TX Course notes

FA 2024
Syllabus A: THE UK TAX SYSTEM AND ITS ADMINISTRATION ......................2
Syllabus A1. The overall function and purpose of taxation. ...............................................................2
Syllabus A2. Principal sources of revenue law and practice .............................................................6
Syllabus A3. The systems for self-assessment and the making of returns .......................................14
Syllabus A4. The Time Limits ......................................................................................................17
Syllabus A5. The Procedures relating to compliance checks, appeals and disputes ........................23
Syllabus A6. Penalties for non-compliance...................................................................................25
Syllabus B: Income Tax And Nic Liabilities .....................................................27
Syllabus B1. The scope of income tax. .......................................................................................27
Syllabus B2. Income from employment ......................................................................................32
Syllabus: B3. Income from self-employment ................................................................................76
Syllabus B4. Property and investment income............................................................................138
Syllabus B5. The Comprehensive computation of taxable income ................................................169
Syllabus B6. National insurance contributions for employed and self-employed persons .................184
Syllabus B7. Exemptions and reliefs in deferring and minimising income tax liabilities .......................193
Syllabus C: Chargeable Gains For Individuals ..............................................210
Syllabus C1. The scope of the taxation of capital gains ...............................................................210
Syllabus C2. The basic principles of computing gains and losses ................................................213
Syllabus C3. Gains and losses on the disposal of movable and immovable property......................236
Syllabus C4. Gains and losses on the disposal of shares and securities .......................................247
Syllabus C5. Entrepreneurs’ relief/Business asset disposal relief ...................................................259
Syllabus C5. Investor’s relief .....................................................................................................265
Syllabus C6. The use of exemptions and reliefs to minimise capital gains tax .................................266
Syllabus D: Inheritance Tax ...........................................................................281
Syllabus D1. Basic principles of computing transfers of value .......................................................281
Syllabus D2. IHT arising on lifetime transfers and on death ...........................................................299
Syllabus D3. Exemptions to defer / minimise IHT ........................................................................315
Syllabus D4. Payment of inheritance tax ....................................................................................321
Syllabus E: Corporation Tax Liabilities ..........................................................328
Syllabus E1. The scope of corporation tax .................................................................................328
Syllabus E2. Taxable total pro ts ...............................................................................................334
Syllabus E3. Chargeable gains for companies............................................................................387
Syllabus E4. The comprehensive computation of corporation tax liability ........................................406
Syllabus E5. Group corporate structure for C.T. .........................................................................412
Syllabus F: Value Added Tax.........................................................................422
Syllabus F1. The VAT registration requirements ...........................................................................422
Syllabus F2. Computation of VAT liabilities ..................................................................................434
Syllabus F3. The effect of special schemes ...............................................................................460

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 Syllabus A: THE UK TAX SYSTEM AND ITS
ADMINISTRATION

Syllabus A1. The overall function and purpose of taxation.

Syllabus A1a. Describe the purpose (economic, social etc) of taxation in a modern economy

The Economic Purpose

Tax can be used by governments to a ect:

1. In ation

Higher tax levels should decrease in ation

2. Employment

Higher tax levels should increase employment (if spent by governments in the
right way!)

Tax can also be used by governments to a ect businesses and

individuals:

• It encourages saving by o ering NISAs (new individual savings accounts)

It encourages charity donations by o ering Gift Aid tax relief

It encourages new businesses by o ering investment tax relief

• It discourages motoring by fuel duties

It discourages drinking alcohol by imposing high duties etc

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 Social Justice Purpose

This can be done through Progressive taxation:

This simply means the higher earners pay a higher % of their income as taxes - thus
redistributing the wealth in society from the rich to the poor

So, income tax is an example of a progressive tax

The opposite of this is Regressive taxation where higher earners pay a lower % of
their earnings as tax

Ad Valorem Principle

Here everyone pays the same % of tax regardless of income

- e.g., VAT on a computer is the same regardless of your income

The nal form of tax is Proportional Taxation

This is where the tax levels (% of earnings) remain the same regardless of income
levels

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 Syllabus A1b) Explain the difference between direct and indirect taxation
c) Identify the different types of capital and revenue tax.

Direct Taxes - tax paid directly to HMRC

So this is SIMPLE, dimple x

Basically DIRECT taxes are paid DIRECTLY to HMRC

But, in true accountancy style, we complicate it unnecessarily by splitting them into

revenue and capital taxes - but hey-ho we can roll with that...

Direct Revenue Tax

These are based on income / pro ts

Basically the more income or pro t, the more tax you pay..

1. Example 1: Income Tax paid on di erent types of income

2. Example 2: Corporation Tax paid on company pro ts

3. Example 3: National Insurance Contributions paid on employment income /

trading pro ts of the self employed

Direct Capital Tax

These are based on assets sold or gifted

Basically the more the asset is sold for (or the higher the gift), the more tax you pay..

1. Example 1: Capital Gains Tax

2. Example 2: Inheritance Tax

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Indirect Taxes - taxes paid to HMRC indirectly through an intermediary

oooh an intermediary - get me!

Basically think of this as a shop for example - you buy an item with tax on it, but
you pay the shop. The shop then pays this tax to the HMRC.

Example: VAT

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 Syllabus A2. Principal sources of revenue law and practice

Syllabus A2a. Describe the overall structure of the UK tax system.

HMRC
Her Majesty's Revenue and Customs *Salutes* ;)

This controls all aspects of tax law in the UK

Purpose of HMRC

1. Make sure there is money available to fund public spending

2. Help families and individuals who need nancial support

HMRC Main Duties:

1. Implement the tax laws

2. Oversee the tax admin

Miscellaneous HMRC stu

Sta are known as "O cers of Revenue and Customs"

Branches are all over UK

Most taxpayers never deal with HMRC direct - instead they le their tax returns
online and pay electronically (compulsory for companies)

The responsibility for assessing how much tax is payable is down to the taxpayer
under a system called "self - assessment" (good name then, really!)

Individuals can still ask HMRC to calculate the tax though for them - companies
can't

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 Structure of the UK tax system

HM Revenue and Customs (HMRC)

The treasury formally imposes and collects taxation.

The management of the treasury is the responsibility of the Chancellor of the

Exchequer.

The administration function for the collection of tax is undertaken by HMRC

Commissioners

At the head of HMRC are the commissioners whose duties are:

1. To implement statue law

2. Oversee the process of UK tax administration

The main body of HMRC is divided into District o ces and Accounting and
payment o ces

District O ces

The Commissioner appoints O cers of HMRC to implement the day to day work of
HMRC

Accounts and payment o ces

These concentrate on the collection and payment of tax.

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 Syllabus A2b) State the different sources of revenue law.

A2c) Describe the organisation HM Revenue & Customs (HMRC) and its terms of reference.

Stop snoring at the back! Learn thezzzzzzze....

There's a few of these sources, but do try and learn the basics - here we go..

Tax Legislation (Statute law)

Law so you HAVE to follow them or boy, you're in deep doggy-do

1. Updated annually by the Finance Act (made by the chancellor of the exchequer)
- referred to as "The Budget"

2. Statutory instruments - These give detailed guidance where necessary on points

of law

Case Law

These are decisions made previously by judges in court about taxation matters

1. The "case" will help decisions be made in similar circumstances

2. The "case" rulings are binding

HMRC Guidance

These explain the laws and help interpret the law

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The main types are:

1. Statements of Practice Provide clari cation of how rules should be applied

2. Extra statutory concessions I know! :(

These allow laws to be relaxed where their implementation would cause undue
hardship

3. Internal HMRC Manuals Give guidance for their sta but are also available to the
public

4. Briefs Not that sort!

These just provide details of a speci c tax issue that's arisen

5. HMRC website, lea ets etc

Use non-technical language aimed at the general public

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 Syllabus A2d. Explain the difference between tax avoidance and tax evasion, and the
purposes of the General Anti-Abuse Rule (GAAR).

Tax EVASION is ILLEGAL

The main forms of tax evasion are:

Not giving all information

Giving false information

Tax AVOIDANCE is LEGAL

It's arranging your income to minimise tax - although HMRC are introducing anti-
avoidance legislation to lower the advantages to the taxpayer

Tax avoidance features..

No misleading information given

Can use loopholes in the tax system

The General Anti-Abuse Rule (GAAR)

This ghts arti cial and abusive schemes (unreasonable courses of action) which
are used to avoid paying tax

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 Syllabus A2e. Appreciate the interaction of the UK tax system with that of other tax
jurisdictions.

A2f) Appreciate the need for double taxation agreements.

This is where income could get taxed under 2 di erent

systems

Double Taxation Agreements

These are agreements between countries over how certain items are taxed - and
take precedence over UK law

They either:

Exempt some overseas income from UK tax or

Provide tax relief if it has been taxed in 2 countries

EU In uences

The EU would like to remove di erences between countries policies as these can
cause distortions and be barriers to trade for some countries

EU countries do NOT have to align their tax policies - but can jointly enact laws
called Directives

One example is the VAT directive

However the rates of VAT are not aligned...

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 Syllabus A2g. Explain the need for an ethical and professional approach.

Advising on tax? You have duties to the HMRC too!

Information given to HMRC must be complete and accurate

Examples:

Not declaring taxable income

Claiming un-entitled reliefs

Not notifying HMRC of their mistakes re under payment of tax etc

If the client commits an o ence - you need to decide if it was an error or fraud

You then explain to the client that they should disclose the error to the HMRC

If the client won't disclose still - then you must stop representing the client and
disclose matters to HMRC if it's in the public interest or you think there might be
money laundering

Professional and ethical guidance

Accountants often act for taxpayers in dealings with HMRC.

Their duties and responsibilities should be towards both clients and HMRC

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 The accountant must uphold standards of the ACCA that is

1. To adopt an ethical approach to work, employers and clients

2. Acknowledge the professional duty to society as a whole

3. Maintain an objective outlook

4. Provide professional high standards of service, conduct and performance at all

times.

The ACCA “Code of Ethics and Conduct”

The ACCA “Code of Ethics and Conduct” sets out ve fundamental principles which
members should adhere to meet these expectations, namely:

1. Integrity

2. Objectivity

3. Professional competence and due care

4. Con dentiality

5. Professional behaviour

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 Syllabus A3. The systems for self-assessment and the
making of returns

Syllabus A3a. Explain and apply the features of the self- assessment system as it applies to
individuals.

Self assessment (SA) is for income not collected at

source*
*An example of tax collected at source and employment income (PAYE)

How Self-Assessment works..

Remember it is the responsibility of the taxpayer to calculate their own tax liability

1. Taxpayer is sent a notice to complete the SA (online or on paper)

2. There are deadlines for ling the SA (31/10 for paper and 31/1 online) or 3
months after being given notice if its later

3. It covers income tax, class 4 NIC and CGT

4. Payment is due 31st January the following year (interim payments on account
may also be paid)

5. 31st January the following year is known as the ling date (for both paper and
online) - di erent to the "actual le date"

6. Online ling - Tax returns submitted electronically automatically calculate the tax
due

7. Paper ling - HMRC will (optionally) calculate it if led by 31st October. If a

taxpayer submits a paper return on time, they can ask HRMC to calculate the
tax due.

8. When the HRMC calculate the tax they make no judgement on the accuracy of
the information given to them

9. HMRC then deliver a statement of account to the taxpayer as a reminder of

amounts due

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 Syllabus A3b. Explain and apply the features of the self- assessment system as it applies to
companies, including the use of iXBRL

Companies must submit a corporation tax return within

12m of their period end

They must pay the tax within 9m + 1day of their chargeable period end (CAP) but
they do not have to le their return until 12 months after the CAP end.

Therefore many submit their corporation tax return before the 9m + 1day payment
deadline too

Features of self assessment for companies

Must be done online

Financial statements are submitted along with it - using iXBRL

Inline eXtensible Business Reporting Language (iXBRL)

iXBRL?!! See this is what happens when you let a bunch of accountants try to come
up with something "cool" :)

iXBRL allows for the exchanging of business information electronically and tags the
accounts so they can be read by a computer

HMRC then uses online software to read the iXBRL info

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Other Options

1. Integrated Software Applications

These automatically insert the iXBRL tags and produces accounts/computations

in the iXBRL format

2. Managed Tagging Services

Company outsources this tagging process

3. Conversion Software

Applies tags and so converts the info into iXBRL

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 Syllabus A4. The Time Limits

Syllabus A4a.Recognise the time limits that apply to the ling of returns and the making of
claims.

Either HMRC or Taxpayer may amend the return

HMRC

May amend any obvious errors (e.g. adding up errors) within 9 months of the date of
ling

Taxpayer

May amend within 12m of the January ling date

Noti cation of Chargeability

The onus is on the taxpayer to inform HMRC that they are liable to tax - must be
done within 6 months of the rst tax year - unless there's no actual tax liability

If no noti cation is made then penalties will occur

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 Syllabus A4b. Recognise the due dates for the payment of tax under the self-assessment
system, and compute payments on account and balancing payments/repayments for
individuals.

Generally the next 31st January

This is the date for income tax, NIC class 4 and CGT

Payments on Account (POA's)

These are made if less than 80% of last years tax liability was deducted at source
(unless less than £1,000)

Therefore employees don't need to make POAs as more than 80% of their tax
liability is deducted at source

They only apply to income tax and class 4 NIC - NOT FOR CGT

DATES for POAs

1. 1st = 31st January

2. 2nd = 31st July

3. Balance on 31st January next year (normal due date)

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CALCULATION of POAs

Based on last years "relevant amount" (half payable on each POA)

Relevant amount = tax due - amount deducted at source

Example

Jack’s tax bill was £10,200 - of which 2,500 was collected using PAYE

What is the amount of the POA’s?

Answer

POA 1 £3,850 (10,200 - 2,500 = 7,700/2)

POA 2 £3,850

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 Syllabus A4c. Explain how large companies are required to account for corporation tax on a
quarterly basis and compute the quarterly instalment payments

Claims to reduce POAs - anytime before next 31

January
The taxpayer would do this if he expects the taxable income to be lower this year
than last (as last years was used to calculate the POA)

The grounds for the claim must be made

If the actual taxable income ends up being higher then interest will be charged on
the underpaid POA tax, and a penalty if the reduction in POA was fraudulent (and
not an innocent error)

Payment of Tax

1. Companies pay tax by self assessment

2. Estimated tax is payable 9 months and one day after the end of each accounting
period (due date), with provisions for quarterly instalment payments for ‘large’
companies. Payment must be made electronically

3. Interest due to the HMRC on tax paid late will run from the due date to the date
of payment at a rate of 7.75% per annum.

4. Interest on overpayments of tax will run from the later of the due date or the date
tax was actually paid at a rate of 4.25% per annum.

Under self assessment interest on tax paid late will be deductible against
interest receivable.

Interest received on overpaid corporation tax will be taxable as Interest receivable

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 Quarterly Instalments

1. Quarterly instalments apply to large companies.

2. A large company is one with a pro t exceeding £1.5M based on a single

company with no associated companies and which prepares accounts for a 12
month period.

The pro t limit must be divided by the number of associated companies and
time apportioned for a chargeable accounting period of less than 12 months.

3. The instalments are based on the estimated current year’s liability.

4. The four quarterly instalments will be made in months 7, 10, 13 and 16 following
the start of the accounting period.

The instalments are due on the 14th of the month.

Thus for the accounting year ended 31 March 2025 the rst quarterly instalment
payment would be due October 14, 2024 followed by further payments due
January 14 2025, April 14 2025, and July 14, 2025

5. Quarterly payments are not required if the company was not large in previous
CAP.

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 Syllabus A4d. List the information and records that taxpayers need to retain for tax purposes.

How long should business records be kept?

Business records and personal records need to be retained for a number of years
after the tax returns have been submitted for that year.

The time for which these records need to be retained are:

Retention of records

Company’s records 6 years from the end of the accounting period

Self employed -
business and non 5 years from 31January following end of the tax year
business records

Employed 12 months from 31 January following end of the tax year

A failure to retain records could result in a penalty of up to £3,000 per accounting period.

However the maximum penalty will only be charged in serious cases.

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 Syllabus A5. The Procedures relating to compliance
checks, appeals and disputes

Syllabus A5a) Explain the circumstances in which HM Revenue & Customs can make a
compliance check into a self-assessment tax return.

A5b) Explain the procedures for dealing with appeals and First and Upper Tier Tribunals

Appeals
Tax appeals are heard by the Tax Tribunal which is made of:

• First Tier Tribunal

Deals with most cases.

• Upper Tribunal
Deals with complex cases.

What is a tax assessment?

Opening up a tax assessment means that either the taxpayer or HMRC thinks the
taxpayer has paid too much or too little tax and wants this to be corrected.

The following table shows when a taxpayer or HMRC can open up a tax
assessment.

HMRC can open a normal enquiry for a tax return, 12 months from the date of
submission.

However, if HMRC suspects something more serious, they can raise a discovery
assessment.

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 The time limit for raising this discovery assessment depends on the reason of
suspicion of HMRC (mentioned below).

After HMRC raises a discovery assessment, taxpayers can raise an appeal within 30
days.

Taxpayers can make an amendment to

12months of the January ling date
his tax return

Taxpayers claim for overpayment relief 4 years from the end of the tax year

12 months from submission of the return (

If return was led on or before the due
date)

If led after the due date, and enquiry can

HMRC can open an enquiry be opened on the anniversary of the
quarter date following the actual
submission of the return

The quarter dates are 31 January, 30

April, 31 July and 31 October.

HMRC can raise a discovery

assessment

— No careless or deliberate behaviour 4 years from the end of the tax year

— Tax lost due to careless behaviour 6 years from the end of the tax year

— Tax lost due to deliberate behaviour 20 years from the end of the tax year

Taxpayers right of appeal 30 days from the assessment — appeal

against an assessment in writing

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 Syllabus A6. Penalties for non-compliance

Syllabus A6a. Calculate late payment interest and state the penalties that can be charged.

You have to pay an INTEREST and a PENALTY

• Late payment interest

If a tax liability is paid late, then late payment interest will be charged.

• Late payment Penalty for balancing payments

If a balancing payment is paid late, then a penalty will be charged.

• Penalties for incorrect returns

If a tax liability is understated, then a penalty might be charged.

1) Late payment interest

The rate of interest is 7.75%.

If the liability is outstanding for less than a full year, then this will be apportioned
accordingly.

For example

A corporation tax liability of £300,000 was outstanding for 4 months.

How much late payment interest will be payable assuming a rate of 7.75%?

4/12 * 7.75% * £300,000 = £7,750

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2) Late payment Penalty for balancing payments

5% for tax unpaid 30 days after payment due date,

further 5% if still unpaid after 6 months and

a further 5% if still unpaid after 12 months.

3) Penalties for incorrect returns

The amount of penalty is based on the amount of tax understated.

But the actual penalty payable is linked to the taxpayer’s behaviour:

• NO PENALTY where a taxpayer simply makes a genuine mistake.

• UP TO 30% of the understated tax where a tax payer fails to take reasonable
care.

• UP TO 70% of the understated tax if error is deliberate.

• UP TO 100% of the understated tax where the error is deliberate and

concealed.

A penalty will be substantially reduced where the taxpayer makes disclosure,

especially unprompted disclosure to HMRC.

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 Syllabus B: Income Tax And Nic Liabilities

Syllabus B1. The scope of income tax.

Syllabus B1a. The residence of an individual

How is the residence of an individual determined?

3 Stages to determine UK residency

If a person is UK resident in a particular tax year they must pay income tax on
their UK and overseas income.

If a person is not UK resident, then they do not pay UK income tax on their
overseas income, they only pay on their UK income.

The determination of whether a person is UK resident is based on 3 major

stages in the following order:

1. Is the person automatically resident overseas? (2 tests)

2. Is the person automatically UK resident? (3 tests)

3. None above satis ed, use table.

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STAGE 1: Is the person automatically resident overseas?

If one of the two tests below are satis ed, then the person is automatically resident
overseas and will only pay UK income tax on his UK income.

Test 1 – Short stay in UK Test 2 – Employed abroad

In UK for less than 16 days in the tax Employed overseas and visits UK for
year. less than 91 days during the tax year.

OR

In UK for less than 46 days in tax year

and never previously UK resident.

Illustration:

Shayna is in the UK for 40 days during the tax year. She was not previously UK
resident.

Will she be considered to be UK resident for this tax year?

Solution:

No - Shayna satis es Test 1 – Short stay in the UK. This is because she is in the UK
for less than 46 days and has not been UK resident previously.

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 STAGE 2: Is the person automatically UK resident?

If any of the tests below are satis ed, then the individual is automatically UK
resident and will pay UK income tax on his worldwide earnings. If none of the tests
are met, then there are detailed rules to follow to determine residency.

Test 2 – Nowhere else to Test 3 - Employed in the

Test 1 - Long stay
go UK

Spends at least 183 days Employed full time in the

Only home is in the UK
in the UK in the tax year UK.

Illustration:

Hemant is in the UK for 60 days during the tax year, his only house is in the UK.

Will he be considered to be UK resident for this tax year?

Solution

Yes - Hemant will be considered to be UK resident for this tax year because he
satis es Test 2 – nowhere else to go.

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The foundation of the detailed rules is based on:

Was the individual previously UK resident?

How many days did they spend in the UK in this tax year?

Do they have the amount of UK ties necessary to be considered UK resident in this

tax year?

Days in the UK Previously UK resident Not previously UK resident

Less than 16 days Automatically not UK resident Automatically not UK resident

16-45 Resident if 4 UK ties Automatically not UK resident

46-90 Resident if 3 UK ties Resident if 4 UK ties

91-120 Resident if 2 UK ties Resident if 3 UK ties

121-182 Resident if 1 UK ties Resident if 2 UK ties

183 days Automatically UK resident Automatically UK resident

Ties

1. Close family in the UK (Wife, child).

2. House in the UK which is used during the tax year. (at least 1 night during the tax
year)

3. In the UK for more time than any other country.

4. In the UK for more than 90 days in either of the previous 2 tax years.

5. Doing substantive work in the UK. (40 days or more)

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Illustration:

Candice has always been UK resident.

During this tax year she purchased a villa in India where she lived for most of this
tax year.

She has a house in the UK where her husband and children stay. During this tax
year she spent 100 days in the UK.

Will Candice be considered to be UK resident in this tax year?

Solution:

Yes - Candice will be considered to be UK resident.

This is because:

1. She spent 100 days in the UK. (Therefore: Resident if 2 UK ties)

2. She was previously UK resident.

3. She has 2 ties in the UK, close family and a house.

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 Syllabus B2. Income from employment

Syllabus B2a. The factors - employment or self-employment

Employed or self-employed?

Why do we want to know whether an individual is employed or self

employed?

We want to know whether an individual is employed or self employed because there

is a di erence in the tax allowable deductions for the employed and the self
employed.

Additionally, there is a di erence in the National Insurance Contributions payable by

the employed and the self employed.

How to determine whether an engagement is treated as employment or self

employment?

The main test of an employment as opposed to self-employment is the existence of

a contract of service (employee) compared with a contract for services (self
employed).

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If there is no contract of service, the following suggest employment:

Factors Explanation

If the individual holds an integral position (e.g.) chairman of the

Integral
organisation, they must be employed. You cannot hold key positions
Position
and be self employed.
An employee will be paid his regular wage regardless of the
Risk organisation making a pro t or not. He does not bear the nancial
risk.
The employer controls the manner and method of work, the
Control
employee must obey.

Legal The employee is entitled to bene ts normally provided to employees,

rights for example: holiday pay and sick pay.

Equipment The employee does not provide his own equipment.

The employee is obliged to work personally and exclusively for the

Exclusivity
employer, and cannot hire their own helpers.

Illustration:
Liam is a driver of luxury cars and started working for Super Cars Ltd on 6 April.

He works a set number of hours each week and is paid an hourly rate for the work
that he does.

When Liam works more than the set number of hours, he is paid overtime.

Liam is under an obligation to accept the work o ered by Super Cars Ltd., and the
work is carried out under the control of the customer services manager.

All the vehicles used by Liam are provided by Super Cars Ltd.

What are the factors that indicate that he should be treated as an employee?

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Solution:

Risk – none. He works for a set number of hours and is paid at an hourly rate. If he
works more than the set number of hours, he is paid overtime.

Control – the customer services manager controls the manner in which the work is
done.

Equipment – all of the cars driven are provided by Super Cars Ltd.

Exclusivity – Liam must do the work provided to him personally.

Conclusion:

Liam will pay income tax under the employment income rules.

Liam will also pay Employee Class 1 NIC.

Super Cars Ltd will pay Employer’s Class 1 NIC and Class 1 A NIC on behalf of
Liam.

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 Syllabus B2b. Recognise the basis of assessment for employment income.

Which employment income to tax in a tax year?

Emoluments

Emoluments are amounts that an employee will pay income tax and national
insurance contributions on.

They include:

• salary

• bonus

• bene ts

Emoluments are taxable on the earlier of 2 dates:

1 When a person becomes entitled to payment of the earnings

2 When payment is made

Example
Peter became entitled to be paid a bonus on 31 January 2025 (Tax year 24/25).

He was actually paid the bonus on 30 April 2025 (Tax year 25/26).

• He should pay income tax on it in the tax year 24/25.

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Illustration:

Frank is employed in Cow plc and his annual salary is £36,000.

On 06/01/25 his annual salary was increased to £42,000.

Note His salary is due for a tax year which runs from 6th April - 5th April and
salaries accrue evenly over a tax year.

His salary has changed in between the tax year.

Therefore, the salary per month must be calculated and then totalled to give a gure
for the entire year.

Additionally, Frank receives the following bonuses based on the company’s results:

For the year ending 31/12/2023 £3000.

He became entitled to the bonus on 31/12/23 and was paid the bonus on 31/5/24.

For the year ending 31/12/2024 £10,000.

He became entitled to the bonus on 31/12/24 and was paid the bonus on 31/5/25.

• Required:

Calculate the taxable income in 2024/25.

Solution:

His salary accrues evenly over the year from

06/04/2024 - 05/04/2025, therefore:
For the 9 months (06/04/24 - 05/01/25), he will be £36,000 * 9/12 = £27,000
entitled to:
For the remaining 3 months (06/01/25 - 05/04/25), £42,000 * 3/12 = £ 10,500
he will be entitled to:
Salary in Total 27 + 10.5 = £ 37,500

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His bonus of £3,000 will be taxed in the tax year 23/24 as he became entitled to it
on 31 December 2023.

His bonus of £10,000 will be taxed in the tax year 24/25 as he became entitled to it
on 31 December 2024.

Conclusion:

Salary= £37,500

Bonus = £10,000

Total income = £47,500

Less personal allowance = (£12,570)

Taxable income = £ 34,930

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 Syllabus B2c. Income assessable

What is taxable employment income?

Employment income to be assessed for tax include:

1. Salary

2. Wages

3. Bonus

4. Commission

5. Bene ts in kind - there are 2 types of bene ts - taxable bene ts and exempt
bene ts.

Only taxable bene ts will have income tax paid on them, exempt bene ts will
not.

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 Syllabus B2d. Allowable deductions

Expenses that you are allowed to deduct from

employment income

Total employment income calculation:

Salary x
Commission x
Bene ts in kind x
= Gross emoluments x
Less allowable deductions (x)
= Total employment income x

Allowable deductions:

1. Contributions to an occupational pension scheme.

Note that Payments to a personal pension scheme are NOT allowable
deductions.
More in Topic Pensions.
2. Travel, subsistence and entertaining incurred wholly, exclusively and necessarily
in the performance of duties of employment
3. Subscription to a professional body (e.g.) ACCA
4. Note that payments for gym memberships are NOT allowable deductions.
5. De cit on a mileage allowance Topic The Authorised approved mileage
allowances.
6. Donations to charity
Note that Donations to political parties are not allowable deductions.
7. Capital allowances are available for plant and machinery provided by an
employee for us in his duties Topic Capital allowances

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Illustration:

Paresh had a salary of £30,000.

He paid £500 for his ACCA subscription.

He also paid £1,000 for travel to Scotland for business purposes entirely.

Finally, he paid £1,000 into a charity under a payroll deduction scheme.

What will his employment income be?

Solution:

Salary £30,000

Less:

ACCA subscription (£500)

Business travel expense (£1,000)

Gift aid donation (£1,000)

Employment income £27,500

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 Syllabus B2e. Discuss the use of the statutory approved mileage allowances.

The authorised mileage allowances

This arises when an employee uses their own car on employer’s business.

• The employee is entitled to receive this mileage allowance from their employer to
compensate for additional costs of running the vehicle due to business miles.

• The amount that can be received tax free is set by HMRC.

Anything in excess that is received from the employer will be taxable, and
anything below the allowance that is received from the employer will be
deductible.

Motor car Up to 10,000 miles Above 10,000 miles

Authorised mileage allowance 45p 25p

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Illustration:

Kerry has a salary of £20,000 per annum.

She uses her own car for employer’s business, the mileage allowance received from
her employer is 50p per mile.

She drove 12,000 business miles in the tax year.

• What is her taxable income?

Solution:

Mileage allowance received = (12 000*0.5) = £6,000

Authorised mileage allowance = (10 000*.45) + (2 000*0.25) = £5,000

Therefore, £1,000 excess will be taxable

Conclusion:

Salary £20,000

Unauthorised mileage allowance £1,000

Total employment income £21,000

Less personal allowance (£12,570)

Taxable income £8,430

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Illustration:

Instead, Kerry receives 35p per business mile.

What is her taxable income?

Solution:

Mileage allowance received = (12 000*0.35) = £4,200

Authorised mileage allowance = (10 000*.45) + (2 000*0.25) = £5,000

Therefore, the de cit of £800 will reduce her employment income.

Salary £20,000

Mileage allowance de cit (£800)

Total employment income £19,200

Less personal allowance (£12,570)

Taxable income £6,630

Note Travelling between home and work does not count as business miles. This is
considered to be ordinary commuting.

Note Travelling to a temporary workplace will count as business miles. A temporary

workplace is one that you attend irregularly or for less than 24 months

Note Travelling between work and client's o ces will count as business miles.

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 Syllabus B2f. Explain the PAYE system, how bene ts can be payrolled, and the purpose of
form P11D.

The system for paying income tax for employed

individuals.
How does PAYE work?

Most tax in respect of employment income is deducted under the PAYE system.

The objective of the PAYE system is to collect the correct amount of tax over the
year.

An employee’s PAYE code is assigned to ensure that their allowances etc. are given
evenly over the year.

The PAYE system applies to most cash payments, other than reimbursed expenses,
and to certain non-cash payments.

• In addition, PAYE applies to round sum expense allowances and payments

instead of bene ts.

It is the employer’s duty to deduct income tax and national insurance

contributions from the pay of his employees.

If he fails to do this, he must pay over the tax which he should have deducted
and the employer may be subject to penalties.

It is now possible for an employer to choose to include most taxable bene ts

within their normal payroll, with the employee’s income tax liability being
collected under PAYE. This is referred to as the payrolling of bene ts.

Living accommodation bene ts and bene cial loans must still be reported on the
P11D.

Any “Payrolled” bene ts do not now have to be reported on the P11D. The P11D
is a form submitted by the employer that lists the bene ts provided to an
employee in a tax year.

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 PAYE codes
An employee’s PAYE code indicates the amount of tax free pay he is entitled to.

The PAYE code will include the employee’s personal allowance and any allowable
deductions and be restricted be various taxable amounts.

• The codes are determined by HMRC.

The employer must act according to the code unless further noti ed by HMRC,
even if the employee appeals against the code.

PAYE Forms
Employers must complete forms P60, P11D and P45.

• A P45 is needed when an employee leaves

When an employee leaves, a form P45 (particulars of Employee Leaving) must be

prepared.

This form shows the employee's code and details of his income and tax paid to date and
is a two part form handed to the employee.

One of the parts is the employee's personal copy.

If the employee takes up a new employment, he must hand the other part of the form P45
to the new employer.

• Form P11D records details of bene ts

Following the end of each tax year, the employer must submit the P11D to HMRC by 6
July.

A copy of the form P11D must also be provided to the employee by 6 July.

The details shown on the P11D include the full cash equivalent of all bene ts, so that the
employee may enter the details on his self-assessment tax return.

Speci c reference numbers for the entries on the P11D are given to assist with the
preparation of the employee's self assessment tax return.

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• Forms P60 is a year-end return

At the end of each tax year, the employer must provide each employee with a form P60

This shows total taxable earnings for the year, tax deducted, code number, NI number
and the employer's name and address.

The P60 must be provided by 31 May following the year of assessment.

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 Syllabus B2g. Explain and compute the amount of bene ts assessable

Use bene t

If an employer lends an asset (e.g. a computer) to an employee, and the employee

uses this asset privately, then the employee must pay income tax on this bene t.

Examples of assets lent:

1. Computers

2. TV sets

3. Boats

4. Furniture

5. Motorcycles

How much income tax needs to be paid on this bene t?

1. We need to nd the value of the bene t in money terms.

2. On this money value, we will apply the income tax rate.

Monetary value of bene t

1. We must nd the market value of the asset when it was rst given to the
employee.

2. Multiply this by 20%.

3. Multiply this value by the number of weeks/months the employee had access to
the asset.

For example, multiplying by 9/12 means that the employee had access to the
asset for 9 out of 12 months in the tax year.

4. Deduct any rent that the employee pays to the employer to use the asset.

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 Proforma:

Assessable bene t: 20% * market value * x/12 X

Less: Rent paid to employer to use asset (X)

Use bene t X

Illustration:

Manish’s employer purchased a dishwasher for Manish’s use on 1 April costing

£900. Manish paid his employer £150 to use the dishwasher for the tax year.

What use bene t will be assessable on Manish?

Assessable bene t: 20%*£900*12/12 = 180

Less: Rent paid to employer to use asset (150)

Use bene t 30

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 Gift bene t

This bene t is linked with the use bene t explained above.

After an employer has given the employee an asset to use privately, the employer
may then decide to give this asset to the employee as a gift.

For example, an employer gave his employee a computer to use for private
purposes for 2 years and the employee was taxed on a bene t for the use of the
asset in each of those 2 years.

After 2 years, the employer then decided to give this computer to the employee as a
gift and the employee was then taxed on an additional bene t for the gift.

The employee will need to pay income tax on the monetary value of gift bene t.

How to calculate the monetary value of this gift?

The monetary value will be the higher of 2 gures:

Figure 1:

• Find the cost to the employer (the original market value of the asset).

• Deduct any use bene ts that the employee has already paid income tax on.

For example, if the computer cost the employee £750 2 years ago when he
purchased it, and the use bene t that the employee paid income tax on for each
year was £150, then the gift bene t will be:

Original market value £750

Year 1 (£150)

Year 2 (£150)

Gift bene t £450 - Income tax will be paid on this gure.

Figure 2:

• Find the market value of the asset at the date of the gift to the employee.

For example, after 2 years, if the computer had a market value of £500, the
bene t would be:

Market value at date of gift £500

Therefore, the Gift bene t is £500 as this is the higher of the two gures.

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 Note that we must take the higher gure out of Figure 1 and Figure 2:

• Figure 1: £450

• Figure 2: £500

Therefore, the gift bene t in this case would be £500

Illustration:

Manish’s employer purchased a dishwasher for Manish’s use on 06/04/2023,

costing £400.

On 06/04/2024 Manish was given the dishwasher by his employer. It’s market
value then being £200.

• What gift bene t will be assessable on Manish?

Solution:
Use bene t assessed in 23/24:

Use bene t assessed 20% * £400 * 12/12 = 80

Use bene t 80

Gift bene t assessed in 24/25:

Figure 1: £

Market value when rst provided 400

Less: Use bene t already assessed (80)

Gift bene t 320

Figure 2: £

Market value on date of gift 200

Gift bene t 200

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 Higher of:
Figure 1 : £320

Figure 2 : £200

The gift bene t that will be assessed on Manish is £320

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 Syllabus B2g. Explain and compute the amount of bene ts assessable

Living accommodation bene t

If an employer provides an employee with a home to live in, without the home being
necessary for the employee to do his or her job, the employee will have to pay
income tax on a living accommodation bene t.

If the home is necessary for the employee to do his or her job, then this bene t will
not arise.

When is a home necessary for an employee to do their job?

Examples of when a home is necessary for an employee to do their job properly

include:

1. A nanny needs to live in the same home that their child lives in to do their job.

Otherwise, they will not be able to do their job. In this case, providing
accommodation will be considered to be work related and a bene t will not
arise.

2. Someone in an army needs to live at the army base, otherwise they will not be
able to do their job.

3. A hotel-worker being provided living accommodation at the hotel will help them
perform their duties better.

4. If there is a special threat to the employee’s security and he lives in the

accommodation as part of special security arrangements, this will ensure that he
is safe to do his job. For example, the Prime Minister or President.

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How to calculate the living accommodation bene t?

• If the employer owns the home, then the home’s annual value will be used.

• If the employer is renting the home, then the amount of the bene t is the higher
of the rent paid by the employer and the annual value.

• The amount paid by the employee to the employer will be deducted to give the
living accommodation bene t.

Illustration - If the employer is renting the home

Ashok, a sales manager, lives in a at that his employer has given him to live in.

The employer pays rent of £5,000 per annum for the at, and Ashok pays the
employer £1,000 per year to use the at. The annual value of the at is £4,900.

• What is the living accommodation bene t that Ashok will have to pay income tax
on?

Solution:

Rent paid by employer (as this is

5,000
higher than annual value)
Less: Rent paid by employee to employer (1,000)

Living accommodation bene t 4,000

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 Illustration - If the employer owns the home

Vandana, a marketing manager, lives in a at owned by her employer.

The at has an annual value of £4,000 and she pays the employer £500 per annum
to use the at.

• What is the living accommodation bene t that she will have to pay income tax
on?

Solution:

£
Annual value 4,000
Less: Rent paid by employee to employer (500)
Living accommodation bene t 3,500

Additional bene t

There is an additional bene t that can arise if the employer owns the home and it
cost the employer more than £75,000 when he purchased it.

How to calculate the money value of the additional bene t?

Did the employer buy the home more than 6 years before he gave it to the
employee to use?

1. No
(Cost - £75,000) * O cial rate of interest (2.25% for 24/25) = Additional bene t

Note
The Cost will include the actual cost of the home plus any amount spent on
extending/enhancing the home before the start of the current tax year.

2. Yes

(Market value - £75,000) * O cial rate of interest = Additional bene t

Note:
The market value of the home when it was rst given to the employee to be used
(the purchase price is not used here).

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Illustration - LESS than 6 years

Vandana, a marketing manager, lives in a at owned by her employer.

She has occupied the at for the last 5 years.

The employer bought this at 5 years ago and paid £85,000.

4 years ago, he spent £10,000 to add a garage onto the at.

What additional bene t that will she have to pay income tax on?

Solution:

(Cost - £75,000) * O cial rate of interest (2.25%) = Additional bene t

(£85,000 + £10,000) = £95,000 (cost plus enhancement expenditure)

(£95,000 - £75,000) *2.25% = £450

£450 is the additional bene t that Vandana will have to pay income tax on.

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Illustration - MORE than 6 years

Vandana, a marketing manager, lives in a at owned by her employer.

She has occupied this at for the last 7 years, and moved in when the at had a
market value of £100,000.

The employer bought this at 15 years ago and paid £85,000.

What additional bene t that will she have to pay income tax on?

Solution:

(Market value - £75,000) * O cial rate of interest = Additional bene t

(£100,000 - £75,000) *2.25% = £563

£563 is the additional bene t that Vandana will have to pay income tax on.

Conclusion:

The normal bene t and the additional bene t are added together to give the total
living accommodation bene t that the employee will pay income tax on.

• For example, Vandana will either pay income tax on:

£3,500 + £450 = £3,950 (Flat was not purchased more than 6 years ago)

or

£3,500 + £563 = £4,063 (Flat was purchased more than 6 years ago)

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 Syllabus B2g. Explain and compute the amount of bene ts assessable

Motor cars - ACCA article

If an employer gives an employee a motor car to use for business and private
purposes, then a bene t will arise which income tax must be paid on by the
employee.

• If there is no private use of the car there is no taxable bene t

• The bene t is a percentage of the car’s list price.

The list price of the car will be given to you in the exam.

The list price includes the list price of any accessories tted to the motor car.

If an employee pays a capital amount towards receiving the car from the
employer, then this list price will be reduced by this capital contribution.

The list price can be reduced by a maximum of £5,000 - even if the employee
has contributed more than this, it will only be reduced by £5,000.

For example the list price of a car is £15,000 and an employee has made a
capital contribution towards it of £7,000 - the list price of the car will only reduce
to £10,000 (£15,000 - £5,000).

Then, this list price will be multiplied by a percentage to give the amount of
bene t to be taxed on.

• How to determine the percentage?

Electric cars

A 2% rate applies to electric powered motor cars with zero CO2 emissions.

For hybrid electric motor cars with CO2 emissions between 1-50 grams per
kilometre, the electric range of the motor car is relevant

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 Electric range

Electric range Percentage

130 miles or more 2%
70 - 129 miles 5%
40-69 miles 8%
30- 39 miles 12%
Less than 30 miles 14%

As emissions rise beyond 50 grams, the following percentages apply:

CO2 emissions Percentage Petrol

51 to 54 g/km 15%
55g 16%
Maximum 37%
percentage

The base percentage of 16% rises in 1% for each 5 grams per kilometre above the
base level of 55 grams per kilometre, up to a maximum of 37%.

The percentage rates are increased by 4% for diesel cars unless the diesel car in
question is registered after 1 September 2017 and it meets the RDE2 standards.
You will be told in the exam if the car meets the RDE2 standards.

Reductions

So far, we have calculated the bene t as:

(List price-capital contribution) * % = Car bene t

This bene t can be reduced by 2 things:

1. If the motor car is unavailable for periods of at least 30 days of the tax year for
example if the car was not available to the individual for one month in the tax
year, then the bene t will be multiplied by 11/12 - because the car was only
available for 11 months in the tax year, and

2. Where the employee makes a contribution to the employer for the use of the
motor car, this is also known as making a contribution towards the running costs
of the car.

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 Note contributing towards the running costs of a car are di erent to the capital
contribution to reduce the list price of a car.

For example An employer gave an employee a motor car to use for private and
business purposes that had a list price of £17,000 - the employee made a
capital contribution of £8,000 towards the list price. The employee also
contributed £1,200 per annum towards the running costs of the car.

The taxable bene t would be:

List price less capital contribution: £17,000 - £5,000 (max) = £12,000

£12,000 * % = Bene t - £1,200 ( running cost contribution). = Taxable bene t.

Pool cars

The use of a pool car does not result in a company car bene t.

A pool car is one provided for the use of any employee to use for business
purposes and is kept at the business place of work..

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Illustration:

Arora plc provided the following employees with company motor cars:

• 1) Lina was provided with a new diesel powered company car on 6 August.

(the car does not meet the RDE2 standards)

The motor car has a list price of £13,500 and an o cial CO2 emission rate of
97 grams per kilometre.

Lina had an accident in October and was unable to use the car for 2 months,
however the car was always available to her to use.

• 2) Naina was provided with a hybrid electric company car throughout the tax
year. The car had a list price of £32,200 and an o cial CO2 emission rate of 24
grams per kilometre and an electric range of 90 miles.

• 3) Falak was provided with a new petrol powered company car throughout the
year.

The motor car has a list price of £22,600 and an o cial CO2 emission rate of
239 grams per kilometre.

Falak paid Arora plc £1,200 for the use of the motor car.

• 4) Jayna was provided with a new petrol powered company car throughout the
year.

The motor car had a list price of £16,000 and an o cial CO2 emission rate of
52 grams per kilometre.

• 5) Saaya was provided with a new diesel car throughout the year.

The motor car had a list price of £11,000 and an o cial CO2 emission rate of
55 grams per kilometre. The car meets the RDE2 standards.

Required:
Calculate the taxable bene t for Lina, Naina, Falak, Jayna and Saaya.

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Solution:

1) Lina

was provided with a diesel powered company car. The CO2 emissions are 97g/km.

The CO2 emissions are rounded down to 95g/km so that it is divisible by ve.

The base level percentage of 16% is increased in 1% steps for each complete 5
grams per kilometre above the base level, so the relevant percentage is 28% (16%
+ 4%(diesel car) + (95-55/5) + 8%)

The motor car was only available for 8 months during the year, so the bene t is
£2,520 (13,500 × 28% × 8/12).

Note that even if Lina was unable to use the car herself for 2 months, the fact that
the car was available for her to use at all times means that the bene t will not be
reduced because of these 2 months.

2) Naina

With CO2 emissions between 1-50 grams, the electric range of the motor car is
relevant. This is between 70 - 129 miles, so the relevant percentage is 5%.

The motor car was available throughout the tax year so the bene t is £32,200 x 5%
= £1,610

3) Falak

The CO2 emissions are 239g/km.

The CO2 emissions are above the base level gure of 55 grams per kilometre.

The relevant percentage is 52% (16% + 36% (235 – 55 = 180/5)), but this is
restricted to the maximum of 37%.

The motor car was available throughout the year so the bene t is £7,162 (22,600 ×
37% = 8,362 - 1,200).

The contribution by Falak towards the use of the motor car reduces the bene t.

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 4) Jayna

The CO2 emissions are between 51 grams per kilometre and 54 grams per
kilometre so the relevant percentage is 15% as it is a petrol car.

The bene t is £16,000 × 15% = £2,400

5) Saaya

The CO2 emissions is 55g per kilometre and the relevant percentage is 16% (16% +
0% (diesel car)). (diesel car meeting the RDE2 standards does not have the 4%
supplement).

The bene t is £11,000 × 16% = £1,760

Fuel provided for private use

1. The car bene t also covers the running costs of the car BUT does not take
account of fuel provided for private use.

2. The amount of fuel bene t is computed on a base gure of £27,800 multiplied by

the percentage used for calculating the car bene t.

The fuel bene t is reduced proportionately where private use fuel is withdrawn
(and not reintroduced during the year) or the car is only given part way through
the tax year.

3. No reduction is made if the employee contributes towards the cost of petrol for
private use.

If he pays for all fuel used for private motoring the charge is cancelled.

Illustration:

Calculate the fuel bene t for Lina, Naina, Falak, Jayna and Saaya assuming also
that Falak pays Arora plc £600 during the year towards the cost of private fuel,
although the actual cost of this fuel was £1,000.

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Solution:

Lina

£27,800 × 28% × 8/12 = £5,189

The fuel was not available for rst 4 months

Naina

£27,800 × 5% = £1,390

Falak

£27,800 × 37% = £10,286

There is no reduction for the contribution made by Falak since the cost of private
fuel was not fully reimbursed.

Jayna

£27,800 × 15% = £4,170

Saaya

£27,800 × 16% = £4,448

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 Vans and heavier commercial vehicles

1. Where an employee uses an employer’s van for journeys between home and
work and other private use is insigni cant there is no bene t.

2. Where private use is not insigni cant the tax charge is £3,960 p.a.

3. An additional charge is made for fuel provided for unrestricted private use equal
to £757 p.a.

4. Both bene ts are time apportioned if the van is unavailable to the employee for
30 days or more during any part of the tax year.

5. Vans producing zero CO2 emissions (zero emission vans) have a zero bene t
charge. There is also no fuel bene t for zero emission van.

Van bene t

If an employer gives an employee a van to use for private journeys, if the amount of
usage is not signi cant, then no bene t will arise that an employee needs to pay
income tax on.

However, if the private usage of the van is signi cant, then a bene t will arise that
an employee will pay income tax on

How to calculate the money value of the bene t?

The money value is a at tax charge of £3,960 per annum.

Therefore, if the van was only provided for 9 months in the tax year, then the tax
charge would be £3,960 * 9/12 = £2,970

How to calculate the monetary value of the private fuel bene t?

If the employer also provides the employee with fuel for their private journeys,
another bene t will arise that the employee must pay income tax on.

The money value is a at tax charge of £757 per annum.

