F6 Tec Articles

FINANCE ACT 2014
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This article looks at the changes made by the Finance Act 2014, and should be read by those of you who are taking
Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June 2016. The aim of the article is to summarise the
changes made by the Finance Act 2014 and to look at the more important changes in greater detail. The article also
includes details of legislation that was enacted prior to the Finance Act 2014, but has only come into effect from 6
April 2014. The article does not refer to any amendments to the Paper F6 (UK) syllabus coverage unless they directly
relate to legislative changes and candidates should therefore consult the Paper F6 (UK) Syllabus andStudy Guide for
the period 1 April 2015 to 30 June 2016 for details of such amendments.
INCOME TAX
Rates of income tax
The rates of income tax for the tax year 201415 are as follows:
Normal
rates
Dividend
rates
Basic rate
1 to 31,865
20%
10%
Higher rate
31,866 to 150,000
40%
32.5%
Additional rate
150,001 and over
45%
37.5%
A starting rate of 10% applies to savings income where it falls within the first 2,880 of taxable income. If non-savings
income exceeds 2,880 the starting rate of 10% for savings does not apply. In this case savings income is taxed at
the basic rate of 20% if it falls below the higher rate threshold of 31,865, at the higher rate of 40% if it falls between
the higher rate threshold of 31,865 and the additional rate threshold of 150,000, and at the additional rate of 45% if
it exceeds the additional rate threshold of 150,000.
Personal allowances
Personal allowances for the tax year 201415 are as follows.
Personal allowance
Born on or after 6 April 1948
10,000
Born between 6 April 1938 and 5 April 1948
10,500
Born before 6 April 1938
10,660
Income limit
Personal allowance
100,000
Personal allowance (born before 6 April 1948)
27,000
The normal personal allowance of 10,000 is gradually reduced to nil where a persons adjusted net income exceeds
100,000. Adjusted net income is net income (total income less deductions for loss relief and interest payments) less
the gross amount of personal pension contributions and gift aid donations.
The personal allowance is reduced by 1 for every 2 that a persons adjusted net income exceeds 100,000.
Therefore, a person with adjusted net income of 120,000 or more is not entitled to any personal allowance (120,000
100,000 = 20,000/2 = 10,000). Where a person has an adjusted net income of between 100,000 and 120,000,
the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a
result of the withdrawal of the personal allowance. In this situation it may be beneficial to make additional personal
pension contributions or gift aid donations.
The same reduction applies in respect of the higher personal allowances available to people born before 6 April 1948.
Where a persons adjusted net income exceeds 27,000, the higher personal allowances are reduced to a minimum
of the normal personal allowance of 10,000. However, there will then be a further reduction if adjusted net income
exceeds 100,000. This means that regardless of a persons age, no personal allowance will be available where their
adjusted net income is 120,000 or more.
EXAMPLE 1
Ingrid was born on 29 May 1974. For the tax year 201415 she has a salary of 37,000, building society interest of
800 (net) and dividends of 9,000 (net). Her income tax liability is as follows:
Employment income
Building society interest
(800 x 100/80)
Dividends (9,000 x 100/90)
37,000
1,000
10,000
______
48,000
Personal allowance
Taxable income
(10,000)
______
38,000
______
Income tax:
28,000 at 20%
3,865 at 10%
6,135 at 32.5%
5,600
386
1,994
______
Tax liability
7,980
______
EXAMPLE 2
June was born on 3 August 1966. For the tax year 201415 she has a trading profit of 184,000. Her income tax
liability is as follows:
Trading profit
184,000
Personal allowance
Nil
______
Taxable income
184,000
______
Income tax:
31,865 at 20%
118,135 at 40%
34,000 at 45%
Tax liability
6,373
47,254
15,300
______
68,927
______
No personal allowance is available as Junes adjusted net income of 184,000 exceeds 120,000.
EXAMPLE 3
Trevor was born on 23 January 1984. For the tax year 201415 he has a trading profit of 132,000, building society
interest of 3,200 (net) and dividends of 34,200 (net). The income tax payable by Trevor is as follows:

Trading profit
132,000

(3,200 x 100/80)
4,000
Dividends
(34,200 x 100/90)
38,000
______
174,000
Personal allowance
Nil
______
Taxable income
174,000
______
Income tax:
31,865 at 20%
104,135 at 40%
14,000 at 32.5%
24,000 at 37.5%
6,373
41,654
4,550
9,000
______
Tax liability
Tax suffered at source

Dividends
(38,000 at 10%)
Building society
interest
(4,000 at 20%)
61,577
3,800
800
______
(4,600)
______
56,977
______
The 10% tax credit on dividend income is available regardless of the rate of tax payable.
EXAMPLE 4
May was born on 19 December 1959. For the tax year 201415 she has a trading profit of 159,000. During the year
May made net personal pension contributions of 32,000 and a net gift aid donation of 9,600. Her income tax liability
is as follows:
Trading profit
159,000
Personal allowance
(6,500)
______
Taxable income
152,500
______
Income tax:
83,865 at 20%
68,635 at 40%
Tax liability
16,773
27,454
______
44,227
______
The gross personal pension contributions are 40,000 (32,000 x 100/80) and the gross gift aid donation is
12,000 (9,600 x 100/80).
Mays adjusted net income is therefore 107,000 (159,000 40,000 12,000), so her personal allowance of
10,000 is reduced to 6,500 (10,000 3,500 (107,000 100,000 = 7,000/2)).
The basic and higher rate tax bands are extended to 83,865 (31,865 + 40,000 + 12,000) and 202,000
(150,000 + 40,000 + 12,000) respectively.
EXAMPLE 5
Ali was born on 12 March 1947. For the tax year 201415 he has pension income of 11,900 and bank interest of
4,000 (net). His income tax liability is as follows:
Pension income
11,900
Bank interest
(4,000 x 100/80)
5,000
_______
16,900
Personal allowance
(10,500)
_______
Taxable income
Income tax:
1,400 at 20%
1,480 at 10%
3,520 at 20%
Tax liability
6,400
_______
280
148
704
_______
1,132
_______
Ali qualifies for the higher personal allowance of 10,500 as he was born between 6 April 1938 and 5 April
1948.
Non-savings income is 1,400 (11,900 10,500), so 1,480 (2,880 1,400) of the savings income is taxed
at the starting rate of 10%. The remainder of the savings income is taxed at the basic rate of 20%.
EXAMPLE 6
Lorn was born on 14 July 1932. For the tax year 201415 she has pension income of 24,000 and building society
interest of 3,200 (net). Her income tax liability is as follows:
Pension income
(3,200 x 100/80)
24,000
4,000
_______
28,000
Personal allowance
(10,160)
_______
Taxable income
17,840
_______
Income tax: 17,840 at 20%
3,568
_______

Tax liability
3,568
_______
Lorns adjusted net income exceeds 27,000, so her higher personal allowance of 10,660 is reduced to
10,160 (10,660 500 (28,000 27,000 = 1,000/2)).
EXAMPLE 7
Rich was born on 2 September 1935. For the tax year 201415 he has a trading profit of 94,000 and pension
income of 18,000. His income tax liability is as follows:
Trading profit
94,000
Pensions
18,000
______
112,000
Personal allowance
(4,000)
______
Taxable income
108,000
______
Income tax:
31,865 at 20%
76,135 at 40%
Tax liability
6,373
30,454
______
36,827
______
Richs adjusted net income exceeds 27,000 to the extent that his higher personal allowance of 10,660 is
initially reduced to the normal personal allowance of 10,000.
As the adjusted net income of 112,000 exceeds 100,000, the normal personal allowance is then reduced
to 4,000 (10,000 6,000 (112,000 100,000 = 12,000/2)).
EMPLOYMENT INCOME
Company car benefit

