Individuals Income Tax

- Income tax is divided into 3 heads:

i. Non-Saving Income
ii. Saving Income
iii. Dividend Income

- Personal Allowance is £12,570. If Adjusted Net Income is more than £100,000 then
Personal Allowance will reduce £1 for each £2 excess. No Personal Allowance if ANI is
more than £125,140.

Non-Saving Income
- Real Estate Investment Trust i.e., REIT is a mutual fund that invests in real estate
market. Benefits of REIT include:
i. Pooling of funds.
ii. Fund is overseen by experts.
iii. Risk is reduced.
- Dividends distributed by the fund are taxed as Non-Saving Income. Withholding is 20%.

Dividend Income
- Dividend Income is taxed at 0% for the first £2,000 regardless of the band.

Interest Income
- NRB for Interest Income is £1,000 for BRTP and £500 for HRTP.
- Will be taxed at 0% if it lies in the first £5,000 of taxable income.
- Interest income on National Saving Certificates or Individual Savings Account are
exempt. ISA limit is £20,000.
- No WHT on Interest Income. However, if interest income is earned on loan notes of
unlisted companies, then 20% WHT will apply.

Trusts
- Trust is a body created in which Donor donates assets, it is managed by trustees and its
income is given to beneficiaries.
- Generally, it is to give funds to people who can’t manage it yet.
- Two types of Trusts i.e., Discretionary and Interest in Possession Trust.
- Discretionary Trust operates at the discretion of trustees. Trustees can change
beneficiaries and the how the trust operates. Tax on income from trust is withheld at the
highest rate possible i.e., 45%. It is taxed on receipt basis.
- Interest in possession trust runs at the discretion of donor. Trustees are employees just
following instructions. Income is taxed on accrual basis. WHT is 20%.
 Qualifying Interest Expense
- Interest Expense i.e., QIE will be deductible from total income.
i. Loan taken to purchase plant and machinery for sole trader business or
partnership.
ii. Loan taken to purchase plant and machinery for employment purposes.
iii. Loan taken to invest in close company.
iv. Loan taken to pay IHT.
v. Loan taken to invest in co-operatives.

Qualifying Donations
- When a taxpayer donates to a registered charity, it qualifies as a qualifying donation.
Benefits are:
i. HMRC contributes 20% gross.
ii. BRB is extended by gross amount.
iii. ANI is reduced by gross amount.

Pensions
- Two types of pension plans.
i. State Managed Pension funds.
 Run by the government. Everyone contributes to this plan in the form of
NIC.
ii. Private Pension funds.

Occupational Pension Plan

- This is run by the employer. Both employer and employee contribute to the plan.
- For the employer, contribution made to the plan is an allowed expense from Trading
PnL.
- For the employee, contribution made are allowed expense from Employment Income.
Plus, Er Contribution is an exempt benefit.

Personal Pension Plan

- These plans are managed by private fund managers.
- For the employer, contribution made to the plan is an allowed expense from Trading
PnL.
- For the employee, HMRC gives following benefits:
i. HMRC contributes 20% gross.
ii. BRB extension by gross amount.
iii. ANI reduction by gross amount.
 UK Relevant Earnings
- An individual can contribute in his personal pension plan based on his UK relevant
earnings. These include Employment Income, Trading income and Furnished Holiday
Letting.
- Minimum UK relevant earnings for the purpose of contribution in PPP is £3,600.

Annual Allowance
- It is the maximum amount of contribution allowed in a PPP in a fiscal year.
- Annual Allowance if £40,000.
- Unused annual allowance can be brought forward from the last 3 years.
- Annual Allowance is reduced by £1 for every £2 excess if the Adjusted Income exceeds
£240,000.
- If the threshold income is less than £200,000 then Annual Allowance will not reduce.
- Any contribution over the annual allowance limit will be subject to annual allowance
charge that will be taxed as a non-saving income.

Net Income xxx

Ee Cont. in OPP xxx
Er Cont. in OPP and PPP xxx
Adjusted Income xxx

Net Income xxx

Gross PPC (xxx)
Threshold income xxx

Extraction from Plan

- Funds can be extracted from plan after the age of 55 years.
- Divided into two heads i.e., Income and Capital.
- Income portion will be taxed as Non-Saving Income.
- Capital portion of the plan is the invested amount or the basic equity of the plan.
o If extracted up till limit of £1,073,000 then no tax.
o 25% Lump sum and 75% annuity.

- If extraction exceeds the limit, then it will be taxed.

o 55% of Lump sum extraction.
o 25% on annuity extraction.
 Tax Reducers
- These are investments which attract tax reliefs.
i. Pension contribution.
ii. Seed Enterprise Investment Scheme.
iii. Enterprise Investment Scheme.
iv. Venture Capital Trust.

