculate Branch Ltd’s SBA for the year ended 30 April 2024.
What will be the effect of the SBA on the base cost of the factory for Tree Ltd?
SOLUTION
Tree Ltd
Y/e 30.4.23
SBA = 3% × (£2m – £0.6m) × 2/12 = £7,000
Y/e 30.4.24
SBA = 3% × £1,400,000 × 3/12 = £10,500
The SBA claimed to the date of disposal of £17,500 will be added to the disposal proceeds in Tree Ltd’s
chargeable gains calculation.
Branch Ltd
Y/e 30.4.24
SBA = 3% × £1,400,000 × 9/12 = £31,500
There is no uplift for the increase in value between construction and 31 July 2023
Tax Compliance 7: Capital allowances 85

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know what qualifies as plant and machinery in terms of being able to claim
capital allowances?

Can you write out a pro forma capital allowance calculation?

Are you able to determine the AIA available to a business and identify which assets
qualify for the AIA?

Can you identify the correct capital allowance treatment for a car?

Do you know how capital allowances work if we have private use of an asset by a sole
trader?

Do you know how an asset being sold impacts the calculation of capital allowances?

How does the capital allowance computation get adjusted if the business ceases to
trade?

Can you identify whether a building qualifies for the SBA and, if it does, how much SBA
can be claimed?
86 7: Capital allowances Tax Compliance
 87

Unincorporated trader losses

Topics
(1) Introduction to trading losses
(2) Loss relief in opening years
(3) Terminal loss relief
(4) Summary of relief options
(5) Restrictions on the use of losses

Learning Objectives
 Calculate the trading loss available for relief in the opening years of a business
 Identify the trading loss relief options open to an individual who has a business that has been
trading for many years, has just commenced trading or is ceasing to trade
 Calculate the taxable income of the individual after the losses are relieved
88 8: Unincorporated trader losses Tax Compliance

1 Introduction to trading losses

A trading loss is achieved if a trader arrives at a negative result for a tax year after adjusting their
profits, deducting capital allowances and allocating the profit to the appropriate tax year(s).
This has two results:
– The trading income for the year should be recorded as nil
– Tax relief can be obtained for the loss

EXAM SMART
During the transition from the basis period rules to the tax year basis, special rules apply to
trade losses. These rules will not be examined in the Tax Compliance exam. Instead, you will
be provided with the trade profit/loss for each tax year in questions with trade losses for
ongoing trades. Alternatively, the trader may have a year end of 31 March to avoid the
transitional period complexities.

1.1 Setting trading losses against general income (s.64)

 A trading loss arising in a tax year may be set against the trader's general income (before the
offset of the personal allowance) for:
– the same tax year, and/or
– the previous tax year
 This can be done in any order, but each claim is ‘all or nothing’ (so, when using a loss vs. the
general income for a particular tax year you have to use as much as possible!)
 This means that using s.64 relief vs. the general income of a tax year with low amounts of
income may lead to income being eliminated with loss relief that otherwise would have been
covered by the personal allowance.
 If the s.64 claim does not cover all of the income of a tax year, the loss should be offset vs.
income in the following order: vs. non-savings income, vs. savings income, then vs. dividend
income.
Tax Compliance 8: Unincorporated trader losses 89

1.2 Carry forward of trading losses (s.83)

 If there is trading loss remaining after any s.64 claim, the remaining trading losses are
automatically carried forward under s.83 and set off against the first available future trading
profits of the same trade.

23/24
Trading loss
(X)
(s.83)
2022/23 2023/24 2024/25
Trading profits X – X
Other income X (s.64) X (s.64) X
Total income X X X

1.3 Choosing which loss relief to use

Consider the following:
 The rate of income tax applying in the relevant tax years;
 The possible wasting of the personal allowance; and
 The timing of the loss relief (i.e. for cashflow purposes earliest is best).

INTERACTIVE QUESTION: S.64 LOSS RELIEF

Alice makes a trading loss of £22,000 in her accounting period to 31 March 2024.
Alice has income as follows:
2022/23 2023/24 2024/25
£ £ £
Trading income 40,000 NIL 5,000
Property income 5,000 15,000 15,000
Requirement
Explain how the loss may be used.
SOLUTION
90 8: Unincorporated trader losses Tax Compliance

1.4 Setting trading losses against chargeable gains (s.261B)

 Following a s.64 claim for trading losses against general income, a claim may also be made
under s.261B TCGA 1992 for any unrelieved part of the trading loss to be set against the trader's
capital gains for that tax year.
 The detail of this relief is explained in chapter 11.

1.5 Writing about loss relief in the exam

When asked to explain the loss relief options for a sole trader / partner in the exam, you should try to
be as specific as possible in your answer to pick up as many marks as possible – try to tell the
examiner:
(1) How much loss will be used
(2) When it will be used (which tax year)
(3) What it will be used against (e.g. general income / trading income)

2 Loss relief in opening years (s.72)

2.1 Opening year loss relief
 In addition to the options in section 1 (s.64 and s.83), there is a special opening year loss relief
available for trading losses incurred in any of the first four tax years under s.72.
 Trading losses can be set-off against the general income of the three tax years preceding the tax
year of the loss on a first in first out (FIFO) basis.
Tax Compliance 8: Unincorporated trader losses 91

 If s.72 relief is used, then the trader must first carry the loss back to use vs. the general income
three tax years prior, then two tax years prior, then any remaining loss vs. the prior tax year.
 As for s.64, this is an ‘all or nothing’ relief.
 For example, a trader who commenced in 2023/24 could use s.72 relief for any losses arising in
the tax years 2023/24 – 2026/27:

23/24 24/25 25/26 26/27

loss loss loss loss
(X) (X) (X) (X)

2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27

Trading profits – – – –
Other income X X X X X X X
Total income X X X X X X X
1. 2. 3.

INTERACTIVE QUESTION: S.72 LOSS RELIEF

Peter started a business on 1 May 2022. His trading results are as follows:
£
11 months ended 31 March 2023 6,120
Year ended 31 March 2024 (48,000)
Year ended 31 March 2025 10,000
Prior to commencing in business Peter had been employed. His employment income for 2020/21 and
2021/22 was £25,000 and £10,000 respectively. In addition he has property income amounting to
£6,000 each year.
Requirement
Show how Peter will obtain relief for the loss if he makes a claim under s.72.
SOLUTION
92 8: Unincorporated trader losses Tax Compliance

2.2 Loss relief and national insurance contributions

 Loss relief under s.64, s.72 or s.83 against trading income reduces both the income tax and class
4 NICs on the trading income.
 However, loss relief under s.64 or s.72 against non-trading income (e.g. employment / property
/ savings / dividend income) only applies for income tax purposes.
 These losses are treated as if carried forward for class 4 national insurance purposes (see later)
to be set off against trading income in future years.

3 Terminal loss relief (s.89)

3.1 How terminal loss relief works
 In addition to relief under s.64, relief is also available under s.89 for a loss on the cessation of a
trade to be carried back and relieved in earlier years.
 The loss available for relief under s.89 is the loss of the last twelve months of trading.
 Relief is given against trading income in the final tax year and the previous three tax years on a
last in first out (LIFO) basis.

3.2 Calculation of the terminal loss

 The terminal loss is calculated as follows:
Tax Compliance 8: Unincorporated trader losses 93

1. 6 April (start of final tax year) to cessation date

Trading loss plus unrelieved overlap profits (if profit, show nil here) (X)

2. Remainder of final 12 months trading up to 5 April

Trading loss (if profit overall, show nil here) (X)
Terminal Loss (X)

Loss 6/4/23 – 31/12/23 (X)

1
Less: Overlap profits (X)
(X)
2020/21 2021/22 2022/23 2023/24
2 Loss 1/1/23 – 5/4/23 (X)
Trading profits X X X – Terminal Loss (X)
3. 2. 1.
Other income X X X X E.g. cease on 31/12/23
Total income X X X X

Note:
 If loss relief has already been claimed under s.89 terminal loss rules, any claim under s.64 for
the final tax year will be reduced by the loss already used under s.89
 If loss relief has already been claimed against total income in the final tax year under s.64, the
terminal loss will be reduced by the loss already used.

INTERACTIVE QUESTION: S.89 LOSS RELIEF

Alysha had the following results prior to ceasing to trade on 31 October 2023.
Year ended 31 December 2020 £6,000
Year ended 31 December 2021 £5,000
Year ended 31 December 2022 £9,000
10 months ended 31 October 2023 (£20,000)
Unrelieved overlap profits from commencement were £2,000.
Alysha also had property income of £25,000 in each of the tax years concerned.
Requirement:
Calculate Alysha’s trading loss for 2023/24 and also Alysha’s terminal loss.
Explain Alysha’s loss relief options
SOLUTION
94 8: Unincorporated trader losses Tax Compliance

4 Summary of loss relief options

s.83 s.64 s.72 s.89
Type of loss relief Carry forward Current year and/or Loss in first 4 tax Terminal loss relief
prior year (any years on cessation
order)
Set against Future trading Total income and Total income Trading profits
profits from same then can be
trade extended against net
gains
Time limits Indefinite Current year and/or 3 year carry back 3 year carry back
prior year (FIFO) (LIFO)
Conditions Automatic All or nothing All or nothing All or nothing
Claim Agree amount of loss 12m from 31 Jan 12m from 31 Jan 4 years of end of
within 4 years of end following tax year of following tax year of tax year of
of tax year of loss loss loss cessation

5 Restrictions on the use of losses

5.1 Non-active traders
If an individual does not devote significant time (10 hours a week) to the trade, loss relief vs. non-
trading income is restricted to £25,000 per tax year. Any remaining loss is then carried forward against
future profits from the same trade.
Tax Compliance 8: Unincorporated trader losses 95

5.2 Restriction on income tax reliefs against total income

There is a limit on the amount of relief a trader can get when setting trading losses against non-trading
income in a particular tax year.
 The limit is the higher of:
(i) £50,000 or
(ii) 25% of adjusted total income
 An unrestricted amount of loss can be claimed against profits of the same trade for the
preceding tax year. The restriction is then against other income
 Adjusted total income is plus Give As You Earn charitable donations, less gross personal pension
contributions
 Any unrelieved restricted loss is carried forward against future profits from the same trade
 The limit applies to the offset of the following reliefs vs. non-trading income:
– S.64 and s.72 loss relief
– Qualifying loan interest on loans to invest in a close company (Ch. 2)

WORKED EXAMPLE: LIMIT ON LOSS RELIEF

In the year to 5 April 2024 Jo made a trading loss of £145,000. She made a trading profit of £30,000 in
2022/23 and had employment income of £125,000 each year.
If Jo claims relief for the trading loss against her total income of the current and the previous year, her
taxable income will be:
2022/23 2023/24
£ £
Trading profit 30,000
Employment income 125,000 125,000
155,000 125,000
Loss relief (80,000) (50,000)
75,000 75,000
Personal allowance (12,570) (12,570)
Taxable income 62,430 62,430

 2023/24 loss relief is capped at £50,000 as this is higher than £31,250 (£125,000 × 25%).
 2022/23 loss relief against the trading profit of £30,000 is not capped but relief against other
income is capped at £50,000 (as this is higher than 25% × £155k). Total relief is £80,000 (30,000
+ 50,000).
 The balance of the loss of £15,000 (145,000 – 50,000 – 80,000) is carried forward against future
profits of the same trade.
 Strangely, the cap is actually beneficial here. The cap results in most of the loss being relieved
against income otherwise taxable at the higher rate, while allowing her to preserve her personal
allowance in both tax years.
96 8: Unincorporated trader losses Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you explain how a trade loss is carried forward or offset in a current year and/ or
prior year claim against general income?

Do you know the extra loss claim available for a sole trader in their opening years?

Do you know the extra loss claim available when a sole trader ceases to trade?

If you spot a large trade loss, do you know this is a prompt to consider whether you
need to restrict the income tax reliefs against total income?
 97

Partnerships

Topics
(1) Partnerships
(2) Limited Liability Partnerships

Learning Objectives
 Allocate profits and losses between partners in an ongoing partnership, where partners are
joining or leaving the partnership or where there is a change in the profit share arrangement
 Deal with the allocation of notional profits and losses
 Discuss the implication of a limited liability partnership
98 9: Partnerships Tax Compliance

1 Partnerships
1.1 Taxation of partnerships
A partnership itself is not a taxable person. Each of the partners is liable to tax on his share of the
taxable trading income of the partnership on the same basis as a sole trader.
Hence, before a partner can be taxed, we need to calculate their share of the partnership’s profits.

1.2 Allocation of partnership profits

(1) Perform adjustments to profit (for the partnership as a whole for the period of account)
(2) Calculate and deduct capital allowances (for the partnership for the period of account) and
(3) Split the profit between the partners in accordance with their partnership agreement (use
salaries and interest on capital first, then the profit sharing ratio to split the remainder).
(4) Treat each partner as a separate sole trader and apply the rules to allocate their taxable trading
profits to the appropriate tax year(s).

1.3 Change in profit sharing ratio during period of account

 If there is a change in the profit-sharing agreement during the period of account, then after
steps 1 and 2 above, divide the period of account into the periods of the different profit sharing
agreements.
 Any salaries and interest on capital as appropriate must be time-apportioned accordingly.

WORKED EXAMPLE: CHANGE IN PARTNERSHIP PROFIT ALLOCATION

Lisa, Alicia and Mary are in partnership. Partnership accounts are made up to 31 July. The partnership
had taxable trading income of £90,000 for the year ended 31 July 2023.
Until 30 November 2022, the partnership had shared profits equally.
From 1 December 2022 it was agreed that the partners should be paid an annual salary and the profit-
sharing ratios divided as follows:
Lisa Alicia Mary
Salary £24,000 £21,000 £15,000
PSR 25% 35% 40%
Requirement
Show the taxable trading income for each partner for the period of account.
SOLUTION
Total Lisa Alicia Mary
First PSR period
4 months 1.8.22 to 30.11.22
PSR ([Link])
£90,000 × 4/12 30,000 10,000 10,000 10,000
Second PSR period
1.12.22 to 31.7.23
Salaries (× 8/12) 40,000 16,000 14,000 10,000
PSR ([Link]) 20,000 5,000 7,000 8,000
Total 90,000 31,000 31,000 28,000
Tax Compliance 9: Partnerships 99

1.4 Partners joining or leaving a partnership

 The tax year basis applies when a new partner joins a partnership during 2023/24, i.e. from the
day they join to 5 April 2024, while existing partners continue to use the transitional rules.
 The closing year rules apply to a partner leaving a partnership, while the remaining partners
continue to use the transitional rules in 2023/24.
 If a partner joins or leaves a partnership during a period of account, then the profit-sharing
agreement will change and, as such, we need to split the period in two (as in the previous
section).
 It is essential to calculate the profit split first before matching those profits with the appropriate
tax year(s).

INTERACTIVE QUESTION: PARTNER JOINING A PARTNERSHIP

Sam and Emma have been in partnership for many years making up accounts to 31 December each
year. Profits have been shared equally.
On 1 June 2023, Hilary joined the partnership. From that date, profits were shared Sam 50% and
Emma and Hilary 25% each.
The partnership taxable trading income for the year ended 31 December 2023 was £48,000 and for the
year ended 31 December 2024 was £60,000.
Sam has overlap profits of £1,500 and Emma’s are £2,000.
Requirement
Compute the trading income taxable on Sam, Emma and Hilary for 2023/24.
SOLUTION
100 9: Partnerships Tax Compliance

1.5 Notional profits and losses

Sometimes, if the partnership makes an overall profit, the allocation of profits results in one or more
of the partners making a notional loss.
In this case, the profit allocation must be adjusted in proportion to the profit initially allocated to the
partners.
Notional losses Notional profits
Description The partnership makes a profit, but one of The partnership makes a loss, but one of the
the partners makes a notional loss. partners makes a notional profit.
Step 1 Calculate the profit / loss of each partner as normal
Step 2 Set the loss making partner’s overall profit / Set the profit making partner’s overall profit
loss to zero / loss to zero
Step 3 Reallocate the notional loss to the other Reallocate the notional profit to the other
partners in proportion to their current profit partners in proportion to their current loss
allocation (reducing their profit allocation) allocation (reducing their loss allocation)

INTERACTIVE QUESTION: NOTIONAL LOSS

Graham, Henry and Isobel are in partnership. In the year to 31 December 2023 the partnership had
taxable trading income of £44,500.
During the period, Graham was entitled to a salary of £28,000 and Henry a salary of £24,000. The
remaining profits/ losses are to be divided equally between the partners.
Requirement
Show the taxable trading income for each of the partners.
SOLUTION
Tax Compliance 9: Partnerships 101

1.6 Loss relief for partners

 Partners are entitled to the same loss reliefs as a sole trader.
 Each partner makes their own loss relief claim based on their own circumstances:
– For example, a partner joining a partnership may claim s.72 loss relief for losses in the
first four tax years in which they are a member of the partnership.

1.7 Capital gains

 Partnership capital transactions are treated as dealings by the individual partners rather than
the partnership.
 Each partner is treated as owning a fractional share of each of the partnership assets.
 Each partner is chargeable on their share of gains arising on disposals of partnership assets. The
chargeable gain will be apportioned between the partners in accordance with the partnership
capital profit sharing ratio.

2 Limited liability partnerships

2.1 What is a limited liability partnership?
 Most partnerships are formed so that the partners each have unlimited liability for the debts of
the partnership.
 However, it is possible to form a limited liability partnership (LLP) under which the liability of
the partners is limited to the amount of capital that they contribute to the partnership.

2.2 Income tax on limited liability partnerships

 The partners of an LLP are taxed on a similar basis to those in a normal (unlimited) partnership.
 Thus each of the partners is liable to tax on their share of the taxable trading income of the LLP.

2.3 Salaried members of LLP

 Salaried members are partners who receive payment from the LLP in return for their services,
and the payment received is fixed (or if variable, the payment does not vary with the profits of
the LLP).
 Such partners are treated for income tax, national insurance and corporation tax purposes as if
they are employees, and not partners (hence they pay income tax and class 1 NICs on the
payments they receive).

2.4 Restriction of loss relief in a limited liability partnership

 There is a limit on the amount of relief a partner in an LLP can get when setting trading losses
against non-trading income (‘sideways relief’).
 The total lifetime ‘sideways’ loss relief an LLP partner can claim is restricted to the amount of
capital invested by that partner.
 Any remaining losses continue to carry forward against future profits from the same trade.
 There is no restriction on loss relief vs. profits of the same trade.
102 9: Partnerships Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you prepare a profit allocation between partners?

Do you know how to handle a change in the profit share, a new partner joining or a
partner leaving the partnership?
 103

10

The cash basis

Topics
(1) Cash basis for small businesses
(2) Cash basis for property businesses
(3) Starting to use the cash basis
(4) Ceasing to use the cash basis
(5) Interaction with other taxes

Learning Objectives
 Integrate knowledge acquired previously in the Principles of Taxation examination to compute
adjusted profits computations for a trader using the cash basis
 Apply the cash basis to a property business
 Identify the adjustments required under the cash basis
104 10: The cash basis Tax Compliance

1 Cash basis for small businesses

1.1 Introduction
 Small unincorporated businesses may elect to use the cash basis rather than accruals
accounting for the purposes of calculating their taxable trading income.
 Under the cash basis, a business is taxed on its cash receipts less any cash payments of
allowable expenses.
 Only use this method in the TC exam if the question tells you to use the cash basis.

1.2 Which businesses can use the cash basis?

Only businesses which meet the following criteria may use the cash basis:
 Unincorporated businesses (sole traders and partnerships, but not LLPs)
 Receipts for the tax year ≤ £150,000 (£300,000 for recipients of Universal Credit)
– Limits scaled down for short accounting periods
– Limits consider receipts from all of the trader’s businesses
 A trader must leave the scheme if their receipts in the previous tax year exceeded £300,000.
 A trader may leave the scheme if ‘commercial circumstances’ change such that the scheme is no
longer appropriate for them

1.3 Calculation of taxable profits

The taxable trading profits are calculated as:
Total cash receipts in accounting period X
Total allowable business expenses paid in accounting period (X)
Total taxable trading profits X

 Tax adjustments are broadly the same as for accruals accounting (per Ch. 6), e.g. expenditure
not wholly and exclusively for the purposes of the business is still a disallowed.
 There are however a number of differences – see table below:

1.4 Differences from the accruals basis

Item Notes
Capital expenditure on plant and  Capital expenditure is deductible from trading profits (instead of
machinery (excluding cars, capital allowances)
non-depreciating assets and land)  Disposal proceeds are taxable income
 Restrict to the business use % if private use by the sole trader /
partner
Purchase of cars Capital allowances (ch.7) or the mileage allowance (ch.6) can be
claimed as normal
Goods taken for own use Only add the cost price back to profits (as opposed to sales price)
Bad debts Not allowable as income is only taxed when it is received
Car lease payments The 15% restriction does not apply for cars with emissions > 50g/km
Tax Compliance 10: The cash basis 105

Item Notes
Interest payments Interest payments on loans (not credit cards or finance leases) are
allowed even if they are not wholly and exclusively for the purposes of
the trade (up to a maximum of £500 for a 12 month period)
Ceasing to use an asset in the The market value of the asset is treated as a taxable receipt
trade
Ceasing to trade The value of stock and work in progress is treated as a taxable receipt
in the final period of account

1.5 Basis of assessment

Rules to determine which tax year profits are taxed in apply in the normal way (per Ch. 6).

WORKED EXAMPLE: CASH BASIS

Adam started to trade as a sole trader on 1 May 2023 and has elected to use the cash basis for tax
purposes. During the year to 30 April 2024 his accounts show receipts of £30,000 and expenditure of
£15,000. Included in these were the following transactions:
 receipt of £5,000 for the sale of a printing press,
 expenditure of £10,000 on a new car (emissions 45g/km)
 interest of £700 was paid on a bank loan taken out last year to buy a new car.
In addition Adam took goods costing £1,000 from the business for his own use. The sale price of these
goods would be £1,500. No entry has yet been made in the accounts.
Requirement
What is the amount of taxable trading profit assessable for the period to 30 April 2024?
SOLUTION
Total receipts per accounts 30,000
Add: goods taken for own use (cost) 1,000
Total taxable receipts 31,000

Total payments per accounts (15,000)

Add: cost of new car (not allowable) 10,000
Add: interest on a bank loan (excess of £500) 200
Total allowable deductions (4,800)
26,200
Less: WDA on car 18% × £10,000 (1,800)
24,400

The proceeds of sale of the printing press are taxable.

1.6 Election to use the cash basis

 An election to join the scheme is made by ticking the ‘cash basis’ box in the self-assessment tax
return.
 The election applies to all the businesses run by the trader.
106 10: The cash basis Tax Compliance

The election is effective for the tax year for which it is made and all subsequent tax years unless:
(a) The trader’s receipts exceed the eligibility limit (see above) or
(b) There is a change of circumstances which makes it more appropriate to prepare accounts using
UK GAAP, and
(c) The trader elects to calculate profits using UK GAAP.

2 Cash basis for property businesses

Per chapter 3, the cash basis is the default method of calculating property income for unincorporated
property businesses with cash receipts not exceeding £150,000 in the tax year, with some exclusions.
 An election can be made to opt out of the cash basis and use the accruals basis under UK GAAP
instead.
 The election has to be made each year.
 Where cash receipts exceed £150,000 the cash basis cannot be used.
Under the cash basis for property businesses, the taxable property income for a tax year is calculated
as cash receipts less expenses actually paid.
The expenses must still be allowable deductions under existing rules for property businesses.

EXAM SMART
In the exam assume the cash basis applies to unincorporated property businesses with cash
receipts not exceeding £150,000, unless specifically told that an election has been made for
the accruals basis to apply.

3 Starting to use the cash basis

3.1 New businesses
 A new sole trader meeting the eligibility criteria can elect to use the cash basis from the date
they start to trade.
 A new property business with cash receipts not exceeding £150,000 will automatically use the
cash basis as the default basis for calculating property income unless an election can be made to
opt out and use the accruals basis.

3.2 Existing businesses

 An existing business which has previously used the accruals basis may start using the cash basis
provided it meets the eligibility criteria.
 An existing property business which has previously used the accruals basis with cash receipts
not exceeding £150,000 will automatically use the cash basis unless it elects to opt out.
 If the fixed rate mileage allowance has been claimed the business must continue to use it under
the cash basis.
Tax Compliance 10: The cash basis 107

3.3 Adjustments when starting to use the cash basis

A trader will need to make some one-off adjustments in the first accounting period in which they use
the cash basis (if they’ve previously used the accruals basis):
Type Description
TWDV brought forward on A tax deduction can be claimed for the TWDV b/f of plant and machinery
plant and machinery (not cars, non-depreciating assets and land) in the capital allowances pools
Adjustment income  This is needed if a tax deduction was given in the previous period for
accrued expenditure (under the accruals basis) which will be paid for in
the current year under the cash basis.
 Adjustment income =
Opening debtors + Opening stock – Opening creditors
 An amount is added to profits in the current period to prevent a
double-deduction for the expenditure.
Adjustment expenditure  This is needed if accrued income was included in the previous period
(under the accruals basis) but the cash is received in the current period.
 Adjustment expense =
Opening debtors + Opening stock – Opening creditors
 An amount is deducted from profits in the current period to prevent
double taxation on the income.

INTERACTIVE QUESTION: CASH BASIS

Ahmed has been running a business as a sole trader for a number of years. He prepares his accounts
for the year to 31 March 2024 on the cash basis and elects to use the cash basis for tax purposes for
the first time.
Ahmed’s net profit (net receipt) per the accounts is £31,000. Included in this figure are the following
amounts:
£
Payment for hire of car 3,000
Purchase of bottles of whiskey for five customers 120
Purchase of furniture for office 600

The car has CO2 emissions of 135g/km. Ahmed drove 4,000 business miles and 1,000 private miles in
the car during the year.
At the beginning of the period the tax written down value on Ahmed’s capital allowances main pool
was £3,300. 75% of the balance relates to cars (all used for business purposes) and 25% to items of
plant and machinery.
Ahmed has opening debtors of £1,000, opening stock of £3,500 and opening creditors of £2,500. This
is not yet included in his calculations for the year.
Requirement
Calculate Ahmed’s taxable trading profit for the year ended 31 March 2024, assuming he does not
claim the fixed rate mileage allowance for the car hired during the year.
108 10: The cash basis Tax Compliance

SOLUTION

4 Ceasing to use the cash basis

When a trader leaves the cash basis another set of adjustments will be made in the first period taxed
under the accruals basis:
Type Description
Plant and machinery Where an asset has been acquired but not fully paid for in a prior period
acquired but not fully paid (e.g. a hire purchase asset), the unrelieved expenditure is allocated to a
for (not cars) capital allowances pool in the next accounting period.
Adjustment income  This is needed if a tax deduction was given in the previous period for
prepaid expenditure (under the cash basis) which will be recognised in
the profit in the current period under the accruals basis.
 Adjustment income =
Opening debtors + Opening stock – Opening creditors
 Spread equally over six years from 1st tax year after leaving the cash
basis.
 Taxed as trading income, unless election is made to accelerate the
charge.
Adjustment expenditure  This is needed if prepaid income was included in the previous period
(under the cash basis) which will be recognised in the profit in the
current period under the accruals basis.
 Adjustment expense =
Opening debtors + Opening stock – Opening creditors
 Deductible as a trading expense in the 1st accounting period after
leaving the cash basis.

5 Interaction with other taxes

Tax Interaction
Income Tax There is no ‘qualifying interest’ relief (see ch.2) on a loan to invest in a partnership if
the partnership is taxed on the cash basis.
Capital Gains Tax The proceeds from sale on items of plant and machinery are taxed as part of trading
profits under the cash basis, hence these disposals are excluded from the CGT
computation.
Tax Compliance 10: The cash basis 109

Tax Interaction
VAT If a trader uses the cash basis for income tax, they must also use the VAT cash
accounting scheme (if they are VAT registered)
Class 4 NIC Class 4 NICs are calculated on the trading profits calculated under the cash basis

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know the rules about which businesses can use the cash basis?

Can you calculate the tax adjusted profit for a business using the cash basis?

Have you remembered that the cash basis is also the default option for calculating an
individual’s property income?

Do you understand the adjustments which need to be made when a business starts/
stops using the cash basis?
110 10: The cash basis Tax Compliance
 111

11

Chargeable gains for

individuals

Topics
(1) Chargeable and exempt persons, assets and disposals
(2) Computing gains / losses on disposal
(3) Capital gains tax payable by individuals
(4) Relief for trading losses
(5) Married couples/civil partners
(6) Connected persons
(7) Shares and securities

Learning Objectives
 Calculate the chargeable gains and losses on assets, including chattels, and shares and securities
 Calculate total taxable gains and tax payable thereon, using available losses to reduce the
liability
112 11: Chargeable gains for individuals Tax Compliance

1 Chargeable and exempt persons, assets and disposals

A chargeable gain is generated if a chargeable person makes a chargeable disposal of a chargeable
asset

1.1 Chargeable persons

Chargeable persons Exempt persons
Individuals Registered charities
Business partners
Trustees Registered pension schemes
Companies, which pay corporation tax on their
chargeable gains, not CGT

1.2 Chargeable disposals

Chargeable disposals Exempt disposals
The sale of whole or part of an asset Gifts to charities, art galleries, museums and
The gift of whole or part of an asset similar institutions
Receipts of capital sums on the surrender of Leaving assets in your will upon death (there is a
rights over assets tax-free uplift of the value of assets passed on
The loss or destruction of the whole or part of an death)
asset
Appropriation of assets as trading stock
(reclassifies a non-current asset as stock)

1.3 Chargeable assets

Chargeable assets are all capital assets except those which are specifically exempted from CGT
Chargeable assets (typical examples) Exempt assets
Land and buildings Legal tender (ie cash)

Shares Wasting chattels (life ≤ 50 years), except plant and

machinery used in a business (see below)
Goodwill (for individuals) Non-wasting chattels bought and sold for <£6,000
Works of art (and other valuable non-wasting Gilt-edged securities
chattels) Qualifying Corporate Bonds (QCBs):
£ denominated and non-convertible
Leases National Savings Certificates and Premium Bonds
Shares and investments held in an Individual Savings
Account (ISA)
Cryptoassets Cars

Plant and machinery used in a business

Sold at a loss – no allowable loss (as capital allowances already given)
Sold at a profit – use the non-wasting chattel rules, so exempt if bought/sold for less than £6,000
Tax Compliance 11: Chargeable gains for individuals 113

2 Computing a gain or loss

2.1 Typical chargeable gains calculations
In the TC exam you need to show one chargeable gains calculation for each individual disposal in a tax
year:
Disposal proceeds (i) X
Less: incidental costs of disposal (ii) (X)
Net disposal proceeds X
Less: allowable costs (ii), (iii) (X)
Chargeable gains/ (allowable loss) X/(X)

(i) The disposal consideration is the sale proceeds or, if the asset is not sold at arm's length
(e.g. a gift or sale at undervalue) the disposal consideration is generally the market value
of the asset.
(ii) Incidental costs of disposal are deducted to give the net disposal consideration. These
include legal fees, estate agents' and auctioneers' fees and advertising costs.
(iii) Allowable costs are:
– Acquisition cost of the asset (purchase price if bought, market value of asset if
gifted, probate value if acquired on death);
– Incidental costs of acquisition such as legal fees, surveyors’ fees, stamp duty, SDLT
– Enhancement expenditure (capital costs of additions and improvements to the
asset reflected in the value of the asset at the date of disposal such as extensions,
planning permission and architects' fees for such extensions).

2.2 Part disposals

 If an asset is purchased and then part of it is disposed of (e.g. land), the original cost of the asset
needs to be apportioned to determine the allowable cost for the gains computation.
A
 In this case, the allowable cost for the disposal is calculated as: Cost x where:
A+B

– A is the market value of the part disposed of (= gross proceeds on the disposal)
– B is the market value of the part that is retained (given in the exam question)

INTERACTIVE QUESTION: PART DISPOSAL

Jenny bought ten hectares of land for £42,500. The incidental costs of purchase were £2,000.
She sold three hectares for £20,400 less auctioneer's fees of 5%. The market value at the time of sale
of the remaining seven hectares was £61,200.
Requirement
Calculate the chargeable gain on sale.
114 11: Chargeable gains for individuals Tax Compliance

3 Capital gains tax payable by individuals

3.1 Annual exempt amount (AEA)
 Each individual is entitled to an annual exempt amount each year. For 2023/24 the annual
exempt amount is £6,000.
 The annual exempt amount is deducted from chargeable gains to produce gains liable to CGT
(taxable gains) and cannot be carried forward if unused

3.2 Capital losses

 Current year capital losses are auto-offset against current year chargeable gains, even if this
means wasting the annual exempt amount.
 Excess capital losses are carried forward to be set against future capital gains
 Capital losses brought forward are used AFTER the AEA and so will not result in it being wasted.

3.3 Rates of capital gains tax

How the taxable gain is taxed depends on the asset disposed of and the level of taxable income. Gains
are effectively treated as sitting on top of an individual’s income:
 Gains falling in any remaining basic rate band are taxed at the standard rate of 10% (18% for
residential property).
 Gains above the basic rate band are taxed at the higher rate of 20% (28% for res. property).