For the tax year 201415 the base level of CO emissions used to calculate company car benefits is unchanged at 95
grams per kilometre. However, the base percentage has been increased from 11% to 12%. There are two lower rates
for company motor cars with low CO emissions. For a motor car with a CO emission rate of 75 grams per kilometre
or less the percentage is unchanged at 5%. For a motor car with a CO emission rate of between 76 and 94 grams
per kilometre the percentage is 11% (increased from 10%).
The percentage rates (including the lower rates of 5% and 11%) are increased by 3% for diesel cars, but not beyond
the maximum percentage rate of 35%.
The company car benefit information that will be given in the tax rates and allowances section of the exam paper for
exams in the financial year 1 April 2015 to 31 March 2016 is as follows:
Car benefit percentage
The relevant base level of CO emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars with CO emissions up to this level are:
75 grams per kilometre or less
5%
76 grams to 94 grams per kilometre
11%
95 grams per kilometre
12%
EXAMPLE 8
During the tax year 201415 Fashionable plc provided the following employees with company motor cars:
Amanda was provided with a new petrol powered company car throughout the tax year 201415. The motor car has a
list price of 12,200 and an official CO emission rate of 84 grams per kilometre.
Betty was provided with a new petrol powered company car throughout the tax year 201415. The motor car has a list
price of 16,400 and an official CO emission rate of 109 grams per kilometre.
Charles was provided with a new diesel powered company car on 6 August 2014. The motor car has a list price of
13,500 and an official CO emission rate of 137 grams per kilometre.
Diana was provided with a new petrol powered company car throughout the tax year 201415. The motor car has a
list price of 84,600 and an official CO emission rate of 228 grams per kilometre. Diana paid Fashionable plc 1,200
during the tax year 201415 for the use of the motor car.
Amanda
The CO emissions are between 76 grams and 94 grams per kilometre so the relevant percentage is 11%. The motor
car was available throughout 201415, so the benefit is 1,342 (12,200 x 11%).
Betty
The CO emissions are above the base level figure of 95 grams per kilometre. The CO emissions figure of 109 is
rounded down to 105 so that it is divisible by five. The minimum percentage of 12% is increased in 1% steps for each
five grams per kilometre above the base level, so the relevant percentage is 14% (12% + 2% (105 95 = 10/5)). The
motor car was available throughout 201415 so the benefit is 2,296 (16,400 x 14%).
Charles
The CO emissions are above the base level figure of 95 grams per kilometre. The relevant percentage is 23% (12%
+ 8% (135 95 = 40/5) = 20% plus a 3% charge for a diesel car). The motor car was only available for eight months
of 201415, so the benefit is 2,070 (13,500 x 23% x 8/12).
Diana
+ 26% (225 95 = 130/5)), but this is restricted to the maximum of 35%. The motor car was available throughout
201415 so the benefit is 28,410 (84,600 x 35% = 29,610 1,200). The contribution by Diana towards the use of the
motor car reduces the benefit.
Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided with a company van has been
increased from 3,000 to 3,090.
Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure that is announced each year. For the tax year 201415
the base figure has been increased from 21,100 to 21,700.
The percentage used in the calculation is exactly the same as that used for calculating the related company car
benefit.
EXAMPLE 9
Continuing with Example 8.
Amanda was provided with fuel for private use between 6 April 2014 and 5 April 2015.
Betty was provided with fuel for private use between 6 April 2014 and 31 December 2014.
Charles was provided with fuel for private use between 6 August 2014 and 5 April 2015.
Diana was provided with fuel for private use between 6 April 2014 and 5 April 2015. She paid Fashionable plc 600
during the tax year 201415 towards the cost of private fuel, although the actual cost of this fuel was 1,000.
Amanda
The motor car was available throughout 201415 so the benefit is 2,387 (21,700 x 11%).
Betty
Fuel was only available for nine months of 201415, so the fuel benefit is 2,278 (21,700 x 14% x 9/12).
Charles
The motor car was only available for eight months of 201415, so the fuel benefit is 3,327 (21,700 x 23% x 8/12).
Diana
The motor car was available throughout 201415 so the benefit is 7,595 (21,700 x 35%). There is no reduction for
the contribution made since the cost of private fuel was not fully reimbursed.
Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased from 564 to 581.
Beneficial loans
The limit below which a beneficial loan to an employee is ignored has been increased from 5,000 to 10,000. There
is no taxable benefit if the loan does not exceed the limit of 10,000 at anytime during the tax year.
Medical treatment
An exemption is going to be introduced where an employer pays for medical treatment for employees. The exemption
will not be introduced until autumn 2014, so for exams in the financial year 1 April 2015 to 31 March 2016 it will not
be examined.
Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the
provision of living accommodation costing in excess of 75,000.
For exams in the financial year 1 April 2015 to 31 March 2016 the actual official rate of interest of 3.25% for the tax
year 201415 will be used.
PAYE Real time reporting late filing penalty
With real time reporting, employers submit income tax and NIC information to HM Revenue and Customs
electronically every time employees are paid. Penalties are going to be imposed on a monthly basis if these
submissions are made late. The original intention was to introduce late filing penalties from 6 April 2014, but their
introduction has been postponed until 6 October 2014 for employers with 50 or more employees, and 6 March 2015
for others. Late filing penalties will therefore not be examined in exams in the financial year 1 April 2015 to 31 March
2016
CAPITAL ALLOWANCES
Annual investment allowance
From 6 April 2014 (1 April 2014 for limited companies) the annual investment allowance (AIA) limit has been
increased to 500,000. The AIA provides an allowance of 100% for the first 500,000 of expenditure on plant and
machinery in a 12 month period. Any expenditure in excess of the 500,000 limit qualifies for writing down allowances
as normal. The AIA applies to all expenditure on plant and machinery with the exception of motor cars. The 500,000
limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For
example, the AIA would be 375,000 (500,000 x 9/12) for a nine-month period of account.
Where a period of account spans 6 April 2014 (1 April 2014 for limited companies), then apportionment will be
necessary in order to determine the amount of AIA. A question will not be set involving apportionment of the AIA as
a result of the period of account spanning 6 April 2014.
The capital allowances information that will be given in the tax rates and allowances section of the exam paper for
Rates of allowance
Plant and machinery

Main pool
18%
Special rate pool
8%
Motor cars
New cars with CO emissions up to
100%
CO emissions between 96 and

18%
CO emissions over
8%
Annual investment allowance

Rate of allowance
100%
Expenditure limit
500,000
Unless there is private use, motor cars qualifying for writing down allowances at the rate of 18% are included in the
main pool, whilst motor cars qualifying for writing down allowances at the rate of 8% are included in the special rate
pool. Motor cars with private use (by a sole trader or partner) are not pooled, but are kept separate so that the private
use adjustment can be calculated.
EXAMPLE 10
Ming prepares accounts to 5 April. On 6 April 2014 the tax written down value of plant and machinery in her main pool
was 16,700.
The following transactions took place during the year ended 5 April 2015:
Cost/
(proceeds)
8 April 2014
Purchased motor car (1)
15,600
14 April 2014
10,100
12 August 2014
Purchased equipment
2 September 2014
28,300
19 November 2014
16,800
12 December 2014
Sold motor car (2)
(8,300)
112,000
Motor car (1) purchased on 8 April 2014 has CO emissions of 120 grams per kilometre. This motor car is used by
Ming, and 20% of the mileage is for private journeys. Motor car (2) purchased on 14 April 2014 and sold on 12
December 2014 has CO emissions of 155 grams per kilometre. Motor car (3) purchased on 2 September 2014
has CO emissions of 125 grams per kilometre. Motor car (4) purchased on 19 November 2014 has CO emissions of
90 grams per kilometre.
Mings capital allowance claim for the year ended 5 April 2015 is as follows:
WDA brought
forward
Addition
qualifying
for AIA
Equipment
Main
pool
16,700
112,000
Motor
car (1)
Special rate
pool
Allowances
AIA 100%
Main
pool
(112,000)
_______
Motor
car (1)
Special rate
pool
Allowances
112,000
Other
additions
Motor
car (1)
Motor
car (2)
Motor
car (3)
15,600
28,300
Proceeds
motor car (2)
______ _______
45,000
WDA 18%
WDA 18%
WDA 8%
(8,100)
10,100
(8,300)
_______
15,600
1,800
x 80%
(2,808)
(144)
8,100
2,246
144
______
36,900
Addition
qualifying
for FYA
Motor
car (4)
FYA
100%
16,800
(16,800)
_______
0
______ _______
16,800
________

WDV carried
forward
Main
pool
Motor
car (1)
Special rate
pool
36,900
12,792
______ _______
1,656
________
Total
allowances
Allowances
_________
139,290
_________
Motor car (1) is kept separately because there is private use by Ming. This motor car has CO emissions
between 96 and 130 grams per kilometre, and therefore qualifies for writing down allowances at the rate of 18%.
Motor car (2) had CO emissions over 130 grams per kilometre and therefore qualifies for writing down
allowances at the rate of 8%. Even though it is the only asset in the special rate pool, there is no balancing
allowance on the disposal of this motor car because the expenditure is included in a pool.
Motor car (3) has CO emissions between 96 and 130 grams per kilometre, and therefore qualifies for writing
down allowances at the rate of 18%.
Motor car (4) has CO emissions of less than 95 grams per kilometre and therefore qualifies for the 100%
first year allowance.
NEW INDIVIDUAL SAVINGS ACCOUNTS