Therefore, if the fuel for private journeys were only provided for 9 months in the tax
year, then the bene t for the private fuel provided would be £757 * 9/12 = £568

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 Illustration:

An employee is given use of his employer’s van on 01/06/2024 and uses it for a
signi cant number of private journeys.

The employer also pays for the fuel for the employee’s private journeys.

What taxable bene t would arise in 2024/25 because of the employer paying for
private fuel?

Solution:

£757 * 10/12 = £630

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 Syllabus B2g. Explain and compute the amount of bene ts assessable

Bene cial Loan Bene t

This bene t arises when an employer gives an employee a loan at an interest rate
that is cheaper than the o cial interest rate (2.25%).

For example, a bene cial loan bene t would arise if an employer gave an employee
a £15,000 loan at 1% per annum.

This is because 1% is cheaper than the 2.25% o cial interest rate.

Carefully note – if the loan is £10,000 or less, no bene cial loan bene t will arise at
all.

If the loan is above £10,000 – then a bene t on the full amount of the loan will arise.

Proforma

Money value of the loan bene t X

Less: Interest actually paid by employee (X)

Bene cial loan bene t X

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 How to calculate the monetary value of the loan bene t?

There are 2 ways to calculate the monetary value of the loan bene t.

The average method applies automatically but the taxpayer or HMRC can elect for
the strict method if it is more bene cial for them

eg the taxpayer will elect when the strict method produces a smaller bene t gure
and HMRC can elect if the strict method gives a MUCH higher bene t gure.

1. Average method

(Loan outstanding at start of year + Loan outstanding at end of year)/2 * O cial

interest rate = £x

2. Strict method

You must nd the interest payable for the actual loan outstanding at all times. (Much
easier to understand with an example)

Illustration - Average method

Vijay was given a loan of £35,000 by his employer on 06/04/2024. Interest is

payable on this loan at 1% per annum.

On 01/06/2024, Vijay repaid £5,000 of the loan and on 01/12/2024, Vijay repaid
another £15,000 of the loan.

The remaining £15,000 was still outstanding at 05/04/2025.

• What is the taxable bene t of the bene cial loan using the average
method?

Solution:

Average method £

Money value of the loan bene t (£35,000 + £15,000)/2 * 2.25% 563

Interest actually paid by employee

Less: (258)
(w1)

Bene cial loan bene t 305

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(W1) - Interest paid by Vijay on loan

From 06/04/2024 (2 months) Vijay paid 1% interest on £35,000 £35,000 * 1% *

– 01/06/2024 loan outstanding = 2/12 = £58

From 01/06/2024 (6 months) Vijay paid 1% interest on £30,000 £30,000 * 1% *

– 01/12/2024 loan outstanding (£5,000 was repaid)= 6/12 = £150

(4 months) Vijay paid 1% interest on £15,000

From 01/12/2024 £15,000 * 1% *
loan outstanding (another £15,000 was
– 05/04/2025 4/12 = £50
repaid)=

Total interest paid

£ 258
by Vijay

£305 – is the bene cial loan bene t that Vijay would have to pay income tax on IF
the average method was used.

Illustration - Strict method

Vijay was given a loan of £35,000 by his employer on 06/04/2024. Interest is

payable on this loan at 1% per annum.

On 01/06/2024, Vijay repaid £5,000 of the loan and on 01/12/2024, Vijay repaid
another £15,000 of the loan.

The remaining £15,000 was still outstanding at 05/04/2025.

• What is the taxable bene t of the bene cial loan using the strict method?

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 Solution:

Strict method £
Monetary value of the loan bene t Vijay should have paid (w1) 582
Vijay actually paid ( gure from
Less: (258)
previous example)
Bene cial loan bene t 324

Vijay should have paid: £131+£338+£113 = £582

£35,000 *
From 06/04/2024 (2 months) Vijay should pay 2.25% interest on
2.25% * 2/12
– 01/06/2024 £35,000 loan outstanding =
= £131

(6 months) Vijay should pay 2.25% interest on £30,000 *

From 01/06/2024
£30,000 loan outstanding (£5,000 was repaid) 2.25% * 6/12
– 01/12/2024
= = £338

From (4 months) Vijay should pay 2.25% interest on £15,000 *

01/12/2024– £15,000 loan outstanding (another £15,000 2.25% * 4/12
05/04/2025 was repaid) = = £113

Conclusion

Vijay’s loan bene t with the average method is : £305

Vijay’s loan bene t with the strict method is : £324

Which one will he pay income tax on?

Vijay will pay tax on the loan bene t arising from the average method - £305 - as
this is the automatic method and the strict method is not so di erent that HMRC
would elect for it.

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 Summary

1. A bene cial loan is one made to an employee below the o cial rate of
interest (2.25%)

2. The bene t is the interest on the loan at the o cial rate, less any interest
actually paid by the employee.

3. There is no bene t if the loans do not exceed £10,000 in total at any time
in the tax year

4. The bene t is calculated using the average method or the strict method

Average method

This uses the loan outstanding at the beginning and the end of the tax year.

If the loan is taken out or paid back during the tax year, that date is used instead
of the beginning or end the tax year.

Strict method

This calculates bene t day by day on the balance actually outstanding.

Either the taxpayer or HMRC can elect to use the strict method.

HMRC will elect if the bene t is signi cantly higher under this method.

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 Syllabus B2g. Explain and compute the amount of bene ts assessable

Other bene ts

Generally, the basis for calculating the taxable value of any other bene t is the cost
to the employer.

There are various bene ts which are exempt or partially exempt.

Although correctly identifying the tax treatment of such a bene t may result in only a
half mark or one mark, it is important that you correctly identify such bene ts so
that time is not wasted with unnecessary calculations.

Finally, there is no exhaustive list of bene ts, but you must keep in mind that if an
employee is using something for personal purposes and the employer is paying for
it, then the bene t that is likely to arise is the cost to the employer.

For example if an employer provides education for an employee's child that cost the
employer £600, then the bene t that will arise on the employee is the cost to the
employer of £600.

Payments for home working are exempt up to £6 per week.

An employee can claim a deduction for the additional cost of working from home,
such as expenditure on lighting and heating.

Employers can pay up to £6 per week (without the need for supporting evidence of
the costs incurred by the employee).

Payments above the £6 require evidence of the employee’s actual costs.

Only £8,000 of relocation cost is exempt.

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 Illustration:

Vary plc provides its employees with various bene ts.

The bene ts were provided:

1) Denzil was provided with two mobile telephones.

The telephones had each cost £250 when purchased by Vary plc in January.

The company paid for all of Denzil’s business and private telephone calls.

2) Emily had her health club membership fee of £710 paid for by Vary plc

3) Frederick spent 5 nights overseas on business for Vary plc.

The company paid him a daily allowance of £10 to cover the cost of personal
expenses such as telephone calls to his family.

4) Grace was paid £11,000 towards the cost of her removal expenses when she
permanently moved to take up her new employment with Vary plc, as she did not
live within a reasonable commuting distance.

The £11,000 covered both her removal expenses and the legal costs of acquiring
a new main residence.

5) Hillary’s three year old daughter was provided with a place at Vary plc’s
workplace nursery.

The total cost to the company of providing this nursery place was £10,800 (240
days at £45 per day).

6) June had the use of Vary plc’s company gym which is only open to employees of
the company.

The cost to Vary plc of providing this bene t to June was £340.

7) Kristin was provided with free meals in Vary plc’s sta canteen.

The total cost of these meals to the company was £1,460.

The canteen is available to all of the company’s employees.

8) Larry regularly works from home two days per week, and was paid an allowance
of £288 (48 weeks at £6 per week) to cover the extra light and heat costs that
were incurred due to this home working.

9) Marge was given a watch valued at £750 as an award for her 20 years of
employment at Vary plc.

10) Nile had £440 of her medical costs paid for by Vary plc.

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 She had been away from work for two months due to an injury, and the
recommended medical treatment was to assist her return to work.

What taxable bene ts will arise on the employees?

Solution:

1) Denzil

Providing one mobile phone to an employee does not result in a taxable bene t.

If additional mobile phones are provided to employees then 20% of the market
value of the phone will be the tax bene t assessed on the employee.

This is very similar to the use bene t

• The provision of one mobile telephone does not give rise to a taxable bene t.

• The taxable bene t for the use of the second telephone is £50 (250 x 20%).

2) Emily

• The bene t of the health club membership is the cost to Vary plc of £710.

3) Frederick

• Payments for private incidental expenses are exempt up to £10 per night when
spent outside the UK, so the allowance does not result in a taxable bene t.

• Note that the equivalent UK allowance is only £5 per night.

4) Grace

• Only £8,000 of the relocation costs is exempt, and so the taxable bene t is
£3,000 (11,000 – 8,000).

5) Hillary

• The provision of a place in a workplace nursery does not give rise to a taxable
bene t.

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 6) June

• The use of a company gym does not give rise to a taxable bene t as the bene t
is available to all employees.

7) Kristin

• The provision of meals in a sta canteen does not give rise to a taxable bene t
as the bene t it available to all employees.

8) Larry

• Payments for home working are exempt up to £6 per week, so the allowance
does not result in a taxable bene t.

9) Marge

• A non-cash long-service award is not a taxable bene t if it is for a period of

service of at least 20 years, and the cost of the award does not exceed £50 per
year of service.

10) Nile

• The payment of medical costs of up to £500 does not result in a taxable bene t.

The exemption applies where medical treatment is provided to an employee to

assist them to return to work after a period of absence due to ill-health or injury.

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Syllabus B2h. Recognise the circumstances in which real time reporting late ling penalties will
be imposed on an employer and the amount of penalty which is charged.

RTI reporting

Employers must send income tax and NIC information to HMRC electronically every
time employees are paid, and make their PAYE payments electronically on the 22nd
of the month under the Real Time Information reporting system.

• There are penalties if submissions made during the tax year are made late,
though there is no penalty for the rst month in a tax year that submissions are
paid late.

• Thereafter a monthly late ling penalty of between £100 and £400 is charged
depending on the number of employees.

An additional penalty of 5% of the tax and NIC due may be charged where the
submission is more than 3 months late.

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 Syllabus: B3. Income from self-employment
Syllabus B3a. Basis of assessment for self employment income

The basis of assessment for self-employment income

A tax year runs from 6 April to 5 April.
The current tax year 2024/25 runs from 6 April 2024 to 5 April 2025.

Pro ts are taxed on a tax year basis. This means that trading pro ts from the
06/04/24 until 05/04/25 will be taxed in the tax year 2024/25.

Trading pro ts will have to be time apportioned if accounts are not made up to 5
April (or 31 March).

Example:
Anaya makes up her accounts to 30 June each year. Her trading pro ts are:
£
Year ended 30 June 2024 61,700
Year ended 30 June 2025 (forecast) 69,500

For the tax year 2024-25, Anaya will be assessed on pro ts for the period 6 April
2024 to 5 April 2025. The assessment is therefore £67,550 ((61,700 x 3/12) +
(69,500 x 9/12)).

Transition pro ts

The previous tax year (2023/24) was the transitional year from the old basis of
assessment to the tax year basis.

A sole trader or partner who did not prepare accounts to 5 April (or 31 March) might
have had higher pro ts for 2023/24 compared to if the old basis had continued to
apply. In these circumstances, the sole trader or partner was only assessed on the
lower pro ts calculated under the old basis.

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 The excess pro ts, called the transition pro ts, are taxed by spreading them over a
period of ve years starting with the tax year 2023/24. For example, the transitional
assessment for the tax year 2023/24 was £110,000, but the assessment would have
only been £60,000 if the old basis had continued to apply. The transition pro ts are
£50,000, with £10,000 (50,000/5) assessed for each of the tax years 2023/24 to
2027/28.

NOTE: You are not expected to calculate transition pro ts, but you do need to know
how a given amount of transition pro t is subject to tax during any of the tax years
2024/25 to 2027/28.

Transition pro ts are included in the income tax computation of a sole trader or
partner as a separate entry. They can impact on the availability of the personal
allowance.

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 Syllabus B3b. Badges of trade

Badges of trade

These are used to help di erentiate whether a person is trading or whether they
are selling their capital assets.

• The need to di erentiate between these 2 types of transactions arises

because an individual who is trading will be assessed to income tax and
national insurance contributions based on self employment.

• However, an individual who is making sales of their capital assets will be

assessed to capital gains tax.

Badges

1. Subject matter

– anything can be trading stock but some items are more likely to be so than
others.

For example, the purchase and resale of a substantial number of toilet rolls is
considered trading.

2. Length of period of ownership

– normally, trading stock is held for a short period of time.

For example an item that is held for less than 12 months will be considered
trading stock, but an item that is held for more than 12 months is likely to be
considered a capital asset.

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3. Frequency of similar operations

– the more often a deal takes place, the greater the assumption that it is a
disposal of trading stock.

For example if cars are bought and sold throughout the year, this will be
considered to be the trading of cars; however if there is a one time sale of one
car, then that is likely to be considered to be the sale of a capital asset.

4. Subsequent work

– change of character of an asset to make it more saleable is likely to be

indicative of trading.

For example, buying bulk marble for ooring and breaking it down into smaller
saleable units to use for individual oors, will be considered trading. Also,
advertising and making the item more marketable may be indicative of trading.

5. Circumstances

– sudden emergency, for example the urgent need of cash can negate the
presumption of trading.

For example selling a vintage car from a collection of vintage cars because of
the urgent need of cash will be considered to be the sale of capital assets.

This is because the motive is not to trade cars, it is to obtain cash quickly.

If the sale is to pay o a business loan then this would be considered to be

trading and subject to income tax on the pro t.

6. Motive

– intention of making a pro t is necessary for trading.

For example, selling cars at a loss just to get immediate cash will not be
considered trading, but waiting to sell cars at a price that will earn a pro t will
indicate trading.

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Illustration:

On 1 May, Tony was made redundant from his job as a marketing executive. Tony
decided to purchase a house for £180,000.

• Tony lived in the house as his main residence and whilst living there he
refurbished it at a cost of £27,700. The renovations were completed on 10
August.

After completing the refurbishment, he was o ered a new job and he immediately
put the house up for sale; and it was sold for £275,000 on 31 August.

• Tony had no other income or capital gains.

• Will this be considered to be trading income or a capital gain?

Solution:

Trading income or
Badge Reason
Capital Gain?

A house can be considered to be both a

Subject matter Trading + Capital
trading and capital asset.

Length of period of
Less than one year Trading
ownership

Frequency of similar
None before Capital
operations

Subsequent work Yes the house was refurbished Trading

Circumstance New job resulted in sale Capital

He earned a pro t, however this was

Motive not his motive, he sold due to the new Capital
job.

As there are 4 badges pointing towards this being a capital gain and only 3 pointing
towards this being trading income, the pro t made on sale will be considered to be
a capital gain.

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 Syllabus B3c. Allowable expenditure

Adjusting the accounting pro t

Allowable or Disallowable expenses?

Net Pro t (PBIT) is adjusted to arrive at Trading pro t

The main adjustments are to disallow for tax certain non-allowable expenses and to
exclude any non-trading income.

You must keep in mind that allowable expenses are usually expenses incurred
directly because of the business.

Personal expenses are not allowable.

The general rule is that expenditure not wholly and exclusively for the purpose of the
trade is not allowable

Net pro t X

ADD BACK: Disallowable expenses X

LESS: Income assessable elsewhere (X)

LESS: Non-taxable income (X)

LESS: Capital allowances (X)

Tax adjusted trading pro t X

Note:

When preparing this calculation, be careful to start with the NET pro t per accounts.

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Disallowable expenses

The following expenses are disallowed by a business.

Therefore, if they have been deducted to arrive at net pro t, they must be added
back.

For example, if the net pro t is £10,000 and a disallowed expenses (£1,000) has
been deducted, then tax adjusted pro t will be £10,000 + £1,000 = £11,000

• Capital expenditure including depreciation is not allowable

Note:
Repair to an asset is revenue expenditure and is allowable

Improvement to an asset is capital expenditure and is not allowable

For example, purchasing a building to carry out trade in is a capital expense

and disallowed, but repairing this building is revenue expense and allowed.

• Reliefs
- such as qualifying loan interest payments are not allowable as they are dealt
with as a deduction from total income.

For example, paying interest on a loan used to purchase inventory is known as

a qualifying loan interest, this is already deducted under a di erent heading in
the income tax computation, therefore it cannot be deducted again.

• Entertaining and gifts

Entertaining is disallowed, unless entertaining employees

For example, spending money to entertain suppliers of stock is disallowed.

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 • Subscriptions and donations

National charity donations are not allowable

Charitable donations (made under Gift Aid) these are not allowable as tax relief is
given by extending the tax bands when calculating income tax.

Political donations - these are not allowable

• Fines and penalties

Disallowed unless the ne is paid on behalf of an employee and incurred whilst

on business

For example, if the employee receives a parking ticket whilst delivering goods to
a customer, this is generally allowable by HMRC

A ne for poor health and safety would not be allowable

• The owner’s salary, or drawings or interest on capital invested in the

business are disallowed

For example, if the owner of the business pays himself 10% interest on the
capital that he has invested of £200,000 - this £20,000 interest is disallowed and
cannot be deducted.

• Interest paid on overdue tax is not deductible and interest received on

overpaid tax is not taxable

For example, if interest is payable of £100 due to the late payment of tax - this
is not allowed and cannot be deducted to arrive at taxable income.

• Irrecoverable Debts (Trade debt write o s & allowances)

These are allowable; the tax treatment follows the accounting treatment

However non trade write o s are not allowable and so the expense is added
back.

For example if an item of trading inventory was sold on credit, but the actual
cash never came from the customer, then this is an irrecoverable debt which is
an allowable expense.

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 For example a loan was made to an employee and then the employee left
without paying it back and it was written o , then this is an irrecoverable debt,
but it is disallowed because it is not a trading item.

Allowable expenses

If they have not been deducted to arrive at tax adjusted pro t, they must be.

For example if net pro t is £10,000 and there is an allowed expense of £1,000 that
has not been deducted, then the tax adjusted pro t will be £10,000 - £1,000 =
£9,000

However, If they are correctly deducted, you will indicate these expenses with 0 in
the exam, because these items do not require adjustment.

For example if net pro t is £10,000 and there is an allowed expense of £1,000 that
has been deducted, then the tax adjusted pro t will be £10,000 and you will
indicate the allowed expense with 0.

1. Entertaining and gifts

Gifts to employees are allowable

Gifts to customers are only allowable if

• they cost less than £50 per person per year, and

• the gift is not food, drink, tobacco or vouchers exchangeable for goods and
services

• the gift carries a conspicuous advertisement for the business.

For example as Christmas presents, a sole trader can give his customers pens
with the company logo printed on them as gifts, as long as they cost less than
£50 per customer.

2. Subscriptions and donations

Trade or professional association subscriptions are allowable

Charitable donation (Not made under Gift Aid)

• if it is wholly and exclusively for trading purposes (e.g promoting business’

name), and it is to a local charity then it is allowable

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 For example if a donation was made to a local charity and in return, at the
charity fundraiser, the business was shown as a sponsor/organiser, then this
would be an allowable expense.

3. Legal and professional charges

Allowable if connected with the trade and are not related to capital items
speci cally allowed by statute:

• costs of obtaining loan nance

• costs of renewing a short lease (50 years or less)

For example if a loan was taken out to purchase inventory for trading, the legal
costs associated with obtaining this loan and the interest cost of the loan are
considered to be allowable expenses.

4. Interest payable

Interest paid on borrowings for trading purposes is allowable on an accruals

basis therefore no adjustment is needed.

For example if a loan was taken out to purchase inventory for trading, the
interest cost of the loan are considered to be allowable expenses.

5. Premium paid for the grant of a lease

The premium itself is disallowed as is any amortisation of the premium.

The allowable amount per year is:

Premium - (2% x (n-1) x Premium) / n

n = number of years of the lease

This is shown in Topic Premiums granted for short leases

6. The private expenditure of the business owner

If the owner uses a car in the business and 20% of his mileage is private, then
only 80% of motor expenses are allowable.

However if the owner provides an employee with a car, and 20% of the mileage
is for private use by the employee, then the full amount of motor expenses is

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 allowable. (The employee is taxed on the private use under Employment
Income).

Private expenses example

If the owner uses his own 4 storey premises as his place to conduct trading and
incurs expenses of £1,000, but he also lives on one of the oors, then 1/4 of the
expenses have been used for private purposes and £250 will be disallowed and
£750 will be allowed.

7. Any salary paid to the family of the owner of the business must not be
excessive. Only salary at the commercial rate for the work done is allowable.

For example John ran his business as sole trader and employed his wife Mary
to work for him as a sales executive. Other sales executives are paid £750 per
week, but his wife was paid £1,000. Only £750 will be an allowable expense,
because the remaining £250 will be considered to be excessive.

8. If an owner removes goods from the business for his own use he must add back
the item as a sale at market value, unless the owner accounts for the cost of the
goods in the business accounts then they need only add back the lost pro t on
the item.

For example if the owner of a business takes goods from his store that cost him
£750 and would normally be sold for £1,000. He must either record the sale of
£1,000 and deduct cost of £750 - therefore increasing the pro t of his store by
£250.

Or, he can simply add £250 to the net pro t in his accounts.This would only work
if the owner has not included the purchase gure in the accounts.

Read the question carefully, for example, if the owner had included the item in
purchases, then the sale of £1,000 would need to be added to pro ts in order for
there to be an overall pro t of £250 left to tax.

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 9. Pre-trading expenditure

– allowable if it is expenditure incurred in the seven years before a business

commences to trade then it is treated as an expense incurred on the day the
business starts trading and follows the above rules.

This is shown in Topic Relief for pre-trading expenditure.

Illustration:

Sunny is self-employed running a retail shop.

Sunny’s statement of pro t or loss for the year is as follows:

£ £
Gross Pro t 140,880
Expenses:
Depreciation 4,760
Light and heat (Note 1) 1,525
Motor expenses (Note 2) 4,720
Professional fees (Note 3) 2,300
Rent and rates (Note 1) 3,900
Repairs and renewals (Note 4) 5,660
Sundry expenses (Note 5) 2,990
Wages and salaries (Note 6) 84,825
110,680
Net pro t 30,200

Notes

Note 1: Private accommodation

Sunny and his wife live in a at that is situated above the clothing shop.

Of the expenditure included in the statement of pro t or loss for light, heat, rent and
rates, 40% relates to the at.

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 Note 2: Motor expenses

During the year, Sunny drove a total of 12,000 miles, of which 9,000 were for private
journeys.

Note 3: Professional fees

Professional fees are as follows:

£
Accountancy - including £250 in respect of a capital gains tax 700
computation.
Legal fees in connection with the purchase of the clothing shop 1,200
Debt collection 400

Total 2300

Note 4: Repairs and renewals

The gure of £5,660 for repairs and renewals includes £2,200 for decorating the
clothing shop, and £1,050 for decorating the private at.

The building was in a usable state when it was purchased.

Note 5: Sundry expenses

The gure of £2,990 for sundry expenses, includes £640 for gifts to customers of
food hampers costing £40 each, £320 for gifts to customers of pens carrying an
advertisement for the clothing shop costing £1.60 each, £100 for a donation to a
national charity, and £40 for a donation to a local charity’s fete.

The fete’s programme carried a free advertisement for the clothing shop.

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 Note 6: Wages and salaries

The gure of £84,825 for wages and salaries includes the annual salary of £15,500
paid to Sunny’s wife.

She works in the clothing shop as a sales assistant.

The other sales assistants doing the same job are paid an annual salary of £11,000.

Note 7: Goods for own use

During the year, Sunny took clothes out of the shop for his personal use without
paying or accounting for them.

The cost of these clothes was £460, and they had a selling price of £650.

Note 8: Plant and machinery

The capital allowances available for the year are £13,060.

(In the actual examination you may be required to prepare a capital allowances
computation and work out this gure. - see Topic Capital allowances)

Calculate Sunny’s tax adjusted trading pro t.

Solution:

Tax adjusted trading pro t

£ £
Net proft as per accounts 30,200
Add: Items debited in P&L – not allowed for tax purposes

Depreciation 4,760
Light and heat (40% × £1,525) 610
Motor expenses (9,000/12,000 × £4,720) 3,540

Personal tax work 250

Legal fees re purchase of new shop (capital) 1,200
Rent and rates (40% × £3,900) 1,560
Decorating private at 1,050

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Gift of food hampers 640
Donation to national charity 100
Excessive remuneration to Sunny’s wife

(£15,500 – £11,000) 4,500

Own consumption (goods were included in purchases) 650
18,860

Adjusted trading profIt 49,060

Less: Capital allowances (given - note 8) (13,060)
Tax adjusted trading profIt 36,000

Note: Personal taxation expense has been added to the net pro t because personal
expenses are not allowable.

Note: The legal fees for the purchase amount for the shop has been added back
because this is not a trading revenue expense, this is a capital expense.

Note: The donation to the local charity is allowable but the donation to the national
charity is not allowable.

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 Syllabus B3d. Cash basis

Cash Basis

Previously, the cash basis could only be used where annual revenue was below
£150,000, but this restriction has been removed – so the cash basis can now be
used by all sole traders and partnerships.

The cash basis has also been made the default method for calculating trading
pro t.

In any question involving the calculation of trading pro t for a sole trader or
partnership, the cash basis is therefore applicable unless the question states
otherwise.

Although a sole trader or partnership can still use the accruals basis to calculate
trading pro t, they now have to elect if they wish to do so.

Calculation of pro t

1. Total cash receipts of the business plus the sale of capital items are included.

For example If the business sells trading stock worth £25,000 and sells a capital
asset worth £50,000, both of these will be included to give a sales gure of
£75,000.

2. Total cash expenses of the business including purchase of capital items used for
business are deducted.

For example If the business purchases trading stock worth £25,000 and
purchases a capital asset worth £50,000, both of these will be included to give a
purchase gure of £75,000.

3. There is an exception of the purchase of motor cars, these will not be included in
the calculation of pro t under the cash basis. (Vans purchased will be allowable).

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 For example, a motor car was purchased for £40,000. Even though this is a
capital item, this will not be included in the purchases of the businesses under
the cash basis.

Illustration:

Sales for the period were ￡61,000 of which ￡4,000 was still owed by business
customers at the end of the period.

Inventory on March 31, amounted to £1,800.

Purchases and expenses of the period (all allowable) amounted to ￡29,000 of

which ￡2,000 was still owed to suppliers at the end of the period.

• What is pro t according to the normal basis and cash basis?

Solution:

Normal Basis £

Revenues 61,000

Cost of sales (29,000 – 1,800) (27,200)

33,800

Cash Basis £

Receipts (61,000 – 4,000) 57,000

Payments (29,000 – 2,000) 27,000

30,000

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Understanding operation

The above calculation of pro t only includes cash item, therefore things such as:
receivables, payables, opening and closing inventory will be ignored.

The business will only pay income tax on its cash pro ts.

Simple proforma to use:

Cash sales received in the tax year x

Cash sales of plant and machinery in the tax year (not car) x

Less:

Cash purchase of inventories in the tax year (x)

Cash allowable expenses in the tax year (x)

Cash purchases of plant and machinery in the tax year (x)

Motor expenses (Authorised mileage allowance) (x)

Tax adjusted trading pro t

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 Motor expenses

A business can use HM Revenue and Customs (HMRC) approved mileage

allowances to calculate the deduction for business mileage.

This is:

1. For the rst 10,000 business miles – 45p/mile

2. For any business miles after 10,000 – 25p/mile

For example, the motor car that was purchased for £40,000, drove 15,000 business
miles.

The allowable deduction will be (10,000 miles * 0.45) + (5,000 miles *0.25) = £5,750

If approved mileage allowances are claimed, the actual running and capital costs of
owning a motor car are ignored – so no claim for capital allowances

If approved mileage allowances are not used, actual running costs and capital
allowances are claimed instead. The method to be used will be stated in the
question.

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 Illustration:

Barry commenced a new self employment business on 06/04/2024.

The following information relates to the year ended 05/04/2025:

1. Sales receipts of £81,000 with a further £750 owing on 05/04/2025.

2. Purchase of inventories of £20,000.

3. Closing inventories of £680 at 05/04/2025.

4. On 10/06/2024 Barry purchased a car with C02 emissions of 185g at a cost of

£20,000. Barry drove 12,000 business miles and 4,000 private miles. The total
motor expenses amounted in £3,600.

5. Ventilation system purchase cost £2,500.

6. Other expenses (allowable) cost £17,600 with a further £400 owed as a payable
at 05/04/2025.

Note: Under the cash basis, approved mileage allowances are used.

Calculate the tax adjusted trading pro t according to the accruals basis and the
cash basis.

Should Barry elect to enter into the accruals basis scheme?

Solution:

Accruals basis

Sales £81,750 W1
COS (£19,320) W2

Gross pro t £62,430

Capital allowances (£3,400) W5
Motor expenses (£2,700) W3

Other allowable expenses (£18,000) W4

Tax adjusted trading pro t £38,330

W1

Cash and credit sales calculation:

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 • £81,000 + £750 = £81,750

W2

Cost of sales calculation:

• Opening inventory + purchases – closing inventory.

0 + £20,000 - £680 = £19,320

W3

Motor running expense calculation:

• The motor running expense must be adjusted for business use only, as
private expenses are not allowable.

£3,600 * 12,000/16,000 = £2,700

W4

Other allowable expenses

• £17,600 + £400 = £18,000

W5

Capital allowance calculation:

• AIA £2,500 (ventilation system)

WDA £20,000 * 6% = £1,200 * 12,000/16,000 = £900 (car: CO2 >50g/km: special

rate pool)

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 The Cash Basis

Tax adjusted trading pro t (Cash basis)

Cash sales £81,000

Cash purchases (£20,000)

Gross pro t £61,000

Cash expenses (£17,600)

Cash capital expenditure (£2,500)

AMAP (£5,000) W1

Tax adjusted trading pro t £35,900

W1

AMAP

• 10,000 miles * 0.45 = £4,500

2,000 miles * 0.25 = £500

• Barry should NOT choose to elect into the accruals basis scheme as this
results in a higher taxable pro t for him

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 Syllabus B3e/E2b. Relief for pre-trading expenditure

When does trading commence?

Trading commences on the rst day on which a trader makes a sale.

However, the trader would have incurred expenditure before this date, for
example, advertising expenditure and/or rent paid in advance.

• This expenditure incurred before trading has commenced is known as “pre-

trading expenditure”.

Pre-trading expenditure will get tax relief by being treated as though it was
incurred on the rst day that a sale is made, if the following conditions are
satis ed.

Conditions for pre-trading expenditure to be allowable

• 1) It is incurred within 7 years of the commencement of the trade.

• 2) It is an allowable expense.

• For example, if goods were purchased for sale for the business 4 years
before the business had its rst sale; this purchase price will be deducted
from the rst pro ts also.

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 Illustration:

Manny made his rst sale in his packaging business on 04/05/2024.

Before this he incurred the material expenses of £3,000 on 31/12/2023.

• Will this expenditure be deducted from the sales revenue to arrive at tax
adjusted trading pro t?

Solution:

Yes, this expenditure will be deducted from his sales revenue to arrive at the tax
adjusted trading pro t.

It will be treated as though the expenditure was incurred on 04/05/2024.

This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.

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 Syllabus B3h/E2c. Capital allowances

Capital allowances

Plant and machinery(P&M) for capital allowances purposes

Capital Allowances (Tax depreciation) are deducted from Operating pro ts

• CA are given for P&M used in the business only

• CA are given for a period of account eg for a year ended 31/12/24, and are
deducted in the adjustment of pro ts calculation to reach the Trading Pro ts
gure

Plant is de ned as assets that perform an active function in the business

e.g. o ce furniture and equipment including moveable o ce partitioning.

Machinery will include motor vehicles and computers, including building

alterations necessary for the installation of plant and machinery.

Rates of allowance %

Main pool assets 18

Special Rate Pool assets 6

Capital allowances are now also available on integral features of a building including
lifts and escalators, electrical systems, heating and air cooling system.

Main pool

1. Computers, equipment, shelving, vans and lorries

2. Movable o ce partitioning

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3. Alterations to building incidental to the installation of plant and machinery

4. Tables and chairs

5. Fire regulation expenditure

Special Rate Pool

The following asset acquisitions should be allocated to the special rate pool:

1. Integral features of a building

– these include all major systems in a building.

For example, electrical, thermal, cooling systems.

2. Long life assets

These are assets, when new, with an expected economic working life of 25 years
or more when total expenditure based on a 12-month accounting period
exceeds £100,000

Writing down allowances

W.D.A.’s are given on main pool assets and special rate pool assets.

For main pool assets, the W.D.A. is 18% for a 12 month period

For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2024.

The writing down allowance on these assets will be £18,000 (£100,000*18%) in the
year ending 31/12/25.

Note if the above period was for 6 months, then the WDA for the main pool would
be £9,000 (£100,000*18%*6/12) in the period ending 31/12/25.

For special rate pool assets, the W.D.A. is 6% for a 12 month period.

For example Assets in the special rate pool had a brought forward value of
£100,000 at 06/04/24.

The writing down allowance on these assets will be £6,000 (£100,000 * 6%) in the
year ending 5/4/25.

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 Note if the above period was for 6 months, then the WDA for the main pool would
be £3,000 (£100,000 * 6% * 6/12) in the period ending 05/04/25.

First year allowances

These are given for new motor cars with zero CO2 emissions.

This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.

The F.Y.A. is not time apportioned for a period of less than 12 months.

For example, a car was purchased on 01/05/2024 for £100,000.

It had zero CO2 emissions.

The rst year allowance for this car will be £100,000 ( £100,000*100%).

Note if the above period was for 6 months, then the FYA would still be £100,000 - it
is not reduced for a period of less than 12 months.

Annual investment allowance

From 1 January 2019, the annual investment allowance is £1,000,000.

This is given to an individual for a 12 month period and is time apportioned if the
period is below 12 months.

Ideally, this A.I.A should be allocated to special rate pool assets purchased rst
because the allowances on these assets are only 6% per year, therefore tax relief on
these assets is received over a longer period.

Once allocated to special rate pool assets purchased in the tax year, then if any of
the allowance is remaining, it can be allocated to main pool assets purchased in the
year.

The A.I.A cannot be given to motor cars purchased in the tax year.

For example a business purchased equipment worth £1,300,000 in their year ended
31/03/2025.

The annual investment allowance is £1,000,000 (maximum available).

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For the remaining £300,000 (£1,300,000- £1,000,000), a writing down allowance will
be available.

As equipment is a main pool asset, the writing down allowance will be £54,000
(£300,000*18%).

The total capital allowances available will be AIA + WDA = £1,054,000 (£1,000,000
+ £54,000)

Note if the above purchase was made in a 6 months period, then the AIA would be
(£1,000,000*6/12) = £500,000 + WDA ((£1,300,000 - 500,000)*18%*6/12) = £72,000.
This would total to £572,000 of capital allowances for the 6 month period.

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 Illustration:

Buzzy Ltd. in the year ended 05/04/2025 made the following transactions.
Date Item Price

01/05/2024 Ventilation system and lift for his freehold o ce £1,278,000

building
26/06/2024 Machinery purchased and alterations made to £29,300
o ce building to install the machinery

08/08/2024 Computers £22,900

The tax written down value on the main pool was £87,800 on 06/04/2024.

What are Buzzy Ltd. capital allowances?

Solution:

Special Capital
Particular AIA Main pool
rate pool allowances
Tax written down value
£87,800
brought forward
Additions:
Ventilation system and
£1,278,000
freehold o ce building
AIA (£1,000,000) £278,000 £1,000,000
Machinery purchased and
£29,300
alterations
Computers £22,900
Total £140,000 £278,000
WDA 18%/6% (£25,200) (£16,680) £41,880
Tax written down value
£114,800 £261,320 £1,041,880
carried foward

Notice how the AIA was rst allocated to special rate pool assets.

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The capital allowances are £1,041,880.

This is the total of:

WDA 18% on the main pool of £25,200
+
WDA 6% on the special pool of £16,680
+
AIA of £1,000,000
= £1,041,880

Illustration:

Shivani commenced trading on 1 July 2024 and prepared accounts to 31 December

2024 thereafter.

Shivani made the following acquisitions of main pool assets:

Accounting Period to 31 December 2024 £

1 July 2024 Plant 70,000

20 October 2024 Computer equipment 5,80,000

Accounting Year ended 31 December 2025

19 October 2025 Machinery 3,00,000

What capital allowances will be allowed for both periods?

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Solution:

Capital Allowance Computations

6 month period to 31 December Main Allowances

2024 Pool
Additions (AIA):
1 July 2024 Plant 70,000
20 October 2024 Computers 580,000

650,000
AIA (max 6/12 x 1,000,000) (500,000) 150,000 500,000
WDA (max 6/12 x 18% x 150,000) (13,500) 13,500

Total Allowances 513,500

Tax Written Down Value (TWDV) c/f 136,500

Year Ended 31 December 2025

TWDV b/f 136,500
Additions (AIA)
19 October 2025 300,000

AIA (300,000) 300,000

WDA (18%) (24,570) 24,570
Total Allowances 324,570

TWDV c/f 111,930

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Assets with private use

A company

Companies do not have assets used privately.

This is because all of the people who work in the company are considered to be
employees of the company.

Therefore, the capital allowances given are not reduced by the % of private usage
by an employee of a company.

A Sole trader

If an asset is used privately by the owner of the business, the capital allowance
given must be reduced by the % of private usage.

If an asset is used privately by an employee of the business, the capital

allowance given is not reduced by the % of private usage.

Illustration (a sole trader)

Mia has been in a business as a sole trader, preparing accounts to 31 March.

On 1 November, she bought computer for £3,000 which she uses 70% in her
business and 30% privately.

She has already used the AIA in this year.

Calculate the capital allowances.

Solution:
WDA = £3,000 x 18% = £540
Capital Allowances (business use only) £540 x 70% = £378

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Illustration (a company)
Cow Ltd. is a trading company, preparing accounts to 31 March.

On 1 November, the company bought computer for £3,000 which is used by the
sales manager 30% privately.

Cow Ltd. has already used the AIA in this year.

Calculate the capital allowances.

Solution:
WDA £3,000 x 18% = £540

Note: The private use of the computer by the employee is not relevant for capital
allowance purposes.

No adjustment is ever made to a company's capital allowances to re ect the private

use of an asset.

Compute capital allowances for motor cars

The F.Y.A is given to new motor cars purchased that have zero CO2 emissions.

For cars with a CO2 emission less than or equal to 50g, an 18% W.D.A. is given,
therefore these are considered to be main pool assets.

For cars with a CO2 emission of more than 50g, an 6% W.D.A. is given, therefore
these are considered to be special rate pool assets.

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Illustration (a Company)

Cow Ltd.:

06/04/2024 Tax written down value on main pool of £16,800

Purchase of car for £10,600. The car had CO2 emissions of 46g/
25/06/2024
km.
Purchase of car for £18,000. The car had CO2 emissions of
16/02/2025
142g/km.

14/03/2025 Purchase of car for £22,000. The car had zero CO2 emissions.

What are Cow Ltd. capital allowances?

Solution:

Special
Main Capital
Particulars F.Y.A. rate
Pool allowances
pool

Tax written down

£16,800
value brought forward

Additions:

Zero CO2 car £22,000 (£22,000) £22,000

Car 46g/km £10,600 £10,600

Car 142g/km £18,000 £18,000

Total (£22,000) £27,400 £18,000

WDA (18%/6%) (£4,932) (£1,080) £6,012

Tax written down

22,468 16,920
value carried forward

Total capital allowances for the year £28,012 (£22,000 + £6,012)

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 Illustration (ANNA - a Soletrader )

06/04/2024 Tax written down value on main pool of £16,800

Purchase of car for £10,600.

The car had CO2 emissions of 46g/km.
25/06/2024
This car is 60% privately used by Anna’s husband who is an
employee of the business.
Purchase of car for £18,000.
16/02/2025 The car had CO2 emissions of 142g/km.
This car is 30% used privately by Anna.
Purchase of car for £22,000.
14/03/2025 The car had zero CO2 emissions.
This car is 25% privately used by Anna’s assistant.

What are Anna’s capital allowances?

Solution:

Capital
Main Special
Particulars F.Y.A. allowan
Pool rate pool
ces

Tax written down

£16,800
value brought forward

Additions:

Zero CO2 car £22,000 (£22,000) £22,000

Car 46g/km £10,600 £10,600

Car 142g/km £18,000 £18,000

Total (£22,000) 27,400 £18,000

(£1,080) *
70%
business £5,688
WDA (18%/6%) (£4,932)
use = (W1)
Capital
allowance

Tax written down

22,468 £16,920
value carried forward

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W1:
The capital allowance is reduced by % of private usage
£4,932 + (£1,080 * 70%) = £5,688

W2:
The tax written down value carried forward is calculated using the entire W.D.A.
£18,000 - £1,080 = £16,920

Total capital allowances for the year £27,688 (£22,000 + £5,688)

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 Disposal of the assets

Use LOWER OF

1. Proceeds

2. Original cost

When an item of plant or machinery is sold - the lower of the sale proceeds received
or the original cost of the asset is deducted from the written down value of the
relevant pool.

For example, if the written down value is 100 and sale proceeds received are
120 but the original cost of the asset is 110, then 110 will be deducted from the
pool to give a balancing charge of 10.

The di erence between proceeds and original cost will be treated as a capital
gain.

Compute balancing allowances and balancing charges

In the nal year of trading, the A.I.A., W.D.A., F.Y.A. are not given.

Instead, balancing allowances and balancing charges are computed on each pool.

Balancing adjustments on the pools can only occur on cessation of trade.

A balancing allowance will be deducted from trading pro t to nd tax adjusted

trading pro t and a balancing charge will be added to trading pro t to nd tax
adjusted trading pro t.

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Illustration:

Karen Ltd. prepares accounts to 05/04.

The company ceased to trade on 05/04/2025 on which all of its plant and
machinery was sold for £8,000.

The written down value on its main pool at 06/04/2024 was £11,000.

The company purchased machinery for £4,000 during the year.

Solution:

Particulars Main pool Capital allowances

TWDV b/f £11,000
Additions £4,000
Total £15,000
Disposals (£8,000)
Balancing allowance £7,000 £7,000

Karen Ltd.’s balancing allowance in her nal year of trading is £7,000.

Structural and Buildings Allowance

The SBA is a new type of capital allowance available when a building (or a structure)
has been constructed / purchased for use in the trade. For example, o ces, retail
and wholesale premises, factories and warehouses all qualify for the SBA.

This allowance is also available if an unused building/structure has been renovated

for use in the trade.

The rate of the allowance is 3% per annum and is given for a period of 33 years and
4 months.

To note about the SBA:

- The value of land does not qualify for the SBA

- Expenditure which quali es as plant and machinery (and therefore will get the AIA)
cannot also qualify for the SBA and vice versa.

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 - The SBA can only be claimed from when the building / structure is brought into
use in the trade. This means that the SBA will be time apportioned for the period
when it is rst brought into use, this is unlike capital allowances for plant and
machinery which are given the full allowance in the period of purchase.

- A separate SBA is given for each building / structure

- When the building / structure is sold, this will not result in a balancing allowance or
balancing charge. For the seller, he allowances already given at the date of sale
will be added to the sale proceeds when calculating the chargeable gain / capital
loss for capital gains tax. For the buyer, the 3% p.a. will continue to be given for
the period remaining out of the 33 years and 4 months.

Illustration

Anaya Ltd prepares accounts to 31/3/2025.

On 1/7/2024 a newly constructed factory was purchased from a builder for

£500,000 (including land cost of £130,000).

The factory was brought into use on 1/9/2024.

What is the SBA available on this factory?

Solution

Purchase price £500,000

Less land cost (£130,000)

Qualifying expenditure for SBA £370,000

SBA £370,000 x 3% x 7/12 = £6,475

The allowance will be given from September 2024 (date it was brought into use).

Illustration

Anaya Ltd sold the factory above on 31/3/2025 for £600,000.

What will the SBA be for the year ended 31/3/2026 for the buyer?

What will the capital gain be on the sale for Anaya Ltd?

Solution

The SBA will be given normally for the year ended 31/3/2026 to the buyer:

£370,000 x 3% = £11,100

The capital gain on the sale for Anaya Ltd:

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 Sale proceeds £600,000 + SBA £6,475

= £606,475

Less cost (£500,000)

Capital gain £106,475

Recognise the treatment of short life assets

Short life assets are main pool assets that have an expected life of 8 years or less.

A de-pooling election can be made so that the asset gets its own W.D.A.’s and on
sale of the asset, a balancing allowance or balancing charge can arise.

The bene t of this election is that a balancing adjustment will arise within 8 years,
which would not have arisen, if this de-pooling did not take place.

If the asset is not sold within the 8 years of acquiring the asset, then the written
down value is added back to the main pool.

This happens on the 8th anniversary of the end of the accounting period in which
the asset was acquired.

Illustration:

Aadi prepares accounts to 05/04 each year.

At 06/04/2024 the WDV of the main pool was £14,000.

On 01/07/2024 Aadi purchased machinery for £1,020,000.

On 01/09/2024 Aadi purchased a printer for £8,000 and made a short life asset
election.

On 01/07/2025, the printer was sold for £4,000.

Calculate the capital allowances for the two years ending 05/04/2026

Solution:

Year ended
05/04/2025

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 Particulars AIA Main Short Capital
pool life allowances
asset

Tax written down £14,000

value brought
forward

Additions:

Machinery £1,020,000

AIA (£1,000,000) £20,000

Printer £8,000

Total £34,000 £8,000 £1,000,000

WDA 18% (£6,120) (£1,440) £7,560

Tax written down £27,880 £6,560 £1,007,560

value carried
forward

Year ended 05/04/2026

Particulars Main Short Capital

pool life allowances
asset

Tax written down value brought £27,880 £6,560

forward

Disposal proceeds (£4,000)

Balancing allowance £2,560 £2,560

WDA 18% (£5,018) £5,018

Tax written down value carried £22,862 Nil £7,578

forward

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Assets on hire purchase

Any asset (including a car) bought on hire purchase (HP) is treated as if purchased
outright for the cash price.
• Therefore the buyer normally obtains capital allowances on the cash price when
the agreement begins.
• He may write o the nance charge as a trade expense over the term of the HP
contract.
Long term leases (those with a term of ve or more years) are treated in the same
way as HP.

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 Syllabus B3i. Relief for trading losses

Relief for trading losses - for individuals

Trading losses can be:

1. Carried forward against the Trading income of the same trade of future
years

2. Relieved against Current year total income plus capital gains

3. Carried back against 12 months of total income plus capital gains

1) Trading losses carried forward against the Trading income of future years

Illustration:

Peter had a Trading loss of £50,000

Next year, Peter made the following income:

Trading income £20,000

Property income £10,000

Interest income (gross) £5,000

How can the trading loss be carried forward?

Trading loss of (£50,000) will be relieved against the trading income generated next
year.

Trading income £20,000

Less c/f trading loss (£20,000)

Trading income Nil

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Property income £10,000
Interest income (gross) £5,000

Total income £15,000

Loss memo:
Trading loss (£50,000)
c/f loss relief £20,000

Loss to be carried forward in the future (£30,000)

2) Trading losses relieved against Current year total income plus capital gains

Trading losses can be relieved against the total income of the current year and the
total income of the previous 12 months.

If the total income of the year has been used, then the chargeable gains of that year
can also be used to relieve the loss remaining.

Total income consists of:

1. Trading income

2. Property income

3. Interest income

4. Employment income

Other Income

is any income other than Trading income.

For example:

1. Property income

2. Interest income

3. Employment income

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Other Income - maximum limit

For using the loss against other income (not including trading income), there is a
maximum limit which applies, this is the greater of £50,000 or 25% of total
income (including trading income).

For example:

if you have a trading loss of £300,000 and employment income (other income) is
£250,000, the amount that can be relieved is the greater of £50,000 or (25% x
£250,000) = £62,500.