Seed Enterprise Investment Scheme

- SEIS is a tax efficient investment scheme under which a qualifying company issues its
shares. If a qualifying investor purchases these shares under SEIS, then a tax relief is
allowed.
- A company which is qualifying to launch SIES must satisfy following conditions:
i. UK resident.
ii. Unlisted.
iii. Less than 25 employees.
iv. Company should not be in a financial difficulty.
v. Assets under £200,000 before the launch of the scheme.
vi. Company can raise maximum £150,000 under SEIS by issuing shares.

- Qualifying investor is:

i. Owns less than 30% shares in the company.
ii. Maximum investment in one SEIS is £100,000.

- Tax relief will be:

- CGT investment relief i.e., if proceeds from disposal of any asset are invested in SEIS,
then lower of will get exempt:
i. 50% of gain on disposal; or
ii. 50% of investment in SEIS.

- Income Tax relief i.e., in the year of investment, income tax liability will reduce by lower
of:
i. Tax liability; or
ii. 50% of investment in SEIS.
- This relief can get carried back up-till 1 year.

- SEIS shares should be held for 3 years. If sold before 3 years, all the reliefs will be
reversed.
- Income tax relief will be withdrawn at the lower of:
a) Original relief; or
b) Disposal proceeds x Effective rate of relief.
- CGT exempted on investment in SEIS and CGT on sale of SEIS shares will get
chargeable. If there is Capital loss, it will be adjusted in the CGT return.
 Enterprise Investment Scheme
- A qualifying company in EIS is:
i. UK resident.
ii. Unlisted.
iii. Less than 250 employees.
iv. Company should not be in a financial difficulty.
v. Company should have assets less than £15m before the issue of the shares and
less than £16m after the issue of the shares.
vi. Company can raise only a maximum of £5m under EIS by issuing shares.

- Qualifying investor is:

i. Owns less than 30% shares; and
ii. Maximum investment in one EIS is £1m.

- Tax reliefs are:

- CGT investment relief i.e., if proceeds from disposal of any asset are invested in EIS
shares then gain will get deferred at the lower of:
i. 100% of gain on disposal; or
ii. 100% of investment in EIS.

- Income tax relief i.e., in the year of investment, income tax liability will reduce by lower
of:
i. Income tax liability; or
ii. 30% of EIS investment.
- This relief can get carried back up-till 1 year.

Venture Capital Trust

- It is a listed company that raised funds from public to invest in EIS and SEIS qualifying
companies.
- VCT must invest at-least 85% of its funds in SEIS and EIS companies.
- Investment in VCT is low-risk due to:
i. It is a listed company.
ii. Pooling of funds.
iii. Fund is managed by experts.
iv. Risk gets spread over multiple investments.

- Tax reliefs are:

- No CGT investment relief on VCT.
- Income tax relief i.e., in the year of investment, income tax liability reduces by lower of:
i. Tax liability; or
ii. 30% of investment in VCT.
- VCT Income tax relief cannot be carried back.
- Maximum investment limit for investor is £200,000 per year.
- Minimum ownership period of VCT shares is 5 years. If shares are sold within 5 years,
then income tax relief will get withdrawn at the lower of:
a) Original Relief; or
b) Disposal proceeds x Effective rate of relief.

- Dividend income on VCT shares is exempt from Income Tax.

Property Income
- This head includes taxation on rental income generated through letting of properties. It is
taxed as non-saving income.
- Property Income is taxed on cash basis.
- Accrual basis only applies if:
i. Rental income exceeds £150,000 per year; or
ii. Landlord is a company; or
iii. A person elects for accrual basis.

- Allowed expenses are deductible for the period of letting.

- Replacement expenditure means that accessories installed in property will not be
allowed expense when installed for the first time. However, if something is being
replaced, it will be an allowed expense. Improvements will not be an allowed expense
while doing replacements.
- Capital expenditure done on infrastructure of the property is not an allowed expense.

- If a person lets out a residential property which was purchased through loan, then
interest expense on that loan will not be an allowed expense. Interest expense will be
relieved as a 20% tax credit from Income Tax Liability.