Individual savings accounts have been simplified so that there is now just one overall investment limit, which for the
tax year 201415 is 15,000. The accounts have also been renamed as new individual savings accounts (NISAs).
The 15,000 limit is completely flexible, so a person can invest 15,000 in a cash NISA, or they can invest 15,000 in
a stocks and shares NISA, or in any combination of the two such as 10,000 in a cash NISA and 5,000 in a stocks
and shares NISA. It is even possible to have just one NISA holding both cash and stocks and shares, although most
people will prefer to keep the two types of investment separate. This limit will be given in the tax rates and allowances
section of the exam paper.
The income from NISAs is exempt from income tax, whilst a chargeable gain made within a stocks and shares NISA
is exempt from capital gains tax.
The simplification only applies from 1 July 2014, but a question will not be setrequiring knowledge of the old
investment rules or limits.
PENSION SCHEMES
Annual allowance
The annual allowance for the tax year 201415 has been reduced from 50,000 to 40,000. 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. The carry
forward from the tax years 201112, 201213 and 201314 is based on the annual allowance of 50,000 applicable
to those years.
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.
The pension scheme information that will be given in the tax rates and allowances section of the exam paper for
Pension scheme limit
Annual allowance
201415
40,000
201112 to 201314
50,000
The maximum contribution that can qualify for tax relief without any earnings is 3,600.
EXAMPLE 11
Monica and Nicola have made the following gross personal pension contributions during the tax years 201112,
201213 and 201314:
Monica
Nicola
201112
Nil
56,000
201213
42,000
29,000
201314
38,000
Nil
Monica was not a member of a pension scheme for the tax year 201112. Nicola was a member of a pension scheme
for all three tax years.
Monica
Monica has unused allowances of 8,000 (50,000 42,000) from 201213 and 12,000 (50,000 38,000) from
201314, so with the annual allowance of 40,000 for 201415 a total of 60,000 (40,000 + 8,000 + 12,000) is
available for 201415. She was not a member of a pension scheme for 201112 so the annual allowance for that year
is lost.
Nicola
Nicola has unused allowances of 21,000 (50,000 29,000) from 201213 and 50,000 from 201314, so with the
annual allowance of 40,000 for 201415 a total of 111,000 (40,000 + 21,000 + 50,000) is available for 201415.
The annual allowance for 201112 is fully utilised, but Nicola was a member of a pension scheme for 201314 so the
annual allowance for that year is available in full.
The annual allowance for the tax year 201415 is utilised first, and then any unused allowances from earlier years
with those from the earliest year used first.
EXAMPLE 12
Perry has made the following gross personal pension contributions:
201112
32,000
201213
41,000

201314
19,000
201415
48,000
The pension contribution of 48,000 for 201415 has used all of Perrys annual allowance of 40,000 for 201415,
and 8,000 (48,000 40,000) of the unused allowance of 18,000 (50,000 32,000) from 201112. Perry therefore
has unused allowances of 9,000 (50,000 41,000) from 201213 and 31,000 (50,000 19,000) from 201314 to
carry forward to 2015-16. The remaining unused allowance from 201112 cannot be carried forward to 201516 as
this is more than three years ago.
Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the
annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual
allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This
charge is subject to income tax at a persons marginal rates.
EXAMPLE 13
For the tax year 201415 Frank has a trading profit of 210,000, and made gross personal pension contributions of
60,000. He does not have any brought forward unused annual allowances. Franks income tax liability is as follows:
Trading profit
210,000
Annual allowance charge
20,000
_______
230,000
Personal allowance
Nil
______
Taxable income
230,000
______
Income tax:
91,865 at 20%
118,135 at 40%
20,000 at 45%
Tax liability
18,373
47,254
9,000
______
74,627
______
Frank has earnings of 210,000 for 201415. All of the pension contributions of 60,000 therefore qualify for
tax relief.
The annual allowance charge is 20,000 (60,000 40,000) being the excess of the pension contributions
over the annual allowance for 201415.
Franks adjusted net income clearly exceeds 120,000, so no personal allowance is available.
Frank will have paid 48,000 (60,000 less 20%) to the personal pension company.
Higher and additional rate tax relief is given by extending the basic and higher rate tax bands to 91,865
(31,865 + 60,000) and 210,000 (150,000 + 60,000) respectively.
Lifetime allowance
The lifetime allowance for the tax year 201415 has been reduced from 1,500,000 to 1,250,000.
The lifetime allowance applies to the total funds that can be built up within a persons pension schemes. Where the
limit is exceeded there will be an additional tax charge when that person subsequently withdraws the funds in the form
of a pension.
CORPORATION TAX
Rates of corporation tax
For the financial year 2014 the small profits rate of corporation tax is unchanged at 20%. The main rate of corporation
tax has been reduced from 23% to 21%. The lower and upper limits are unchanged.
Marginal relief eases the transition from the small profits rate to the main rate of corporation tax where augmented
profits fall between 300,000 and 1,500,000. The standard fraction used in the calculation of marginal relief for the
financial year 2014 is 1/400th. The effective marginal rate of corporation tax on profits that fall between the 300,000
and 1,500,000 limits is reduced from 23.75% to 21.25%.
The corporation tax rates for the financial year 2014 can therefore be summarised as follows:
Level of profits
Effective rate
Up to 300,000
20%
300,001 to 1,500,000
21.25%
Over 1,500,000
21%
The corporation tax information that will be given in the tax rates and allowances section of the exam paper for exams
in the financial year 1 April 2015 to 31 March 2016 is as follows:
Financial year
2012
2013
2014
Small profits rate
20%
20%
20%
Main rate
24%
23%
21%
Financial year
2012
2013
2014
Lower limit
300,000
300,000
300,000
Upper limit
1,500,000
1,500,000
1,500,000
1/100
3/400
1/400
Standard fraction
EXAMPLE 14
For the year ended 31 March 2015 Easy Ltd has taxable total profits of 40,000 and franked investment income (FII)
of 10,000.
For the year ended 31 December 2014 Moderate Ltd has taxable total profits of 1,400,000 and FII of 160,000.
For the year ended 31 March 2015 Difficult Ltd has taxable total profits of 600,000 and FII of 50,000.
For the year ended 31 December 2014 Hard Ltd has taxable total profits of 600,000 and FII of 50,000.
Easy Ltd
Corporation tax is 8,000 (40,000 at 20%) as the augmented profits of 50,000 (40,000 + 10,000) are less than
300,000.
Moderate Ltd
The augmented profits of 1,560,000 (1,400,000 + 160,000) are more than 1,500,000. Because the companys
accounting period straddles 31 March the corporation tax liability is calculated as follows:
Financial year 2013

1,400,000 x 3/12 = 350,000 at 23%
Financial year 2014
1,400,000 x 9/12 = 1,050,000 at 21%
Liability
80,500
220,500
_______
301,000
_______
Difficult Ltd
Marginal relief applies as the augmented profits of 650,000 (600,000 + 50,000) are between 300,000 and
1,500,000. The companys corporation tax liability is as follows:

600,000 at 21%
126,000
Marginal relief
1/400 (1,500,000 650,000) x 600,000/650,000
(1,962)
_______
Liability
124,038
_______
Hard Ltd
The augmented profits of 650,000 (600,000 + 50,000) are between 300,000 and 1,500,000. Because the
companys accounting period straddles 31 March the corporation tax liability is calculated as follows:
Financial year 2013

600,000 x 3/12 = 150,000 at 23%
34,500
Marginal relief
3/400 (1,500,000 650,000) x 600,000/650,000 x 3/12
(1,471)
Financial year 2014

600,000 x 9/12 = 450,000 at 21%
94,500
Marginal relief
1/400 (1,500,000 650,000) x 600,000/650,000 x 9/12
(1,471)
_______
Liability
126,058
_______
Note that there are alternative ways of calculating the tax liability for Hard Ltd, but this approach is the most
straightforward since there is no need to apportion any figures.
CAPITAL GAINS TAX

Annual exempt amount
The annual exempt amount for the tax year 201415 has been increased from 10,900 to 11,000.
Rates of capital gains tax
The lower rate and the higher rate of capital gains tax for the tax year 201415 are unchanged at 18% and 28%.
Chargeable gains are taxed at the lower rate of 18% where they fall within the basic rate tax band of 31,865, and at
the higher rate of 28% where they exceed this threshold. The basic rate band is extended if a person pays personal
pension contributions or makes a gift aid donation.
EXAMPLE 15
For the tax year 201415 Adam has a salary of 40,000, and during the year he made net personal pension
contributions of 4,400. On 15 June 2014 Adam sold an antique table and this resulted in a chargeable gain of
17,500.
For the tax year 201415 Bee has a trading profit of 60,000. On 20 August 2014 she sold an antique vase and this
resulted in a chargeable gain of 19,000.
For the tax year 201415 Chester has a salary of 36,000. On 25 October 2014 he sold an antique clock and this
Adam
Adams taxable income is 30,000 (40,000 less the personal allowance of 10,000). His basic rate tax band is
extended to 37,365 (31,865 + 5,500 (4,400 x 100/80)), of which 7,365 (37,365 30,000) is unused.
Adams taxable gain of 6,500 (17,500 less the annual exempt amount of 11,000) is fully within the unused basic rate
tax band, so his capital gains tax liability is therefore 1,170 (6,500 at 18%).
Bee
Bees taxable income is 50,000 (60,000 - 10,000), so all of her basic rate tax band has been used. The capital gains
tax liability on her taxable gain of 8,000 (19,000 11,000) is therefore 2,240 (8,000 at 28%).
Chester
Chesters taxable income is 26,000 (36,000 10,000), so 5,865 (31,865 26,000) of his basic rate tax band is
unused. The capital gains tax liability on Chesters taxable gain of 12,900 (23,900 11,000) is therefore calculated
as follows:
5,865 at 18%
1,056
7,035 at 28%
1,970
_____
Tax liability
3,026
_____
In each case, the capital gains tax liability will be due on 31 January 2016.
Entrepreneurs relief
Entrepreneurs relief can be claimed when an individual disposes of a business or a part of a business. For the tax
year 201415 the lifetime qualifying limit is unchanged at 10 million.
Gains qualifying for entrepreneurs relief are taxed at a rate of 10% regardless of the level of a persons taxable
income.
EXAMPLE 16
On 25 January 2015 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal
resulted in a chargeable gain of 800,000. Michael had owned the shares since 1 March 2008, and was an employee
of the company from that date until the date of disposal.
He has taxable income of 8,000 for the tax year 201415.