Therefore, the amount of loss that would be relieved against employment income
that year is £62,500.

Note, this applies to the carryback claim against total income also.

However, the previous year's trading pro t can be entirely used, it only applies to
other income.

For example:

This year, you have a trading loss of £300,000 and no other income.

Last year, there was a trading pro t of £10,000 and other income for the year was
£250,000, the amount that can be relieved is the greater of £50,000 or (25%*
£260,000) = £65,000 PLUS £10,000 from trading pro t, therefore £75,000 of loss
can be relieved.

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 Illustration
This year, John had a trading loss of (£100,000).

Last year, He had a trading income of £2,000 and other income of £300,000.

How much of his trading loss can he relieve using the carry back total income
claim?

Solution
Trading loss (£100,000)

Trading pro t £2,000

Other income Restriction

The higher of:

25% x £302,000 = £75,500 0r £50,000

Therefore, he can relieve £2,000 + £75,500 = £77,500 of his trading loss using the
carry back total income claim.

Chargeable gains of the year

Once the total income of a year has been relieved against, and there is still
trading loss remaining, then the loss can be used against the chargeable gains
of the year.

The amount of trade loss available to o set against chargeable gains is the lower
of:

- trade loss left

- current year capital gains less current year capital losses less the full
amount of capital losses brought forward.

Chargeable gains do not have to be utilised in the loss claim but if the taxpayer
chooses to use the trade loss against capital gains of the same year then the
loss is treated as a current year capital loss and so it cannot be restricted to
preserve the annual exemption.

The only times you can restrict a capital loss to preserve the annual exemption
are on capital losses b/f and capital losses in the year of death.

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 For example Kathy had a capital gain of £44,000. She has a capital loss brought
forward of £4,000 and has trading losses available of £24,000 - after a claim
against the total income.

Gain 44,000

Current year trade loss (24,000)

Annual exemption (3,000)

Chargeable gain 17,000

Loss b/f (4,000)

Taxable gain 13,000

Illustration:
Jane had a trading loss of £100,000 and uses £45,000 against her current year total
income claim.

She had chargeable gains of £50,000 and a loss b/f of £1,000. She wants to use the
loss against chargeable gains.

How much of the trading loss will she relieve against the chargeable gains?

Solution:

Trade loss available: lower of

- trade loss left £55,000 (100,000 - 45,000)

- capital gain less losses cy and bf £49,000 (50,000 - 1,000)

Therefore £49,000 is available to o set against current year gains.

Gain 50,000

Current year trade loss (49,000)

Chargeable gain 1,000

Annual exemption (3,000)

Loss b/f (NIL*)

Taxable gain NIL

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 *the loss b.f of £1,000 does not need to be used this year as the gain that is left after
using the cy trade loss is covered by the annual exemption. The £1,000 capital loss and
the remaining trade loss of £6,000 (55,000-49,000) will be carried forward.

Illustration:

Peter made the following income for the year ended 05/04/2024:

Trading income £40,000

Property income £20,000

Interest income (gross) £5,000

Capital gains £5,000

Peter made the following income for the year ended 05/04/2025:

Trading income (£75,000)

Property income £20,000

Interest income (gross) £5,000

Capital gains £5,000

Peter made the following income for the year ended 05/04/2026:

Trading income £20,000

Property income £20,000

Interest income (gross) £5,000

How can the trading loss of the year ended 05/04/2025 be relieved against
the current year total income and carried back against total income for 12
months?

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 Solution:

£65,000 of the trading loss of (£75,000) incurred in the year ended 05/04/2025
will be carried back against the total income generated in 05/04/2024 and Peter
will receive a refund of any tax paid for 2023/24. This wastes the personal
allowance unfortunately.

The remaining loss of £10,000 will be used against total income of the current
year 2024/2025. This leaves total income of £15,000 of which will be mostly
covered by the personal allowance.

It would not be advisable to use the £10,000 remaining loss against the gains of
£5,000 in either year as most of the gains would be covered by the annual
exemptions.

In the year ended 05/04/2025

Trading income Nil

Property income £20,000

Interest income £5,000

Trading income total income claim (£10,000)

Total income £ 15,000

The personal allowance has not been wasted.

In the year ended 05/04/2025 and 05/04/24

Capital gains £5,000

Trading loss relief Nil

Annual exemption (£3,000)

Taxable gains 2,000

Note - assumes the PA and AE are the 2024/25 rates

In the year ended 05/04/2024

The carry back total income claim for 12 months:

Trading income £40,000

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Property income £20,000

Interest income £5,000

Trading loss relief carry back claim (£65,000)

Total income £Nil

The personal allowance is wasted in 23/24.

Loss memo:

Trading loss of 05/04/2025 (£75,000)

Carry back total income claim £65,000

Current year total income claim £10,000

Loss to be carried forward Nil

Note carefully that it is a carry back claim against total income for 12 months.

Therefore, if there is a shorter chargeable accounting period before the loss making
year, then the claim extends back for a full 12 months.

Opening years’ relief

If a loss is made within the rst 4 tax years of trading (after applying the opening
year rules) …

… then the loss can be relieved against total income of the individual for the
previous 3 tax years on a FIFO basis.

The loss cannot be restricted to save personal allowances.

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 Illustration:

Mary started trading in 2021/22. She had never worked before she opened her
business.

She made the following trading pro ts/losses in the following tax years.

2021/22 Trading pro t £2,000

2022/23 Trading pro t £17,000
2023/24 Trading pro t of £12,000
2024/25 Trading loss of (£10,000)

How can Mary apply the opening years relief for trading losses?

Solution:

Trading loss of (£10,000) in 2024/25

Relieve rst against:

2021/22 Trading pro t £2,000
2024/25 Trading loss (£2,000)

Trading pro t reduced to £0 in 2021/22

Trading loss of (£8,000) in 2024/25 remaining

Relieve second against:

2022/23 Trading pro t of £17,000

2024/25 Trading loss (£8,000)

Trading pro t reduced to £9,000 in 2022/23

2024/25 loss to carry forward - £nil

Note
That the opening years relief has to be applied on a FIFO basis, therefore the
personal allowances for 21/22 was wasted.

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 Terminal loss relief

If a trading loss occurs in the nal 12 months of trading, then this trading loss can
be o set against any trading pro ts of the nal tax year of trade and then carried
back for 3 tax years against the trading pro ts of the company on a LIFO basis.

Once again, the loss cannot be restricted to save any personal allowances.

Additionally, for the years in which tax has already been paid, this will result in a
repayment of tax.

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Illustration:

• Mr. Unlucky, ceased trading on 31/03/2025 and incurred a loss of (£13,500).

• The trading pro ts for the year ended 31/03/2024 were £22,500.

• What is the terminal loss that Mr. Unlucky can claim terminal loss relief on?

Solution:

Terminal loss is the loss in the nal 12 months of trading which is 13,500.

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 Illustration:

How would Mr. Unlucky obtain terminal loss relief for this loss?

Solution:

He had pro ts of £22,500 in the year ended 31/03/2024.

• Terminal loss relief states that the terminal loss must be relieved against
trading pro ts from the same trade of the last 3 tax years on a LIFO basis.

Therefore,

Trading pro ts £22,500

Terminal loss relief (£13,500)

Trading pro ts £9,000

The factors that will in uence the choice of loss relief claims are:

1. Loss relief is as soon as possible.

2. Loss relief is obtained at the highest tax rate.

3. Personal allowances are saved when the claims are made

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 Syllabus B3j. Partnerships and limited liability partnerships

Partnerships and limited liability partnerships

What is a partnership?

A partnership is a single trading entity, but for taxation purposes each partner is
treated individually.

Allocation of the trading pro t or trading loss

1. The trading income or trading loss is divided between the partners according to
their pro t sharing arrangements.

2. Partners may rstly be entitled to salaries and interest on capital.

The balance of any trading pro t (or loss) will then be allocated in the pro t sharing
ratio (PSR).

Illustration 1

Peter has been in partnership with Paul for many years.

The partnership's tax adjusted trading pro t is £120,000.

The partners share pro ts equally.

• Required:

What will Peter's and Paul's share of tax adjusted trading pro t be?

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 Solution:

£120,000 x 1/2 = £60,000

• Peter and Paul will both have £60,000 pro t.

A change in the pro t sharing agreement

If the pro t sharing agreement is changed during a period of account, the pro t
must be time apportioned before allocation under the di erent agreements.

Illustration 2

Peter has been in partnership with Paul and Claire.

Paul resigned as a partner on 1 January 2025.

The partnership's tax adjusted trading pro t for the year ended 5 April 2025 is
£120,000.

The partners have always shared pro ts equally, and continued to do so after Paul
resigned.

• Required:

What will Peter's share of tax adjusted trading pro t be?

What will Paul's share of tax adjusted trading pro t be?

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 Solution:

Tax adjusted trading pro t for Paul:

6/4/2024 - 31/12/2024

£120,000 x 9/12 x 1/3 = £30,000

Tax adjusted trading pro t for Paul £30,000

• Tax adjusted trading pro t for Peter:

6/4/2024 - 31/12/2024

£120,000 x 9/12 x 1/3 = £30,000

• 1/1/2025 - 5/4/2025

£120,000 x 3/12 x 1/2 = £15,000

• £30,000 + £15,000 = £45,000 pro t for Peter

Illustration 3

Canda and Panda are in partnership.

The trading income was £18,000

Pro ts are shared between Canda and Panda in this ratio 3:2, after paying salary of
£3,000 to Canda.

Calculate Canda’s share of residual trading pro ts.

Solution:

£18,000 - £3,000 = £15,000*3/5 = £9,000

If the question had asked for her total pro t share then she would have been
entitled to her salary of £3,000 plus the residual pro t share of £9,000, giving a total
income from the partnership of £12,000.

Illustration 4

Doug and Rob are in partnership.

The trading income for the year ended 31 March 2025 was £18,000

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 • Up to 31 December 2024 pro ts were shared between Doug and Rob 3:2, after
paying salaries of £3,000 and £2,000 per annum.

• From 1 January 2025 pro ts were shared 2:1 after paying salaries of £6,000 and
£4,000 per annum.

• Required:

Show the allocation of trading pro ts for the Accounting Period ended 31 March
2025.

Solution:

Total Doug Rob

£ £ £

1/4/2024 to 31/12/2024

(Income £18,000 × 9⁄12 =

13,500)

5,000 x 9/12 = 3,000 x 9/12 2,000 x 9/12

Salaries (9/12)
3,750 = 2,250 = 1,500

13,500 - 3,750 9,750 x 3/5 = 9,750 x 2/5 =

Pro t shared (3:2)
= 9,750 5,850 3,900

Pro t + salary 13,500 8,100 5,400

1/1/2025 to 31/3/25

(Income £18,000 × 3/12 =

4,500

Salaries (3/12) 2,500 1,500 1,000

Pro t shared (2:1) 2,000 1,333 667

Pro t + Salary 4,500 2,833 1,667

Total allocation 18,000 10,933 7,067

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Partnership capital allowances

1. Capital allowances are deducted as an expense in calculating trading pro t.

2. If assets are used privately, the business proportion is included in the

partnership’s capital allowances computation.

Illustration 5

Peter has been in partnership with Paul.

The partnership's tax adjusted trading pro t is £120,000. this gure is before taking
account of capital allowances.

Capital allowances for the period are £20,000.

The partners share pro ts equally.

• Required:

What will Peter's and Paul's share of tax adjusted trading pro t be?

Solution:

£120,000 - £20,000 = £100,000

£100,000 x 1/2 = £50,000

• Peter and Paul will both have £50,000 pro t.

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 Basis of assessment
1. The basis of assessment rules are the same as for a sole trader.

2. The pro t is allocated between the partners for accounting periods and then
the assessment rules are applied. Just like for a sole trader, a question
involving calculation of the assessable pro ts will always have an accounting
period ending on the 31/03 or 05/04.

3. Each partner is e ectively taxed as a sole trader on his/her share of the

adjusted trading pro t

4. When a new partner joins a partnership part way through the year, allocation
of pro ts is split between the two periods.

5. Similarly, when an old partner leaves a partnership part way through the year,
allocation of pro ts is split between the two periods.

As long as there is at least one partner common to the business before and
after the change, the partnership continues.

Illustration 6

Ann and Beryl have been in partnership since 6 April 2022 making up their accounts
to 5 April each year. On 6 April 2024 Clair joins the partnership.
The partnership’s trading pro t is as follows:

Year ended 5 April 2023 12,000

Year ended 5 April 2024 14,000

Year ended 5 April 2025 24,000

Pro ts are shared equally.

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 1) Show the amounts assessed on the individual partners for all relevant tax
years of assessment.

Pro ts will be allocated between

the partners and assessed as
follows:

Total Ann Beryl Clair

£ £ £

y/e 05/04/2023 (2022/23) 12,000 6,000 6,000 -

y/e 05/04/2024 (2023/24) 14,000 7,000 7,000 -

y/e 05/04/2025 (2024/25) 24,000 8,000 8,000 8,000

Partnership losses

1. Losses are allocated between partners in the same way as pro ts.

2. Loss relief claims available are the same as for sole traders.

3. A partner joining the partnership may claim under opening years loss relief, for
losses in the rst four tax years of his membership of the partnership.

This relief is not available to existing partners.

4. A partner leaving a partnership may claim under terminal loss relief. This relief is
not available to partners remaining in the partnership.

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Illustration 7

John, James and Paul are in partnership making up their accounts to 5 April.

During the year, Paul left the partnership and George joined in his place.

The partnership made a trading loss of £40,000 during the year.

• Required:

State the loss relief claims that will be available to the partners.

Solution:

Paul will be entitled to terminal loss relief since he has actually ceased trading.

George will be entitled to claim opening years relief since he has actually
commenced trading.

John and James will not be entitled to either of the above reliefs.

All the partners will be entitled to relief against total income of the current or
previous tax year and against gains.

All the partners except Paul will be entitled to carry forward relief.

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 Syllabus B4. Property and investment income

Syllabus B4a. Computation of property business pro ts

Computation of property business pro ts

How to pay income tax on property business pro ts?

What does property business pro t consist of?

Income from land and buildings in the UK will be liable to assessment under
property income.

This includes: rent received/receivable under any lease or tenancy agreement and
the premium received on the grant of a short lease

Property income is assessed in the following manner:

Rent received / receivable in the tax year x

Plus: premiums received in the tax year x

Less: capital element of the premium received in the tax year (x)

Less allowable property expenses paid / payable (x)

Property business pro ts / losses x / (x)

From 2019/20 the default method for the calculation of property income is the cash
basis - rental income received less allowable expenses paid. This gives automatic
bad debt relief as rental income is not taxed unless it is received.

Rental income and allowable expenses will be assessed on an accruals basis

when:

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• Property income receipts for the tax year exceed £150,000

• The property business is carried on by a company

• An election is made for the accruals basis to apply (elect by 31 January 2027 for
2024/25 tax year

Under the accruals method, whatever income is allocated to the tax year and
whatever expenses are allocated to the tax year will be taxable in that tax year.

When this income is actually received in hand or when the expenditure is actually
paid out does not matter.

For premiums received due to grant of a short lease, the entire income element of
the premium will be assessed in the tax year that it is received.

This calculation will be illustrated in Topic Premiums granted for short leases.

NOTE: in your exam you should assume that the cash basis applies unless told
otherwise.

Illustration:

Penny owned two properties which were let out unfurnished until both properties
were sold on 31 December 2024.

The following information is available in respect of the two properties:

Property one Property two

Rent received 3,500 7,300

Allowable revenue expenditure (4,800) (2,500)

What is her property business pro t?

Solution:

Revenue 3500 + 7300 = 10,800

Allowable cost (4,800 + 2500) = (7,300)

Property business pro t 3,500

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Illustration:

Anne bought a property and rented it out for the rst time on 01/07/2024.

The rent of £1,000 is paid in arrears on the last day of each month. The payment for
March 2025 was not received until 10 April 2025.

She paid allowable expenses of £300 in November 2024 and £500 in May 2025 for
repairs that were completed in March 2025.

• Required:

Calculate the property income, using (i) the cash basis and (ii) the accruals basis.

Solution:

(i) cash basis (ii) accruals basis

8 x £1,000 = 9 x £1,000 = £9,000

£8,000 (rent is accrued for
Rent received / receivable (1 July -
(March rent was the whole period
5 April)
not received until from 1 July 2024 to
after 5 April 2025). 5 April 2025).

Allowable expenses (£300) (£300)

(£500)

Property income assessable £7,700 £8,200

Note

On the cash basis the March 2025 rent was not received before the tax year end
and so it is not taxed in 2024/25. The expense of £500 was not paid until after the
tax year end and so it is excluded from the calculation. Both of these items will be
dealt with in the tax year 2025/26.

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 Allowable expenses:
These are expenses incurred by the landlord and reduce the taxable property
business pro ts.

To be allowable, an expense must have been incurred wholly and exclusively in

connection with the business, for example:

• Insurance

• Agent’s fees

• Other management expenses

e.g. cleaning expenses

• Repairs

Capital expenditure is NOT allowed, therefore repairs are allowable, however

capital expenditure to improve the property are not allowed.

This di erentiation can be made simpler by asking yourself whether the

expenditure improved the income earning capacity of the property, if it did, it is
likely to be capital expenditure.

Capital allowances may be claimed for expenditure on plant and machinery used
for the maintenance of the property.

• Interest on a loan to purchase a non residential property

• Interest on a loan to purchase a residential property (100% restriction)

• Decorating

• Impairment losses

e.g. A tenant left owing 1 month’s rent which you were unable to recover.

• Advertising costs

• Cost of replacing windows, doors and boilers

• Motor expenses

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 If a landlord uses their own vehicle to travel to and from the property they can either
deduct the actual motoring costs or use the approved mileage allowance which we
saw in the Topic The authorised mileage allowances.

• Replacement furniture allowance (this replaces the old wear and tear
allowance and is available for all properties (except furnished holiday lets)
whether fully or part furnished)

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

Furnishings include items such as beds, televisions, fridges and freezers,

carpets and oor coverings, curtains, and crockery and cutlery.

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

The amount of relief is reduced by any proceeds from selling the old asset which
has been replaced (Replacement cost - sale proceeds = replacement
furniture relief).

Also, relief is not given for any cost which represents an improvement, for
example, if a washing machine is replaced with a washer-dryer, only the cost of
an equivalent washing machine quali es for relief.

Example, during April 2024, Fred furnished a residential property with a cooker
costing £440, a washing machine costing £330, and oor coverings costing
£2,200.

The cooker was sold during December 2024 for £110, and replaced with a
similar model costing £460.

The washing machine was scrapped, with nil proceeds, during March 2025.

It was replaced by a washer-dryer costing £670, although the cost of a similar

washing machine would have been £360.

What would the replacement furniture allowance be?

Replacement furniture relief:

Cooker (£460 – £110) = (£350)
Washing machine = (£360)

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 Note:

No relief is available for the initial cost of the cooker, washing machine and oor
coverings.

Relief for the replacement cooker is reduced by the proceeds of £110 from the
sale of the original cooker.

No relief is given for that part of the cost of the washer-dryer which represents
an improvement over the original washing machine.

Illustration - Impairment losses under the accruals basis

Howard had an unfurnished property and charged rent of £800 per month payable
at the end of each month.

The property was let from 06/04/2024 - 31/12/2024 when the tenant left owing 1
month’s rent which Howard was unable to recover. Allowable expenses paid in the
period amounted to £500.

What is Howard’s property income assessable for 2024/25 using the accruals
basis?

Solution:

Rent receivable 9 months * £800 = £7,200

Impairment losses 1 month * £800 = (£800)

Allowable expenses = (£500)

Property income assessable = £5,900

Note: impairment losses do not exist under the cash basis as property income
is based on rental income actually received.

Pre-trading expenditure

Relief is available for revenue expenditure incurred before letting commenced.

• This means that it must be incurred within 7 years of renting

• It will be treated as though it is incurred on day 1 of renting

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 Illustration:

Hailey owned a furnished at that she acquired on 01/06/2024.

She paid mortgage interest of £700 on the loan taken out to acquire the property.

On 01/06/2024 she incurred advertising fees of £500 and paid an insurance

premium of £300 for the year to 31/05/2025.

She paid decorating costs of £900 on 15/06/2024.

The at remained empty until 01/12/2024 when it was rented for £500 payable
monthly in advance.

Solution:

Rent received ( 1 Dec 24 - 5 April 25) 5 months * £500 = £2,500

Allowable expenses:

Decorating costs paid (£900)

Advertising fees paid (£500)

Insurance premium paid (£300)

Mortgage interest (100% restriction for

0
residential property)
Property income £800

Note: under the cash basis the whole of the insurance premium is accounted for in
the tax year because it was paid in the tax year.

Under the accruals basis, when calculating the insurance premium payable, the
premium has been paid for 12 months to 31/05/2025, but we only need the
premium applicable until 05/04/2025, this is why 10/12 months are taken.

Note if there was furniture that was replaced for this property, then this would also
be deducted when calculating the property loss.

Note from 2017/18 there is a restriction on the amount of mortgage interest that can
be deducted from property income. In 2024/25, NONE of the interest can be
deducted from property income. The full interest amount is taken o the income tax
liability at the basic rate of 20%. This means that any higher rate or additional rate
taxpayers will not get full relief for the interest expense.

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So in this illustration, Hailey deducts none of the interest from property income and
then would deduct £140 (£700 x 20%) from her income tax liability.

This is explored in more detail in Topic Property Income Finance Costs.

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 Syllabus B4b. Furnished holiday lettings

Furnished holiday lettings

What is a furnished holiday letting?

Advantages of being classi ed as a furnished holiday letting are:

1. Capital allowances are claimed on the cost of furniture instead of claiming

replacement furniture relief if the accruals basis is used (Refer to Topic Capital
allowances). If the cash basis is used then deduction is available for the capital
costs of the furniture when paid.

2. Annual investment allowance is 100%. (This is a part of capital allowances and

can be seen in Topic Capital allowances)

3. Relevant earnings when calculating the maximum amount that can be invested
in a registered pension scheme includes income from a furnished holiday letting.
(Refer to Topic Pensions)

4. Rollover relief is available if the owner invests in another furnished holiday

letting. (Refer to Topic Rollover relief, Holdover relief)

5. Gift Holdover relief is available on the gift of a furnished holiday letting. (Refer to
Topic Rollover relief, Holdover relief)

6. Entrepreneur’s relief/Business asset disposal relief is available on the disposal of

a furnished holiday letting. (Refer to Topic Rollover relief, Holdover relief)

Note - the restriction to mortgage interest does not apply to furnished holiday
lets.

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In order to qualify to be a furnished holiday letting, the following conditions
need to be satis ed:

1. The accommodation must be situated in the European Economic Area.

For example in Malta.

2. The accommodation must be available for letting for at least 210 days in the tax
year.

3. The accommodation must actually be let for 105 days in the tax year.

4. The accommodation must be let on a commercial basis.

This means that no one person should occupy the letting for more than 31
consecutive days in the tax year.

For example if the letting is let for 105 days in the tax year, it cannot be let by
one person for more than 31 days at a stretch.

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 Syllabus B4c. Rent a room relief

Rent a room relief

What is rent a room relief?

Two methods to calculate the relief

This relief is based upon letting a room out in your main residence where you live.

There are 2 methods under which the income from letting this room can be
assessed.

One of the two methods below can be chosen

Method 1:

If an individual lets a room, furnished, in their main residence – the gross rent up to
£7,500 is exempt.

Alternative – rent a room relief calculation:

Gross rent x
Less: rent a room relief (£7,500)
Property income x

Method 2:

This exemption may be ignored if under normal treatment (rental-allowable

expenses) the tax payer is able to generate a lower assessable income, that is
where the allowable expenses exceed £7,500.

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Ordinary calculation:

Gross rent x

Less: rent a room relief (x)

Wear and tear allowance (x)

Property income x

The election for 2024/25 must be made by 31/01/2027 and stays in force until it is
revoked.

Illustration:

Sunder rents a room in his main residence. Gross rents are £145 per week and
expenses amount to £120 per year.

• What is his property income assessable and when does the relevant election
need to be made?

Solution:

Ordinary calculation:

Rent receivable 52 weeks * £145 = £7,540

Allowable expenses (£120)

Property income £7,420

Alternative – rent a room relief – calculation:

Rent receivable £7,540

Rent a room relief exemption (£7,500)

Property income £40

Sunder will decide to elect the rent a room relief exemption as this produces the
lower property income assessable. He will have to make this election by 31/01/2027
for income receivable in 2024/25.

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 Syllabus B4d. Premiums granted for short leases

Premiums granted for short leases

How are premiums paid for short leases taxed?

The grant of a short lease

When a tenant takes on a new lease, he may pay a one o premium to the landlord
in addition to the annual rent.

• This premium is paid to the landlord for the lease to secure the property space
for a number of years by the person renting the space.

• If this lease is for less than 50 years, then it is considered to be a short lease and
a part of it will be taxable in the year that it is received

• This taxable part is known as the income element of the premium.

• The part that is not taxable is known as the capital element of the premium
received.

Calculating the income element and capital elements of the premium:

• Capital element:

Premium received * ((number of years of lease-1)*2%)

• Income element:

Premium received-capital element = income element

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 Illustration:

Amanda was granted a 22 year lease of a property on 01/05/2024. She paid the
landlord a premium of £6,900 and also pays rent of £2,100 per month.

• What will the property income assessable be for the landlord in 2024/25?

Solution:

Calculation of income element of lease that will be taxable

£6,900*((22-1)*2%) = £2,898 is the capital element of the lease

Therefore,
£6,900-£2,898 = £4,002 is the income element that will be taxed

Rent received 11 months * £2,100= £23,100

Income element of premium received £4,002
Property income £27,102

Trading pro t deduction for traders

If a trader paid a premium for a short lease he may deduct the following annual
amount against his trading pro t in each of the year’s of the lease in which the
property is used in the trade.

This deduction per year is calculated as:

• Income element of premium / number of years of lease

This is in addition to any rent paid.

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Illustration:

Amanda is using the property for her trade.

• What will be the allowable deduction from property income in 2024/25 for
Amanda?

Solution:

Rent paid (as shown above) £23,100

Lease payment (£4,002/22) £182

Property payments £23,282

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 Syllabus B4e.
Understand and apply the restriction on property income nance costs

Property income nance costs

If a loan is taken out to either purchase or repair a residential property, there is a

restriction on the amount of interest expense that will be allowable.

How does the restriction work?

1) None of the interest will be deducted from property income (100% restriction)
2) The full interest amount will be used to create a tax credit (a deduction from the
income tax liability) at 20%.

Who/What does this restriction NOT apply to?

1) Companies
2) Furnished Holiday Lettings (FHL)
3) Non residential property
The restriction has no impact on basic rate taxpayers but it still applies to them.

Illustration:

Freddie purchased a freehold house.

The property was then let throughout the tax year at a monthly rent of £1,000 (all
rent was received in the year).

Freddie partly nanced the purchase of the property with a repayment mortgage,
paying mortgage interest of £4,000.

The other expenditure on the property amounted to £1,300, and this is all allowable.

Freddie has a salary of £80,000.

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Solution:
Freddie’s property income is:
Rent received (£1,000*12) = £12,000
Less:
Mortgage interest = (£0)
Other expenses (£1,300)
Property income £10,700

His income tax liability is:

Employment income £80,000

Property income £10,700
Total £90,700
Less P.A. (£12,570)
Taxable Income £78,130

Income tax
£37,700 * 20% = £7,540
£40,430*40% = £16,172
Total £23,712
Interest relief (£4,000*20%) ( £800)
I.T. Liability £22,912

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 Syllabus B4f. Property business loss relief

Property business loss relief

How is a property business loss given tax relief?

Relief is only given against future property business pro ts

If total expenses exceed total income, the property income assessable is NIL and
the excess property loss is carried forward and o set against future property
income pro ts ONLY.

Illustration:

In 2023/24 a trading income of £6,000 was generated and a property loss of

(£1,000) was generated.

In 2024/25 a trading income of £1000 was generated and property income of £800
was generated.

What property income will be assessable to income tax in the years 23/24 and
24/25?

Solution:

2023/24 – Nil (as property loss is incurred, the income assessed is Nil and can only
be used against future property pro ts) (notice change of dates in table)

2024/25

Property income £800

Property loss b/f (£800)

Property income assessed Nil

Property loss carried forward to 2025/26 = (£200)

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Note that for a furnished holiday letting loss, this can only be carried forward
against future furnished holiday letting pro ts, it cannot be relieved against other
property income.

For example, if there was a FHLA loss of £1,000 in 23/24 and property income of
£1,000 (from a di erent property) in 24/25 - the FHLA loss would not be relieved
against the other property income in 24/25.

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 Syllabus B4g/B5a)/B5d. Compute the tax payable on savings and dividends income.

Tax payable on savings and dividend income/Income

tax computation/Income tax payable

What is included in taxable income?

Computation of Taxable Income

An Income Tax Computation is prepared for each taxpayer and records the income
to be taxed for that individual for a tax year.

The tax year runs from April 6 to following April 5.

The tax year 2024/25 runs from April 6, 2024 to April 5, 2025.

Therefore each source of income requires its own basis of assessment to determine
how much income is to be assessed to tax in each such tax year.

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 Proforma income tax computation

Non-savings Savings Dividends Total

income income
£ £ £ £
Trading Pro t X X
Less Trading Loss relief – (X) (X)
brought forward
Employment Income X X
Property Income X X
Dividends from UK companies X X
Building society interest X X
Bank deposit interest X X
Other interest X X
TOTAL INCOME X X X X
Less
Qualifying interest (X) (X)
Other Trading Loss reliefs (X) (X)
NET INCOME X X X X
Less: Personal Allowance (X) (X)
TAXABLE INCOME X X X X

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 Non savings income

This includes income from employment, income from self employment and property
income.

Savings income

Savings income is all types of interest income, and for the exam, it is received gross
- therefore you just need to include the received amount in the income tax
computation.

Savings income now bene ts from a 0% rate, because there is a savings income nil
rate band.

For basic rate taxpayers, the savings income nil rate band for the tax year 2024/25
is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not
bene t from any savings income nil rate band.

Do not confuse this with the personal allowance, this savings nil rate band is
only for savings income, if there is no savings income then it cannot be used
against any other types of income.

Also do not confuse this with the savings income starting rate of £5,000 which
applies if there is taxable non savings income of less than £5,000.

Savings income in excess of the savings income nil rate band is taxed at the basic
rate of 20% if it falls below the higher rate threshold of £37,700, at the higher rate of
40% if it falls between the higher rate threshold of £37,700 and the additional rate
threshold of £125,140, and at the additional rate of 45% if it exceeds the additional
rate threshold of £125,140.

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• Example of a higher rate payer

For the tax year 2024/25, Jina has a salary of £48,500 and savings income of
£1,800.

Income tax on:

Non savings income

Employment income £48,500
Personal allowance (£12,570)
Taxable income £35,930

£35,930 at 20% = £7,186

Savings income
Savings income £1,800

£500 at 0% = £0
£1,270 at 20% (£37,700 - £35,930 - £500) = £254

£30 at 40% (£1,800 – £500 - £1,270) = £12

Tax liability (7,186 + 0 + 254 + 12) = £7,452

Note if she was a basic rate taxpayer, then the savings nil rate band would have
been £1,000 and if she was an additional rate taxpayer, then there would be no
nil rate band available.

Also notice that the nil rate band uses up some of the basic rate band.

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 Dividend income

This includes dividends received from UK companies.

The rst £500 of dividend income for the tax year 2024/25 bene ts from a 0%
rate.

This £500 nil rate band is available to all taxpayers, regardless of whether they
pay tax at the basic, higher or additional rate.

• Example of dividend nil rate band

Eesha has a salary of £56,000 and dividend income of £6,800.

Income tax on:

Non savings income

Employment income £56,000
Personal allowance (£12,570)
Taxable income £43,430

37,700 at 20% = £7,540

5,730 (43,430 – 37,700) at 40% = £2,292

Dividend income
Dividend income £6,800
500 at 0% =£Nil
6,300 (6,800 – 500) at 33.75% = £2,126

Tax liability (7,540 + 2,292 + 2,126) = £11,958

Carefully note

These nil rate bands are not deductions, they just allow some savings and
dividend income to be taxed at 0%.

They also use up the bands so, if there is taxable non savings income of £23,000
and taxable savings income of £15,000, even though £500 of the savings
income is at 0% it still uses the band and so £38,000 is taxable in total meaning
that this taxpayer is higher rate.

Only the personal allowance is a deduction which must be rst given to non
savings income, then savings income and then dividend income.

This also applies for other reliefs.

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 Income that is exempt from income tax

1. Interest or bonuses on National Savings & Investment Certi cates

2. Interest and dividends within an Individual Savings Account [ISA]

3. Gaming, lottery and premium bond winnings

The di erence between an income tax liability and income tax payable

Income tax liability is a taxpayers total tax liability for the year.

Tax payable is the amount of tax that is still owing at the end of the year.

For example, if you are an employee with no other income, you are unlikely to have
any tax to pay at the end of the year as it has all been deducted at source by your
employer via PAYE.

You would still calculate your tax liability, then deduct any tax paid at source via
PAYE to leave you with a tax payable gure.

Therefore,

Income tax liability – tax deducted at source = Income tax payable

Non-savings income is taxed at the following rates:

£1-£37,700 at 20% (basic rate band)

£37,701-£125,140 at 40% (higher rate band)

£125,141 - onwards at 45% (additional rate band)

Savings income is taxed at the following rates:

£1-£37,700 at 20% (basic rate band) (unless the starting rate is available and then it
is £0 - £5,000 at 0% and £5,001 to £37,700 at 20%)

£37,701-£125,140 at 40% (higher rate band)

£125,141 - onwards at 45% (additional rate band)

Remember to use your savings nil rate band!

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Dividend income is taxed at the following rates:

£1-£37,700 at 8.75% (basic rate band)

£37,701-£125,140 at 33.75% (higher rate band)

£125,141 - onwards at 39.35% (additional rate band)

Remember to use your dividend nil rate band!

Illustration:

For the tax year 2024/25, Joe has a salary of £40,000, savings income of £2,000
and dividend income of £9,000.

During the year, he paid interest of £300 which was for a qualifying purpose.

Joe’s employer deducted £5,800 in PAYE from his earnings.

What is the income tax payable by Joe for 2024/25?

Solution:

Type of income £
Employment income 40,000
Savings income 2,000
Dividend income 9,000
Total income 51,000
Interest paid (300)
Personal allowance (12,570)
Taxable income 38,130

Income tax:
27,130 (40,000 – 300 – 12,570) x 20% = £5,426
500 at 0% = £0

1,500 (2,000 – 500) x 20% = £300

500 at 0% = £0
8,070 x 8.75% = £706

430 (9,000 – 500 – 8,070) x 33.75% = £145

Tax liability (5,426 + 0 + 300 + 0 + 706 + 145) = £6,577

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 Less PAYE (£5,800)
Income tax payable £777

Note

Joe is a higher rate taxpayer, so his savings income nil rate band is £500.

The dividend 0% nil rate band used up some of the basic rate band leaving £8,070
of the basic rate band for some of the dividends with the remainder of the dividends
being taxed at the higher rate.

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 Savings income starting rate band

There is a tax rate of 0% for savings income within the savings income starting rate
band (£5,000) (don't confuse this with the Savings income nil rate band, that you
have seen in the previous topic)

The savings income starting rate only applies where the savings income falls wholly
or partly below the starting rate limit.

Keep in mind that income tax is charged rst on Non-savings income.

The savings income starting rate band counts towards the basic rate limit of
£37,700.

Example (using the Saving starting rate band)

Peter has a trading income of £13,000 and savings income of £9,000.

Calculate Peter's tax liability.

• Solution

NSI
13,000 - PA 12,570 = £430 x 20% = £86

SI
Savings income starting rate band: £5,000 - £430 = £4,570 x 0% = £0
Savings nil rate band: basic rate taxpayer = £1,000 x 0% = £0
(£9,000 - £4,570 - £1,000) = £3,430 x 20% = £686

Tax liability = £86 + £686 = £772

Note: We used the Savings starting rate band here because the Non-savings
taxable income was below £5,000. In fact, it was £430, therefore we could still use
£4,570 (5,000 - 430) savings starting rate band and use 0% rate.

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Example (where you can't use the Saving starting rate band)
Peter has a trading income of £46,350 and savings income of £9,000.

Calculate Peter's tax liability.

• Solution

NSI
46,350 - PA 12,570 = £33,780 x 20% = £6,756

Peter is a higher rate taxpayer since his Total taxable income is more than £37,700
(£33,780 + £9,000 = £42,780).

SI
Savings nil rate band: higher rate taxpayer = £500 x 0% = £0
(£37,700 - £33,780 - £500) = £3,420 x 20% =£684

(£9,000 - 500 - 3,420) = 5,080 x 40% = 2,032

Tax liability = £6,756 + £0 + £684 + 2,032 = £9,472

Note: We could NOT use the Savings starting rate band here because the Non-
savings taxable income was more than £5,000. In fact, it was £33,780

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 Syllabus B4hi)
h) Recognise the treatment of individual savings accounts (ISAs) and other tax exempt
investments.
ii) Understand how the accrued income scheme applies to UK Government securities (gilts)

Individual Savings Accounts and other tax exempt

investments

What is an Individual Savings Account

Individual Savings Accounts (ISA’s) have for many years been the most common
form of tax e cient investment.

The individual savings account (ISA) investment limit for the tax year 24/25 is
£20,000.

The £20,000 limit is completely exible, so a person can invest £20,000 in a cash
ISA, or they can invest £20,000 in a stocks and shares ISA, or in any combination of
the two – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.

The main advantages of ISAs are:

1. Income is free of income tax (since the introduction of the savings income nil
rate band for basic and higher rate taxpayers this is less likely to be an
advantage for most individuals. However, it would still be an advantage to an
additional rate taxpayer and other taxpayers who have already used their nil rate
band)

2. Disposals of investments within an ISA are free from capital gains tax.

Components of an ISA

1. Cash - for example in a bank account

2. Stocks and shares listed anywhere in the world

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 National savings

These o er a variety of products some of which are tax free, e.g. National Savings
Certi cates

However, some National Savings & Investments (NS&I) products are taxable,
namely:

• NS&I Easy Access account / NS&I Direct Saver Account

• NS&I Investments accounts

• The income is received gross without deduction of tax at source.

The nature of the investments are historically risk free.

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 Syllabus B5. The Comprehensive computation of taxable income

Syllabus B5b. Calculate the amount of personal allowance available.

Personal allowance

What is a personal allowance?

Personal allowance

is an amount on which income tax will not be charged.

If an individual makes income above this allowance amount, then income tax will be
charged on that additional income and the relevant rates.

Calculation of the personal allowance

For the tax year 2024/25 the personal allowance is £12,570 but it is reduced if the
taxpayer has adjusted net income for the year in excess of £100,000.

If the adjusted net income exceeds £100,000 then the personal allowance is
reduced by ½ of the excess of £100,000.

Therefore, the personal allowance is reduced to Nil if the adjusted net income is
£125,140. (£125,140-£100,000)/2 = £12,570.

How to calculate Net income and Adjusted net income?

Net income = Total income – qualifying interest payments – trading loss reliefs.

• Adjusted net income = Net income – gross personal pension contributions -

gross gift aid contributions.

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How does this all look?

Total income
Less: X
Trading loss reliefs (X)
Qualifying interest (X)
Less:
Personal allowance (X)
Taxable income X

Illustration:

Bubble has net income of £103,150 and has a gross personal pension contribution
of £2,000.

• How much personal allowance will she be entitled to?

• What is her taxable income?

Solution:

Adjusted net income = £103,150 - £2,000 = £101,150

Personal allowance reduction

£101,150 - £100,000 = £1,150 / 2 = £575

• £12,570

• (£575)

• £11,995 is the personal allowance available to Bubble (changes in table

below)

Total income

Net income £103,150

Personal allowance (£11,995)

Taxable income £91,155

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 Syllabus B5c. Understand the impact of the transferable amount of personal allowance for
spouses and civil partners.

Transferable Personal Allowance

What is a transferable P.A.?

For an unused personal allowance to be transferrable between spouses/civil

partners:

One individual must be a non-taxpayer and have unused P.A.

The other individual must be a basic rate tax payer.

• The maximum amount that can be transferred from the non taxpaying spouse is:
£1,260. This reduces their available personal allowance to £11,310 (£12,570-
£1,260)

• (This must be available to the non-taxpayer to actually transfer)

• This transfer will be given in the form of a 20% tax credit to the spouse who is
taking it: 20% * (£1,260) = £252 is the maximum tax credit that can be given to
the spouse who is paying tax.

• Thus, this amount will be deducted from their income tax liability to reduce their
income tax payable.

• The election to transfer must be made within 4 years of the end of the tax year to
which it should apply, and remains automatically e ective until it is withdrawn.

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Illustration:

A husband has trading income of £30,000. His wife only has employment income of
£8,000.

• Does she have unused personal allowance? YES

• How much of her unused personal allowance can she transfer to her husband?
£1,260

• How will this reduce his income tax payable? TAX REDUCER OF £252
(£1,260*20%)

Solution:

Wife

Employment income £8,000

Personal allowance (12,570)

Taxable income Nil

Unused P.A. = £4,570 – the maximum that can be transferred is £1,260.

Husband

Trading income £30,000

Personal allowance (£12,570)

Taxable income £17,430

I.T. liability = £17,430 * 20% = £3,486

Tax credit of unused

(£252)
P.A. (£1,260 * 20%)

I.T. payable £3,234

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 Syllabus B5e. Qualifying loans

Qualifying loans

Trading income and property business income

Certain interest payments made on loans taken are deducted from trading income
and property business income.

These include taking out a loan for trading purposes and taking out a loan to
purchase an investment property.

The interest payments here will be deducted from their respective headings that
they relate to.

• Here, we will look at the interest payments which will reduce a taxpayer’s
total income.

• Interest paid on certain loans are deductible from a taxpayer’s total income is
known as interest paid on qualifying loans.

The main types of eligible loans are:

1. Loan to purchase plant and machinery which is necessarily acquired for the use
in the employment of the taxpayer

Illustration:

Purchasing a computer to use for employment, if a loan was taken out to make
this purchase, then the interest payable is deducted from total income.

2. Loan to purchase plant and machinery for the use in the business of a
partnership, in which the taxpayer is a partner.

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 Illustration:

A partner would have taken out a personal loan to purchase a computer for use
in the partnership, here interest payable would be deducted from total income

3. Loan to purchase an interest in a partnership.

Illustration:

Partner A puts in £20,000 into the partnership bank account to fund the
business.

If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the
£1,400 payable from his total income.

4. Loan to purchase ordinary shares in a close company

This is allowable as long as the taxpayer owns at least 5% of the ordinary share
capital or works for the greater part of his time in the management of the
company.

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 Syllabus B5f. Understand the treatment of gift aid donations and charitable giving.

Gift aid donations

There are 3 tax bene ts available for making personal gift aid donations:

Let's say that an individual makes a gift aid donation of £1,000

1. Pay net of 20%.

For example, if an individual want to make a gift aid donation of £1,000, he

needs to pay 80% and HMRC will make the remaining 20% donation on his
behalf.

Therefore, he will pay £800 and HMRC will pay £200 to the fund.

2. Increase the basic and higher rate bands by the gross gift aid donation.

Therefore, this same individual will increase his basic rate band to 37,700 +
1,000 = £38,700 and his higher rate band to 125,140 + 1,000 = £126,140.

This will result in an additional £1,000 being taxed at the lower rate of 20%
instead of 40%, and an additional £1,000 being taxed at the higher rate of 40%
instead of 45%.

3. Gross gift aid donation are deducted from net income to arrive at adjusted net
income.

Adjusted net income is used to determine the amount of personal allowance

available. (Topic Personal allowance)

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 Illustration:

Eli has a trading pro t of £60,000 and he paid £2,400 to charity under the gift aid
system.

• Show the tax bene ts of this donation.

Calculate Eli’s income tax liability

Solution:

Bene t 1:

• Eli paid £2,400 (80%)

HMRC paid £600 (20%)

Bene t 2:

• Basic band extension: £37,700 + £3,000 = £40,700

Higher band extension: £125,140 + £3,000 = £128,140

Bene t 3:

Adjusted net income = £60,000 - £3,000 = £57,000

Income tax liability

Total income £60,000

Personal allowance £(12,570)

Taxable income £47,430

£40,700 * 20% = £8,140

(£47,430 - £40,700) = £6,730 * 40% = £2,692

Total income tax liability £10,832

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 Syllabus B5g. Child bene t tax charge

Child bene t tax charge

Child bene t charge

The child bene t is a monetary bene t that the UK government provides to

individuals with children, regardless of their nancial standing.

• The child bene t charge is designed to claw back the bene t from individuals
with high income

• If an individual who claims child bene t has an adjusted net income in excess of
£60,000, an income tax charge arises.

The charge is levied at the rate of 1% of the amount of the child bene t received
for every £200 of income above £60,000.

• Therefore, if the adjusted net income exceeds £80,000, then the charge is equal
to the full amount of the child bene t received.

Thus, if an individual expects their adjusted net income to exceed £80,000, they
can choose instead not to claim child bene t.

• The tax charge will be collected through the self-assessment system along with
the income tax payable.

How to calculate adjusted net income?

Adjusted net income = Net income – Gross personal pension contributions - Gross
gift aid contributions

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 Illustration:

Vineeta earns £80,000. She receives £1,000 of child bene t.

• How much of the bene t will be clawed back by the government?

Solution:

Income above £60,000:

• = £80,000 - £60,000 = £20,000

For every £200 above £60,000, 1% of the bene t will be returned:

£20,000 / £200 = 100% of the bene t will be returned

Bene t returned:

100% * £1,000 = £1,000

Therefore, Vineeta can choose instead not to claim child bene t.

How is the bene t returned to the government?

The bene t that needs to be returned to the government is added to the income tax
liability of the taxpayer.

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 Syllabus B5h/7b.
B5h) Understand the treatment of property owned jointly by a married couple, or by a couple
in a civil partnership.
B7b) Understand how a married couple or a couple in a civil partnership can minimise their tax
liabilities.

Jointly owned property by a married couple/civil

partners

Understand the treatment of property owned jointly by a married couple, or by a

couple in a civil partnership.

• If assets are owned jointly then the rule is that any income generated from the
asset must be split 50:50.

• It is possible to make a declaration of bene cial interest in order that the joint
income is split in order to the actual entitlement.

• If one spouse does not own any shares in the property, shares can be
transferred to that spouse to result in actual entitlement.

Transferring just 5% of shares can result in actual entitlement of 50% to income.

If more shares are transferred, then more income can be legally transferred.

• Ideally, to be tax e cient, the declaration should assign more income to the
individual who is a lower rate tax payer and potentially has some unused
personal allowance.

The overall objective is to save tax for the family as a whole.

Illustration:

A couple has a joint property which generates annual income of £100,000.

The husband contributed nothing towards the purchase of the house and the wife
contributed 100% towards the purchase of the house.

How will this income be split if no declaration is made?

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Solution:

If no declaration is made, then the income will be split in the following manner:

Husband £50,000
Wife £50,000

Illustration:

For the same couple above, the following information relates to their yearly income
aside from the property income.

• Husband: £100,000 salary per annum.

Wife: Not earning

• If the declaration is made to split the income according to actual entitlement,

how much income tax will be saved as a couple?

Solution:

Current situation

Husband

Salary £100,000

Property income £50,000

Total income £150,000

P.A. Nil (Income above £125,140)

Taxable income £150,000

Wife
Property income £50,000
Total income £50,000
P.A. (£12,570)
Taxable income £ 37,430

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Income tax liability

Husband
£37,700 * 20% = £7,540
(£125,140 - £37,700) * 40% = £34,976
(£150,000 - £125,140) * 45% = £11,187
Total £53,703

Wife
£37,430 * 20% = £7,486

Total £7,486

• The husband is already paying tax at a higher rate and with the £50,000 property
income, he will not have any personal allowance remaining.