Rent-a-Room Relief
- If an individual rents out a part of his private residence, such that the letting was
furnished, he will be able to claim a relief.
- Rent-a-room relief allows, allowed expense to be claimed at the higher of:
i. £7,500
ii. Actual allowed expense allocated to that room.
 Lease Premiums
- In premium letting, the tenant pays rent plus a lease premium that allows the tenant
additional rights to the property, such as sub-letting and modifying the property.
- If lease is of more than 50 years, the property is treated as disposed and will be
assessed in Capital Gains Tax.
- If lease is of less than 50 years, the Lease Premium will be assessed in Property Income
and CGT head.
- Property Income part is calculated as
Premium xxx
2% x (n-1) x Premium (xxx)
Property Income xxx

- Premium paid is a cost for tenant. Tenant can claim allowed expense on premium paid
amount which is after adjusting CGT amount i.e., 2% x (n-1) x Premium.
- If tenant is using the property for business, then allowed expense will be claimed from
Trading PnL. Accordingly, if the property is sublet, then claim from Property Income.

Furnished Holiday Letting

- If letting qualifies for FHL, it is treated as a business activity.
- Conditions for FHL are:
i. Property should be available for letting for at-least 210 days in a fiscal year.
ii. Property should be let for 105 days in a fiscal year.
iii. Long period of letting i.e., 31 days or more, should not exceeds 155 days in a
fiscal year.
iv. Letting should be furnished. Duh.

- If a letting is qualified as FHL, then its impact will be:

i. Its income will be considered as UK relevant earning for PPC.
ii. Capital allowance will be available on assets installed in the property.
iii. No restriction of residential property interest expense.
iv. FHL property will qualify as a business asset in CGT and IHT (i.e., BADR and
Business Property Relief is available).
v. If there is a loss in FHL activity, then that loss is adjustable against FHL’s future
income only.
 Trading Income
- Trading income is taxed as non-saving.
- For NIC, trading income is subject to Class 2 and 4 NIC.
- Class 2 NIC is fixed at £3.15/week. If trading income is less than £12,570 then Class 2
NIC is waived.
- Class 4 NIC is applied on trading income based on bands.

Badges of Trade
- Frequency of transactions.
- Period of ownership.
- Customary work done = Trade.
- If transaction is planned or not.
- Nature of asset.

Employment Income
- It includes taxation issues on amounts earned due to their employment.
i. Income tax and NIC.
ii. Termination payments.
iii. Share-based remuneration.
iv. Basic employment income.

Income Tax and NIC

- Income tax is classified as non-saving.
- Class 1 Ee and Er NIC is payable based on bands. It applies on all cash benefits.
- Class 1A Ee NIC is payable on all non-cash benefits.

Termination Payments
- Payments made to employee on termination of employment.
- Statutory payments: Wholly exempt.
- Contractual payments: Wholly chargeable. (Income tax and Class 1A NIC)
- Ex-Gratia payments: Exempt up-till £30,000. Exemption amount is reduced by Statutory
payments.
 Share-Based Remuneration
- Two types of SBR; Share incentives and Share options.
- In Share incentives, employer gives free shares to employees. Employment benefit is
assessed on Market value of shares – Amount paid by employee.
- If shares are quoted, then NIC is payable as a cash benefit.
- If shares are unquoted, then NIC is payable as non-cash benefit.

Share Options
- In share options, employer gives employees shares on a future date.
- Two types of SOPs; Approved and Un-approved plans.
- If SOP is approved, then its taxation will be:
o Grant Date: No tax
o Exercise date: No tax
o Disposal date: CGT will be charged.

- If SOP is un-approved, then its taxation will be:

o Grant date: No tax
o Exercise date: Employment benefit will be assessed as difference between
market value and amount paid by employee.
o Disposal Date: CGT will be charged.

Company Share-Option Plan

1. This SOP is flexible as employer can include anyone in this plan.
2. No requirement of employment period.
3. However, employees must be full time workers and own less than 30% in the
company.
4. Exercise period is 3-10 years.
5. Maximum value of shares that can be included is £30,000, valued at market value on
grant date.
6. Exercise price must equal to Market Value on grant date. The difference will be
assessed as employment benefit.
7. Cost of running the plan will be an allowed expense for the employer.

Enterprise Management Incentive Plan

1. Flexible as anyone can be included.
2. No requirement of employment period.
3. Employees must be full time workers with less than 30% shares.
4. Exercise period is 0-10 years.
5. Maximum value of shares is £250,000, valued at market value on grant date.
6. Exercise price must equal to Market Value on grant date. The difference will be
assessed as employment benefit.
7. Cost of running the plan will be an allowed expense for the employer.
- EMI plan is only available to those employers who satisfy the following conditions:
1. Less than 250 employees.
2. Gross assets are less than £30 million.
3. Company should not be a subsidiary.

- On EMI shares, condition of 5% ownership is waived for BADR.