Michaels capital gains tax liability is as follows:
Shareholding in Green Ltd
800,000
(11,000)
_______
789,000
_______
78,900
_______
Capital gains tax: 789,000 at 10%
Although chargeable gains that qualify for entrepreneurs relief are always taxed at a rate of 10%, they must be taken
into account when establishing the rate that applies to other capital gains. Chargeable gains qualifying for
entrepreneurs relief therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do
not qualify for entrepreneurs relief. This approach will save capital gains tax at either 18% or 28%, compared to just
10% if used against chargeable gains that do qualify for relief.
There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest
approach is to keep chargeable gains qualifying for entrepreneurs relief and other chargeable gains separate.
EXAMPLE 17
On 30 September 2014 Mika sold a business that she had run as a sole trader since 1 January 2008. The sale
resulted in the following chargeable gains:
Goodwill
260,000
Freehold office building
370,000
Freehold warehouse
170,000
_______
800,000
_______
The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used
by Mika for business purposes.
Mika has taxable income of 4,000 for the tax year 201415. She has unused capital losses of 28,000 brought
forward from the tax year 201314.
Mikas capital gains tax liability is as follows:
Gains qualifying for entrepreneurs

relief
Goodwill
260,000
370,000
_______
630,000
_______
Other gains
Freehold warehouse
170,000
Capital losses brought forward
(28,000)
_______
142,000
(11,000)
_______
131,000
_______
Capital gains tax:

630,000 at 10%
131,000 at 28%
Tax liability
63,000
36,680
_______
99,680
_______
The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the
freehold warehouse as this does not qualify for entrepreneurs relief.
27,865 (31,865 4,000) of Mikas basic rate tax band is unused, but this is set against the gains qualifying
for entrepreneurs relief of 630,000 even though this has no affect on the 10% tax rate.
The capital gains tax information that will be given in the tax rates and allowances section of the exam paper for
Capital gains tax

Rates of tax
Lower rate
Higher rate
18%
28%

Entrepreneurs' relief
Lifetime limit
Rate of tax
11,000
10,000,000
10%
Principal private residences

The final period of ownership of a principal private residence is always treated as a period of ownership. This period
of exemption has been reduced from 36 months to 18 months. There are no changes to any of the other periods of
deemed occupation.
EXAMPLE 18
On 30 September 2014 Hue sold a house for 381,900. The house had been purchased on 1 October 1994 for
141,900.
Hue occupied the house as her main residence from the date of purchase until 31 March 1998. The house was then
unoccupied between 1 April 1998 and 31 December 2001 due to Hue being required by her employer to work
elsewhere in the UK.
From 1 January 2002 until 31 December 2008 Hue again occupied the house as her main residence. The house was
then unoccupied until it was sold on 30 September 2014.
The chargeable gain on the house is as follows:
Disposal proceeds
Cost
381,900
(141,900)
________
240,000

Principal private residence exemption
(189,000)
________
51,000
________
The total period of ownership of the house is 240 months (189 + 51), of which 189 months qualify for
exemption as follows:
Exempt
months
1 October 1994 to
31 March 1998 (occupied)
42
1 April 1998 to
31 December 2001 (working in UK)
45
1 January 2002 to
31 December 2008 (occupied)
84
1 January 2009 to
31 March 2013 (unoccupied)
1 April 2013 to
30 September 2014 (final 18
months)
Chargeable
months
51
18
____
____
189
____
51
____
The unoccupied period from 1 January 2009 to 31 March 2013 is not a period of deemed occupation as it was not
followed by a period of actual occupation.
The exemption is therefore 189,000 (240,000 x 189/240).
INHERITANCE TAX
Rates of inheritance tax
The nil rate band for the tax year 201415 is unchanged at 325,000.
The inheritance tax information that will be given in the tax rates and allowances section of the exam paper for exams
in the financial year 1 April 2015 to 31 March 2016 is as follows:
Inheritance tax: tax rates

1 325,000
Nil
Excess
Death rate
Lifetime rate
40%
20%
Inheritance tax: taper relief
Years before death
Percentage
reduction %
Over 3 but less than 4 years
20
40
60
80
Where nil rate bands are required for previous years then these will be given to you within the question.
NATIONAL INSURANCE CONTRIBUTIONS

Class 1 and class 1A national insurance contributions
For the tax year 201415 the rates of employee class 1 NIC are unchanged at 12% and 2%. The rate of 12% is paid
on earnings between 7,957 per year and 41,865 per year, and the rate of 2% is paid on all earnings over 41,865
per year.
The rate of employers class 1 NIC is unchanged at 13.8%, and is paid on all earnings over 7,956 per year. Note that
this limit is now aligned with the employee limit.
The rate of class 1A NIC that employers pay on taxable benefits provided to employees is also unchanged at 13.8%.
Employment allowance
An annual employment allowance has been introduced which all businesses can use to reduce the amount of
employers class 1 NIC that is paid to HM Revenue and Customs. The allowance is 2,000 per year per employer,
and does not affect the amount of class 1A or employee class 1 NIC that is payable. For example, if a businesss total
employers class 1 NIC for the tax year 201415 is 4,600, then only 2,600 (4,600 2,000) will be paid to HM
Revenue and Customs. If total employers class 1 NIC is 2,000 or less, then the liability will be nil.
The class 1 and class 1A NIC information that will be given in the tax rates and allowances section of the exam paper
for exams in the financial year 1 April 2015 to 31 March 2016 is as follows:
%
Class 1
employee
1 7,956 per year
Nil
7,957 41,865 per year
12
41,866 and above per year
Class 1
employer
1 7,956 per year
Nil
13.8
2,000
13.8
Class 1A
EXAMPLE 19
Simone Ltd has one employee who is paid 50,000 per year, and was provided with the following taxable benefits
during the tax year 201415:
Company motor car
6,300
Car fuel
5,425
Living accommodation
1,800
The class 1 and class 1A NIC liabilities are as follows:
Employee class 1 NIC

41,865 7,956 = 33,909 at 12%
4,069

163
_____
50,000 41,865 = 8,135 at 2%
4,232
_____
Employers class 1 NIC
50,000 7,956 = 42,044 at 13.8%
5,802
(2,000)
_____
3,802
_____
Employers class 1A NIC

1,866
_____
13,525 (6,300 + 5,425 + 1,800) at 13.8%
Class 2 and class 4 national insurance contributions

For the tax year 201415 the rate of class 2 NIC has been increased to 2.75 per week.
The rates of class 4 NIC are unchanged at 9% and 2%. The rate of 9% is paid on profits between 7,957 and
41,865, and the rate of 2% is paid on all profits over 41,865.
Collection of class 2 national insurance contributions
HM Revenue and Customs can now collect unpaid class 2 NICs by including the unpaid amount in a persons PAYE
tax code.
The class 4 NIC information that will be given in the tax rates and allowances section of the exam paper for exams in
the financial year 1 April 2015 to 31 March 2016 is as follows:
%
Class 4
1 7,956 per year
Nil
7,957 41,865 per year
EXAMPLE 20
Jimmy is a self-employed builder and Jenny is a self-employed consultant. Their trading profits for the tax year 2014
15 are respectively 25,000 and 50,000. The class 4 NIC liabilities are as follows:
Jimmy
Jenny
1,534
_____
25,000 7,956 = 17,044 at 9%
3,052
163
_____
41,865 7,956 = 33,909 at 9%

50,000 41,865 = 8,135 at 2%
3,215
_____
VALUE ADDED TAX (VAT)