Taxable gains
taxed at 20/28%
£37,700
Taxable gains
taxed at 10/18%

Taxable Income

Trusts only ever pay the higher rates of 20%/28%

There is a 10% rate for Business Asset Disposal Relief and Investors’ Relief gains (see Chapter 12).
Tax Compliance 11: Chargeable gains for individuals 115

3.4 CGT calculation steps

Chargeable gains in tax year X
Capital losses in tax year (X)
Net chargeable gains in year X
Annual exempt amount (6,000)
X
Capital losses b/f (X)
Taxable gain X
CGT at 10%/20% X
(18%/28% for residential property)

Tips for the CGT computation

(1) Calculate the chargeable gain or allowable loss on each capital disposal in the tax year
(2) Combine the gains and losses into one capital gains tax calculation for the tax year
(3) Use separate columns for any residential property and for any gains qualifying for Business
Asset Disposal Relief and Investors’ Relief (see ch.12)
(4) Apply any current year capital losses, brought forward capital losses and annual exempt amount
in the following order: first vs. residential property, then vs. ‘normal’ gains and finally vs. gains
qualifying for Business Asset Disposal Relief and Investors’ Relief.
(5) Calculate the CGT

WORKED EXAMPLE: CGT LIABILITY

Samira has taxable income in 2023/24 of £24,000. In 2023/24 she makes chargeable gains of £20,000
on the disposal of shares and chargeable gains of £44,000 on the disposal of a residential property
which she has always rented out. She has capital losses brought forward of £5,000.
Requirement
Calculate Samira’s CGT liability for 2023/24.
SOLUTION
Residential
property gains Other gains Tax
Gains on residential property 44,000
Gains on shares 20,000
AEA (6,000)
Capital losses b/f (5,000)
Taxable gains 33,000 20,000
Tax at 18% (37.7k – 24k) 13,700 2,466
Tax at 28% (33k – 13.7k) 19,300 5,404
Tax at 20% 20,000 4,000
CGT liability 11,870
116 11: Chargeable gains for individuals Tax Compliance

4 Relief for trading losses vs. gains

 Per chapter 8, an individual may make a claim for trading loss relief under s.64 ITA 2007 against
their general income in the tax year of the loss and/or the previous year.
 In addition, they may then extend the claim for any unrelieved part of the trading loss to be set
against their chargeable gains for the tax year of the loss and/or the previous year (s.261B TCGA
1992).
 A claim must be made against general income for a tax year first before any remaining loss can
be offset against gains arising in that same year.

23/24
trading loss
(X)
2022/23 2023/24
Trading profits X –
Other income X 1 X 1
Total income X X
Chargeable gains X 2 X 2

 The amount of the s.261B loss is the lower of:

– The unrelieved trading loss (the relevant amount)
– The current year gains less current year capital losses and all capital losses brought
forward
 The claim must be made within 12 months from 31 January following the end of the tax year in
which the loss arose.

INTERACTIVE QUESTION: TRADING LOSS

Maud is a sole trader. She made a trading loss of £41,000 in her period of account to 31 March 2024.
She makes a claim under s.64 to relieve the loss against income and a s.261B claim against gains for
2023/24. Her income and gains for that year are:
Trading income 14,000
Other income 9,000
Chargeable gain 31,000
Capital losses brought forward are £9,000.
Requirement
Calculate the taxable gain assuming a s.261B claim is made and show any unrelieved losses carried
forward.
SOLUTION
Tax Compliance 11: Chargeable gains for individuals 117

5 Married couples/civil partners

5.1 Taxation of spouses/civil partners
 In general, spouses/civil partners are taxed separately as two individual taxpayers. Each has
their own annual exempt amount.
 Losses cannot be shared between spouses/civil partners.
 Disposals in a tax year between spouses/civil partners who are living together in that tax year
are on a no gain/no loss basis.
– The deemed acquisition cost of the acquiring spouse/civil partner is equal to the deemed
disposal proceeds for the disposing spouse.
– On a subsequent disposal to a third party the gain is simply proceeds (or market value for
non-arm’s length disposal) less the deemed acquisition cost.

5.2 Tax planning for spouses/civil partners

Spouses/civil partners can transfer assets between themselves to ensure that as a couple they:
 Make use of both spouses/civil partners annual exempt amounts;
 Make use of any unrelieved capital losses;
 Make use of any remaining basic rate band.

6 Connected persons
 An individual is connected with their:
– Spouse/civil partner
– Direct relatives (brothers, sisters, direct ancestors and descendants) and their
spouses/civil partners (and the direct relatives of their spouse)
– Their business partners and their spouses/relatives
– Companies they control
 Disposals to a connected person are always at market value (unless to a spouse, then it is NGNL)
 Any loss arising on a disposal to a connected person is ringfenced and can only be used against
gains on disposals to the same person.
118 11: Chargeable gains for individuals Tax Compliance

7 Disposals of shares and securities by individuals

7.1 Share matching rules
Where a disposal is made from a shareholding that has been acquired piecemeal over time, special
rules exist to identify which shares are deemed to have been sold.
Disposals of shares are matched against acquisitions of the same class of shares in the same company
in the following order:
(1) Any acquisitions made on the same day as the date of the disposal.
(2) Any acquisitions within the following 30 days
(3) Any shares in the s.104 pool which consists of all shares acquired prior to the date of disposal.

INTERACTIVE QUESTION: MATCHING RULES FOR INDIVIDUALS

James has the following transactions in the ordinary shares of A plc:

Shares acquired/(disposed of) Date
2,350 28 May 1999
1,300 23 August 2002
1,500 4 September 2023
(2,600) 4 September 2023
800 17 September 2023
Requirement
Apply the matching rules to the disposal.
SOLUTION
Tax Compliance 11: Chargeable gains for individuals 119

7.2 S.104 pool

The s.104 pool was introduced in Finance Act 1985. It contains all acquisitions prior to the date of the
current disposal.

WORKED EXAMPLE: S.104 POOL

Lars has acquired ordinary shares in G plc, a quoted trading company, as follows:
Shares
Date acquired Cost
£
16 September 1990 1,750 1,925
7 August 1991 3,500 4,025
1 October 1996 5,250 5,500
On 24 November 2023, Lars sold 7,350 shares for £29,750.
Requirement
Calculate the gain before reliefs on the sale.
SOLUTION
Gain on disposal
£
Disposal proceeds 29,750
Less: cost (W) (8,015)
Chargeable gain 21,735

(W) S.104 pool

No. Cost
£
16 September 1990
Acquisition 1,750 1,925
7 August 1991
Acquisition 3,500 4,025
1 October 1996
Acquisition 5,250 5,500
10,500 11,450
24 November 2023
Disposal (7,350) (8,015)
C/f 3,150 3,435

Cryptocurrency is also usually pooled, with each type in its own pool (eg one for bitcoin, one for ether)
120 11: Chargeable gains for individuals Tax Compliance

7.3 Bonus issues

When a company offers a bonus issue of shares, it issues free shares to its existing shareholders in
proportion to their existing shareholdings.

WORKED EXAMPLE: BONUS ISSUE

Maisie made the following acquisitions of ordinary shares in Q plc:

Date Shares acquired Cost
£
8 October 2002 2,800 12,075
10 January 2008 215 1,300
On 4 November 2007, the company made a 1 for 7 bonus issue.
Recently, Maisie sold 3,000 shares for £10 per share. This was her only capital disposal in the tax year.
Requirement
Calculate the taxable gain on the recent sale.
SOLUTION
Gain:
£
Disposal proceeds 3,000 × £10 30,000
Less: cost (W) (11,749)
Chargeable gain 18,251
Annual exempt amount (6,000)
Taxable gain 12,251

(W) S.104 holding

No. Cost
£
8 October 2002
Acquisition 2,800 12,075
4 November 2007
Bonus issue 1:7 400 –
10 January 2008
Acquisition 215 1,300
3,415 13,375

Disposal (3,000) (11,749)

415 1,626
Tax Compliance 11: Chargeable gains for individuals 121

7.4 Rights issues

When a company offers a rights issue, it offers its existing shareholders the right to buy extra shares,
usually at a discounted price, in proportion to their existing shareholdings. The key difference from a
bonus issue is that right shares are not issued free.

WORKED EXAMPLE: RIGHTS ISSUE

Rose had the following transactions in K Ltd:

August 1991 Acquired 2,500 shares for £3,900
June 1993 Rights 1 for 2 acquired at £2.50 per share
Recently Rose sold all her shares for £4 per share.
Requirement
Calculate the gain before reliefs on sale.
SOLUTION
Gain
£
Disposal proceeds 3,750 × £4 15,000
Less: cost (7,025)
Gain before reliefs 7,975

S.104 pool
No. Cost
£
August 1991
Acquisition 2,500 3,900
June 1993
Rights 1:2 @ £2.50 1,250 3,125
3,750 7,025

Disposal (3,750) (7,025)

– –

7.5 Gifts of quoted shares

 When quoted shares are gifted, there are special rules to determine the market value of the
shares at the date of the gift ie the proceeds.
 For most capital gains tax purposes quoted shares are valued at the mid-price as follows:
(Higher quoted price + lower quoted price)
2
 NB The valuation for inheritance tax purposes is different (see later in these notes) and requires
additional information concerning the marked bargains on the date of the gift. Be careful not to
use these if valuing shares for capital gains tax purposes.
122 11: Chargeable gains for individuals Tax Compliance

WORKED EXAMPLE: QUOTED SHARE VALUATION FOR CGT PURPOSES

Rose gifted 10,000 shares in A plc to her daughter. The Stock Exchange information for A plc shares on
the date of disposal is:
Quoted at 330p – 346p
Marked bargains 332p, 336p, 343p
Rose had acquired the shares for £2.50 per share.
Requirement
Calculate the chargeable gain on the gift of shares.
SOLUTION
The value per share at the date of disposal is 330p + ½ (346 – 330) = 338p. The marked bargains are
ignored here.
Gain
£
Disposal proceeds (market value)
£3.38 × 10,000 33,800
Less: cost £2.50 × 10,000 (25,000)
Gain 8,800

8 Payment of CGT
There are different rules for the payment of CGT based on the type of disposal:
Disposal of UK residential
Normal due date Payment by instalment property
31st January after the If a gain arose on a gift of land or a shares in CGT on disposals of UK residential
tax year of disposal a company you control, you may pay tax in property is payable within 60 days
10 equal annual instalments (starting on the of the disposal
normal due date).
Interest will normally be charged.
Tax Compliance 11: Chargeable gains for individuals 123

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you spot when there’s been a chargeable disposal of a chargeable asset by a
chargeable person and therefore a gain needs to be calculated?

Can you calculate a gain on a disposal of an asset? How would you tweak the
calculation for a part disposal?

Do you know the pro forma to pull together an individual’s gains, deduct losses and
the annual exempt amount and then tax the taxable gains?

Do you know how a transfer of an asset between a married couple/ civil partnership
works for tax?

Can you spot a disposal to a connected person and do you know why this is
significant?

Can you calculate a gain on a disposal of shares?

124 11: Chargeable gains for individuals Tax Compliance
 125

12

Capital gains tax reliefs

Topics
(1) Private residence and letting reliefs
(2) Replacement of business assets (rollover relief)
(3) Gift relief for business assets
(4) Business asset disposal relief

Learning Objectives
 Describe the circumstances in which the following reliefs apply and calculate the effect of full or
partial relief available in a given situation:
– Rollover relief
– Gift relief
– Business asset disposal relief
– Investors’ relief
 Calculate the reliefs where specific restrictions apply, for example some non-business use for
rollover relief
 Calculate the gain on the disposal of an individual’s private residence where there are periods of
deemed occupation / letting / business use
126 12: Capital gains tax reliefs Tax Compliance

1 Private residence and letting reliefs

1.1 What is private residence relief?
Private Residence Relief reduces the chargeable gain on the sale of an individual’s private
residence(with reference to length of time they have occupied the building for).

KEY TERM
Private residence: A taxpayer's only or main residence, including grounds or gardens
totalling up to half a hectare.

 The property must usually be actually occupied as the residence of the taxpayer throughout the
period of ownership to obtain full relief.

1.2 Partial private residence relief

Private Residence Relief exempts a proportion of a gain upon sale of an individual’s private residence.
The relief is calculated as:
Periods of actual or deemed occupation
Gain on disposal ×
Total period of ownership
 Periods of actual occupation of the building are periods where the owner actually lives in the
building
 The following count as periods of deemed occupation of the building:
Type of deemed occupation Conditions
Last 9 months of ownership Must have occupied the entire residence at some point during the
(36m for disabled people or long-term ownership period
residents in care homes)
Up to three years of absence for any Must have lived in the residence at some point before and after
reason absence
Up to four years of absence whilst Must have occupied the residence at some point before absence
working elsewhere (employed or self- (but no need to re-occupy after absence if work prevents you
employed) from doing so)
Any period when an employee is Must have occupied the residence at some point before absence
required to work overseas (but no need to re-occupy after absence if work prevents you
from doing so)
Up to 24 months of absence whilst Where you are prevented from living in the residence because:
prevented from living in the  It’s being built / altered
residence  Necessary steps are being taken to dispose of your
previous residence

1.3 Business use

 You are not able to use deemed occupation rules on periods where the private residence is
– Partly occupied and
– Partly used for business or let out
 The exception is the ability to use the last 9 months rule (which can be used if the home was
fully occupied at some point prior to disposal).
Tax Compliance 12: Capital gains tax reliefs 127

1.4 Letting relief

 Letting relief is available to owner of a main residence in addition to private residence relief if
part of the property has been let out while the owner is living there. (It does not apply for
periods where the owner lets out the entire property).
 Letting relief is the lowest of:
– Gain in let period for the part of the property that was let
– Gain exempt under private residence relief
– £40,000.

INTERACTIVE QUESTION: PRR

Paul bought his house in London on 1 February 2008 for £200,000. He sold it on 1 August 2023 for
£751,600. Paul lived in the house from the date of acquisition to 1 March 2010. He moved out because
his job was re-located to Bristol. Paul re-occupied on 1 March 2015. Paul stayed in the house until
1 July 2018 when he moved out for good to live with his girlfriend.
Required:
Calculate Paul’s chargeable gain after any reliefs.
SOLUTION
128 12: Capital gains tax reliefs Tax Compliance

WORKED EXAMPLE: PARTIAL OCCUPATION

Lena bought a three storey house on 1 December 2015 for £120,000. She occupied the whole of the
house until 1 June 2017 when she let out the top floor to a tenant. Lena sold the house for £360,000
on 1 June 2023.
Requirement
Calculate the chargeable gain on sale.
SOLUTION
£
Disposal proceeds 360,000
Less: cost (120,000)
Gain before reliefs 240,000
Less: PRR (W1) (184,000)
56,000
Less: letting relief (W2) (40,000)
Chargeable gain 16,000

WORKINGS
(1) PRR
Chargeable Exempt Total
months months months
1.12.15 – 1.6.17 actual occupation 18 18
1.6.17 – 1.9.22 1/3 let, 2/3 actual occupation 21 42 63
1.9.22 – 1.6.23 last 9 months 9 9
21 69 90
PRR is:
69
× £240,000 = £184,000
90

(2) Letting relief

Lowest of:

21 £56,000
Letting gain: × £240,000
90
PRR £184,000
Maximum £40,000
Letting relief is therefore £40,000

1.5 More than one residence

 An individual may only have one private residence at any one time, spouses/civil partners may
only have one private residence between them.
 If an individual owns and lives in ≥ 2 properties, they have 2 years from the purchase of the 2nd
property to elect one to be their private residence.
 If an individual lives in job-related accommodation (per chapter 5) and acquires a property
which they intend to occupy in the future their private residence, it is not necessary to establish
actual occupation of the 2nd property whilst living in the private residence.
Tax Compliance 12: Capital gains tax reliefs 129

1.6 Marriage/civil partnership

 If a spouse / civil partner transfers an interest in a property to their spouse / civil partner, the
recipient inherits the transferor’s ownership and occupation history.
 If a marriage / civil partnership breaks down, one owner may cease to live in the property.
– If they then dispose of their interest in the property to the other party to the marriage /
civil partnership, then this period of absence will be treated as deemed occupation if the
other party still lives in the property.

2 Rollover relief
2.1 What is rollover relief?
 Rollover relief defers payment of tax on gains from selling one asset if the proceeds are
reinvested in a replacement asset.
 The logic is that the taxpayer has insufficient funds to pay the tax.
 The relief is available to both individuals (sole traders and partners) and companies.

Type of relief Deferral relief

How does it work?  Disposal of an old asset followed by acquisition of new asset.
 Both old and new asset must be used in trade.
 Reinvestment required within 12 months before and 36 months after disposal
What qualifies?  Land and buildings
 Goodwill (individuals only, not companies)
 Fixed plant and fixed machinery
 Ships, aircraft, hovercraft
 Satellites, space stations and spacecraft
How much is the  If all the proceeds are reinvested  100% relief
relief?  If some proceed are retained, the chargeable gain is the lower of:
– The amount not reinvested
– The gain on disposal
How is relief given? Reinvestment in non-depreciating asset  deduct deferred gain from the base
cost of the replacement
Reinvest in depreciating asset (useful life of < 60 years, includes all plant and
machinery)  gain is frozen and becomes chargeable on earliest of:
– 10 years from date of purchase of replacement asset
– Date replacement asset ceases to be used in trade
– Disposal of new asset
Claim deadline Relief must be claimed within 4 years of the accounting period (companies) or tax
year (individuals) of the disposal of the old asset or acquisition of the new asset.

 Assets owned personally but used by a company in which the individual own ≥ 5% of the shares
will also qualify for Rollover Relief.
130 12: Capital gains tax reliefs Tax Compliance

INTERACTIVE QUESTION: ROLLOVER RELIEF

Mark is a sole trader.

In June 2011 he bought a factory for £195,000. He sold the factory for £230,000 in June 2023 and
acquired another factory for £210,000 in July 2023. Both factories were used in Mark’s business.
Requirement
Show Mark's chargeable gain on sale of the first factory and his base cost for the second factory.
SOLUTION

WORKED EXAMPLE: DEPRECIATING ASSETS

Norma bought a freehold shop for use in her business in June 2014 for £125,000. She sold it for
£140,000 on 1 August 2021. On 10 July 2021, Norma had bought some fixed plant and machinery to
use in her business, costing £150,000. She then sells the plant and machinery for £167,000 on 19
November 2023.
Requirement
Show Norma's total gain on disposal of the plant and machinery.
SOLUTION
Gain on the disposal of the shop:
£
Proceeds of shop 140,000
Less: cost (125,000)
Gain 15,000
Rollover relief (15,000)
Chargeable gain –

This gain is deferred in relation to the purchase of the plant and machinery.
Sale of plant and machinery:
£
Proceeds 167,000
Less: cost (150,000)
Gain 17,000
Add: gain deferred 15,000
Total chargeable gain 32,000
Tax Compliance 12: Capital gains tax reliefs 131

2.2 Non-business use

Rollover relief is reduced if there is non-business use of either the original asset or replacement asset:
Original asset not used 100% in business Replacement asset not used 100% in business
Action Time apportion gain between business Split cost of replacement between business and
and non-business use  business part non-business parts  only the business part
qualifies for RoR qualifies as reinvestment for RoR
Example Own asset for 4 years, use in business for Buy replacement building for £100k, only use 80%
3 years in your business.
Dispose and generate £80k gain  80% of cost (£80k) qualifies as reinvestment for
 only ¾ of gain (£60k) qualifies for RoR RoR

WORKED EXAMPLE: NON-BUSINESS USE

James bought a factory for £150,000 on 1 January 2018, for use in his business. From 1 January 2020
he let the factory for two years. He then used it for his own business again, until he sold it on
1 September 2023 for £225,000.
On 10 November 2023 James purchased another factory costing £140,000, for use in his business.
Requirement
Calculate the gain on the disposal of the factory in September 2023 and the base cost of the
replacement factory.
SOLUTION
September 2023
Non-bus. Business Total
£ £ £
Disposal proceeds (24/68:44/68) (W1) 79,412 145,588 225,000
Less: cost (24/68:44/68) (W1) (52,941) (97,059) (150,000)
Gain before reliefs 26,471 48,529 75,000
Less: rollover relief – (42,941) (42,941)
Gain (W2) 26,471 5,588 32,059

Base cost of replacement factory

£
Cost 140,000
Rollover relief (42,941)
Base cost 97,059

(W1) Period of ownership

Total period of ownership 68 months
Period of non-business use 24 months
(W2) Proceeds not reinvested
£
Proceeds of business element 145,588
Cost of replacement factory (140,000)
Gain left in charge (proceeds not reinvested) 5,588
132 12: Capital gains tax reliefs Tax Compliance

3 Gift relief for business assets

3.1 What is gift relief?
 Gifts and sales at under-value are deemed to have been sold for market value.
 Relief is available for the gift of certain assets (from one UK resident person to another).

Type of relief Deferral relief

How does it work? Gift of a qualifying asset or sale of a qualifying asset at undervalue
What qualifies?  Chargeable assets used in a business
 Shares in trading company (need a minimum 5% holding if quoted)
How much is the Normal situations
relief?  If no cash received then all the gains are deferred
 Where actual proceeds > allowable cost, the gain chargeable after gift relief =
actual proceeds – allowable cost
How is relief given? Gain deferred is deducted from donee’s base cost
Anti-avoidance If an individual becomes non-resident within 6 years of receiving a gift that was
subject to gift relief, the gain held over becomes subject to CGT immediately before
his departure from the UK.
Claim deadline A joint election (by the transferor and recipient) is required within 4 years of the tax
year of the disposal

WORKED EXAMPLE: GIFT RELIEF

Charlie is a sole trader. He acquired a shop for use in his business for £60,000. Two years ago, Charlie
gave the shop to his son, Pat, when Pat took over Charlie's business. The shop was then worth
£75,000. Charlie and Pat make an election for gift relief.
Pat recently sold the shop for £80,000.
Requirement
Show the chargeable gain on Pat's sale.
SOLUTION
Charlie's gain:
£
Market value 75,000
Less: Cost (60,000)
Gain 15,000
Gift relief (15,000)
Chargeable gain –

Gift relief election made and no proceeds paid, so 100% of the gain is deferred.
Base cost to Pat:
£
Market value 75,000
Less: gift relief (15,000)
Base cost 60,000

Notice that Pat's base cost is the same as Charlie's base cost.
Tax Compliance 12: Capital gains tax reliefs 133

Pat's gain:
£
Disposal proceeds 80,000
Less: cost (60,000)
Gain 20,000

3.2 Restriction on gift relief where consideration received

 As stated earlier, if consideration > the base cost of the asset is paid, only partial gift relief will
be available.
 Any excess of actual consideration over the base cost of the asset is immediately chargeable.

INTERACTIVE QUESTION: EXCESS CONSIDERATION

Sheryl is a sole trader and a higher rate taxpayer. She acquired a workshop for use in her business for
£50,000. Sheryl sells the workshop (her only business asset) to her daughter Michelle for £77,000. The
market value of the workshop is then £90,000.
Requirement
Show the amount of the gain on which gift relief could be claimed, Sheryl’s taxable gains, and the base
cost for Michelle.
SOLUTION
134 12: Capital gains tax reliefs Tax Compliance

3.3 Restriction on gift relief on shares in personal company

 If giving shares away, the gift relief is restricted if the company owns non-business assets (e.g.
shares in another company or an investment property).
 If so, the gift relief is restricted to:
Chargeable business assets
Gain ×
Chargeable assets

– Chargeable assets include any asset that if sold would be subject to CGT
– Chargeable business assets are chargeable assets used in the business

EXAM SMART
Watch out for the examiner giving you lots of detail about the contents of a company
statement of financial position.

WORKED EXAMPLE: CBA/CA RESTRICTION

Henry owns 10% of the shares in A Ltd. He gives his shareholding to Frances. The gain on the disposal
is £20,000. At the date of the disposal, A Ltd has the following assets:
£
Factory used in trade 300,000
Plant and machinery (all worth over £6,000) 90,000
Stock 45,000
Debtors 10,000
Cash at bank 15,000
Shares in B Ltd held as investment 40,000
500,000

Requirement
Show the gain eligible for gift relief.
SOLUTION
Asset CA CBA
Factory 300,000 300,000
Plant and machinery 90,000 90,000
Shares in B Ltd 40,000 n/a
Total 430,000 390,000

Gain eligible for gift relief:

390,000
× £20,000 = £18,140
430,000

Stock, debtors and cash are not chargeable assets.

Tax Compliance 12: Capital gains tax reliefs 135

4 Business asset disposal relief / Investors’ relief

Type of relief Reduced rate of CGT (10%)
How does it work?  Gains eligible for relief qualify for a rate of CGT at 10% irrespective of income
levels
 Can offset capital losses and the AEA against non-qualifying assets first
 Qualifying assets are treated as using up any remaining basic rate band in
priority to non-qualifying assets (so likely to have other gains taxed at 20%)
What qualifies? Business asset disposal relief
An ownership period of ≥ 2 years is required. Qualifying disposals are:
(1) The whole of substantial part of an unincorporated business
(2) Assets of an unincorporated business sold ≤ 3 years after cessation of trade
(3) Shares in trading company where you are an employee and have ≥ 5%
Investors’ relief
 New shares issued on/after 17th March 2016 and held for ≥ 3 years
 The company must be an unquoted trading co
 The investor cannot have worked for the company
How much is the  Lifetime limits for gains eligible for reduced CGT rate at 10%
relief? – BADR limit = £1m (since 11/3/20)
– Investors’ relief limit = £10m
How is relief given? Qualifying gains will be taxed at 10%
Claim deadline Within 1 year of 31st January after the end of the tax year of disposal

INTERACTIVE QUESTION: BUSINESS ASSET DISPOSAL RELIEF

Tash sold her unincorporated business for £700,000 in December 2023. The assets sold were:
Asset Cost Market value
Factory 300,000 450,000
Goodwill 0 200,000
Plant and machinery (all worth < £6k) 40,000 15,000
Net current assets N/A 35,000
700,000

She had started trading in January 2013. She also made a gain of £33,700 on the sale of a painting in
January 2024. Tash had capital losses brought forward of £5,000 and has no prior disposals qualifying
for business asset disposal relief.
Required:
Calculate Tash’s CGT liability for 2023/24.
136 12: Capital gains tax reliefs Tax Compliance

SOLUTION

4.1 Business asset disposal relief when a shareholding ceases to be a

personal company
A personal company means that the shareholder owns at least 5%.
 If a shareholding is diluted below 5% due to a new share issue for cash, BADR may still be
available.
 Two elections are available if a disposal of the shares immediately before the dilution would
have qualified for BADR:

Election 1
 A deemed disposal and reacquisition at MV immediately before the share issue.
 This must be claimed ≤ 1 year after 31 January following the tax year of the deemed disposal.

Election 2
 Defer the gain until a future disposal of the shares.
 This election must be made within 4 years of the end of the tax year of the deemed disposal.
 Relief must then be claimed ≤ 1 year after 31 January following the tax year of the disposal.
Tax Compliance 12: Capital gains tax reliefs 137

WORKED EXAMPLE: SHARE DILUTION

Tariq purchased a 6% shareholding in trading company Fabric Ltd in June 2013 for £30,000. Tariq has
been employed by Fabric Ltd throughout his period of ownership.
On 1 December 2022 one of the directors of Fabric Ltd exercised some share options and Tariq’s
shareholding was reduced to 4.5%. Just before the exercise of the share options Tariq’s shares had
been worth £58,000.
Tariq sold his shares on 1 May 2023 for £60,000. He is a higher rate taxpayer and makes other
disposals which use his annual exempt amount each year.
Requirement
Calculate the CGT payable by Tariq assuming he wishes to pay as little tax as possible and as late as
possible.
SOLUTION
2022/23 – December 2022
Tariq can elect (Election 1) for a deemed disposal at MV, i.e. a gain of £28,000 (£58,000 - £30,000).
This election must be made by 31 January 2025.
Tariq can also make an election (Election 2) to defer the gain until the shares are sold. This election
must be made by 5 April 2027.
2023/24 – May 2023
Tariq disposes of the shares and makes a gain of £2,000 (£60,000-£58,000). In addition, the deferred
gain crystallises. BADR can be claimed on the deferred gain (the election must be made by 31 January
2026).
CGT payable is £3,200 [(£28,000 × 10%) + (£2,000 × 20%)].

4.2 Interaction of gift relief and Business Asset Disposal Relief

It is possible for both reliefs to be claimed on one disposal.
In such a scenario in the Tax Compliance examination, apply both reliefs unless you are instructed
otherwise.
 Gift relief must be claimed first (maximum relief must be claimed).
 Business Asset Disposal Relief can then be applied if any gain remains in charge to tax.
138 12: Capital gains tax reliefs Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know the conditions to be met to be able to claim rollover relief?

If a rollover relief claim is made, can you work out how much of the gain is deferred
and explain how the gain is deferred?

Do you know the conditions to be met in order to claim gift relief? Do you know it’s a
joint claim?

If a gift relief claim is made do you know how much of the gain is deferred and how it is
deferred?

Do you know the conditions to be met in order to claim business asset disposal relief?

If a business asset disposal relief claim is made do you know how this impacts the CGT
computation?

Can you spot a scenario where investors’ relief is relevant, and do you know how it
works?

Do you understand how private residence relief works and can you calculate the gain
which remains taxable when there has been partial occupation?
 139

13

Overseas aspects of income

tax and capital gains tax

Topics
(1) Residence and domicile
(2) Overseas aspects of income tax
(3) Overseas aspects of capital gains tax

Learning Objectives
 Explain the impact of an individual’s residence, domicile and deemed domicile
 Explain the impact of an individual’s residence, domicile and deemed domicile on their capital
gains tax liability
 Calculate total taxable gains and tax payable thereon, including the computation of double tax
relief where appropriate
 Calculate total taxable income and the income tax payable or repayable for employees,
company directors, partners and self-employed individuals including the computation of double
tax relief
140 13: Overseas aspects of IT and CGT Tax Compliance

1 Residence and domicile

The income tax and capital gains tax that an individual pays in the UK is impacted by both the
residence and domicile status of that individual.

1.1 Overview of residence and domicile

Status Test
Residence  Residence is based on statutory tests and is assessed for each tax year.
 Normally an individual is either UK resident or non-resident for the entire tax year.
 Once residence has been determined (see below), then the impact of domicile is
considered.
Domicile  Domicile is based on general law and considers where you have your permanent home
 There are three types of domicile:
– Of origin – an individual is born with their father’s domicile (or mother’s if your
parents were unmarried)
– Of dependency – as a child (<16), an individual’s domicile changes with that of the
person on whom they are legally dependent
– Of choice – as an adult (≥16) an individual can change their permanent home by:
– Leaving the old country permanently – “severing all ties”; AND
– Settling permanently in a new country
Deemed UK  An individual will also be considered ‘deemed UK domiciled’ for income tax and CGT if
domicile they meet either of the following two criteria:
– They have been UK resident for 15 of the last 20 yrs (up to and including the prior
tax year), OR
– They are non-UK domiciled, but were born in the UK, with a UK domicile of origin
and are UK resident

1.2 Statutory residence tests (consider for each tax year)

To conclude on someone’s residency status we must apply the following three tests in order (stopping
as soon as we pass one of them):
Tax Compliance 13: Overseas aspects of IT and CGT 141

1. Automatic Overseas Test: non-UK resident if any of following apply

1 In UK < 16 days in tax year
2 In UK < 46 days in tax year & not resident in prior 3 tax years
3 Works full time abroad in tax year (average 35hrs/week)
and little UK work (works in UK for ≤ 30 days for > 3 hrs/day + in UK ≤ 90 days)
FAIL?

2. Automatic UK Test: UK resident if any of following apply

1 In UK ≥ 183 days in tax year
2 Has a home in UK for 91 consecutive days (spend ≥ 30 days there in tax year)
No overseas home (or spend < 30 days there)
3 Works full time in the UK if:
365 day period where works in UK (average of 35hrs/week) with ≥ 1 day in tax year
No breaks in UK work > 30 days, work > 75% of working days in UK

FAIL?