• Therefore, the husband and wife should make a declaration so that the husband
is able to use his personal allowance as well.

• A declaration should be made to transfer 100% of the property income to the

wife, so that the both individuals can utilise their personal allowances fully.

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After declaration:

Husband

Salary £100,000

Property income £Nil

Total income £100,000

P.A. (12,570)

Taxable income £87,430

Wife

Wife
Property income £100,000

Total income £100,000

P.A. (£12,570)
Taxable income £87,430

Income tax liability (same calculation for both husband and wife as they both now
have income of £100,000 less the personal allowance)

Income tax liability

£
£37,700 * 20% = 7,540
(£87,430 - £37,700) * 40% = 19,892
Total 27,432

Total liability of husband and wife before declaration (£53,703 +

£61,189
£7,486)
Total liability of husband and wife after declaration (£27,432 +
(£54,864)
£27,432)

Tax saving £6,325

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Note:

1. A joint bank account will always be taxed 50:50 regardless of who contributes
what amount

2. If shares are owned, dividends are always divided according to the exact
proportion to which each is actually entitled, it is never assumed that it is in
equal proportions.

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Syllabus B6. National insurance contributions for employed
and self-employed persons

Syllabus B6a. NICs

National insurance contributions (NICs)

We have the following classes of NIC:

1. Employee’s Class 1

Paid by employees

2. Employer’s Class 1

Paid by employers

3. Class 1A

Paid by employers

4. Class 4

Paid by the self-employed

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 Syllabus B6a. Class 1 and 1A NIC

NIC for the employed

There are 3 types of contributions that are payable for those who are
employed:

1. Employee’s Class 1

2. Employer’s Class 1

3. Class 1A

Class 1 Primary is paid by employees (changes in table)

For the tax year 24/25 the rates of employee class 1 NIC is 8% and 2%.

NIC Paid by Paid on behalf Limits Rates

of
Employee’s Employees Employee cash £0- 0%
Class 1 earnings £12,570

£12,571- 8%
£50,270
£50,271 - 2%
onwards

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Illustration - Employee’s Class 1

Cow plc has one employee who is paid £57,000 per year.

Calculate the Class 1 NIC primary payable by the employee.

Solution:

Employee’s Class 1 payable:

12,570 * 0% = £0
£50,270-£12,570 = £37,700 * 8% = £3,016
£57,000 – £50,270 = £6,730 * 2% = £135

Total Employee’s Class 1 NIC payable = £3,151

Note that when you are calculating the NIC payable, you need to start paying from
£12,570.Therefore, you will subtract £12,570 from £50,270 and so forth.

Employer’s Class 1 NIC is paid by employers

Employer’s Class 1 NIC is paid by employers on the employee earnings.

There is an employment allowance of £5,000 (given in the exam) available per

employer to reduce the employer’s Class 1 Secondary NIC payable.

Note: this allowance is not available to companies where the only employee is the
Director.

The rate of employer class 1 NIC is 13.8% and is paid on all earnings over £9,100 in
the tax year.

There is no higher limit for the earnings.

NIC Paid by Paid on behalf of Limits Rates

Employer’s Employee cash £0-

Employer 0%
Class 1 earnings £9,100
£9,101
13.8%
onwards

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 Illustration - Employer’s Class 1

Cow plc has three employees who are each paid £55,000 per year.

Calculate the Class 1 secondary payable by the employer in 24/25.

Solution:

£9,100 * 0% = £0
£55,000 – £9,100 = £45,900 * 13.8% = £6,334

£6,334 x 3 employees = £19,002

Less employment allowance = (£5,000)

Total Class 1 Secondary payable = £14,002

Class 1A is paid by employers

Class 1A NIC is paid by employers on behalf of the bene ts provided to employees.

Note that you may have to calculate the monetary value of the bene ts, and then
calculate the Class 1 A NIC payable, based on the bene t's monetary value.

These explanations can be found in topics The statutory approved

mileage allowances and RTI reporting

The amount of bene ts assessable

The rate of employer Class 1 A NIC is 13.8%.

NIC Paid by Paid on behalf of Limits Rates

Bene ts provided to
Class I A Employer No limits 13.8%
employee

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 Illustration Class 1A NIC

Jane is employed by Cow plc and earns £25,000 per year.

During 24/25 she received the following taxable bene ts:

Car bene t £4,500

Fuel bene t £2,222
Medical Insurance £1,800

Calculate the Class 1A NIC liability in 24/25.

Solution:

Car bene t £4,500

Fuel bene t £2,222
Medical insurance £1,800
Total bene ts = £8,522

Class 1 A NIC payable = £8,522 * 13.8% = £1,176

Illustration - Calculating monetary value of car bene t - ACCA ARTICLE

John has been given a petrol car to use for private purposes during the tax year
2024/25.

The car has a list price of £10,000 and it has a CO2 emission of 135g.

What is the monetary value of this bene t?

What will the Class 1 A NIC payable be upon this bene t?

Solution

Calculating the car bene t:

135g-55g = 80g/5g = 16% +16% = 32%

32% * £10,000 = £3,200 is the monetary value of the car bene t

Class 1 A NIC payable = £3,200*13.8% = £442

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 Syllabus B6a. Class 2 and 4 NIC

Class 4 NIC

Contributions for the self employed

Class 4 NIC is payable by the self employed on behalf of their earnings

The rates of Class 4 NIC are 6% and 2%.

The rate of 0% is paid on pro ts below £12,570.

The rate of 6% is paid on pro ts between £12,571-£50,270
The rate of 2% is paid on all pro ts over £50,270 (change in table)

Paid on behalf
NIC Paid by Limits Rates
of
£0-£12,570 0%
Self Self employed
Class 4 £12,571-£50,270 6%
employed cash earnings
£50,271 -onwards 2%

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Illustration:

Calculate the NIC payable by Shobha if she is self-employed in 24/25 and has self-
employed income of £57,000.

Solution:

Class 4 NIC payable:

£12,570 * 0% = £0
£50,270-£12,570 = £37,700 * 6 % = £2,262
£57,000 - £50,270 = £6,730 * 2% = £135

Total Class 4 NIC payable = £2,397

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 Syllabus B6a. The annual employment allowance

The annual employment allowance

Employment allowance

Annual employment allowance

There is an employment allowance of £5,000 available per employer to reduce the

employer’s Class 1 NIC payable.

This allowance cannot be used to reduce the employer's Class 1A NIC payable or
the employee's Class 1 NIC payable. It is only available to reduce the employer's
Class 1 NIC payable.

This will reduce the liability that results from the calculation of Employer’s Class 1
NIC by £5,000.

Do not mistake this for a lower limit.

Illustration:

Arya has a salary of £52,000 per annum.

What will her:

1) Employee’s Class 1 NIC payable be?

What will her employer's:

1) Class 1 NIC payable be?

2) Class 1 A NIC payable be?

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 Solution:

Employee’s Class 1 NIC:

£12,570 * 0% = £0

(£50,270-£12,570) = £37,700 * 8% = £3,016

(£52,000-£50,270) = £1,730 * 2% = £35

Total Employee’s Class 1 NIC payable = £3,051

Employer’s Class 1 NIC: £9,100 * 0% = £0

(£52,000-£9,100) = £42,900 * 13.8% = £5,920

Employer’s Class 1 NIC liability £5,920

Less annual employment allowance (£5,000)

Employer’s Class 1 NIC Payable £920

Class 1 A NIC payable= Nil

There is no Class 1 A because the employee was not given any employment
bene ts.

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Syllabus B7. Exemptions and reliefs in deferring and
minimising income tax liabilities
Syllabus B7a. Explain and compute the relief given for contributions to personal pension
schemes, and to occupational pension schemes.

Pensions

Types of pension schemes

Occupational pension schemes

These are pension schemes that are run by an employer.

An employee can contribute into the scheme and an employer can contribute into
the scheme on behalf of the employee.

If an employee contributes into the scheme, tax relief is given as follows:

• The contribution made by the employee is deducted from their salary in arriving
at taxable income.

It is basically treated as an allowable expense.

Illustration 1:

David has a salary of £20,000 for the year ended 05/04/2025.

During the year he has contributed £1,000 into his occupational pension scheme.

• What is his taxable income for 24/25?

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Solution:

Salary £20,000

Less:
Pension contribution (£1,000)
Net income £19,000
Less:

Personal allowance (£12,570)

Taxable income £ 6,430.00

Registered personal pension schemes

There are 3 tax bene ts available for making personal pension contributions into a
registered scheme.

They are exactly the same as the tax bene ts available for making gift aid
donations.

These are:

1. Pay net of 20%.

For example, if an individual wants to make a personal pension contribution of

£1,000, he needs to pay 80% and HMRC will make the remaining 20%
contribution on his behalf.

Therefore, he will pay £800 and HMRC will pay £200 to the fund.

2. Increase the basic and higher rate bands by the gross personal pension
contribution.

Therefore, this same individual will increase his basic rate band to £38,700 and
his higher rate band to £126,140.

This will result in an additional £1,000 being taxed at the lower rate of 20%, and
an additional £1,000 being taxed at the higher rate of 40%.

3. Gross personal pension contributions are deducted from net income to arrive at
adjusted net income.

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 Adjusted net income is used to determine the amount of personal allowance
available.

Illustration 2:

Eli has a trading pro t of £55,000 and he paid £2,400 (net) to a registered personal
pension scheme in the tax year 24/25.

• Show the tax bene ts of this contribution.

Calculate Eli’s income tax liability for 24/25.

Solution:

Bene t 1:

Eli paid £2,400 (80%)

HMRC paid £600 (20%)

Bene t 2:

Basic band extension: £37,700 + £3,000= £40,700

Higher band extension: £125,140 + £3,000 = £128,140

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 Bene t 3:

Adjusted net income = £55,000 - £3,000 £52, 000

Income tax liability

Total income £55,000

Personal allowance (£12,570)

Taxable income £42,430

£40,700 * 20% = £8,140

(£42,430 - £40,700) * 40% = £692

Total income tax liability £8,832

Limitations of the tax relief available

Pensions do have the taxable bene ts mentioned above.

However, there are 2 limitations under which contributions must be to qualify for the
tax relief outlined.

These are:

1. They must be within the relevant earnings of the individual. If not, a certain
amount of the contribution will be taxable.

2. If they are within the relevant earnings, they must be also within the annual
allowances of the individual. If they are not, a certain amount of the contribution
will be taxable.

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What are relevant earnings?

These are the greater of

• £3,600 and

100% of:

• Trading income (e.g) pro ts from a business

• Employment income (e.g.) salary

• Income from furnished holiday lettings (e.g.) rental income from a FHLA

For example

if an individual has trading pro ts of £50,000, then the greater of £3,600 and
£50,000 will be chosen as relevant earnings, £50,000 will be the relevant earnings.

if an individual has trading pro ts of £3,000, then the greater of £3,600 and £3,000
will be chosen as relevant earnings, £3,600 will be the relevant earnings.

What is the annual allowance?

This is an allowance given to individuals every year.

The individual can use the allowance yearly, and the amount unused is carried
forward for 3 years but only if they are a member of a pension scheme in those
years.

• Therefore, at any particular time, an individual can use their current year
allowance plus 3 years’ b/f unused annual allowances on a FIFO basis.
The gross contributions are deducted from the annual allowances.

2021/22 £40,000

2022/23 £40,000

2023/24 £60,000

2024/25 £ 60,000

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Illustration 3:

Sally's trading income for the year ended 05/04/2025 were £80,000.

Sally made contributions of £76,000 (gross) into a personal pension scheme during
the tax year 24/25.

She has made gross pension contributions of £30,000 for 21/22 and 22/23. For
23/24 she made a gross pension contribution of £50,000.

How much of the pension contribution quali es for relief?

What is the income tax liability of Sally?

Solution:

Sally’s relevant earnings are the higher of £3,600 and £80,000:

Therefore, Relevant earnings is £80,000.

Therefore, the pension contribution is within 100% of relevant earnings.

However, is the contribution within the annual allowance?

Current year annual allowance £60,000

21/22 b/f annual allowance 40,000 - 30,000 £10,000
22/23 b/f annual allowance 40,000 - 30,000 £10,000
23/24 b/f annual allowance 60,000 - 50,000 £10,000
Total allowance £90,000

Gross contribution £76,000

Total allowance (£90,000)
The contribution is within the annual allowance, therefore £76k quali es for
the tax relief

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What happens if the gross contributions are above the relevant earnings or
annual allowance available?

The additional amount is added to the total income, on top of other income,
therefore it is chargeable to income tax at the highest rate that the individual pays.

This is called the annual allowance charge.

Annual allowances only start to accumulate in the rst year that an individual makes
a contribution.

Illustration 4:

Sally is self employed.

Her trading income for the year ended 05/04/2025 were £95,000.

Sally made contributions of £76,000 (gross) into a personal pension scheme during
the tax year 24/25.

She has made gross pension contributions of £39,000 for 21/22 and 22/23. For
23/24 she made a gross pension contribution of £59,000.

• How much of the pension contribution quali es for relief?

• How much will result in an annual allowance charge?

• What is the income tax liability of Sally?

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Solution:

Sally’s relevant earnings are the higher of £3,600 and £95,000:

• Relevant earnings: £95,000

• Therefore, the pension contribution is within 100% of relevant earnings.

• However, is the contribution within the annual allowance?

Current year annual allowance £60,000

21/22 b/f annual allowance 40,000 - 39,000 £1,000
22/23 b/f annual allowance 40,000 - 39,000 £1,000
23/24 b/f annual allowance 60,000 - 59,000 £1,000
Total allowance £63,000

Gross contribution £76,000

Total allowance (£63,000)

Annual allowance charge £13,000

Total income
Trading income £95,000
Annual allowance charge £13,000
Total income £108,000

Basic Band extension: £37,700 + £76,000 = £113,700

Income tax liability:

Total income £108,000

Less P.A. (£12,570)
Taxable income £95,430

£95,430 * 20% = £19,086

Total income tax liability £19,086

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 Tapered annual allowance

• If AI (Adjusted income) is more than £260,000 then the CURRENT year

Allowance is a tapered allowance

• It means that the normal annual allowance of £60,000 is reduced by £1 for every
£2 by which a person’s adjusted income exceeds £260,000, down to a
minimum tapered annual allowance of £10,000.

This is similar to how personal allowances are reduced, except the

adjusted net income in this case needs to be £260,000 to reduce, not
£100,000.

Therefore, a person with adjusted income of £360,000 or more, will only be

entitled to an annual allowance of £10,000 (£60,000 – ((£360,000 – £260,000)/2)
= £10,000).

Tapering applies on a tax year basis, so a taxpayer with variable income might
nd themselves entitled to the full £60,000 annual allowance for some years, and
a tapered annual allowance in other years.

For example

• if the taxpayer only has adjusted income of £100,000

then they will be entitled to the full £60,000 but

• if the taxpayer has adjusted income of £280,000

then they will be entitled to (£280,000 - £260,000 = £20,000/2 = 10,000,

£60,000 - £10,000 = £50,000 annual allowance available.

A.I. For the self employed = Net income

A.I. For the employed = Net income + employer contribution to pension

scheme + employee contribution to pension scheme.

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• If the annual allowance is not fully used in any tax year, then it is possible to
carry forward any unused allowance for up to three years on a FIFO basis

For this exam, you will be carrying forward annual allowances from 2021/22
onwards based on the £40,000 that was applicable in that year.

If there is any annual allowance remaining from 2024/25, after the tapering has
been done to the allowance, this can also be carried forward in the normal way.

General rule carry forward is only possible if a person is a member of a pension

scheme for a particular tax year.

Therefore, for any year in which a person is not a member of a pension scheme
the annual allowance is lost.

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Illustration AI < £260,000

Peter has made the following gross personal pension contributions:

2021/22 £32,000
2022/23 £31,000
2023/24 £39,000
2024/25 £68,000

Peter's adjusted income for the tax year 2024/25 is £140,000.

Will Peter be subject to an annual allowance charge?

Solution:

No, Peter will not be subject to an annual allowance charge.

The pension contribution of £68,000 for 2024/25 has used all of Peter’s annual
allowance of £60,000 for 2024/25 and £8,000 (68,000 – 60,000) of the unused
allowance of £8,000 (40,000 – 32,000) from 2021/22.

Unused allowances to carry forward to 2025/26:

£9,000 (40,000 – 31,000) from 2022/23
£21,000 (60,000 – 39,000) from 2023/24

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Illustration AI>£260,000

Chirag has made the following gross personal pension contributions:

2021/22 £32,000
2022/23 £31,000
2023/24 £39,000
2024/25 £9,000

His adjusted net income for the year is £370,000. This is the rst time that his ANI
has been above £260,000.

Will Chirag be subject to an annual allowance charge?

Solution:

No.

Chirag’s tapered annual allowance for 2024/25 is the minimum of £10,000 because
his adjusted income exceeds £360,000.

His contribution this year is only £9,000 - therefore it is within the tapered annual
allowance of £10,000 and he will have £1,000 to carry forward to 2025/26.

Unused allowances to carry forward to 2025/26:

of £9,000 (40,000 – 31,000) from 2022/23,
£21,000 (60,000 – 39,000) from 2023/24
£1,000 (£10,000 – £9,000) from 2024/25.

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 Syllabus B7c. Basic income tax planning

Tax planning

When we dealt with jointly owned assets, we illustrated the tax advantage to be
gained from transferring ownership of an income producing asset, such as a rental
property from a higher rate taxpayer to a spouse who was only a basic rate
taxpayer, or even greater tax savings to be had when the transferee spouse was not
even a basic rate taxpayer and was not therefore using some or all of their personal
allowance.

This would allow income that would have been taxed at 40% to now be taxed at
20% or indeed not taxed at all if the income fell within the available personal
allowance of the transferee spouse.

The introduction of nil rate bands for savings income and dividend income has
created opportunities for spouses to reduce their overall charge to income tax and
may even give an advantage to transferring such income from a basic rate taxpayer
spouse to a higher rate taxpayer spouse!

Example

Donald and Theresa are a married couple and have regular annual income as
follows:

Donald
Salary £60,000

Theresa
Salary £18,000
Interest £2,000
Dividends £9,000

It is clear from the above information that Donald is a higher rate taxpayer with
taxable income of £47,430 (60,000 – 12,570) and Theresa is a basic rate taxpayer
with taxable income of £16,430 ((18,000 + 2,000 + 9,000) – 12,570).

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 In this situation it would normally be the case that for tax planning purposes it
would be advisable to see if any investment income could be moved from the
higher rate taxpayer to the basic rate taxpayer.

This, however is not possible as Donald’s only income is his salary.

The introduction of the nil rate bands, however, means that in the above example
tax savings can be achieved if rstly, £500 of the interest income could be made by
Donald and therefore use his savings income nil rate band of £500 that is currently
being wasted.

This income is being taxed at 20% on Theresa as she has savings income in excess
of her nil rate band of £1,000.

Theresa is £2,000 - £1,000 = £1,000 * 20% = £200

If she transferred £500 to her husband, he would use his nil rate band and she
would save: £500 * 20% = £100

The second transfer would be of su cient shares to move £500 of dividend income
from Theresa to Donald in order that both may use their dividend income nil rate
bands of up to £500.

Currently Theresa is being taxed at 8.75% on £500 of her dividend income, so a tax
saving of £43.75 (£500 * 8.75%) would be possible here.

Clearly in practice choosing the right amount of interest bearing securities and
shares to transfer to Donald to allow usage of the available nil rate bands may be a
little di cult to precisely achieve.

Carefully keep in mind that it is now not necessary to transfer from a higher rate
payer to a basic rate payer to save tax, it can be the other way round.

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 Income tax in the exam

Exam tips for the income tax questions!

Section A and Section B Income tax questions

For the objective questions on income tax, remember that it's an all or nothing
game, you either get the 2 marks or you get 0 marks.

All of options are not random numbers but answers that you can actually think are
correct if you have made a small mistake (that the examiner has already thought
you will make).

To avoid this, you must be very careful to read the exact requirement!

For example, does the question ask you to compute Income Tax Liability or Payable
or even Taxable Income?

Does it ask for Class 1 NIC payable by the employer or all Class 1 NIC payable
(employer and employee) or all NIC payable by the employer (Class 1 and Class 1A
NIC of the employer?

Does the examiner ask for the allowable expenses of the trader to be computed or
the disallowable?

Always pick out the easier MCQ rst and if there are a few that you nd very
di cult, do not waste your time on them until the end as there are marks that you
can score more easily in Section C - as the examiner gives you marks for your
workings, so even if your nal answer is wrong there, you should be able to score
some marks.

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 Section C Income tax question

You will see a 15 mark Income Tax question which is likely to require an Income tax
Computation to be prepared including a combination of employment income with
assessable bene ts, property income, interest and dividend income.

It may also include the opening or closing years of an unincorporated trader as the
individual moves from employment to self employment during the tax year or vice
versa.

Remember to keep all of these rules in mind!

Income tax computation

Non-savings Savings Dividend

Total
Income Income Income

£ £ £ £
Trading Pro t x x

Less Trading Loss relief –

(x) (x)
brought forward

Employment income x x
Property income x x

Dividends from UK companies x x

Building society interest x x

Bank deposit interest x x

TOTAL INCOME x x x x
Less
Qualifying interest (x) (x)
Other Trading Loss reliefs (x) (x)
NET INCOME x x x x
Less: Personal Allowance (x) (x)
TAXABLE INCOME x x x x

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Employment income (salaries, wages) must be included gross in the computation
before deduction of PAYE by the employer and these will always be stated gross in
the exam question.

Dividends and interest must always be included gross in the computation.

Deductions are always made rst from non savings income, savings income and
then dividend income.

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 Syllabus C: Chargeable Gains For Individuals
Syllabus C1. The scope of the taxation of capital gains

Syllabus C1a. The scope of capital gains tax

The scope of capital gains tax

You should pay CGT on:

1. The sale or gift of the whole or part of an asset.

For example out of a 10 hectares plot of freehold land, 5 hectares is sold.

Capital gains tax will be paid on the disposal of the 5 hectare part.

2. The loss or destruction of an asset.

For example a painting costing £5,000 was destroyed in a re.

This destruction will be considered to be a capital disposal.

The disposal proceeds will be Nil and therefore a capital loss of (£5,000) will be
realised on destruction.

3. Compensation in connection with an asset.

For example a painting costing £5,000 was destroyed completely in a re.

The painting was insured and insurance proceeds of £10,000 were received
because of the loss of the painting.

Capital gains tax should be paid on (£10,000-£5,000) = £5,000.

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 Chargeable assets

All assets are chargeable unless speci cally exempted.

This list is provided in C1b.

Chargeable person

An individual who is resident in the UK is a chargeable person and is therefore

subject to UK CGT on their worldwide assets.

Note the di erences between companies and individuals

1. Companies pay corporation tax on their capital gains whereas individuals pay
capital gains tax.

2. Companies have an indexation allowance up to December 2017 which allows for

the adjustment of the cost of an asset for in ation, whereas individuals have an
annual exemption.

3. Companies can use rollover and holdover relief with respect to their chargeable
gains whereas individuals have a much wider array of reliefs available to them.

4. Companies can be part of 75% gains groups whereas individuals cannot.

5. Loss relief is dealt with di erently between both companies and individuals.

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 Syllabus C1b. Assets which are exempt

Assets which are exempt

Exempt assets include:

• Motor cars suitable for private use

• Animals (wasting chattels that do not qualify for capital allowances)

• Debtors

• Cash

• Chattels bought and sold for less than £6,000

• Corporate bonds

• Government securities

• Trading stock

• Shares in individual savings accounts ISA

• Shares in a VCT

• Foreign currency for private use (Cash)

• Works of art given for national use

• Damages for personal injury

• Life insurance policies (Cash)

• National Savings and Investment certi cates

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 Syllabus C2. The basic principles of computing gains and
losses

Syllabus C2/5a. Compute and explain the treatment of capital gains.

and Compute the amount of capital gains tax payable.

The treatment of capital gains

The capital gain is calculated as follows:

Disposal proceeds X

Less: Incidental cost of disposal (X)

Less: Acquisition cost (X)

Capital Gain (Chargeable gain) / (Capital loss) X / (X)

Illustration:

A chargeable asset was disposed for for £10,000.

On disposal, £1,000 of legal cost was incurred.

The asset originally cost £5,000.

Which of these costs will be classi ed as incidental cost to disposal?

Which of these costs will be classi ed as acquisition cost?

Solution:

The legal cost of £1,000 is classi ed as the incidental cost to disposal.

This is because it has been incurred because of the disposal.

Incidental cost to disposal can also include advertising cost and agency fees.

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 • The original cost of the asset of £5,000 is classi ed as the acquisition cost.

This is because it is the amount spent to acquire the asset originally.

Capital gain calculation:

Disposal proceeds £10,000

Incidental cost to disposal (legal cost) (£1,000)

Acquisition cost (£5,000)

Capital gain (Chargeable gain) £4,000

Capital gains tax is calculated as follows:

Capital Gains (Chargeable gain) X

Less: Annual exempt amount (3,000)

Taxable Gains X

CGT × 10%, 20% or 18%, 24% X

Annual exempt amount

This is an amount of capital gain that will not be subject to capital gains tax.

It is similar to the personal allowance that individuals get.

The amount is £3,000 for 2024/25.

If this amount is not used in a particular tax year, then it is wasted.

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The rates of capital gains tax are:

• Rate 10%

After considering a person's taxable income, any remaining amount falling within
the basic rate band is charged at 10%

• Rate 20%

Once the entire basic rate band has been used, then a rate of 20% is applied.

• For a residential property only

The same treatment applies as explained above, except that the 10% rate is
replaced with 18% and the 20% rate is replaced with 24%.

• Rate 10%

This rate is used for capital gains that qualify for entrepreneur's relief/business
asset disposal relief.

There are conditions that need to be met in order to be able to use this rate.

They are discussed in Topic Entrepreneur's relief/Business asset disposal relief.

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Illustration 1

Peter sold a capital asset and this resulted in a taxable gain of £40,000.

Peter has taxable income of £20,000. (Basic rate band: £37,700)

Required:
Calculate Peter's capital gain tax.

Solution:

Taxable gain 40,000

Basic band remaining (£37,700 - £20,000) = £17,700

Capital Gains Tax (£17,700 * 10%) = £1,770

(£40,000 - £17,700) * 20% = £4,460

Total capital gains tax payable = 1,770+ 4,460 = £6,230

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Illustration 2

Peter sold a residential property and this resulted in a chargeable gain of £40,000.

Peter has taxable income of £20,000. (Basic rate band: £37,700)

Required:
Calculate Peter's capital gain tax.

Solution:

Chargeable gain 40,000

Annual exempt amount (3,000)
Taxable gain 37,000
Basic rate band remaining (£37,700 - £20,000) = £17,700
Capital gains tax (£17,700 * 18%) = £3,186
(£37,000 - £17,700) * 24% = £4,632
Total capital gains tax payable = 3,186 + 4,632 = £7,818

Illustration 3

Katherine has a trading pro t of £35,600 in 2024/25. (Basic rate band: £37,700)

Additionally, she sold a capital asset giving rise to a taxable gain of £15,000.

What is her capital gains tax payable for 2024/25?

Note A taxable gain is after the deduction of the annual exempt amount.

Solution: (changes in table)

Trading income £35,600

Personal allowance (£12,570)

Taxable income £23,030

Basic rate band left £37,700 - £23,030 = £14,670

Capital gains tax £14,670 * 10% = £1,467

(£15,000 - £14,670) * 20% = £66

Total capital gains tax payable 1,467 + 66 = £1,533

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Illustration 4

What if Katherine had capital gain (Chargeable gain) of £15,000?

Solution:

Basic rate band left = (£37,700 - £23,030) = £14,670

Chargeable gain £15,000

Less:

A/E (£3,000)

Taxable gain £12,000

CGT £12,000 * 10% = £1,200

The rate used is 10% because the taxable gain of £12,000 fell entirely into the
remaining basic rate band of £14,670 that remained.

When is capital gains tax payable?

Capital gains tax is payable on the 31 January following the tax year.

For 24/25, it is payable on 31/1/26.

Payment on account when a residential property is disposed:

When a residential property is disposed of, a payment on account of CGT must be

made within 60 days of the disposal for this gain.

Calculation of payment on account:

Residential property capital gain

(Current year capital losses before sale of residential property)

(Brought forward capital losses)

(Annual exemption)

= Taxable gain for residential property

Tax on this taxable gain will be paid at 18% or 24% (Depending on whether the
individual is a basic or higher rate taxpayer for the year).

Calculation of nal capital gains tax payable on 31/1/26:

CGT Liability

(POA)

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= x (payable) / (x) (refund from HMRC)

This POA on the disposal of a residential property has nothing to do with the
payments on account that are made for income tax.

Illustration

Anaya is a higher rate taxpayer for 2024/25.

She has the following chargeable gains/loses for the year:

11/4/2024 Capital loss on disposal of shares (£5,000)

1/6/2024 Capital gain on disposal of shares £28,400

31/8/2024 Capital gain on disposal of residential property £90,000

11/3/2025 Capital loss on disposal of shares (£15,000)

What is the payment on account for the residential property and the nal capital
gains tax payment?

Solution

POA:

Residential capital gain £90,000

Less current year capital loss (£5,000)

Less brought forward capital loss (£0)

Less annual exemption (£3,000)

Taxable gain = £82,000 x 24% (Higher rate taxpayer)

= £19,680 is the POA to be made on 30/10/2024 (60 days from the sale)

On 31/1/26 (Final payment)

Residential property gain £90,000

Less current year losses (£20,000)

Less annual exemption (£3,000)

Taxable gain £67,000

CGT at 24% = £16,080

Gain on disposal of shares £28,400

At 20% = £5,680

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Total CGT payable = £16,080 + £5,680 = £21,760

Less POA (£19,680)

CGT payable on 31/1/26 = £2,080

Note that the capital losses and annual exemption are given to the residential
property gain rst as that gain pays tax at 24%, whereas the other gain pays tax at
20%

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 Syllabus C2b. The treatment of capital losses

The treatment of capital losses

Capital losses

1. Current year capital losses are set against current year capital gains in the same
tax year.

2. The set o is made to the maximum possible extent and cannot be restricted to
avoid wasting the annual exemption.

3. If there are insu cient gains to set o the capital losses in the year they arise,
the unrelieved capital losses may be carried forward.

4. The capital losses brought forward are o set after the deduction of the annual
exemption and therefore do not waste the annual exemption.

5. Any unrelieved capital losses brought forward are carried forward to the next
year to be set o against capital gains.

Illustration:

Fiona and Jane made capital gains and capital losses for the years 2023/24 and
2024/25 as set out below:

Fiona Jane
2023/24
Capital gains 13,000 7,000
Capital losses 10,000 20,000
2024/25
Capital gains 14,500 16,200
Capital losses 5,200 2,000

Calculate the taxable gains for Fiona and Jane for both 2023/24 and 2024/25 and
the amount of any losses carried forward at the end of 2024/25.

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 Solution:

Fiona 23/24 24/25

Capital gains £13,000 £14,500

Capital losses (£10,000) (£5,200)

Net capital
£3,000 £9,300
gains/loss

Annual
(£3,000) (£3,000)
exemption
Taxable gain Nil £6,300

Jane 23/24 24/25

Capital gains £7,000 16,200

Capital losses (£20,000) (2,000)

(£13,000) will be carried

Net capital
forward against c. gains £14,200
gains/loss
of 24/25

Annual
Wasted -£ 3,000
exemption

Capital losses
brought forward (£11,200)

Taxable gain Nil Nil

Jane had a loss of 13,000 in 23/24 which was carried forward to 24/25.

After deducting the annual exemption in 24/25 £11,200 of the loss brought
forward was used, therefore £1,800 is carried forward to 25/26.

Note that the current year losses must be set o to a maximum without any
restriction and thus wastage of the annual exemption.

However, capital losses brought forward will only be o set if a gain remains after
deduction of the annual exemption.

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 Syllabus C2c. Transfers between husband and wife or civil partners

Transfers between husband and wife or civil partners

Don’t pay CGT if:

You transfer the assets to your husband or wife or civil partner.

• If a husband transfers an asset to his wife, she would be treated as though

she acquired the asset on the same date and at the same cost as husband
did.

Illustration:

On 01/05/2009 a man acquires a piece of land for £10,000.

On 01/05/2024 he transfers it to his wife when the market value of the land is
£80,000.

• Will a capital gain be assessable on the husband?

Solution:

The wife would be treated as though she acquired the asset on 01/05/2009 for
£10,000.

Therefore, this transfer would have been made at no gain/no loss and no capital
gain would be assessable.

Illustration:

What if this man made the same transfer to his daughter?

• Will a capital gain be assessable on the father?

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Solution:

A capital gain would arise on the father:

Sale proceeds (deemed to be market value) £80,000

Cost (£10,000)

Capital gain £70,000

Annual exemption (£3,000)

Taxable gain £67,000

• Note: As the father made a gift to the daughter and no sale proceeds were
actually received, the market value of the land will be considered to be the
value that the asset is sold for.

You will see the treatment of gifts in C2a

Why is this treatment bene cial?

This treatment is bene cial if one spouse does not have any capital gains and is a
basic rate taxpayer.

• It would be wise to transfer the chargeable asset to this spouse so that they can
fully utilise their annual exemption and pay capital gains tax at the lower rate of
10% since their basic band is not fully being used (unless it is a residential
property, then the lower rate is 18%).

• IF the asset stays with the spouse who is a higher rate payer and already has
capital gains, then an annual exemption allowance would be wasted and capital
gains tax would be paid at 20% (unless it is a residential property, then the
higher rate is 24%).

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Illustration:

Greg owned a piece of land bought on 01/06/2013 for £40,000.

For the tax year 24/25, he has taxable income of £50,000 and already has net
capital gains of £20,000.

He wants to sell this land for sale proceeds of £65,000.

• Greg’s wife is a housewife and does not have any income or capital gains of
her own.

He thinks that it is wise to transfer the asset to his wife and let her sell it.

• What amount of tax will Greg save if he does this?

Solution:

Without transferring the asset to his wife:

• Net capital gains £20,000

• Gain on land (W1) £25,000

• Net capital gains £45,000

• Annual exemption (£3,000)

• Taxable gains £42,000

• Capital gains tax payable at 20% = £8,400

• The CGT payable speci cally on the land is = 20% * £25,000 = £5,000

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W1:

Disposal proceeds £65,000

• Cost (£40,000)

• Net capital gain £25,000

Why is CGT payable at 20% and not 10%?

• This is because he has used his entire basic rate band up with his taxable
income. (Explained in Topic: The treatment of capital gains)

Transferred the asset to wife and she sold it:

• Disposal proceeds £65,000

• Cost (£40,000)

• Net capital gain £25,000

• Annual exemption (£3,000)

• Taxable gain £22,000

• Capital gains tax is payable at 10% because this taxable gain falls entirely
into the basic rate band = £22,000 * 10% = £2,200

• Savings:

• CGT paid by husband on the land: £5,000

• CGT paid by wife on the land: £2,200

• Saving: £2,800

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 Syllabus C2d. Allowable expenditure on a part disposal

Allowable expenditure on a part disposal

Allowable cost for part disposal

A part disposal

If an individual owns a chargeable asset and disposes of only part of it, a capital
gain will arise.

For example, if an individual owns a large piece of land and decides to only dispose
of a part of it, this is known as a part disposal.

Or, if an individual owns 5 antique vases, bought as a set, then disposing of only 2
from the set is considered to be a part disposal of the whole set.
A cost from the entire asset cost must be given to the part of the asset being disposed of.

This is known as the allowable cost. This allowable cost is then deducted from the
proceeds received for the part disposal, to arrive at a capital gain.

How much cost can you deduct from the disposal proceeds?

= Original purchase cost * [A / (A+B)]

Where:

A – Disposal proceeds received

B – Market value of the remainder of the asset (Given in question)

Illustration:

Peter buys a house for £26,000 in October, 1998.

He has never lived in the house as his main residence.

He sells the garden for £100,000 in August 2024, incurring selling costs of £1,000.

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The value of the remaining house in August 2024 is £160,000.

• What capital gain will arise on this sale?

Solution:

Allowable cost for part sold:

• Original purchase cost = £26,000

Proceeds received (A) = £100,000

Market value for the remainder of the house (B) = £160,000

• Original purchase cost * [A / (A+B)]

£26,000 * [£100,000 / (£100,000 + £160,000)] = £10,000

• Notice that only £10,000 is considered to be the allowable cost.

This is because, this is the amount of cost that relates only to the part of the
asset being disposed of.

The other £16,000 is known as the base cost.

It relates to cost that will be used to calculate the capital gain when the
remainder of the asset is disposed of.

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Chargeable gain on sale:

Disposal proceeds £100,000

Incidental cost to sell (£1,000)

Net proceeds £99,000

Allowable cost (£10,000)

Chargeable gain £89,000

Less annual exemption (£3,000)

Taxable gain £86,000

Illustration:

The base cost of remaining house is: Original purchase cost – Allowable costs used.

£26,000 - £10,000 = £16,000

If the remainder of the house was disposed of for £120,000 after one year, what
taxable gain would arise then?

Disposal proceeds £120,000

Allowable cost (£16,000)

Chargeable gain £104,000

Less annual exemption (£3,000)

Taxable gain £101,000

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 Syllabus C2e. Insurance proceeds received for a damaged/lost/destroyed asset.

Insurance proceeds received for a damaged/lost/

destroyed asset.

Damaged/lost/destroyed chargeable asset

When a chargeable asset is destroyed/lost/damaged and the value of the asset has
become negligible (very small value), then a person can make a negligible value
claim.

The asset will be treated as though it has been disposed of at it’s current, negligible
value, therefore the person can realise a capital loss. The asset does not actually
have to be disposed of, it is just a way of realising a loss. When the asset is sold in
the future, the negligible value will be used as its cost.

Illustration:

A painting was acquired for £10,000 and damaged in a re.

It now is worth a negligible amount.

How will it be treated for capital gains tax?

Solution:

Disposal proceeds £ Nil

Acquisition cost (£10,000)

Capital loss (£10,000)

• This capital loss will be relieved against current year capital gains, and if it
cannot be relieved fully, it will be carried forward to be relieved against future
capital gains.

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 • Note the painting could be valued at any amount and this same treatment
would apply.

For example, if the painting was valued at £100,000 at the time it was
damaged, then the capital loss realised would be:

Disposal proceeds £ Nil

Acquisition cost (£100,000)

Capital loss (£100,000)

Insurance proceeds received for damaged/lost/destroyed chargeable asset

You have to pay CGT on the insurance proceeds.

The disposal proceeds are the amount of money received from the insurance
company.

Capital gains calculation:

Proceeds received from insurance company X

Cost of asset lost/destroyed (X)
Chargeable gain X

The disposal is treated as though it occurred in the tax year that the insurance
proceeds are received.

Illustration:

Holly owned a vase which was destroyed on 06/04/2024, she had paid £28,000 for
it on 01/05/2011.

The market value when it was destroyed was £80,000 however she only received
£68,000 of insurance proceeds.

What will the capital gains treatment be if she does not decide to reinvest the
proceeds?

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Solution:

For the tax year 24/25

Insurance proceeds £68,000

Acquisition cost (£28,000)

Chargeable gain £40,000

Annual exemption (£3,000)

Taxable gain £37,000

Note the insurance proceeds received are £68,000, this will be used in the
computation.

It does not matter that the market value at the time of disposal was £80,000 -
the actual insurance proceeds received will be used.

Insurance Rollover Relief (IRR)

You get IRR if the insurance proceeds received are reinvested into another
replacement asset within 12 months of the proceeds being received.

• However, if only some of the proceeds are reinvested, then the proceeds
which are not reinvested will be taxable immediately.

For example:
Insurance proceeds received £1,000
Asset costing £900 was destroyed
Reinvestment in a new asset £950

The capital gain that resulted was £100 (£1,000 - £900)

The £50 of insurance proceeds not reinvested (£1,000 - £950) will be taxable
immediately.

The remaining £50 of capital gain will be deferred to be taxed at a later date.

This is known as the gain rolled over

• How is this £50 of capital gain deferred to be taxed at a later date?

It is deducted from the cost of the replacement asset.

£950 - £50 = £900

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 This £900 is known as the base cost of the replacement asset.

This base cost will be used as the cost of the replacement asset when it is
disposed.

Illustration:

What if Holly used the insurance proceeds to buy a replacement vase for £59,000
on 01/03/2025?

What capital gain will be realisable in this case?

Solution:

Proceeds received £68,000

Acquisition cost (£28,000)

Chargeable gain £40,000

IRR (40,000 - 9,000) balancing gure £31,000

Capital gain realisable now (w1) £9,000

Working 1:

Proceeds received £68,000

Proceeds reinvested within 12 months of receipt (£59,000)

Capital gain realisable now (w1) (proceeds not reinvested) £9,000

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Base cost of replacement vase:

Cost to acquire the new vase – Capital gain rolled over = Base cost of replacement
vase

Capital gain rolled over:

Total capital gain £40,000

Gain realised immediately (£9,000)
Capital gain rolled over £31,000

Cost of new vase £59,000

IRR (£31,000)

Base cost of vase £28,000

What if Holly disposes of the new vase after 10 years for £100,000?

Proceeds received £100,000

Base cost (£28,000)

Chargeable gain £72,000

Annual exemption (£3,000)

Taxable gain £69,000

Insurance proceeds used in restoration

If an individual receives insurance due to the damage of an asset and spends the
insurance proceeds on restoring the asset plus an additional amount, the base cost
of the asset will be treated as:

Cost £X
(Insurance proceeds received) (£X)
+ Additional amount spent £X
Base Cost £X

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Illustration:

On 15/01/2025, a timepiece owned by Kamal fell and was badly damaged.

The timepiece had been purchased for £99,000. Kamal received insurance
proceeds of £54,000 and he additionally spent a total of £45,000 on restoring the
timepiece to working condition again.

What is the base cost of the timepiece after restoring it?

Solution:

Cost £99,000
Proceeds (£54,000)
Additional spent £45,000
Base cost £90,000

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 Syllabus C3. Gains and losses on the disposal of movable
and immovable property

Syllabus C3ab. Chattels and wasting assets

Chattels and wasting assets

Exempt chattels and wasting assets.

Chattels

A chattel is a piece of tangible, movable property (something that you can touch
and move).

Your personal possessions will normally be chattels.

For example, items of household furniture, paintings, items of plant and machinery
xed to a building.

Some chattels are exempt and some are chargeable to capital gains tax.

A wasting chattel is exempt from capital gains tax.

A wasting chattel is one with a life of 50 years or less.

For example, racehorses, boats.

Exception to the exemption of wasting chattels:

Plant and machinery (with a life of less than 50 years) on which capital allowances
have been claimed are treated as non wasting chattels.

A capital gain needs to be calculated on their disposal, but a capital loss will not be
allowable on their disposal.

It is possible that they are exempt under the non-wasting chattel exemption (being
bought and sold for less than or equal to £6,000).

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Non wasting chattel capital gains calculation:

Cost Proceeds Treatment

<=£6,000 <=£6,000 Exempt

<=£6,000 >£6,000 Normal calculation but the gain is restricted to 5/3*(Gross

proceeds-£6,000)

>£6,000 <£6,000 Deemed gross proceeds = £6,000

>£6,000 >£6,000 Normal calculation

Illustration:

Maria sold the following assets in December:

1. An antique table which had cost £3,000 and was sold for £5,000

2. A painting which had cost £2,000 and was sold for £10,000

3. An antique vase which had cost £8,000 and was sold for £3,000

4. A set of china which had cost £7,000 and was sold for £8,000.

Solution:

1. The table is exempt as it was bought and sold for less than £6,000

2. The painting:

Proceeds £10,000

Cost (£2,000)

Capital gain £8,000

Maximum gain assessable = 5/3*(£10,000-£6,000) = £6,667

3. The vase:

Deemed proceeds £6,000

Cost (£8,000)

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 Capital loss £(2,000)

The proceeds are deemed to be £6,000 as it was bought for more than
£6,000 and sold for less than £6,000.

4. The china:

Proceeds £8,000

Cost (£7,000)

Capital gain £1,000

This is the normal calculation as the set of china had been bought and
sold for more than £6,000.

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 Syllabus C3c. Principal private residence relief

Principal private residence relief

Principal Private Residence Relief

What is it?

Simply, don't pay any tax if you sell your house.

• But you will have to if you didn't live there all the time or used it for business
purposes.

How much capital gain is exempt with PPR Relief?

• FULL exemption

If you occupied the property throughout the entire period of ownership.

• Partial exemption

If you stay there only for part of the period.

This is calculated as:

Capital gain * Period of occupation/Period of ownership

There are however periods of absence which are deemed to be full occupation

1. Last 9 months - if the property was the individuals main residence at some
point in time.

For example An individual purchased a house on 31/03/2006, he lived in it

for 2 months and then travelled the world, living in hotels until he sold it on
31/03/2025.

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 The last 9 months of ownership of the house, from 01/07/2024 - 31/03/2025
will be considered to be occupied by the individual, even though he did not
live there at the time.

2. Any periods during which the individual was required by his employment to
live abroad.

The person must come back to live in the house after this period in order for
this time to be considered to be deemed occupation.

For example An individual purchased a house in London on 31/03/2006, he

lived in it for 2 months and then moved to Barbados for employment for 4
years, he then returned to live in the house until he sold it on 31/03/2025.

For capital gains tax purposes the 4 years during which the individual lived
abroad will be considered to be deemed occupation by the individual.

This is because the reason for living abroad was employment purposes and
he moved back to the house when he returned.

3. Any period up to four years during which the individual is required to live
elsewhere in the UK due to employment.

The person must come back to live in the house after this period in order for
this time to be considered to be deemed occupation.

For example An individual purchased a house in London on 31/03/2006, he

lived in it for 2 months and then moved to Newcastle for employment for 4
years, he then returned to live in the house until he sold it on 31/03/2025.

For capital gains tax purposes the 4 years during which the individual lived
elsewhere in the UK will be considered to be deemed occupation by the
individual.

This is because the reason for living elsewhere in the UK was employment
purposes and it was for 4 years only, and he moved back to the house when
he returned.

4. Up to three years for any reason.

The person must come back to live in the house after this period in order for
this time to be considered to be deemed occupation.

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 For example An individual purchased a house on 31/03/2006, he lived in it
for 2 months and then traveled the world until 31/03/2009, he then moved
back to the house and lived in it until he sold it on 31/03/2025.

For capital gains tax purposes the 3 years during which the individual was
travelling will be considered to be deemed occupation by the individual.

This is because the reason up to 3 years for any reason is allowable and he
lived in the house when he returned.

For points 2 and 3, where an individual is not living in their main residence
due to work, if they do not return to their house to live in it after because of
another work engagement immediately after the rst one, this will still be
considered deemed occupation.

Illustration:

On 30 September 2024, Jane sold a house for £400,000.

The house had been purchased on 1 October 2004 for £167,500.

Jane occupied the house as her main residence from the date of purchase until 31
March 2008.

The house was then unoccupied between 1 April 2008 and 31 December 2011 due
to Jane moving to Chicago for work.

From 1 January 2012 until 31 December 2018, Jane again occupied the house as
her main residence.

The house was then unoccupied until it was sold on 30 September 2024.

What capital gain arises on this sale?

Solution:

Principal private residence exemption £174,375 (232,500 x 180/240).

The total period of ownership of the house is 240 months (180 + 60), of which 180
months qualify for exemption as follows because the unoccupied period from 1
January 2019 to 31 December 2023 is not a period of deemed occupation because
it was not followed by a period of actual occupation.