Registration and deregistration limits
The limit of annual turnover above which VAT registration is compulsory has been increased from 79,000 to 81,000,
and the deregistration limit has been increased from 77,000 to 79,000.
Standard rate of VAT
The standard rate of VAT is unchanged at 20%.
EXAMPLE 21
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2015. The following information
is available:
Sales invoices totaling 128,000 were issued in respect of standard rated sales.
Standard rated materials amounted to 32,400.
Standard rated expenses amounted to 24,800.
On 15 February 2015 Gwen purchased machinery at a cost of 24,150. This figure is inclusive of VAT.
Unless stated otherwise all of the above figures are exclusive of VAT.
Output VAT
Sales (128,000 x 20%)
25,600
Input VAT
Materials (32,400 x 20%)
6,480
Expenses (24,800 x 20%)
4,960
Machinery (24,150 x 20/120)
VAT payable
4,025
______
(15,465)
_______
10,135
_______
Discounts
Output VAT is only chargeable on the net amount where a discount is offered for prompt payment, regardless of
whether payment is made within the specified time for the discount to be received.
This treatment is currently being phased out so that output VAT will instead be charged on the actual amount received
if a prompt payment discount is not taken. However, there will be no change as regards the majority of supplies until 1
April 2015 onwards, so the current rules will continue to be examined in exams in the financial year 1 April 2015 to
31 March 2016.
TAX MANAGEMENT
Penalties for late filing of VAT returns and late payment of VAT
New penalties for the late filing of returns and for late payment of tax are being introduced over a number of years.
Although legislation has been introduced regarding the late filing of VAT returns and the late payment of VAT, HM
Revenue and Customs have yet to introduce the changes. Therefore, for exams in the financial year 1 April 2015 to 31
March 2016 the changes will not be examined.
Late payment interest and repayment interest
The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, Class 4
NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April
2014. For exams in the financial year 1 April 2015 to 31 March 2016 the assumed rate of late payment interest will
therefore be 3%, and the assumed rate of repayment interest will be 0.5%.
Written by a member of the Paper F6 (UK) examining team
BENEFITS
RELATED LINKS
Test your understanding
Student Accounting hub page
This article is relevant to candidates sitting Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June
2016, and is based on tax legislation as it applies to the tax year 201415 (Finance Act 2014).
Benefits feature regularly in the Paper F6 (UK) exam, although such questions are generally not answered as well as
would be expected. The article is not intended to cover every aspect of benefits, but instead mainly covers those
areas which are more commonly examined. Motor cars are not covered as they are dealt with in a separate article.
LIVING ACCOMMODATION
There are four aspects to consider:
The basic benefit is the annual value of the property. If the property is rented then the basic benefit is the
higher of the annual value and the amount of rent paid.
There is an additional benefit if the property cost more than 75,000. This is calculated as:
(Cost 75,000) x 3.25% (the official rate of interest)
Cost is the cost of the property plus any subsequent improvements. However, where the property was
purchased more than six years before first being provided to the employee, then the cost figure is replaced by
the market value when first provided (again plus any subsequent improvements).
If the employer pays for the running costs relating to the property then the amount paid will also be a benefit.
If the employer has furnished the property then the benefit for the use of the furniture is based on 20% of its
cost.
Example 1
During the tax year 201415 Prop plc provided three of its employees with living accommodation.
Alex has been provided with living accommodation since 1 January 2012. Prop plc had purchased the property in
2011 for 160,000, and it was valued at 185,000 on 1 January 2012. Improvements costing 13,000 were made to
the property during June 2013. The annual value of the property is 9,100.
Bess was provided with living accommodation from 1 January to 5 April 2015. The property is rented by Prop plc at a
cost of 2,250 per month, and it has an annual value of 10,400. On 1 January 2015 Prop plc purchased furniture for
the property at a cost of 16,200. The company pays for the running costs relating to the property, and for the period
1 January to 5 April 2015 these amounted to 1,900.
Chloe was provided with living accommodation on 6 April 2014, and she lived in the property throughout the tax year
201415. The company had purchased the property in 2005 for 89,000, and it was valued at 145,000 on 6 April
2014. The annual value of the property is 4,600.
Alex
The basic benefit is the annual value of 9,100.
Bess
The living accommodation cost is in excess of 75,000 so there is an additional benefit. Since the property
was not purchased more than six years before first being provided to Alex, the benefit is based on the cost of
the property plus subsequent improvements. The additional benefit is therefore 3,185 (98,000 (160,000 +
13,000 75,000) at 3.25%).
The benefit is the rent paid of 6,750 (2,250 x 3) since this is higher than the annual value of 2,600 (10,400
x 3/12).
The benefit in respect of the furniture is 810 (16,200 x 20% x 3/12).
The running costs of 1,900 are also taxed as a benefit.
Chloe
The basic benefit is the annual value of 4,600.
The living accommodation cost is in excess of 75,000 so there is an additional benefit. Since the property
was purchased more than six years before first being provided, the benefit is based on the market value when
first provided. The additional benefit is therefore 2,275 (70,000 (145,000 75,000) at 3.25%).
BENEFICIAL LOANS
There is a taxable benefit where an employee is provided with an interest free loan or where the interest rate payable
is below the official rate of interest of 3.25%. There are two alternative methods of calculating the benefit:
The average method: The average is taken of the amount outstanding at the start of the tax year (or when the loan
was made if later) and at the end of the tax year (or when the loan was repaid if earlier). The official rate of interest is
then applied to this average.
The strict method: The official rate of interest is applied to the amount outstanding on a monthly basis.
If no repayments have been made during the tax year then both methods will produce the same result.
The average method applies unless either the employee or HM Revenue and Customs elects for the strict method. In
an exam context, both methods should be calculated even if one party opts for the strict method. However, a question
might instruct you to just use the average method, since in reality HM Revenue and Customs only elect for the strict
method when it will make a significant difference.
Example 2
During the tax year 201415 Rest Ltd provided three of its employees with loans.
Kim was provided with an interest free loan of 24,000 on 1 June 2014 so that she could purchase a new motor car.
Ming was provided with an interest free loan of 120,000 on 1 May 2014 so that she could purchase a holiday
cottage. Ming repaid 50,000 of the loan on 31 July 2014, and repaid the balance of the loan of 70,000 on 31
December 2014.
Newt was provided with a loan during 2012 so that she could purchase a yacht. The amount of loan outstanding at 6
April 2014 was 60,000, and Newt repaid 5,000 of the loan on 31 August 2014, and then repaid a further 5,000 on
28 February 2015. Newt paid loan interest of 720 to Rest Ltd during the tax year 201415. The taxable benefit in
respect of this loan is calculated using the average method.
Kim
The benefit is 650 (24,000 at 3.25% x 10/12).
Since no repayments have been made during 201415, both methods will produce the same result.
Ming
The benefit calculated using the average method is 2,058 as follows:
120,000 + 70,000 x 3.25% x 8/12

2
The benefit calculated using the strict method is 1,923 as follows:
2,058

120,000 at 3.25% x 3/12
975
70,000 at 3.25% x 5/12
948
1,923
Newt
Ming will therefore elect to have the taxable benefit calculated according to the strict method as this gives her
a lower taxable benefit.
Newt repaid 10,000 (5,000 + 5,000) of the loan during 201415, so the outstanding balance at 5 April 2015
is 50,000 (60,000 10,000).
The benefit calculated using the average method is 1,067 as follows:
60,000 + 50,000 x 3.25%

2
1,787
Interest paid
(720)
1,067
There is no taxable benefit if an employees beneficial loans do not exceed 10,000 during the tax year.
USE OF ASSETS
Where an employee is provided with an asset for their personal use then the benefit is based on 20% of its market
value when first provided to the employee (exactly the same as furniture provided along with living accommodation).
If the asset is subsequently sold or given to the employee, then there will be a further benefit being the greater of:
Market value at the date the employee acquires the asset.

Market value when first provided to the employee less any amounts assessed as benefits for having the use
of the asset.
Example 3
Joe is employed by Firstly plc. On 6 April 2014 the company provided him with a home entertainment system costing
4,400 for his personal use. Firstly plc gave the home entertainment system to Joe on 31 December 2014 for free,
although its market value on that date was 3,860.
The benefit for the use of the home entertainment system is 660 (4,400 x 20% x 9/12).
The benefit for the acquisition of the home entertainment system is the market value of 3,860, as this is
greater than 3,740 (4,400 660).
OTHER BENEFITS
Generally, the basis for calculating any other benefit is the cost to the employer.
There are various benefits which are exempt or partially exempt. Although correctly identifying the tax treatment of
such a benefit may result in only a half mark or one mark, it is important that you correctly identify such benefits so
that time is not wasted with unnecessary calculations.
Example 4
Vary plc provides its employees with various benefits. The benefits were provided throughout the tax year 201415
unless otherwise stated.
Denzil was provided with two mobile telephones. The telephones had each cost 250 when purchased by Vary plc in
January 2014. The company paid for all of Denzils business and private telephone calls.
Emily had her health club membership fee of 710 paid for by Vary plc.
Frederick spent five 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.
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.
Hillarys three year old daughter was provided with a place at Vary plcs workplace nursery. The total cost to the
company of providing this nursery place was 10,800 (240 days at 45 per day).
Ian was provided with 48 weeks of childcare vouchers costing 100 per week. He used the vouchers to provide
childcare for his four year old daughter at a registered nursery near to Vary plcs offices. Ian pays income tax at the
basic rate.
June had the use of Vary plcs company gym which is only open to employees of the company. The cost to Vary plc
of providing this benefit to June was 340.
Kristin was provided with free meals in Vary plcs staff canteen. The total cost of these meals to the company was
1,460. The canteen is available to all of the companys employees.
Larry regularly works from home two days per week, and was paid an allowance of 192 (48 weeks at 4 per week)
to cover the extra light and heat costs that were incurred due to this home working.
Marge was given a watch valued at 750 as an award for her 20 years of employment at Vary plc.
Denzil
The provision of one mobile telephone does not give rise to a taxable benefit.
Emily
The benefit for the use of the second telephone is 50 (250 x 20%).
The benefit of the health club membership is the cost to Vary plc of 710.
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 benefit.
Grace
Note that the equivalent UK allowance is only 5 per night.