3. Sufficient Ties Test: UK resident if you have the following ties:

Days in UK Resident in 1 of prior 3 tax years Not resident in prior 3 tax years
<16 NON UK RESIDENT NON UK RESIDENT
16-45 4 NON UK RESIDENT
46-90 3 4
91-120 2 3
121-182 1 2
≥183 UK RESIDENT UK RESIDENT

Types of ties
(1) UK resident close family: spouse/civil partner/child (if < 18 and spend ≥61 days with them)
(2) UK accommodation available ≥ 91 days (occupied for ≥ 1 night in tax year, 16 nights if owned by
close family)
(3) Substantive UK work (> 3hrs/day for ≥ 40 days)
(4) Spends > 90 days in UK in either of previous 2 tax years
(5) In UK for more days than any other country this tax year (only if resident ≥ 1 of last 3 tax years)

WORKED EXAMPLE: RESIDENCE

(1) Curt has been resident in South Africa for many years. In 2023/24 he came to the UK on holiday
on four occasions, amounting to 44 days in total.
Requirement
Explain whether Curt will be UK resident in 2023/24.
(2) Isabella's only home is in England and she has lived in the UK since birth. However, she has only
been in the UK and visited her home for 100 days of 2023/24.
142 13: Overseas aspects of IT and CGT Tax Compliance

Requirement
Explain whether Isabella will be UK resident in 2023/24.
(3) Helene (a widow) has a home in the UK as well as a home in France. She was UK resident
(spending at least 11 months of every year in the UK) until one year ago when she moved
permanently to France. In 2023/24 she spends 85 days in the UK visiting family and friends with
the remainder of the year in France. Her sister is her only other family member living in the UK.
Requirement
Explain whether Helene is UK resident in 2023/24.
SOLUTION
(1) No, Curt will not be treated as UK resident as he was not UK resident in any of the three
previous tax years and has spent fewer than 46 days in the UK in 2023/24. (This is the second
automatic overseas test in Hardmans.) He will therefore be non-UK-resident.
(2) Isabella does not meet any of the automatic tests to be non-resident and has not been in the UK
for 183 days or more in 2023/24. She does, however, meet the automatic test to be UK resident
in that her only home is in the UK and she visited that home in 2023/24 for 30 days or more
(this is the second automatic UK test in Hardmans). She will therefore be UK resident in
2023/24.
(3) Helene does not meet any of the automatic tests to determine her residence. The sufficient ties
tests and her position as a ‘leaver’ must therefore be used to determine her residence status. As
a leaver spending 85 days in the UK she will be UK resident if she has three or more ties to the
UK.
Helene does not have a spouse/minor child resident in the UK (family tie), she does not work in
the UK on 40 or more days in the tax year (substantive UK employment tie) and has not had
more midnights in the UK than in any other country (country tie). She does, however, have an
accommodation tie and has had more than 90 days in the UK in either of the previous two tax
years (90-day tie). She therefore only has two UK ties and will be non-UK resident.

2 Overseas aspects of income tax

2.1 Employment income
Duties performed wholly Duties performed wholly
or partly in the UK outside the UK
in the UK Outside the UK
Resident and domiciled Arising basis Arising basis Arising basis
Resident but not domiciled Arising basis Arising basis Possible remittance basis* or
Amount earned
Not resident Arising basis Not taxable Not taxable

* If the employer is non-UK resident.

Tax free benefits for employees who work abroad include

 Cost of board and lodgings paid by the employer
 Return trips home paid by the employer
 For absences of 60 days or more travelling expenses for 2 visits for a spouse and minor child
Tax Compliance 13: Overseas aspects of IT and CGT 143

2.2 Other income

Income other than employment income is taxable on the following basis:
UK income Overseas income
Resident and domiciled Arising basis Arising basis
Resident but not domiciled in the UK Arising basis Possible remittance basis
Non-resident Arising basis Not taxable in UK

Note: For individuals who are non-resident, the general rule is that any UK tax charge is limited to the
tax deducted at source (if any). This does not apply to trading, employment or rental income, where
tax is calculated as normal but ignoring the personal allowance.

2.3 Double tax relief (DTR)

If an individual is UK resident, they will be taxed on their overseas income in the UK and may have also
already been taxed overseas. This is called double-taxation and relief is available:

Treaty relief
If a double tax treaty exists between the UK and a foreign country, the income will only be taxed in
one country (preventing double taxation). You will be given any details needed in the exam.

Unilateral relief
If no double tax treaty exists, the overseas income is included in the UK income tax computation gross of
overseas taxes
DTR is calculated on a source by source basis, as the lower of:
 UK tax on the o/s income (the decrease in IT liability if the o/s income were removed)
 overseas tax suffered
To calculate the UK tax on each source of overseas income:
(1) Calculate the total income tax including that source of o/s income
(2) Calculate the total income tax excluding that source of o/s income
(3) The difference = the UK tax on that source of o/s income (=X-Y in the diagram below)
For example:

UK Savings Income

Overseas property
income UK Savings Income

UK Non-Savings UK Non-Savings
Income Income

Tax liability = £X Tax liability = £Y

144 13: Overseas aspects of IT and CGT Tax Compliance

Notes:
 Always treat the overseas income as the ‘top slice’ of that income category
 If there are multiple overseas income sources, then start with the one with the highest rate of
overseas tax.

INTERACTIVE QUESTION: INCOME TAX AND DTR

Sue is resident and domiciled in the UK. Her income for 2023/24 is as follows:
UK employment income £32,550
Overseas property income (gross) £15,000
Savings income – UK interest received £3,063
Sue paid overseas tax of £5,500 on the property income.
Requirement
Calculate Sue’s total UK tax payable for 2023/24.
SOLUTION
Tax Compliance 13: Overseas aspects of IT and CGT 145

2.4 The remittance basis

Using the remittance basis allows individuals who are UK resident, but non-UK domiciled to avoid:
 Income tax on unremitted overseas income (income not brought into the UK)
 Capital gains tax on unremitted overseas gains (proceeds not brought into the UK)
Individuals must usually claim the remittance basis and become a remittance basis user (RBU) and
 Lose their entitlement to UK personal allowances and the capital gains tax annual exempt
amount, and
 Have to pay a remittance basis charge (RBC) of:
– £30,000 per annum if resident for 7 out of the last 9 years, or
– £60,000 per annum if resident for 12 out of the last 14 years
 Must treat remitted foreign savings and dividend income as non-savings income

Automatic remittance basis application

 The remittance basis applies automatically in the following 2 cases:
(i) If unremitted overseas income and gains for the tax year are < £2,000.
(ii) If an individual is non-UK domiciled, has no UK income or gains (or only has taxed UK
investment income of ≤ £100), doesn’t remit any overseas income or gains and has been
UK resident for ≤ 6 of the prior 9 tax years.
 If so, the individual doesn’t lose their tax free amounts and doesn’t pay the RBC

INTERACTIVE QUESTION: INCOME TAX AND THE REMITTANCE BASIS

Sergio has been resident in the UK for tax purposes since 2012/13 but is not UK domiciled.
In 2023/24, he has the following income:
UK trading income £130,000
Non-UK dividend income (gross of 10% withholding tax) £100,000
146 13: Overseas aspects of IT and CGT Tax Compliance

He remits £20,000 (gross) of his non-UK dividend income into the UK.
Requirement
Advise Sergio whether he should claim the remittance basis in 2023/24.
SOLUTION
Tax Compliance 13: Overseas aspects of IT and CGT 147

 If a question only asks for an income tax calculation and remittance basis is to be claimed you
should include the remittance basis charge in your calculation.
 If the question only asks for a capital gains tax calculation and a remittance basis claim is to be
made then the remittance basis charge should be included in the capital gains tax computation.

2.5 Personal allowances

Personal allowances, may be claimed by all UK residents (s.t. remittance rules above).
Personal allowances may only be claimed by non-UK residents if they are:
 citizens of the EEA;
 resident in the Isle of Man or Channel Islands;
 current or former Crown servants and their widows or widowers;
 resident in certain territories with which the UK has a double tax agreement;
 former residents who have left the UK for health reasons.

3 Overseas aspects of capital gains tax

3.1 Basis of assessment
Status UK gains Overseas gains
Resident and domiciled Arising basis Arising basis (1)
Resident but not domiciled in the UK Arising basis Possible remittance basis (2)
Non-resident Not taxable in UK (aside from 3.3 Not taxable in UK
and 3.4 below)

3.2 CGT for UK residents

(1) Double tax relief
 DTR is available on overseas gains (as for income):
– DTR is the lower of the UK tax and overseas tax on the overseas gain
– Use the AEA, capital losses and basic rate band on UK gains to maximise the DTR on the
overseas gains

(2) Remittance basis for gains

 The remittance basis claim is one claim per year for both income tax and CGT (per section
2.4) and will lead to the loss of the annual exempt amount and the possible payment of a
remittance basis charge.
 If elected, the taxpayer will only be taxed on UK gains and remitted overseas gains.
 For overseas gains (on the disposal of overseas assets), the amount of the gain remitted
is the lower of:
– The proceeds remitted to the UK
– The original gain
148 13: Overseas aspects of IT and CGT Tax Compliance

WORKED EXAMPLE: CGT AND DTR

Billie makes UK and foreign gains (on the disposal of minority shareholdings) of £17,000 each, when
his basic rate band remaining is £3,000 and overseas tax paid is £3,100.
Requirement
Calculate Billie’s UK CGT liability after DTR.
SOLUTION
Foreign
UK CGT liability UK Gains Gains
£ £
Gains 17,000 17,000
Less AEA (treat as set against UK gains only) (6,000) –
Taxable gains 11,000 17,000
Basic rate band remaining is £3,000
£3,000 @ 10% 300 –
£8,000 @ 20% 1,600
£17,000 @ 20% (treat as if foreign gains are top slice) – 3,400
Total CGT due 1,900 3,400
Less double tax relief
Lower of:
UK tax on overseas gains £3,400
Overseas tax paid is £3,100 – (3,100)
1,900 300
Total CGT liability = £1,900 + £300 = £2,200

3.3 Non-residents disposing of UK residential property

 From 6/4/15 non-UK resident individuals are subject to UK CGT on disposals of UK residential
property at the rate of 18%/28%.
 The gain can be calculated in one of three ways:
Default method Time apportionment ‘Retrospective method’
election election
Proceeds X OR Proceeds X OR Proceeds X
5/4/15 MV (X) Original cost (X) Original cost (X)
Gain/ loss X Gain/ loss X Gain/ loss X
Time apportion X
for post-5/4/15
ownership

 The default method calculates the gain or loss arising since 5/4/15 based on the market value at
that date.
 Where it results in a lower gain or higher loss for the individual they may instead elect to:
– Time apportion the gain or loss on a straight line basis, or
– Simply use the normal gain (the ‘retrospective’ method’)
Tax Compliance 13: Overseas aspects of IT and CGT 149

Private Residence Relief

 PRR will be available for the usual periods when the individual occupied the property as their
main residence (see Chapter 12).
 However, as only the gain arising after 5 April 2015 is taxable so only the period of ownership
from 6 April 2015 is considered for PRR purposes.
 PRR is only available in a tax year if the taxpayer was living in the UK in the tax year or stayed
overnight at the property at least 90 times in the tax year (the 90 day rule).
 Where the 90 day rule is not met PRR is not available for any periods of occupation during that
tax year.
 Provided the property qualified for PRR at some time during the period of ownership the last
9 months of ownership will, as for UK residents, be covered by PRR relief.

WORKED EXAMPLE: PRR FOR NON-UK RESIDENT

Joseph was resident in the UK until 1 July 2013, when he left to live in France. In the UK, Joseph had
lived continuously in a house which he had bought for £150,000 on 1 October 2009, and which had a
market value on 5 April 2015 of £320,000. Joseph rents out the house while he is resident in France,
and did not return at any point to the UK.
Requirement
Calculate Joseph's chargeable gain if he were to sell the house while still resident in France for
£370,000 on 1 October 2023.
SOLUTION
£
Disposal proceeds 370,000
Less market value at 5 April 2015 (320,000)
Gain over period from 5 April 2015 50,000
PRR £50,000 × 9/102 (note) (4,412)
Gain 45,588

Note: Joseph does not meet the 90 day rule for any tax year following 5 April 2015, but as the property
was once his main residence, he can claim PRR for the last 9 months of ownership. Joseph owned the
property for 102 months from 5 April 2015. Letting relief is not available, as Joseph is not living in the
house at the same time as his tenants.

3.4 Non-residents disposing of UK non-residential property

 From 6/4/19 non-UK resident individuals are subject to CGT on disposals of UK non-residential
property or UK property-rich assets.
– A property-rich asset is usually shares in a company which derive at least 75% of their
gross value from UK land (where the vendor has ≥ 25% shareholding at some point during
the 2 years before sale).
 The taxable gain is that part of the gain arising since 5/4/19, with cost based on MV at that date.
 An election is available to ignore rebasing at 5/4/19 and calculate the gain or loss based on
original cost.
150 13: Overseas aspects of IT and CGT Tax Compliance

3.5 Payment of CGT for non-UK residents disposing of UK property

 The non-resident individual must make a payment on account of CGT within 60 days of
completion of the contract.

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you determine an individual’s residence and domicile?

Do you know how an individual’s residence and domicile position impacts the
individual’s income tax due?

Do you know when the remittance basis will be available automatically and when it
needs to be claimed?

Do you know the consequences of both an automatic remittance basis calculation and
also of a claim to use the remittance basis?

Can you calculate double tax relief?

Do you know how an individual’s residence and domicile position impacts their capital
gains tax position?

Do you know the special rules which apply where a non-resident individual disposes of
UK property?
 151

14

National insurance and

further administrative matters

Topics
(1) Administration of National Insurance Contributions (NICs)
(2) Class 1 contributions
(3) Class 1A contributions
(4) Class 2 and class 4 contributions
(5) Net disposable income
(6) Maximum annual contributions
(7) Class 1B contributions
(8) Self-assessment payments on account
(9) Apprenticeship levy

Learning Objectives
 Identify the key features of the self-assessment system for individuals, determine due dates for
returns, payments, and payments on account, and calculate the interest and penalties due for
late submission of returns, incorrect returns and late or incorrect payments of tax
 Identify the different classes of national insurance contributions
 Calculate the national insurance due on employment income and the assessable trading profits
of the self-employed
 Recognise when the annual maxima rules for the payment of national insurance contributions
apply
 Calculate the total national insurance contributions payable by employees, employers and self-
employed individuals
152 14: National insurance and further administrative matters Tax Compliance

1 Classes and payment of national insurance contributions

 National insurance contributions are administered by the National Insurance Contributions and
Employer Office (NICO).
 Types of NIC assessable in the TC exam are listed below:
Type of NIC Who pays it Payment due dates
Class 1 Paid by employees (Class 1 Primary) and Collected under the PAYE system on a monthly
their employers (Class 1 Secondary) on cash basis.
earnings
Class 1A Paid by employers on taxable BIKs Payable by 19 July (22 July if paid
electronically) following the end of the tax year
Class 1B Paid by employers on the grossed-up value Payable by 19 October (22 October if paid
of earnings in a PAYE settlement agreement electronically) following the end of the tax
year.
Class 2 Paid by self-employed individuals Payment due by 31st January after the tax year
Class 4 Paid by self-employed individuals on Collected via self-assessment with:
taxable trading income  Payments on account
 Final balancing payment

2 Class 1 NICs
2.1 Class 1 Primary NICs
 Class 1 Primary NICs are paid by employees on their earnings
– Earnings are an employee’s gross pay (e.g. cash payments, excess mileage allowance over
45p/mile, round sum allowances and vouchers) before any deductions
 Payments start on the employee’s 16th birthday and cease on reaching state pension age
birthday (currently 66)
 The NICs calculation should be done referencing weekly / monthly / annual limits based on the
employee’s pay interval (though directors are always treated as having an annual pay interval)
Earnings Percentage Weekly Monthly Annual
£0 – Primary Threshold 0% £0 – £242 £0 – £1,048 £0 – £12,570
PT – Upper Earnings Limit 12% £242 – £967 £1,048 – £4,189 £12,570 – £50,270
> UEL 2% > £967 > £4,189 > £50,270

2.2 Class 1 Secondary NICs

 Class 1 Secondary NICs are paid by employers on the earnings of their employees
Earnings Percentage Weekly Monthly Annual
£0 – Secondary Threshold 0% £0 – £175 £0 – £758 £0 – £9,100
> ST 13.8% > £175 > £758 > £9,100

 The secondary threshold increases to £967/week, £4,189/month, £50,270/year for employees

< 21 and apprentices < 25.
Tax Compliance 14: National insurance and further administrative matters 153

Employment allowance
 The total secondary class 1 NICs of most employers is reduced by £5,000 per tax year.
 This allowance is not available to companies with 1 director and no other employees, or
companies with ≥ £100,000 of Class 1 Secondary liabilities in the prior year.

3 Class 1A NICs
3.1 Class 1A contributions
 Employers are also liable to pay Class 1A contributions on taxable benefits provided to
employees at the rate of 13.8%.
 The value of the taxable benefits for NICs is generally the same as the taxable value for income
tax. However, any benefits taxed as earnings under Class 1 are not also subject to Class 1A
charge (such as excess mileage allowance, vouchers and round-sum allowances)

INTERACTIVE QUESTION: CLASS 1 NICS

Raj is paid a salary of £2,000 a month and receives a bonus in January 2024 of £3,500. He makes
contributions into an occupational pension scheme of £1,500 and his employer, Jet Ltd, makes
contributions of £900. He has access to a petrol company car with emissions of 67 g/km (registered in
January 2023) and a list price of £21,000 throughout 2023/24. Raj is not a director of Jet Ltd.
Requirement
Calculate the National Insurance Contributions for Raj and Jet Ltd for 2023/24.
SOLUTION
154 14: National insurance and further administrative matters Tax Compliance

4 Class 2 and Class 4 NICs

Self-employed individuals (sole traders and partners) pay Class 2 and Class 4 NICs:

4.1 Class 2 NICs

 A self-employed individual aged between 16 and state pension age is required to pay flat rate
weekly Class 2 contributions (£3.45 per week for 2023/24).
 Payments start on the individual’s 16th birthday and cease on their state pension age birthday.
 No contributions are payable if the individual’s taxable trading profits are below the lower
profits limit (£12,570 for 2023/24).

4.2 Class 4 NICs

 In addition to the flat rate Class 2 liability, self-employed individuals may also be liable to pay
Class 4 NICs based on their taxable trading profit (as calculated for income tax purposes) at the
following rates:
Profits Percentage
£0 – £12,570 0%
£12,570 - £50,270 9%
> £50,270 2%

 An individual is liable to pay Class 4 contributions if aged 16 or over at the start of the tax year
and ceases to be liable if they have reached state pension age by the start of the tax year.

INTERACTIVE QUESTION: CLASS 2 AND 4 CONTRIBUTIONS

Andreas has been self-employed for many years. His accounts to 5 April 2024 show a taxable profit of
£57,000.
Requirement
What are the Class 2 and Class 4 NICs payable by Andreas in 2023/24?
SOLUTION
Tax Compliance 14: National insurance and further administrative matters 155

 As Class 4 NIC is only charged on trading profits, if the trader makes a loss relief claim against
their general income (e.g. under s.64 or s.72) the loss is carried forward for NIC purposes
against future Class 4 trade profits.

INTERACTIVE QUESTION: TRADE LOSSES AND CLASS 4 NIC

Loic makes a trading loss of £12,000 in 2023/24. He has income as follows:

2022/23 2023/24 2024/25
Trading income 7,000 NIL 18,000
Other income 20,000 6,000 8,000
For income tax purposes, Loic makes a claim to offset his trade loss under s.64 against his 2022/23
total income.
Requirement
Calculate Loic’s Class 4 national insurance for each year
SOLUTION
156 14: National insurance and further administrative matters Tax Compliance

5 Net disposable income

 In the examination, you might be asked to work out the annual NICs payable by an employee, in
which case you should use the annual limits if income is earned evenly throughout the year.
 Do not forget the impact of national insurance. For example, you may be asked to calculate an
individual’s net disposable income:

5.1 Net disposable income for an employee (steps to follow)

(1) Start by recording cash received (e.g. salary)
(2) Deduct cash payments (e.g. pension contributions, expenses incurred by the employee)
(3) Calculate and deduct income tax payable (on earnings and benefits in kind)
(4) Calculate and deduct Class 1 Primary NICs (only on earnings)

WORKED EXAMPLE: NET DISPOSABLE INCOME

Elsa receives the following income in 2023/24:

 Gross salary £95,875 (PAYE £27,300)
 Property income £31,700
 Bank interest £26,425
 Dividends from UK companies £17,000
She makes contributions of £4,794 into an occupational pension scheme and her employer contributes
£2,876.
Requirement
(1) What is Elsa’s net disposable income for 2023/24?
(2) Calculate Elsa’s marginal and effective tax rate (to the nearest 1 d.p.).
Tax Compliance 14: National insurance and further administrative matters 157

SOLUTION
(1) Elsa’s income tax liability
Non-savings Savings Dividends Total
Employment income
(£95,875 – £4,794) 91,081
Property income 31,700
Bank interest 26,425
Dividends 17,000
Personal allowance
(ANI ≥ £125,140) –
Taxable income 122,781 26,425 17,000 166,206
Taxed at 20% 37,700 7,540
Taxed at 40% 85,081 2,359 34,976
Taxed at 45% 24,066 10,830
Taxed at 0% 1,000 0
Taxed at 39.35% 16,000 6,296
Income tax liability 59,642

Elsa’s Class 1 Primary NIC liability

(£50,270 – £12,570) × 12% 4,524
(£95,875 – £50,270) × 2% 912
5,436

Elsa’s net disposable income

Salary net of PAYE (£95,875 – £27,300) 68,575
Property income 31,700
Bank interest 26,425
Dividends 17,000
Less: pension contribution (4,794)
Less: income tax (£59,642 – £27,300) (32,342)
Less: NICs (5,436)
Net disposable income £101,128

Notes:
 Elsa receives income tax relief on her occupational pension contribution by deducting it
from her salary, but her gross salary is subject to Class 1 NICs
 Elsa isn’t taxed on the employer pension contribution (it’s a tax free benefit)
(2) Elsa’s marginal and effective tax rates
Elsa’s marginal tax rate for an extra £ of dividend income is 39.35% (it would be 47% (45%
income tax + 2% NIC) for an additional pound of savings or non-savings income).
Her effective tax rate is 39.15% ((£59,642 + £5,436) / £166,206)

6 Maximum annual NI contributions

As NICs are calculated separately on each source of earnings, an individual could pay an excessive
amount of contributions, for example where an individual has the following:
 Two of more employments (two sources of Class 1); or
 An employment and is also self-employed (Classes 1, 2 and 4).
158 14: National insurance and further administrative matters Tax Compliance

In these circumstances there are annual maximum limits of NICs payable. Any overpayment will be
repaid by HMRC. The calculation of the annual maximum is not examinable.

7 Class 1B contributions
 Employers are liable to pay class 1B contributions on the grossed-up value of earnings in a PAYE
settlement agreement at the rate of 13.8%.
 A PAYE settlement agreement is one between an employer and HMRC where the employer pays
the income tax on employee benefits (rather than subjecting the employee to income tax on
those benefits
 Before calculating the NICs, the value of the benefit must be grossed up by
100
’
(100 – the employee s % marginal rate of income tax)
 E.g. for a basic-rate taxpayer the value of the benefit would be grossed-up by 100/80

WORKED EXAMPLE: CLASS 1B CONTRIBUTIONS

Beryl, a higher rate taxpayer, is employed by Z plc. During 2023/24, she receives a gift of a watch
worth £120 from Z plc as a wedding present. The watch is subject to a PAYE settlement agreement.
Requirement
Calculate the total amount payable by Z plc in respect of this gift.
SOLUTION
100
Grossed up earnings = × £120 = £200
60

Class 1B contributions = Grossed up earnings × 13.8% (£200 × 13.8%) £28

Income tax payable = Grossed up earnings × 40% (£200 × 40%) £80
Total payable to HMRC = £28 + £80 £108

8 Self-assessment payments on account

8.1 Payments on account
 Payments on account are required when income tax and Class 4 NIC for the previous tax year
exceeded the income tax and Class 4 NIC deducted at source, e.g. via PAYE.
 The excess is called the relevant amount.
– Each PoA = 50% of the relevant amount for the previous year.
– PoAs are not required if either:
(1) The relevant amount last year was below £1,000 or
(2) If ≥ 80% of last year’s tax was paid at source (e.g. PAYE).
Tax Compliance 14: National insurance and further administrative matters 159

Payment due dates

Payment Date
1st payment on account 31 January in tax year
2 payment on account
nd
31 July after tax year
Final payment of o/s liability 31 January after tax year

8.2 Reduction in PoAs

A taxpayer may wish to reduce their PoAs (e.g. if there was an unusually large liability in the previous
tax year which is not likely to be repeated in the current tax year).
They may make a claim to reduce their PoAs stating that they believe their liability will be:
 A stated amount which is less than the liability for the previous year; or
 Nil.

8.3 Interest and penalties for incorrect reduction

Penalties for incorrect reduction Interest on reduced PoAs
Applied if the claim to reduce PoAs was Interest will be payable if the liability estimated when
fraudulent reducing the PoAs is lower than the actual liability
Max penalty = Original PoAs – reduced PoAs Interest is payable on each PoA on the lower of:
 Reduced PoA + 50% of bal payment
 The originally calculated PoA (pre-reduction) – PoA
paid

9 Apprenticeship levy
 An employer with an annual pay bill in excess of £3 million must pay the apprenticeship levy.
 The apprenticeship levy is 0.5% of the annual pay bill, calculated on a cumulative monthly basis
(in a similar way to the calculation of income tax under PAYE)
 Employers have an apprenticeship levy allowance of £15,000 for a tax year. The allowance
reduces the amount of the levy payable over the year  the monthly apprenticeship levy is
reduced by £1,250 (£15k/12)
 Connected companies (control / common control) only have one £15,000 allowance (they
decide how to share between connected companies).
 Levy paying employers can create an account with HMRC to receive levy funds to spend on
apprenticeships, such as paying for exams and assessments and to pay training providers.
160 14: National insurance and further administrative matters Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know how to calculate class 1 primary NIC contributions? Do you know who
pays them, based on what and when?

Do you know how to calculate class 1 secondary NIC contributions? Do you know who
pays them, based on what and when?

Do you know how to calculate class 1A and 1B NIC contributions? Do you know who
pays them, based on what and when?

Do you know how to calculate class 2 and class 4 NIC contributions? Do you know who
pays them and when?

Do you know which taxpayers are required to make two payments on account of their
liability to income tax and class 4 NIC?

Can you quickly find all the NIC information and the details about payments on
account in Hardmans?
 161

15

Inheritance tax – basic

principles

Topics
(1) Scope of Inheritance Tax (IHT)
(2) Exempt transfers
(3) Lifetime transfers

Learning Objectives
 Explain the principles of inheritance tax and identify the different classes of taxpayer liable to
pay inheritance tax
 Explain when the lifetime transfer of an asset gives rise to an inheritance tax liability, calculate
the inheritance tax payable on chargeable lifetime transfers in straightforward scenarios
 Calculate the death tax due on lifetime transfers
 Describe the circumstances in which taper relief and fall in value relief applies and calculate the
amount of relief available in a given situation
162 15: Inheritance tax – basic principles Tax Compliance

1 Scope of Inheritance Tax (IHT)

KEY TERMS
An inheritance tax charge potentially arises if a transfer of value of chargeable
property is made by a chargeable person

1.1 Transfers of value

 A transfer of value is anything that causes a reduction in value in the transferor’s assets
 This includes gifts and sales at undervalue
 The measure is the loss for the transferor, not the increase in the transferee’s wealth
 Dispositions which do not count as transfers of value include:
– Dispositions without gratuitous intent;
– Dispositions made for the maintenance of the transferor's family;
– Gratuitous dispositions which constitute allowable expenditure for the purposes of
income / corporation tax (e.g. employer pension contributions).

1.2 Chargeable person

 Worldwide transfers of assets by UK domiciled individuals are within the scope of UK IHT
 For non-UK domiciled individuals, only transfers of UK assets are within the scope of UK IHT

1.3 Chargeable property

 Property is chargeable unless it is excluded property (which is out of the scope of IHT).
 The main example of excluded property is property situated outside the UK, where the person
beneficially entitled to the property is not domiciled in the UK (see chapter 17).

2 Exempt transfers
Several exemptions are available wholly or partially exempt a transfer from IHT:
Exemptions for transfers during life or Exemptions available only for transfers during life
upon death
Transfers to spouse/civil partner (if non- Transfers of ≤ £3,000 each tax year for a transferor are
domiciled, maximum exemption is covered by an Annual exemption (applied in chronological
£325,000 – see ch.17) order, unused amounts c/f for 1 tax year)
Gifts to UK charities Transfers are exempt under the Small gifts exemption (if ≤
£250 is transferred to an individual during tax year – if more is
transferred, the exemption doesn’t apply)
Gifts to qualifying political parties (2 MPs The marriage exemption exempts all / part of a gift on the
or 1 MP and ≥ 150,000 votes at last occasion of marriage (£5,000 from a parent, £2,500 from a
general election) grandparent, £1,000 anyone else)
Normal expenditure out of income (where there is a pattern
of gifts made to the same recipient out of income, so that the
donor has enough income left to maintain their usual lifestyle)
Tax Compliance 15: Inheritance tax – basic principles 163

WORKED EXAMPLE: ANNUAL EXEMPTION

Daniel made the following cash gifts to his children:

1 July 2021 £1,300 to son 15 May 2022 £800 to son
22 October 2021 £3,700 to daughter 26 June 2023 £7,500 to son
Requirement
Show the amount of each of the transfers after deduction of the annual exemption.
SOLUTION
1 July 2021
£
Cash 1,300
Less: CY annual exemption 2021/22 (part) (1,300)
Transfer NIL

22 October 2021
£
Cash 3,700
Less: CY annual exemption 2021/22 (balance) (1,700)
PY annual exemption 2020/21 b/f (2,000)
Transfer NIL

15 May 2022
£
Cash 800
Less: CY annual exemption 2022/23 (part) (800)
Transfer NIL

26 June 2023
£
Cash 7,500
Less: CY annual exemption 2023/24 (3,000)
PY annual exemption 2022/23 (balance) b/f (2,200)
Transfer 2,300

3 Lifetime transfers
3.1 Types of lifetime transfer
There are two types of lifetime transfer:
 Chargeable lifetime transfers (CLTs); and
 Potentially exempt transfers (PETs)
164 15: Inheritance tax – basic principles Tax Compliance

Chargeable Lifetime Transfers (CLTs) Potentially Exempt Transfers (PETs)

Description Lifetime transfers to: Lifetime transfers to:
 Discretionary trusts  Other individuals
 Interest in possession trusts  Certain types of trust (rare)*
Life tax  Chargeable during life (life tax rate None
20% of gross transfer)
 Assume donor pays life tax unless told
otherwise
Death tax Additionally, death tax at 40% payable if the These only become chargeable if donor
transferor dies ≤ 7 years of the transfer. dies ≤ 7 years after the transfer, with
death tax charged at 40%

*It is very rare to see transfers to trusts which are treated as PETs – examples include transfers to:
– Bare trusts, which are transparent for all tax purposes
– Interest in possession trusts created before 22/3/06 (not examinable)

KEY TERMS
 Discretionary trust: A trust where no beneficiary is entitled by right to any income or
capital; it is left up to the discretion of the trustees which of the beneficiaries is to
benefit from the trust and how they are to benefit.
 Interest in possession trust: A trust where one or more of the beneficiaries has the
right to receive the income of the trust (an interest in possession), the capital passing
to other beneficiaries when the interest in possession comes to an end.
 Bare trust: Such trusts are treated as transparent for tax purposes. Consequently, the
transfer of assets to bare trustees is treated as an outright gift to the beneficiary and
will be a PET by the settlor.

3.2 Chargeable lifetime transfers – calculation of lifetime tax

Pro forma: lifetime tax on a CLT
Transfer Value X
Less: CY Annual Exemption (X)
Less: PY Annual Exemption (X)
A
Less remaining Nil Rate Band (W) (N)
Excess over NRB X

Tax @ 20% if trustees pay tax B

Tax @ 20/80 if donor pays tax
Gross Chargeable Transfer
If trustees pay tax A
If donor pays tax A+B
Gross Chargeable Transfer = A (if the trustees pay) or A + B (if the donor pays)
Tax Compliance 15: Inheritance tax – basic principles 165

WORKING
Remaining nil rate band
Lifetime NRB 325,000
Less chargeable in previous 7 years (X)
Remaining NRB N

The nil-rate band

 All individuals benefit from a ‘rolling’ nil-rate band, a tax free amount – £325,000 for 2023/24
(and all prior years since 2009/10)
 The nil rate band that can be used on a specific chargeable transfer is reduced by any gross
chargeable transfers in the 7 years prior to the transfer.

Gross chargeable transfers (GCT)

 The gross value of the transfer (after exemptions, but before the nil rate band is applied) is
called a ‘gross chargeable transfer’.
 If the transferor pays the lifetime tax on a CLT, this constitutes an additional loss for the
transferor and hence the value of the life tax paid is added when calculating the GCT value.

WORKED EXAMPLE: CHARGEABLE LIFETIME TRANSFER

On 1 July 2023, Seth created a discretionary trust and gave £342,000 in cash to the trustees. This was
the first transfer of value that Seth had made. The trustees agreed to pay any IHT due on the transfer.
Requirement
Compute the IHT payable on the transfer.
SOLUTION
As this is the first transfer of value made by Seth, he can set his annual exemption for 2023/24 against
the cash gift and also his 2022/23 annual exemption:
£
Cash 342,000
Less: annual exemption 2023/24 (3,000)
annual exemption 2022/23 b/f (3,000)
Gross chargeable transfer 336,000
Less: nil rate band 2023/24 (325,000)
Excess over nil band 11,000

IHT on £11,000 @ 20% 2,200

INTERACTIVE QUESTION: PREVIOUS CHARGEABLE LIFETIME TRANSFERS

On 1 July 2023, Delia created a discretionary trust and gave £65,000 in cash to the trustees. This was
the first transfer of value that Delia had made.
On 10 December 2023, Delia gave the trustees a further £400,000 in cash.
Delia paid the IHT due on the transfers.
Requirement
Compute the IHT payable on the transfers.
166 15: Inheritance tax – basic principles Tax Compliance

SOLUTION

EXAM SMART
 In the examination assume that the transferor pays the lifetime tax on each transfer,
unless the question specifically states otherwise.
Tax Compliance 15: Inheritance tax – basic principles 167

3.3 Chargeable lifetime transfers – additional tax on death

 If the transferor of a chargeable lifetime transfer dies within seven years of making the transfer,
additional IHT may be payable.
 Note that the calculation is based on the GCT value from the life tax calculation (not the value of
the asset at the date of death).
 The IHT is calculated using the nil rate band at the date of death (not the date of the CLT).
However, you still need to look back seven years from the date of the CLT (not seven years from
the date of death) to see whether any of the nil rate band has been used up.