£
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 Disposal proceeds 400,000

Acquisition cost (167,500)

232,500
PPR Exemption (174,375)
Capital gain 58,125

Exempt months Chargeable months

1 October 2004 to
42
31 March 2008 (occupied)

1 April 2008 to
31 December 2011 45
(working overseas)

1 January 2012 to
31 December 2018 84
(occupied)

1 January 2019 to
60
31 December 23 (unoccupied)

1 January 2024 to
30 September 2024 9
( nal 9 months)

180 60

Illustration:

Dolly bought a house on 1 April 1995 for £10,000.

She lived in it for 3 months.

Then she worked abroad for 24 months.

She came back and lived in the house for another 174 months.

Then she lived and worked elsewhere in UK for 48 months.

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 Dolly never returned to the house and it was sold 108 months later in December
2024 for £150,000.

Calculate the chargeable gain arising.

Solution:

The total period of ownership of the house is 357 months, out of which 210 months
qualify for the PPR exemption.

The 4 years of working elsewhere in the UK cannot be classi ed as deemed

occupation because she never returned to the house to live in it after that.

The exemption is 210/357 * £140,000 = £82,353

Disposal proceeds 150,000

Less cost (10,000)

Capital Gain 140,000

Less PPR relief (W1) (82,353)

Chargeable Gain 57,647

Actual & Deemed Absent

(W1)
Occupation (months) (months)
(actual) 3
(working overseas) 24
(actual) 174

4 years work in the UK 48

Living elsewhere 99

(4 years work in UK/

9
last 9 months)

210 147

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Business use
Where part of a residence is used exclusively for business purposes throughout the
period of ownership, the gain in relation to that part is not covered by relief.

Illustration:

On 30 September 2024, Henry sold a house for £155,000.

The house had been purchased on 1 October 2013 for £100,000.

Throughout the period of ownership, the house was occupied by Henry as his main
residence, but one of the house’s ve rooms was always used as Henry's o ce
premises.

What capital gain arises on this disposal?

Solution:

The principal private residence exemption is restricted to £44,000 (55,000 x 4/5).

This is because 1 out of 5 rooms of the house has always been used only for
business purposes.

The capital gain arising on the sale is £11,000

Disposal proceeds 155,000

Acquisition cost (100,000)

PPR exemption (44,000)

Capital gain 11,000

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Letting relief
If an individual lives in a property as their main residence and while living in the main
residence, they let all or part of the residence for residential purposes;

on the disposal of this property, in addition to claiming PPR relief, the letting relief is
also available to reduce the capital gain.

This relief is the lower of:

• PPR relief given

• £40,000

• Gain attributable to letting

Illustration:
Susan purchased a house for £200,000 in 2000 and sold it for £350,000 in 2024.

Throughout this time, she lived in the house as her only residence but let out two spare
rooms amounting to 25% of the property to tenants who had exclusive use of their rooms.

What is the chargeable gain after the PPR exemption and letting relief exemption?

Solution:

Sale proceeds £350,000

Less cost (£200,000)

Chargeable gain £150,000

PPR (£112,500)

Letting (£37,500)

Chargeable gain £Nil

Explanation:

Susan made a chargeable gain of £150,000 when she sold the property.

She is entitled to claim PPR on 75% of the gain (75% x £150,000 = £112,500)

She will qualify for letting relief as she is sharing occupation of the property with her
tenants.

Gain attributable to the letting is £150,000 x 25% = £37,500

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 (W1) Letting relief is the lower of:

(i) PPR relief gure £112,500

(ii) £40,000

(iii) Gain attributable to letting £37,500

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 Syllabus C4. Gains and losses on the disposal of shares
and securities

Syllabus C4a. Gift of quoted shares

Gift of quoted shares

If you give away shares as a gift

You will have to pay Capital gains tax on it

Step by step approach:

1. Step 1
Value the shares using:

Lower quoted price + 1/2 (higher quoted price - lower quoted price)

Note: the share valuation rules are di erent for IHT so be careful not to confuse
them

2. Step 2
Calculate Disposal proceeds
= Number of shares given * value per share (step 1)

Illustration:

Megha gifted 1,000 shares in N plc when they were quoted at 400-408 pence
per share, with marked bargains on that day of 398p, 402p, and 407p.

• Calculate the value to be used for capital gains disposal proceeds.

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 Solution:

1. Step 1 - Value the shares

400 + 1/2 (408 - 400) = 404p

Note: the marked bargains are not relevant for CGT life gifts but they would be
relevant for IHT

2. Step 2 - Calculate Disposal proceeds

= Number of shares given * value per share (step 1)

= 1,000 shares * £4.04 = £4,040

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 Syllabus C4bc. Identi cation rules for individuals

Share matching rules for individuals

Share matching rules

The problem

When shares are disposed of, a problem arises in nding their allowable cost, if
the shares were acquired over a long period of time.

The solution
To make this simpler, HMRC uses a set of rules to determine the acquisition date
and cost of the shares being disposed of.

These rules are called the matching rules.

Disposals of shares are matched with acquisitions in the following order:

1. Shares acquired on the same day of disposal.

2. Shares acquired in the next 30 days following the disposal (FIFO).

3. Shares from the share pool.

This would be much easier to understand if we did an example!

Illustration:

Benazir owns shares in L plc.

She acquired 1,500 shares in the company on 31/05/2022 for £20,000, and 500
shares on 30/06/2023 for £10,000.

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On 07/03/2025 Benazir bought a further 200 shares in L plc. for £4,000.

Benazir sold 1,000 shares in L. plc for £25,000 on 28/02/2025.

Calculate Benazir’s capital gain on the disposal of the shares in February 2025.

Solution:

We need to dispose of 1,000 shares.

Let us apply our matching rules to see which shares we are disposing of.

FIRST MATCH –
SECOND MATCH – 30 days THIRD MATCH –
same day
following disposal acquisition share pool
acquisition
800 shares
07/03/2025 – 200 shares for
None. needed from share
£4,000.
pool.

Share pool:

Description Number Cost

31/05/2022 purchase 1,500 20,000

30/06/2023 purchase 500 £10,000

2,000
Total £30,000
shares
(800
Disposal from share pool (800/2000) * £30,000 = (£12,000)
shares)
1,200
Remaining in share pool £18,000
shares

Specially note how the cost of the shares from the share pool is calculated.

(No. of shares to be disposed from pool/Total shares in pool) * Total cost in pool =
Average cost that we apply to our disposal

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Calculating capital gain:

Disposal proceeds £25,000

Acquisition cost:

07/03/25 (£4,000)

Share pool (£12,000)

Capital gain £9,000

• You also might want to try to draw a timeline to ensure that you do not miss
any acquisition dates!

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 Syllabus C4d. Bonus issues, rights issues, takeovers and reorganisations

Bonus issues, rights issues, takeovers and

reorganisations

Bonus Issues

This is an issue of shares to existing shareholders in proportion to the number of

shares owned.

• For example, if you owned 500 shares and a 1:5 bonus issue was declared,
you would receive (500/5) *1 = 100 bonus shares.

• These shares are deemed to be acquired at the same date and at the same
cost as the original shares to which they relate.

They have no cost of their own.

Therefore, in your share pool, a bonus issue will only result in an increase in
the number of shares, and no increase in the cost of shares

Illustration:

Mina purchased shares in C Co.

The details of her purchases are below:

• May 2024 Purchased 3000 shares for £3,000

• Jan 2025 Purchased 1500 shares for £2,000

• March 2025 Bonus issue of 1:3 declared by the company

• How many shares will Mina receive under the bonus issue?

• What is the cost of these shares?

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 Solution:

• Total shares in company = 4,500

• New shares received = (4,500/3) * 1 = 1,500

• The bonus shares will have a cost of £0

A rights issue
occurs where a company o ers its existing shareholders the right to buy extra
shares.

Rights issues are similar to bonus issues in that the number of shares o ered to
each shareholder is generally in proportion to his or her existing shareholder.

• The only di erence is that a price is paid for these shares.

• The price for the shares is normally lower than current market value, in order
for the existing shareholders to be attracted to taking up the issue.

Illustration:

Jack is an employee in Jill Ltd.

He had the following transactions in the company’s shares:

• Jul 2024 Purchased 6,000 shares for £15,000

• Sep 2024 Purchased 900 shares for £2,700

• Dec 2024 Took up 1:5 rights issue for £2.00 per share

• What will the rights issue cost Jack if he decides to subscribe to the issue
fully?

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 Solution:

• Total shares in company = 6,900

• New shares received = (6,900/5) * 1 = 1,380 shares

• The rights shares will have a cost of £2.00 * 1,380 shares = £2,760

Bonus issues and rights issue and disposal

• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.

• The bonus issues will be included in the share pool at no cost and the rights
issue shares will be included in the share pool at their respective cost.

• Nothing changes with the matching rules.

Takeovers/Reorganisations
Takeovers or company reorganisations normally occur when a company is facing
nancial di culty.

They attempt to change the structure and ownership of a company by having

another company take over the individual company.

This will result in the identity and management changed of the individual
company, in the hope of better decisions being made for the company in the
future, resulting in a longer life for the company.

Takeovers/Reorganisations can either be for a share for share exchange, or a

takeover can be for a cash exchange.

We will deal with both of these situations separately via the use of illustrations.

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 Takeovers (share for share exchange)

• If a takeover is for a share for share exchange, then no capital gains tax
arises immediately.

• The market value of the new holding provided will be used to apportion our
initial holding cost.

• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.

Illustration:

Jayna owned 2000 shares in A plc. which cost her £2,000 in 2014, and A plc
was being taken over by B plc in 2025.

• Jayna was o ered by B. plc 1,500 ordinary shares with a market value of
£3,000 and 500 preference shares with a market value of £1,000.

• Jayna takes up the o er.

• Will capital gains tax arise immediately?

• If not, when Jayna sells these new ordinary shares and new preference
shares, what cost would be attributed to each?

Solution:

There will be no immediate charge to CGT as this is a ‘paper for paper’

exchange - there is no cash involved.

The original cost of the A Plc shares will just need to be apportioned between
the new ordinary and preference B Plc shares.

Total market value of new holding: £3,000 + £1,000 = £4,000

• Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost

• = £3,000/£4,000 * £2,000 = £1,500

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 Cost attributed to preference shares:

Market value of preference shares/Total market value of new holding * original

cost

• = £1,000/£4,000 * £2,000 = £500

• Jayna needs to use these costs as the acquisition cost when she decides to
sell the shares in B. plc.

(She cannot use the market value of the shares when they were given to her).

Takeovers (share for cash exchange)

• If a takeover is for a share for cash exchange, capital gains tax will arise
immediately for the proportion of cash given compared to the total market
value of the new holding.

• The market value of the new holding provided will be used to apportion our
initial holding cost to be used.

Illustration:

Jayna owned 2000 shares in A plc which cost her £2,000 in 2014, and A plc was
being taken over by B plc in 2025.
Jayna was o ered by B. plc 1,500 ordinary shares with a market value of £3,000 and
cash of £1,000.

• Jayna takes up the o er.

• Will capital gains tax arise immediately?

Solution:

Total market value of new holding: £3,000 + £1,000 = £4,000

Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost

= £3,000/£4,000 * £2,000 = £1,500

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Cost attributed to cash given:

Cash received/Total market value of new holding * original cost

= £1,000/£4,000 * £2,000 = £500

Jayna needs to use this £500 as the acquisition cost of the shares that she is
deemed to have disposed of for the cash received.

Capital gains:

Disposal proceeds £1,000

Acquisition cost (£500)

Capital gain £500

No capital gain will arise on the share element, as described above.

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 Syllabus C4e. Exemptions available for gilt-edged securities and qualifying corporate bonds

Exemptions available for gilt-edged securities and

qualifying corporate bonds

Exemptions

Disposals of gilt edged securities and qualifying corporate bonds are exempt from
capital gains tax.

A qualifying corporate bond is:

A normal commercial loan

In sterling

Cannot be converted into other shares, securities or currencies.

Issued on or after 13/03/1984

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 Syllabus C5. Entrepreneurs’ relief/Business asset disposal
relief

Syllabus C5b. Explain and apply entrepreneurs’ relief/business asset disposal relief

Entrepreneurs’ relief/Business asset disposal relief

Entrepreneur’s relief/Business asset disposal relief

covers the rst £1,000,000 of qualifying chargeable gains that a person makes in
their lifetime.

• It operates by charging CGT at 10% for the disposals on which it is claimed

regardless of an individual’s taxable income.

Conditions to get the relief:

1. The asset must have been owned for at least 2 years prior to the disposal.

2. The election for the relief must be made by the anniversary of the 31/01
following the tax year of the disposal.

Therefore, if the tax year of disposal is 24/25, then the election must be made by
31/01/27.

(It is not the 31/01 immediately after the tax year, it is the one following the tax
year of the disposal.)

3. It must be a disposal of a qualifying asset.

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 Qualifying assets include:

1. The disposal of a whole business run by a sole trader or by partners in a

partnership.

The assets must have been used in the trade to qualify for the relief.

Also, the entire business must be disposed of, if a single trading asset is
disposed of it, it will not qualify for the relief.

2. Individual business assets of the individual’s or partnership’s trading

business that has now ceased.

Note the disposal of assets must take place within three years of cessation of
trade.

The di erence here is that the entire business is not being sold, it is being
shut down.

Therefore, no trading activity will continue and this is why the assets can be
disposed of within 3 years of cessation

3. The disposal of shares in a trading company, where the individual has 5%

shareholding and is also an employee of the company, for 2 years prior to the
disposal.

Entrepreneurs’ relief/Business asset disposal relief will be available on the

entire disposal, regardless of whether the trading company owns assets for
investment or not.

Illustration:

On 14 October 2024, a shareholder of Numbers Ltd, an unquoted trading company,

sold his entire shareholding in the company.

He had been the advertising director of Numbers Ltd since the company’s
incorporation on 1 December 2023.

He had 40% shares in the company since its incorporation on 1 December 2023.

Will this disposal qualify for entrepreneurs’ relief/business asset disposal relief?

Solution:

This disposal will not qualify for entrepreneurs’ relief/business asset disposal relief
because:

• The shares were owned for less than 2 years.

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 Illustration:

Sunder disposed of his business to an unconnected person. The business had the
following asset values:

• Goodwill £150,000

• Freehold o ce £200,000

• Inventory stock £20,000

• Debtors £30,000

• Investment property £100,000

• Cash £50,000

• Which of the assets will qualify for entrepreneurs’ relief/business asset

disposal relief on disposal of the entire business?

Solution:

The investment property does not qualify for entrepreneurs’ relief/business asset
disposal relief as only assets that are used in the trade can qualify.

An investment property is just held for investment, not used in the trade.

Market
Asset Capital gains tax treatment
Values

Entrepreneurs’ relief/Business asset

Goodwill £150,000
disposal relief available. Taxed at 10%

Entrepreneurs’ relief/Business asset

Freehold o ce £200,000
disposal relief available. Taxed at 10%

Inventory stock £20,000 Exempt

Debtors £30,000 Exempt
Cash £50,000 Exempt
Investment
£100,000 Taxed normally at 10% or 20%.
property

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 Illustration:

In March 2025, Sunder also disposed of a 20% shareholding in Cow Ltd.

He had been an employee of Cow Ltd. since January 2023, when he acquired the
shares.

The gain arising on disposal was £200,000.

• Will this gain be eligible for entrepreneurs’ relief/business asset disposal

relief?

Solution:

Yes it will be.

This is because he has owned the shares and worked in the company for more than
2 years.

Illustration:

On 30 October 2024, Bhumi sold a business that she had run as a sole trader since
1 February 2017 to an unconnected person. The disposal resulted in the following
chargeable gains:

Goodwill 150,000

Freehold o ce building 400,000

Freehold warehouse 180,000

730,000

The warehouse had never been used by Bhumi for business purposes.

Bhumi has taxable income of £6,000 for the tax year 2024/25.

She has unused capital losses of £30,000 brought forward from the tax year
2023/24.

What is Bhumi's capital gains tax liability for the year?

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 Solution:

Gains qualifying for entrepreneurs’ relief/business asset disposal £

relief
Goodwill 150,000
Freehold o ce building 400,000
550,000
Other gains
Freehold warehouse 180,000
Annual exempt amount (3,000)
177,000
Capital losses brought forward (30,000)
147,000

Capital gains tax: 55,000

550,000 at 10%
147,000 at 20% 29,400
Tax liability 84,400

Explanation:

• The capital losses and the annual exemption are set against the gains that do
not qualify for entrepreneur’s relief/business asset disposal relief.

• This is because it saves more tax to set the losses and exemptions against gains
that are taxed at a higher rate of 20%.

• £31,700 (37,700 – 6,000) of Mika’s basic rate tax band is unused, but this
remaining band limit is rst set against the gains qualifying for entrepreneurs’
relief/business asset disposal relief of £550,000 even though this has no e ect
on the 10% tax rate.

• If there is any basic rate band remaining, then it will be used for gains that do not
qualify for entrepreneurs’ relief/business asset disposal relief.

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Things to note:

• a) Gains that qualify for entrepreneurs’ relief/business asset disposal relief will
take priority in using up the basic rate band limit rst.

Therefore, it is likely that other capital gains will normally fall into the higher
band and pay CGT at 20%.

• b) The annual exemption and relief for losses is not automatically given to the
gains which qualify for entrepreneur’s relief/business asset disposal relief.

Therefore 2 separate calculations should be made and gains which do not

qualify should be given the annual exemption and losses carried forward rst,
in order to save CGT at a higher rate.

Note: From 6 April 2019, where an unincorporated business has been sold to a
company wholly or partly in exchange for shares, and incorporation relief has been
applied, the period when the individual owned the unincorporated business now
counts towards the qualifying two year period.

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 Syllabus C5. Investor’s relief

Syllabus C5b. Explain and apply investor’s relief

Investors’ relief e ectively extends entrepreneurs’ relief/business asset disposal relief to

external investors in unquoted trading companies.

To qualify for investors’ relief shares must be:

Newly issued and acquired by subscription;

Owned for at least 3 years after 17 March 2016.

£10m lifetime limit (in addition to the entrepreneurs’ relief/business asset disposal relief
limit)

Gains taxed at 10%

Investor must not be an employee or director of the company whilst holding the shares in
that company.

Illustration:
On 6 November 2021 Elise subscribed for 100,000 £1 ordinary shares (a 3% holding) in Oz
Ltd, an unquoted trading company, at their par value.

She has never been an employee or director of the company.

On 22 November 2024 Elise sold the shares for £700,000.

Elise’s shareholding does not qualify for Entrepreneurs’ Relief/Business asset disposal relief
as she was not an employee and did not hold 5% or more of the share capital of Oz Ltd.

However, she does qualify for Investors’ Relief - newly issued shares acquired by
subscription and owned for more than 3 years.

Elise’s capital gains tax liability would be:

Chargeable gain £600,000

AE £(3,000)

Taxable gain £597,000

CGT: £597,000 x 10% = £59,700

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Syllabus C6. The use of exemptions and reliefs to minimise
capital gains tax

Syllabus C6ai. Rollover relief

Rollover relief

Rollover relief (The replacement of business assets)

If you sell your warehouse and buy a new one, you can decrease the Capital
gain by deducting the new warehouse's purchase costs.

Conditions:

1. The new and old assets must be used for business purpose.

2. You have to replace the asset 12 months prior to the sale or 36 months post
the sale.

3. No Rollover relief is available if the amount not reinvested exceeds the

chargeable gain. (See below)

Qualifying assets:

• Land and buildings.

• Fixed plant and machinery.

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 Step by step approach

1. Step 1 - Get the information

About the OLD asset:

- Disposal proceeds of the OLD asset
- Original purchase costs of the OLD asset
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees)

About the NEW asset:

- Purchase costs of the NEW asset

2. Step 2 - Calculate the Chargeable gain

Disposal proceeds X
The Original Purchase costs (X)
Legal fees (X)
Chargeable gain X (proceeds not reinvested)

3. Step 3 - Calculate how much is NOT reinvested

Disposal proceeds - Purchase costs of the NEW asset

How much you get for the OLD asset X

How much you pay for the NEW asset (X)
Amount NOT reinvested X

4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds

the Chargeable gain (Step 2)

No Rollover relief is available if the amount NOT reinvested exceeds the

chargeable gain.

5. Step 5 - Calculate the new Chargeable gain

Disposal proceed X
The Original Purchase costs (X)
Chargeable gain X
Rollover relief (Balancing gure) (X)
The new Chargeable gain (Step 3) X (proceeds not reinvested)

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 6. Step 6 - Calculate Base cost

Basically, the Purchase costs of the NEW asset less the Rollover relief

This base cost will be used as the cost of the new o ce when it is disposed of in
the future.

Illustration 1

Peter sold a freehold warehouse for £200,000 on 1 January 2025.

The warehouse had been purchased for £150,000.

Peter incurred legal fees of £10,000 in connection with the purchase.

On 1 February 2025, he bought another freehold factory for £100,000.

Required:
Calculate the chargeable gain.

Step by step answer

1. Step 1 - Get the information

About the OLD asset:

- Disposal proceeds of the OLD asset = £200,000
- Original purchase costs of the OLD asset = £150,000
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees) =
£10,000

About the NEW asset:

- Purchase costs of the NEW asset = £100,000

2. Step 2 - Calculate the Chargeable gain

Disposal proceed 200,000

The Original Purchase costs (150,000)
Legal fees (10,000)
Chargeable gain 40,000

3. Step 3 - Calculate how much is NOT reinvested

How much you get for the OLD asset 200,000

How much you pay for the NEW asset (100,000)
Amount NOT reinvested 100,000

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 4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds
the Chargeable gain (Step 2)

Amount NOT reinvested (Step 3) = £100,000 > Chargeable gain (Step 2) =

£40,000

No Rollover relief is available if the amount NOT reinvested exceeds the

chargeable gain.

Therefore the chargeable gain will be £40,000.

Illustration 2

Peter sold a freehold warehouse for £300,000 on 1 January 2025.

The warehouse had been purchased for £150,000.

On 1 February 2025, he bought a freehold factory for £200,000.

Required:
Calculate the chargeable gain.

Step by step answer

1. Step 1 - Get the information

About the OLD asset:

- Disposal proceeds of the OLD asset = £300,000
- Original purchase costs of the OLD asset = £150,000

About the NEW asset:

- Purchase costs of the NEW asset = £200,000

2. Step 2 - Calculate the Chargeable gain

Disposal proceed 300,000

The Original Purchase costs (150,000)
Chargeable gain 150,000

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 3. Step 3 - Calculate how much is NOT reinvested

How much you get for the OLD asset 300,000

How much you pay for the NEW asset (200,000)
Amount NOT reinvested 100,000

4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds

the Chargeable gain (Step 2)

Amount NOT reinvested (Step 3) = £100,000 < Chargeable gain (Step 2) =

£150,000

5. Step 5 - Calculate the new Chargeable gain

Disposal proceed 300,000

The Original Purchase costs (150,000)
Chargeable gain 150,000
Rollover relief (balancing gure) 150,000 - 100,000 = (50,000)
The new Chargeable gain (Step 3) 100,000

Illustration 3

Jeremy sold his business o ce on 30/06/2024 for £350,000.

This o ce cost him £100,000.

He bought another business o ce for £250,000 on 31/12/2024.

• How much of his capital gain can be rolled over?

• What is the base cost of his new business o ce?

Solution:

Disposal proceeds £350,000

Acquisition cost (£100,000)

Chargeable gain £250,000

Rollover relief (balancing gure) (250,000 - 100,000) (£150,000)

Capital gain now (w1) (proceeds not reinvested) £100,000

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 W1 Proceeds not reinvested:

Old o ce sale proceeds £350,000

New o ce costs (£250,000)

Capital gain to be realised now £100,000

Base cost of new business o ce:

Cost of new o ce £250,000

Rollover relief (£150,000)

Base cost of new o ce £100,000

• This base cost will be used as the cost of the new o ce when it is
disposed of in the future.

Qualifying assets that are not fully used in the business

Assets that are not used in the business entirely will have restrictions for roll over
relief on sale.

The amount of gain that cannot be rolled over, and must be realised now is:

% of asset not used in business * Chargeable gain.

Illustration:

Jeremy had another property purchased for use in his business.

However, he did not require the entire property for his business and rented out
20% of the property.

The property cost him £400,000 on 06/06/2012 and he sold it for £800,000 on
06/06/2024.

He bought another property for use in his business on 12/12/2024 for £900,000.
He will use 100% of this property for his business.

• How much of his capital gain can be rolled over?

• What is the base cost of his new business o ce?

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 Solution:

Disposal proceeds £800,000

Acquisition cost (£400,000)

Chargeable gain £400,000

Rollover relief (400,000 - 80,000) (£320,000)

Capital gain now (W1) £80,000

W1:

Chargeable gain £400,000

All proceeds relating to the business element of the property were reinvested
(80%*£800,000) BUT 20% of the property was not used in business (£80,000 =
20% * £400,000)
Therefore, Rollover relief is restricted to £320,000 (£400,000 - £80,000)

Base cost of new business o ce:

Cost of o ce £900,000

Gain to be rolled over (£320,000)

Base cost of new o ce £580,000

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 Syllabus C6aii. Holdover relief

Holdover relief

Holdover relief

If the new asset purchased is a depreciating asset (an asset with an expected
life of 60 years or less at the time of acquisition) for example, leasehold land and
buildings or xed plant and machinery the gain arising on the disposal of the old
asset is not rolled over and cannot be deducted from the cost of the new asset.

Instead, the gain is to be temporarily frozen or “held over” until it becomes

chargeable on the earliest of the 3 following dates:

1. Date on which the new asset is disposed of.

2. Date on which the new asset ceases to be used in the trade.

3. 10th anniversary of acquisition of the new asset.

Illustration:

Craig purchased a freehold factory in 2013 for £100,000.

In June 2023, he sold it for £300,000 and purchased a leasehold factory with a
55-year lease for £350,000 in December 2023.

Craig then sold the leasehold factory in October 2024 for £400,000.

• What capital gain will be chargeable in the tax year 23/24 and in 24/25?

Solution:

• 23/24 capital gain:

Disposal proceeds £300,000

Acquisition cost (£100,000)

Capital gain £200,000

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 Gain held over (W1) (£200,000)

Chargeable gain Nil

• 24/25 Capital gain:

Disposal proceeds £400,000

Acquisition cost (£350,000)

Capital gain £50,000

+
Capital gain held over £200,000

Total capital gain £250,000

W1:

Disposal proceeds received £300,000

Disposal proceeds reinvested (£350,000)

Capital gain now Nil

• Therefore, the entire gain (£200,000) will be held over as all of the disposal
proceeds are reinvested.

Note:

The £200,000 capital gain held over becomes chargeable in the tax year 2024/25
because the asset against which it was held over has been sold.

Also note that the gain held over was not deducted from the cost of the new
asset, it was held over in its own right.

No holdover relief for assets that do not qualify.

Holdover relief is available for qualifying business assets (chargeable business

assets).

Qualifying business assets are basically assets that are used in the business, not
assets held for investment (chargeable assets).

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 Therefore, if a gift is made of unquoted shares (a qualifying business asset),
holdover relief is available for the capital gain, however it will not be available for
the proportion of assets held by the business for investment (non-business)
purposes.

Illustration:

On 5 October 2024, Tina made a gift of her entire holding of 20,000 £1 ordinary
shares in Banana Ltd, a personal company, to her daughter.

The market value of the shares on that date was £200,000.

The shares had been purchased on 1 January 2020 for £140,000.

On 5 October 2024, the market value of Banana Ltd’s chargeable assets was
£150,000, of which £120,000 was in respect of chargeable business assets.

Tina and her daughter have elected to hold over the gain as a gift of a business
asset.

What chargeable gain will arise on this gift?

Solution:

Tina’s chargeable gain is:

Deemed proceeds £200,000

Cost (£140,000)
£60,000
Holdover relief (£48,000) W1
£12,000

WI

Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), the

proportion of chargeable assets to chargeable business assets.

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 Capital gains in the exam

Capital gains in the exam

Capital gains tax in the exam

Tips for the exam

Below are a few tips for the exam!

Good luck!!

• Make sure you identify any exempt disposals so that you do not waste time
performing unnecessary calculations.

• An unincorporated business is not treated as a separate entity for CGT

purposes. Therefore, when a business is disposed of you should deal with
each asset separately.

• Do not forget to deduct the annual exempt amount if it is available.

• When dealing with shares it is important to look carefully at the dates to see if
same day or 30-day matching is applicable.

• It is important to establish how much of a person’s basic rate tax band is

available. Remember that a taxable income gure is after the personal
allowance has been deducted.

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 Syllabus C6b. Basic capital gains tax planning

Capital gains tax planning

How to plan to minimise the capital gains tax liability?

Gifting or selling assets has 2 results for tax - inheritance tax and capital gains tax,
therefore the choice to gift must be made carefully, in order to avoid both taxes!

Example

A owns 100% of the shares in A Ltd an unquoted trading company.

A Ltd has 100,000 £1 ordinary shares in issue all of which were subscribed for at
par by A in 2005, from which date A has been the managing director of the
company.

Share valuations have now been agreed as follows:

20% £10 per share
40% £15 per share
80% £20 per share
100% £25 per share

What are the tax implications of gifting 20,000 of his shares to his daughter?

Inheritance tax implications

For IHT purposes the gift would be a potentially exempt transfer (PET) and have no
immediate tax implications.

If A died within 7 years of the transfer the PET would become chargeable at either
nil rate and / or 40% rate depending upon what other transfers had been made by A
prior to this gift.

If A survived for at least 3 years then any IHT computed would be reduced by taper
relief.

Any such IHT payable would be payable by the donee, V and should be paid within
6 months of the end of the month in which the death occurred.

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 The value of the PET would be the fall in value of the estate of A.

Before the gift 100,000 shares @ £25ps £2,500,000

After the gift 80,000 shares @ £20ps £(1,600,000)

Transfer of value £900,000

Capital gains tax implications

The shares are £1 ordinary shares which were subscribed for at par, so the cost is
£1 per share.

The gain that arises would be included in the net gains of the tax year from which
the annual exempt amount would be deducted to derive the taxable gain.

The question then arises as to what tax rate would apply?

Shares in unquoted trading companies are a qualifying business asset for purposes
of entrepreneurs’ relief/business asset disposal relief and as A owns the minimum
required 5% shareholding and is an employee of the company, a claim for
entrepreneurs’ relief/business asset disposal relief is available and will result in a
10% tax rate being applied to the taxable amount of the gain.

There is however another RELIEF that is available where such an asset is gifted!

Yes gift relief is available to be claimed, jointly by A and V, as shares in an unquoted

trading company are qualifying business assets for gift relief purposes.

This would allow the entire gain to be deferred, such that the donor, A, would not
now be chargeable and the daughter, V would be deemed to acquire the shares at
the original cost to the father of £20,000 instead of a cost of £200,000.

Without gift relief the shares are deemed to be acquired by V at their open market
value of £200,000. With gift relief, that cost is reduced by the amount of the
deferred gain (£180,000) and thus a cost to V of £20,000 would then apply.

NOTICE how the value for IHT and CGT are di erent. For CGT you value the asset
that is given away, eg a 20% shareholding. For IHT you look at how much the gift
reduces the donor’s estate by. In this case it reduced it from a 100% holding of
shares to an 80% holding of shares.

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Conclusion:

For those taxpayers with both a capacity and a willingness to make gifts in lifetime
and not just on death, the further guidance that they may request from you is
whether to make such gifts in lifetime or wait and gift the assets upon their death.

It is again a consideration of the capital taxes that is the key issue.

If assets are gifted on death there will be no CGT and the bene ciaries will acquire
those assets at their then value, thus wiping out any accrued gains on those assets.

The assets, however at their then open market value (probate value) will then be
included within the chargeable estate at death, which being in excess of the
available nil rate band will be charged to IHT at a rate of 40%.

Therefore to avoid IHT it would be better to gift in lifetime as when a PET is made
there is no immediate charge to IHT and the PET will only become chargeable if the
donor dies within 7 years.

The further advantages for IHT of gifting in lifetime are that if the taxpayer at least
survives for 3 years then taper relief will reduce any IHT payable, plus the value of
the PET is “frozen” at the date of the transfer meaning that an appreciating asset
will have a lower value charged to IHT than if it had been kept until death.

Lifetime gifts will also bene t from annual exemptions.

The problem of course with gifting in lifetime as we have already seen is CGT, as a
gift in lifetime is a chargeable disposal and a gain must be computed using the
open market value of the asset.

This, however will only happen if the asset is a chargeable asset so that exempt
assets such as cash, chattels and cars could be gifted without any CGT arising.

If assets are chargeable assets then they may still be gifted if the gains arising each
tax year do not exceed the AEA, for example if the taxpayer gifts an asset valued at
£50,000 and it cost £47,000, there will be a chargeable gain of £3,000 which will be
covered by the AEA of the taxpayer.

This will have removed £50,000 of value from the taxpayer’s estate which at death
may have been charged to 40% IHT.

If chargeable assets will give rise to more substantial gains then as we have seen
above, if the asset is a qualifying asset for gift relief then the gain may be deferred
by a claim for gift relief.

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If the asset was the principal private residence of the taxpayer then PPR relief would
be available to exempt any gain arising.

You should keep all of these things in mind for written sections in the exam!

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 Syllabus D: Inheritance Tax
Syllabus D1. Basic principles of computing transfers of
value

Syllabus D1a. Chargeable persons

Chargeable persons

Chargeable persons

A person who is domiciled in the UK is liable to IHT in respect of their worldwide assets.

For TX IHT - people will always be domiciled in the UK.

Additionally, the only relevant chargeable person is an individual.

Married couples (and registered civil partnerships) are not chargeable persons because
each spouse (or civil partner) is taxed separately.

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 Syllabus D1b. Transfer of value, Chargeable Transfer, Potentially Exempt Transfer

Transfer of value, Chargeable Transfer, Potentially

Exempt Transfer

What is a transfer of value?

It is the reduction in value of a person's estate because they made a gift

A gift made during a person’s lifetime may be either:

1. Potentially exempt transfer (PET)

2. Chargeable lifetime transfers (CLT)

1) Potentially exempt transfers

Any transfer that is made to another individual is a potentially exempt transfer (PET).

If the donor survives for seven years then the PET becomes exempt and can be
completely ignored.

A PET only becomes chargeable if the donor dies within seven years of making
the gift.

So, remember:

• If the donor dies within seven years of making a PET then it becomes
chargeable.

• Tax will be charged according to the rates and allowances applicable to the
tax year in which the donor dies.

• However, the value of a PET is xed at the time that the gift is made.

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 Illustration:

Sophie died on 23 January 2025.

She had made the following lifetime gifts:

8 November 2017 – A gift of £450,000 to her son.

12 August 2022 – A gift of a house valued at £610,000 to her daughter.

By 23 January 2025, the value of the house had increased to £655,000. Sophie did
not live in the house after the gift.

Solution:

The gift to Sophie’s son on 8 November 2017 is a PET for £450,000.

Because the PET was made more than seven years before the date of Sophie’s
death it is exempt from IHT.

The gift to Sophie’s daughter on 12 August 2021 is a PET for £610,000 and is
initially ignored.

It becomes chargeable as a result of Sophie dying within seven years of making the
gift, and the transfer of £610,000 less annual exemptions of £3,000 pa for 2022/23
and 2021/22 will be charged to IHT based on the rates and allowances for 2024/25.
No taper relief will apply because Sophie dies within 3 years of making the gift.

2) Chargeable lifetime transfers

Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).

• There is no legal de nition of what a trust is, but essentially a trust arises
where a person transfers assets to people (the trustees) to hold for the
bene t of other people (the bene ciaries).

For example, parents may not want to make an outright gift of assets to their
young children.

Instead, assets can be put into a trust with the trust being controlled by
trustees until the children are older.

• Unlike a PET, a CLT is immediately charged to IHT based on the rates and
allowances applicable to the tax year in which the CLT is made.

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 An additional tax liability may then arise if the donor dies within seven years
of making the gift.

Just as for a PET, the value of a CLT is xed at the time that the gift is made,
but the additional tax liability is calculated using the rates and allowances
applicable to the tax year in which the donor dies.

Illustration:

Lim died on 4 December 2024.

She had made the following lifetime gifts:

2 November 2017 – A gift of £420,000 to a trust.

21 August 2022 – A gift of a house valued at £615,000 to a trust. By 4 December

2024, the value of the house had increased to £650,000.

Solution:

The gift to the trust on 2 November 2017 is a CLT for £420,000, and will be
immediately charged to IHT based on the rates and allowances for 2017/18.

There will be no additional tax liability as the gift was made more than seven years
before the date of Lim’s death.

The gift to the trust on 21 August 2022 is a CLT for £615,000, and will be
immediately charged to IHT based on the rates and allowances for 2022/23.

Lim has died within seven years of making the gift so an additional tax liability may
arise based on the rates and allowances for 2024/25.

Saving IHT

It is bene cial for a grandparent to give their grandchildren gifts to save IHT.

This is because if the grandparent gave it to their child and then their child gave it to
their child - IHT would be paid 3 times as all 3 individuals would die, whereas if the
grandparent gave the gift directly to their grandchild, IHT would only be paid twice
as there would only be 2 death's involved for IHT - the gift never went to the third
person.

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 Syllabus D1c. Diminution in value principle

Diminution in value principle

Transfers of value may need to be calculated using the diminution in

value principle

Ordinary shares in unquoted company as a GIFT

Normally, as seen in Topic Transfer of value, Chargeable Transfer, Potentially

Exempt Transfer for most assets the transfer of value will be the same as the open
market value of the asset

e.g. gifting a property worth £250,000 or cash of £100,000, but for some assets,
notably shares in unquoted companies the transfer of value may be considerably
higher than the market value of the asset being gifted.

The transfer of value will be calculated as the di erence in estate value before and
after the gift of the asset.

Illustration:

A owns 60% of the shares in A Ltd. A Ltd has 100,000 £1 ordinary shares in issue.

Share valuations have been agreed as follows:

20% £10 per share

40% £15 per share
60% £25 per share
80% £40 per share

Required:

Compute the transfer of value if A were to die leaving his shares to his daughter, or
alternatively if he were to make a lifetime gift of 20,000 shares to his daughter.

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Solution:

• If A died owning his 60,000 shares, a 60% shareholding, they would be

valued at £25 per share i.e. 60,000 @ £25 = £1,500,000.

• If, however, he were to give 20,000 shares in lifetime the transfer of value
would not be based on the value of a 20% interest i.e. £10 per share, but
would be computed as the di erence between the value of his estate before
and after the transfer:

Before 60,000 shares (60%) @ £25 = 1,500,000

After 40,000 shares (40%) @ £15 = 600,000

Transfer of Value 900,000

A transfer of value will arise by the gift of an asset either in lifetime and / or on
death.

For most taxpayers, as stated above, their only transfers of value will arise as a
result of their death.

Illustration:

B owns 80% of the shares in B Ltd. B Ltd has 100,000 £1 ordinary shares in issue.

Share valuations have been agreed as follows:

20% @ £10/share
40% @ £15/share
60% @ £25/share
80% @ £40/share

Compute the transfer of value and IHT payable if B were to die 2 years after leaving
20,000 shares to his daughter.

All exemptions and Nil Rate Band have been used up.

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 Solution:

If B died owning his 80,000 shares, an 80% shareholding, they would be valued at
£40 per share i.e. 80,000 @ £40 = £3,200,000.

If, however, he were to give 20,000 shares in lifetime the transfer of value would not
be based on the value of a 20% interest i.e. £10 per share, but would be computed
as the di erence between the value of his estate before and after the transfer:

Before 80,000 shares * £40 = £3,200,000

After transfer 60,000 shares * £25 = £1,500,000

Value of PET
£3,200,000 - £1,500,000 = £1,700,000

IHT payable £1,700,000 * 40% = £680,000

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 Syllabus D1d. Demonstrate the seven year accumulation principle taking into account
changes in the level of the nil rate band.

7 year accumulation principle

What and how is inheritance tax paid on?
2 things to remember

1. Firstly, every individual receives a nil rate band. If their total chargeable transfers
exceed this nil rate band, only then is inheritance tax payable.

2. Secondly, if a transfer is made MORE than 7 years before an individual dies, then
inheritance tax on death will not be paid on that transfer.

The nil rate band is £325,000, and for previous years it has been:
£

2010-11 3,25,000

2011-12 325,000

2012-13 325,000

2013-14 325,000

2014-15 325,000

2015-16 325,000

2016-17 325,000

2017-18 325,000

2018-19 325,000

2019-20 325,000

2020-21 325,000

2021-22 325,000

2022-23 3,25,000

2023-24 3,25,000

2024-25 3,25,000

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The rate of IHT payable as a result of a person’s death is 40%

This is the rate that is charged on:

• a person’s estate at death

• PETs that become chargeable as a result of death within seven years

• any additional tax payable on CLTs made within seven years of death

The rate of IHT payable on CLTs at the time they are made is 20% (half the death
rate). This is the lifetime rate.

The tax rates information that will be given in the tax rates and allowances
section of the exam in this period is:

£1 – £325,000 Nil

Excess – Death rate 40%

– Lifetime rate 20%

Where nil rate bands are required for previous years then these will be given to you
within the question.

Illustration 1:

Sophie died on 26 May 2024 leaving an estate valued at £600,000.

The IHT liability is as follows:

Death estate
£
Chargeable estate 600,000

IHT liability
325,000 at nil% 0

(600,000 - 325,000) = 275,000 at 40% 110,000

110,000

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 Illustration 2:
Ming died on 22 April 2024 leaving an estate valued at £300,000.

On 30 April 2022, she had made a gift of £240,000 to her son.

This gure is after deducting available exemptions.

Solution:

IHT liabilities are as follows:

Lifetime transfer – 30 April 2022 (Less than 7 years)

Potentially exempt transfer 240,000

The PET is initially ignored.

Additional liability arising on death

The IHT must be calculated for the gift £240,000, because Ming gave it to her son

Less than 7 years before she died.

£
Potentially exempt transfer 240,000

The PET utilises £240,000 of the nil rate band of £325,000. No IHT is payable.

Death estate £
Chargeable estate 300,000
IHT liability
(325,000 - 240,000) = 85,000 at nil% 0
(300,000 - 85,000) = 215,000 at 40% 86,000
86,000

Only £85,000 (325,000 – 240,000) of the nil rate band is available against the death
estate.

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 Illustration 3:

Joe died on 13 October 2024 leaving an estate valued at £750,000.

On 12 November 2021, he had made a gift of £400,000 to a trust.

This gure is after deducting available exemptions.

The trust paid the IHT arising from the gift.

The nil rate band for the tax year 2021/22 is £325,000.

1) Gift of £400,000 to a trust - On 12 November 2021

Lifetime transfer £
Chargeable transfer 400,000
IHT liability
325,000 at nil% 0
(400,000 - 325,000) = 75,000 at 20% 15,000
15,000

The gift to a trust is a CLT.

The lifetime IHT liability is calculated using the nil rate band for 2021/22.

Additional liability arising on death (13 October 2024) £

Chargeable transfer 400,000
IHT liability
325,000 at nil% 0
75,000 at 40% 30,000
IHT already paid (15,000)
Additional liability 15,000

The additional liability arising on death is calculated using the nil rate band for
2024/25.

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2) Death estate (13 October 2024)

£
Chargeable estate 750,000
IHT liability 750,000 at 40% 300,000

The CLT made on 12 November 2021 has fully utilised the nil rate band of £325,000.

A NRB is given every year, therefore the CLT used the NRB of 21/22 when
lifetime tax was calculated

The NRB of 24/25 is used to calculate tax paid on death, it is rst given to the
CLT and then the death estate because it is allocated in chronological order

Illustration 4:

Mr Wealthy made the following gifts during his lifetime.

01/11/2023 £333,000 into a trust for his son (the trustees paid any life tax)
14/11/2024 £50,000 cash to his daughter

He died in January 2025 with an estate valued at £500,000.

What is his IHT payable during his lifetime and on his death?
Ignore annual exemptions.
The NRB of 23/24 and 24/25 are £325,000.

Solution:

Gift to trust £333,000

Less NRB (£325,000)
£8,000 *20% = £1,600 lifetime tax.

On death:
NRB is £325,000 (New NRB for 24/25)

This is allocated on chronological order - rst to the CLT, then PET, then death
estate.

CLT £333,000
NRB (£325,000)
£8,000 *40% = £3,200

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IHT paid (£1,600)
IHT due £1,600

PET £50,000 * 40% = £20,000 IHT due

Death estate £500,000 *40% = £200,000 IHT due on death estate

The 7 year cumulation period

In most of the illustrations so far, all the lifetime transfers, both PET’s and CLT’s
have taken place within the 7 years prior to death and have all therefore been
chargeable to IHT on the death of the taxpayer.

Very important note The earliest / oldest transfers within this period are rst to use
the nil rate band with the later transfers and / or the chargeable estate at death then
being taxed at 40%.

Basically, the nil rate band must be applied in chronological order - it is given to the
gift made earliest.

If PET’s have been made more than 7 years before the date of death

• they were neither chargeable when made nor chargeable on death, they are
exempt from IHT and are ignored.

A CLT made more than 7 years before death

• These transfers were chargeable when made using the nil rate band in force at
that date but are not chargeable on death as the taxpayer has survived for the
required 7 years.

The 7 year cumulation period, however means that when computing the IHT on
either a PET or CLT made within the 7 years of death it is necessary to take account
of any CLT made within the 7 years prior to it, so as to determine how much nil rate
band, if any, remains to use against that transfer.

For example

if an individual dies in January 2025 having made a CLT in June 2014 of £255,000,
this CLT will not be taxable on the death as he survived for more than 7 years.

If he had also made a PET in August 2020 of £200,000 this will be taxable.

In computing the nil rate band available to go against the PET, however, the
£325,000 will be reduced by the amount of the June 2014 CLT as this was within
the 7 years prior to the PET.

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Therefore, the NRB available to the PET would be (£325,000-£255,000) = £70,000

IHT payable on the PET

Value of PET £200,000
Less NRB (£70,000)

£130,000 *40% = £52,000

Illustration:

Lachlan made a CLT in 2014 of £200,000 and a PET in 2017 of £255,000

He died in 2024 with an estate value of £500,000.

NRB in 2024 is £325,000.

How will the NRB be shared?

How much IHT will be payable?

Solution:

He will have to pay death tax when he dies, his NRB of 2024 will rst go to the
PET BUT, the PET must share it with the CLT because it was within 7 years of the
PET.

Therefore, NRB available to PET is (£325,000-£200,000) = £125,000

IHT payable on PET

Value £255,000
Less NRB (£125,000)
£130,000 * 40% = £52,000

Note: the CLT is more than 7 years before death and as such it will not be subject to
death tax.

Then, for his death estate - the NRB will only be shared with the PET as that is
within 7 years of the date of death.

NRB available on death = £325,000 - £255,000 (Value of PET) = £70,000

IHT on death estate:

Estate value £500,000
Less NRB (£70,000)
£430,000 * 40% = £172,000

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Illustration:

Lachman made a PET in 2014 of £200,000 and a PET in 2017 of £255,000.

He died in 2024 with an estate valued at £500,000.

NRB is £325,000.

How will the NRB be shared?

How much IHT will be payable?

Solution:

He will have to pay death tax when he dies, his NRB of 2024 will rst go to the 2017
PET of £255,000 BUT, the PET will not share it with the 2014 PET of £200,000
because that was given more than 7 years before death and therefore exempt from
IHT.

IHT payable for PET

Value of PET £255,000
NRB (£255,000)
Nil payable

Remaining NRB for the death estate £325,000 - £255,000 = £70,000

The NRB for the death estate will only be shared with the 2015 PET of £255,000 as
that is within 7 years.

IHT payable on death estate

Value of estate £500,000
Less NRB (£70,000)
£430,000*40% = £172,000

Note on death, NRB is shared with PET's that occur within 7 year's of death.

Note

When a gift is made during lifetime, the value of the gift is frozen and will only
become chargeable to IHT when the person who made the gift dies.