Only 8,000 of the relocation costs is exempt, and so the taxable benefit is 3,000 (11,000 8,000).
Hillary
The provision of a place in a workplace nursery does not give rise to a taxable benefit.
Ian
The exemption for childcare vouchers is 55 per week where the employee is a basic rate taxpayer.
The taxable benefit is therefore 2,160 (45 (100 55) x 48).

June
Note that the exemption is less for higher and additional rate taxpayers, so that all taxpayers effectively
receive the same amount of tax relief.
The use of a company gym does not give rise to a taxable benefit.
Kristin
The provision of meals in a staff canteen does not give rise to a taxable benefit.
Larry
Payments for home working are exempt up to 4 per week, so the allowance does not result in a taxable
benefit.
Marge
A non-cash long-service award is not a taxable benefit 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.
REDUCTIONS AND CONTRIBUTIONS

There are two further possible adjustments that could apply to most of the benefits that have been covered.
Reduction: The taxable benefit is proportionately reduced if it is only available for part of the tax year.
Contribution: Any contribution made by an employee will reduce the taxable benefit. Contributions are deducted
after any reduction has been applied.
CHARGEABLE GAINS, PART 1

RELATED LINKS
Chargeable gains, part 2
PERSONAL CHARGEABLE GAINS

SCOPE OF CAPITAL GAINS TAX (CGT)
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is
an exempt disposal. A person who inherits an asset takes it over at its value at the time of death.
Example 1
On 19 May 2000 Jorge purchased an acre of land for 20,200. He died on 20 June 2014, and the land was inherited
by his son, William. On that date the land was valued at 71,600.
The transfer of the land on Jorges death is an exempt disposal.
William will take over the land with a base cost of 71,600.
All forms of property are chargeable assets unless exempted. The most important exempt assets as far as Paper F6
(UK) is concerned are:
Certain chattels (see later)
Motor cars
UK Government securities (Gilts)
In determining whether or not an individual is chargeable to CGT it is necessary to consider their residence status.
Example 2
Explain when a person will be treated as resident in the UK for a particular tax year, and state how a persons
residence status establishes whether or not they are liable to CGT.
Subject to not meeting any of the automatic nonresident tests, the following people will be treated as resident:
A person who is in the UK for 183 days or more during a tax year.
A person whose only home is in the UK.
A person who carries out full time work in the UK.
A person can also be treated as resident if they have more UK ties than is permitted according to the number of days
they are in the UK during a tax year.
A person is liable to CGT on the disposal of assets during any tax year in which they are resident in the UK.
BASIC COMPUTATION
For individuals the basic CGT computation is quite straightforward.
Example 3
Andy sold a factory on 15 February 2015 for 320,000. The factory was purchased on 24 January 1996 for 164,000,
and was extended at a cost of 37,000 during March 2006. During May 2008 the roof of the factory was replaced at a
cost of 24,000 following a fire.
Andy incurred legal fees of 3,600 in connection with the purchase of the factory, and legal fees of 5,400 in
connection with the disposal.
Andys taxable gain for 201415 is as follows:
Disposal proceeds
Cost
Enhancement expenditure
320,000
164,000
37,000
Incidental costs
(3,600 + 5,400)
9,000
_______
Chargeable gain
(210,000)
110,000
(11,000)
Taxable gain
99,000
The factory extension is enhancement expenditure as it has added to the value of the factory.
The replacement of the roof is not enhancement expenditure, being in the nature of a repair.
Note that the standardised term chargeable gain refers to the gain before deducting the annual exempt
amount, whilst the term taxable gain refers to the gain after deducting the annual exempt amount.
CAPITAL LOSSES
Capital losses are set off against any chargeable gains arising in the same tax year, even if this results in the annual
exempt amount being wasted. Any unrelieved capital losses are carried forward, but in future years they are only set
off to the extent that the annual exempt amount is not wasted.
Example 4
For the tax year 201415 Nim has chargeable gains of 18,000. He has unused capital losses of 16,700 brought
Nims taxable gains for 201415 are as follows:
Chargeable gains
18,000
Capital losses brought forward
(7,000)
Chargeable gains
11,000
Taxable gains
(11,000)
Nil
The set off of the brought forward capital losses is restricted to 7,000 (18,000 11,000) so that chargeable
gains are reduced to the amount of the annual exempt amount.
Nim therefore has capital losses carried forward of 9,700 (16,700 7,000).
RATES OF CAPITAL GAINS TAX