Pro forma: death tax on a CLT

Gross chargeable transfer X
Less remaining NRB (W) (N)
Excess over NRB X
Tax @ 40% X
Chargeable after taper relief X
Less: Lifetime tax paid (X)
Tax payable X

WORKING
Remaining nil rate band
NRB @ death 325,000
Less chargeable in previous 7 years (X)
Remaining NRB N

Taper relief
 If the transferor survives more than three years after the CLT, but less than seven years, the
additional tax on death is charged at the following percentages of the full amount:
Period between CLT and death % chargeable
More than 3 years but not 4 years 80%
More than 4 years but not 5 years 60%
More than 5 years but not 6 years 40%
More than six years but not seven years 20%

 This reduction in tax is called taper relief.

INTERACTIVE QUESTION: ADDITIONAL IHT ON DEATH

On 1 November 2020, Mary created a trust in which her son had an interest in possession and gave
£553,000 in cash to the trustees. This was the first transfer of value that Mary had made. Mary died on
10 March 2024.
Requirement
Compute the additional IHT payable on the transfer as a result of Mary's death.
168 15: Inheritance tax – basic principles Tax Compliance

SOLUTION

3.4 Potentially exempt transfers

Treatment in lifetime
 Whilst the transferor is alive, it is assumed that a PET is an exempt transfer. Therefore, during
the lifetime of the transferor, no IHT is chargeable on the PET and it should not be included in
the cumulation when working out lifetime tax on CLTs.
 The only impact that PETs have during lifetime is to consume annual exemption (regardless of
whether they become chargeable).

Treatment on death
 If the transferor dies more than seven years after making a PET, the PET is an exempt transfer.
 If the transferor dies within seven years of making the PET, the PET is a chargeable transfer. IHT
is calculated on the PET in a similar way to the additional tax on a CLT.
Tax Compliance 15: Inheritance tax – basic principles 169

 Note that the transfer value used is the value at the date of the transfer, rather than at the date
of death.

Proforma: Death tax on a PET

Death tax on a PET
Transfer value X
Less: CY annual exemption (X)
Less: PY annual exemption (X)
Gross chargeable transfer X
Less: remaining NRB (W) (N)
Excess over NRB X
Tax @ 40% X
Chargeable after taper relief X

WORKING
Remaining nil rate band
NRB @ death 325,000
Less chargeable in previous 7 years (X)
Remaining NRB N

INTERACTIVE QUESTION: PETS

Graham made the following gifts during his life:

11 July 2016 Cash of £105,000 to son on his son's marriage
12 September 2017 Land valued at £265,000 to daughter
23 December 2019 Cash of £75,000 to son
Graham died on 22 October 2023.
Requirement
Compute the IHT payable as a result of Graham's death.
SOLUTION
170 15: Inheritance tax – basic principles Tax Compliance
Tax Compliance 15: Inheritance tax – basic principles 171

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check
you are able to confirm you possess the following essential learning from this chapter. If not, you
are advised to revisit the relevant learning from this chapter.
Confirm your learning Yes/No

Do you understand what a ‘transfer of value’ means?

Can you explain the various exemptions available on lifetime gifts?

Can you classify a transfer of value as either exempt, a chargeable lifetime transfer
(CLT) or a potentially exempt transfer?

Can you calculate lifetime IHT on a CLT?

Can you calculate additional tax due on death for a CLT?

Can you calculate IHT due on death for a PET?

172 15: Inheritance tax – basic principles Tax Compliance
 173

16

Inheritance tax – death estate

and valuation

Topics
(1) IHT on the death estate
(2) Residence nil rate band
(3) Transfer of nil rate band
(4) Reduced rate for estates leaving 10% or more to charity
(5) Valuation

Learning Objectives
 Calculate the value of an individual’s estate at death and the inheritance tax due
 Describe the circumstances in which quick succession relief applies and calculate the amount of
relief available in a given situation
174 16: Inheritance tax – death estate and valuation Tax Compliance

1 IHT on the death estate

1.1 Charge to IHT on the death estate
 The death estate consists of all the assets to which the deceased was beneficially entitled at
their death (i.e. the assets they owned when they died) less debts and funeral expenses.
 It includes anything acquired by reason of their death, such as the proceeds (rather than the
surrender value) of a life assurance policy.
 Tax on the death estate is payable by the personal representatives.
 Per chapter 15, three main exemptions apply to the death estate:
– Spouse/civil partner;
– Charity;
– Qualifying political party.
 The Nil Rate Band available on the death estate calculation is reduced by GCTs in the 7 years
before death, with any excess value over the NRB taxed at 40%.

Proforma: tax on a Death Estate

Death estate (assets owned at death) X
Less: Allowable expenses & debts:
- Debts (not endowment mortgages or gambling) (X)
- Unpaid taxes (X)
- Funeral expenses (X)
(X)
Less: Exemptions:
- Amounts left to spouse (X)
- Amounts left to charity (X)
- Amounts left to political party (X)
Chargeable estate X
Less Residence NRB (later in ch.16) (X)
Less NRB (W) (N)
Excess over NRB X
Tax @ 40% (36% if > 10% left to charity – later in ch.16) X
Less: Quick succession relief (later in ch.16) (X)
Less: Double tax relief (later in ch.17) (X)
Tax payable X

WORKING
Remaining nil rate band
NRB @ death 325,000
Transferred NRB from dead spouse (later in Ch. 16) X
Less chargeable in previous 7 years (X)
Remaining NRB N
Tax Compliance 16: Inheritance tax – death estate and valuation 175

INTERACTIVE QUESTION: DEATH ESTATE

Ryan died on 12 July 2023. His death estate was as follows:

£
House 500,000
Cash 163,000
Quoted investments 355,000
Personal chattels 50,000
Gross assets 1,068,000
Less: allowable debts and funeral expenses (40,000)
Net assets 1,028,000

Ryan had made a CLT with a gross chargeable transfer value of £41,000 in July 2017. He also made a
potentially exempt transfer of £67,000 in October 2021 (after deduction of annual exemptions).
Ryan left his estate as follows:
 £10,000 to RSPCA (a registered charity)
 House and personal chattels to his wife
Rest of his estate to his son.
Requirement
Compute the IHT payable on Ryan's death estate and state who is liable to pay the IHT due.
SOLUTION
176 16: Inheritance tax – death estate and valuation Tax Compliance

1.2 Debts and expenses

 The following debts and expenses can be deducted in the computation of the death estate:
– Debts incurred for full consideration, e.g. credit card bills for goods bought prior to death,
rent due accrued to date of death, but not gambling debts as such debts are not incurred
for consideration;
– Taxes imposed by law eg income tax, capital gains tax;
– Reasonable funeral expenses, including the cost of a tombstone.
 Where a debt is charged on specific property, eg a mortgage on a house, the debt is deductible
primarily from the property on which it is charged.

STEPS TO CALCULATE IHT

Step 1: Calculate transfer values
 Categorise all lifetime transfers as CLTs, PETs or exempt and note which tax year they happen in
 Work though transfers in chronological order (oldest to most recent) calculating the value of the
transfer
 Deduct any exemptions, including the annual exemptions (AEs) – using current tax year AEs
first, before using any carried forward from the prior tax year
Step 2: Calculate lifetime tax on CLTs
 Calculate the NRB available on each CLT, as reduced by other CLTs in prior 7 years (ignore PETs)
 Tax excess at 20% or 20/80 (if trustees, or settlor respectively pay the tax)
Step 3: Calculate death tax on all lifetime transfers made within 7 years before death
 Work though all lifetime transfers in 7 years before death in chronological order
 PETs made more than 7 years before death are completely exempt
 On each transfer reduce the NRB available by the GCTs in the prior 7 years to the transfer
(ignoring PETs made > 7 years before death)
 Tax the excess at 40%
 Apply taper relief if transfer was > 3 years before death
 Deduct any lifetime tax paid (if a CLT) to arrive at death tax payable
Step 4: Calculate death tax on death estate
 Calculate the chargeable estate (asset values less exemptions, reliefs and debts)
 The only exemptions available are spouse / charity / political party
 Deduct any remaining NRB (reduced by GCTs in prior 7 years)
 Consider whether the residence NRB applies (main residence left to a direct descendant)
 Tax at 40% (36% if charity rate triggered)
Tax Compliance 16: Inheritance tax – death estate and valuation 177

1.3 Quick succession relief (QSR)

The broad aim of IHT is to tax wealth once every generation
 QSR available if the recipient of a chargeable transfer (either as a lifetime or death gift) dies
within 5 years of IHT being charged on the transfer – e.g.
– A transfers an asset to B
– A dies and IHT is charged on the transfer
– B then dies within 5 years of A’s death
 QSR reduces tax on the recipient’s death estate
 The property does not have to be owned on recipient’s death (e.g. Bertie dies: 2 years ago he
was given a pocket watch which he sold just before his death. QSR is available against Bertie’s
death estate)
Approach (after recipient’s death)
(1) Calculate tax on recipient’s death estate as normal
(2) Deduct a tax credit, calculated as follows:
Net transfer
Tax paid on 1st transfer × × relevant percentage
Gross transfer

– Net transfer = net amount received due to 1st death

– Gross transfer = chargeable amount on which tax on 1st death was calculated
(pre-NRB)
Time between transfers Relief
≤ one year 100%
≤ two years 80%
≤ three years 60%
≤ four years 40%
≤ five years 20%
≤ six years 0%

INTERACTIVE QUESTION: QUICK SUCCESSION RELIEF

Petra died on 14 August 2019. Her chargeable death estate was £335,000 and she left the whole of her
estate to her son, Michael. Petra had made no lifetime transfers.
Michael died on 15 February 2024. His chargeable death estate was £602,000 and he left the whole of
his estate to his daughter, Lianne. Michael had made no lifetime transfers.
Requirement
Compute the IHT payable on Michael's death.
SOLUTION
178 16: Inheritance tax – death estate and valuation Tax Compliance

1.4 Fall in value relief

 Fall in Value Relief applies where property is transferred within seven years before the
transferor's death and either:
– The market value on the transferor's death is < the value at the time of the transfer (and
recipient still owns the asset), or
– The property has been sold by the transferee before the transferor's death and the sale
proceeds were < the value at the time of the transfer.
 If this is the case, the transferee can deduct the fall in value from the transfer value when
calculating the death tax.
 For both PETs and CLTs, the claim does not alter the value of the transfer (GCT value) in the
cumulative total used for calculating the nil band for subsequent transfers or the death estate.
 The relief does not apply to plant and machinery nor to chattels with a useful life ≤ 50 years.

INTERACTIVE QUESTION: FALL IN VALUE RELIEF

Sumira made the following gifts during her life:

1 January 2013 A CLT with a gross chargeable transfer value of £329,000
10 December 2019 House worth £131,000 to a discretionary trust.
Sumira died on 1 December 2023. At her death the house was worth £126,000. Sumira's death estate
was valued at £190,000.
Requirement
Compute the IHT payable on the gift on 10 December 2019 and as a result of Sumira's death.
SOLUTION
Tax Compliance 16: Inheritance tax – death estate and valuation 179

2 Residence nil rate band (RNRB)

2.1 What is the residence nil rate band?
 For deaths on/after 6/4/17, any residential property left to direct descendants (children /
grandchildren and their spouses) upon death will qualify for a Residence NRB (if the property
was at some point the home of the deceased)
 The RNRB is £175,000 for deaths in 2023/24 and is frozen until 2027/28
 Max claim is the lower of £175k and the value of the property, and only applies to the death
estate
 The RNRB is reduced by £1 for every £2 which an individual’s estate exceeds £2m so reduced to
nil where the estate is £2.35m (value of the estate after liabilities, but before exemptions,
reliefs and the Nil Rate Band)
 The RNRB is separate from the regular NRB and is not reduced by GCTs in the prior 7 years

WORKED EXAMPLE: RESTRICTION OF THE RNRB

Dorothy died on 24 June 2023 and her estate comprised the following:
£
House in London – lived in by Dorothy at her death 950,000
Other assets 1,250,000
Dorothy’s allowable debts and funeral expenses totalled £80,000. She left £100,000 to charity and the
remainder of her estate to her children.
Requirement
Calculate the amount of the RNRB available to set against Dorothy’s estate.
180 16: Inheritance tax – death estate and valuation Tax Compliance

SOLUTION
Dorothy estate – 24 June 2023
£
House in London 950,000
Other assets 1,250,00
Less allowable debts and funeral expenses (80,000)
Value of estate for RNRB 2,120,000

Note. No deduction for charitable donation or standard NRB.

RNRB
RNRB 175,000
Less restriction (2,120,000 – 2,000,000)/2 (60,000)
Revised RNRB 115,000

As the tapered RNRB of £115,000 is less than the value of the house, the RNRB of £115,000 can be
used against the death estate.

3 Transfer of nil rate band / residence nil rate band

3.1 Transfer of the Nil Rate Band
 This rule allows a claim to be made for the part of the nil rate band which is unused on the
death of the first spouse/civil partner to be transferred to the surviving spouse/civil partner
when he/she dies.
 The nil rate band available to the survivor will be increased according to the proportion of the
nil rate band that was unused at the death of the first spouse:
(Remaining NRB left after 1st spouses death estate calculation)
NRB in force when 1st spouse died
 This additional NRB will only be used in death tax calculations for the surviving spouse (death
tax on lifetime transfers and death tax on the death estate).
 Nil rate bands can be transferred from more than one deceased spouse or civil partner, but
there is a limit of one additional nil rate band being available on the death of the survivor.

Claiming the transfer of the unused nil rate band

The claim must be made by the later of:
 Two years from the end of the month of death of the survivor, or
 Three months from the date the personal representatives first act for the survivor.
Tax Compliance 16: Inheritance tax – death estate and valuation 181

INTERACTIVE QUESTION: TRANSFER OF UNUSED NIL RATE BAND (LESS THAN 100%)

Joseph's wife Mollie died in January 2008. Mollie had a chargeable estate at death of £114,000 which
she left to her daughter. Mollie had made no lifetime transfers. The nil rate band in 2007/08 was
£300,000.
Joseph died on 21 October 2023. He had a chargeable estate of £580,000.
Joseph had made no lifetime transfers.
Requirement
Compute the IHT payable on Joseph's death assuming a claim is made to transfer any unused nil rate
band from Mollie.
SOLUTION

3.2 Transfer of unused RNRB

 In a similar way to the transfer of any unused basic nil rate band, when a surviving spouse/civil
partner dies, any unused proportion of RNRB can be transferred.
 The proportion unused will be based on the RNRB in force at the date of the 1st spouse’s death
(£100k for 17/18, £125k for 18/19, £150k for 19/20) less any tapering due to their estate being
worth > £2m.
 If the first person died before 6 April 2017 (prior to the RNRB being available), no RNRB would
have been used in the estate, and so 100% RNRB is available to transfer unless their estate
exceeded £2,000,000 where the RNRB will be tapered away.
 A claim to transfer unused RNRB must be made by the personal representatives within two
years of the end of the month of the survivor’s death.

4 Reduced rate for estates leaving 10% or more to charity

 IHT is charged at 36% (rather than 40%) where an individual leaves at least 10% of their 'net
chargeable estate' to charity.
 The 'net chargeable estate' is the value of the estate after deducting all available reliefs,
exemptions and remaining nil rate band (as increased by any amount transferable from a
spouse/civil partner), but without deducting the charitable legacy itself and the residence NRB.
182 16: Inheritance tax – death estate and valuation Tax Compliance

WORKED EXAMPLE: REDUCED RATES FOR ESTATES LEAVING 10% OR MORE TO CHARITY

Irene died on 10 August 2023. Her death estate was as follows:

£
House 500,000
Cash 234,000
Personal chattels 50,000
Allowable debts and funeral expenses 30,000
Irene had made a gross chargeable transfer of value of £80,000 in August 2018.
Irene left £60,000 of her estate to Oxfam (a registered charity). The rest of her estate was left to her
son.
Requirement
Compute the IHT payable on Irene's death estate.
SOLUTION
Irene death estate – 10 August 2023
£ £
House 500,000
Cash 234,000
Chattels 50,000
784,000
Less: debts and funeral expenses (30,000)
754,000
Less: charity exemption (60,000)
Chargeable estate 694,000
RNRB (max £175,000) (175,000)
Nil rate band at death 325,000
Less: gross transfer of value in 7 years before death (after 10.8.16) (80,000)
Nil rate band (245,000)
Excess over nil band 274,000
IHT on £274,000 @ 36% 98,640
 The net chargeable estate = £754k – £245k = £509,000
 The charitable donation is therefore 60k / 509k = 11.8% of the net chargeable estate, hence the
estate will be taxed at 36%
Tax Compliance 16: Inheritance tax – death estate and valuation 183

5 Valuation
5.1 Loss to donor
For IHT, the transfer value is calculated as the loss suffered by the donor (diminution in value):
Value of assets owned by the donor before the transfer X
Less: Value of assets owned by the donor after the transfer (X)
Transfer of value X

WORKED EXAMPLE: DIMINUTION OF VALUE

Simon owns 80% of the shares in T Ltd. He gives a 20% shareholding to his son, Edward. The values
agreed with HMRC are:
£
80% holding 400,000
60% holding 260,000
20% holding 40,000
Requirement
Show the transfer of value made by Simon.
SOLUTION
£
Before: 80% holding 400,000
After: 60% holding (260,000)
Transfer of value 140,000

5.2 Quoted shares

For IHT, the value of quoted shares is calculated as:
 Transfer value = lower of:
1
– Quarter-up: Bid price + (Offer price-bid price)
4

– Average of highest and lowest marked bargains

WORKED EXAMPLE: QUOTED SHARES

Peter gave his daughter Paula 100 shares in Mary plc. The shares closed at 495 – 515p with bargains
marked at 480p, 510p and 530p. The shares will be valued as follows:
We take the lower of:
Quarter-up = 495 + ¼ (515 – 495) = 500p, or
480+530
Average of highest and lowest marked bargains = = 505p
2
The shares will therefore be valued at 500p each (make sure to write this as £5.00 for use in further
calculations)
184 16: Inheritance tax – death estate and valuation Tax Compliance

5.3 Unit trusts

 Units in an authorised unit trust are valued at the bid price (the lower of the two quoted prices).

5.4 Life assurance policies

 If the individual dies owning a life assurance policy on his own life not written in trust, the
proceeds (rather than the market value) of the policy are included in his estate for IHT
purposes.
 It is common for such a policy to be written in trust so that the proceeds do not form part of the
individual's estate but are held on the terms of the trust for specified beneficiaries. Thus no IHT
will then be paid on the proceeds.

5.5 Related property valuations

Rules apply to restrict the saving that could be made by transferring an asset on a piecemeal basis via
an exempt transfer:
 For example, giving half your shares to your spouse, then both you and your spouse giving the
shares to your daughter
We have to consider the transferor’s share of all of the property owned by the transferor and any
related property owned by others.

KEY TERM
Related property is any property owned by a:
 Spouse
 Charity or political party which received the property via an exempt transfer
from either spouse (property remains related for up to 5 years after the
charity or political party disposes of it)

 The transfer value is taken as the higher of the diminution in value using related property rules
and the diminution in value ignoring related property rules.
Type of asset How to calculate share of related property
Shares Donor shareholding
× Total related value of related shares
Total related shareholding
OR
Donor shareholding × share price (based on total related shareholding)

Other assets MV of donor's asset

× Total related value of related assets
MV of donor's asset + MV of related assets

EXAM SMART
For examination purposes calculate both the valuation as if there is no related property and
the related property valuation. Then select the higher valuation.
Tax Compliance 16: Inheritance tax – death estate and valuation 185

WORKED EXAMPLE: RELATED PROPERTY

Ellen owns 6,000 shares in NBC Ltd. Ellen’s civil partner Portia owns a further 1,500 shares in NBC Ltd.
Ellen has decided to give 2,500 shares to her son Harry. NBC Ltd has 10,000 shares in issuance. The
following share prices apply to the shares:
% holding Share price
75% £40.00
60% £33.33
50% £30.00
35% £22.86
25% £18.00
Ellen also owns 6 acres of land in Buckinghamshire worth £400,000. Portia owns another 4 acres of the
same plot of land which are worth £270,000. The total value of the combined 10 acre plot is £850,000.
Ellen decides to give all 6 of her acres to her daughter Mabel.
Requirement
Calculate Ellen’s transfers of value.
SOLUTION
Shares
(1) Diminution in value ignoring related property rules
£
Value of 60% holding: 6,000 × £33.33 199,980
Value of 35% holding: 3,500 × £22.86 (80,010)
Diminution in value 119,970

(2) Diminution in value considering related property

£
Value before transfer (75%): 6,000 × £40 240,000
Value after transfer (50%): 3,500 × £30 (105,000)
Diminution in value 135,000
The value transferred by Ellen is therefore £135,000.
Land
(1) The diminution in value ignoring related property rules = £400,000
(2) The diminution in value (including RP) = £850k × £400k / (£400k + £270k) = £507,463
Hence the value transferred = £507,463

 Where assets are held jointly by more than one individual, a discount of between 5% and 15%
will be allowed from the full value of the interest. However, this does not apply where related
property is held

5.6 Overseas assets in the death estate

 Where an overseas asset is included in the death estate quoted in a foreign currency, it must be
converted into sterling using the exchange rate giving the lowest sterling valuation.
 If additional administration costs are incurred due to the asset being located overseas (such as
solicitors’ fees), these costs can be deducted from the value of the asset in the computation up
to a maximum of 5% of the value of the foreign asset.
 Relief for overseas death taxes on overseas assets is given by double taxation relief (see Ch. 17)
186 16: Inheritance tax – death estate and valuation Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know how to present a death estate calculation?

Can you identify when quick succession relief is relevant, and do you know how to
calculate it?

Do you know when an individual is entitled to the residence nil rate band and do you
know how to include it in your inheritance tax calculation?

If there’s a pre-deceased spouse or civil partner do you know how to bring any unused
NRB and RNRB into your calculations?

Do you know the rules to determine whether the reduced 36% rate of IHT applies due
to a large charitable donation?

Can you value a transfer where there is related property?

 187

17

Inheritance tax – reliefs and

other aspects

Topics
(1) Business property relief
(2) Overseas aspects of IHT
(3) Administration of IHT
(4) Interaction of IHT and CGT

Learning Objectives
 Explain the impact of an individual’s domicile and deemed domicile on their inheritance tax
liability
 Calculate the inheritance tax payable on chargeable lifetime transfers in straightforward
scenarios and state the due date for payment
 Calculate the death tax due on lifetime transfers and state the due date for payment
 Calculate the value of an individual’s estate at death and the inheritance tax due and state the
due date for payment
 Describe the circumstances in which business property relief applies and calculate the amount
of relief available in a given situation
 Determine, in straightforward cases, due dates for inheritance tax returns
 Calculate the interest and penalties due in respect of late payment of inheritance tax
188 17: Inheritance tax – reliefs and other aspects Tax Compliance

1 Business Property Relief (BPR)

 BPR can entirely or partially exempt an asset from IHT and applies to both lifetime transfers and
assets in the death estate.
 Agricultural Property Relief (APR) is available where agricultural property, such as farms, are
transferred. The Tax Compliance exam will not test APR.
 To qualify for BPR, two conditions need to be satisfied:
– A qualifying asset
– A sufficient ownership period

1.1 Qualifying assets

Asset Relief
Unincorporated trading business, e.g. sole trader business or share in partnership 100%
Shares in unquoted (incl. AIM) trading company 100%
Securities in an unquoted trading company (if transferor has control) 100%
Shares in quoted trading company (if transferor has control) 50%
Land, buildings, P&M owned personally and used in a partnership, or a company controlled by 50%
the individual

 Related property is taken into account when deciding control

 Includes property located anywhere in the world
 BPR does not apply where there is already a contract in place to sell the business property (Look
out for wording of partnership/shareholder agreements).

1.2 Ownership period

Generally 2 years, with the following exceptions:
 Where the property transferred replaced other business property which together were owned
for at least two years within the five years prior to the transfer;
 Where property passed on death from a spouse/civil partner, ownership by the deceased
spouse is counted as ownership by spouse/civil partner making the transfer;
 Where there are successive transfers of the same property, one of which was on death and the
first transfer of property qualified for relief, the two year ownership requirement on the second
transfer is deemed to have been satisfied.

WORKED EXAMPLE: BPR OWNERSHIP REQUIREMENT

Jasmine inherited a greengrocery business from her husband on his death on 1 September 2021. He
had started the business on 1 July 2020.
Jasmine also bought some shares in Y Ltd, an unquoted manufacturing company, on 12 December
2017. She sold the shares in Y Ltd on 15 October 2022 and used the whole of the proceeds to buy
some shares in G Ltd, another unquoted manufacturing company, on 10 November 2022.
Jasmine gave the business and the shares in G Ltd to her son, Dean, on 18 July 2023.
Requirement
Explain whether the BPR ownership requirement is satisfied on each of the transfers to Dean.
Tax Compliance 17: Inheritance tax – reliefs and other aspects 189

SOLUTION
Greengrocery business
Jasmine has not owned the business herself for two years before the transfer (ownership 1 September
2021 to 18 July 2023). However, since the property was passed to Jasmine on death by her spouse, his
ownership is counted as hers.
Therefore, Jasmine has an ownership period from 1 July 2020 to 18 July 2023 which exceeds two years
and so the ownership requirement for this transfer is satisfied.
Shares in G Ltd
Jasmine has not owned the shares in G Ltd for two years before the transfer (10 November 2022 to
18 July 2023).
However, since the shares in G Ltd replaced the shares in Y Ltd, and the periods of ownership in the
five years before the transfer exceeded two years in total (18 July 2018 to 15 October 2022 and
10 November 2022 to 18 July 2023), the ownership requirement for this transfer is satisfied.

1.3 BPR – excepted assets

 BPR does not apply to the value of excepted assets (e.g. large cash balances/assets held as
investments) held by a business being transferred or the business of a company where shares
are being transferred.
 I.e. for shares in a company with excepted assets, you can only get BPR on:
Net Assets-Excepted Assets
Share value ×
Net Assets

WORKED EXAMPLE: EXCEPTED ASSETS

Marcus has for many years owned a 20% shareholding in Z Ltd, a manufacturing company. He gave the
shares to his daughter when they were worth £80,000.
At the time of the transfer, Z Ltd had total assets less current liabilities of £2,185,000. Additionally
there were non-current liabilities of £185,000 due to a long term loan.
Included in the assets was £100,000 which was the value of a warehouse which the company had
ceased to use six months previously and is surplus to the requirements of the company's business.
Requirement
Show the amount of the transfer of value on the gift by Marcus.
SOLUTION
£
Value of shares 80,000
(2,000,000 – 100,000)
Less: BPR £80,000 × × 100% (76,000)
2,000,000
Transfer of value 4,000

Note: Net assets equal total assets less current liabilities of £2,185,000 less non-current liabilities of
£185,000.
190 17: Inheritance tax – reliefs and other aspects Tax Compliance

1.4 Availability of BPR for lifetime gifts

 If the donor dies within seven years of making a gift of an asset that was eligible for BPR (and/or
APR), relief will not apply to death tax on that lifetime transfer if the transferee no longer owns
the transferred property as relevant business property at the date of the donor’s death.
 Examples include where:
– The transferee has sold the property before the death of the transferor (unless a
replacement asset is acquired within 3 years)
– The transfer was of unquoted shares or securities, the shares become quoted and the
transferee does not have control of the company.

INTERACTIVE QUESTION: COMPLETE IHT EXAMPLE

Ron died on 1 January 2024. The following information may be relevant:

(1) Ron was a widower whose wife died in 2017, using her full nil rate band. She left her share of
the family home to Ron in her will.
(2) Ron had made the following lifetime gifts:
9 September 2018 Gift of £80,000 to his daughter on marriage
10 March 2020 Gift of property worth £350,000 to a discretionary trust
(3) Probate values of assets in death estate:
£
Main residence 433,000
Shares in Nancy Ltd (trading company, shares held > 2 years) 28,000
Shares in Reagan plc (quoted trading company, Ronnie held 250 of 1m issued shares) 325,000
Cash ISA 3,200
Car 15,000
Building society deposit 12,000
(4) Ron’s debts and funeral expenses amounted to £7,500, including a gambling debt of £500
(5) Ron left his entire estate to his daughter.
Requirement
Calculate the tax payable as a result of Ron’s death.
SOLUTION
Tax Compliance 17: Inheritance tax – reliefs and other aspects 191
192 17: Inheritance tax – reliefs and other aspects Tax Compliance

2 Overseas aspects of IHT

Status UK assets Overseas assets
Domiciled in UK or deemed UK domiciled* Assessable Assessable
Non-UK domiciled Assessable Exempt

*Deemed domiciled – see below

2.1 Deemed domicile

 In addition to the normal domicile rules, individuals can be deemed domiciled in the UK for IHT
purposes:
(i) If they are resident in UK for 15 out of last 20 tax years (and one of the 4 years prior to
the transfer), OR
(ii) If they are non-UK domiciled, but were born in the UK, with a UK domicile of origin and
are UK resident in one of the 2 tax years before the transfer, OR
(iii) For 36 months after ceasing to be UK domiciled under general law

2.1.1 Election for UK domicile

Non-UK domiciled individuals can elect to be UK domiciled.
 Election only available if spouse/civil partner is, or was, UK domiciled.
 If spouse/civil partner alive, election can specify that it should apply from a date up to 7 years
prior to the date of the election (but not prior to 6 April 2013).
– Advantage of an election: No upper limit on the spouse exemption for transfers to the
non-UK domiciled spouse (otherwise the limit is £325k)
– Disadvantage: The individual’s overseas assets will be brought within the UK IHT charge.
– Election applies to IHT only.
 Election irrevocable, although it lapses if the individual is non-UK resident for 4 consecutive tax
years.

2.2 Double tax relief for IHT

DTR given as a tax credit against the IHT payable on the overseas asset
 Relief is lower of
– UK tax (the effective rate = IHT liability / gross chargeable estate) on the o/s asset, and
– Overseas tax on overseas asset
Tax Compliance 17: Inheritance tax – reliefs and other aspects 193

WORKED EXAMPLE: DOUBLE TAXATION RELIEF

Joseph died leaving a chargeable estate of £306,000. Included in this total is a foreign asset valued at
£96,000 in respect of which foreign taxes of £18,000 were paid.
Requirement
Calculate the IHT payable on the estate assuming that Joseph made a gross chargeable lifetime
transfer of £182,000 one year before his death.
SOLUTION
£
Death estate 306,000
Less: nil rate band £(325,000 − 182,000) (143,000)
Chargeable estate 163,000
IHT @ 40% 65,200
(Average rate: £65,200/£306,000 = 21.307%)
Less DTR: lower of:
(a) £18,000
(b) £96,000 × 21.307% = £20,455 (18,000)
IHT payable on the estate 47,200

2.3 Location of assets

Type of asset Location
Land and buildings Where physically situated
Debt Where the debtor resides (opposite for CGT)
Life policies Where the proceeds are payable
Registered shares and securities Where they are registered
Bank accounts At the branch where the account is kept
Interest in a partnership Where the partnership business is carried on
Goodwill Where the business to which it is attached is carried on
Tangible property At its physical location

3 Administration of IHT
3.1 Filing deadlines
When an IHT event occurs, an account must be delivered to HMRC specifying details of the property
chargeable and its value. The account must be delivered as follows:
194 17: Inheritance tax – reliefs and other aspects Tax Compliance

Event Person responsible Latest date

CLT – lifetime IHT Transferor 12 months after end of month in which gift made
PET Transferee 12 months after end of month in which death
occurred
Death estate Personal representatives (PRs) 12 months after end of month in which death
eg executors appointed in will, occurred or, if later, three months following the
administrators if no will date they become PRs

3.2 Payment deadlines

Event Person primarily liable Due date
CLT – lifetime IHT Transferor Later of:
6 months after end of month in which CLT made; and
30 April in tax year following the tax year of CLT
CLT – death IHT Transferee 6 months after end of month in which death occurred
PET Transferee 6 months after end of month in which death occurred
Death estate Personal representatives On delivery of IHT account
(taken out of the balance of
the estate, so suffered by the
residuary legatee)

For lifetime transfers, interest will run from the due date on unpaid IHT. For the death estate, interest
will run from the end of six months following the date of death.

Payment by instalments
In some circumstances the taxpayer can make a written election to HMRC to pay the IHT due in ten
equal annual instalments starting on the normal due date. Payment by instalments can be made for:
 Land and buildings;
 Most unquoted shares and securities;
 A business or interest in a business.
Interest-bearing instalments are available on:
 Unquoted shares and securities which are either not a controlling holding or are in certain
companies such as investment companies and property trading companies
 Businesses and interests in businesses (including partnerships) which are investment businesses
or businesses in property trading
 Land
If the property is sold, the IHT on it immediately becomes payable in full.