Therefore, if a grandmother makes a gift to her grandchild - IHT will only be paid
once by the grandmother and the second time when the grandchild dies, this
avoid's the additional IHT payable if the grandmother made a gift directly to her
child.

To avoid additional IHT - making gifts to grandchildren as opposed to children is a

good option.

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 Syllabus D1e. Taper Relief

Taper Relief

What is taper relief?

This is:

It would be somewhat unfair if a donor did not quite live for seven years after
making a gift with the result that the gift was fully chargeable to IHT.

Therefore, taper relief reduces the amount of tax payable where a donor lives for
more than three years, but less than seven years, after making a gift. The reduction
is as follows:

Years before death Percentage reduction %

Over three years but less than four years 20

Over four years but less than ve years 40

Over ve years but less than six years 60

Over six years but less than seven years 80

Although taper relief reduces the amount of tax payable, it does not reduce the
value of a gift for cumulation purposes.

The taper relief table will be given in the tax rates and allowances section of the
exam.

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 Illustration:

Winnie died on 9 January 2025. She had made the following lifetime gifts:

2 February 2018 – A gift of £473,000 to a trust. The trust paid the IHT arising from
this gift.

16 August 2021 – A gift of £320,000 to her son.

These gures are after deducting available exemptions.

The nil rate band for the tax year 2017/18 is £325,000, and for the tax year 2021/22
it is £325,000

IHT liabilities are as follows:

Lifetime transfers £
2 February 2018
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 20% 29,600
29,600
16 August 2021
Potentially exempt transfer 320,000

Additional liabilities arising on death

2 February 2018
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 40% 59,200
Taper relief reduction – 80% (47,360)
11,840
IHT already paid (29,600)
Additional liability 0

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The taper relief reduction is 80% because the gift to the trust was made between
six and seven years of the date of Winnie’s death.

Although the nal IHT liability of £11,840 is lower than the amount of IHT already
paid of £29,600, a refund is never made for life tax paid, it can only reduce the IHT
liability to zero.

16 August 2021

Potentially exempt transfer 320,000

IHT liability 320,000 at 40% 128,000

Taper relief reduction – 20% (25,600)

102,400

The taper relief reduction is 20% because the gift to the son was made between
three and four years of the date of Winnie’s death.

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 Syllabus D2. IHT arising on lifetime transfers and on death

Syllabus D2a. Tax implications of lifetime transfers

Tax implications of lifetime transfers

What tax liability arises on lifetime transfers?

When calculating the tax liability on lifetime transfers, there are three aspects that
are a bit more di cult to understand and can therefore cause problems.

Chargeable lifetime transfer preceded by a potentially exempt transfer that

becomes chargeable

The situation where a chargeable lifetime transfer (CLT) is made before a potentially
exempt transfer (PET) is fairly straightforward, and was covered previously.

However, where the sequence of gifts is reversed, the IHT calculations are more
complicated because the PET will use some or all of the nil rate band previously
given to the CLT.

Illustration:

Ali died on 3 March 2025. He had made the following lifetime gifts:

• 1 August 2022 – A gift of £360,000 to his son

• 21 November 2023 – A gift of £240,000 to a trust

These gures are after deducting available exemptions.

The nil rate band for all the tax years is £325,000.

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IHT liabilities are as follows:

Lifetime transfers £

1 August 2022

Potentially exempt transfer 360,000

21 November 2023

Chargeable transfer 240,000

No lifetime IHT is payable because the CLT is less than the nil rate band for
2023/24.

Additional liabilities arising on death

£
1 August 2022
Potentially exempt transfer 360,000

IHT liability 325,000 at nil% 0

35,000 at 40% 14,000
14,000
£
21 November 2023
Chargeable transfer 240,000

IHT liability 240,000 at 40% 96,000

IHT already paid (Nil)
Additional liability 96,000

The nil rate band for 2024/25 of £325,000 has been fully utilised by the PET made
on 1 August 2022.

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Grossing up

So far, in all of the examples concerning a CLT, the trust (the donee) has paid any
lifetime IHT at the rate of 20%.

However, when the donor of the gift is paying IHT on the gift into the trust the rate
of 20/80 (25%) is used as the gift is deemed to be the net amount of money that is
leaving the donors estate. The estate value falls by the gift plus the tax in this case.

For the death tax calculations, the amount of the gift will need to be grossed up by
the amount of the tax. Any available annual exemptions are deducted prior to
grossing up.

The annual exemptions are explained in Topic Exemptions - there is an annual

exemption of £3,000 each year that is allowed, and if the annual exemption of
£3,000 of the previous year has not been used, this can be brought forward and
used in the current year, after allocating the current year annual exemption.

For example if a cash gift was made into a trust in February 2025 of £100,000 and
no other gifts had been made previously, then the annual exemptions of £3,000
(24/25) and then £3,000 (23/24) would be deducted rst.

£100,000 - £3,000-£3,000 = £94,000 would be the value of the transfer and IHT
would be calculated on the 94,000.

Illustration:

On 17 June 2021, Annie made a gift of £406,000 to a trust. She paid the IHT arising
from the gift.

Annie has not made any other gifts since 6 April 2021.

The nil rate band for the tax year 2021/22 is £325,000.

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The lifetime IHT liability is calculated as follows:

£ £

Value transferred 406,000

Annual exemptions

2021/22 3,000

2020/21 3,000

(6,000)

Net chargeable transfer 400,000

IHT liability

325,000 at nil% 0

75,000 x 20/80 18,750

Gross chargeable transfer 418,750

The amount of lifetime IHT payable by Annie is £18,750. This gure can be
checked by calculating the IHT on the gross chargeable transfer of £418,750:

IHT liability

325,000 at nil% 0

93,750 at 20% 18,750

18,750

Once the gross chargeable transfer has been calculated, then this gure is used in
all subsequent calculations.

CLTs are never re-grossed up on death, even if the nil rate band is reallocated as a
result of a PET becoming chargeable.

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 Illustration:

Continuing with example 2, Annie died on 12 March 2025.

Additional liability arising on death

12 March 2025 £

Gross chargeable transfer 418,750

IHT liability

325,000 at nil% 0

93,750 at 40% 37,500

Taper relief reduction – 20% (7,500)

30,000

IHT already paid (18,750)

Additional liability 11,250

When an IHT question involves a CLT, then make sure you know who is paying the
IHT. Grossing up is not necessary if the trust (the donee) pays.

Seven-year cumulation period

Jayne died on 18 March 2025 leaving an estate valued at £450,000. She had made
the following lifetime gifts:

1 August 2016 – A gift of £200,000 to a trust

1 November 2022 – A gift of £280,000 to a trust

These gures are after deducting available exemptions. In each case, the trust paid
any IHT arising from the gift.

Note: if the question in the exam does not say who pays the tax then you will
always assume that the donor pays the tax and use 20/80 (25%).

The nil rate band for the tax year 2016/17 is £325,000, and for the tax year 2022/23
it is £325,000.

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IHT liabilities are as follows:

Lifetime transfers - 1 August 2016 £

Chargeable transfer 200,000

No lifetime IHT is payable because the CLT is less than the nil rate band for
2016/17.

Lifetime transfers - 1 November 2022 £

Chargeable transfer 280,000
IHT liability
(325,000 - 200,000) = 125,000 at nil% 0
155,000 at 20% 31,000
31,000

The CLT made on 1 August 2016 is within seven years of 1 November 2022, so it
utilises £200,000 of the nil rate band for 2022/23.

Additional liabilities arising on death

1 August 2016 £
Chargeable transfer 200,000

There is no additional liability because this CLT was made more than seven years
before the date of Jayne’s death on 18 March 2025.

1 November 2022 £
Chargeable transfer 280,000
IHT liability
125,000 at nil% 0
155,000 at 40% 62,000
IHT already paid (31,000)
Additional liability 31,000

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The CLT made on 1 August 2016 utilises £200,000 of the nil rate band for 2024/25
of £325,000 because it was made 7 years before this CLT.

Death estate

£
Chargeable transfer 450,000

IHT liability
45,000 at nil% (325,000 - 280,000) 0

405,000 at 40% 162,000

162,000

The CLT made on 1 August 2016 is not relevant when calculating the IHT on the
death estate because it was made more than seven years before the date of Jayne’s
death on 18 March 2025.

Therefore, only the CLT made on 1 November 2022 is taken into account, and this
utilises £280,000 of the nil rate band of £325,000.

Total IHT: life tax £31,000 + death tax £31,000 + 162,000 = £224,000

Illustration:

The same situation as in example 4, except that on 1 November 2022 Jayne made a
gift of £280,000 to her daughter rather than to a trust.

IHT liabilities are as follows:

Lifetime transfers £

1 August 2016

Chargeable transfer 200,000

1 November 2022

Potentially exempt transfer 280,000

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Additional liabilities arising on death

£
1 August 2016
Chargeable transfer 200,000

1 November 2022
Potentially exempt transfer 280,000

IHT liability
(325,000-200,0000) =125,000 x 0%

(280,000-125,000 x 40%) 62,000

The CLT is entirely covered by the NRB, therefore there is no lifetime tax
payable, and it was made 7 years before death, therefore there will be no
additional death tax payable.

Notice that the PET does not pay lifetime tax, and on death it used NRB rst,
therefore paying £62,000 death tax.

Death estate

Chargeable estate 450,000

IHT liability
45,000 at nil% 0
405,000 at 40% 162,000
162,000

Total IHT: Life tax £0, death tax £162,000.

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 Syllabus D2b. IHT liability on the death estate

IHT liability on the death estate

Tax liability on the death estate

Until now, the examples have simply given a gure for the value of a person’s
estate.

However, it may be necessary to calculate the value.

A person’s estate includes the value of everything that they own at the date of death
such as property, shares, motor vehicles, cash and other investments.

A person’s estate also includes the proceeds from life assurance policies even
though the proceeds will not be received until after the date of death.

The actual market value of a life assurance policy at the date of death is irrelevant.

The following deductions are permitted:

• Funeral expenses

• Debts due by the deceased provided they can be legally enforced. Therefore,
gambling debts cannot be deducted, nor can debts that are unenforceable
because there is no written evidence.

• Mortgages on property. This does not include endowment mortgages

because these are repaid upon death by the life assurance element of the
mortgage. Repayment mortgages and interest-only mortgages are
deductible.

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 Illustration:

Andy died on 31 December 2024.

At the date of his death he owned the following assets:

• A main residence valued at £425,000 - - this was not left in his will to a direct
descendent and as such the residence nil rate band will not apply.

This had an outstanding interest-only mortgage of £180,000.

• Motor cars valued at £63,000.

• Ordinary shares in Herbert plc valued at £54,000.

• Building society deposits of £25,000.

• Investments in individual savings accounts valued at £22,000, savings

certi cates from NS&I (National Savings and Investments) valued at £19,000
and government securities (gilts) valued at £34,000.

• A life assurance policy on his own life. On 31 December 2024, the policy had
an open market value of £85,000 and proceeds of £100,000 were received
following Andy’s death.

On 31 December 2024, Andy owed £700 in respect of credit card debts and he had
also verbally promised to pay the £800 legal fee of a friend.

The cost of his funeral amounted to £4,300.

£ £

Property 425,000

Mortgage (180,000)

245,000

Motor cars 63,000

Ordinary shares in Herbert plc 54,000

Building society deposits 25,000

Other investments (22,000 + 19,000 + 34,000) 75,000

Proceeds of life assurance policy 100,000

562,000

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Credit card debts 700

Funeral expenses 4,300

(5,000)

Chargeable estate 557,000

IHT liability

325,000 at nil% 0

232,000 at 40% 92,800

92,800

The promise to pay the friend’s legal fee is not deductible because it is not legally
enforceable.

Unlike capital gains tax, there is no exemption for motor cars, individual savings
accounts, saving certi cates from NS&I or for government securities.

The IHT liability on the life assurance policy could have easily been avoided if the
policy had been written into trust for the bene ciaries of Andy’s estate.

The proceeds would have then been paid directly to the bene ciaries, and not form
part of Andy’s estate.

Illustration:

Joe Kerr died on April 6 2024, leaving £25,000 to his friend and the remainder to his
nephew.

At the date of his death Joe owned the following assets:

His principal private residence valued at £300,000 upon which the outstanding
repayment mortgage at the date of death was £80,000. The house was not left to a
direct descendent and as such the residence nil rate band does not apply.

A holiday home valued at £140,000

Bank and Building Society Deposits amounting to £230,000

12,000 Shares in Joe Ltd valued at £20 per share

A life assurance policy with an open market value on April 6 2024, of £125,000 from
which proceeds of £140,000 were received into trust following Joe’s death.

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Joe had no outstanding expenses at the date of his death.

Joe's wife only used 50% of her NRB at the date of her death and Joe never made
any gifts previous to his death, so his NRB is fully available.

How much will his nephew inherit?

Solution:

Death estate

House £300,000
Less:
Repayment mortgage (£80,000)
Holiday home £140,000
Bank deposits £230,000
Shares (12,000*£20) = £240,000

Total estate £830,000

NRB available (£325,000 + 0.5*£325,000) = (£487,500)

Chargeable estate = £342,500

IHT payable = 40%*£342,500 = £137,000

Therefore, his nephew will inherit:

£830,000 - £25,000 (gift to friend) - £137,000 (IHT paid from estate) = £668,000

Note: the life assurance policy was written into trust for the bene ciaries and so it
does not become chargeable to IHT in the death estate.

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 Syllabus D2c. Transfer of unused NRB between spouses

Transfer of unused NRB between spouses

What if a spouse does not use their entire nil rate band?

This is how the other spouse bene ts:

Any unused nil rate band on a person’s death can be transferred to their surviving
spouse (or registered civil partner).

The nil rate band will often not be fully used on the death of the rst spouse
because any assets left to the surviving spouse are exempt from IHT (see the
following section on transfers to spouses).

A claim for the transfer of any unused nil rate band is made by the personal
representatives who are looking after the estate of the second spouse to die.

The amount that can be claimed is based on the proportion of the nil rate band not
used when the rst spouse died.

Even though the rst spouse may have died several years ago when the nil rate
band was much lower, the amount that can be claimed on the death of the second
spouse is calculated using the current limit of £325,000.

Illustration:

Nun died on 29 March 2025.

None of her husband’s nil rate band was used when he died on 5 May 2008.

When calculating the IHT on Nun’s estate a nil rate band of £650,000 (325,000 +
325,000) can be used because a claim can be made to transfer 100% of her
husband’s nil rate band.

Note: the nil rate band in 2008/09 was not £325,000 but it is the unused percentage
that is carried forward and not the amount of unused nil band. Therefore, Nun can
use 100% of the current value of the nil band as well as her own nil band.

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 Illustration:

Win died on 24 February 2025 leaving an estate valued at £800,000.

Only 60% of his wife’s nil rate band was used when she died on 12 May 2010.

On 10 May 2020, Win had made a gift of £200,000 to his son.

This gure is after deducting available exemptions.

The nil rate band for the tax year 2020/21 is £325,000

IHT liabilities are as follows:

Lifetime transfer – a gift of £200,000 to his son £

Potentially exempt transfer 200,000

No life tax on a PET.

Additional liability arising on death £

Potentially exempt transfer 200,000

Covered by the 2020/21 NRB

Death estate £

Chargeable estate 800,000

IHT liability

255,000 at nil% (325,000 + (40% x 325,000) - 200,000 PET) 0

545,000 at 40% 218,000
218,000

Win’s personal representatives can claim the wife’s unused nil rate band of
£130,000 (325,000 x 40%). We use the NRB for 2024/25 (the second person who
dies)

The amount of nil rate band is therefore £455,000 (325,000 + 130,000), of which
£200,000 is utilised by the PET made on 10 May 2020.

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 Syllabus D2d
d) Understand and apply the residence nil rate band available when a residential property is
inherited by direct descendants.

Residence NRB

An additional nil rate band has been introduced where a main residence is inherited
on death by direct descendants (children and grandchildren).
For the tax year 2024/25, the residence nil rate band is £175,000.
The residence nil rate band is only available if:
1) The individual dies on or after 6 April 2017
2) Their estate includes a main residence
3) It is inherited by direct descendants

Illustration:

Sophie died on 26 May 2024 leaving an estate valued at £800,000. Under the terms
of her will, Sophie’s estate was left to her children. The estate included a main
residence valued at £250,000.

Solution:
The inheritance tax (IHT) liability is:
Chargeable estate £800,000

IHT liability:
£175,000 at 0% (residence NRB)
£325,000 at 0% (NRB)
£300,000 *40% = £120,000

The residence nil rate band of £175,000 is available because Sophie’s estate
included a main residence and this was left to her direct descendants.

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Transferring Residence NRB
In the same way in which any unused normal nil rate band can be transferred to a
surviving spouse (or registered civil partner), the residence nil rate band is also
transferable. It does not matter when the rst spouse died.

Illustration:

Trevor died on 19 June 2024 leaving an estate valued at £750,000. Under the terms
of his will, Trevor’s estate was left to his children. The estate included a main
residence valued at £350,000.
Trevor’s wife died on 5 May 2010. She used all of her nil rate band of £325,000.

Solution:
Trevor’s IHT liability is:
Chargeable estate £750,000
IHT liability:
£675,000 at 0% (£325,000 NRB + £175,000 Trevor Residence NRB + £175,000

Trevor’s wife’s unused residence NRB)

£75,000 *40% = £30,000

Trevor’s personal representatives can claim the wife’s unused residence nil rate
band of £175,000 even though the residence nil rate band did not exist when
Trevor’s wife died.

The amount of residence nil rate band is therefore £350,000 (175,000 + 175,000).

Note:
1) The value of the main residence is after deducting any repayment mortgage
or interest-only mortgage secured on that property (as normal).
2) If a main residence is valued at less than the available residence nil rate
band, then the residence nil rate band is reduced to the value of the
residence.
If an individual’s death estate is valued at more than £2 million then the
residence NRB is reduced by £1 for every £2 that the estate is over £2
million. The whole residence NRB will be withdrawn once the value of the
estate exceeds £2.35 million.

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 Syllabus D3. Exemptions to defer / minimise IHT

Syllabus D3a. Exemptions

Exemptions

Which exemptions are available for IHT?

Transfers to spouses

Gifts to spouses (and registered civil partners) are exempt from IHT.

This exemption applies both to lifetime gifts and on death.

Illustration:

Sophie died on 25 June 2024.

On 12 April 2020, she had made a gift of £400,000 to her husband.

Sophie's estate on 25 June 2024 was valued at £900,000.

Under the terms of her will, Sophie divided her estate equally between her husband
and her daughter.

The nil rate band for the tax year 2020/21 is £325,000.

IHT liabilities are as follows:

Lifetime transfers

The gift on 12 April 2020 is exempt as it is to Sophie’s husband.

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Death estate

£
Value of estate 900,000
Spouse exemption (900,000/2) (450,000)
Chargeable estate 450,000
IHT liability
325,000 at nil% 0
125,000 at 40% 50,000
50,000

There are a number of other exemptions that only apply to lifetime gifts.

Small gifts exemption

Gifts up to £250 per person in any one tax year are exempt.

This exemption can not be used to reduce the value of a greater gift.

For example, a gift of £249 to one person will be wholly exempt, but if the gift is
£251 it will be wholly taxable. It is possible to use the exemption any number of
times by making gifts to di erent donees.

Illustration:

During the tax year 2024/25, Peter made the following gifts:

• On 18 May 2024, he made a gift of £240 to his son.

• On 5 October 2024, he made a gift of £400 to his daughter.

• On 20 March 2025, he made a gift of £100 to a friend.

The gifts on 18 May 2024 and 20 March 2025 are both exempt because they do not
exceed £250.

The gift on 5 October 2024 for £400 does not qualify for the small gifts exemption
because it is more than £250.

The whole amount of £400 will be chargeable unless it can be covered by Peter’s
annual exemption for 2024/25 (see the next section).

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Annual exemption

Each tax year a person has an annual exemption of £3,000.

If the whole of the annual exemption is not used in any tax year, then the balance is
carried forward to the following tax year.

However, the exemption for the current tax year must be used rst, and any unused
brought forward exemption cannot be carried forward a second time.

Therefore, the maximum amount of annual exemptions available in any tax year is
£6,000 (£3,000 x 2).

Illustration:

Simone made the following gifts:

• On 10 May 2023, she made a gift of £1,400 to her son.

• On 25 October 2024, she made a gift of £4,000 to her daughter.

The gift on 10 May 2023 utilises £1,400 of Simone’s annual exemption for 2023/24.

The balance of £1,600 (3,000 – 1,400) is carried forward to 2024/25.

The gift on 25 October 2024 utilises all of the £3,000 annual exemption for 2024/25
and £1,000 (4,000 – 3,000) of the balance brought forward of £1,600.

Because the annual exemption for 2024/25 must be used rst, the unused balance
brought forward of £600 (1,600 – 1,000) is lost.

The annual exemption is applied on a strict chronological basis, and is therefore

given against PETs even when they do not become chargeable.

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 Illustration:

Nigel made the following gifts:

• On 17 May 2023, he made a gift of £60,000 to his son

• On 25 June 2024, he made a gift of £100,000 to a trust.

The gift on 17 May 2023 utilises Nigel’s annual exemptions for 2023/24 and
2022/23.

The value of the PET is £54,000 (60,000 – 3,000 – 3,000).

The gift on 25 June 2024 utilises Nigel’s annual exemption for 2024/25. The 2023/24
annual exemption is not available as it has been used by the PET.

The value of the CLT is £97,000 (100,000 – 3,000). No lifetime IHT liability is payable
because this is within the nil rate band for 2024/25.

Ideally the gift to the trust should have been made before the gift to the son.

Normal expenditure out of income

IHT is not intended to apply to gifts of income.

Therefore, a gift is exempt if it is made as part of a person’s normal expenditure, is

made out of income and that person is left with su cient income to maintain their
normal standard of living.

To count as normal, gifts must be habitual.

Therefore, regular annual gifts of £2,500 made by a person with an annual income
of £100,000 would probably be exempt.

A one-o gift of £70,000 made by the same person would probably not be, and
would instead be a PET or a CLT.

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Gifts in consideration of marriage

This exemption covers gifts made in consideration of a couple getting married or

registering a civil partnership.

The amount of exemption depends on the relationship of the donor to the donee
(who must be one of the two persons getting married):

• £5,000 if the gift if made by a parent.

• £2,500 if the gift is made by a grandparent or by one of the couple getting

married to the other.

• £1,000 if the gift is made by anyone else.

Illustration:

On 19 September 2024, William made a gift of £20,000 to his daughter when she
got married.

He has not made any other gifts since 6 April 2024.

The gift is a PET, but £5,000 will be exempt as a gift in consideration of marriage
and William’s annual exemptions for 2024/25 and 2023/24 are also available.

The value of the PET is therefore £9,000 (20,000 – 5,000 – 3,000 – 3,000).

This remaining £9,000 will only be chargeable to IHT if William dies before
19/09/2031 (within 7 years of making the gift)

Note: the marriage exemption is deducted from the value of the gift BEFORE the
annual exemptions.

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 Syllabus D3b. Basic inheritance tax planning

Basic IHT planning

How to pay as little IHT as possible?
IHT planning

The overall objective is to ensure that the HMRC get as little as possible and the
next generations get as much as possible.

The total inheritance payable can be reduced if a person makes lifetime gifts rather
than death gifts.

Lifetime exemptions can apply to reduce the total inheritance tax payable.

• Make lifetime gifts each year su cient to use the Annual Exemption – £3,000.

• Make as many small gifts of £250 per donee per tax year.

• On the marriage of a son, daughter, grandchild, nephew and niece make gifts
covered by the marriage exemption.

From a parent £5,000

From a grandparent £2,500
From any other person £1,000

• Make lifetime gifts of appreciating assets and those which do not generate a
signi cant CGT liability.

• Lifetime gifts to other individuals can reduce IHT as they will not give rise to any
IHT when the gift is made and will be totally exempt from IHT if the donor lives
for > 7 years.

• If the donor dies within 7 years then IHT may become payable on death but
provided the donor lives for > 3 years the IHT payable will be reduced by taper
relief.

• There is no IHT saving by lifetime giving of assets that qualify for BPR or APR at
100%.

• Ensure that estates of husband and wife are shared so that each spouse will fully
use their nil bands in the event that they should die at the same time.

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 Syllabus D4. Payment of inheritance tax

Syllabus D4a. Payment of inheritance tax and the due date

Payment of inheritance tax and the due date

When does inheritance tax need to be paid?

For Chargeable lifetime transfers:

The donor is primarily responsible for any IHT that has to be paid in respect of a
CLT.

However, a question may state that the donee is to instead pay the IHT.

Remember that grossing up is only necessary where the donor pays the tax.

The due date is the later of:

• 30 April following the end of the tax year in which the gift is made.

• Six months from the end of the month in which the gift is made.

Therefore, if a CLT is made between 6 April and 30 September in a tax year, then
any IHT will be due on the following 30 April.

If a CLT is made between 1 October and 5 April in a tax year, then any IHT will be
due six months from the end of the month in which the gift is made.

The donee is always responsible for any additional IHT that becomes payable as a
result of the death of the donor within seven years of making a CLT.

The due date is six months after the end of the month in which the donor died.

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 For potentially exempt transfers

The donee is always responsible for any additional IHT that becomes payable as a
result of the death of the donor within seven years of making a PET.

The due date is six months after the end of the month in which the donor died.

For death estate:

The personal representatives of the deceased’s estate are responsible for any IHT
that is payable.

The due date is six months after the end of the month in which death occurred.

However, the personal representatives are required to pay the IHT when they deliver
their account of the estate assets to HM Revenue and Customs, and this may be
earlier than the due date.

Where part of the estate is left to a spouse, then this part will be exempt and will not
bear any of the IHT liability.

Where a speci c gift is left to a bene ciary, then this gift will not normally bear any
IHT. The IHT is therefore usually paid out of the non-exempt residue of the estate.

Illustration:

Alfred died on 15 December 2024. He had made the following lifetime gifts:

• 20 November 2022 – A gift of £420,000 to a trust. Alfred paid the IHT arising
from this gift.

• 8 August 2023 – A gift of £360,000 to his son.

These gures are after deducting available exemptions.

Alfred’s estate at 15 December 2024 was valued at £850,000. Under the terms of
his will, he left £250,000 to his wife, a speci c legacy of £50,000 to his brother, and
the residue of the estate to his children. The residue of the estate did not include a
residential property.

The nil rate band for the tax years 2022/23, 2023/24 and 2024/25 is £325,000.

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IHT liabilities are as follows:

Lifetime transfers

20 November 2022

£
Net chargeable transfer 420,000
IHT liability
325,000 at nil% 0
95,000 x 20/80 23,750
Gross chargeable transfer 443,750

The due date for the IHT liability of £23,750 payable by Alfred was 31 May 2023.

8 August 2023

Potentially exempt transfer 360,000

The PET is initially ignored.

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Additional liabilities arising on death

20 November 2022

£
Gross chargeable transfer 443,750
IHT liability
325,000 at nil% 0
118,750 at 40% 47,500
IHT already paid (23,750)
Additional liability 23,750

The due date for the additional IHT liability of £23,750 payable by the trust is 30
June 2025.

8 August 2023

£
Potentially exempt transfer 360,000

IHT liability 360,000 at 40% 144,000

The CLT made on 20 November 2022 has fully utilised the nil rate band.

The due date for the IHT liability of £144,000 payable by Alfred’s son is 30 June
2025.

Death estate

£
Value of estate 850,000
Spouse exemption (250,000)
Chargeable estate 600,000
IHT liability 600,000 at 40% 240,000

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 The due date for the IHT liability of £240,000 payable by the personal
representatives of Alfred’s estate is 30 June 2025.

Alfred’s wife will inherit £250,000, his brother will inherit £50,000, and the children
will inherit the residue of the estate of £310,000 (850,000 – 250,000 – 50,000 –
240,000).

If the death estate is distributed with:

1. Speci c gifts left to speci c chargeable persons, and

2. The remaining (residue) of the estate is left to an exempt person

Then, there is a special way to calculate the inheritance tax payable.

How to calculate the IHT payable?

Step 1:

(Net chargeable estate – NRB available) * 40/60 = IHT payable

Step 2:

The gross chargeable estate is then calculated as:

Net chargeable estate + IHT payable (from above)

Step 3:

The amount allocated to the exempt residuary legatee will be:

Total estate – gross chargeable estate (from above)

This is much easier to understand with an illustration!

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Illustration

Eddy dies on 06/06/2024 leaving an estate valued at £900,000.

He made no lifetime gifts.

He left £400,000 in cash to his son and the remainder of his estate to his wife.

What is the gross chargeable estate value, the IHT payable and the amount of
the estate that is left to his wife?

Solution

IHT liability on the estate:

Net chargeable estate £400,000

Less NRB (£325,000)

Taxable amount £75,000

IHT on death £75,000 * 40/60 = £50,000

Gross chargeable estate

£400,000 + £50,000 = £450,000

Remainder of estate left to his wife:

£900,000 - £450,000 = £450,000

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 Inheritance tax in the exam

Tips for the exam

IHT in the exam!

Below are a few points that might help jog your memory and ensure that you score
well in the IHT section of the exam!

Make gifts early in life

Gifts should be made as early in life as possible so that there is a greater chance of
the donor surviving for seven years.

Gifts made just before death will be of little or no IHT bene t, and may result in a
capital gains tax liability (whereas transfers on death are exempt disposals for
capital gains tax purposes).

Make use of the nil rate band

Gifts can be made to trusts up to the amount of the nil rate band every seven years
without incurring any immediate charge to IHT.

Gifts to trusts within seven years of each other will be subject to the seven year
cumulation period, whilst an immediate charge to IHT will arise if a gift exceeds the
nil rate band.

Skip a generation
When making gifts either during lifetime or on death, it can be bene cial to skip a
generation so that gifts are made to grandchildren rather than children. This avoids
a further charge to IHT when the children die. Gifts will then only be taxed once
before being inherited by the grandchildren, rather than twice.

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 Syllabus E: Corporation Tax Liabilities
Syllabus E1. The scope of corporation tax

Syllabus E1ab. Period of account and CAP

Period of account and CAP

Period of account

A period of account is the period for which a company prepares its accounts.

Normally, a period of account is for 12 months, however it may be longer or shorter

than this.

This will normally occur when the company starts to trade, ceases to trade or
changes its accounting date.

The maximum length of a period of account is 18 months.

Accounting period / Chargeable accounting period

Normally, a company’s chargeable accounting period is the same as it’s period of

account.

The di erence between both is that a chargeable accounting period must be equal
to or less than 12 months.

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 However, a period of account can exceed 12 months.

• In the case where a company’s period of account exceeds 12 months, then 2

chargeable accounting periods will be created.

The rst one for the rst 12 months and the second one for the remaining
months in the period of account.

• It is the chargeable accounting period for which a corporation tax

computation is prepared.

Therefore, if a period of account is split into 2 chargeable accounting periods

because it is longer than 12 months, then 2 corporation tax computations will
result.

When does a chargeable accounting period start or end?

A CAP will normally start immediately after the end of a previous CAP.

• A CAP will also start when a company commences to trade, or when its
pro ts become liable to corporation tax.

• A CAP will normally nish 12 months after the beginning of the period or at
the end of a company’s period of account.

• A CAP will also nish when a company ceases to trade, or when its pro ts
otherwise cease being liable to corporation tax.

Financial Year (FY)

Financial years run from 01 April – 31 March.

• FY 24 = 01/04/2024 - 31/03/2025

• Financial years determine which corporation tax rates to use.

• Until FY22, a single rate of corporation tax of 19% was applicable regardless
of the size of the company.

• From FY23 onwards, there are 2 rates of corporation tax. The main rate of
25% applies where augmented pro ts of the company are more than or
equal to the upper limit of 250,000.

• The small pro ts rate of 19% applies where augmented pro ts of the
company are less than or equal to the lower limit of 50,000.

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 • These upper and lower limits are pro rated for shorter accounting periods
and also divided between the number of 51% associated companies.

• Augmented pro ts of a company are the taxable total pro ts plus any
dividends from unconnected companies.

• When a company's augmented pro ts are between the lower limit(50,000)

and the upper limit(250,000), tax is calculated at the main rate of 25% but it
is then reduced by the marginal relief.

• Marginal relief = (Upper limit - Augmented pro ts) x 3/200 x taxable total
pro ts/augmented pro ts

• For the TX - UK examination, students will be required to calculate a hybrid

rate of corporation tax when a chargeable accounting period spans an earlier
nancial year.

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Illustration:

A company prepares accounts for the 15 month period from 01/01/2024 -

31/03/2025.

• What is the period of account?

• What are the chargeable accounting periods?

• How many corporation tax computations will be prepared?

Solution:

Period of account:

01/01/2024 – 31/03/2025

Chargeable accounting periods:

01/01/2024-31/12/2024 (First 12 months)

01/01/2025-31/03/2025 (Last 3 months)

2 corporation tax computations will be prepared, one for each chargeable

accounting period.

Note: In the case of the rst chargeable accounting period, 3 months fall in FY23.
The remaining 9 months fall in FY24 but the corporation tax rates for both years
have remained the same.

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Illustration:

Smarty Ltd. became incorporated on 26/05/2024.

It commenced trading on 01/11/2024.

It prepared its accounts to 31/03/2025.

When does Smarty Ltd,’s accounting period start?

Solution:

It starts on 01/11/2024, this is because the company commenced trading on this

date.

Note normally the accounting period starts after the previous one has nished,
however as Smarty Ltd. does not have a previous accounting period, their
accounting period starts when they commenced to trade.

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 Syllabus E1c. Residency of a company

Residency of a company

Who pays UK corporation tax?

How is UK residency determined for companies?

A company is resident in the UK if:

1. It has been incorporated in the UK, for example. K Ltd. or B plc.

2. It is centrally managed and controlled in the UK for example, M. Inc. which

was incorporated overseas has majority of its board meetings held in the UK,
and most of its directors are resident in the UK.

Illustration:

B Inc. was incorporated in Barbados.

All of the company's board meetings are held in the UK.

Will the company be considered to be UK resident and therefore have to pay UK

Corporation Tax?

Solution:

Yes, the company will be considered to be UK resident and therefore pay UK

Corporation Tax.

This is because, even though it has been incorporated overseas, it is centrally

managed from the UK.

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 Syllabus E2. Taxable total pro ts

Syllabus E2a. Allowable expenditure in calculating T.A.T.P.

Allowable expenditure in calculating Tax adjusted

trading pro t

How to calculate Tax adjusted trading pro t?

Pro t before tax "PBT" (Operating pro t) X

+ Disallowed expenses X
Allowable expenses 0*
- Non trading income (X)
- Capital allowances (X)
Tax adjusted trading pro t X

* At the exam you will start the adjustment with the pro t before taxation of £X and
deal with all the items listed and you will indicate with a zero (0) any items which do
not require adjustment.

Allowable expenses

Are expenses which should be included in taxable pro ts.

Therefore we have to keep them in Pro t before tax.

You will indicate these expenses with 0 in the exam, because these items do not
require adjustment.

• Patent royalties’ receivable/payable

• Sta costs

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 • Impairment losses

• Legal fees:

- in connection with the Issue of loan notes (for trading activities)

- in connection with an action brought against a supplier for breach of
contract
- in connection with the registration of trade marks

• Loan arrangement fee for trading

• Income element of premium paid for grant of short lease for trading
premises

• Gifts to customers if:

- they cost LESS than £50 per recipient per year

- are not of food, drink, tobacco
- are not vouchers for exchangeable goods
- carry an advertisement for the company making the gift (e.g. pens costing
£30 each displaying company's name)
• Repairs

For example:
- Repairs to warehouse following a ood
- Repainting the exterior of the company's o ce building

• Accountancy

• Entertaining employees

The only exception to the non-deductibility of entertaining expenditure is

when it is in respect of employees.

• Non-qualifying charitable donations

Illustration 1:

Operating pro t is £100,000.

Expenses included in Operating pro t:

Repairs to warehouse following a ood £100
Entertaining employees £30
Accountancy £15
Legal fees in connection with the registration of trade marks £5
Gifts to customers - pens costing £30 each displaying company's name = £60

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 Required:

Calculate Tax adjusted trading pro t.

Solution:

Pro t before tax "PBT" (Operating pro t) 100,000

Allowable expenses:
Repairs 0
Entertaining employees 0
Accountancy 0
Legal fees 0
Gifts 0
Tax adjusted trading pro t 100,000

Note: All expenses were indicated with 0, because these items do not require
adjustment, they were all allowable.

Disallowable expenses

Are adjustments which INCREASE taxable pro ts.

Meaning these items were included in PBT, but should not have been there,
therefore we have to take them away by ADDING them to PBT.

An Example:
The expense of £10 is included in PBT (e.g. £100) but should not have been there,
so you need to take the expense away from PBT and therefore you add the expense
to PBT (100 + 10 = £110) and therefore you will increase Pro t.

• Entertaining customers and suppliers UK and overseas

Note:
The only exception to the non-deductibility of entertaining expenditure is
when it is in respect of employees.

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 • Depreciation / Amortisation (usually given in the question)

• Legal costs:

- of acquiring a short lease

- for issue of preference shares
- for renewal of long lease

• Issue cost of shares

• Dividends

• Issue cost and interest for non-trading loan

• Capital expenditure

e.g.
- costs of new computers
- Extending the o ce building in order to create a new reception area
- Improvement of the building rather than repair

• Donations:

- to political parties
- paid under the gift aid scheme

• Gifts to customers if:

- they cost MORE than £50 per recipient per year (e.g. pens costing £60)
- are of food, drink, tobacco (e.g. food hampers)
- are vouchers for exchangeable goods
- don't carry an advertisement for the company making the gift (e.g pens not
displaying company's name)
Remember that the above is just a summary of the important points
mentioned in Topic: Allowable expenditure.

Illustration 2:

Operating pro t is £100,000

Depreciation £500
Capital Allowances £400

Expenses included in Operating pro t:

Donations to political parties £25
Entertaining employees £30
Accountancy £15
Legal fees in connection with the registration of trade marks £5

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 Legal fees for issue of preference shares £20
Gifts to customers - pens costing £30 each displaying company's name = £60
Gifts to customers - watches costing £60 each = £120

Required:

Calculate Tax adjusted trading pro t.

Solution:

Pro t before tax "PBT" (Operating pro t) 100,000

+ Disallowed expenses:
+ Donations 25
+ Legal fees for issue of preference shares 20
+ Gifts to customers - watches costing £60 eac 120
+ Depreciation 500
Allowable expenses:
Entertaining employees 0
Accountancy 0
Legal fees in connection with the registration of trade marks 0
Gifts to customers - pens costing £30 each displaying company's name 0
- Capital allowances (400)
Tax adjusted trading pro t 100,265

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 Illustration:

Alpha Ltd. had an accounting pro t of £59,850.

The following items are included in the accounting pro t gure:

Income from sales £20,000

Cost of 4 computers £5,000
Interest paid on a loan for working capital requirements £3,000
Depreciation £1,250

What is the tax adjusted accounting pro t?

Solution:

Accounting pro t £59,850

Allowable expenses (Interest paid ) 0
Add: disallowed expenditure
Capital expenditure on computers £5,000
Depreciation £1,250
Deduct: capital allowances (£5,000)
Tax adjusted accounting pro t £ 61,100

Note:

A company is allowed an annual investment allowance of £1,000,000 per

year.

This means that a company can spend up to £1,000,000 on capital items, for
example computers and be allowed the full expenditure to be an allowable
expense in the tax year.

Therefore, as the capital expenditure on computers is only £5,000 – the

annual investment allowance will take care of this.

1. The loan interest is allowable as it is a loan for trading requirements

As companies will have shareholders (people who own the company) and
directors/employees (people who work for the company) separated, there are
some di erences between the rules for unincorporated traders and
companies:

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These include:

• No private element of expenses added back

• Drawings (cash and goods) are not relevant for companies.

Dividends are paid out of post-tax pro ts.

• Family salaries are not relevant for companies.

Basically, there will not be any personal use of expenses because everyone who
uses the company’s money or facilities will be an employee, not an owner.

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 Syllabus B3e/E2b. Relief for pre-trading expenditure

Relief for pre-trading expenditure

When does trading commence?

Trading commences on the rst day on which a trader makes a sale.

However, the trader would have incurred expenditure before this date, for example,
advertising expenditure and/or rent paid in advance.

• This expenditure incurred before trading has commenced is known as “pre-

trading expenditure”.

• Pre-trading expenditure will get tax relief by being treated as though it was
incurred on the rst day that a sale is made, if the following conditions are
satis ed.

Conditions for pre-trading expenditure to be allowable

• 1) It is incurred within 7 years of the commencement of the trade.

• 2) It is an allowable expense.

• For example, if goods were purchased for sale for the business 4 years
before the business had its rst sale; this purchase price will be deducted
from the rst pro ts also.

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Illustration:

Manny Ltd. made their rst sale in his packaging business on 04/05/2024.

Before this they incurred the material expenses of £3,000 on 31/12/2023.

• Will this expenditure be deducted from the sales revenue to arrive at tax
adjusted trading pro t?

Solution:

Yes, this expenditure will be deducted from their sales revenue to arrive at the tax
adjusted trading pro t.

It will be treated as though the expenditure was incurred on 04/05/2024.

This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.

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 Syllabus B3h/E2c. Capital allowances

Capital allowances

Plant and machinery(P&M) for capital allowances purposes

Capital Allowances (Tax depreciation) are deducted from Operating pro ts

• CA are given for P&M used in the business only

• CA are given for a period of account eg for a year ended 31/12/24, and
are deducted in the adjustment of pro ts calculation to reach the Trading
Pro ts gure

• Plant is de ned as assets that perform an active function in the business

• e.g. o ce furniture and equipment including moveable o ce partitioning

• Machinery will include motor vehicles and computers, including building

alterations necessary for the installation of plant and machinery

Rates of allowance %

Main pool assets 18

Special Rate Pool assets 6

Capital allowances are now also available on integral features of a building including
lifts and escalators, electrical systems, heating and air cooling system.

Main pool

1. Computers, equipment, shelving, vans and lorries

2. Movable o ce partitioning

3. Alterations to building incidental to the installation of plant and machinery

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 4. Tables and chairs

5. Fire regulation expenditure

Special Rate Pool

The following asset acquisitions should be allocated to the special rate pool:

1. Integral features of a building

– these include all major systems in a building.

For example, electrical, thermal, cooling systems.

2. Long life assets

These are assets, when new, with an expected economic working life of 25
years or more when total expenditure based on a 12-month accounting
period exceeds £100,000

Writing down allowances

W.D.A.’s are given on main pool assets and special rate pool assets.

For main pool assets, the W.D.A. is 18% for a 12 month period

For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2024

The writing down allowance on these assets will be £18,000 (£100,000*18%) in

the year ending 31/12/2024.

Note if the above period was for 6 months, then the WDA for the main pool
would be £9,000 (£100,000*18%*6/12) in the period ending 31/12/2024.

For special rate pool assets, the W.D.A. is 6% for a 12 month period.

For example Assets in the special rate pool had a brought forward value of
£100,000 at 06/04/2024

The writing down allowance on these assets will be £6,000 (£100,000*6%) in the
year ending 05/04/2025.

Note if the above period was for 6 months, then the WDA would be £3,000
(£100,000*6%*6/12) in the period ending 05/04/2025.

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 Annual investment allowance

From 1 January 2019, the annual investment allowance is £1,000,000.

This is given to an individual for a 12 month period and is time apportioned if the
period is below 12 months.

Ideally, this A.I.A should be allocated to special rate pool assets purchased rst
because the allowances on these assets are only 6% per year, therefore tax
relief on these assets is received over a longer period.

Once allocated to special rate pool assets purchased in the tax year, then if any
of the allowance is remaining, it can be allocated to main pool assets purchased
in the year.

The A.I.A cannot be given to motor cars purchased in the tax year.

For example a business purchased equipment worth £1,300,000 in their year

ending 31/03/2025.

The annual investment allowance is £1,000,000 (maximum available).

For the remaining £300,000 (£1,300,000- £1,000,000), a writing down allowance

will be available.

As equipment is a main pool asset, the writing down allowance will be £54,000
(£300,000*18%).

The total capital allowances available will be AIA + WDA = £1,054,000

(£1,000,000 + £54,000)

Note: if the above purchase was made in a 6 months period, then the AIA would be
(£1,000,000*6/12) = £500,000 + WDA ((£1,300,000 - 500,000)*18%*6/12) = £72,000.
This would total to £572,000 of capital allowances for the 6 month period.

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Enhanced capital allowances for companies only

Companies get enhanced capital allowances when they purchase NEW plant and
machinery (not available on cars):

For expenditure which would fall into the main pool, there is a 100% rst year
allowance (FYA)(full expensing).

For expenditure which would fall into the special rate pool, there is a 50% FYA.

The disposal of these assets is treated di erently from other assets:

The proceeds on sale of those assets on which the 100% FYA had been claimed
will result in a balancing charge (instead of going into the main pool).

For those assets where the 50% FYA had been claimed the proceeds are split
proportionately according to the amounts originally claimed as 50% FYA and AIA.

As regards capital allowances planning for companies:

The 100% annual investment allowance should initially be claimed against second-
hand assets – those otherwise qualifying for 6% WDA, and then those otherwise
qualifying for 18% WDA.

The 100% annual investment allowance should then be claimed on new assets
falling into the special rate pool in preference to the 50% rst year allowance.

Finally, any remaining annual investment allowance should be claimed against new
assets falling into the main pool.

Although the amount of relief is initially exactly the same, the treatment of
subsequent disposal proceeds will normally be preferable when the annual
investment allowance has been claimed (proceeds deducted from the main pool)
rather than when the 100% rst year allowance is claimed (proceeds result in a
balancing charge).

However, the 50% and 100% rst year allowances have no upper limit, so they will
come into play after a company has exhausted the annual investment allowance.

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Illustration:

Cow Ltd has an accounting reference date of 31 March.

On 1 April 2024, the tax written down value of plant and machinery in the
company’s main pool and special rate pool is £0.

During the year ended 31 March 2025, Cow Ltd purchased the following equipment:

£
Second-hand main pool expenditure 260,000
New main pool expenditure 680,000
New special rate pool expenditure 510,000

Cow Ltd’s capital allowance claim for the year ended 31 March 2025 is:
£
Annual investment allowance
Second-hand expenditure (260,000 x 100%) 260,000
Special rate pool expenditure (510,000 x 100%) 510,000
Main pool expenditure
((1,000,000 – 260,000 – 510,000) x 100%) 230,000
First year allowance ((680,000 – 230,000) x 100%) 450,000
_________
Total allowances 1,450,000
________

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 Compute capital allowances for motor cars

First year allowances

These are given for zero emission motor cars.

This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.

The F.Y.A. is not time apportioned for a period of less than 12 months.

For example, a car was purchased on 01/05/2024 for £100,000.

It had a zero CO2 emissions.

The rst year allowance for this car will be £100,000 ( £100,000*100%).

Note if the above period was for 6 months, then the FYA would still be £100,000
- it is not reduced for a period of less than 12 months.

The F.Y.A is given to motor cars purchased that have zero CO2 emissions

For cars with a CO2 emission of less than or equal to 50g CO2 emissions, an 18%
W.D.A. is given, therefore these are considered to be main pool assets.

For cars with a CO2 emission of more than 50g, an 6% W.D.A. is given, therefore
these are considered to be special rate pool assets.

Illustration (a Company):

Cow Ltd.:

06/04/2024 Tax written down value on main pool of £16,800

Purchase of car for £10,600. The car had CO2 emissions of 46g/
25/06/2024
km.
Purchase of car for £18,000. The car had CO2 emissions of
16/02/2025
142g/km.

14/03/2025 Purchase of car for £22,000. The car had zero CO2 emissions.

What are Cow Ltd. capital allowances?