The rate of CGT is linked to the level of a persons taxable income. Taxable gains are taxed at a lower rate of 18%
where they fall within the basic rate tax band of 31,865, and at a higher rate of 28% where they exceed this
threshold. Remember that the basic rate band is extended if a person pays personal pension contributions or makes a
gift aid donation.
CGT is collected as part of the self-assessment system, and is due in one amount on 31 January following the tax
year. Therefore a CGT liability for the tax year 201415 will be payable on 31 January 2016. Payments on account are
not required in respect of CGT.
Example 5
For the tax year 201415 Adam has a salary of 40,000, and during the year he made net personal pension
contributions of 4,400. On 15 June 2014 Adam sold an antique table and this resulted in a chargeable gain of
17,500.
For the tax year 201415 Bee has a trading profit of 60,000. On 20 August 2014 she sold an antique vase and this
For the tax year 201415 Chester has a salary of 36,000. On 25 October 2014 he sold an antique clock and this
Adam
Adams taxable income is 30,000 (40,000 less the personal allowance of 10,000). His basic rate tax band is
extended to 37,365 (31,865 + 5,500 (4,400 x 100/80)), of which 7,365 (37,365 30,000) is unused.
Adams taxable gain of 6,500 (17,500 less the annual exempt amount of 11,000) is fully within the unused basic rate
tax band, so his CGT liability for 201415 is therefore 1,170 (6,500 at 18%).
Bee
Bees taxable income is 50,000 (60,000 10,000), so all of her basic rate tax band has been used. The CGT liability
for 201415 on her taxable gain of 8,000 (19,000 11,000) is therefore 2,240 (8,000 at 28%).
Chester
Chesters taxable income is 26,000 (36,000 10,000), so 5,865 (31,865 26,000) of his basic rate tax band is
unused. The CGT liability for 201415 on Chesters taxable gain of 12,900 (23,900 11,000) is therefore calculated
as follows:
5,865 at 18%
1,056
7,035 at 28%
1,970
3,026
In each case, the CGT liability will be due on 31 January 2016.
ENTREPRENEURS RELIEF
A reduced CGT rate of 10% applies if a disposal qualifies for entrepreneurs relief. This rate applies regardless of the
level of a persons taxable income. Entrepreneurs relief can be claimed when an individual disposes of a business or
a part of a business as follows:
A disposal of the whole or part of a business run as a sole trader. Relief is only available in respect of
chargeable gains arising from the disposal of assets in use for the purpose of the business. This will exclude
chargeable gains arising from investments.
The disposal of shares in a trading company where an individual has at least a 5% shareholding in the
company and is also an officer or an employee of the company. Provided the limited company is a trading
company, there is no restriction to the amount of relief if it holds non-trading assets such as investments.
The relief covers the first 10 million of qualifying gains that a person makes during their lifetime. Gains in excess of
the 10 million limit are taxed as normal at the 18% or 28% rates.
The qualifying conditions must be met for a period of one year prior to the date of disposal in order for entrepreneurs
relief to be available.
Example 6
On 15 October 2014 the four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the
company. Alphabet Ltd has a share capital of 100,000 1 ordinary shares.
Aloi had been the managing director of Alphabet Ltd since the companys incorporation on 1 January 2004. She had
held 60,000 shares since 1 January 2004.
Bon had been the sales director of Alphabet Ltd since 1 February 2014, having not previously been an employee of
the company. She had held 25,000 shares since 1 February 2014.
Cherry had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2007.
Dee had been an employee of Alphabet Ltd since 1 May 2005. She had held 3,000 shares since 20 June 2006.
Alois disposal qualified for entrepreneurs relief because she was a director of Alphabet Ltd, had a
shareholding of 60% (60,000/100,000 x 100), and these qualifying conditions were met for one year prior to the
date of disposal.
Bons disposal did not qualify for entrepreneurs relief because she only acquired her shareholding and
became a director on 1 February 2014. The qualifying conditions were therefore not met for one year prior to the
date of disposal.
Cherrys disposal did not qualify for entrepreneurs relief because she was not an officer or an employee of
Alphabet Ltd.
Dees disposal did not qualify for entrepreneurs relief because her shareholding of 3% (3,000/100,000 x
100) was less than the minimum required holding of 5%.
Example 7
On 25 January 2015 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal
resulted in a chargeable gain of 800,000. Michael had owned the shares since 1 March 2008, and was an employee
of the company from that date until the date of disposal.
He has taxable income of 8,000 for the tax year 201415.
Michaels CGT liability for 201415 is as follows:
Chargeable gain
800,000
(11,000)
789,000
Capital gains tax:
789,000 at 10%
78,900
Although chargeable gains that qualify for entrepreneurs relief are always taxed at a rate of 10%, they must be taken
into account when establishing which rate applies to other chargeable gains. Chargeable gains qualifying for
entrepreneurs relief therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do
not qualify for entrepreneurs relief. This approach will save CGT at either 18% or 28%, compared to just 10% if used
against chargeable gains that do qualify for relief.
There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to
keep gains qualifying for entrepreneurs relief and other gains separate.
Example 8
On 30 September 2014 Mika sold a business that she had run as a sole trader since 1 January 2008. The disposal
resulted in the following chargeable gains:
Goodwill
260,000
370,000
Freehold warehouse
170,000
800,000
The warehouse had never been used by Mika for business purposes.
Mika has taxable income of 4,000 for the tax year 201415. She has unused capital losses of 28,000 brought
Mikas CGT liability for 201415 is as follows:
Gains qualifying for entrepreneurs relief
Goodwill
260,000
370,000
630,000
Other gains
Freehold warehouse
170,000
Capital losses
brought forward
(28,000)
142,000
(11,000)
131,000
Capital gains tax:
Tax liability
630,000 at 10%
63,000
131,000 at 28%
36,680
99,680
The capital losses and the annual exempt amount are set against the chargeable gain on the sale of the
freehold warehouse as this does not qualify for entrepreneurs relief.
27,865 (31,865 4,000) of Mikas basic rate tax band is unused, but this is set against the gains qualifying
for entrepreneurs relief of 630,000 even though this has no effect on the 10% tax rate.
MARRIED COUPLES
Transfers between spouses do not give rise to any chargeable gain or capital loss. The same treatment applies to
transfers between same-sex partners in a registered civil partnership.
Example 9
Bill and Cathy Dew are a married couple. They disposed of the following assets during the tax year 201415:
On 10 July 2014 Bill and Cathy sold a house for 380,000. The house had been purchased on 1 December
2011 for 290,000, and has never been occupied as their main residence.
On 5 August 2014 Bill transferred his entire shareholding of 20,000 1 ordinary shares in Elf plc to Cathy. On
that date the shares were valued at 64,000. Bills shareholding had been purchased on 21 September 2012 for
48,000.
On 7 October 2014 Cathy sold the 20,000 1 ordinary shares in Elf plc that had been transferred to her from
Bill. The sale proceeds were 70,000.
Bill and Cathy each have taxable income of 50,000 for the tax year 201415.
Jointly owned property
The chargeable gain on the house is 90,000 (380,000 290,000).
Bill and Cathy will each be assessed on 45,000 (90,000 x 50%) of the chargeable gain.
Bill Dew CGT liability 201415
45,000
House
(11,000)
34,000
Capital gains tax: 34,000 at 28%
9,520
The transfer of the 20,000 1 ordinary shares in Elf plc to Cathy does not give rise to any chargeable gain or
capital loss, because it is a transfer between spouses.
Cathy Dew CGT liability 201415
Cathy Dew CGT liability 201415
House
45,000
Ordinary shares in Elf plc
Disposal proceeds
70,000
(48,000)
22,000
67,000
(11,000)
56,000
Capital gains tax:
56,000 at 28%
15,680
Bills original cost is used in calculating the chargeable gain on the disposal of the shares in Elf plc.
It may be the case that one spouse has not utilised their annual exempt amount and/or basic rate tax band for a
particular tax year. It could therefore be beneficial to transfer an asset to that spouse before its disposal, or to put an
asset into joint names prior to disposal.
Example 10
For the tax year 201415 Jane is a higher rate taxpayer, but her husband Claude does not have any taxable income.
During March 2015 Jane is going to dispose of a house, and this will result in a chargeable gain of 120,000.
If 50% ownership of the house is transferred to Claude prior to its disposal, this will enable his annual exempt amount
and basic rate tax band for 201415 to be utilised. The CGT saving for the couple will be 6,266 as follows:
11,000 at 28%
3,080
31,865 at 10%
Lower rate tax saving
(28% 18%)
3,186
6,266
PART DISPOSALS
When just part of an asset is disposed of then the cost must be apportioned between the part disposed of and the
part retained.
Example 11
On 16 February 2015 Joan sold three acres of land for 285,000. She had originally purchased four acres of land on
17 July 2013 for 220,000. The market value of the unsold acre of land as at 16 February 2015 was 90,000.
The cost relating to the three acres of land sold is 167,200 (220,000 x 285,000/375,000 (285,000 +
90,000)).
The chargeable gain on the land is therefore 117,800 (285,000 167,200).
The base cost of the remaining acre of land is 52,800 (220,000 167,200).
With part disposals, care must be taken with enhancement expenditure and incidental costs as these may relate to
the whole asset or just to the part being disposed of.
Example 12
On 20 February 2015 Fergus sold an acre of land for 130,000. He had originally purchased four acres of land on 13
April 2003 for 210,000. During January 2015 Fergus spent 22,800 clearing and levelling all four acres of land. The
market value of the unsold three acres of land as at 20 February 2015 was 350,000. Fergus incurred legal fees of
3,200 in connection with the disposal.
Fergus chargeable gain for 201415 is as follows:
Disposal proceeds
Cost
130,000
56,875
6,175
Incidental costs
3,200
_______
(66,250)
63,750
The cost relating to the acre of land sold is 56,875 (210,000 x 130,000/480,000 (130,000 + 350,000)).
The cost of clearing and levelling the land is enhancement expenditure. The cost relating to the acre of land
sold is 6,175 (22,800 x 130,000/480,000).
The incidental costs relate entirely to the acre of land sold, and so they are not apportioned.
CHATTELS
Special rules apply to chattels. A chattel is tangible moveable property.
Example 13
On 18 August 2014 Gloria sold an antique table for 5,600 and an antique clock for 7,200. The antique table had
been purchased on 27 May 2013 for 3,200, and the antique clock had been purchased on 14 June 2013 for 3,700.
The antique table is exempt from CGT because the gross sale proceeds were less than 6,000.
The chargeable gain on the antique clock is restricted to 2,000 (1,200 (7,200 6,000) x 5/3) as this is less
than the normal gain of 3,500 (7,200 3,700).
Where a chattel is sold at a loss and the sale proceeds are less than 6,000, then the amount of allowable capital
loss will be restricted. If capital allowances have been claimed then no capital loss will be available at all.
Example 14
Giles sold the following assets during the tax year 201415:
On 3 February 2015 he sold an antique table for 4,700. The table had been purchased on 2 May 2004 for
10,200.
On 12 March 2015 he sold machinery for 22,600. The machinery had been purchased on 1 June 2011 for
34,000. Giles claimed capital allowances totalling 11,400 in respect of this machinery.
Table
The table has been sold for less than 6,000, so the proceeds are deemed to be 6,000 (rather than
4,700).
The allowable capital loss is therefore 4,200 (6,000 10,200).
Machinery
The cost of 34,000 is reduced by the capital allowances claimed of 11,400, giving an allowable cost of
22,600.
Since the proceeds are also 22,600, the disposal is on a no gain, no loss basis.
WASTING ASSETS
A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be
adjusted for the expected depreciation over the life of the asset.
Example 15
On 31 March 2015 Mung sold a copyright for 9,600. The copyright had been purchased on 1 April 2010 for 10,000
when it had an unexpired life of 20 years.
The chargeable gain on the copyright is as follows:
Disposal proceeds
Cost (10,000 x 15/20)
9,600
(7,500)
2,100
The cost of 10,000 is depreciated based on an unexpired life of 20 years at the date of acquisition and an
unexpired life of 15 years at the date of disposal.
INSURANCE PROCEEDS
If an asset is lost or destroyed then the receipt of insurance proceeds is treated as a normal disposal. However,
rollover relief is available if the insurance monies are used to purchase a replacement asset within a period of 12
months.
Example 16
On 20 October 2014 an antique table owned by Claude was destroyed in a fire. The table had been purchased on 23
November 2012 for 50,000. Claude received insurance proceeds of 74,000 on 6 December 2014 and on 18
December 2014 he paid 75,400 for a replacement table.
The insurance proceeds of 74,000 received by Claude have been fully reinvested in a replacement table.
There is therefore no disposal on the receipt of the insurance proceeds.
The gain of 24,000 (insurance proceeds of 74,000 less original cost of 50,000) is set against the cost of
the replacement table, so its base cost is 51,400 (75,400 24,000).
If the insurance proceeds are not entirely reinvested then there will be an immediate chargeable gain.
Example 17
Continuing with example 16, assume that the replacement table only cost 71,500.
The insurance proceeds not reinvested of 2,500 (74,000 71,500) are taxed as a chargeable gain in 2014
15.
The balance of the gain of 21,500 (24,000 2,500) is set against the cost of the replacement table, so its
base cost is 50,000 (71,500 21,500).
If an asset is damaged then the receipt of insurance proceeds is treated as a part disposal. However, if all the
proceeds are used to restore the asset then a claim can be made to ignore the part disposal rules.
Example 18
On 1 October 2014 an antique carpet owned by Juliet was damaged by a flood. The carpet had been purchased on
17 November 2010 for 69,000. Juliet received insurance proceeds of 12,000 on 12 December 2014, and she spent
a total of 13,400 during December 2014 restoring the carpet. Juliet has made a claim to ignore the part disposal
rules.
The insurance proceeds of 12,000 received by Juliet have been fully applied in restoring the carpet.
There is therefore no disposal on the receipt of the insurance proceeds.
The revised base cost of the carpet is 70,400 (69,000 12,000 + 13,400).
PRINCIPAL PRIVATE RESIDENCES
A gain on the disposal of a principal private residence is exempt where the owner has occupied the house throughout
the whole period of ownership. The final 18 months of ownership are always treated as a period of ownership. The
following periods of absence are also deemed to be periods of occupation:
Periods up to a total of three years for any reason.
Any periods where the owner is required to live abroad due to their employment.
Periods up to four years where the owner is required to live elsewhere in the UK due to their work.
These deemed periods of occupation must normally be preceded and followed by actual periods of occupation.
Example 19
On 30 September 2014 Hue sold a house for 381,900. The house had been purchased on 1 October 1994 for
141,900.
Hue occupied the house as her main residence from the date of purchase until 31 March 1998. The house was then
unoccupied between 1 April 1998 and 31 December 2001 due to Hue being required by her employer to work
elsewhere in the UK.
From 1 January 2002 until 31 December 2008 Hue again occupied the house as her main residence. The house was
then unoccupied until it was sold on 30 September 2014.
Disposal proceeds
Cost
381,900
(141,900)
240,000
Principal private
residence exemption
(189,000)
51,000
The total period of ownership of the house is 240 months (189 + 51), of which 189 months qualify for
exemption as follows:
Exempt months
Chargeable
months
1 October 1994 to
31 March 1998 (occupied)
42
1 April 1998 to
31 December 2001
(working in UK)
45
1 January 2002 to
31 December 2008
(occupied)
84
1 January 2009 to
31 March 2013 (unoccupied)
51
1 April 2013 to
30 September 2014
(final 18 months)
18
__
189
51
The unoccupied period from 1 January 2009 to 31 March 2013 is not a period of deemed occupation as it
was not followed by a period of actual occupation.
The exemption is therefore 189,000 (240,000 x 189/240).
Letting relief will extend the principal private residence exemption where a property is let out during a period that does
not otherwise qualify for exemption.
Example 20
Continuing with example 19, assume that Hue let her house out during the periods that she did not occupy it.
The chargeable gain on the house will now be as follows:
Disposal proceeds
Cost
381,900
(141,900)
240,000
Principal private
residence exemption
Letting relief exemption
(189,000)
(40,000)
11,000
The letting relief exemption is the lower of:
40,000
189,000 (the amount of the gain exempt under the principal private residence rules)
51,000 (the amount of the non-exempt gain attributable to the period of letting (240,000 x 51/240))
Where part of a house is used exclusively for business use then the principal private residence exemption will be
restricted.
Example 21
On 30 September 2014 Mae sold a house for 186,000. The house had been purchased on 1 October 2004 for
122,000. Throughout the period of ownership the house was occupied by Mae as her main residence, but one of the
houses eight rooms was always used exclusively for business purposes by Mae.
Disposal proceeds
186,000
Cost
(122,000)
64,000
Principal private residence exemption
(56,000)
8,000
The principal private residence exemption is restricted to 56,000 (64,000 x 7/8).
The second part of the article will cover shares, reliefs, and the way in which gains made by limited companies are
taxed. It also contains some guidance for when you are answering a chargeable gains question in the exam, plus a
test of your understanding.
CHARGEABLE GAINS, PART 2