4 Interaction of IHT and CGT

In the TC exam you may be expected to appraise a set of transactions and separately calculate:
 Any CGT liabilities
 Any IHT liabilities
The following table gives an overview of the aspects to consider in such a question:
Tax Compliance 17: Inheritance tax – reliefs and other aspects 195

Capital gains tax Inheritance tax

Lifetime gifts If it’s a disposal of chargeable assets Life tax + death tax on a CLT, or
(defined in Ch. 11), there will be a capital Death tax on a PET
gain / loss based on a disposal at MV.
Gifts on death Assets left in the will / death estate are Death tax on the death estate
exempt from CGT

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know the conditions to be met for a transfer to qualify for business property
relief?

Do you know how to determine an individual’s domicile and deemed domicile for IHT?
Remember the definition of deemed domicile for IHT is different to that for IT and
CGT.

Do you know how an individual’s domicile (or deemed domicile) impacts their liability
to UK IHT?

Can you calculate double tax relief in an IHT computation?

Can you state who pays IHT and when, for lifetime gifts and on the death estate? Do
you know when an IHT account needs to be delivered to HMRC?
196 17: Inheritance tax – reliefs and other aspects Tax Compliance
 197

18

Corporation tax

Topics
(1) Charge to corporation tax
(2) Taxable total profits
(3) Computation of corporation tax
(4) Administration of corporation tax

Learning Objectives
 Explain the relevance of the distinction between revenue and capital for both receipts and
expenses and apply the distinction in a given scenario
 Recognise the effect on trading profits of the treatment of:
– Provisions
– Capitalised revenue expenditure
 Calculate trading profits or losses after adjustments and allowable deductions (including capital
allowances on plant and machinery and structures and buildings)
 Recognise the effect of the following issues on corporation tax payable:
– Having a period of account less than or more than 12 months in length
– Having one or more associated companies
 Calculate the taxable total profits and the tax payable or repayable for companies
 Identify the key features of the self-assessment system for companies, determine due dates for
returns, payments and payments on account, and calculate the interest and penalties due for
late submission of returns, incorrect returns and late or incorrect payments of tax
198 18: Corporation tax Tax Compliance

1 The charge to corporation tax

1.1 Overview of the corporation tax computation
 UK resident companies pay UK corporation tax on their worldwide profits
 A company is resident in the UK if it is:
– Incorporated in the UK, or
– Has its centre of management and control in the UK
 Companies prepare one corporation tax computation for each Accounting Period:

Example corporation tax computation

Trading income (after capital allowances) X
NTLR income X
Property business profits X
Chargeable gains X
TOTAL PROFITS X

Less: NTLR deficit relief (s.463) (X)

Less: Property losses (X)
Less: Trading loss relief (s.37, s.45) (X)
Less: Qualifying charitable donations (X)
TAXABLE TOTAL PROFITS (TTP) X

Less: Group relief (X)

Revised TTP X

1.2 Accounting periods

 A period of account is the date range for which a company prepares its accounts
 A chargeable accounting period is the date range for which a company must prepare its
corporation tax return

Accounting Period Start/End dates

AP starts when AP ends at earliest of:
Trading commences 12 months after the start
Source of chargeable income acquired End of the period of account
Company starts / ceases trading
After last AP ends Company ceases to be UK resident
Tax Compliance 18: Corporation tax 199

Long Periods of Account (PoA)

A long period of accounts will have to be split into two separate accounting periods – the below shows
you how to calculate the profits for each period.
E.g. a 17 month PoA must be split into 2 APs (1st AP 12m long, 2nd 5m long):
Corporation tax item Treatment
Trading income Adjust profits first, then time apportion 12/17 and 5/17
Capital allowances Two separate calculations – one for each AP (AIA and WDA restricted
to 5/12 in second accounting period. Never restrict FYA)
Property & NTLR income Split between the APs on an accruals basis
Chargeable gains Allocate to the period in which the gain arises
Qualifying charitable donations Allocate to the period in which they are paid

2 Calculating taxable total profits (TTP)

In the TC exam you may be expected to complete the corporation tax computation for an accounting
period, having been given the company’s net profit per account.
In order to do this, you need to calculate the 4 major sources of profit for a company:
 Trading income
 Non-trading loan relationship income
 Property income
 Chargeable gains
Your approach should be:
(1) Start with the profit per account
(2) Adjust those profits for the following to find the trading income:
– Remove disallowed expenditure (per rules in ch.6)
– Calculate and deduct capital allowances (per rules in ch.7)
– Remove any non-trading items (amounts related to non-trading loans, property or gains)
(3) Calculate the NTLR income, property income, and chargeable gains separately
(4) Collate the 4 sources of income into a lead schedule corporation tax computation (see sec. 1)

2.1 Trading income

Adjustments to trading profits
The rules for calculating trading profits for a company are similar rules to those for unincorporated
businesses (see ch.6) with some differences:
 All wages and salaries (including those of owner directors) are allowable for corporation tax
 Private use of company assets is ignored, i.e. 100% of the cost incurred is allowable for
corporation tax. The employee or director may be taxed on a taxable benefit.
200 18: Corporation tax Tax Compliance

Capital allowances
Capital allowances are calculated as for unincorporated businesses (ch.7) with the following
differences:
 No private use adjustments
 Calculated for the accounting period (AP) (so the maximum length of calculation is 12 months)
 Group companies share one amount of £1m AIA between them
 Temporary FYAs available for unlimited expenditure on new assets (not cars):
Expenditure between 1.4.21 and 31.3.23:
Special rate pool
Main pool assets assets
Purchased in AP ending before 130% ‘super deduction’
1.4.23
Purchased in AP ending ‘Super-deduction’ rate: 50% FYA
on/after 1.4.23 No of months in AP pre-1.4.23
Total months in AP × 30% + 100%
Balancing charge on disposal:
– in AP ending before 1.4.23 130% × lower of cost and proceeds
– 50% × lower of
– in AP straddling 1.4.23 No of months in AP pre-1.4.23
cost and proceeds
Total months in AP × 30% + 100%
– Deduct remaining
× lower of cost and proceeds 50% from pool
– in AP ending on/after 1.4.23 Lower of cost and proceeds

Expenditure between 1.4.23 and 31.3.26:

Main pool assets Special rate pool assets
100% FYA 50% FYA
100% × lower of cost and proceeds – 50% × lower of cost and proceeds
– Deduct remaining 50% from pool

INTERACTIVE QUESTION: MAIN POOL SUPER-DEDUCTION

Bungalow Ltd disposed of an asset for £10,000 during its accounting year ended 31 March 2023. It had
purchased the asset for £15,000 and had claimed a super-deduction on this expenditure.
Requirements
(a) Explain the impact of disposal on Bungalow Ltd’s capital allowances.
(b) Explain the difference if, instead, the disposal occurred during the year ended 31 March 2024.
(c) Explain the difference if the disposal was in the year ended 30 September 2023.
Tax Compliance 18: Corporation tax 201

SOLUTION

INTERACTIVE QUESTION: ADDITIONAL FYAS

Buttercup Ltd is a single company with a year end of 31 March. At 1 April 2022 Buttercup Ltd had a tax
written down value of £235,000 in its main pool and £100,000 in the special rate pool. During the
years ended 31 March 2023 and 31 March 2024 it made the following additions and disposals:
01.09.22 Acquisition of a machine with cost of £200,000
30.12.22 Acquisition of a car with CO2 emissions of 70g/km with a cost of £15,000
01.05.23 Acquisition of a new air conditioning system with a cost of £1,200,000
01.02.24 Disposal of the machine with proceeds of £100,000
Requirements
(a) Calculate the capital allowances available to Buttercup Ltd for the years ended 31 March 2023
and 2024. Ignore VAT.
(b) How would you change the capital allowance calculation for the year ended 31 March 2024 if an
asset which had been bought for £50,000, on which a 50% special rate allowance had been
claimed, was disposed of for £20,000 during the year?
202 18: Corporation tax Tax Compliance

SOLUTION
Tax Compliance 18: Corporation tax 203

2.2 Loan relationship rules

 Loan relationship credits: Income from lending money
 Loan relationship debits: Expenditure from borrowing money

Trading loan relationships

Interest type Treatment
Debits Interest on + incidental costs of: Deduct interest from trading profits as a
 Bank overdraft trading expense
 Loans / debentures to buy assets related
to trade (not shares)
Credits Very unlikely in this exam – the company’s trade would have to be money lending

Non trading loan relationships (NTLR)

Interest type Treatment
Debits Interest on + incidental costs of: Pool debits and credits:
 Borrowings to buy non-trading assets  Net credits taxed as NTLR income
(rental properties, shares)  Net debits can be relieved (see ch.21)
 Interest paid on late corporation tax
 Losses on sale of debentures
Credits  Any interest received by the company
 Profits on sale of debentures

2.3 Property income

 If a company rents out a building, it will calculate property income in a similar way to individuals
– Rents and expenses are pooled
– Replacement furniture relief is available.
 But there are three key differences:
– Profit is always accounted for on an accruals basis
– Interest on a loan to buy property is dealt with under loan relationships (NTLR debit)
– Net property losses are set against Total Profits for the same AP (see ch.21)

2.4 Chargeable gains

 Gains are calculated as for individuals, with some key differences (more detail in ch.19):
– Companies get indexation allowance on assets acquired before December 2017
– Companies do NOT receive the annual exempt amount

2.5 Qualifying charitable donations (QCDs)

 Payments to registered charities under the qualifying charitable donations rules (paid gross) are
allowable against total profits in the period in which they are paid.
 QCD payments are therefore disallowed as a trading expense.
204 18: Corporation tax Tax Compliance

2.6 Dividends
 Dividends received by a company are usually exempt  for the purposes of the exam, assume
that all UK dividends received by a company are exempt dividends.
 You will be told if foreign dividends received are taxable in the UK, otherwise assume they are
exempt.
 However, exempt dividends received may affect:
– The corporation tax rate payable by the company, and
– The payment date of corporation tax (see later).

3 Corporation tax liability

 Corporation tax (CT) rates are set for financial years. FY23 runs from 1/4/23 to 31/3/24.
 From FY23 there are two CT rates, based on the company’s augmented profits.

KEY TERMS
Augmented profits: A company’s taxable total profits (TTP) plus exempt ABGH distributions
Exempt ABGH distributions: Exempt dividends and tax credits received from UK and
overseas companies which are not the receiving company’s 51% subsidiaries or
sub-subsidiaries.

 The two CT rates are:

Augmented profits FY22 FY23
Main rate > £250,000 (upper limit) 19% 25%
Small profits rate ≤ £50,000 (lower limit) N/A 19%

 The augmented profits upper and lower limits are scaled down for:
– APs < 12 months
– Associated companies

KEY TERM
Associated companies: Companies (including sub-subsidiaries) are associated if:
– One is under the control (i.e. >50%) of the other, or
– Both are under common control of a third party (individual, partnership or another
company).

 Corporation tax liability = CT rate x Taxable Total Profits (TTP) for the AP
 If an AP straddles two FYs with different CT rates must time apportion TTP, augmented profits
and limits between the FYs
 If augmented profits are between £50,000 and £250,000 CT is calculated as:
– Main rate (i.e. 25%) × TTP less marginal relief
TTP 3
 Marginal relief = (Upper limit – Augmented profits) × ×
Augmented profits 200
Tax Compliance 18: Corporation tax 205

 Note that where there are no exempt ABGH dividends the marginal CT rate between the lower
and upper limits is 26.5%

INTERACTIVE QUESTION: CORPORATION TAX LIABILITY

Willow has the following shareholdings in three other companies:

%
Sycamore Ltd 80
Beech Ltd 51
Sapling Ltd 30
For the year ended 31 March 2024, Willow has taxable total profits of £75,000. It received a dividend
of £12,000 from Sycamore Ltd and a dividend of £5,000 from Sapling Ltd.
Requirement
Compute the corporation tax liability for Willow Ltd for the year ended 31 March 2024.

SOLUTION

WORKED EXAMPLE: FINANCIAL YEAR STRADDLE

Birch Ltd makes up its accounts to 31 December each year. In the year to 31 December 2023, the
company has taxable total profits of £260,000 and receives dividend income from an unconnected
company of £10,000.
Requirement
What is the corporation tax liability of Birch Ltd for the year ended 31 December 2023?
206 18: Corporation tax Tax Compliance

SOLUTION
Birch Ltd
y/e 31.12.23
£
TTP 260,000
Add exempt ABGH dividends 10,000
Augmented profits 270,000
The period of account straddles FY22 and FY23 so the limits for marginal relief for Birch Ltd must be
time apportioned.
FY22 FY23
3/12 9/12
£ £
TTP 65,000 195,000
Exempt ABGH dividends N/A 7,500
Augmented profits 65,000 202,500
CT limits:
Upper limit: £250,000 × 9/12 N/A 187,500
Lower limit: £50,000 × 9/12 N/A 37,500
FY22: TTP × 19% 12,350
FY23 TTP × 25% 48,750
Total CT liability 61,100

An alternative way of calculating the corporation tax liability once you’ve established that Birch Ltd
pays tax at the main rate is as follows:
£
FY22: 3/12 × £260,000 × 19% 12,350
FY23: 9/12 × £260,000 × 25% 48,750
Total CT liability 61,100

INTERACTIVE QUESTION: FINANCIAL YEAR STRADDLE WITH MARGINAL RELIEF

Cedar Ltd makes up its accounts to 30 September each year. In the year to 30 September2023, the
company has taxable total profits of £200,000 and receives exempt ABGH distributions of £10,000.
Requirement
What is Cedar Ltd’s corporation tax liability for the year ended 30 September 2023?

SOLUTION
Tax Compliance 18: Corporation tax 207

4 Payment of corporation tax

Companies’ payment due dates are dependent on size of their augmented profits.

4.1 Small Companies

 Companies which are not large are required to pay corporation tax 9 months and one day after
the end of their accounting period

4.2 Large Companies

 Large companies make quarterly instalments on the 14th of months 7, 10, 13 and 16 of the
accounting period
208 18: Corporation tax Tax Compliance

 A company is large if its augmented profits > £1.5m

 The £1.5 million threshold is:
– Time apportioned for short accounting periods
– Divided by the total number of associated companies at the end of the prior accounting
period
 A company is not large if:
– It has a liability of less than £10,000, or
– It was not large in the preceding 12 months and has augmented profits of not more than
£10,000,000 (scaled down by the number of associated companies)

4.3 Very Large Companies

 Very large companies make quarterly instalments on the 14th of months 3, 6, 9 and 12 of the
accounting period
 A company is very large if its augmented profits > £20m
 The £20 million threshold is:
– Time apportioned for short accounting periods
– Divided by the total number of associated companies at the end of the prior accounting
period
 A company is not very large if it has a liability < £10,000

WORKED EXAMPLE: CORPORATION TAX PAYMENT DATES

The following information relates to J Ltd:

TTP Augmented profits
Y/e 31/3/23 500,000 600,000
Y/e 31/3/24 3,600,000 4,000,000
J Ltd has two associated companies, K Ltd and L Ltd. It acquired its shares in K Ltd on 1 March 2023 and
those in L Ltd on 1 July 2023.
Requirement
Explain whether J Ltd will be required to pay corporation tax by instalments for the year ended
31 March 2024.

SOLUTION
J Ltd will not have to pay corporation tax by instalments for the year ended 31 March 2024 because:
 It was not a large company in the previous year, i.e. y/e 31 March 2023.
– The limit for that year was £1,500,000 (as neither K Ltd nor L Ltd were associated
companies at the end of the previous accounting period, i.e. on 31 March 2022);
 It has augmented profits of less than £10,000,000/2 = £5,000,000 in the current year, i.e. y/e
31 March 2024.
– K Ltd is an associated company as it satisfied that definition at the end of the previous
accounting period, but L Ltd does not.
Hence, J Ltd will pay its corporation tax liability of £3.6m × 25% = £900,000 by 1/1/25
Tax Compliance 18: Corporation tax 209

5 Short accounting periods

5.1 Instalment payments
If a company pays tax by instalment for a short accounting period, each instalment is the lower of:
 3 × CT/n where
– CT is the expected corporation tax liability for the accounting period and
– n is the number of months in the accounting period
 The remaining corporation tax due for the accounting period.

5.2 Timing of instalment payments

Large companies Very large companies
1st instalment date 14th of month 7 of AP 14th of month 3 of AP
Subsequent instalments 3 month intervals (2nd instalment will 3 month intervals (2nd instalment will
be 14th of month 10) be 14th of month 6)
Balancing payment 14th of fourth month after AP 14th of final month of AP

WORKED EXAMPLE: INSTALMENTS FOR SHORT PERIOD OF ACCOUNT

(a) Y Ltd makes up accounts for an eight month period of account to 30 June 2023. The company
initially estimated that its corporation tax liability would be £600,000. Y Ltd does not receive any
dividends. Y Ltd is a large company for corporation tax payment purposes.
Requirement
Show the amount of the instalments due assuming that the actual corporation tax liability
equals the estimated liability and state the due date of each instalment.
(b) Y Ltd revised its estimate of its corporation tax liability in July 2023 to £660,000. It adjusted its
second instalment accordingly and paid the extra amount of the first instalment on the due date
for the second instalment.
The actual corporation tax due is £672,000. The final instalment is paid on the due date.
Requirement
Show the amount of the second and final instalments and calculate the interest payable
(assume interest on underpayments is 6.75%)
SOLUTION
(a) Actual CT liability equals the estimate
First instalment
3 × £600,000/8 £225,000
Due 14 May 2023
Second instalment
210 18: Corporation tax Tax Compliance

3 × £600,000/8 £225,000
Due 14 August 2023
Final instalment
Balance (£600,000 – £225,000 – £225,000) £150,000
Due 14 October 2023 (14th of the fourth month after AP)
(b)
Second instalment
3 × £660,000/8 £247,500
Plus extra amount for first instalment
3 × £660,000/8 = £247,500 – £225,000 (amount paid) £22,500
Total paid on 14 August 2023 £270,000

Final instalment
Balance (£672,000 – £247,500 [adjusted first instalment] – £247,500) £177,000
Based on the eventual corporation tax due, the first two instalments should have been
3 × £672,000/8 = 252,000
Interest payable (calculated from the day after the due date)
 Interest on the 1st instalment is:
– 15/5/23 – 14/8/23: (252k – 225k) × 6.75% × 3/12 = £456
– 15/8/23 – 14/10/23: (252k – 247.5k) × 6.75% × 2/12 = £51
 Interest on the 2nd instalment is:
– 15/8/23 – 14/10/23: (252k – 247.5k) × 6.75% × 2/12 = £51
 Total interest payable £558

6 Submission of corporation tax return

The corporation tax return must usually be submitted 12 months after the end of the period of
account (30 months from the start if the period is> 18 months long).
Tax Compliance 18: Corporation tax 211

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know the pro forma corporation tax computation?

Can you calculate the super-deduction and special rate allowance available to
companies on expenditure on new plant and machinery?

If a question contains a long period of account, do you know how to split your
computation into two accounting periods?

Can you calculate which rate(s) of corporation tax apply to a company’s taxable total
profits?

Can you state the deadline for filing a corporate tax return and paying corporation tax
due?
212 18: Corporation tax Tax Compliance
 213

19

Chargeable gains for

companies

Topics
(1) Computing chargeable gains for companies
(2) Disposals of shares and securities by companies
(3) Substantial shareholding exemption
(4) Non-resident companies and chargeable gains

Learning Objectives
 Calculate the chargeable gains and losses on assets including shares and securities
 Calculate the taxable total profit for companies
214 19: Chargeable gains for companies Tax Compliance

1 Computing chargeable gains for companies

1.1 Chargeable gain computation for companies
 As mentioned in chapter 18, chargeable gains are calculated as for individuals (with rollover
relief available on qualifying disposals), with some key differences:
– Companies get indexation allowance on assets acquired before December 2017
– Companies do NOT receive the annual exempt amount
£
Disposal consideration X
Less: allowable costs (X)
Less: indexation allowance (X)
Chargeable gain X

1.2 Indexation allowance

 Companies benefit from indexation allowance on assets bought before December 2017,
calculated as:

Allowable cost x indexation factor

RD−RI
 The indexation factor =
RI
– RD is the RPI number in the month of disposal (or at December 2017 if later)
– RI is the RPI number in the month the expenditure was incurred
– The indexation factor must be rounded to 3 d.p. before multiplying by the cost (aside
from on disposals of shares).
 Indexation allowance cannot create or increase a loss.

WORKED EXAMPLE: INDEXATION ALLOWANCE

Lilliput Ltd bought an asset on 3 March 1991 (RPI 131.4) for £19,560. In addition, there were legal
expenses of £150 on the purchase. The RPI in December 2017 was 278.1.
The company sold the asset on 15 September 2023 for £42,300, and paid legal costs of £450 on sale.
Requirement
What is Lilliput Ltd’s chargeable gain on sale?
SOLUTION
Gross proceeds 42,300
Less: legal fees (450)
Net disposal consideration 41,850
Less: acquisition cost 19,560
legal fees 150 (19,710)
Unindexed gain 22,140
Less: indexation allowance
278.1 – 131.4/131.4 = 1.116 × 19,710 (21,996)
Chargeable gain 144
Tax Compliance 19: Chargeable gains for companies 215

1.3 Capital losses

 A capital loss is first set off against other gains for the accounting period in which the loss arose.
Any remaining loss is carried forward to be set against the first available gains.
 A company's net chargeable gains for its accounting period are the sum of its gains and losses
for that period less any capital losses brought forward from earlier accounting periods.

2 Disposals of shares and securities by companies

2.1 Share matching rules for companies
The share matching rules for companies are different from those for individuals.
Disposals of shares owned by a company are matched in the following order:
(1) Any acquisitions made on the same day as the date of the disposal;
(2) Any acquisitions within the previous nine days;
(3) Any shares in the s.104 pool which consists of shares acquired on or after 1 April 1982.
No indexation allowance is available on shares matched under the previous nine days rule, even where
the acquisition and disposal fall in different months.

INTERACTIVE QUESTION: DISPOSAL OF SHARES BY COMPANY

A plc acquired the following shares in B Ltd, an investment company:

Date No. Cost
£
10 August 1986 6,000 12,200
15 December 2000 5,000 15,000
28 May 2023 4,000 20,000
A plc sold 10,500 of the shares in B Ltd on 2 June 2023 for £59,200.
Requirement
Apply the matching rules to the disposal
SOLUTION

2.2 S.104 pool

From 1 April 1985, the pool will be adjusted for each operative event. An operative event occurs
whenever shares are acquired or disposed of. The indexed rise in the indexed cost pool in this case
only is not rounded to three decimal places.
Once the share pool has been indexed up to December 2017 no further indexation will be available.
216 19: Chargeable gains for companies Tax Compliance

WORKED EXAMPLE: S.104 POOL

D Ltd has acquired ordinary shares in G plc, a quoted trading company, as follows:
Shares
Date acquired Cost RPI
£
16 September 1988 1,750 1,925 108.4
7 August 1990 3,500 4,025 128.1
1 October 1995 5,250 5,500 149.8
On 24 November 2023, D Ltd sold 7,350 shares for £29,750.
Requirement
Calculate the chargeable gain on sale.
RPI December 2017 = 278.1
SOLUTION
Gain
£
Disposal proceeds 29,750
Less: indexed cost (W) (16,721) = 23,887 × 7,350 / 10,500
Chargeable gain 13,029

(W) S.104 pool

No. Cost Indexed cost
£ £
16 September 1988
Acquisition 1,750 1,925 1,925
7 August 1990
Indexed rise
128.1−108.4
× £1,925 350
108.4
Acquisition 3,500 4,025 4,025
6,300
1 October 1995
Indexed rise
149.8−128.1
× £6,300 1,067
128.1
Acquisition 5,250 5,500 5,500
12,867
24 November 2023
Indexed rise
278.1−149.8
× £12,867 11,020
149.8
10,500 11,450 23,887
Disposal (7,350) (8,015) (16,721)
c/f 3,150 3,435 7,166

2.3 Bonus issues

When added into the s.104 pool, the pool is not indexed up prior to recording the bonus issue as a
bonus issue is not an operative event. It represents merely a reorganisation of share capital and not a
new issue of shares.
Tax Compliance 19: Chargeable gains for companies 217

2.4 Rights issues

The acquisition of rights issue shares in the s.104 pool is an operative event so an indexed rise in the
pool is calculated if the rights issue is prior to 1 January 2018.

WORKED EXAMPLE: RIGHTS ISSUE

R Ltd had the following transactions in K Ltd:

August 1990 Acquired 1,000 shares for £2,700
July 1991 Bonus issue 1:2 held
June 1992 Rights 1 for 2 acquired at £2.50 per share
In November 2023, R Ltd sold 2,000 shares for £5 per share.
RPIs: August 1990 128.1, June 1992 139.3, December 2017 278.1
Requirement
Calculate the chargeable gains on sale.
SOLUTION
Gain
£
Disposal proceeds 2,000 × £5 10,000
Less: index cost (W) (8,537) = 9,605 × 2,000 / 2,250
Chargeable gain 1,463

(W) S.104 pool

No. Cost Index cost
August 1990 £ £
Acquisition 1,000 2,700 2,700
Bonus issue 500
June 1992
Indexed rise
139.3−128.1
× £2,700 236
128.1
Rights 1:2 @ £2.50 750 1,875 1,875
4,811
November 2023
Indexed rise (to December 2017)
278.1−139.3
× £4,811 4,794
139.3
2,250 4,575 9,605
Disposal (2,000) (4,067) (8,537)
c/f 250 508 1,068
218 19: Chargeable gains for companies Tax Compliance

3 Substantial shareholding exemption (SSE)

A Ltd

≥ 10% for 12 months of last 6 years

B Ltd

 Substantial Shareholding Exemption applies on the disposal of shares in one company (say
B Ltd) by another (say A Ltd) if:
– A has owned ≥ 10% of the shares in B for 12 months (continuous) in the last 6 years
– B is a trading company, or the holding company in a trading group
 If SSE applies, then any gain on disposal is exempt and any loss is not allowable
 SSE is automatic and cannot be disapplied

WORKED EXAMPLE: SUBSTANTIAL SHAREHOLDING

M Ltd and T Ltd are trading companies.

M Ltd acquired 6% of the ordinary shares in T Ltd on 1 August 2015 and a further 7% of the ordinary
shares in T Ltd on 10 September 2015.
M Ltd sold 4% of the ordinary shares on 15 May 2018, 5% of the ordinary shares on 13 December 2022
and the remaining 4% of ordinary shares on 18 June 2023.
Requirement
Explain whether the substantial shareholding exemption applies to the disposals in December 2022
and June 2023.
SOLUTION
Shareholding history
%
1 August 2015 6
10 September 2015 7
13
15 May 2018 (4)
9
13 December 2022 (5)
4
18 June 2023 (4)
NIL

13 December 2022
In the six year period starting on 13 December 2016, the 10% test is satisfied by M Ltd from
13 December 2016 to 14 May 2018 which is more than 12 months.
The substantial shareholding exemption therefore applies to this disposal.
Tax Compliance 19: Chargeable gains for companies 219

18 June 2023
In the six year period starting on 18 June 2017, the 10% test is satisfied by M Ltd from 18 June 2017 to
14 May 2018 which is less than 12 months.
The substantial shareholding exemption therefore does not apply to this disposal.

4 Non-resident companies and chargeable gains

4.1 Introduction
 From 6 April 2019 a non-UK resident company is subject to corporation tax on disposals of
either
– UK land and buildings, or
– Assets deriving at least 75% of their value from UK land and buildings (‘property-rich
assets’)

4.2 Disposals of UK non-residential property (or property-rich assets)

 Per chapter 13, only the gain from 6 April 2019 is taxable.
– This is calculated using ‘cost’ based on the market value at 5 April 2019.
– Alternatively, an election can be made to ignore the rebasing at 5 April 2019 and
calculate the gain or loss over the whole period of ownership based on original cost.

4.3 Disposals of UK residential property

 Per chapter 13, only the gain from 6 April 2015 is taxable.
– This is calculated using ‘cost’ based on the market value at 5 April 2015.
– Alternatively, two different elections can be made to change the calculation:
 The total gain over the whole period of ownership is time apportioned and only
the post 5 April 2015 gain charged to tax.
 Calculate the gain or loss for the full period of ownership, based on original cost.

4.4 Payment of corporation tax on gains by a non-resident company

Where a disposal is charged to tax under these rules the corporation tax due on the disposal will be
due within 60 days of the completion of the disposal.
220 19: Chargeable gains for companies Tax Compliance

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you calculate a chargeable gain for a company? How is the calculation different to
that for an individual?

Do you know what a share pool calculation looks like for a company?

Do you know the conditions to be met for the substantial shareholding exemption to
be available?

Do you know which gains of a non-resident company are chargeable to UK corporation

tax?
 221

20

Additional aspects of
corporation tax

Topics
(1) Pension contributions
(2) Research and development expenditure
(3) Double taxation relief

Learning Objectives
 Calculate trading profits or losses after adjustments and allowable deductions
 Calculate the taxable total profit and the tax payable or repayable for companies including the
computation of double tax relief where appropriate
222 20: Additional aspects of corporation tax Tax Compliance

1 Pension contributions
1.1 Tax relief
 Per chapter 4, all employer pension contributions are made gross with the employer obtaining
tax relief by deducting the contribution as an expense in calculating trading profits in the
accounting period in which the payment is made, not accrued.
 There is no limit on the amount of tax deductible contributions an employer can make.
 However, HMRC may seek to disallow a contribution which it considers is not a revenue
expense or is not made wholly and exclusively for the purposes of the trade – e.g.
– where a contribution is made on behalf of a controlling director (or close associate) at a
disproportionately high level, or
– where contributions are made in connection with the sale or cessation of a trade.

2 Research and development expenditure

2.1 What is research and development (R&D) expenditure?
 Qualifying R&D expenditure is that spent on projects which, for example:
– Extend knowledge in a field of science or technology
– Create a product that represents an increase in knowledge in a field of science or
technology

2.2 Relief for R&D capital expenditure

 Capital expenditure on R&D (excluding the cost of land) qualifies for a 100% First Year
Allowance (capital allowance)
 More advantageous to choose the 130% super-deduction for plant and machinery (e.g. a
computer) purchased for R&D purposes before 31 March 2023, but costs of building, say, a
laboratory will continue to qualify for the 100% R&D FYA only

2.3 Relief for R&D revenue expenditure

 Qualifying R&D expenditure includes revenue expenditure on:
– Staff directly / indirectly engaged on R&D;
– External staff provider who provides staff to be directly engaged on R&D*;
– Consumable or transformable materials;
– Computer software (but not hardware);
– Data licences;
– Cloud computing services;
– Power, water and fuel;
– Expenditure of the same nature subcontracted by a SME*
 * Note that the only 65% of the costs of externally provided workers and work subcontracted to
unconnected companies will qualify for the special reliefs (see following sections).
 The relief available for R&D revenue expenditure is dependent on whether the company is a
Small Medium Enterprise (SME) or is large. You will be told in the exam whether the company
is a SME or large
Tax Compliance 20: Additional aspects of corporation tax 223

2.3.1 SME: Additional deduction for R&D revenue expenditure

 Where a small or medium sized company incurs expenditure on qualifying R&D on or after
1 April 2023, it may take an additional 86% trading deduction. The additional deduction before
that date was 130%, so where the company does not have a 31 March year end the relief must
be time apportioned.
 In total the SME will get a 186%/230% deduction vs. trading profits for qualifying R&D revenue
expenditure.

WORKED EXAMPLE: R & D EXPENDITURE

Y Ltd is a small company with the following results for the year to 31 March 2024:
£
Trading income (before taking into account R&D expenditure) 265,000
Qualifying R&D expenditure (no capital expenditure) 108,000
Bank interest receivable 2,000
Chargeable gain 28,000
Requirement
Compute the taxable total profits of Y Ltd for the year ended 31 March 2024.
SOLUTION
£
Trading income before R&D expenditure 265,000
Less: £108,000 × 186% R&D deduction (200,880)
Trading income 64,120
Non-trading loan relationships 2,000
Chargeable gain 28,000
Taxable total profits 94,120

2.3.2 Large companies: R&D expenditure credits (RDEC)

 Large companies can elect for a tax credit regime to apply to their R&D revenue expenditure
 20% of their qualifying R&D revenue expenditure incurred on or after 1 April 2023 (13% before
that date)
 The tax credit is treated as taxable income. This means that the company’s taxable income
increases by the value of the credit.
 The tax credit is then deducted from the company’s corporation tax liability.