Save As You Earn Plan

1. Not a flexible plan as all the employees must be a part of the plan.
2. Employees must be full time workers. Employer can set up a minimum employment
period of 5 years to be included in the plan.
3. Employees make a monthly contribution between £5 to £500.
4. Plan can continue up-till 3 or 5 years.
5. On maturity, employee can opt for cash or shares. If shares are opted, exercise price
would be 80%-100% of the market value.
6. Employer can pay a tax-free interest to employees on their funds.
7. Employer can also pay a bonus once every 2 years.
8. Cost of running the plan will be an allowed expense for the employer.

Share Incentive Plan

1. Not flexible as all employees must be included.
2. Employment period of minimum 18 months is required.
3. SIP is announced in 3 level.
i. Free shares up-to £3,600
ii. Partnership shares up-to lower of £1,800 or 10% of employment income.
iii. Free matching shares worth £2 against every £1 partnership share.

4. Maximum value per year per employee is £9,600.

5. Must be kept for 5 years. If sold within 5 years, income tax and NIC will be payable.
o If sold within 3 years then, Income tax and NIC is payable on Disposal
Proceeds.
o If sold after 3 years then, Income tax and NIC is payable on lower of Disposal
Proceeds and Market Value on Grant Date.
 Basic Employment Income
Car and Fuel Benefit
- Car Benefit = Cost of Car x CO2%
- Fuel Benefit = £25,300 x CO2%
- Cost of Car is:
List Price xxx
Transportation xxx
Legal and Reg. Cost xxx
Accessories xxx
Capital contribution (£5,000)
Cost of Car xxx

- Accessories added this year will be taxed next year.

- Disability accessories and child car seat are exempt accessories.
- If CO2 emission rate exceeds 55 gm, then 1% will increase for every 5-gm excess.
- If a Diesel car does not meet RDE-2 standard, then 4% will increase for every 5-gm
excess.
- Maximum CO2 rate for both petrol and diesel car are 37%.
- If employee pays usage contribution, then it is deductible from benefit.

Accommodation Benefit
- If employer provides accommodation for employee, then accommodation benefit will be
assessed. It is calculated in 3 parts.
1. Basic Charge; higher of:
a) Actual rent paid by employer.
b) Market value of annual rent.

2. Additional Charge is assessed if the accommodation is owned by the employer

and its value exceeds £75,000.
Additional Charge = [(Cost of House + Improvements) - £75,000] x 2%

o Improvements made in current fiscal year are assessed in the next year.
o If the gap between the purchase date of the house and provision date to
employee is of 6 years or more, then market value of house when provided to
employee is used instead of cost.

3. Ancillary Charge, if employer is paying any support cost of house, then benefit
will be chargeable.
 Job Related Accommodation
- If accommodation provided to employee is recognized as JRA, then:
i. Basic charge is exempt.
ii. Additional charge is exempt.
iii. Ancillary charge is taxable up-till 10% of employment income.

- An accommodation is JRA if:

i. It is necessary for employment.
ii. It is for better performance of job.
iii. It is for security reasons.

Usage and Gift Benefit

- Usage benefit is assessed at 20% of the cost of asset.
- Employer owned/rented asset is provided to employee for private use.

- Gift benefit will be higher of:

1. Market value of asset xxx
Amount paid by Ee (xxx)
Gift Benefit xxx

2. Cost of Asset xxx

Benefit already assessed (xxx)
Book Value xxx
Amount paid by Ee (xxx)
Gift Benefit xxx

Loan Benefit
- Loan benefit will be assessed if loan is provided at a rate less than 2%.
- Loan benefit will be lower of:
1. Actual pro-rated.
2. Average method = Highest + Lowest / 2

- If loan balance remains below £10,000 for the year, then no loan benefit.
 Inheritance Tax
- IHT applies on gifts of assets by and individual or by a Trust during lifetime or at the time
of death.

Potentially Exempt Transfer

- If an individual gifts to another individual during lifetime, then it will be classified as PET.
1. No IHT during lifetime.
2. If Donor dies within 7 years of the gift, IHT will be payable on Death at 40%.

Chargeable Lifetime Transfer

- If an individual gifts to a Trust in lifetime, then it is called a CLT.
1. Lifetime IHT will be payable at 20% if donee is paying and 25% if Donor is paying
the tax.
2. If Donor dies within 7 years of gift, IHT will be payable on death at 40%. Lifetime
tax already paid will be adjustable.

Annual Exemption
- Annual exemption of £3,000 is available to be used against PET and CLT.
- AE is automatically used against first gift in a fiscal year.
- Can be brought forward for 1 year.
- NRB of £325,000 will be available whenever IHT is calculated. This NRB will be reduced
by Chargeable Transfers in last 7 years.
- Taper Relief is available if the gift if the gap between the gift and death is at least 3
years.
- Taper Relief will reduce Death Tax.