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Solution:

Special
Main Capital
Particulars F.Y.A. rate
Pool allowances
pool

Tax written down

£16,800
value brought forward

Additions:

Zero CO2 car £22,000 (£22,000) £22,000

Car 46g/km £10,600 £10,600

Car 142g/km £18,000 £18,000

Total (£22,000) £27,400 £18,000

WDA (18%/6%) (£4,932) (£1,080) £6,012

Tax written down

22,468 16,920
value carried forward

Total capital allowances for the year £28,012 (£22,000 + £6,012)

Illustration (ANNA - a Soletrader )

06/04/2024 Tax written down value on main pool of £16,800

Purchase of car for £10,600.

The car had CO2 emissions of 46g/km.
25/06/2024
This car is 60% privately used by Anna’s husband who is an
employee of the business.
Purchase of car for £18,000.
16/02/2025 The car had CO2 emissions of 142g/km.
This car is 30% used privately by Anna.
Purchase of car for £22,000.
14/03/2025 The car had zero CO2 emissions.
This car is 25% privately used by Anna’s assistant.

What are Anna’s capital allowances?

Solution:

Capital

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 Tax written down
£16,800
value brought forward

Additions:

Zero CO2 car £22,000 (£22,000) £22,000

Car 46g/km £10,600 £10,600

Car 142g/km £18,000 £18,000

Total (£22,000) 27,400 £18,000

(£1,080) *
70%
business £5,688
WDA (18%/6%) (£4,932)
use = (W1)
Capital
allowance

Tax written down

22,468 £16,920
value carried forward

W1:
The capital allowance is reduced by % of private usage
£4,932 + (£1,080 * 70%) = £5,688

W2:
The tax written down value carried forward is calculated using the entire W.D.A.
£18,000 - £1,080 = £16,920

Total capital allowances for the year £27,688 (£22,000 + £5,688)

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Assets with private use

A company

Companies do not have assets used privately.

This is because all of the people who work in the company are considered to be
employees of the company.

Therefore, the capital allowances given are not reduced by the % of private usage
by an employee of a company.

A Sole trader

If an asset is used privately by the owner of the business, the capital allowance
given must be reduced by the % of private usage.

If an asset is used privately by an employee of the business, the capital

allowance given is not reduced by the % of private usage.

Illustration (a sole trader)

Mia has been in a business as a sole trader.

She bought computer for £3,000 which she uses 70% in her business and 30%
privately.

She has already used the AIA in this tax year.

Calculate the capital allowances.

Solution:
WDA = £3,000 x 18% = £540
Capital Allowances (business use only) £540 x 70% = £378

Illustration (a company)
Cow Ltd. is a trading company.

The company bought computer for £3,000 which is used by the sales manager
30% privately.

Cow Ltd. has already used the AIA in this year.

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Calculate the capital allowances.

Solution:
WDA = £3,000 x 18% = £540

Note: The private use of the computer by the employee is not relevant for capital
allowance purposes.
No adjustment is ever made to a company's capital allowances to re ect the private
use of an asset.

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 Disposal of the assets
Use LOWER OF

1. Proceeds

2. Original cost

When an item of plant or machinery is sold - the lower of the sale proceeds received or
the original cost of the asset is deducted from the written down value of the relevant
pool.

For example, if the written down value is 100 and sale proceeds received are 120 but
the original cost of the asset is 110, then 110 will be deducted from the pool to give a
balancing charge of 10. The di erence between proceeds and original cost will be
treated as a capital gain.

Compute balancing allowances and balancing charges

In the nal year of trading, the A.I.A., W.D.A., F.Y.A. are not given.

Instead, balancing allowances and balancing charges are computed on each pool.

Balancing adjustments on the pools can only occur on cessation of trade.

A balancing allowance will be deducted from trading pro t to nd tax adjusted

trading pro t and a balancing charge will be added to trading pro t to nd tax
adjusted trading pro t.

Illustration:

Karen Ltd. prepares accounts to 05/04.

The company ceased to trade on 05/04/2025 on which all of its plant and
machinery was sold for £8,000.

The written down value on its main pool at 06/04/2024 was £11,000.

The company purchased machinery for £4,000 during the year.

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Solution:

Particulars Main pool Capital allowances

TWDV b/f £11,000
Additions £4,000
Total £15,000
Disposals (£8,000)
Balancing allowance £7,000 £7,000

Karen Ltd.’s balancing allowance in her nal year of trading is £7,000.

Assets on which super deduction was claimed

Super deduction of 130% on MP assets and 50% on SRP assets is no longer
available.

In the TX - UK exam, a question involving disposal of an asset on which super

deduction was claimed may be asked. The disposal gives rise to a balancing
charge.

It the asset being disposed o is a MP asset on which 130% super deduction

was claimed

Balancing charge = Sale proceeds

It the asset being disposed o is a SRP asset on which 50% super deduction
was claimed

Balancing charge = Sale proceeds x (cost on which super deduction was claimed/
total cost) x 50%

The remainder of the sale proceeds are deducted from the SRP.

Illustration:

For the year ended 31/3/25, a company sold a MP asset for 60,000. Original cost of
the asset was 80,000. Super deduction of 130% was claimed on the original cost.

This will give rise to a balancing charge equal to the sale proceeds of 60,000.

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 The company also sold a SRP asset sold for 650,000. Original cost of the asset was
1,100,000. AIA was claimed for 1,000,000 and 50% super deduction on the
remaining 100,000.

Balancing charge = 650,000 x (100,000/1,100,000) x 50% = 29,545

The remaining sale proceeds of 620,455 will be deducted from the SRP.

Structural and Buildings Allowance

The SBA is is a new type of capital allowance available when a building (or a
structure) has been constructed / purchased for use in the trade. For example,
o ces, retail and wholesale premises, factories and warehouses all qualify for the
SBA.

This allowance is also available if an unused building/structure has been renovated

for use in the trade.

The rate of the allowance is 3% per annum and is given for a period of 33 years and
4 months.

To note about the SBA:

- The value of land does not qualify for the SBA

- Expenditure which quali es as plant and machinery (and therefore will get the AIA)
cannot also qualify for the SBA and vice versa.

- The SBA can only be claimed from when the building / structure is brought into
use in the trade. This means that the SBA will be time apportioned for the period
when it is rst brought into use, this is unlike capital allowances for plant and
machinery which are given the full allowance in the period of purchase.

- A separate SBA is given for each building / structure

- When the building / structure is sold, this will not result in a balancing allowance or
balancing charge, the 3% p.a. will continue to be given for the period remaining
out of the 33 years and 4 months. However, the allowances already given at the
date of sale will be added to the sale proceeds when calculating the chargeable
gain / capital loss for capital gains tax.

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Illustration

Anaya Ltd prepares accounts to 31/3/2025.

On 1/7/2024 a newly constructed factory was purchased from a builder for

£500,000 (including land cost of £130,000).

The factory was brought into use on 1/9/2024.

What is the SBA available on this factory?

Solution

Purchase price £500,000

Less land cost (£130,000)

Qualifying expenditure for SBA £370,000

SBA £370,000 x 3% x 7/12 = £6,475

The allowance will be given from September 2024 (date it was brought into use).

Illustration

Anaya Ltd sold the factory above on 31/3/2025 for £600,000.

What will the SBA be for the year ended 31/3/2026?

What will the capital gain be on the sale?

Solution

The SBA will be given normally for the year ended 31/3/2026:

£370,000 x 3% = £11,100

The capital gain on the sale:

Sale proceeds £600,000 + SBA £6,475

= £606,475

Less cost (£500,000)

Capital gain £106,475

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 Recognise the treatment of short life assets

Short life assets are main pool assets that have an expected life of 8 years or less.

A de-pooling election can be made so that the asset gets its own W.D.A.’s and on
sale of the asset, a balancing allowance or balancing charge can arise.

The bene t of this election is that a balancing adjustment will arise within 8 years,
which would not have arisen, if this de-pooling did not take place.

If the asset is not sold within the 8 years of acquiring the asset, then the written
down value is added back to the main pool.

This happens on the 8th anniversary of the end of the accounting period in which
the asset was acquired.

Assets on hire purchase or lease

Any asset (including a car) bought on hire purchase (HP) is treated as if purchased
outright for the cash price. Therefore:

• The buyer normally obtains capital allowances on the cash price when the agreement
begins

• He may write o the nance charge as a trade expense over the term of the HP
contract

Long-term leases (those with a term of ve or more years) are treated in the same way
as HP.

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 Syllabus E2d. Property business pro ts and relief for property losses

Property business pro ts and relief for property losses

The calculation of property business pro ts is exactly the same as that for
individuals with 4 exceptions:

1. Interest payable on a loan to buy an investment property is deducted from

“Interest income” under the loan relationship rules as opposed to “property
business pro ts”.

The 100% restriction to interest expenses that we saw in the income tax
topic does not apply to companies.

2. There is no rent a room relief for companies as a company will not have a
main residence.

3. Property losses for a company are entirely relieved against Total Income of
the:

1) current year or

2) carried forward to future years.

4. Property income is calculated using the accruals basis for companies, not
the cash basis.

Note:
Property losses CANNOT be carried back 12 months. ONLY Trading losses CAN

Qualifying charitable donations (QCD) CANNOT be saved!

LOSS must be deducted rst and if any income remains - then the QCD can be
deducted

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Please refer to Topics Computation of property business pro ts, Furnished
holiday lettings, Rent a room relief, Premiums granted for short leases,
Property business loss relief to review how property business pro ts are
calculated.

Illustration:

For the year ended 31/03/2025 Theta Ltd. has:

Trading income £100,000
Property loss (£20,000)
Qualifying charitable donation £85,000

What will Theta Ltd. taxable total pro ts be?

Solution:

Trading income £100,000

Property loss (£20,000)

Net income £80,000

Qualifying charitable donation (£80,000)

Taxable total pro t Nil

Note that the property loss is relieved before the qualifying charitable donation
against total income.

Additionally, this has resulted in £5,000 of the qualifying charitable donation being
wasted.

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 Relief for trading losses - for Companies

1) Relieved against Current year Total income

You HAVE TO deduct the LOSS from Total Income FIRST and then deduct
Qualifying charitable donations (QCD)

The LOSS can be given to 75% group companies for relief against total income
(Without relieving loss against their own income rst)

2) Carried back against 12 months of Total income - AFTER the current year
total income has been fully used for the trading loss

You HAVE TO deduct the LOSS from Total Income FIRST and then deduct
Qualifying charitable donations (QCD)

3) Carried forward against Future Total income (Trading, Property, Interest)

Qualifying charitable donations can be saved (ie) the QCD is deducted before the
LOSS

The LOSS can be given to 75% group companies for relief against total income (The
loss must be relieved against their own income rst)

Note: The current year total income relief and carry back total income relief are
normally used before the carry forward relief.

This is because companies want loss relief as soon as possible.

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 Syllabus E2f. Total income relief for trading losses

1) Current year relief of trading losses

Trading losses can be deducted from a Current year Total income

Illustration 1

In 2025, Cow plc. made a trading loss of (£100,000)

It also had property income of £75,000 and chargeable gains of £35,000.

Cow plc can relieve the trading loss by deducting it from it's total income:

Property income £75,000

Chargeable gains £35,000
Total Income £110,000

Less:
Current year trading loss (£100,000)

Total Taxable pro ts £10,000 - this is the amount that corporation tax will be paid
on.

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 Remember:
Qualifying charitable donations (QCD) CANNOT be saved, loss must be deducted
rst and if any income remains - then the QCD can be deducted

Illustration 2

In 2025:

Trading loss of (£100,000)

Property income of £75,000

Chargeable gains of £35,000

Qualifying charitable donations of £35,000

Calculate the Total Taxable Pro t.

Solution:
Property income £75,000

Chargeable gains £35,000

Total Income £110,000

Less:
Current year trading loss (£100,000)

Total Income £10,000

Less: QCD £10,000

Total Taxable Pro t £Nil - no corporation tax will be paid.

Note £25,000 (£35,000-£10,000) of the qualifying charitable donation was wasted

because the claim for loss relief must be made in full.

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 3) Carry back relief of trading losses

A trading loss can be deducted from the previous 12 month's Total income

Illustration 1

In 2025 - a trading loss of (£100,000), it had no other income in that year.

In 2024 - property income of £75,000 and chargeable gains of £35,000

Calculate Total taxable pro ts.

Solution:

Property income £75,000

Chargeable gains £35,000
Total income £110,000

Less:

Trading loss carried back (£100,000)

Total Taxable Pro t £10,000 - this is the amount that corporation tax will be paid on.

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The current year total income claim must be made FIRST
Unlike for individuals, the current year total income claim must be made before the
claim against total income for the previous 12 months.

Illustration 2

In 2025 - a trading loss of (£100,000) and property income of £25,000

In 2024 - Total income of £200,000

The trading loss must rst be deducted from 2025 total income, and can then be
carried back to the total income (2024)

Current year relief:

Property income £25,000

Less
Current year trading loss (£25,000)
Total income £Nil - no corporation tax will be paid in the year ending 31/03/2025.

Carry back relief:

Total income £200,000

Less:
Trading loss carried back (£75,000)
Total income £125,000 - corporation tax will be paid on this amount in the tax year
ended 31/03/2024.

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 Illustration 3:

Pulkit Ltd. made the following income for the year ended 31/03/2025:

Trading income (£30,000)

Property income £20,000

Interest income £5,000

Qualifying charitable donations £5,000

Pulkit Ltd. made the following income for the year ended 31/03/2024:

Trading income £20,000

Property income £20,000

Interest income £5,000

Qualifying charitable donations £5,000

How can the trading loss of the year ended 31/03/2025 be relieved?

Solution:

The trading loss of 31/03/2025 can be relieved against:

1. Current year total income (£20,000 + £5,000)

2. Carry back 12 months of total income (£20,000 + £20,000 + £5,000)

3. Total pro ts of future years (future total pro ts = unknown)

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Here we will illustrate only the current year total income claim and the carry back
claim against total income for 12 months.

Trading loss of (£30,000) incurred in the year ended 31/03/2025 will be relieved
against the total income generated in 31/03/2025 as shown below.

In the year ended 31/03/2025

Property income £20,000

Interest income £5,000

Total income £25,000

Current year trading loss (£25,000)
£Nil - no corporation
Total taxable pro t
tax will be paid.

The qualifying charitable donations for the year ended 31/03/2025 have been
wasted.

In the year ended 31/03/2024:

The carry back total income claim for 12 months:

Trading income £20,000

Property income £20,000

Interest income £5,000

Total income £45,000

Trading loss relief carry back claim (£5,000)

Qualifying charitable donations (£5,000)

Taxable total pro ts £35,000

Notice here that the qualifying charitable donation has not been wasted, as there
was enough income remaining for it to be deducted.

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Loss memo:

Trading loss of 31/03/2025 (£30,000)

Current year claim against total income £25,000

Carry back claim against total income £5,000

Loss to be carried forward Nil

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 The carry back of a loss - periods of less than 12
months

If the period before your loss making period is less than 12 months

Your carry back relief claim is for 12 months

Therefore you will have to go one further period back for the remaining months.

For example:

2025 - Loss

2024 - the period was 8 months long only

2023 - the period was 1 year long

Then you will take the full 8 months from 2024 and 4 from 2023 total income - to
make sure that you have gone back a full 12 months.

For example

Above, I must relieve the loss against the total income for 8 months of 2024 and
ONLY 4 months of 2023.

You'll see this clearly in Lina Ltd. Illustration below.

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 Illustration

Lina Ltd. had the following results:

Year ended 8 months ended Year ended

30.04.2024 31.12.2024 31.12.25

Trading pro ts/

£60,000 £2,000 £(66,000)
loss

Chargeable gains £2,000 £10,000 £10,000

Total income £62,000 £12,000 £10,000

What amount of loss relief will the company get if they use the current year
and carry back total income claims for loss relief?

Solution

Note the company's previous accounting period is only for 8 months.

Therefore the carry back 12 month claim will use these 8 months and go further
back 4 months to make up an entire 12 month claim.

8 months ended Year ended

Year ended 30.04.2024
31.12.2024 31.12.2025

Trading pro ts/

£60,000 £2,000 Nil
loss

Chargeable gains £2,000 £10,000 £10,000

Total income £62,000 £12,000 £10,000

Total income
(£10,000)
current year claim

Total income
carry back 12
months claim (set £(12,000)
o in full in this 8
month period)

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 Total income
Carry back 12 4/12*£62,000 = £20,667 (total
months claim income for 4 months)
(restrict set o to 4
months of pro t)

(20,667)
Total taxable
£41,333 £Nil £Nil
profts

Loss memo:

Trading loss of 31/12/2025 (£66,000)

Current year claim against total income £10,000

Carry back claim against total income (8 months) £12,000

Carry back claim against total income (4 months) £ 20,667

Loss to be carried forward £23,333

Notice how the loss is restricted in the second carry back period. Look out for this
in the exam, don’t just allocate the remaining loss in this second period.

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 Syllabus E2e. Carry forward relief of trading losses

Carry forward relief of trading losses

If a company makes a trading loss, then it can relieve the loss by carrying it
forward and deducting it from its Future Total Income.

This rule came into force for losses from 1 April 2017.

In your TX - UK exam you will not be tested on losses that arose before 1 April
2017.

You have to start claiming it within 2 years

Claims for carried forward loss relief must be made within 2 years of the end of the
accounting period in which the loss is relieved.

BUT once you start claiming, then Trading losses can be carried forward for any
amount of time, until the full amount of the loss has been relieved.

For example (Cow plc )

In 2024 - a trading loss of (£30,000)

In 2025 - a trading pro t of £50,000 and investment income of £20,000.

Calculate Total taxable pro t:

Trading pro t £50,000

Investment income £20,000

Total Income £70,000

Less:

Trading loss carried forward (£30,000)

Total taxable pro t £40,000 - this is the amount that will be taxed, after the carried
forward loss has been deducted.

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 REMEMBER:

Unlike current year and carry back loss relief, under carry forward loss relief a
company can choose the amount of trading loss to use in order to save its
charitable donations.

For example

Cow plc made a trading loss of (£30,000) in the tax year ending 31/03/2024.

Cow plc made a trading pro t of £50,000 in the tax year ending 31/03/2025.

Cow plc also made a qualifying charitable donation of £35,000 in the tax year
ending 31/03/2025.

In the tax year ending 31/03/2025 Cow plc will:

Trading pro t £50,000

Less:
Trading loss carried forward (£15,000) (restricted to save charitable donation)

Trading pro t £35,000

Less:
Qualifying charitable donation (£35,000)

Trading pro t £Nil - no trading pro t will be taxed in the tax year ending
31/03/2025.

The remaining trading loss of £15,000 (£30,000 - £15,000) will be carried forward to
future years

Trading losses can be carried forward for any amount of time, until the full amount
of the loss has been relieved.

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 Illustration:

Pulkit Ltd. made the following income for the year ended 31/03/2024:

Trading income (£50,000)

Property income £20,000

Interest income £5,000

Qualifying charitable donations £5,000

Pulkit Ltd. made the following income for the year ended 31/03/2025:

Trading income £20,000

Property income £20,000

Interest income £5,000

Qualifying charitable donations £5,000

How can the trading loss of the year ended 31/03/2024 be relieved against
future Total Income?

Solution:

Trading loss of (£50,000) incurred in the year ended 31/03/2024 will be relieved
against the total pro ts generated in 31/03/2025.

BUT only £40,000 of the loss needs to be used, the remaining £5,000 of total pro ts
is covered by the qualifying charitable donations.

The remaining £10,000 of the loss will be carried forward to o set against future
total pro ts.

Trading income £20,000

Property income £20,000
Interest income £5,000
Total income £ 45,000
Trading loss carried forward (£ 40,000)
Qualifying charitable donations (£5,000)
Taxable total pro ts £NIL

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Loss memo:

Trading loss incurred in 31/03/2024 (£50,000)

C/F loss relief in 31/03/2025 £40,000

Loss to be carried forward to 31/03/2026 (£10,000)

Note: an alternative would be to use the loss in the current year and o set £25,000
against other income.

The downside of this is that £5,000 of donations would be wasted.

Terminal loss relief

If a trading loss occurs in the nal 12 months of trading, then this trading loss can be
carried back for 36 months against the total income of the company, on a LIFO (last in rst
out) basis.

Once again, the loss cannot be restricted to save qualifying charitable donations.

For example Creamy plc. made a trading loss of (£100,000) in its nal year of trading.

It had the following total income:

Year ended 31/03/2025 - £40,000

Year ended 31/03/2024 - £20,000
Year ended 31/03/2023 - £55,000

The trading loss of (£100,000) will rst be relieved against the total income of 31/03/2025:

Total income £40,000

Less:
Terminal loss relief (£40,000)
Total income £Nil - whatever corporation tax has been paid will be repaid to the company
by HMRC

Then,

The trading loss of (£60,000) (£100,000-£40,000)will second be relieved against the total
income of 31/03/2024:

Total income £20,000

Less:
Terminal loss relief (£20,000)

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Total income £Nil - whatever corporation tax has been paid, part of it will be repaid to the
company by HMRC

Then,

The trading loss of (£40,000) (£100,000-£40,000-£20,000)will second be relieved against

the total income of 31/03/2023:

Total income £55,000

Less:
Terminal loss relief (£40,000)
Total income £15,000- whatever corporation tax has been paid, part of it will be repaid to
the company by HMRC

Note for the years in which tax has already been paid, this will result in a repayment of tax.

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 Syllabus E2g. Factors that in uence choice of loss relief claim

Factors that in uence choice of loss relief claim

In uencing loss relief claims

There are 3 factors that will be relevant in the TX exam that will in uence the
choice of the loss relief claim:

1. Relief as soon as possible

Therefore, the current year total income and carry back 12 months’ total
income claim are much more likely to be used before the carry forward claim
against trading pro ts

2. The rate of corporation tax

Loss relief claim against pro ts before 1 April 2023 will save tax at 19%.

Loss relief claim against pro ts after 1 April 2023 will save tax at following
rates. This is also the most preferable order to follow with respect to the amount of
tax being saved.

1) Pro ts between the lower limit and upper limit - 26.5%

2) Pro ts taxed at the main rate - 25%

3) Pro ts taxed at the small pro ts rate - 19%

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 Here’s an illustration to show why the tax saving between the lower limit and
the upper limit is at 26.5%.
Cow Ltd has TTP of 50,000 for the y.e. 31/3/25.

Cat Ltd has TTP of 60,000 for the y.e. 31/3/25.

Cow Ltd - Pro ts are within the lower limit of 50,000 - CT at 19%

CT liability = 50,000 x 19% = 9,500

Cat Ltd - Pro ts are between the lower limit and upper limit

60,000 x 25% = 15,000

Marginal relief = (250,000 - 60,000) x 3/200 x 60,000/60,000 = 2,850

CT liability = 15,000 - 2,850 = 12,150

Pro ts between the lower and upper limit are 10,000 (60,000 - 50,000).

Excess tax payable on these pro ts is 2,650 (12,150 - 9,500).

2,650/10,000 x 100 = 26.5%

3. Making a large company a small company for corporation tax purposes

If a loss relief claim can reduce the size of the company, then this will avoid
the company having to make quarterly instalments of corporation tax.

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 Syllabus E2h. Loan relationship rules

Loan relationship rules

The loan relationship rules

Basis of assessment of “Interest Income”

There is an “interest element” in the corporation tax computation for companies.

All interest is received gross for companies and the basis of assessment for interest
income is the accruals basis.

Operation of “Interest Income”

Any interest payable or receivable by companies will be deducted from or added to

“interest income”

• For example, if a loan was taken out to purchase an investment property, the
interest payable would be deducted from this area, not property income.

• However, there is one exception to this rule, that is that any loan taken or
received for trading purposes will have its interest payable or receivable
adjusted within “Trading pro ts”.

• Otherwise, any non trading loans will be adjusted within “Interest income”.

Summary of similarities and di erences between individuals and companies

Particular Individuals Companies

Gross/Net Gross and net Gross

Accruals Accruals Accruals

Trading/Non trading Deducted from their Deducted from Interest income,

loans respective areas except for trading loans

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Simple proforma:

Bank and building society interest receivable x

Gilt interest receivable x

Loan note interest receivable x

Repayment interest receivable from HMRC x

Less:

Loan arrangement fee (x)

Interest payable on loan to buy inv. Prop. (x)

Late payment interest on overdue tax (x)

Interest surplus/de cit x/ (x)

Illustration:

Seeta Ltd. took out a £190,000 loan on 01/07/24 in her year ended 31 March 2025.

The arrangement fee for this loan amounted to £1,400.

The interest on this loan is £7.25% per annum. This loan is used for various
activities:

1. £130,000 to buy an investment property.

2. £45,000 to repair an o ce building that is rented out.

3. £15,000 to fund working capital requirements.

How much of the interest payable will be taken under the Interest income?

Solution:

The year ends 31/03/2025. Therefore 9 months of interest will be payable.

9/12 * (190,000 * 7.25%) = £10,331

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Interest Income:

1. Loan interest to buy an investment property is allowable

2. Loan interest to repair an investment property is allowable

= (£130,000+£45,000)/£190,000 * £10,331 = £9,515

Trading income:

1. Loan interest to fund working capital requirements will be treated as a trading

expense.
£10,331 - £9,515 = £816

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 Syllabus E2i. Qualifying charitable donations

Qualifying charitable donations

Tax relief is available for qualifying charitable donations

You can deduct charitable donations from the taxable total pro ts.

Also note the di erence between how qualifying charitable donations are
treated between individuals and companies:

1. Companies deduct these payments, whereas individuals cannot deduct the

payments from their income.

2. A company makes the payment gross, whereas an individual makes the

payment net.

Illustration:

Satya Ltd. has the following income and expenses for the year ending
31/03/2025:

Tax adjusted trading pro t £200,000

Property income £50,000

Interest receivable £20,000

Chargeable gains £10,000

Qualifying charitable donation £15,000

Compute the taxable total pro ts for the year.

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Solution:

Tax adjusted trading pro t £200,000

Property income £50,000

Interest receivable £20,000

Chargeable gains £10,000

Qualifying charitable donations (£15,000)

Taxable total pro ts £265,000

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 Syllabus E2j. Computation of taxable total pro ts

Computation of taxable total pro ts

How to calculate taxable total pro ts?

Taxable total pro ts include:

Trading income x

Other income and gains:

Property income x
Interest income x
Capital gains x

Less:

Loss relief claims (x)

Qualifying charitable donations (x)
= Taxable total pro ts x

Each of these areas are discussed in detail in their respective sections.

Remember that dividends received are not subject to corporation tax and are
therefore not included in taxable total pro ts.

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 Illustration:

Lachmi Ltd. has the following income for the year:

Trading pro ts £310,000

Property income £200,000
Interest income £50,000
Capital gains £20,000
Qualifying charitable donations £50,000
She has also received a dividend from a non-associated company of £18,000.

What are Lachmi Ltd. taxable total pro ts for the year?

Solution:

Taxable total pro ts for the year

Trading pro ts £310,000

Property income £200,000

Interest income £50,000

Capital gains £20,000

Less:

Qualifying charitable donations (£50,000)

Taxable total pro ts £530,000

Notice that dividends received are not included.

They are exempt and only used for the calculation of Augmented pro ts for
payment of corporation tax.

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 Little trick!

Interest income is taxed on an accruals basis.

This means that the interest which is taxed is the interest which is receivable during
the year, not the interest which is actually received during the year.

For example, bank interest receivable of £2,000 was accrued at 31 March 2024
and £1,000 was accrued at 31 March 2025 respectively.

This means that £2,000 should have been paid in the year ended 31 March 2024
but was not, and £1,000 should have been paid at 31 March 2025, but has not been
paid yet.

The interest actually received during the year ended 31 March 2025 was £6,000.

Therefore, how do we gure out what the amount is that should have actually been
received for the year ended 31 March 2025?

Amount paid - Amount due for previous year + Amount still due at this year end =
Amount that should have been paid for this year.

£6,000 was paid

(£2,000 was paid towards the amount due at 31 March 2024)

Therefore, £4,000 paid was actually due for the year ended 31 March 2025
+
£1,000 is still to be paid for the year ended 31 March 2025

Therefore, £6,000-£2,000+£1,000 = £5,000 is actually due for the year ended 31

March 2025 - this amount will be used in the proforma.

Illustration:

Kamal Ltd. has the following results for the year ended 31/03/2025

£
Trading pro ts/loss before capital allowance 30,000
Chargeable gains 2,000
Interest income 62,000
Property income 50,000

Dividends received 100,000

Capital allowances for the year 3,000

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 Qualifying charitable donations 15,000

Kamal Ltd. had £2,000 interest accrued at 31/03/2024 and £3,000 of interest
accrued at 31/03/2025.

What will Kamal Ltd.'s taxable total pro ts be for the year ended 31/03/2025?

Trading pro ts/loss before capital

30,000
allowance

Less: capital allowances (3,000)

Tax adjusted trading pro ts 27,000

Interest receivable 62,000-2,000+3,000

63,000
=63,000

Chargeable gains 2,000

Property income 50,000

Total income 142,000

Less:

Qualifying charitable donations (15,000)

Taxable Total Pro ts 127,000

Taxable Total Pro ts 127,000

Exempt dividends 100,000

227,000 (This is below the upper limit of

1,500,000, so the company is a small company
Augmented Pro ts
and would not have to pay its corporation tax
in instalments)

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 Syllabus E3. Chargeable gains for companies

Syllabus E3ab. Capital gains computation

Capital gains computation

How to calculate capital gains?

Capital gains and losses are netted o for each tax year

Corporation tax is paid upon this net gain.

For a company’s capital gain, the following computation can be used:

Disposal proceeds X

Less: Incidental cost of disposal (X)

Net proceeds X

Less: Acquisition Costs (X)

Capital Gain / (Capital loss) X / (X)

Less: Indexation allowance (X)

Taxable gain X

After all individual indexed gains and losses have been computed, then they must be
aggregated and the following computation can be used.

Capital Gains in tax year X

Less: Capital losses in tax year (X)

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 Net Capital Gains in tax year X

Less: Capital losses brought forward

Taxable Gains X

This nal gure is then taken to the TTP computation if it is a gain and carried
forward if it is a loss.

What is the indexation allowance?

The indexation allowance is an allowance given to companies to remove the part of

the gain that has been produced by increases in in ation rather than genuine
increases in the value of the asset. Indexation therefore reduces the chargeable
gain.

This allowance is given to companies, instead of the annual exemption.

How do we calculate the indexation allowance?

Prices increase due to in ation, therefore to avoid a company paying tax due to the
increases in in ation, an indexation allowance is calculated based on retail price
indexes to remove the e ects of in ationary increases in the capital gain.

Total cost of asset *

(R.P.I disposal date – R.P.I. acquisition date)/R.P.I. acquisition = Indexation
date allowance

Note: you will not be expected to calculate indexation allowances in your

exam. You will be given the correct gure to use.

Other things regarding the Indexation allowance:

1. The indexation allowance can only reduce a capital gain to Nil, it cannot
create a capital loss or increase a capital loss.

2. If an asset has been enhanced, therefore capital expenditure has been

incurred to improve the earning capacity of the asset, then another
indexation allowance must be calculated for this enhancement expenditure.
The same calculation is used, replacing “cost” with the “enhancement
expenditure” and the “R.P.I acquisition” with R.P.I at enhancement date. Total
enhancement expenditure of asset * (R.P.I disposal date or Dec 17 – R.P.I.

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 enhancement date)/R.P.I. enhancement date = Indexation allowance for
enhancement expenditure

3. If there are incidental costs to acquisition or enhancement, for example, legal

costs incurred on the date of purchase, this cost also needs to be included in
the “total cost” and indexed along with it.

4. If the R.P.I factor has fallen from the month of acquisition to the month of
disposal, the indexation allowance is Nil.

5. Indexation was frozen in December 2017 so any in ation element of a gain

from January 2018 will be taxable.

Illustration:

Greenwood Ltd. disposed of an investment property on 31/12/2024.

They received disposal proceeds of £115,000 for the property and incurred legal
fees on disposal of £5,000.

They had initially purchased the property for £15,000 and incurred incidental costs
on acquisition of £1,500 on 31/12/2012.

They had spent £25,000 to extend the property on 31/12/2014.

Relevant indexation factors are:

On cost 0.306

On enhancement 0.218

What is the capital gain for FY 24?

Solution:

Disposal proceeds £115,000

Incidental costs to dispose (£5,000)

Net sale proceeds £110,000

Acquisition cost (£15,000)

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Incidental cost to acquire (£1,500)

Extension cost (£25,000)

Unindexed gain £68,500

Indexation allowance for acquisition (£5,049) (W1)

Indexation allowance for extension (£5,450) (W2)

Capital gain £58,001

The unindexed gain is a capital gain from which indexation allowance has not yet
been deducted.

W1:

I.A. for acquisition:

0.306 * £16,500 = £5,049

Note that the incidental costs to acquire are included (15,000 + 1,500) = 16,500.

W2:

I.A. for enhancement:

0.218 * £25,000 = £5,450

Note: even though the asset was not sold until December 2024, indexation is only
calculated to December 2017.

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 Syllabus E3c. Capital losses

Capital losses

How to get relief for capital losses?

When a company has a capital loss:

1. It is rst set o against any Capital gains arising in the same accounting
period.

2. Any remaining capital loss is then carried forward and set o against future
Capital gains.

Illustration:

Kruti Ltd. sold an o ce building on 06/06/2023 for £400,000, the unindexed cost of
the asset was £420,000.

There were no other chargeable asset sales in FY23.

In FY24, Kruti Ltd. realised a capital gain of £25,000 on the sale of a small piece of
land that the company owned.

What is the capital income to be assessed to corporation tax in FY 23 and FY

24?

Solution:

• FY 23 (1/4/23-31/3/24)

Disposal proceeds £400,000

Acquisition cost (£420,000)
Capital loss (£20,000)

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 • The capital income to be assessed to corporation tax in FY23 is Nil.

The loss of (£20,000) will be carried forward and set o against future capital
gains.

• FY 24 (1/4/24-31/3/25)

Net capital gain £25,000

Capital loss b/f (£20,000)
Chargeable gain £5,000

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 Syllabus E3de. Disposals of shares by companies, with share identi cation rules

Disposals of shares by companies, with share

identi cation rules

Matching rules

Disposals of shares for individuals and for companies are extremely similar.

There are 2 di erences, these are that we index the cost of the shares and when
looking at shares to be sold, and we do not look 30 days after the sale, we look 9
days previous to the sale.

• There is no other di erence between the two.

• For this reason, the same illustrations and quizzes have been used to explain
this are so that you can compare for yourself both applications.

• When shares are disposed of, a problem arises in nding their allowable cost,
if the shares were acquired over a long period of time.

• To make this simpler, HMRC uses a set of rules to determine the acquisition
date and cost of the shares being disposed of.

• These rules are called the matching rules.

Disposals of shares are matched with acquisitions in the following order:

1. Shares acquired on the same day of disposal.

2. Shares acquired within 9 days before disposal date (there is no indexation

calculation required for this match)

3. Shares from the share pool.

This would be much easier to understand if we did an example!

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Illustration:

Benazir Ltd owns shares in L plc.

It acquired 1,500 shares in the company on 31/05/2016 for £20,000, and 500 shares
on 30/06/2017 for £10,000.

On 21/02/2025 Benazir Ltd bought a further 200 shares in L plc. For £4,000.

Benazir Ltd sold 1,000 shares in L. plc for £25,000 on 28/02/2025.

Calculate Benazir Ltd’s capital gain on the disposal of the shares in February
2025.

Solution:

We need to dispose of 1,000 shares.

Let us apply our matching rules to see which shares we are disposing of.

FIRST MATCH – same SECOND MATCH – 9 days previous THIRD MATCH –

day acquisition to disposal acquisition share pool

800 shares needed

None. 21/02/2025 – 200 shares for £4,000.
from share pool.

NOTE: you do not round indexation in the share pool

Indexation factors:

To June 2017 £356

To Dec 2017 £1,731

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Share pool:

Description Number Cost Indexed cost

31/05/2016 purchase 1,500 £20,000 £ 20,000

Indexing to June 2017:

£ 356

Indexed cost of May 16

£ 20,356
purchase
30/06/2017 purchase 500 £10,000 £ 10,000

Total £ 30,356

Index to Dec 17: £ 1,731

Total 2,000 £ 30,000 £ 32,087

(800/2000) * £30,000 = (800/2000)*£32,087 =

Disposal from share pool (800)
(£12,000) (£12,835)
1,200
Remaining in share pool £18,000 £ 19,252
shares

Specially note how each purchase will be indexed to the next EVENT date (an
event being either a purchase, sale or rights issue).

Calculating capital gain:

Disposal proceeds £25,000

Acquisition cost:

21/02/25 (£4,000)

Share pool (£12,835)

Capital gain £8,165

Note: The share pool gure in the above calculation is the indexed cost gure. This
could be shown separately as cost £12,000 and indexation (12,835 - 12,000) £835.
This is useful to be aware of because indexation cannot create or increase a loss so
if the proceeds had been £11,000 and the cost £12,000 there would have been an
allowable loss of £1,000. But if you had not separated out the cost and indexation

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you would have calculated a loss of (11,000 - 12,835) £1,835 which would have
been incorrect.

• You also might want to try to draw a timeline to ensure that you do not miss
any acquisition dates!

• From this illustration, you have learnt how to index shares.

• Shares issued through a bonus issue will not be indexed as no money has
been paid for them.

• It will be assumed as though they have been acquired on the last purchase
date.

• Shares that have been issued via a rights issue will be indexed as normal, as
money has been paid for them.

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 Syllabus E3f. Bonus issues, rights issues, takeovers and reorganisations

Bonus issues, rights issues, takeovers and

reorganisations

Share issues

Bonus issues, rights issues, takeovers and reorganisations.

Once again, the treatment of bonus issues, rights issues, takeovers and
reorganisations are exactly the same for companies and individuals.

The only di erence is that a company will index its cost, whereas an individual will
get an annual exemption.

For this reason, very similar illustrations and quizzes have been used so that the
di erence can be highlighted to you.

Bonus Issues

This is an issue of shares to existing shareholders in proportion to the number of

shares owned at the date of the bonus issue.

• For example, if you owned 500 shares in a company and a 1:5 bonus issue
was declared, you would receive (500/5) *1 = 100 bonus shares.

• These shares are deemed to be acquired at the same date and at the same
cost as the original shares to which they relate.

• They have no cost of their own.

• Therefore, in your share pool, a bonus issue will only result in an increase in
the number of shares, and no increase in the indexed cost of shares.

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 Illustration:

Mina Ltd purchased shares in C Co.

The details of the purchases are below:

• May 2024 Purchased 3000 shares for £3,000

• Jan 2025 Purchased 1500 shares for £2,000

• March 2025 Bonus issue of 1:3 declared by the company.

• How many shares will Mina Ltd receive under the bonus issue?

• What is the cost of these shares?

Solution:

Total shares in company = 4,500

• Bonus shares received = (4,500/3) * 1 = 1,500 shares

• New total of shares at March 2025 = 4,500+1,500 = 6,000 shares

• The bonus shares will have a Nil cost.

• When they are included in the share pool, the shares purchased previously
will not be indexed to the bonus issue date.

• The indexation of all of the shares will only happen once the next monetary
purchase happens.

Rights Issues

A rights issue occurs where a company o ers its existing shareholders the right to
buy extra shares.

Rights issues are similar to bonus issues in that the number of shares o ered to
each shareholder is generally in proportion to his or her existing shareholding.

• The only di erence is that a price is paid for these shares.

• The price for the shares is normally lower than current market value, in order
for the existing shareholders to be attracted to taking up the issue.

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Illustration:

Jack Ltd had the following transactions in Jill Ltd’s shares:

• Jul 2024 Purchased 6,000 shares for £15,000

• Sep 2024 Purchased 900 shares for £2,700

• Dec 2024 Took up 1:5 rights issue for £2.00 per share

• What will the rights issue cost Jack Ltd if it decides to subscribe to the issue
fully?

Solution:

Total shares in company = 6,900

• Right shares received = (6,900/5) * 1 = 1,380 shares

• The rights shares will have a cost of £2.00*1,380 shares = £2,760

• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.

• The bonus issues will be included in the share pool at no cost and the rights
issue shares will be included in the share pool at their respective cost.

• The rights issue share purchase will cause indexation of the previous
purchases until this date as this is a monetary purchase.

• Nothing changes with the matching rules.

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Takeovers

Takeovers can either be for a share for share exchange, or a takeover can be for a
cash exchange.

We will deal with both of these situations separately via the use of illustrations.

• Takeovers (share for share exchange)

• If a takeover is for a share for share exchange, then no capital gains tax
arises immediately.

• The market value of the new holding provided will be used to apportion our
initial holding cost.

• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.

Illustration:

Jayna Ltd owned 2000 shares in A plc which cost £2,000 in 2010, and A plc was
being taken over by B plc in 2025

• Jayna Ltd was o ered by B. plc 1,500 ordinary shares with a market value of
£3,000 and 500 preference shares with a market value of £1,000.

• Jayna Ltd takes up the o er.

• Will capital gains tax arise immediately?

• If not, when Jayna Ltd sells these new ordinary shares and new preference
shares, what cost would be attributed to each?

Solution:

Total market value of new holding: £3,000+£1,000 = £4,000

Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost

= £3,000/£4,000 * £2,000 = £1,500

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Cost attributed to preference shares:

Market value of preference shares/Total market value of new holding * original cost

= £1,000/£4,000 * £2,000 = £500

• Jayna Ltd needs to use these costs as the acquisition cost when it decides
to sell the shares in B. plc.

• (It cannot use the market value of the shares when they were given).

• Takeovers (share for cash exchange)

• If a takeover is for a share for cash exchange, capital gains tax will arise
immediately for the proportion of cash given compared to the total market
value of the new holding.

• The market value of the new holding provided will be used to apportion our
initial holding cost to be used.

Illustration:

Jayna Ltd owned 2000 shares in A plc. which cost £2,000 in 2010, and A plc was
being taken over by B plc in 2025.

• Jayna Ltd was o ered by B. plc 1,500 ordinary shares with a market value of
£3,000 and cash of £1,000.

• Jayna Ltd takes up the o er.

• Will capital gains tax arise immediately?

Solution:

Total market value of new holding: £3,000 + £1,000 = £4,000

Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost

= £3,000/£4,000 * £2,000 = £1,500

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Cost attributed to cash given:

Cash received/Total market value of new holding * original cost

= £1,000/£4,000 * £2,000 = £500

Jayna Ltd needs to use this £500 as the acquisition cost of the shares that it is
deemed to have disposed of for the cash received.

Capital gains:

Disposal proceeds £1,000

Acquisition cost (£500)

Capital gain £500 (taxable gain)

• No capital gain will arise on the share element, as described above.

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 Syllabus E2g. Rollover relief

Rollover relief

Capital gain reliefs for companies

Rollover relief for companies

Rollover relief for companies is the same as rollover relief for individuals.

The only di erence between the two is that the indexed gain is rolled over for
companies, whereas individuals do not index the gain.

Explanation

Subject to certain conditions a company may claim that the gain arising on the
disposal of a business asset may be rolled over against the cost of acquiring a
replacement business asset.

Main e ects:

1. Disposal of the old asset will arise in neither a gain nor a loss.

2. Cost of the new asset is reduced by the indexed gain that would have been
chargeable on the disposal of the old asset if the claim for roll over relief had
not been made.

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 Conditions:

1. The disposal must have been of a qualifying business asset and the
reinvestment must be in a qualifying business asset.

2. The reinvestment must be made 12 months prior to the sale or 36 months

post the sale.

3. All of the sale proceeds received on the sale must be reinvested for
quali cation of full roll over relief. If only some of the sale proceeds are
reinvested, then:

Total sale proceeds received-sale proceeds reinvested = indexed capital gain

realised NOW.

Total indexed capital gain-indexed capital gain realised now = indexed capital
gain to be rolled over.

Qualifying assets:

1. Land and buildings.

2. Fixed plant and machinery.

Both of these assets must be used in the business.

Illustration:

Jeremy Ltd. sold its business o ce on 30/06/2024 for £350,000.

This o ce cost the company £100,000 on 29/09/2003. Jeremy Ltd. bought another
business o ce for £250,000 on 31/12/2024. Indexation factor 0.915

• How much of the indexed capital gain can be rolled over?

• What is the base cost of new business o ce?

Solution:

Disposal proceeds £350,000

Acquisition cost (£100,000)

Unindexed capital gain £250,000

Indexation allowance (W1) (£91,500)

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 Indexed capital gain £158,500

Gain deferred (£58,500)

Capital gain now (W2) £100,000

Base cost of new business o ce:

Cost of o ce £250,000

Gain to be rolled over (£58,500)

Base cost of new o ce £191,500

This base cost will be used as the cost against the disposal of the new o ce.

W1:

0.915 * £100,000 = £91,500

W2:

Disposal proceeds received £350,000

Disposal proceeds reinvested (£250,000)

Capital gain to be realised now £100,000

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 Syllabus E4. The comprehensive computation of
corporation tax liability

Syllabus E4a.Compute the corporation tax liability

Compute the corporation tax liability

How to calculate the corporation tax liability?

Corporation tax liability

A company will pay corporation tax at the rate of 19% for FY22.

For FY23 and FY24, there are 2 rates of corporation tax.

The main rate of 25% applies where augmented pro ts of the company are more
than or equal to the upper limit of 250,000.

The small pro ts rate of 19% applies where augmented pro ts of the company are
less than or equal to the lower limit of 50,000.

Augmented pro ts of a company are the taxable total pro ts plus any dividends
from non associated companies.

The upper limit (250,000) and lower limit (50,000) is pro rated for shorter accounting
periods and also divided between the number of 51% associated companies.

When a company's augmented pro ts are between the lower limit(50,000) and the
upper limit (250,000), tax is calculated at the main rate of 25% but it is then reduced
by the marginal relief.

Marginal relief = (Upper limit - Augmented pro ts) x 3/200 x taxable total pro ts/
augmented pro ts

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As you know, dividends received by a company from non-associated companies
are not charged to corporation tax.

However, they do determine whether a company is small or large.

How?

You will need to add the dividends gure it to the taxable total pro ts.

If the total of this exceeds the upper limit of 1,500,000, then the company will be
deemed to be large.

Note: The upper limit of 1,500,000 is separate from the upper limit of 250,000,
which is used to determine the rate of corporation tax.

Do not forget that dividends are just used to determine whether a company is small
or large, they are never subject to corporation tax!

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Illustration:

A company has taxable total pro ts of £1,450,000.

They have received a dividend from a non-associated company of £250,000.

• Will they be considered to be a large company?

Illustration:

T.T.P £1,450,000
Dividend : £250,000 £250,000
Augmented pro ts £1,700,000

Yes, the total has crossed £1,500,000 and therefore the company will be considered
to be a large company.

They will pay corporation tax at 25% like small companies but the di erence is that
they will have to pay their corporation tax in quarterly instalments.

Corporation tax due 25% * £1,450,000 = £362,500

Related 51% group companies

Companies count as related 51% group companies if:

1. One company owns more than 51% of the other

2. Both companies are owned more than 51% by the same company

Which companies can/cannot be included in the group?

1. An individual is not a company, therefore if an individual controls 2

companies, these companies will NOT be related 51% companies.

2. Dormant companies are not considered to be related companies.

3. Companies resident overseas are considered to be related companies.

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What is control?

The parent company needs to own more than 50% of the share capital of the
subsidiary at the end of the previous chargeable accounting period. The 50% needs
to be both direct and e ective interest. For example if A Ltd owns 51% of B Ltd
and B Ltd owns 51% of C Ltd, the situation would be as follows:

A Ltd is related to B Ltd so A would divide the limit by 2

B Ltd is related to A Ltd and C Ltd so B would divide the limit by 3

C Ltd is related to B Ltd so C would divide the limit by 2

What are the tax implications of related 51% group companies?