WORKED EXAMPLE: RDEC FOR LARGE COMPANIES

Q is a large company. In the year to 31 December 2023 it has taxable trading profits of £800,000, after
the deduction of qualifying R&D expenditure of £860,000. £100,000 of the R&D expenditure was
incurred prior to 1 April 2023 with the balance after this date. It also has interest income of £80,000
and a chargeable gain of £20,000.
Requirement
Compute the corporation tax payable by Q for the year ended 31 December 2023 assuming it has
elected into the large company regime for RDEC.
224 20: Additional aspects of corporation tax Tax Compliance

SOLUTION
£
Taxable trading profits after deduction of R&D expenditure 800,000
RDEC (13% × £100,000 + 20% × £760,000) 165,000
Trading profits 965,000
Non-trade loan relationship income 80,000
Gains 20,000
TTP 1,065,000
Corporation tax:
£1,065,000 × 3/12 × 19% 50,588
£1,065,000 × 9/12 × 25% 199,687
Less RDEC (165,000)
Corporation tax liability 85,275

3 Double taxation relief

If profits are subject to tax in both the UK and a foreign country (e.g. UK resident companies with
overseas profits), then double tax relief will be available. There are three methods of double tax relief:
treaty relief, unilateral relief and expense relief

3.1 Treaty relief

 If a double tax treaty exists between the UK and the other country, then you will be told how
the treaty works in the exam and you simply follow the terms of the treaty.

3.2 Unilateral (credit) relief

 This is the most commonly examined relief method and applies in the absence of a treaty.
 The foreign profits are included in the UK corporation tax computation (gross of any overseas
tax) and are taxed along with the UK profits. Relief is then given on a source-by-source basis as
the lower of:
– The UK tax on the overseas profit
– The overseas tax on the overseas profit
 Loss relief and qualifying charitable donations can be offset on a source by source basis. In
practice these should be set against UK income and gains before overseas income as DTR will
cover at least some of the overseas income, thus reducing the value of the loss/QCD, see below
Tax Compliance 20: Additional aspects of corporation tax 225

INTERACTIVE QUESTION: UNILATERAL RELIEF, MULTIPLE SOURCES OF INCOME

SAM Ltd has received rental income from two properties situated in Utopia and Ruritania.
SAM Ltd has the following results for the year ended 31 March 2024:
£
Trading income 200,000
Property income (gross Utopian rental income) 100,000
Property income (gross Ruritanian rental income) 100,000
Qualifying donations 210,000
Foreign tax has been suffered as follows:
Property income (Utopian rental income) 10,000
Property income (Ruritanian rental income) 40,000
Requirement
Calculate SAM Ltd’s corporation tax liability for the year ended 31 March 2024.
SOLUTION
226 20: Additional aspects of corporation tax Tax Compliance

3.3 Expense relief

 Where a company has overseas profits that will be eliminated due to the use of trading losses,
property losses or qualifying charitable donations, then DTR on the overseas profits would be
lost under unilateral relief (as the UK tax on the overseas profits would be zero).
 In this situation it will be beneficial to use expense relief to deduct overseas tax from the
overseas profits before applying the loss / QCD relief.

3.4 Foreign Dividends

The majority of foreign dividends received by UK companies are exempt from tax in the UK, however a
minority are taxable (you will be told in the exam whether a foreign dividend is exempt or taxable).
Exempt foreign dividends received (other than from 51% subsidiaries) are included in exempt ABGH
distributions and are therefore taken into account when determining whether a company must pay
corporation tax by instalments. Any overseas tax suffered in respect of the dividend is ignored.
If the dividend is taxable, then DTR is available on withholding tax (WHT) and (if you own ≥ 10%)
underlying tax (UT) suffered. If this is the case, you need to:
 Add back the WHT to the dividend
 Add back the UT = (dividend (gross of WHT) / profits after tax) x tax paid
 Add the dividend (gross of WHT and UT) into the corporation tax calculation
 DTR = lower of UK tax and the overseas tax (= WHT + UT)
Tax Compliance 20: Additional aspects of corporation tax 227

WORKED EXAMPLE: TAXABLE FOREIGN DIVIDENDS

Loaf Ltd receives a taxable dividend of £8,500 from a foreign company Croissant Inc (its shareholding is
20%) during its year ended 31 March 2024. This dividend was received net of withholding tax of 15%.
Croissant Inc paid overseas corporation tax of £100,000 on profits after tax of £2 million.
Requirement
Calculate the amounts to enter into Loaf Ltd’s corporation tax return in respect of the dividend and
also the UK corporation tax liability on the dividend for the year ended 31 March 2024.
SOLUTION
£
Net dividend 8,500
WHT (8,500 × 15/85) 1,500
10,000
ULT (10,000/2,000,000 × 100,000) 500
Taxable dividend 10,500

Corporation tax at 19% 1,995

DTR = lower of UK tax £1,995, and
Overseas tax (1,500 + 500) £2,000 (1,995)
UK corporation tax liability Nil

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know what qualifying research and development expenditure is?

How does a small or medium sized entity receive tax relief for research and
development?

How does a large entity receive tax relief for research and development?

Can you calculate double tax relief in a corporation tax computation?

228 20: Additional aspects of corporation tax Tax Compliance
 229

21

Corporation tax losses

Topics
(1) Trading losses
(2) Non-trading losses
(3) Carry forward of losses
(4) Election deadlines

Learning Objectives
 Explain and illustrate how losses may be used effectively by a company or group
 Calculate the taxable total profit and the tax payable or repayable for companies including using
losses to reduce the tax liability
230 21: Corporation tax losses Tax Compliance

1 Trading losses
If a company generates a trading loss, it will record trading income of nil and can claim loss relief:

1.1 Trading losses – continuing business

(1) Trading losses can be used vs. current accounting period total profits (s.37) - this is an all or
nothing election
(2) Remaining losses can be used vs. the prior 12m total profits (but only after relief in current
accounting period)
(3) Unrelieved trading losses are carried forward to be used in future accounting periods vs. total
profits (you choose how much), as long as the trade was ongoing in the period of relief (s.45A)
YE 31/12/23
trading loss
(X)
YE 31/12/22 YE 31/12/23 YE 31/12/24
Trading income X – X
Property income X X X
NTLR income X X (1) (3) X
Chargeable gains X X X
Total profits X X X
(2)

INTERACTIVE QUESTION: S.37 LOSS RELIEF

G plc has the following results:

y/e 31.3.22 y/e 31.3.23 y/e 31.3.24
£ £ £
Trading income/(loss) 10,000 (21,000) 14,000
Property income 2,000 2,000 2,000
Chargeable gains 3,000 Nil Nil
Qualifying donation 1,000 1,000 1,000
Requirement
Compute the taxable total profits for all years, assuming that the company wishes to claim loss relief
as early as possible, and show any qualifying donations that become unrelieved.
SOLUTION
Tax Compliance 21: Corporation tax losses 231
232 21: Corporation tax losses Tax Compliance

1.2 Trading losses – ‘terminal’ losses (s.37)

 A trading loss cannot be carried forward once the trade ceases
 A terminal loss is the trading loss from the last 12m of trading (before cessation of trade)
 A terminal loss can be used vs. total profits of the same accounting period (i) and then carried
back to be set against the total profits of the prior 36 months (ii) – all or nothing relief
 Use losses in chronological order and use non-terminal losses before using terminal losses
YE 31/12/23
trading loss
(X)

YE 31/12/20 YE 31/12/21 YE 31/12/22 YE 31/12/23

Trading profits X X X –
Property profits X X X X
NTLR income X X X X (i)
Chargeable gains X X X X
Total profits X X X X
3. 2. 1.
(ii)

WORKED EXAMPLE: TERMINAL LOSS RELIEF

Desert Ltd ceased trading on 30 June 2023. It had the following results for the accounting periods up
to cessation.
Y/e Y/e Y/e P/e
30.9.20 30.9.21 30.9.22 30.6.23
£ £ £ £
Trading profit/(loss) 70,000 60,000 40,000 (190,000)
Chargeable gains 10,000 – 12,000 –
Property income 5,000 7,000 14,000 16,000
Requirement
Show how Desert Ltd can obtain terminal loss relief for its trading loss on cessation.
Tax Compliance 21: Corporation tax losses 233

SOLUTION
Y/e Y/e Y/e P/e
30.9.20 30.9.21 30.9.22 30.6.23
£ £ £ £
Trading income 70,000 60,000 40,000 –
Chargeable gains 10,000 – 12,000 –
Property income 5,000 7,000 14,000 16,000
Total profits 85,000 67,000 66,000 16,000
Less: s.37(3)(a) (16,000)
s.37(3)(b) (41,000) (67,000) (66,000)
Taxable total profits 44,000 – – –

Trading loss working

The last 12 months of trade would include the 3 months ended 30.9.22. A profit was generated during this
period and so it is ignored for the purpose of calculating the amount of terminal loss available for relief.
£
Terminal loss 190,000
Less: used under s.37(3)(a) p/e 30.6.23 (16,000)
174,000
Less: used under s.37(3)(b) y/e 30.9.22 (66,000)
108,000
Less: used under s.37(3)(b) y/e 30.9.21 (67,000)
41,000
Less: used under s.37(3)(b) y/e 30.9.20 β(41,000)
–

2 Non-trading losses
2.1 Summary of relief for non-trading losses
Loss type Relief vs. current AP Carry back Carry forward
Property Automatically set against N/A Excess carried forward against
losses total profits (before QCDs) future total profits (you choose
how much to use + when)
NTLR deficits Relief vs. total profits (you Relief vs. NTLR income of Unused amounts carried forward
(s.463B) choose how much to use) prior 12m (you choose vs. future total profits (you choose
how much to use) how much to use + when)
Capital Automatically set against N/A Excess carried forward against
Losses chargeable gains of same next available chargeable gains
AP
234 21: Corporation tax losses Tax Compliance

3 Carry forward of losses

3.1 Carry forward of trading, NTLR and property losses
As mentioned in sections 1 and 2, if any of the following losses are carried forward, they can be set
against the total profits of a future accounting period (you choose how much and when):
 trading losses (CTA 2010 s.45A);
 non-trading loan relationship deficits; and
 UK property business losses.

EXAM SMART
In the exam, assume use of trading / NTLR / property losses brought forward will always be
restricted to preserve qualifying charitable donations unless told otherwise

WORKED EXAMPLE: CARRIED FORWARD LOSS RELIEF

F Ltd had a trading loss of £196,000 in the year to 31 March 2023. It had no other income or gains for
the year. The company's projected results for the following two years are:
y/e 31.3.24 y/e 31.3.25
£ £
Trading income/(loss) 46,500 2,610,000
Property income 82,500 99,000
Chargeable gains 59,750 944,000
Requirement
Compute F Ltd's taxable total profits for these two years assuming F Ltd wishes to claim relief for the
trade losses as early as possible.
SOLUTION
y/e 31.3.24 y/e 31.3.25
£ £
Trading income 46,500 2,610,000
Property income 82,500 99,000
Chargeable gains 59,750 944,000
Total profits 188,750 3,653,000
Less: s.45 relief (188,750) (7,250)
Taxable total profits Nil 3,645,750

Trading loss working

£
y/e 31.3.23 loss 196,000
Less: used under s.45A y/e 31.3.24 (188,750)
7,250
Less: used under s.45A y/e 31.3.25 (7,250)
Loss c/f Nil
Tax Compliance 21: Corporation tax losses 235

3.2 Restriction on carried forward relief

 There is a restriction on the use of brought forward losses
 This applies to trading losses, property losses, NTLR deficits and capital losses

Calculation of the restriction

 The maximum relief for losses b/f is limited to a ‘relevant maximum’ of:
– A deductions allowance (DA) of £5m PLUS
– 50% of the excess profits over £5m (after current period loss relief)
 The £5m deductions allowance is shared between members of the same 75% group (see ch.22)
 The claimant company can decide how to allocate its deductions allowance between different
types of loss b/f  in the exam you will be told which type of loss the deductions allowance will
be allocated to.

WORKED EXAMPLE: RESTRICTION ON CARRIED FORWARD RELIEF

Sherbert Ltd, a single company, has trading losses of £12 million incurred in y/e 31 March 2023 which
are unused and thus carried forward at 1 April 2023.
The company’s projected results for the following two years are:
y/e 31.3.24 y/e 31.3.25
Trading income/(loss) 6,000,000 15,000,000
Chargeable gains 2,000,000 3,000,000
Requirement
Compute Sherbert Ltd’s taxable total profits for these two years assuming Sherbert Ltd would like to
claim relief for losses as early as possible.

SOLUTION
y/e 31.3.24 y/e 31.3.25
£ £
Trading income/(loss) 6,000,000 15,000,000
Chargeable gains 2,000,000 3,000,000
Total profits 8,000,000 18,000,000
Less s.45A relief (W) (6,500,000) (5,500,000)
TTP 1,500,000 12,500,000

Working
 The maximum loss c/f relievable vs. y/e 31.3.24 total profits is the lower of:
– The available loss = £12m
– The relevant maximum = £5m + 0.5 × (£8m – £5m) = £6.5m
 The maximum loss c/f relievable vs. y/e 31.3.25 total profits is the lower of:
– The available loss = £12m – £6.5m = £5.5m
– The relevant maximum = £5m + 0.5 × (£18m – £5m) = £11.5m
236 21: Corporation tax losses Tax Compliance

4 Election deadlines
Relief Claim deadline
s.45A c/f trading loss 2 years after the end of the accounting period
s.37 trading loss vs. total profits 2 years after the end of the accounting period
Loss relief
s.39 terminal loss 2 years after the end of the accounting period
s.463B NTLR deficits 2 years after the end of the accounting period

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you understand how a company can set off its trading losses in the current,
previous and future periods?

Can you explain how terminal loss relief operates?

Can you identify non-trading losses and explain how they can be set off?

Do you know when carried forward loss offsets are restricted?

 237

22

Groups

Topics
(1) Group loss relief
(2) Gains groups
(3) Substantial shareholding exemption for groups

Learning Objectives
 Recognise the effect of being a member of a group on corporation tax payable
 Explain and illustrate how losses may be used effectively by a company or group
238 22: Groups Tax Compliance

1 Group loss relief

1.1 Meaning of 'group'
A group relief group / loss group exists where:
 One company owns at least 75% of the ordinary share capital of the other. Indirect holdings are
taken into account.
 Foreign companies can provide a link between a UK holding company and a UK sub-subsidiary, but
generally can’t participate in the relief.

ILLUSTRATION: GROUP RELIEF GROUP

A Ltd
90% 90%

B Ltd C Ltd

85% 80%

D Ltd E Ltd
 A, B, C and D are in a ‘group relief’ group because A has effective control of at least 75% of B, C
and D (90% of 85% is 76.5% of D).
 Any of A, B, C or D could surrender losses to any other member of the A, B, C, D group. Losses
cannot be transferred to or from E by A, B or D.
 C and E are in a separate ‘group relief’ group because C controls at least 75% of E. Losses can
therefore be passed between C and E.
 C cannot pass on losses from E to A, B or D. C cannot pass losses from A, B or D to E.

1.2 Group relief – current period losses

A Ltd
A’s loss
against
≥ 75%
B’s TTP

B Ltd

1.2.1 What may be surrendered?

 A loss making company (A Ltd) can surrender all or any CURRENT PERIOD:
Trading losses Excess property losses
NTLR deficits Excess QCDs
Tax Compliance 22: Groups 239

 QCDs, property losses and management expenses are only 'excess' if they exceed other income
and gains before the deduction of any losses (current year, brought forward or carried back).
 The recipient company (B Ltd) sets the loss against its CURRENT PERIOD TTP. NO carry back or
carry forward of surrendered losses is possible.

1.2.2 How much can you surrender?

 Maximum group relief = lower of:
– Company A’s loss (before any use against A’s profits)
– Company B’s TTP for the same period after deduction of:
 B’s total current period trading and property losses,
 B’s trading / NTLR losses b/f, and
 Current period NTLR deficits which have been relieved vs. current period profits
 If a subsidiary is not owned for the whole period, losses can be surrendered for the period of
ownership only (time-apportion the loss and the TTP). Group relief is denied from the point
when ‘arrangements are in place’ for a company to leave the group.
 If A and B have different year ends, then time apportionment will be needed to calculate the
losses and profits arising in the same period

Y/E 31/12/23 - Profit

A Ltd
Calculate losses and profits for overlapping 9m
B Ltd
Y/E 31/3/24 - Loss

 Any claim between zero and the maximum is allowed  you choose how much!

INTERACTIVE QUESTION: GROUP RELIEF

X plc is wholly owned by Y plc. The companies had the following results for the year ended 31 March
2024:
X plc Y plc
£ £
Trading profit/(loss) (140,000) 200,000
Non-trading loan relationships deficit (10,000) (20,000)
Chargeable gains 15,000 12,000
Qualifying donation 2,000 20,000
Y plc does not wish to make a claim under s.463B CTA 2009 to relieve its non-trading loan deficit in the
current accounting period.
Requirement
Compute the maximum group relief claim that can be made by Y plc for the year ended 31 March 2024
and the corporation tax saved as a result of making the claim.
240 22: Groups Tax Compliance

SOLUTION

1.3 Group relief – brought forward losses

 If losses have arisen on/after 1st April 2017, these losses can be group relieved, even if brought
forward from a prior period
 This includes trading losses, NTLR deficits and property losses

1.3.1 How much can you surrender?

 Maximum group relief = lower of:
– Company A’s b/f loss (after any possible use vs. A’s own profits)
– Company B’s TTP for the same period – as per section 1.2.2 but also after any group
relief claim for current period losses and any possible relief for their own b/f losses

1.3.2 Restriction on b/f loss relief in a group

 In chapter 21 we saw that individual companies could claim relief for brought forward losses up
to a ‘relevant maximum’ of:
– A deductions allowance of £5m PLUS
– 50% of the excess profits over £5m (after current period loss relief)
 A loss group must share a single £5m ‘group deductions allowance’ for each 12-month period
(can be split in any way between the companies in the group)
Tax Compliance 22: Groups 241

EXAM SMART
In an exam question you will only be asked to deal with post April 2017 losses, and it will
state how the ‘deductions allowance’ has been allocated around a group if relevant.

WORKED EXAMPLE: GROUP RELIEF OF CARRIED FORWARD LOSSES

Egg plc has two wholly owned subsidiaries Bacon plc and Sausage plc. The companies had the
following results for the year ended 31 March 2024:
Egg Bacon Sausage
£ £ £
Trading profit/(loss) (100,000) 5,000 100,000
Trading loss incurred in y/e 31.3.23 c/f to 1.4.23 (20,000) (10,000)
Non-trading loan relationship deficit (10,000)
Chargeable gains 25,000 62,000
Qualifying donation 2,000 2,000
Sausage plc will be making a claim under s463B to relieve its non-trading loan deficit in the current
accounting period.
Requirement
Compute the maximum group relief claim(s) which can be made within the Egg group for the year
ended 31 March 2024.
SOLUTION
Egg plc – Available losses
£
Trading loss 100,000
Total losses available for group relief 100,000
Notes
(1) It is not necessary for Egg plc to use the loss first against its own profits.
(2) The trading loss carried forward can be used against Egg plc’s own total profits and so is not
eligible for group relief.
Bacon plc – Available losses and profits
£
Trading loss carried-forward (£10,000 - £5,000) 5,000
Total losses available for group relief 5,000
Note: As Bacon plc is able to offset £5,000 of its own carried forward trading losses against its total
profits only £5,000 of trading losses carried forward will be available for group relief for carried
forward losses. Similarly, as Bacon can offset its trading losses carried forward against its own total
profits bringing them down to nil it has no available profits to receive a group relief claim.
Sausage plc – Available profits
£
Trading profit 100,000
Chargeable gains 62,000
162,000
Less non-trading loan relationship deficit (10,000)
Less qualifying charitable donation (2,000)
Available profits 150,000
242 22: Groups Tax Compliance

Note: Sausage plc has made a claim under s.463B CTA 2009 to relieve the non-trading loan
relationships deficit against current period profits and so the available profits are reduced by this
amount.
The maximum group relief for current period losses claim is therefore £100,000 from Egg plc to
Sausage plc and the maximum group relief for carried forward losses is £5,000 from Bacon plc to
Sausage plc.

2 Chargeable gains groups

2.1 Establishing the gains group
A group exists if there are ≥ 75% links between two or more companies and the holding company has
more than 50%, (indirectly) of any sub-subsidiaries.
A Ltd
75%
B Ltd
75%
C Ltd
 In the above diagram A, B and C are all part of a gains group because there is ≥ 75% link
between each company and a > 50% indirect link from A to C (indirect ownership of 56.25%).
 A company cannot be a member of more than one capital gains group (i.e. unlike for a loss relief
group).
 Non-UK resident companies cannot benefit from gains group rules but can link UK companies in
a gains group.

2.2 Tax implications of a gains group

Nil Gain Nil Loss transfers
 Assets transferred between companies in a gains group are transferred on a ‘nil gain, nil loss’
basis. This is not an option, it is a rule
 The base cost for transferee = original cost + indexation allowance to the transfer date

Transfer of current period capital gains / losses

 Two members of a gains group (A and B) can elect that all or any part of one’s current period
chargeable gain or current period capital loss can be transferred to the other.
 Note that a company can only receive capital losses to the extent it has current period capital
gains to use them against.

Group rollover relief

 A chargeable gain (qualifying for rollover relief) of one group member may be rolled over
against the qualifying reinvestment of another group member.
Tax Compliance 22: Groups 243

INTERACTIVE QUESTION: NIL GAIN/NIL LOSS TRANSFERS

D plc has owned 85% of E Ltd for many years. Both companies prepare accounts to 31 March each
year.
On 20 February 1997 (RPI 155.0), D plc bought some land for £143,000. On 15 July 2002 (RPI 175.9),
when its market value was £188,000, D plc transferred the land to E Ltd.
On 8 September 2023 E Ltd sold the land to a third party for £349,000. The RPI in December 2017 was
278.1.
Requirement
Calculate the chargeable gains arising.
SOLUTION

2.3 Company leaving the group – degrouping charge

 A degrouping charge will apply if both of the following conditions are satisfied:
– A company leaves a gains group ≤ 6 years of receiving an asset in a NGNL transfer, AND
– It still owns the asset at the date it leaves the group
 The degrouping charge equals the gain that would have arisen if the asset was sold to a third
party at market value on the date of the original transfer.

2.3.1 DGC as a result of a share disposal

 If the company leaves the group as a result of its parent selling shares, the DGC is added to the
share sales proceeds received by the parent (similarly, a degrouping loss is deducted from the
proceeds of the share sale).
 The base cost of the asset is updated to the MV on the date of the original transfer.
 Where the gain (or loss) on the qualifying share disposal itself is exempt as a result of the
substantial shareholding exemption, any degrouping charge is also exempt.
244 22: Groups Tax Compliance

WORKED EXAMPLE: DEGROUPING CHARGE

F Ltd acquired a freehold property in May 1999 for £60,000. On 31 August 2018 the property was
transferred to G Ltd, a wholly-owned subsidiary of F Ltd, when the property was valued at £140,000.
G Ltd's only assets are investment properties. On 30 December 2023, F Ltd sells its shares in G Ltd to
an arm's-length purchaser for £1.5m. The companies prepare accounts to 31 December each year.
Assume an indexation factor of 0.679 from May 1999 to December 2017.
Requirement
Explain, with calculations, the effect of the transactions.
SOLUTION
There is a deemed disposal of the freehold property:
£ £
Market value on 31.8.18 140,000
Less: Cost to F Ltd 60,000
Indexation to December 2017
£60,000 × 0.679 40,740 (100,740)
Degrouping gain 39,260

The degrouping gain will be added to the sales proceeds from the disposal of the shares of £1.5m.
The proceeds will therefore become £1,539,260. The base cost carried forward by G Ltd is £140,000
(deemed acquisition date of 31 August 2018).

3 Substantial shareholding exemption for groups

3.1 Introduction
As we have already seen, if a trading company, or member of a trading group, disposes of shares in
another trading company (or holding company of a trading group) out of a substantial shareholding:
 any capital gain arising is exempt from corporation tax;
 any capital loss is not allowable.

EXAM SMART
In the exam you will be told whether a company is a ‘trading company’ for the purposes of the
substantial shareholding exemption.

3.2 Nil gain, nil loss transfers

The substantial shareholding exemption does not apply to a disposal where the nil gain/nil loss
treatment applies. An intra-group share transfer will be treated as a no gain/no loss disposal in the
same way as the disposal of any other asset.

3.3 Aggregation of group holdings

When a company is a member of a group (>50%) then the holdings of the shares in companies which
may potentially qualify for the SSE exemption can be aggregated within the group.
Tax Compliance 22: Groups 245

3.4 SSE following group transfers

Where a newly incorporated subsidiary receives assets from another group company, a sale of the
shares in the new company will qualify for the substantial shareholding exemption providing that the
assets transferred were used in the trade of the other group company for the 12 months before the
transfer.

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you identify which companies form part of a group relief group?

Do you know what can be group relieved and how to calculate the maximum group
relief claim available?

Do you know how group relief for carried forward losses works?

Can you identify which companies form part of a gains group? Do you understand it’s a
slightly different definition to that of a group relief group?

What are the advantages of being in a gains group?

Can you explain the interaction between the degrouping charge and the substantial
shareholding exemption?
246 22: Groups Tax Compliance
 247

23

Value added tax

Topics
(1) Assumed prior knowledge
(2) Single and multiple supplies
(3) VAT groups
(4) Partial exemption
(5) Property transactions
(6) Capital goods scheme
(7) Flat rate scheme
(8) Overseas aspects

Learning Objectives
 Explain the VAT consequences of group registration for VAT
 Explain the VAT consequences of property transactions including the option to tax
 Explain the VAT consequences for a particular transaction within the capital goods scheme
 Calculate the VAT due to or from HMRC for both wholly taxable and partially exempt traders
 Explain the VAT issues of trading with countries overseas
 Explain the classification of supplies and the distinction between goods and services
 Identify and explain the differing VAT treatment of single and multiple supplies
248 23: Value added tax Tax Compliance

1 VAT: assumed prior knowledge

Knowledge of the Principles of Tax VAT syllabus will be required in the TC exam, along with knowledge
of new VAT topics.

1.1 The VAT return

 VAT registered traders must charge VAT on their taxable supplies (sales) – this is output VAT
 They will also incur input VAT on their purchases of taxable items
 They then produce a VAT return (usually quarterly) that summarises the output VAT and input
VAT for the period and will pay over the difference (output VAT – input VAT) to HMRC.
Output VAT X
Less: Input VAT (X)
VAT payable to / repayable from HMRC X / (X)

 Some input VAT is irrecoverable (e.g. input VAT on cars with private use)  more on
irrecoverable VAT later.

1.2 Types of supply

There are several types of supplies for VAT, the VAT treatment of the supply is based on the category
goods / services supplied:
Taxable supplies Exempt supplies
Standard rated – 20% VAT (e.g. electronics, catering, cars) No VAT charged on these supplies –
Zero rated – 0% VAT (e.g. non-luxury food, travel, books) e.g. insurance, education

Reduced rated – 5% VAT (e.g. domestic fuel, children’s’ car seats)

 A person making only exempt supplies cannot register for VAT and cannot recover VAT on
inputs, so the VAT incurred is a real cost for the business.

How to categorise
If a trader makes a supply you need to categorise that supply for VAT as follows (using Hardmans):
Step 1: Look at the zero rated list to see if it is zero rated. If not:
Step 2: Look at the reduced rate list to see if the reduced rate of VAT applies. If not:
Step 3: Look at the exempt list to see if it is exempt. If not:
Step 4: The supply is standard rated.

2 Single and multiple supplies

Where different goods and / or services are supplied together it is essential to determine whether the
transaction is:
 A single supply, which is one supply with one VAT treatment, or
 A multiple supply, which is a number of different supplies each with its own VAT treatment
This is particularly important where the supplies that make up the single or multiple supply are
chargeable at different VAT rates.
Tax Compliance 23: Value added tax 249

2.1 Identification of single / multiple supplies

Single supply Multiple supplies
Description  There are multiple separate elements of  There are different elements of the
the supply supply which are separate and clearly
 One is the principal element identifiable
 Others are is merely incidental /  They have been invoiced together at an
‘ancillary’ to the principal element, or a inclusive price for both items
means of better enjoying that main  No one item is considered the principal
element element – there is a clear intention to
buy two distinct goods / services
Result There is one supply for VAT purposes and There are multiple supplies for VAT purposes
the VAT treatment of the principal element and each item will have VAT charged at the
will apply to the whole supply appropriate rate based on the type of good /
service
Example – Flights and in-flight catering Example – River cruise and evening meal
 Travel (principal element) is zero-rated  Travel is zero-rated
 Catering (the ancillary element) is  Catering is standard rated
standard rated  It was decided that the two elements
 The whole supply is treated as one zero- were complimentary with no principal
rated supply (follows the treatment of (the brochure strongly advertised the
the principal element) evening barbecue)
 The cruise and meal were treated
separately (with the cruise being zero
rated and the meal standard rated)
Other  Classroom study materials  Food hamper with zero and standard
examples  Doctor visit and supplying drugs rated food
 Membership of a club including T-shirt,
magazine, insurance, handbook etc
 Flight and in-flight catering

3 VAT groups
3.1 Conditions for forming a VAT group
 Companies under common control (by a holding company, individual or partnership) can apply
for group registration if they are either established in the UK or have a permanent
establishment in the UK:

A Ltd Partnership

> 50% > 50% > 50% > 50% > 50% > 50%

B Ltd C Ltd B Ltd C Ltd B Ltd C Ltd

250 23: Value added tax Tax Compliance

3.2 Impact of VAT groups

 A VAT group is treated as a single VAT entity which submits one VAT return (prepared by and in
the name of a representative member)
 No VAT is charged on intra-group supplies (this is particularly useful in group reorganisations
involving land and buildings)
 You can pick and choose which companies to include in the group, e.g.:
– Exclude a company in a net repayment situation (making mainly zero rated supplies) that
would benefit from monthly VAT returns and cash repayments from HMRC
– Consider whether to include companies making exempt supplies, based on the level of
exempt supplies in the group compared to the partial exemption de-minimis thresholds

3.3 Pros and cons of VAT groups

Pros Cons
No VAT is charged on intra-group supplies All companies in the group are jointly and severally
liable for the VAT of the group
Only one VAT return is required Having to make one return may cause
administrative difficulties (in collecting and
combining the data)
If a relatively small wholly exempt company is Bringing in an exempt or partially exempt company
included in the VAT group, it may recover its input may lead to a restriction of input tax
tax under the de minimis partial exemption rules
(see later)

4 Partial exemption
4.1 Recovery of input tax
 VAT-registered traders making wholly taxable supplies will be able to recover all of the input
VAT they suffer (by deducting it from output VAT in the VAT return)
 However, if a trader makes both taxable and exempt supplies, they may not be able to recover
all input VAT suffered (these traders are referred to as ‘partially exempt’)
 In the exam a partially exempt trader will have 3 categories of input VAT:
– Input VAT directly attributable to taxable supplies
– Input VAT directly attributable to exempt supplies
– Un-attributable input VAT
 If none of the de-minimis tests are satisfied, only the following is recoverable:
– The Input VAT related to taxable supplies AND
– A proportion of the un-attributable input VAT:
The % of un-attributable input VAT recoverable =
Taxable turnover excl. VAT
× 100%, (round up to nearest whole %*)
Total turnover excl. VAT
*Note that rounding should be to 2dp if unattributable input VAT > £400k
Tax Compliance 23: Value added tax 251

4.2 De-minimis tests

All input VAT is fully recoverable if any ONE of the following three tests is satisfied:
(1) Simplified Test 1:
(i) Total input tax is no more than £625 per month on average AND
(ii) The value of its exempt supplies is no more than 50% of the value of all of its supplies
(2) Simplified Test 2:
(i) Total input tax less input tax directly attributable to taxable supplies is no more than
£625 per month on average AND
(ii) The value of exempt supplies is no more than 50% of the value of all of supplies
(3) Standard Test (applied after the split of unattributable input VAT from 1.2):
(i) Input tax relating to exempt supplies is no more than £625 per month on average AND
(ii) No more than 50% of total input tax.
Note: the de-minimis tests are applied quarterly and again at the end of the VAT year to determine if
an annual adjustment is needed (if VAT has been over or under-paid).

4.3 Annual Test

 A trader can treat themselves as de-minimis for the whole VAT year and only apply the de
minimis tests at the end of the year if:
– They were de-minimis in the prior VAT year (based on the above tests)
– They expect input VAT for the current VAT year to be ≤ £1m
 If this annual test is used, the de-minimis test will be applied in respect of the whole year at the
end of the year, with an adjustment being payable if too much input VAT was recovered during
the year.