Death Estate
- Net assets owned by a person at the time of his death will make up his Death Estate.
- Distribution is made according to a person’s will or rules of intestacy.
- No Annual Exemption of Death Estate.
- Assets are valued at market value at the time of death.
- Shares and securities are valued at lower of: Quarter-up Rule and Average Bargain.
- Mutual fund units are valued at lowest bid price.
- Gambling debts are not deductible.

- Exempt parties in IHT include:

1. Spouse or Civil Partner.
2. UK registered charity.
3. National Institutions i.e., like Library or Museum.
4. Qualifying Political Party.
- No IHT on gift made to exempt party during life or at death.
 Transfer of NRB
- If one of the spouse or civil partners dies, their unused NRB can be transferred to the
other spouse at the death of the other spouse.

Residence NRB
- When a person gifts main residence to a direct descendant through Death Estate, then a
Residence NRB of £175,000 will be available.
- If a person’s net Death Estate is more than £2,000,000, then the Residence NRB will
reduce by £1 for every £2 excess.
- Residence NRB can also be transferred to the other spouse.

Reduced Rate of IHT

- IHT rate can be reduced from 40% to 36% if a person gifts 10% of his Base Line amount
to a UK registered charity from his Death Estate.
 UK Ties
- Connected person is UK resident i.e., Spouse or kids.
- Accommodation available in UK for more than 90 days and lived one night in UK. 16
days in a relative’s house.
- 40 days’ work in UK.
- Lived 90 days in UK in the last 2 years.
- Comparative days in UK are greater.

Automatic Non-Resident
- Less than 90 days having an overseas job.
- Less than 45 days having no overseas job.
- Less than 16 days being resident in any of last 3 years.

Automatic Resident
- 183 days in a year.
- 365 consecutive days in 2 years.
- 30 days and only house is in UK.

SEIS
- 25 Employees.
- Max Assets 200,000.
- Max Value of Scheme 150,000.
- Max investment 100,000.

EIS
- 250 employees.
- Max Assets 15m before and 16m after.
- Max Value 5m.
- Max Investment 1m.

CSOP
- Full time employees. 30% holding.
- Anyone can be included.
- Max Value 30,000.
- Exercise period 3-10 years.
- Ex. Price must be equal to market value on grant date. Difference will be Emp. Benefit.
 EMI
- Full time employees. 30% holding.
- Max Value 250,000.
- Exercise period 0-10 years.
- Less than 250 employees.
- Gross assets less than 30m.
- Must not be a 51% subsidiary.

SIP
- All full-time employees included.
- 3,600 after first stage.
- 2nd stage: 1,800 or 10% employment income as partnership shares.
- 3rd stage: Option to convert partnership shares into matching shares at 2 for 1. (Minimum
3,600).
- SIP shares must be kept for 5 years.
- If sold before 3 years, Emp. Benefit will be charged at disposal.
- If sold after 3 years, Emp. Benefit at lower of Disposal and MV on Grant Date.

Deemed Domicile
- For 3 years after leaving actual domicile.
- If resident for 15 out of 20 last years.
o Such that resident in any of the last 4 years.

Formerly Domiciled
- Domicile by origin.
- Born in UK.
- Are UK resident in current tax year.
- Resident in any of the last 2 tax years.

Substantial Shareholding Exemption

- Company sells shares of another company.
- No Gain, No Loss.
- Must own at least 10% of shares in last 12 months out of 6 years.
 Business Property Relief
- If business is gifted, then BPR can be claimed at:
o 100% for unincorporated business.
o 100% unquoted shares.
o 50% quoted shares.
o 50% personal asset used in business.
- Holding period is 2 years minimum.

Gift Relief
- Quoted shares with less than 5% holding.
- Unquoted shares.
- Sole trader or partnership business.
- Transactions immediately chargeable to IHT.
- APR.

Administration
- Death Tax IHT is payable 6 months after death.
- Lifetime IHT is payable by 31 April if made in first 6 months of the year. Otherwise, 6
months after the gift.
- VAT return and payment must be done in 1 month and 7 days after each quarter.
- CGT is paid on 31 Jan after fiscal year.
- All deferral reliefs can be claimed up-to 4 years.
- Individual return 31 October manually and 31 Jan electronic.
- Income tax and Class 4 NIC is paid in installments unless 80% is paid at source.
o 31 Jan during fiscal year.
o 31 July after fiscal year.
o 31 Jan after fiscal year.

- Stamp duty is paid within 30 days of the transaction otherwise penalty of:
o 100 if 3 months late.
o 200 for more than 3 months.