1. One annual investment allowance is given to the entire group. The group can
decide which companies get the allowance. Therefore, it is tax e cient to
allocate the allowance to large companies and companies which have
purchased special rate pool assets.

2. The upper limit of £1,500,000 is divided by the number of related 51% group
companies to determine an upper limit for each company in the group. If the
individual company’s pro ts exceed the upper limit, then they are deemed to
be a large company and must pay quarterly instalments of their corporation
tax.

Illustration 1:

Q Ltd owns 51% of Z Ltd. and 65% of A Ltd.

Z Ltd. owns 100% of Z Inc. (overseas company).

A. Ltd. owns 100% of B Ltd. and 100% of C. Ltd. (dormant company)

Which companies are related 51% group companies?

Solution:

There are 5 related companies in this group.

• Q Ltd, Z Ltd, Z Inc, A Ltd and B Ltd.

• C Ltd. is not considered as it is a dormant company.

• The upper limit would be: £1,500,000/5 = £300,000

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 Illustration 2:

Q Ltd owns 51% of Z Ltd. and 65% of A Ltd.

Z Ltd. owns 50% of Z Inc. (overseas company).

A. Ltd. owns 60% of B Ltd. and 100% of C. Ltd. (dormant company)

Which companies are related 51% group companies of Q Ltd?

Solution:

Q Ltd is only related to Z Ltd and A Ltd so the limit would be divided by 3

C Ltd is excluded because it is dormant

B Ltd is excluded because the e ective interest is less than 51% (65% x 60% =
39%)

Z Inc is excluded because the e ective interest is less than 51% (51% x 50% =
25.5%)

Note:

A Ltd would include Q Ltd and B Ltd as related 51% companies (limit/3)

B Ltd would include A Ltd as a related 51% company (limit/2)

Z Ltd would include Q Ltd as a related 51% company (limit/2)

Hopefully you can see from these illustrations that there is not just one answer for a
group. It depends from which company you are looking from. The limit could be
di erent for each company.

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When do large companies pay their C.T. Instalments?

A large company will pay corporation tax in instalments in the second year that they
are large on:

1) First instalment = 1/4 x Estimated C.T. Liability on 14th of 7th month in CAP.

2) Second instalment = 1/4 x Estimated C.T. Liability on 14th of 10th month in CAP.

3) Third instalment = 1/4 x Estimated C.T. Liability on 14th of 13th month in CAP.

4) Fourth balancing payment = (Final C.T. liability - payments already made) on 14th
of 16th month in CAP.

Illustration:

A Ltd. is a large company and has a nal C.T. liability of £600,000 for the year ended
30/4/24.

What/when are instalments and the balancing payment made?

Solution:

First instalment of 1/4 x £600,000 = £150,000 on 14th November 2023

Second instalment is 1/4 x £600,000 = £150,000 on 14th February 2024

Third instalment of 1/4 x 600,000 =£150,000 on 14th May 2024

Balancing payment of (£600,000 - £450,000) = £150,000 on 14th August 2024

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 Syllabus E5. Group corporate structure for C.T.

Syllabus E5a. 75% loss group

75% loss group

A group of companies is like a family, they can share their losses and
gains

There are 4 types of groups that you need to know:

A – Related 51% group companies

B – VAT groups

C – 75% loss groups

D – 75% gains groups

We have already dealt with related 51% group companies and VAT groups.

75% loss groups

There are 2 conditions that need to be satis ed for a company to be a part of a 75%
loss group.

These are:

1. The parent company must own (directly or indirectly) an e ective interest of

75% of the ordinary share capital all member companies.

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 Illustration:

A Ltd. owns 90% of B Ltd.

B Ltd. owns 90% of C. Ltd.

Which companies are members of this 75% loss group?

Solution:

All 3 companies are members.

This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect
interest of 81% (90% * 90%) in C Ltd.

Therefore, the parent e ective interest is satis ed.

Illustration:

• A Ltd. owns 100% of B Ltd.

• B Ltd. owns 75% of C. Ltd.

• C. Ltd. owns 100% of D Ltd.

• Which companies are members of this 75% loss group?

Solution:

All 3 companies are members of A Ltd’s group

This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect interest
of 75% (100% * 75%) in C Ltd, and an indirect interest of 75%(100% * 75% *
100%) in D Ltd.

Therefore, the parent company condition is satis ed.

The e ect of 75% loss groups

UK members of a 75% group can surrender losses to other UK members.

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What losses can they surrender?

1. Excess property losses.

This means that the property losses of the company who has generated the
loss must relieve the loss against its own total income before surrendering it
to a group member.

Thus, the loss making company’s total income should be NIL before it
surrenders its property loss.

2. Excess qualifying charitable donations.

This means that the qualifying donations of the company who has generated
the loss must relieve the loss against its own total income before
surrendering it to a group member.

Thus, the loss making company’s total income should be NIL before it
surrenders its qualifying donation.

3. Trading losses.

This means that the trading losses of the company who generated them
must NOT relieve the loss against its total income or previous year’s income
before surrendering it to a group member.

Thus, the loss making company’s total income does not need to be NIL
before it surrenders its trading loss.

This trading loss cannot be carried back against group members income, it
can only be relieved in the corresponding period or carried forward to future
periods. The surrendering company can choose the amount to surrender as
group relief.

A company may only surrender carried forward trade losses if the loss can
not be used against its own pro ts.

The claimant company must calculate the pro ts available for o set via
group relief by rst deducting all possible single company loss reliefs even if
they do not intent to claim them.

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 4. Non-trading loan relationship de cits.

A de cit arises on non-trade relationships when the non-trade interest

expense is greater than the non-trade interest income. All or some of this
de cit can be surrendered to group companies in the current year or carried
forward to future years. It does not have to be set against the surrendering
companies total income rst.

Conditions for loss relief

The loss relieved must be the lower o :

1. The loss of the surrendering company for the exact same period against
which it is being surrendered.

2. The pro t of the claimant company for the exact same period against which it
is being claimed.

These periods are called “co-terminus periods”.

You will be able to understand this better with an illustration.

Illustration:

• Ilea Ltd. made a loss for the year ending 31/03/25 of (£180,000).

• William Ltd. joined the group on 01/01/2025 and made a pro t of £100,000
for the period ending 31/03/2025.

• Jane Ltd. had been a part of the group for many years and made a pro t of
£55,000 for the year ending 30/06/2025.

• How much loss relief can be obtained?

Solution:

Loss relieved against William Ltd.

• Only 3 months are co-terminus since William Ltd. joined the group
(01/01/25-31/03/25).

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Therefore the lower of:

William: 3/12 * £100,000 = £25,000

Ilea: 3/12 * £180,000 = £45,000

• £25,000 loss can be relieved against William Ltd. pro ts.

• Loss relieved against Jane Ltd.

• Only 9 months are co-terminus as both companies have a di erent year end
(01/07/24-31/03/25).

Therefore the lower of:

Jane: 9/12 * 55,000 = £41,250

Ilea: 9/12 * £180,000 = £135,000

£41,250 loss can be relieved against Jane Ltd. pro ts.

Loss memo:

24/25 trading loss (£180,000)

Relief against William Ltd. £25,000

Relief against Jane Ltd. £41,250

Loss to be carried forward against Ilea future trading pro ts £113,750

Illustration:

A Ltd. and B Ltd. are part of a 75% loss group. They both have 31/03 year endings.

• A Ltd. makes a trading loss of (£190,000). B. Ltd makes a pro t of £180,000.

• How much of A Ltd.’s loss can be relieved?

Solution:

The lower of £190,000 and £180,000, therefore only £180,000 loss can be relieved
and the remaining will be carried forward against A Ltd.’s future trading pro ts or
used for future group relief.

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 Carried forward group relief
Carried forward group relief from 1 April 2017
A company which has a post 1 April 2017 loss carried forward may transfer all or part of
that loss to a member of the 75% group.

Losses that can be surrendered:

• Carried forward trade losses;

• Carried forward property losses;

• Carried forward non-trading loan relationship de cits;

• Carried forward management expenses.

Unlike current period group relief, the surrendering company can only surrender a
carried forward loss if it cannot use it itself.

When calculating available taxable pro ts against which to use the carried forward
loss relief, the claimant company must deduct its own losses rst.

Note: if a company joins the group and already has carried forward losses, it cannot
surrender these losses to other group companies.

Illustration

Apple Plc has one 75% subsidiary, Banana Ltd. Their results for the year ended 31
March 2025 are as follows:

Apple Plc Banana Ltd

£ £
Trading profit 70,000 40,000
Trading loss carried (5,000) (1,10,000)
forward from 31 March
2024
Non-trade loan 10,000 10,000
relationship income
Chargeable gain 12,000 6,000

Calculate the maximum carry forward group relief that Apple Plc can claim from
Banana Ltd.

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 Solution

Banana Ltd can only surrender the amount of carried forward loss that it cannot use
itself, even if it would not choose to use the loss itself:

Carried forward trade loss £110,000

Trading pro t £(40,000)

NTLR income £(10,000)

Chargeable gain £(6,000)

Loss available for carry forward group relief £54,000

Apple Plc can only claim a loss against pro ts after deducting it’s own losses rst:

Trading income £70,000

NTLR income £10,000

Chargeable gain £12,000

Carried forward trade loss £(5,000)

Available taxable total pro ts £87,000

Maximum carry forward group relief that Apple Plc can claim from Banana Ltd is
therefore £54,000 (the lower of £54,000 and £87,000)

Note: you will not be tested on group relief involving carried forward losses made
prior to 1 April 2017.

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 Syllabus E5b. 75% gains group

75% gains group

What is a 75% chargeable gains group?

This is a group in which members can:

1. Transfer assets at no gain or no loss.

The asset will be transferred between group members at its indexed cost
(cost + indexation until date of transfer).

This is similar to husband/wife or civil partner transfers for individuals.

2. Obtain group rollover relief.

Therefore one member of a group can sell a qualifying asset, and if another
member purchases a qualifying asset within the time limit, the chargeable
gain on the rst asset can be rolled over against the purchase of the second
asset of the other group member.

(Rollover relief conditions must still be satis ed).

3. Chargeable gains or capital losses can be given to group members freely, to

reduce their taxable total pro ts as necessary.

An asset does not have to be physically moved and sold by another group
member for a chargeable gain or capital loss to arise on them, the gain or
loss can simply be transferred.

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 How does a company obtain membership into a 75% gains group?

• The parent company must hold a direct or indirect e ective interest of more
than 50% in each subsidiary.

• Subsidiary companies must own a direct interest of 75% of sub-subsidiary

companies.

Illustration:

A Ltd. owns 90% of B Ltd.

B Ltd. owns 75% of C. Ltd.

Which companies are members of this 75% gains group?

Solution:

All 3 companies are members.

This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect
interest of 67.5% (90% * 75%) in C Ltd.

Therefore, the parent e ective interest is satis ed and the sub-subsidiary condition
is satis ed.

Illustration:

A Ltd. owns 100% of B Ltd.

B Ltd. owns 75% of C. Ltd.

C. Ltd. owns 75% of D Ltd.

Which companies are members of this 75% gains group?

Solution:

All 4 companies are members.

• This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect

interest of 75% (100% * 75%) in C Ltd, and an indirect interest of
56.25%(100% * 75% * 75%) in D Ltd.

• Additionally, B Ltd. owns 75% in the sub-subsidiary C Ltd.

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 • Finally, C Ltd. owns 75% in the sub-subsidiary D Ltd.

• Therefore, the parent company condition is satis ed and the sub-subsidiary

condition is satis ed.

Illustration:

Zooby Ltd. and Scrappy Ltd. are members of a 75% group. Zooby Ltd. sold a
qualifying asset for £500,000 and this resulted in a capital gain of £100,000.

• Scrappy Ltd. spent £650,000 on a qualifying asset 6 months after the sale of
of Zooby Ltd.’s asset.

What is the base cost of Scrappy Ltd.’s asset?

Solution:

As group rollover relief is available due to both assets being qualifying and
purchased within the necessary time limit, the base cost of Zooby Ltd.’s asset will
be:

Purchase cost £650,000

Gain rolled over (£100,000)

Base cost £550,000

No chargeable gain will result for Zooby Ltd. at present

Illustration:

If two companies are members of a capital gains group and one company transfers
an asset to another.

Will this asset be transferred at its original cost or indexed cost?

Solution:

Indexed cost

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 Syllabus F: Value Added Tax
Syllabus F1. The VAT registration requirements

Syllabus F1a. Recognise the circumstances in which a person must register or deregister for
VAT (compulsory) and when a person may register or deregister for VAT (voluntary).

VAT Registration - Compulsory and Voluntary

When is it compulsory to register for VAT?

When your sales (excluding VAT) go over the registration limit (£90,000).

There are 2 separate tests for compulsory registration:

1. Historic Turnover

2. Future Prospects

When you satisfy both tests HMRC (HM Revenue and Customs) will use the test
that gives the earlier registration date.

Historic Turnover test

At the end of every month check to see if the last 12 month sales were over
£90,000.

If so, you have 30 days to tell HMRC (30 days of the end of the month in which the
limit is exceeded)

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You are then registered for VAT from the end of the next month (or earlier if agreed)

• So let’s say the limit was exceeded in April

• You must notify HMRC by 30th May (within 30 days of the end of the month -
April)

• You will be registered for VAT from 1st June

Illustration 1:

Year ended 31st December.

Sales were £120,000 (accrued evenly).

When would we become VAT registered?

Answer

• 120,000 / 12 = 10,000 per month

• So limit is reached 90,000 / 10,000 = 9 months (September)

• So tell HMRC by 30th October and will be registered for VAT from 1st
November

Future Prospects test

If you think the limit (£90,000) will be reached in the next 30 days alone

• then you have 30 days to tell HMRC and

• registration starts at the beginning of the 30 days you expect to reach the
limit

• For example:

On 1 July, the company signed a contract valued at £100,000 for completion

during July.

The company will register for VAT from 1 July and have to notify HMRC by 30
July.

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Illustration 2:

Guy starts to trade and in the year ended 31st December sales are expected to be
£240,000 (accrued evenly).

When would we become VAT registered?

• Answer - using the historic test because the threshold is not £90,000 in
one 30 day period alone.

• 240,000 / 12 = 20,000 per month

• 90,000 / 20,000 = 4.5 month (April)

• So limit is expected to be reached in the fourth month (April)

• So tell HMRC by 30th May and registration starts on 1st June

Note: although the historic test tells us to look back 12 months, when someone
starts to trade you look back after every month as they may need to be registered
before 12 months have gone by.

Illustration 3:

The budgeted turnover of Shobha Ltd. in the rst 9 months is £810 000.

The company starts trade on the 1st of July.

When must the company register for VAT?

Solution: using the future test as the threshold is exceeded in one 30 day
period alone

£810 000 / 9 = £90 000 per month

Therefore, the limit would be crossed in the rst month of operation (July).

HMRC will need to be noti ed by 30th July (within 30 days).

Registration will be e ective from 01/07 (the beginning of the 30 day period).

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 De-registration

• A trader stops being liable to VAT registration when it ceases to make taxable
supplies.

The trader must notify HMRC within 30 days and will be deregistered from
the date of cessation or from an earlier agreed date.

• A trader may also deregister for VAT when its expected taxable turnover in
the next 12 months is expected to fall below £88,000.

The trader may deregister for VAT if they consider this bene cial.

Illustration:

A company has been VAT registered for many years, however it has recently faced
nancial di culties and sales for the year ended 31/12/2024 are forecast to be
£60,000.

• Can the company deregister for VAT?

• When will the de-registration be applicable?

Solution:

The company can request HMRC to cancel its registration because its taxable
supplies for the next 12 months are below £88,000.

The de-registration will be e ective from the date on which the request is made or
from an earlier agreed date.

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VAT implications on selling a business (deregistering permanently)

General Rule

• When a business is sold, it will cease to be registered for VAT.

The sale of the business is assumed to be a taxable supply for VAT purposes.

Therefore, all of the assets, such as plant, equipment and trading inventory
owned by the business, will need to have output tax payable on them when
the business is sold.

An exception is made if the VAT due is less than or equal to £1,000. In this
situation, VAT will not be payable.

• Illustration:

Cow plc. was being sold in the year ended 31/03/2025.

It owned plant and equipment costing £1,200,000 (VAT inclusive) and had
inventory remaining that cost £120,000 (VAT inclusive).

All of the input VAT on the inventory had been claimed in previous VAT
returns.

How much output VAT will be payable on the sale of this business assuming
the plant and inventory are sold for cost?

• Solution:

VAT payable
Plant and machinery £1,200,000 * 1/6 = £200,000
Inventory £120,000 * 1/6 = £20,000

Total VAT payable = £220,000

Exception to general rule (where the sale is not treated as a taxable

supply)

If the business disposes of its assets and trade as a going concern, no

output VAT will be charged as it will be outside the scope of VAT if the
following conditions are met.

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 The conditions for this treatment are:

1. The business is transferred as a going concern

2. No signi cant break in trading

3. The same type of trade is pursued by the transferee

4. The transferee is or will become VAT registered

Voluntary registration for VAT

Even if someone is not required to register for VAT, once they are making taxable
supplies, they are allowed to.

For example, if a company makes zero rated supplies, they are not required to
register for VAT, but they are allowed to do so.

Advantages of voluntary registration:

1. Avoids late registration penalties.

2. Can recover input tax on supplies.

3. Disguises a small company to look big. (Investors may be apprehensive to

invest in a small company).

4. If a company makes zero rated supplies and standard rated purchases, then
the company will be eligible for repayments from HMRC.

Disadvantages of voluntary registration:

1. VAT added to the selling price will make an item more expensive for a nal
consumer who is not VAT registered, and therefore reduce competitive
advantage of the business.

2. If the trader wants to remain competitive and still be VAT registered, then the
pro ts of the trader will su er as they will have to su er the output VAT
payments on their own, they cannot pass them on to the nal consumer.

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 Illustration:

Villa sells furniture, a taxable supply. Her taxable turnover for the previous 12
months is £68,000 and standard rated purchases are £45,000 (vat inclusive).

Villa sells to nal consumers who are not VAT registered.

• Competition is high and most traders in this eld are not VAT registered,
therefore, Villa cannot increase her prices. If she does, customers will go
elsewhere.

• Is it bene cial for Villa to register for VAT or not?

Solution:

Pro t without registering:

Sales revenue £68,000

Purchases (£45,000)
Gross pro t £23,000

• Pro t after registration:

Sales revenue £68,000

Purchases (£45,000)
Gross pro t £23,000
Less VAT paid (£3,833) (W1)
Net pro t £19,167

• W1:

VAT payable: 20/120 * £68,000 = £11,333

VAT receivable: 20/120 * £45,000 = (£7,500)
Net VAT payable = £3,833

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 Syllabus F1b. Circumstances for pre-registration VAT can be recovered

Recovery of pre-registration input VAT

Recovery of input VAT prior to registration

Input VAT incurred prior to VAT registration can be recovered on goods and services
purchased in certain circumstances. These include:

Purchased
Goods Services
item

Cannot be acquired more than 4 Cannot be supplied more than

Time limit?
years prior to registration. 6 months prior to registration

Must be acquired for business Must be acquired for business

Purpose?
purposes purposes

The goods purchased that pre- Services are consumed

registration input VAT will be immediately as they are
Still in hand?
claimed on must still be in inventory provided. Therefore, this is not
prior to registration. applicable.

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 How do we claim the pre-registration input VAT?
We treat these goods/services as being purchased on the rst day of VAT
registration, therefore we will claim the input VAT when we le our rst VAT return.

Illustration:

Sunil Ltd. registered for VAT on 31/01/2025.

He has to le his VAT returns quarterly, and his rst return will be led on
01/04/2025.

Sunil Ltd. purchased inventory for the business on 31/03/2024

This inventory is still in stock. It’s VAT inclusive price is £120.

How will the input VAT for this purchase be treated?

Solution:

Sunil Ltd. will claim the £20 (input vat paid) on his rst VAT return in 01/04/2025.

This is because these goods qualify to have pre-registration VAT claimed on them.

They are used for business purposes, still in stock and purchased within 4 years of
VAT registration.

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 Syllabus F1c. Conditions for companies to be treated as VAT group

Conditions for companies to be treated as VAT group

VAT registration requirements

Conditions:

1. 2 or more companies must be associated with each other.

That is one company must own 51% or more of the share capital in another
company, or 2 companies must be under common control.

2. All companies must be UK resident or trading from a permanent

establishment in the UK.

Consequences of Group Registration:

1. The VAT Group is treated for VAT purposes as a single company registered
for VAT on its own.

2. There will be 1 VAT registration number for the whole group.

3. One VAT return will need to be led on behalf of the whole group.

4. The group must have a representative who lls in the VAT return.

This member will have to gather all of the output and input VAT of the
individual members and ll it in on one return.

This representative is also responsible for paying VAT on behalf of the group.

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 Advantages of a VAT Group:

1. There is no VAT on intra-group supplies

2. Only one return must be led, therefore administration costs will be saved.

Disadvantages of a VAT Group:

1. All members remain jointly and severally liable

2. A single return may cause administration di culties in collecting and collating

the information

3. There are special VAT schemes for businesses such as the cash, annual and
at rate schemes.

To enter into these schemes, a business must have a turnover under a certain limit.

Since a VAT group is treated as a single company, the whole VAT group’s turnover
will be considered in comparison to the limit, when one company in the group is
trying to enter into the scheme.

Thus, it is unlikely that a company in VAT group will be eligible to enter into such
schemes, whereas if they were not in the VAT group, they would be more likely to
qualify.

For example, there is a VAT group with 4 companies (A Ltd., B Ltd., C Ltd., and D
Ltd.).

The annual turnover of the entire group is £5,400,000, and each individual
company’s annual turnover is £1,350,000.

B. Ltd. wants to enter into the cash accounting scheme, the company’s individual
turnover is within the limit of £1,350,000, however it cannot enter the scheme
because the VAT group’s annual turnover of £5,400,000 will be considered instead
of individual company turnover and B Ltd. will not qualify.

Illustration

Jay owns shares in a number of companies set out below

60% in A Ltd., and 80% in B Ltd.

B Ltd owns 80% in C Ltd and 51% in G Inc. (An overseas company)

Which of the above companies can be in a VAT group?

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Solution:

A Ltd., B. Ltd., and C. Ltd can be in a VAT Group.

This is because Jay e ectively owns more that 50% of the shares in each of them
and they are trading from a permanent establishment in the UK.

However, G Inc. is not trading from a permanent establishment in the UK and can
therefore not be included in the group.

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 Syllabus F2. Computation of VAT liabilities

Syllabus F2a. Calculate the amount of VAT payable/recoverable

Calculate the amount of VAT payable/recoverable

VAT payable/recoverable
VAT on standard rated supplies is 20%

Therefore, if an item is standard rated and VAT inclusive, then its total amount will be 100%
+ 20% = 120%.

• To nd the VAT element alone:

VAT inclusive price * 20/120 = VAT element

Or

VAT inclusive price * 1/6 = VAT element

• VAT paid on standard rated purchases is called “input VAT” and can be claimed from
the government.

VAT charged on standard rated sales is called “output VAT” and must be paid to the
government.

The net of these 2 amounts will actually be payable/receivable from the government.

Illustration:

Mr. Mohan is self employed and has made standard rated sales of £120 (VAT inclusive) in
February 2025 and has standard rated purchases of £60 (Vat inclusive) from a VAT
registered supplier.

• What is Mr. Mohan’s VAT payable/recoverable?

Solution:

Output VAT: 20/120 * £120 = £20

Input VAT: 20/120 * 60 = (£10)

Net output VAT payable = £10

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 Syllabus F2b. Understand how VAT is accounted for and administered

Understand how VAT is accounted for and administered

VAT return accounting

Quarterly accounting for VAT and electronic ling

1. On registration, the trader must charge VAT on all taxable supplies (output
VAT).

2. The trader can also reclaim VAT on all taxable supplies purchased (input VAT).

3. At the end of a 3-month period, the trader accounts to HMRC for all the
output tax less the input tax on their VAT return.

4. VAT is accounted for quarterly

5. VAT registered businesses must le their returns and make payments online.

6. The deadline for submitting the VAT return and making payments
electronically is 1 month and 7 days after the period has ended.

Therefore, for the period ending 31/03/2025, the return with payment can be
submitted electronically on 07/05/2025.

Illustration 1

Cow Ltd's sales (standard rated) for the rst 3 months were:

January 2025 - £30,000

February 2025 - £30,000
March 2025 - £40,000

How, and when, will Cow Ltd have to submit its quarterly VAT return and pay any
related VAT liability?

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 • Solution

Cow Ltd will have to le its VAT returns online and pay the VAT which is due
electronically.

The deadline for lling the VAT return and paying any VAT is one months and seven
days after the end of each quarter.

So, in our case, Cow Ltd will pay (30,000 + 30,000 + 40,000) x 20% = £20,000 VAT
on 7 May 2025 for the quarter ended 31 March 2025.

Illustration 2

For the quarter ended 30/06/2024, Pooja Ltd. had output vat of £10,000 and input
VAT of £7,000.

When will the company be required to le and pay the VAT liability and how much is
it?

Solution:

Output VAT £10,000

Input VAT (£7,000)
Net VAT payable £3,000

• Pooja Ltd. must le the return and make the payment online on 07/08/2024.

Other points

1. Because VAT is a self-assessed tax, HMRC make control visits to VAT

registered traders.

The purpose of a control visit is to provide an opportunity for HMRC to check

the accuracy of VAT returns.

2. A business may choose to submit monthly returns but would only do so if it

received regular VAT repayments.

This would arise where the business had standard rated purchases and
expenses but made zero rated sales and hence always had more input tax
than output tax and would claim a repayment.

3. If a trader’s VAT liability exceeds £2,000,000 over a 12-month period, they

must make monthly payments on account of the VAT liability.

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 Syllabus F2c. Recognise the tax point when goods or services are supplied

Recognise the tax point when goods or services are

supplied

What is the tax point?

The tax point is the date used to identify the VAT period which should be used to
include the output or input VAT.

Basic tax point

This is:

1. The date the goods are delivered

or

2. The date the services are performed

Actual tax point:

The actual tax point is used more frequently than the basic tax point.

The actual tax point is the earlier of:

1. The date the cash is received or paid before the goods

and

2. The basic tax point

The basic tax point date is replaced by the invoice date if an invoice is issued within
14 days of the basic tax point.

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 Here is a simple way to work your tax point out:

1. Step 1:
The basic tax point is the date that the goods are delivered or services are
performed.

Use the basic tax point if the answers to the below two steps are NO.

2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)

Yes – Use this date.

No – Go to step 3

3. Step 3:
Is an invoice issued within 14 days after the goods are delivered or services
are performed (basic tax point date)? (Actual tax point)

Yes – Use this date.

No – Use the basic tax point date from step 1.

You will nd this easier to understand with an illustration!

Illustration:

Joe is a sole trader in business selling furniture (a standard rated supply). His year
end is 31 December.

He sells furniture to Ikea on 31/05/2024 for £50,000 (Vat inclusive).

31/05/2024 Deposit of £2,000 received

30/09/2024 Goods delivered
12/10/2024 Invoice issued for goods
02/01/2025 Balance of £48,000 paid for goods.

Joe les his VAT returns quarterly.

On which VAT return will this output VAT be included?

• Here is how the transaction went:

Solution:

1. Step 1:
The basic tax point is 30/09/2024. Let us move on to the other 2 steps.

2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)

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Yes – £2,000 deposit but the remaining has not been paid.

Therefore, for this £2,000 sale the output VAT related to it of:

£2,000 * 1/6 = £333 must be included in the VAT return led on 30/06/2024.

Now, for the remaining £48,000 – we must go through the steps again.

1. Step 1:
The basic tax point is 30/09/2024. Let us move on to the other 2 steps.

2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)

No – Go to step 3

3. Step 3:
Is an invoice issued within 14 days after the goods are delivered or services
are performed (basic tax point date)? (Actual tax point)

Yes – Invoice was issued on 12/10/2024. and the goods were delivered on
30/09/2024.

Therefore, for this £48,000 sale the output VAT related to it of:

£48,000 * 1/6 = £8,000 must be included in the VAT return led on 31/12/2024.

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 Syllabus F2d. Information that must be given on a VAT invoice

Information that must be given on a VAT invoice

What should a VAT invoice contain?

A VAT registered trader making a supply to another taxable person must issue a VAT
invoice within 30 days of the relevant tax point.

A VAT invoice must contain certain information including:

• VAT registration number

• The tax point

• The rate of VAT for each supply

• The VAT exclusive amount for each supply

• The total VAT exclusive amount

• The amount of VAT payable

• The invoice date and invoice number

• The type of supply

• The quantity and description of the goods supplied

• The company’s name and address

• The name and address of the customer

If a sales invoice is meant to be valid for VAT purposes i.e. a separate VAT invoice
does not need to be issued, then all of the above needs to be included in the sales
invoice.

Otherwise, a separate VAT invoice will need to be issued.

A VAT invoice must be issued within 30 days of making a taxable supply.

VAT records (including VAT invoices) must normally be retained for six years.

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 Simpli ed VAT invoice

A less detailed VAT invoice may be issued by a taxable person where the invoice is
for a total including VAT of up to £250.

Such an invoice must show:

1. The supplier’s name, address and registration number

2. The date of the supply

3. A description of the goods or services supplied

4. The rate of VAT chargeable

5. The total amount chargeable including VAT

Zero-rated and exempt supplies must not be included in less detailed invoices.

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 Syllabus F2e. Principles regarding the valuation of supplies

Principles regarding the valuation of supplies

Value of supply
The value of a supply is the VAT-exclusive price on which VAT is charged.

With a standard rate of 20%:

• Value + VAT = Selling price

£100 + £20.00 = £120.00

Discounts o ered

VAT is chargeable on the actual amount received where a discount is o ered for
prompt payment.

1. If the discount is not taken the VAT is charged on the full sale price

2. if the discount is taken, then the VAT is based on the discounted price.

However, it is not as straightforward as that because we often don’t know when a

customer will pay.

Therefore, the supplier can charge the full amount of the VAT and then issue a credit
note for the discount if it is taken or the supplier can issue an invoice stating the
terms of the discount and that the customer can only reclaim the VAT on the
amount actually paid.

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 Illustration:

Tony is a sole trader and makes standard rated sales.

He o ers a discount of 5% to customers who pay within 14 days.

He makes a sale of £100 (VAT exclusive).

1) What is the output VAT charged if the customer pays within 14 days?
2) What is the output VAT charged if the customer doesn't pay within 14 days?

1) Solution ( if the customer pays within 14 days):

Sale £100
Discount (5%) (£5)
Net Sale £95
Output VAT charged (20% * £95) = £19
Selling price (95 + 19) = £114

2) Solution ( if the customer doesn't pay within 14 days):

Sale £100

Discount (0%) (£0)

Net Sale £100

Output VAT charged (20% * £100) = £20

Selling price (100 + 20) = £120

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 Syllabus F2f. Principal zero rates and exempt supplies

Zero rated and exempt supplies

Types of supplies

Standard rated supplies

A standard rated supply is taxable at 20%.

If a trader is VAT registered and makes standard rated purchases, they can reclaim
input VAT at 20%, and they must pay output VAT of 20% on their standard rated
sales.

For example, an accountancy rm sold their services for £240 and made purchases
of stationery of £12.
Both of these are standard rated items and VAT inclusive.

Therefore, the net VAT payable will be:

Output VAT: £240 * 1/6 = £40

Input VAT: £12 * 1/6 = (£2)
VAT payable = £38

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Examples:

• Stationery

• Furniture

• Computers

• Cars

• Petrol and diesel

• Accountancy fees

• Legal fees

• Advertising costs

• Confectionery

• Vans and lorries

• Sale of freehold commercial buildings within 3 years from completion

• Re-painting o ce premises

• Extensions to business premises

Zero rated supplies

A zero rated supply is taxable at 0%.

If a trader is VAT registered and makes zero rated purchases, no input VAT can be
claimed, and if they make zero rated sales, no output VAT is payable.

For example, a VAT registered trader sells baby clothes for £240.

This item is zero rated, and therefore no output VAT will be payable on the sale.

On the other hand, if a trader makes zero rated supplies and has standard rated
purchases, the trader will qualify for VAT repayments.

For example, a VAT registered trader sells baby clothes for £240. He pays for his
advertising expenses, which cost him £120.

The trader makes zero rated supplies but standard rated purchases, and can
therefore claim the input VAT paid on his advertising expense of £20. (£120 * 1/6)

1. Basic food (not pet food or luxury items like alcohol and confectionary)

2. Sewerage services and water

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 3. New construction work or the sale of buildings by builders where the building
is going to be used for residential/charitable purposes

4. Drugs and medicines

5. Export of goods outside the U.K.

6. Transport (but pleasure transport and transport in vehicles sitting less than 12
people is standard rated)

7. Clothing and footwear of children

8. Residential and charitable buildings

Exempt supplies

An exempt supply is not chargeable to VAT.

A person making exempt supplies cannot recover VAT on inputs, this is because
someone making solely exempt supplies will not have any taxable turnover
and cannot become VAT registered.

1. Land

2. Insurance

3. Postal services

4. Financial services for example, bank charges or credit card services

5. Education

6. Health services

7. Burial and cremation services

8. Subscriptions to professional bodies

9. Sale of freehold commercial buildings owned for more than or equal to 3

years

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 Syllabus F2g. Circumstances in which input VAT is non-deductible

Circumstances in which input VAT is non-deductible

Non-recoverable input VAT

Input VAT cannot be recovered in the following circumstances:

1. Input VAT can–not be recovered in respect of business entertainment of UK

customers

2. Input VAT cannot be recovered in relation to any items that are privately used
by an owner of a business.

For example, if an owner purchases stationery for private use, input VAT
cannot be recovered on this purchase.

3. Input VAT cannot be recovered on motor cars (unless they are used 100% for
business purposes).

This applies to both employees and owners of businesses.

A car must be used 100% for business purposes in order for input VAT to be
recovered on its purchase.

For example, an employer purchases a car for his employee.

The employee uses this car for both business and private purposes.

Input VAT cannot be recovered on the purchase price of this car.

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Input VAT can be recovered in the following circumstances:

1. Input VAT can be recovered where fuel is used for private mileage (either by a
sole trader or an employee), but output VAT must be accounted for.

Output VAT is calculated according to a scale charge based on the car’s CO2
emissions.

The scale charge is VAT inclusive and will be provided to you in the exam.

2. Input VAT can fully be recovered in respect of repairs to a motor car, provided
that there is some business use.

For example, an employer purchases a car for his employee.

The employee uses this car for both business and private purposes.

Input VAT can be recovered on the repairs incurred in respect of this car.

3. Input VAT on business entertainment is recoverable if it relates to the cost of

entertaining overseas customers!

Illustration:

In the quarter to 31 March 2025, Shiva claimed all of the input VAT on his fuel cost
(20%), which he uses for private purposes.

The fuel cost was £1,200 (VAT inclusive).

The relevant scale charge for the car is £458.

How much VAT will be paid/reclaimed for the quarter ended 31 March 2025?

Solution

Input VAT claimed:

£1,200 * 1/6 = £200

Output VAT charged:

£458 * 1/6 = £76

Net VAT reclaimed:

£124

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Illustration:

Lina Ltd. is registered for VAT. All of the sales are standard rated and all gures are
inclusive of VAT.

The following information relates to the company’s VAT return for the quarter ended
31/03/2025:

• Standard rated sales of £60,000.

• Standard rated purchases and expenses of £30,000.

• On 01/01/2025 Lina Ltd. purchased a motor car for an employee costing

£12,000 VAT inclusive.

• The car is used for both business and private purposes.

• Lina Ltd. paid for the petrol and repairs of the car.

• The relevant quarterly scale charge is £310 for the quarter to 31/03/2025.

• The scale charge is based on the C02 emissions of the car.

• The petrol and running cost of the car was £2,000 VAT inclusive.

• Calculate the VAT payable for the quarter ended 31/03/2025.

Solution:

• Input VAT that can be claimed in the quarter to 31/03/2025:

Standard rated exp. and purchases: 1/6 * £30,000 = £5,000

Purchase of motor car: Nil
Petrol and running cost paid for: 1/6 * £2,000 = £333
Total input VAT that can be claimed: £5,333

• Output VAT payable in the quarter to 31/03/2025:

Sales: 1/6 * £60, 000: £10,000

Scale charge for petrol of car: 1/6 * £310 = £52
Total output VAT Payable: £10,052

• Net output VAT Payable: £4,719

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 Syllabus F2h. Relief available for impairment losses on trade debts

Relief available for impairment losses on trade debts

VAT recovered on impairment losses

Recoverability of VAT on impairment losses (bad debts)

Normally, output VAT is accounted for when an invoice is issued.

If the sale becomes an impairment loss, the seller has paid VAT to HMRC and has
not been able to recover this from the customer.

It is possible for the supplier to reclaim this VAT on the impairment loss from HMRC
provided the following conditions are met:

1. The loss has been written o in the accounting records (the income
statement)

2. 6 months has passed since the debt has been due.

If these conditions are met, then the seller can include the amount of VAT as input
VAT on the next VAT return led and therefore get relief for it.

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 Illustration:
Sahil Ltd. made a sale on 31/08/2024 for £120 (VAT inclusive).

The buyer was given a 30-day credit period.

On 31/03/25, the debt was not paid and written o in Sahil Ltd.’s accounting records.

• Will the output VAT paid be refunded?

Solution:

• Sale £100
Output VAT £20
Selling price £120

• This £20 output was paid and included in the VAT returned led on 30/09/2024 (VAT
returns are led quarterly).

• The £120 was due on 30/09/2024, however it has not been paid by 31/03/25.

Therefore 6 months have passed since the debt was due to be paid and it has been
written o in Sahil Ltd.’s accounting records.

• Therefore, Sahil Ltd. will get relief for this output VAT of £20 by including it in the VAT
return led on 31/03/25 as input VAT

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 Syllabus F2i.Penalties and interest for late ling and late payment

Penalties and interest for late ling and late payment

Late ling penalty

The penalty works on a points based system.

Each time a VAT return is submitted late, a business incurs 1 penalty point.

Once a business has reached the penalty threshold of 4 points, a £200 penalty is
charged.

Any subsequent late VAT returns also incur a £200 penalty.

The points normally expire after 2 years. However, they do not expire once the
penalty threshold of 4 points has been reached.

To reset the points to 0 after reaching the penalty threshold of 4 points, a business
has to submit 4 VAT returns on time (over a period of 12 months).

Late payment penalty

No penalty is charged if the VAT liability is paid within 15 days of the due date.

A 2% penalty is charged if the VAT liability is paid within 16 and 30 days of the due
date.

A 4% penalty is charged if the VAT liability is paid more than 30 days after the due
date.

In addition, where the VAT liability is paid more than 30 days late, a daily penalty at
an annual rate of 4% is charged beginning after the initial 30-day period.

Late payment interest

Late payment interest is payable at the rate of 7.75% p.a. from the due date until
the date that the VAT liability is actually paid.

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 Illustration

Anaya has submitted her VAT returns and paid her VAT liability as follows:

Quarter ended VAT due Days late

30/6/24 22,000 7

30/9/24 29,500 45

31/12/24 24,000 21

31/3/25 31,000 2

For the quarter ended 30/6/24

Late ling penalty

Submitted the VAT return late - incurs 1 penalty point

Late payment penalty

VAT liability paid within 15 days so no late payment penalty

Late payment interest

22,000 x 7.75% x 7/365 = 33

For the quarter ended 30/9/24

Late ling penalty

Submitted the VAT return late - incurs 1 penalty point (2 points in total)

Late payment penalty

VAT liability paid after 30 days so penalty is calculated at 4% along with the
additional daily penalty at 4%

Penalty - 29,500 x 4% = 1,180

Additional daily penalty - 29,500 x 4% x 15/365 = 49

Late payment interest

29,500 x 7.75% x 45/365 = 282

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 For the quarter ended 31/12/24

Late ling penalty

Submitted the VAT return late - incurs 1 penalty point (3 points in total)

Late payment penalty

VAT liability paid in 21 days so penalty is calculated at 2%

24,000 x 2% = 480

Late payment interest

24,000 x 7.75% x 21/365 = 107

For the quarter ended 31/3/25

Late ling penalty

Submitted the VAT return late - incurs 1 penalty point (4 points in total) so Anaya
has to pay £200 penalty

Late payment penalty

VAT liability paid within 15 days so no late payment penalty is incurred.

Late payment interest

31,000 x 7.75% x 2/365 = 13

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Errors on a VAT return

If a VAT return is submitted incorrectly, the following penalties and surcharges will
apply.

Disclosed by the taxpayer

Errors disclosed by a taxpayer are either de ned as small or large.

If an error occurs, then default interest and a standard penalty may be payable.

These depend on whether an error is de ned as small or large.

Default interest is interest based on the delayed payment of the VAT liability.

A standard penalty may be payable depending upon the reason for the late
submission.

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 The di erence between a small and a large error are:

A small error is de ned by being less than the de-minimus limit.

The de-minimus limit is the greater of:

£10,000 and
1% of turnover (subject to an upper limit of £50,000)

Consequences Small Error Large Error

Default interest
No Yes
payable?
Separately disclose to
How to disclose? On the next VAT return
HMRC
May be payable depending May be payable depending
Standard penalty?
in reason of error on reason of error

Illustration:

Bebe Ltd. has made an error relating to understated output VAT of £7,000 for the
quarter to 31/12/2024.

The company’s turnover for the quarter is £200,000.

How should this error be disclosed to HMRC?

• Solution:

De-minimus limit:

The greater of:

1) £10,000
2) 1% * £200,000 = £2,000

The error is small because it is less than the de-minimus limit.

Therefore, it can be disclosed on the next VAT return.

No interest will be payable and depending on the reason for the

understatement, a standard penalty will be decided.

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Disclosed by HMRC

- Default interest due regardless of size of error.

- Standard penalty.

• Standard penalty is based on the reason of inaccuracy

Genuine mistake – no penalty

Careless mistake – 30% of VAT due

Deliberate mistake – 70% of VAT due

Concealment – 100% of VAT due

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 Syllabus F2j. Treatment of imports, exports and trade within the EU

Treatment of imports to the UK exports from the UK

Exporting outside of the U.K.

• The supply of goods is zero rated

• The supply of services is outside of the scope of VAT

Illustration

A UK VAT registered trader supplies computers costing £10,000 (VAT exclusive) to

a company outside the U.K.

The supply will be treated as zero rated and therefore no output VAT will be
charged.

Whether the company outside of the U.K. is VAT registered or not does not matter,
the supply will be treated as though it is zero rated.

Coming into the UK:

• VAT must be accounted for on acquisition.

• The VAT charge is declared on the return as output VAT but can be reclaimed
as input VAT on the same VAT return.

The UK trader accounts for output VAT as the goods would be standard
rated if supplied in the UK.

The UK trader can claim back input VAT of the same amount on the same
return as the goods are used by a trader that only makes taxable supplies.

The net e ect on VAT payable is therefore nil.

• The entries contra each other, therefore there is no actual VAT cost.

• The only time that there is a VAT cost is if a business makes exempt supplies,
since an exempt business cannot reclaim any input VAT.

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Illustration

A UK company purchased computers costing £10,000 (VAT exclusive) from a

company in the U.S.A.

The VAT of £2,000 will be accounted for but not paid.

On receipt, the UK company will account for the £2,000 on its VAT return and can
claim the £2,000 input VAT on the same VAT return.

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 Syllabus F3. The e ect of special schemes

Syllabus F3a. Operation of and advantages of VAT special schemes

Operation of and advantages of VAT special schemes

Special schemes

These schemes are available to small businesses to reduce the work and amount of
VAT payable.

There are 3 schemes:

1. Cash accounting scheme

2. Annual accounting scheme

3. Flat rate scheme

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 1) Cash accounting scheme

Operation:

1. The tax point is the date on which the output tax is received and the input tax
is paid.

2. For sales, it is the date that cash is received from customers and for
purchases, it is the date that cash is paid to suppliers.

Conditions:

1. Annual taxable turnover must not exceed £1,350,000.

2. VAT returns must be kept up to date.

3. A business must leave the scheme if annual taxable supplies exceeds

£1,600,000.

Advantages:

1. A business will not pay output tax until received from customers. This is a
cash ow advantage for the business.

2. The scheme provides automatic bad debt relief as output VAT will not have
been paid on a sale until the cash is received from the customer.

Illustration

Shivani has an annual turnover of £1,200,000.

All sales are standard rated and are made on credit for 60 days.

All purchases are standard rated are made on credit for 30 days.

If Shivani opts into the cash accounting scheme, when will she need to account for
VAT for her sales and purchases?

• Solution

Shivani will need to account for her standard rated sales 60 days after the
sale is made, as this is when the cash is received.

This will ensure that Shivani does not pay any output VAT for bad debts.

She will need to account for her standard rated purchases 30 days after the
purchase is made, as this is when the cash is paid.

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 2) Annual accounting scheme
Operation:

1. One VAT return is prepared each year.

2. The VAT return is due 2 months after the annual accounting VAT period, along
with the balancing payment of VAT.

3. 9 payments of VAT are made from months 4-12 during the annual accounting
period. These are (10% * VAT paid last period).

4. The nal payment (2 months after the annual accounting period) is calculated
as follows:

(VAT payable for the year – 9 payments made during months 4-12 during the
period) = balancing payment.

Conditions:

1. Annual taxable turnover must not exceed £1,350,000.

2. VAT returns must be kept up to date.

3. A business must leave the scheme if annual taxable supplies exceeds

£1,600,000.

Advantages:

1. Administration costs are saved, only one VAT return is prepared per year.

2. Regular monthly payments help the cash ow of the business, small regular
payments are made as opposed to less frequent large out ows.

3. It simpli es accounting for VAT.

Illustration:

Terry for the year ended 31/12/2023 paid VAT of £10,000.

• She was eligible to enter the annual accounting scheme and for the year
ended 31/12/2024 she had VAT payable of £12,000.

• What were her payments during the year ended 31/12/2024?

When did she make these payments?
What was her balancing payment?
When did she make this payment?

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Solution:

Payments on account:

• (10% * last year’s VAT paid)

= (10% * £10,000) = £1,000 each month

• Payments on account were made from months 4-12 during the year ended
31/12/2024. Therefore, they were made from April to December. This total 9
payments on account.

• Balancing payment:

• (VAT payable for the year – payments on account)

= £12,000 – (£1,000 * 9)
= £3,000

• This payment is made 2 months after the year has ended. Therefore, it is
made on 28/02/2025.

3) Flat rate scheme

Operation:

1. VAT payable is computed by using a at rate %. The at rate % di ers from

industry to industry (you will be told the % in the exam)

2. This % is multiplied by the sales revenue.

3. The sales revenue used includes VAT, exempt supplies and zero rated
supplies.

Note: from 6/4/17 there is a standard % of 16.5% for limited cost traders. This
means that, regardless of their industry, if they are deemed to be limited cost
traders, then they must use the rate of 16.5% (you will be told if this rate applies in
the exam).

Conditions:

1. Annual taxable sales must not exceed £150,000.

2. A business must leave the scheme once turnover exceeds £230,000.

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 Advantages:

1. Simplicity of scheme

2. Reduces administration costs

3. Less detailed records of input and output VAT are needed.

Illustration:

Addi Ltd. has annual sales of £84,000.

These are standard rated and inclusive of VAT.

The company also has standard rated expenses of £4,800 (VAT inclusive).

The at rate is 16.5%.

• Is it bene cial for the company to use the at rate scheme or account for VAT
normally?

Solution:

Flat rate scheme:

• 16.5% * £84,000 = £13,860 payable

• Normal accounting:

• Output VAT: 20/120 * £84,000 = £14,000

Input VAT: 20/120 * £4,800 = (£800)
Net VAT payable = £13,200

• It is not bene cial for Addi Ltd. to opt into the at rate scheme.

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