INTERACTIVE QUESTION: DE MINIMIS LIMIT FOR PARTIAL EXEMPTION

Lyra makes the following supplies in the VAT quarter:

£
Standard rated taxable supplies (excluding VAT) 42,000
Exempt supplies 9,000
51,000

Lyra's input tax for the period is:

£
Wholly attributable to taxable supplies 2,250
Wholly attributable to exempt supplies 1,350
Non-attributable 1,800
5,400
Requirement
Compute the input tax recoverable for the quarter.
252 23: Value added tax Tax Compliance

SOLUTION

5 VAT on property transactions

5.1 General rules
 The sale of new residential buildings is zero-rated
 The sale of “new” (< 3years old) commercial buildings is standard-rated
 Other transactions in land (e.g. supplies of old commercial buildings, lease or rental of any
commercial building) are exempt, UNLESS there has been an option to tax

5.2 Option to tax

 Can be applied to otherwise exempt supplies of commercial land and buildings (e.g. sale of old
commercial buildings, building rental)
 VAT registered owner can ‘opt to tax’ and waive the exemption. They must then charge
standard rate VAT on all future supplies of the land / building
 The option has a 6 month cooling-off period, but is then only revocable after 20 years with
HMRC agreement
Tax Compliance 23: Value added tax 253

Advantages of opting to tax Disadvantages of opting to tax

Allows the owner to potentially increase recovery of Tenants / buyers may not be able to recover the
input VAT suffered on the building (through the VAT that they will now be charged
capital goods scheme)
Allows the owner to recover input VAT on other Stamp duty land tax will be higher for any purchaser
building related expenses (repairs, cleaning etc) (calculated based on VAT-inclusive consideration)

6 Capital goods scheme

6.1 Rationale / criteria
 The capital goods scheme allows HMRC to ensure the correct amount of VAT is claimed on
computers, land, buildings, aircraft, ships and boats where taxable use changes over time
 Applies to the VAT exclusive cost of:
– Land & buildings costing ≥ £250,000
– Single computer items, aircraft, ships, boats and other vessels costing ≥ £50,000

6.2 Calculation of input VAT recovered

 Input VAT is recovered over:
– 10 years for land and buildings
– 5 years for other assets

The first period

 Recovery of input VAT = Input VAT × % taxable use (based on taxable use in VAT year of
purchase)

Annual adjustment
 In each following VAT year, an adjustment will be calculated, determining either additional
input VAT that may be recovered, or a repayment from the company to HMRC.
 Annual adjustment = (1/N) × Input VAT × (current % taxable use - original % taxable use)
 N = 10 years for land + buildings, 5 years for other assets.

Sale of asset
If the asset is sold, two adjustments are needed in the VAT year of sale:
(1) Normal annual adjustment (assuming usage to date of sale would have applied for whole year)
(2) An adjustment on sale = (P/N) × Input VAT × (R – original % taxable use)
 P = number of VAT periods remaining out of original 5 or 10
 N = 10 years for land + buildings, 5 years for other assets
 R = 0% if sale was exempt for VAT or 100% if sale was taxable for VAT
Note: HMRC may limit any additional input VAT recoverable to the output VAT charged
on the taxable sale.
254 23: Value added tax Tax Compliance

INTERACTIVE QUESTION: CAPITAL GOODS SCHEME

B Ltd bought a building for £400,000, excluding VAT at 20%, on 1 February 2022. The building was built
in June 2020.
B purchased the building to use in its trade (which is partially exempt for VAT purposes)
The company used the building 70% for taxable purposes in the quarter ended 31 March 2022, and
55% in the year ended 31 March 2023.
The building was sold on 31 January 2024 for £300,000 excluding VAT. B Ltd opted to tax the building
prior to its sale and the VAT on sale was 20% × £300,000 = £60,000.
The taxable usage in the final VAT year (up to the date of sale) was 60%.
Required:
Show the VAT recoverable/payable in the three years to 31 March 2024.
SOLUTION

7 Flat rate scheme – limited cost traders

As seen in Principles of Taxation, the flat rate scheme allows traders to calculate net VAT due to HMRC
by applying a flat rate percentage (ranging from 4% to 14.5%) to their VAT-inclusive turnover, rather
than accounting for VAT on individual sales and purchases.
 If a business qualifies as a limited cost trader a percentage of 16.5% is applied, rather than the
percentage applicable to the business, thus removing one of the main advantages of the
scheme.
 A business is a limited cost trader if the amount spent on relevant goods inclusive of VAT is
either:
– less than 2% of VAT inclusive turnover, or
– greater than 2% of VAT inclusive turnover but less than £1,000 per year.
 Relevant goods are goods used exclusively for the business including stock, stationery and office
supplies, and gas and electricity. It does not include any capital expenditure, or the supply of
services such as accountancy, rent or advertising fees.
Tax Compliance 23: Value added tax 255

 The calculation to decide whether the business is a limited cost trader must be made each time
a VAT return is completed.
 Although input tax generally cannot be reclaimed under the scheme, it can be reclaimed on the
purchase of capital assets (e.g. computers) costing >£2,000.

WORKED EXAMPLE: FLAT RATE SCHEME – LIMITED COST TRADER

Monica uses the flat rate scheme for her business. She makes standard rated supplies and the
percentage for her business is 9%.
In her most recent quarter, Monica has the following transactions:
£
Sales 20,000
Purchases of stock 200
Requirement
Compute the VAT due for the quarter.
SOLUTION
£
VAT inclusive turnover = £20,000 × 120/100 24,000
Relevant goods = £200 × 120/100 240
Monica’s business will be a limited cost trader as amount spent on relevant goods inclusive of VAT is
less than 2% of VAT inclusive turnover (2% × £24,000 = £480)
Therefore 16.5% will apply:
VAT due is £24,000 × 16.5% = £3,960

8 Overseas aspects
8.1 Overseas aspects and Brexit
The UK left the EU on 31 January 2020 with a transition period in force until 31 December 2020.
Special rules applied to transactions with the EU whilst the UK was a member, but these are not
examinable in Tax Compliance.
Transactions with EU businesses/individuals are treated the same as non-EU businesses/individuals in
the majority of cases, ie as imports and exports.
There are also some special rules which apply to transactions involving Northern Ireland (the
‘Northern Ireland Protocol’).
256 23: Value added tax Tax Compliance

8.2 Goods
This section deals with the VAT treatment of the sale of goods to customers outside the UK and the
purchase of goods from suppliers outside the UK.
Imports:
1. VAT paid to HMRC at the appropriate UK rates upon arrival in UK
2. HMRC release the goods
3. UK trader recovers VAT paid as input tax in their next VAT return (if VAT-
registered)
4. Traders can instead use postponed VAT accounting, i.e. include the output and
input VAT in their next VAT return (rather than paying input VAT and then
recovering it)

Exports:
1. Zero-rated
2. Must have proof the goods left the country

8.3 Supply of goods between NI and GB

NI remains subject to EU VAT rules on a supply of goods (but not services)  treated as imports and
exports.
VAT continues to be accounted for as it always has been on goods sold between GB and NI:
– Supplier charges VAT as normal
– Customer recovers VAT subject to the normal input tax rules

WORKED EXAMPLE: OVERSEAS GOODS

Tulip Ltd sells £50,000 of goods to a French customer. The goods are transferred from England, where
Tulip Ltd operates, to France. In addition, Tulip Ltd makes purchases of £10,000 from Northern Ireland.
Requirement
Explain the VAT treatment of Tulip Ltd’s sales and purchases.
SOLUTION
Provided Tulip Ltd can evidence that the £50,000 of goods have been exported, they will be zero rated
for VAT purposes for Tulip Ltd. The importer will deal with the VAT.
The £10,000 of purchases from Northern Ireland will have VAT charged on them by the supplier in
Northern Ireland. Tulip Ltd will then be able to recover the VAT subject to the normal VAT rule.
Tax Compliance 23: Value added tax 257

8.4 Services
There are separate rules if services are purchased from suppliers / supplied to customers in a different
country:

Supplies to business customers (B2B)

 The place of supply is where the customer’s business is located.
 Hence no VAT is charged by the supplier, but both output VAT and input VAT is accounted for by
a UK customer (if purchasing from a foreign supplier) – the reverse charge under the
‘destination system’.

Supplies to non-business customers (B2C)

 The place of supply is where the supplier’s business is located.
 Hence the supplier charges VAT at their normal local rate for that type of service.

WORKED EXAMPLE: OVERSEAS ASPECTS

T Ltd, a manufacturing company, has the following relevant information for the quarter to
30 September.
Sales
£
Sales in the UK (standard-rated) 182,940
Sales in the UK (zero-rated) 18,450
Sales to Mexico (VAT registered customers) 12,500
213,890

Purchases
£
Raw materials 37,750
Distribution expenses 9,100
Accountancy services (UK supplier) 3,750
Management consultancy services (French supplier) 2,250
Other expenses (all input VAT recoverable) 14,190
67,040

All the purchases are standard-rated. The sales to Mexico would be standard rated if sold in the UK. All
figures exclude VAT.
Requirement
Compute the VAT due for the quarter.
258 23: Value added tax Tax Compliance

SOLUTION
T Ltd – VAT due quarter ended 30 September
£ £
Output tax
Standard-rated supplies (£182,940 @ 20%) 36,588
Management consultancy services (£2,250 @ 20%) 450
37,038
Input tax (all at 20%)
Purchases 7,550
Distribution expenses 1,820
Accountancy services 750
Management consultancy services 450
Other expenses 2,838
(13,408)
VAT due for the quarter 23,630

The supply of goods to the Mexican VAT registered customers are zero-rated (assuming HMRC is
satisfied the goods have actually been exported).
The receipt of the management consultancy services from the overseas supplier is subject to the
reverse charge rules and there is an output and an input on this supply for T Ltd.

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you understand the difference between zero-rated, reduced rate, exempt and
standard-rated supplies?

Can you determine which entities may form a VAT group?

Do you know the advantages and disadvantages of forming a VAT group?

Can you use the three partial exemption tests to determine how much input VAT a
business can recover?

Can you determine whether VAT needs to be charged on a sale of land or a building?

Do you know which assets are caught by the capital goods scheme?

If the capital goods scheme applies, can you explain how input VAT is recovered?

Do you know how a sale or purchase of goods to/from overseas is treated for VAT
purposes? How about services?
 259

24

Stamp taxes

Topics
(1) Stamp duty
(2) Stamp duty reserve tax
(3) Stamp duty land tax (SDLT)

Learning Objectives
 Identify common situations in which a liability to Stamp Duty Land Tax, Stamp Duty Reserve Tax
and Stamp Duty arises
 Identify situations where there is an exemption from stamp taxes
 Calculate the amount of stamp taxes due in straightforward transactions
 Determine the due dates for stamp taxes returns
 Calculate the interest and penalties due in respect of late payment of stamp taxes
260 24: Stamp taxes Tax Compliance

1 Stamp duty
Stamp taxes are payable on the transfer of shares, securities and land by the purchaser and are
calculated on the consideration paid.

1.1 Charge to stamp duty

 Stamp duty is charged at 0.5% of the consideration payable by the purchaser on the paper
transfer of shares and securities.
 The charge is rounded up to the nearest £5.

1.2 Exemptions from stamp duty

 Gifts / divorce arrangements / variations of wills
 Issuance of new shares
 Transfers between companies in a 75% group (defined as for group relief)

1.3 Administration of stamp duty

 The due date for filing and payment is 30 days from date of the transfer
 Interest is charged on late payments (rounded down to nearest multiple of £5 and not charged
if < £25).
 Penalties for late filing (not charged if < £20), rounded down to next multiple of £5):
– ≤ 12m late  10% of duty (capped at £300)
– 12–24m late  20% of duty
– > 24m late  30% of duty

WORKED EXAMPLE: STAMP DUTY

Ginny buys 10,000 shares in Loubie Ltd for £127,537 on 15 April 2023.
Requirements
Calculate the stamp duty payable by Ginny and state the due date for payment
SOLUTION
£127,537 × 0.5% = £638  round up to next multiple of £5 = £640.
The due date for payment is 30 days from the date of transfer = 14 May 2023

2 Stamp duty reserve tax

 SDRT is payable on the paperless, i.e. electronic transfer of shares and securities
 The rate of duty is 0.5% of the consideration. Unlike stamp duty, there is no rounding
 Filing and payment date is 7th day of the month following the transfer (or paid ≤ 14 days of trade
date if payment made by CREST).
Tax Compliance 24: Stamp taxes 261

3 Stamp duty land tax

3.1 Charge to SDLT
 Stamp duty land tax (SDLT) is chargeable on land transactions, payable by the purchaser within
14 days of the transfer
 It is based on the VAT inclusive consideration
 The rate of SDLT depends on whether the land is used for residential or non-residential
purposes
 Stamp duty land tax on the purchase price, lease premium or transfer value is calculated as a
percentage of chargeable consideration according to the following table:
% Residential % Non-residential
01,2 Up to £250,000 0 Up to £150,000
2 1,2
N/A 2 £150,001 - £250,000
51,2 £250,001 - £925,000 5 £250,001 and over
101 £925,001 - £1,500,000
12 1
£1,500,001 and over

Notes
(1) A further 3% is charged where a purchaser buys a second residential property (a refund will
apply if the new house will be a main residence and the old house is disposed of ≤ 3 years)
(2) A first-time buyer buying a single residential property as their only/main residence for ≤
£625,000 will pay no SDLT on the first £425,000 and 5% on the remainder; if consideration >
£625,000 no relief is given and the usual rates apply

3.2 Leases
 SDLT is payable on the grant of leases on both:
– The premium (using the table above) and
– The rental (using the table below)
 For the TC exam the rental charge is based on the total rent payable to the landlord over the
term of the lease.
% Residential Non-residential
0 Up to £250,000 Up to £150,000
1 £250,001 and over £150,001 - £5,000,000
2 £5,000,001 and over

3.3 Exemptions from SDLT

 Gifts / divorce arrangements / variations of wills
 Transfers in a 75% (group relief) group, but relief is denied if:
– Arrangements exist for the two companies to cease to be members of the same group; or
– The transaction is not for bona fide commercial reasons / the transaction forms part of
arrangements of which the main purpose is tax avoidance
262 24: Stamp taxes Tax Compliance

– SDLT will be charged retrospectively if the transferee company leaves the group within
three years whilst still owning the land.

3.4 Administration of stamp duty land tax

 The purchaser’s due date for filing and payment is 14 days from date of the transfer
 Interest (calculated on a monthly basis in the exam) is charged on late payments
 Penalties for late filing (not charged if < £20), rounded down to next multiple of £5):
– ≤ 3m late  fixed penalty of £100
– > 3m late  fixed penalty of £200
– > 1 year late  additional tax-geared penalty (max = value of the SDLT).

WORKED EXAMPLE: SDLT ON SALE OF FREEHOLD LAND

Harold sells his house to Lily for £475,000 on 10 April 2023.
Requirements
(i) Compute the SDLT payable by Lily if she owns no other property and is a first-time buyer.
(ii) Compute the SDLT payable by Lily if she owns no other property and is not a first-time buyer.
(iii) Compute the SDLT payable by Lily if she bought the house and already owns a house which she
intends to keep.
(iv) Compute the SDLT payable if Lily had purchased instead a non-residential property on
1 December 2023 for £475,000.
SOLUTION
(i) SDLT is calculated as follows:
£
£425,000 × 0% 0
£50,000 × 5% 2,500
SDLT payable is 2,500

(ii) SDLT is calculated as follows:

£
£250,000 × 0% 0
(£475,000 – £250,000) × 5% 11,250
SDLT payable is 11,250

(iii) SDLT is calculated as follows:

£
£250,000 × 3% 7,500
(£475,000 – £250,000) × 8% 18,000
SDLT payable is 25,500

(iv) SDLT is calculated as follows:

£
£150,000 × 0% 0
(£250,000 – £150,000) × 2% 2,000
(£475,000 – £250,000) × 5% 11,250
SDLT payable is 13,250
Tax Compliance 24: Stamp taxes 263

INTERACTIVE QUESTION: SDLT ON RENTAL

Donald is granted a 25 year lease of a factory by Simon. He pays an annual rental of £9,000 per year
for the term of the lease.
Requirement
Compute the SDLT payable by Donald.
SOLUTION

Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you know how to calculate stamp duty/stamp duty reserve tax on a purchase of
shares? Who pays it? When is it due?

Do you know how to calculate stamp duty on a purchase of land? Who pays it? When
is it due?
264 24: Stamp taxes Tax Compliance
 265

Solutions to
Interactive Questions
266 Solutions to interactive questions Tax Compliance

Chapter 1
No. Ethical issues Topics to include in an exam answer
1 A client’s spouse arrives in the This is a breach of the principal of confidentiality.
office and asks for information
about his wife’s tax return as she
does not understand financial
matters
2 A client asks you to massage the This is a self-interest threat to your principles of objectivity,
figures in his tax return in integrity and professional behaviour.
exchange for an ongoing working
relationship
3 You receive a request from HMRC You may not disclose without your client’s authority unless
to disclose information which you there is an express legal right or duty to disclose.
hold about the client Such an authority may be written into the engagement letter in
advance.
4 HMRC issue a statutory request This is a legal obligation to disclose.
for information which you hold.
5 Secondment of a tax practitioner Care should be taken to make sure that there is no scope for
to HMRC conflict between HMRC and the seconding organisation.
6 Advising 2 business partners on a This is permissible if both parties are aware of the potential
transaction where one proposes conflict and agree (separate engagement teams may help here).
to buy out the interest of the If the parties do not agree the adviser can choose to act for one
other or neither party.
7 Client has received an over Notify client of his obligations and possible criminal
payment from HMRC consequences of his actions
Tell the client that you must cease to act for him.
Tell HMRC that you are no longer acting (but not why!)
Keep records of your discussions.
Consider whether to make a disclosure under the money
laundering regulations.
8 Client refuses to disclose a taxable As above.
receipt
Tax Compliance Solutions to interactive questions 267

Chapter 2
Solution: Income tax for someone with little non-savings income
Income tax liability
Non-savings Savings
income income Total
£ £ £
Property income 13,150
Building society interest 51,000
Net income 13,150 51,000 64,150
Personal allowance (12,570) (12,570)
Taxable income 580 51,000 51,580
Tax
£
Tax on non-savings income: £580 × 20% 116
Tax on savings income:
– in starting rate band £4,420 × 0% 0
£5,000
– savings income nil rate band £500 × 0% 0
– in savings basic rate band £32,200 × 20% 6,440
£37,700
– in savings higher rate band £13,880 × 40% 5,552
£51,580
Income tax liability 12,108

The £580 of non-savings taxable income is taxed first at 20%, the basic rate of tax for non-savings
income.
Savings income is taxed next on a cumulative basis. Since the taxable non-savings income was less
than £5,000 there is £4,420 of savings income in the starting rate band to tax at 0%.
Evie is entitled to savings income nil rate band of £500 as she is a higher rate taxpayer (taxable income
of £51,580 exceeds £37,700) and so the next £500 of savings income is taxed at the savings nil rate of
0%.
On a cumulative basis a total of £5,500 of taxable income has been taxed so far. This leaves £32,200
(£37,700 – £5,500) of the basic rate band to tax the savings income at the savings basic rate of 20%.
Finally £13,880 of savings income falls in the savings higher rate band which is taxed at 40%.
268 Solutions to interactive questions Tax Compliance

Solution: Income tax payable for a high earner: Elise

Income tax payable
Non-savings Savings Dividend
income income income Total
£ £ £ £

Employment income 95,876

Bank interest 10,000
Dividends 7,500
Net income 95,876 10,000 7,500 113,376
Personal allowance (5,882) (5,882)
Taxable income 89,994 10,000 7,500 107,494
Tax
£
Tax on non-savings income:
– in basic rate band £37,700 × 20% 7,540
– in higher rate band £52,294 × 40% 20,918
£89,994
Tax on savings income:
– savings nil-rate band £500 × 0% 0
– savings higher-rate band £9,500 × 40% 3,800
£99,994
Tax on dividends:
– in dividend nil rate band £1,000 × 0% 0
– in dividend higher-rate band £6,500 × 33.75% 2,194
£107,494
Income tax liability 34,452
Less tax deducted at source (PAYE) (25,800)
Income tax payable 8,652

The personal allowance is reduced to £12,570 – (113,376-100,000)/2 = £5,882

Since the taxable non-savings income was more than £5,000 there is no starting rate band remaining
to tax any savings income at 0%.
There is a savings nil rate band of £500 as Elise is a higher-rate taxpayer (£37.7k < taxable income ≤
£150k)

Solution: Gift Aid: Roz

Roz
Taxable income (all non-savings) £170,000
Tax
£39,700 × 20% (working – extended band) 7,940
£87,440 × 40% (extended band) 34,976
£127,140
£42,860 × 45% 19,287
£170,000
Income tax liability 62,203
Tax Compliance Solutions to interactive questions 269

Working
Basic rate band 37,700
Gift aid (1,600 × 100/80) 2,000
39,700

Higher rate band 125,140

Gift aid 2,000
127,140

Solution: Marriage allowance

Josie
Income tax liability £
Net income 20,000
Less personal allowance (12,570)
Taxable income 7,430
Tax
£7,430 × 20% 1,486
Less marriage allowance reduction
£1,260 × 20% (252)
Income tax liability 1,234

Chapter 3
Solution: Property income – cash/ accruals basis
(a) Susan
As Susan’s rental receipts clearly exceed £1,000 and her expenses exceed £1,000 she would not
elect to use the property allowance in calculating her taxable property income. As her receipts
are less than £150,000 she will use the cash basis unless she elects to use the accruals basis.
Property income- cash basis
270 Solutions to interactive questions Tax Compliance

£ £
Rent received
April 2023 – June 2023 £1,250 × 3 3,750
July 2023 – March 2024 £1,500 × 8 12,000
15,750
Less: insurance premium – paid 1 January 2024 1,800
other expenses 6,020 (7,820)
Taxable property income 7,930

(b) Susan
Property income- accruals basis
£ £
Rent accrued
April 2023 – June 2023 £1,250 × 3 3,750
July 2023 – March 2024 £1,500 × 9 13,500
17,250
Less: insurance premium
April 2023 – December 2023
£1,600 × 9/12 1,200
January 2024 – March 2024
£1,800 × 3/12 450
other expenses 6,020 (7,670)
Taxable property income 9,580

Note that the fact that the March 2024 rental payment is not received until 2024/25 is not
relevant – the amount due is accrued in 2023/24 and is therefore taxable in that year.

Solution: Taxable property income

Lee
£ £
Income:
Rent received
52 × £125 6,500
Expenses:
Repairs 460
Replacement cost (£300 + £10) 310
Council tax 680
Water rates 255
Redecoration 500
Insurance 240
Gardening and cleaning 440
Advertising for new tenant 25
(2,910)
Taxable property income 3,590

The element of the cost of the washer-dryer that represents an improvement over a washing machine
i.e. £100 (£400 – £300) cannot be deducted, but the cost of disposing of the old machine can.
Tax Compliance Solutions to interactive questions 271

Chapter 4
Solution: Auto enrolment
Pavel meets the auto enrolment criteria and so is eligible and D Ltd must enrol him in a qualifying
pension scheme.
Julie is under 22 years old, so is not eligible and D Ltd does not need to auto enrol her.
Lolita does not earn at least £10,000, and earns below the lower earnings limit, so is not eligible and
D Ltd does not need to auto enrol her.

Chapter 5
Solution: receipt of general earnings
Jordan
£
Salary (£36,000 × 5/12) 15,000
Bonus (w) 6,000
Taxable earnings 2023/24 21,000

(w) Because he is a director, Jordan’s bonus is taxable at the earliest of:

– The date of payment (30/4/24)
– The date it was accrued in the accounts (10/4/24)
– The date of determination of the bonus (if after the period of account) (1/4/2243)
Hence, the bonus is taxable on 1/4/24 and should be included in Jordan’s tax return for 2023/24

Solution: allowable deductions

Expense Amount to include in employment income
£10 train ticket from home to normal place of No deduction. Normal commuting is not a
work qualifying travel expense.
£50 a month subscription to health club (many No deduction. Not necessarily for performance of
clients also use club) duties of employment, even if wholly and
exclusively conditions satisfied.
£500 for smart clothes suitable for office work No deduction. Not wholly, exclusively or
necessarily for performance of duties of
employment.
£320 annual subscription by an accountant to the Deduction £320. Professional subscription.
ICAEW
£50 a month specific entertainment allowance of £45 deductible. The balance (£50 – £45) will be
which £45 used on actual entertaining taxable on the employee.
£25 train ticket from home to temporary £25 deductible for each journey. Where an
workplace for six-month secondment employee works at a temporary workplace for no
more than 24 months, travel from home to the
temporary workplace during that period will be
deductible.
272 Solutions to interactive questions Tax Compliance

£500 general round sum allowance of which £300 Only the £50 is deductible – hence £450 is
used on actual entertaining and £50 spent on taxable on the employee.
travel to visit clients.

Solution: Private use assets

(a)
Television
Annual value
20% × £1,100 £220

Available for six months in tax year

£
£220 × 6/12 110
Less: employee contribution £10 × 6 (60)
Taxable benefit 50
Computer
Insignificant private use therefore no taxable benefit £nil

(b)
Computer £
Annual value
20% × £2,700 540
Business use (55%) (297)
Taxable benefit (45%) 243

Solution: Asset transferred to employee

First, work out the amounts taxable under the private use rules:
2022/23 £4,000 × 20% £800
2023/24 £4,000 × 20% × 9/12 £600
Then work out the taxable benefit on the transfer of the asset:
Tax Compliance Solutions to interactive questions 273

Greater of:
Current market value £1,000
Market value at provision less amounts taxed
£(4,000 – 800 – 600) £2,600
ie £2,600 less price paid £700 = £1,900
Total taxable benefits for 2023/24 in respect of furniture
(£600 + £1,900) £2,500

Solution: Employment related loans

Since the total of all the loans exceeds £10,000, all three loans give rise to taxable benefits.
Loan 1
Average method
Balance at start of year £1,300
Balance at end of year (£1,300 – £200) = £1,100
£1,300 + £1,100
= £1,200 × 2.25% £27
2
Strict method
£
6 April 2023 – 5 March 2024 11/12 × £1,300 × 2.25% 27
6 March 2024 – 5 April 2024 1/12 × £1,100 × 2.25% 2
Total interest 29

Fennella would use the average method. In practice, the strict method is not different enough to be
worth election by HMRC.
Loan 2
Average method
Balance at start of year £50,000
Balance at end of year £50,000
£
£50,000 + £50,000
= £50,000 × 2.25% 1,125
2
Less: interest paid £50,000 × 1% (500)
Taxable benefit 625

Strict method would give the same benefit as the average method.
Loan 3
Average method
Balance at start of year £100,000
Balance at end of year £30,000
£100,000 + £30,000
= £65,000 × 2.25% £1,463
2
274 Solutions to interactive questions Tax Compliance

Strict method
£
6 April 2023 – 5 July 2023 3/12 × £100,000 × 2.25% 563
6 July 2023 – 5 April 2024 9/12 × £30,000 × 2.25% 506
Total interest 1,069

Fennella would use the strict method.

Solution: Marginal cost

First determine which fee cost is relevant.
The marginal cost of providing the place is the equivalent to the additional cost, i.e. £1,500.
Then deduct the contribution paid by Leonard i.e. £2,000
This cannot give rise to a negative benefit, so the benefit is nil.
Tax Compliance Solutions to interactive questions 275

Solution: Employment Income

Salary 55,000
Company car BIK 604 29,000 × 5% × 5/12
Private medical insurance 2,500 Cost to the employer
Season ticket loan – Exempt as ≤ £10k
Amanda’s pension contribution (2,750) Occupational scheme
Employer pension contribution – Exempt
Festive hamper 200 Too expensive for trivial benefit exemption
Employment Income 55,554

Chapter 6
Solution: Adjustment of profit
Taxable trading income (before capital allowances)
£
Net profit per accounts 39,000
Add: Disallowable expenditure
Drawings £50 × 52 2,600
Dean's NICs 179
Wages to son 1,000
New heating system 3,000
Political donation 260
Private medical insurance for Dean 564
Dean's income tax 15,590
Non-trade debt written off 250
Increase in general bad debt provision 150
Fees on acquisition of machinery (capital asset) 200
Fees relating to motoring offence 190
Depreciation 630
Lease rental on car disallowed – (15% × £2,400) 360
Oxfam donation 30
Interest on overdue tax 130
Dean's speeding fine 625
Private motoring 1/3 × (£1,560 + £3,255 + £160) 1,658
Entertaining customers 850
67,266
Trading income not shown in accounts
Goods for own consumption (£625 – £500) 125
67,391
Less: Non-trading income
Interest receivable (3,000)
Taxable trading income (before capital allowances) 64,391

Solution: Tax year basis on commencement of trade

Lolita
276 Solutions to interactive questions Tax Compliance

Tax Year Working £

2025/26 1.10.25 – 5.4.26
6/12 × £12,200 6,100
2026/27 6.4.26 – 5.4.27
6/12 × £12,200 + 6/12 × £16,100 14,150

Solution: Transitional year rules (2)

Gustav
The profits of y/e 30.6.22 would have been taxed under CYB in 2022/23.
The 2023/24 basis period therefore runs from 1.7.22 – 5.4.24. As this is >12 months, we need to use
the six-step process:
Step 1: Profit of the standard part £ £
12m/e 30.6.23 12,000

Step 2: Profit of the transition part

Profit for the period 1.7.23 – 5.4.24
9/12 × £16,000 12,000

Step 3: Step 2 less overlap profit 12,000

(1,000)
11,000
Step 4: Step 1 plus Step 3 12,000
11,000
– Not a loss so continue to Step 5 23,000

Step 5: Lower of Step 3 and Step 4

i.e. lower of £11,000 or £23,000
Transition profits £11,000 @ 20% 2,200

Step 6: Step 1 gave a profit

Step 1 12,000
Step 5 2,200
Assessable 2023/24 14,200
Tax Compliance Solutions to interactive questions 277

Chapter 7
Solution: Capital allowances
Vaneesha
Special Private use car
Main Pool Rate Pool (70% bus. use) Allowances
Y/e 31 March 2024 £ £ £ £
TWDV b/f 22,000 19,000

Additions – AIA
Lift (integral to the building) 535,000
Equipment 265,000
AIA (W) (265,000) (535,000) 800,000
Additions – non-AIA
Car 1 (45g) 25,000

Car 2 (0g) 13,000

FYA @ 100% (13,000) 13,000

Car 3 (155g) 10,100

Disposals
Lorry (8,000)
39,000 10,100 19,000

WDA – 18% (7,020) 7,020

WDA – 18% (3,420) × 70% 2,394
WDA – 6% (606) 606
TWDV c/f 31,980 9,494 15,580
Total Capital Allowances 823,020

(W) AIA
In order to maximise the capital allowances, AIA is claimed on special rate pool purchases in priority to
main pool purchases.
278 Solutions to interactive questions Tax Compliance

Solution: Short periods

Yasir
Special
Main Pool Rate Pool Allowances
£ £ £
TWDV b/f 12,000 15,000

Additions

Thermal insulation 510,000

AIA (W1) (500,000) 500,000

Charge-point equipment 5,000

FYA @ 100% (W2) (5,000) 5,000
12,000 25,000

WDA – 18% × 6/12 (1,080) 1,080

WDA – 6% × 6/12 (750) 750
TWDV c/f 10,920 24,250
Total Capital Allowances 506,830

(W1) AIA
The maximum AIA for the period is £1,000,000 × 6/12 = £500,000
(W2) FYA
Expenditure on charge-point equipment took place before 6 April 2025 so 100% FYA available

Solution: Cessation of business

Ted
Main pool Car Allowances
£ £ £
Period of account – 1.1.23 to 30.9.23
TWDVs b/f 24,285 23,750
Additions
14.5.23 Office furniture 1,850
26,135
Disposals
30.9.23 main pool (26,590)
(455)
Balancing charge 455 (455)
30.9.23 Car (19,680)
4,070
Balancing allowance (4,070) × 70% 2,849
Allowances 2,394

Taxable trading income p/e 30 September 2023

£
Taxable trading income before capital allowances 9,000
Less: capital allowances (2,394)
Taxable trading income 6,606
Tax Compliance Solutions to interactive questions 279

Taxable trading income for closing year

Last tax year (2023/24)
End of previous basis period (CYB for 2022/23) to cessation
1 January 2023 to 30 September 2023
£
Taxable trading income 6,606
Less: overlap relief (2,000) £4,606

Chapter 8
Solution: s.64 loss relief
The loss arises in 2023/24
S.83
The loss may be carried forward under s.83. £5,000 of the loss will be used against the trading income
of 2024/25. The remainder of the loss (£17,000) will be carried forward against the first available
trading income in subsequent years.
S.64 and s.83
The loss may be set against general income in 2023/24 and/or 2022/23. Any remaining loss can be
carried forward under s.83.
The following three possible claims may be made:
Claim 1 – set off against general income in 2022/23 only
£
2022/23 – s.64 vs. general income 22,000

Claim 2 – set off against general income in 2023/24 only, c/f remainder
£
2023/24 – s.64 vs. general income 15,000
2024/25 – s.83 vs. trading income 5,000
2025/26 and later vs. trading income 2,000
22,000

Claim 3 – set off against general income in 2023/24 first and then against general income in 2022/23
£
2023/24 – s.64 vs. general income 15,000
2022/23 – s.64 vs. general income 7,000
22,000
280 Solutions to interactive questions Tax Compliance

Solution: s.72 loss relief

Trading income
£
2022/23
1 May 2022 – 31 March 2023 (same as 5 April) 6,120

2023/24
y/e 31 March 2024 (48,000)

2024/25
y/e 31 March 2025 10,000

The loss arises in 2023/24 and, as this is one of the first four years of trading, it can be relieved against
income of 2020/21 to 2022/23, in that order, under s.72.
2020/21 2021/22 2022/23 2023/24
£ £ £ £
Employment income 25,000 10,000 NIL NIL
Trading income NIL NIL 6,120 NIL
Property income 6,000 6,000 6,000 6,000
Total income before losses 31,000 16,000 12,120 6,000
Less s.72 relief (W) (31,000) (16,000) (1,000)
Net income NIL NIL 11,120 6,000
Loss memo
£
Loss 48,000
Less s.72 claim 2020/21 (31,000)
17,000
Less s.72 claim 2021/22 (16,000)
1,000
Less s.72 claim 2022/23 (1,000)
Loss available for c/f NIL

Solution: s.89 loss relief on cessation

Working – Calculation of trading loss 2023/24
£
Loss in 10m ended 31.10.23 (CYB for 2022/23) 20,000
Add overlap profits 2,000
2023/24 Trading Loss 22,000

Working – Calculation of terminal loss

£ £
Loss in final tax year
(1) 6 Apr 2023 to 31 Oct 2023 (7 m) 7/10 × £20,000 (14,000)
Add overlap profits (2,000)
(16,000)
Loss in penultimate tax year
Tax Compliance Solutions to interactive questions 281

(2) 1 Nov 2022 to 5 Apr 2023

3/10 × £20,000 (6,000)
2/12 × £9,000 1,500
Note 1 (4,500)
Terminal loss available for relief (20,500)

Note: The profits arising in the two months to December 2022 must be netted off when calculating the
terminal loss.
Option 1
S.64 claim: Relieve £22k 2023/24 trading loss against total income of £34,000 (£25k + £9k) in 2022/23
Option 2
S.89 claim (terminal loss): Relieve the £20,500 available for terminal loss relief:
£9k against trading profits in 2022/23
£5k against trading profits in 2021/22
£6k against trading profits in 2020/21
This has used £20k of losses.
The 2023/24 trading loss of £22k is reduced by the loss already used under s.89 (£20k)
This leaves £2k to relieve against total income in 2022/23

Chapter 9
Solution: Partner joining a partnership
Sam and Emma
First allocate the taxable trading income between the partners:
y/e 31.12.23 Total Sam Emma Hilary
£ £ £ £
First PSR period
1.1.23 to 31.5.23 = £48,000 × 5/12
PSR (1:1) 20,000 10,000 10,000 n/a
Second PSR period
1.6.23 to 31.12.23 = £48,000 × 7/12
PSR ([Link]) 28,000 14,000 7,000 7,000
Totals 48,000 24,000 17,000 7,000

y/e 31.12.24 Total Sam Emma Hilary

£ £ £ £
PSR ([Link]) 60,000 30,000 15,000 15,000

Next, consider the profits taxed for each partner for 2023/24.
282 Solutions to interactive questions Tax Compliance

Sam
Transitional period rules
The profits of y/e 31.12.22 would have been taxed under CYB in 2022/23.
The 2023/24 basis period therefore runs from 1.1.23 – 5.4.24. As this is >12 months, we need to use
the six-step process:
Step 1: Profit of the standard part £ £
12m/e 31.12.23 24,000

Step 2: Profit of the transition part

Profit for the period 1.1.24 – 5.4.24
3/12 × £30,000 7,500

Step 3: Step 2 less overlap profit 7,500

(1,500)
6,000
Step 4: Step 1 plus Step 3 24,000
6,000
– Not a loss so continue to Step 5 30,000

Step 5: Lower of Step 3 and Step 4

i.e. lower of £6,000 or £30,000
Transition profits £6,000 @ 20% 1,200

Step 6: Step 1 gave a profit

Step 1 24,000
Step 5 1,200
Assessable 2023/24 25,200

Emma
Transitional period rules apply, as for Sam
2023/24 trade profit: £17,000 + [(£15,000 × 3/12 – £2,000) × 20%] £17,350
Tax Compliance Solutions to interactive questions 283

Hilary
First tax year (2023/24)
Tax year basis
1.6.23 to 5.4.24
£
1.6.23 to 31.12.23 7,000
1.1.24 to 5.4.24
3/12 × £15,000 3,750
Total 10,750

Solution: Notional loss

First, allocate the profit in accordance with the partnership sharing arrangements.
Total Graham Henry Isobel
£ £ £ £
Salaries 52,000 28,000 24,000 NIL
PSR ([Link]) (7,500) (2,500) (2,500) (2,500)
Total 44,500 25,500 21,500 (2,500)

Isobel has a notional loss and therefore will have NIL taxable trading income.
The remaining partners will have the profit of £44,500 reallocated to them:
25,500
Graham × £44,500 £24,144
25,500+21,500

21,500
Henry × £44,500 £20,356
25,500+21,500

The taxable trading income for each of the partners is therefore:

Total Graham Henry Isobel
£ £ £ £
44,500 24,144 20,356 NIL

Chapter 10
Solution: Cash basis
Ahmed
Taxable trading profit for the year to 31 March:
£
Net profit (receipt) per accounts 31,000
Add: Car hire: Private use (£3,000 × 1,000/5,000) (Note 1) 600
Gifts of alcohol disallowed 120
Furniture – allowable expense as plant and machinery –

Deduct: TWDV bfwd re plant and machinery (£3,300 × 25%) (Note 2) (825)
Adjustment expense – deducted in first year of the cash basis
(£1,000 + £3,500 – £2,500) (2,000)
Capital allowances on balance of main pool (£3,300 × 75% × 18%) (Note 2) (446)
Taxable trading profit 28,449

Note1 : The15% restriction for hired cars with high CO2 emissions does not apply to the cash basis.
284 Solutions to interactive questions Tax Compliance

Note 2: The proportion of the capital allowances which relate to plant and machinery (the ‘relevant
portion’) is eligible for an opening adjustment on joining the cash basis. Thus £825 is available as a
deduction. In addition, the balance of the main pool ie, the cars (£3,300 – £825 = £2,475) is eligible for
the standard writing down allowance.

Chapter 11
Solution: Part disposal
Jenny
Gross proceeds 20,400
Less: auctioneers' fees (£20,400 × 5%) (1,020)
Net disposal consideration 19,380
Less: acquisition cost
20,400 10,625
× £42,500
20,400+61,200
incidental costs of acquisition
20,400
× £2,000
20,400+61,200 500 (11,125)
Gain 8,255

Solution: trading loss

S.261B TCGA 1992 claim
Relevant amount: £
Unrelieved trading loss (£41,000 – £14,000 – £9,000) £18,000
Maximum amount:
Gain of year 31,000
Less loss brought forward (9,000)
Maximum amount 22,000
S.261B loss is therefore £18,000

Taxable gain
£
Gain 31,000
Less current year loss (s.261B) (18,000)
13,000
Annual exempt amount (6,000)
7,000
Less capital loss brought forward (7,000)
Taxable gain Nil
Unrelieved trading loss carried forward Nil
Unrelieved capital loss carried forward (£9,000 – £7,000) 2,000
Tax Compliance Solutions to interactive questions 285

Solution: Matching rules for individuals

4 September 2023 – disposal of 2,600 A plc shares
£
Same day acquisition 1,500
Acquisition in following 30 days 800
S.104 pool 300
2,600

Chapter 12
Solution: PRR
Paul’s gain is as follows:
£
Proceeds 751,600
Cost (200,000)
Gain (before PRR) 551,600

Exempt months Chargeable

1.2.08-1.3.10 Occupied 25
1.3.10-1.3.14 Employed UK 4 yrs 48
1.3.14-1.3.15 Exempt < 3 yrs for any reason 12
1.3.15-1.7.18 Occupied 40
1.7.18-1.11.22 Balancing period 52
1.11.22-1.8.23 Last 9 months 9
134 52

PRR 134/186 × 551,600 = (397,389)

Chargeable gain 154,211

Solution: Rollover relief

First factory
£
Disposal proceeds 230,000
Less: cost (195,000)
Gain 35,000
Amount not reinvested is:
Disposal proceeds 230,000
Less: cost of second factory (210,000)
Not invested = gain chargeable 20,000

Second factory
£ £
Cost 210,000
Less: Rollover relief
Gain on first factory 35,000
Less: chargeable (20,000) (15,000)
Base cost 195,000

Solution: Excess consideration

286 Solutions to interactive questions Tax Compliance

Gift relief gain

£
Market value 90,000
Less: cost (50,000)
Gain 40,000

Gain immediately chargeable

£
Consideration received 77,000
Less: cost (50,000)
Gain immediately chargeable on Sheryl 27,000
Annual exempt amount (6,000)
Taxable gains 21,000

Base cost to Michelle

£ £
Market value 90,000
Less: gift relief
gain on disposal 40,000
Less: chargeable (27,000) (13,000)
Base cost 77,000

You will see that the base cost for Michelle is actually the consideration that she gave to Sheryl.

Solution: Business asset disposal relief

Gains on Factory and Goodwill
Proceeds 650,000
Cost (300,000)
Gain 350,000

 No chargeable gains arise on the plant and machinery as the items are all worth < £6k and no
chargeable gains arise on the net current assets as they are not chargeable assets (cash,
receivables, stock)
 The gains on disposal of the business qualify for business asset disposal relief, as she has owned
the assets and run the business for ≥ 2 years
Tax Compliance Solutions to interactive questions 287

Tash’s CGT liability for 2023/24

Non-BADR gains BADR gains
Gains 33,700 350,000
AEA (6,000)
Losses b/f (5,000)
Taxable gains 22,700 350,000
Tax @ 10% 350,000 35,000
Tax @ 20% 22,700 4,540
CGT liability 39,540

Chapter 13
Solution: Income tax and DTR
Non-savings Savings
Sue Income Income
Income £ £
UK employment income 32,550
Overseas property income 15,000
Interest 3,063
Total income 47,550 3,063
Personal allowance (12,570)
Taxable income 34,980 3,063

Tax £
£34,980 @ 20% 6,996
£500 @ 0% 0
£2,220 @ 20% 444
£343 @ 40% 137
7,577
Less: DTR (W1) (3,168)
Income tax payable 4,409

WORKING 1 – DTR
Excluding overseas income, UK income tax would be:
Non-savings Savings Total
Income income income
Taxable income 19,980 3,063 23,043
Tax £
£19,980 @ 20% 3,996
£1,000 @ 0% 0
£2,063 @ 20% 413

Income tax liability 4,409

Thus UK income tax on the overseas income is £7,577 – £4,409 = £3,168

DTR is the lower of the actual overseas tax of £5,500 and the UK tax on the overseas income, i.e. the
DTR is £3,168.
288 Solutions to interactive questions Tax Compliance

Solution: Income tax and the remittance basis

Remittance basis
If Sergio uses the remittance basis he will need to make a claim for it to apply and will therefore be
liable to pay the remittance basis charge and lose his entitlement to both the personal allowance and
the annual exempt amount. Sergio will be taxed on his UK income and the overseas income which he
remits to the UK. Although dividend income, this will be taxed as NS income at higher rates and with
no dividend allowance.
UK trading income 130,000
Non-UK dividend income remitted to the UK 20,000
Taxable income (no personal allowance as claimed to be remittance basis user) 150,000

His income tax liability will therefore be:

£37,700 × 20% 7,540
£87,440 × 40% 34,976
£24,860 × 45% 11,187
Less: DTR lower of UK tax (45% × 20,000) and O/S tax (10% × 20,000) (2,000)
Remittance basis charge (present for at least 7 but fewer than 12 years) 30,000
Income tax payable 81,703
Arising basis
If Sergio does not make a claim for the remittance basis to apply, he will instead be taxed on his
world-wide income on an arising basis.
£
UK trading income 130,000
Non-UK dividend income 100,000
Taxable income (no personal allowance as income exceeds £125,140) 230,000

His income tax liability will therefore be:

£37,700 × 20% 7,540
£87,440 × 40% 34,976
£4,860 × 45% 2,187
£1,000 × 0% 0
£99,000 × 39.35% 38,957
Less DTR: lower of UK tax (£38,563) and O/S tax (100,000 × 10%) (10,000)
Income tax payable 73,660
Sergio should NOT claim the remittance basis as he would be 81,703 – 73,660 = £8,043 worse off.
Tax Compliance Solutions to interactive questions 289

Chapter 14
Solution: Class 1 NICs
Raj
 Raj’s earnings are £2,000 per month for 11 months of the year and £5,500 in January 2024
 For 11 months, his monthly Class 1 Primary NICs are:
Monthly
6.4.23-5.4.24 (excl Jan) (2,000 – 1,048) × 12% = 114
Total for 11 months 114 × 11 1,254

For January (4,189 – 1,048) × 12% = 377

(5,500 – 4,189) × 2% = 26
Total Class 1 Primary NICs 1,657

Jet Ltd
 For 11 months, the monthly Class 1 Secondary NICs are:
Monthly (2,000 – 758) × 13.8% = 171
In total for 11 months 171 × 11 = 1,881

For January (5,500 – 758) × 13.8% = 654

Total Class 1 Secondary NICs 2,535
 The BIK on the company car is £21,000 × 18% = £3,780
 Hence, Jet Ltd will pay Class 1A NICs of £3,780 × 13.8% = 522

Solution: Class 2 and 4 contributions

Andreas
Class 2 contributions
Above lower profits limit
52 × £3.45 = £179

Class 4 contributions
(£50,270 – £12,570) × 9% = £3,393
(£57,000 – £50,270) × 2% = £135
£3,528

Solution: Trade losses and Class 4 NIC

Andreas
For income tax purposes Loic would use all £12,000 of his 2023/24 trade loss against his total income
in 2022/23.
However, for NIC purposes, only £7,000 of the trade loss is offset against the 2022/23 trade profits,
meaning no Class 4 NIC will be due in 2022/23. The remaining £5,000 of the trade loss is carried
forward to offset against the first available trade profits.
As there are no trade profits in 2023/24 no Class 4 NIC will be due.
In 2024/25 the trade profits of £18,000 can be reduced by the balance of £5,000 trade loss carried
forward from 2023/24. The Class 4 NIC will therefore be due based on trade profits of £13,000.
Class 4 NIC for 2024/25: (£13,000 – £12,570) = £430 × 9% = £39
290 Solutions to interactive questions Tax Compliance

Note: This rule does not apply for Class 2 NIC purposes. So Class 2 NIC will be due, as normal, in
2024/25 as trade profits exceed the lower profits limit but no Class 2 NICs will be due for 2022/23 as
trade profits are below the lower profits limit.

Chapter 15
Solution: Previous chargeable lifetime transfers
Delia
Jul 2023 CLT Dec 2023 CLT
Stage 1 – Transfers
Transfer 65,000 400,000
CY annual exemption (3,000) –
PY annual exemption (3,000) –
59,000 400,000
Stage 2 – Lifetime tax
Less remaining NRB (W) (325,000) (266,000)
– 134,000
Lifetime tax at 20/80 – 33,500
GCT (transfer – exemptions + tax paid by donor) 59,000 433,500
Tax Compliance Solutions to interactive questions 291

(W) remaining NRB

Jul 2023 CLT Dec 2023 CLT
NRB at date of transfer 325,000 325,000
Less: GCTs in previous 7 years – (59,000)
Remaining NRB 325,000 266,000

Solution: Additional IHT on death

Mary
Nov 2020 CLT
Stage 1 – Transfers
Transfer 553,000
CY annual exemption (3,000)
PY annual exemption (3,000)
547,000
Stage 2 – Lifetime tax
Less remaining NRB (W) (325,000)
222,000
Lifetime tax at 20/80 55,500
Gross chargeable transfer (£547,000 + £55,500) 602,500
Stage 3 – Death tax
GCT 602,500
Less remaining NRB (W) (325,000)
277,500
Death tax at 40% 111,000
Chargeable after taper relief (3-4 years = 80%) 88,800
Less: lifetime tax (55,500)
Tax payable on death 33,300

(W) remaining NRB

Nov 2020 CLT
Stage 2 – Lifetime tax
Lifetime NRB 325,000
Less: chargeable in previous 7 years –
Remaining NRB 325,000

Stage 3 – Death tax

NRB at death 325,000
Less: chargeable in previous 7 years –
Remaining NRB 325,000

Solution: PETs
292 Solutions to interactive questions Tax Compliance

Jul 16 PET Sep 17 PET Dec 19 PET

Stage 1 – Transfers
Transfer 105,000 265,000 75,000
Marriage exemption (5,000)
CY annual exemption (3,000) (3,000) (3,000)
PY annual exemption (3,000) – (3,000)
94,000 262,000 69,000
Stage 2 – Lifetime tax
No LT tax No LT tax No LT tax

Stage 3 – Death tax

GCT 94,000 262,000 69,000
Less remaining NRB (W) > 7yrs pre-death (325,000) (63,000)
– 6,000
Death tax at 40% – 2,400
Chargeable after taper relief (3-4 years = 80%) 1,920
Tax payable on death 1,920

(W) remaining NRB

Jul 16 PET Sep 17 PET Dec 19 PET
Stage 3 – Death tax
NRB at death N/A 325,000 325,000
Less: chargeable in previous 7 years – (262,000)
Remaining NRB 325,000 63,000

Chapter 16
Solution: Death estate
Ryan – Death estate 12 July 2023
£ £
Gross assets 1,068,000
Less: Allowable debts and funeral expenses (40,000)
Spouse exemption: 1,028,000
House 500,000
Chattels 50,000 (550,000)
Charity exemption (10,000)
Chargeable estate 468,000
Nil rate band 2023/24 325,000
Less: gross transfer of value in 7 years before death (after 12.7.16)
(£41,000 + £67,000) (108,000)
Nil rate band (217,000)
Excess over nil band 251,000

IHT on £251,000 @ 40% 100,400

The personal representatives are responsible for paying the IHT due on the death estate.
Tax Compliance Solutions to interactive questions 293

Solution: Quick Succession Relief

Michael – Death estate 15 February 2024
£
Chargeable estate 602,000
Less: Nil rate band 2023/24 (325,000)
Excess over nil band 277,000

IHT on £277,000 @ 40% 110,800

Less: QSR (W) (790)
IHT payable 110,010

WORKING
IHT on Petra's death:
£
Chargeable estate 335,000
Less: nil rate band 2019/20 (325,000)
Excess over nil band 10,000

IHT on £10,000 @ 40% 4,000

Net transfer is (£335,000 – £4,000) 331,000

Period between death of Petra and Michael is more than four years but less than five years. QSR is
therefore:
£331,000
£4,000 × × 20% 790
£335,000
294 Solutions to interactive questions Tax Compliance

Solution: Fall in value relief

Sumira
Jan 13 CLT Dec 19 CLT Death Estate
Stage 1 – Transfers
Transfer 131,000 190,000
CY annual exemption (3,000) N/A
PY annual exemption (3,000) N/A
125,000 190,000
Stage 2 – Lifetime tax
Less remaining NRB (W) – No LT tax
125,000
Lifetime tax at 20/80 31,250
GCT 329,000 156,250 190,000
Stage 3 – Death tax
GCT > 7 years before death 156,250 190,000
Less: Fall in Value Relief (5,000)
Less remaining NRB (W) – (168,750)
151,250 21,250
Death tax at 40% 60,500 8,500
Chargeable after taper relief (3-4 years = 80%) 48,400
Less lifetime tax paid (31,250)
Tax payable on death 17,150 8,500

(W) Remaining NRB

Jan 13 CLT Dec 19 CLT Death Estate
Stage 2 – Lifetime tax
NRB at date of transfer 325,000
Less: chargeable in previous 7 years (329,000)
Remaining NRB 0

Stage 3 – Death tax

NRB at date of transfer N/A 325,000 325,000
Less: chargeable in previous 7 years (329,000) (156,250)
Remaining NRB 0 168,750

Solution: Transfer of unused nil rate band (less than 100%)

Mollie
Mollie used £114,000 of the £300,000 nil rate band available at her death. This left an unused
proportion of:
£300,000 − £114,000
= 62%
£300,000

The nil rate band on the death of Joseph can be increased by 62%.
Tax Compliance Solutions to interactive questions 295

Joseph – Death estate 21 October 2023

£
Chargeable estate 580,000
Less: nil rate band at death plus transfer from spouse ((100% + 62%) × £325,000) (526,500)
Excess over nil rate band 53,500

IHT on £53,500 @ 40% 21,400

Chapter 17
Solution: Complete IHT example
Sep 18 PET Mar 20 CLT Death Estate
Stage 1 – Transfers
Transfer (W2) 80,000 350,000
Marriage exemption (5,000)
CY annual exemption (3,000) (3,000)
PY annual exemption (3,000) –
69,000 347,000
Stage 2 – Lifetime tax
Less remaining NRB (W) No LT tax (325,000) No LT tax
22,000
Lifetime tax at 20/80 5,500
GCT 352,500
Stage 3 – Death tax
GCT 69,000 352,500 431,200
Less remaining NRB (W1) (325,000) (256,000) –
– 96,500 431,200
Death tax at 40% – 38,600 172,480
Chargeable after taper relief (3-4 years = 80%) 30,880
Less lifetime tax paid (5,500)
Tax payable on death – 25,380 172,480
(W1) remaining NRB
Sep 18 PET Mar 20 CLT Death Estate
Stage 2 – Lifetime tax
Lifetime NRB 325,000
Less: chargeable in previous 7 years –
Remaining NRB 325,000

Stage 3 – Death tax

NRB at death 325,000 325,000 325,000
Less: chargeable in previous 7 years – (69,000) (421,500)
Remaining NRB 325,000 256,000 –
296 Solutions to interactive questions Tax Compliance

(W2) Death estate valuation

Residence 433,000
Nancy Ltd 28,000
BPR 100% (28,000)
Nil
Reagan plc (No BPR) 325,000
ISA 3,200
Car 15,000
Building society 12,000
788,200
Debts (£7,500 – £500 gambling) (7,000)
Less: 2 × RNRB = £175k × 2 (350,000)
Chargeable estate 431,200

Chapter 18
Solution: Main pool super-deduction
Bungalow Ltd
(a) As the disposal is in an accounting period which ends prior to 1 April 2023, the balancing charge
is 1.3 × the lower of disposal proceeds and cost, i.e. 1.3 × £10,000 = £13,000.
(b) The balancing charge would simply be the lower of disposal proceeds and cost, i.e. £10,000
(c) As the disposal occurs in an accounting period which straddles 1 April 2023, the balancing
charge is a % of the lower of disposal proceeds and cost. The % will be:
(6/12 × 30%) +100% = 115%
The BC will be 115% × £10,000 = £11,500

Solution: Additional FYAs

Buttercup Ltd
(a) Capital allowances
Special rate
AIA FYA Main pool pool Allowances
Y/e 31.3.23 £ £ £ £ £
TWDV b/f 235,000 100,000

Additions – AIA/FYA
Machine (£200k × 130%) 260,000
Additions – non-AIA
Car 15,000
AIA/FYA @ 130% (260,000) 260,000

0 0 235,000 115,000
WDA – 18% (42,300) 42,300
WDA – 6% (6,900) 6,900
TWDV c/f 0 0 192,700 108,100
Total Capital Allowances 309,200
Tax Compliance Solutions to interactive questions 297

Special rate
AIA FYA Main pool pool Allowances
Y/e 31.3.24 £ £ £ £ £
TWDV b/f 192,700 108,100
Additions – AIA/FYA
Aircon system 1,000,000 200,000
AIA (1,000,000) 1,000,000
FYA @ 50% (100,000) 100,000
Disposals
Machine: BC = proceeds (100,000)
0 100,000 192,700 108,100
WDA – 18% (34,686) 34,686
WDA – 6% (6,486) 6,486
Transfer to SRP (100,000) 100,000
TWDV c/f 0 0 158,014 201,614
Total Capital Allowances 1,041,172

Notes:
The super-deduction of 130% is available on the acquisition of the machine. As its disposal takes
place in an AP commencing on or after 1.4.23 there is a balancing charge equal to the proceeds.
Remember that neither the super-deduction nor the special rate allowance is available on the
acquisition of cars.
The maximum AIA of £1,000,000 for the y/e 31/03/24 has been claimed against the expenditure
on the air conditioning system first, as this gives a 100% deduction rather than 50%. The special
rate allowance of 50% is claimed on the remaining £200,000 of expenditure. The balance after
the special rate allowance is transferred to the special rate pool. You will not see a disposal of
an asset such as this in the tax compliance exam.
(b) 50% special FYA asset
A balancing charge of £10,000 (50% of the lower of proceeds (£20,000) and cost (£50,000))
would be charged.
In addition, £10,000 of proceeds would also have been deducted from the balance on the
special rate pool before calculating the 6% WDA.

Solution: Corporation tax liability

Willow Ltd
The period of account falls entirely within FY23.
£
TTP 75,000
Add exempt ABGH dividends 5,000
Augmented profits 80,000
The dividend from Sycamore Ltd is ignored because it is a >50% subsidiary of Willow Ltd.
Willow Ltd has two associated companies, Sycamore Ltd and Beech Ltd, as it owns more than 50% of
the shares of each company.
Sapling Ltd is not an associated company as Willow Ltd only owns 30% of the shares of this company.
298 Solutions to interactive questions Tax Compliance

Limits for marginal relief for Willow Ltd and its two associated companies (three associated companies
in total) are:
Upper limit (£250,000/3) = £83,333
Lower limit (£50,000/3) = £16,667
Therefore marginal relief applies.
£
£75,000 × 25% 18,750
Less marginal relief:
£75,000 3 (47)
(£83,333 – £80,000) × ×
£80,000 200
CT liability 18,703

Solution: Financial year straddle with marginal relief

Cedar Ltd
y/e 30.9.23
£
TTP 200,000
Add exempt ABGH dividends 10,000
Augmented profits 210,000

FY22 FY23
6/12 6/12
£ £
TTP 100,000 100,000
Exempt ABGH dividends N/A 5,000
Augmented profits N/A 105,000
CT limits:
Upper limit: £250,000 × 6/12 N/A 125,000
Lower limit: £50,000 × 6/12 N/A 25,000
£ £
FY22: £100,000 × 19% 19,000
FY23 £100,000 × 25% 25,000
Less: marginal relief:
£100,000 3 (286)
(£125,000 – £105,000) × ×
£105,000 200
19,000 24,714
Total CT liability 43,714

Chapter 19
Solution: Disposal of shares by company
A plc
2 June 2023 – disposal of 10,500 shares
Tax Compliance Solutions to interactive questions 299

Acquisitions within the previous nine days – 28 May 2023 4,000

Shares in the s.104 pool
10 August 1986 6,000
15 December 2000 5,000
11,000 6,500
10,500

Chapter 20
Solution: Unilateral relief, multiple sources of income
Corporation tax computation y/e 31.3.24
£
Trading income 200,000
Property income Utopia 100,000
Property income Ruritania 100,000
400,000
Qualifying donations (210,000)
Taxable total profits/augmented profits 190,000

Corporation tax @ 25% 47,500

Less: marginal relief (£250,000 – £190,000) × 3/200 (900)
46,600
DTR (Working) (34,530)
Corporation tax liability 12,070

WORKING
Property Property
Trading Income income
income Utopia Ruritania Total
£ £ £ £
Profits 200,000 100,000 100,000 400,000
Qualifying donations (200,000) (10,000) – (210,000)
Taxable total profits – 90,000 100,000 190,000

Corporation tax:
46,600 / 190,000 = 24.53% – 22,077 24,530 46,607
Double tax relief
Lower of – £22,077
– £10,000 – (10,000) – (10,000)
Lower of – £24,530 – – (24,530) (24,530)
– £40,000
Corporation tax payable – 12,077 – 12,077

Note the slight difference in the figures is due to the rounding of the average CT rate to 2 decimal
points.
In the exam equal credit would be given for rounded or unrounded average corporation tax rates.
However, as is normal practice, the examiner must be able to see the working showing how you
arrived at the average rate.
The unrelieved overseas tax of £15,470 (£40,000 – £24,530) from the Ruritanian rental income is lost.
Note: If the surplus donations of £10,000 had been offset against the Ruritanian source of property
income, the double tax relief would be reduced to £22,077 on that source.
300 Solutions to interactive questions Tax Compliance

Chapter 21
Solution: s.37 loss relief
(a) Taxable total profits
G plc
y/e y/e y/e
31.3.22 31.3.23 31.3.24
£ £ £
Trading income 10,000 Nil 14,000
Property income 2,000 2,000 2,000
Chargeable gains 3,000
Total profits 15,000 2,000 16,000
Less: s.37(3)(a) (2,000)1
Less: s.37(3)(b) (15,000)2
s.45A (4,000)3
Nil Nil 12,000
Less: Qualifying donation Nil Nil (1,000)
Taxable total profits Nil Nil 11,000

Unrelieved qualifying donations 1,000 1,000

Trading loss working
£
y/e 31.3.23 loss 21,000
Less: used under s.37(3)(a) y/e 31.3.231 (2,000)
19,000
Less: used under s.37(3)(b) y/e 31.3.222 (15,000)
4,000
Less: used under s.45A y/e 31.3.243 (4,000)
Loss c/f Nil

(b) CT saved
y/e y/e y/e
31.3.22 31.3.23 31.3.24
£ £ £
TTP before loss relief (W) 14,000 1,000 15,000
TTP after loss relief (from (a)) 0 0 11,000
Difference 14,000 1,000 4,000
FY and tax rate FY21 – 19% FY22 – 19% FY23 – 19%
CT saved:
£14,000 × 19% 2,660
£1,000 × 19% 190
£4,000 × 19% 760
Tax Compliance Solutions to interactive questions 301

(W) TTP before loss relief

y/e y/e y/e
31.3.22 31.3.23 31.3.24
£ £ £
Total profit 15,000 2,000 16,000
Less QCDs (1,000) (1,000) (1,000)
TTP before loss relief 15,000 2,000 16,000

Chapter 22
Solution: Group relief
X plc – Available losses
£
Trading loss 140,000
Non-trading loan relationships deficit 10,000
Total losses available for group relief 150,000

Notes
(i) It is not necessary for X plc to use the loss first against its own profits.
(ii) The qualifying donation can be set against the chargeable gains and so there are no
excess qualifying donations to be group relieved.
Y plc – Available profits
£
Trading profit 200,000
Chargeable gains 12,000
212,000
Less qualifying charitable donation (20,000)
Available profits 192,000

Note. Y plc has not made a claim under s.463B CTA 2009 to relieve the non-trading loan relationships
deficit against current period profits and so the available profits are not reduced by this amount.
The maximum group relief claim is therefore £150,000.
The y/e 31.3.24 is entirely in FY23. There are two associated companies so the limits for corporation
tax are:
 Upper limit: £250,000 / 2 = £125,000
 Lower limit: £50,000 / 2 = £25,000
Y’s TTP before the loss offset = £192,000
Y’s TTP after the loss offset = £42,000
The first £67,000 (£192,000 – £125,000) of trade loss will save tax at 25% = £16,750
The remaining £83,000 (£150,000 – £67,000) of trade loss will save tax at 26.5% = £21,995
Total tax saved is therefore £38,745
This method using the marginal rates of tax only works where there are no ABGH distributions. If there
are ABGH distributions a fuller calculation would be required:
302 Solutions to interactive questions Tax Compliance

CT before loss relief: £ £

£192,000 × 25% 48,000

CT after loss relief:

£42,000 × 25% 10,500
Less marginal relief: (£125,000 – £42,000) × 3/200 (1,245)
(9,255)
38,745

Solution: Nil gain/Nil loss transfers

Transfer by D plc to E Ltd
£
Deemed proceeds (balancing figure) 162,305
Less cost (143,000)
Unindexed gain 19,305
Less indexation allowance
175.9−155.0 (19,305)
= 0.135 × £143,000
155.0
Gain/loss NIL

Disposal by E Ltd
Tax Compliance Solutions to interactive questions 303

£
Proceeds 349,000
Less cost (deemed proceeds above) (162,305)
Unindexed gain 186,695
Less indexation allowance
278.1−175.9 (94,299)
= 0.581 × £162,305
175.9
Indexed gain 92,396

Chapter 23
Solution: De minimis limit for partial exemption
Lyra – VAT quarter
Taxable Exempt Total
supplies supplies supplies
Wholly attributable input tax: £ £ £
Taxable supplies 2,250 2,250
Exempt supplies 1,350 1,350
Non-attributable input tax:
Recoverable amount % is
42,000
= 83% (rounded up)
42,000+9,000
Attributable to taxable supplies:
83% × £1,800 1,494 1,494
Attributable to exempt supplies:
17% × £1,800 306 306
Input VAT 3,744 1,656 5,400

Tests for de minimis limit:

(1) Is the monthly average attributable to exempt supplies £625 or less?
1,656
Monthly average = £552 per month.
3
Test 1 
(2) Is the proportion of VAT on exempt supplies no more than 50% of all input VAT for the period?
1,656
= 30.66%
5,400
Test 2 
Both tests passed so input tax attributable to exempt supplies is below de minimis limits.
Conclusion
The whole of the input tax of £5,400 for the quarter is recoverable.

Solution: Capital goods scheme

VAT of £80k was payable on the purchase of the building, as it was a new commercial building
(<3 years old)
304 Solutions to interactive questions Tax Compliance

Y/e 31 Mar VAT recoverable/payable £

2022 20% × £400,000 × 70% 56,000 recoverable
2023 20% × £400,000 × (70 – 55)% × 1/10 (1,200) payable
2024 (a) Usage 20% × £400,000 × (70 – 60)% × 1/10 (800) payable
(b) Sale £400,000 × 20% × (100 – 70)% × 7/10 16,800 recoverable
(There are seven years left after the year of sale. 70,800
£16,800 recoverable as this is less than the £60,000
charged on sale)

Chapter 24
Solution: SDLT on rental
Donald
Non-residential property
Rental payable over term of lease
£9,000 × 25 225,000
SDLT (£225,000 – 150,000) × 1% £750
Tax Compliance Solutions to interactive questions 305
306 Solutions to interactive questions Tax Compliance

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