RELATED LINKS
Chargeable gains, part 1
PERSONAL CHARGEABLE GAINS (CONTINUED)

SHARES
The disposal of shares can create a particular problem. This is because the shares disposed of might have been
purchased at different times, and it is then difficult to identify exactly which shares have been sold. Disposals of
shares are matched with purchases in the following order:
Shares purchased on the same day as the disposal.
Shares purchased within the following 30 days.
Shares in share pool.
The share pool aggregates all purchases made up to the day of the disposal.
Example 1
Ivy has had the following transactions in the shares of Jing plc:
1 June 2007 Purchased 4,000 shares for 6,200.
30 April 2012 Purchased 2,000 shares for 8,800
15 July 2014 Purchased 500 shares for 2,500
15 July 2014 Sold 4,500 shares for 27,000
Ivys chargeable gain for 201415 is as follows:
Purchase 15 July 2014
Disposal proceeds
(27,000 x 500/4,500)
Cost
3,000
(2,500)
500
Share pool
Disposal proceeds
(27,000 x 4,000/4,500)
Cost
24,000
(10,000)
14,000
14,500
Share pool
Number
Cost
Purchase 1 June 2007
4,000
6,200
Purchase 30 April 2012
2,000
8,800
6,000
15,000
Number
Cost
(4,000)
(10,000)
2,000
5,000
Disposal 15 July 2014 (15,000 x

4,000/6,000)
Balance carried forward
The disposal is first matched with the same day purchase and then against the share pool.
The reason that disposals are matched with shares purchased within the following 30 days is to prevent a practice
known as bed and breakfasting. A person might sell shares at the close of business one day and then buy them back
at the opening of business the next day. Previously, a chargeable gain or a capital loss could thus be established
without a genuine disposal being made. The 30-day matching rule makes bed and breakfasting much more difficult,
since the subsequent purchase cannot take place within 30 days.
Example 2
Keith purchased 1,000 shares in Long plc on 5 July 2014 for 10,000. The shares have fallen in value, so he would
like to establish a capital loss. Therefore the shares were sold on 2 December 2014 for 2,000, and purchased back
on 10 December 2014 for 1,900.
Keiths transactions are caught by the 30-day matching rule. The disposal on 2 December 2014 will be matched with
the purchase on 10 December 2014, and so for 201415 he will have a chargeable gain of 100 (2,000 1,900).
With individuals it might be necessary to establish a market value figure where the shares are disposed of by way of a
gift rather than being sold.
Example 3
Maude made a gift of her entire shareholding of 10,000 1 ordinary shares in Night plc to her daughter. On the date of
the gift the shares were quoted at 5.10 5.18, with recorded bargains of 5.00, 5.15 and 5.22.
The shares in Night plc are valued at the lower of the quarter up price of 5.12 (5.10 + (5.18 5.10))
and 5.11 being the average of the days highest and lowest bargains ((5.00 + 5.22)/2).
The deemed proceeds figure is therefore 51,100 (10,000 x 5.11).
With a bonus issue there is no additional cost involved. The only thing that changes is the number of shares held.
Example 4
On 22 January 2015 Oliver sold 30,000 1 ordinary shares in Pink plc for 140,000. Oliver had purchased 40,000
shares in Pink plc on 9 February 2013 for 96,000. On 3 April 2014 Pink plc made a 1 for 2 bonus issue.
Olivers chargeable gain for 201415 is as follows:
Disposal proceeds
140,000
Cost
(48,000)
92,000
Oliver was issued with 20,000 (40,000 x 1/2) new ordinary shares as a result of the bonus issue.
The cost of the shares sold is therefore 48,000 (96,000 x 30,000/(40,000 + 20,000)).
With a rights issue the new shares are paid for, and so the cost figure will have to be adjusted.
Example 5
On 22 January 2015 Quinn sold 30,000 1 ordinary shares in Red plc for 140,000. Quinn had purchased 40,000
shares in Red plc on 9 February 2012 for 100,000. On 3 May 2014 Red plc made a 1 for 2 rights issue. Quinn took
up her allocation under the rights issue in full, paying 3.00 for each new share issued.
Quinns chargeable gain for 201415 is as follows:
Disposal proceeds
140,000
Cost
(80,000)
60,000
Quinn was issued with 20,000 (40,000 x 1/2) new ordinary shares under the rights issue at a cost of 60,000
(20,000 x 3.00).
The cost of the shares sold is therefore 80,000 (100,000 + 60,000 = 160,000 x 30,000/(40,000 + 20,000)).
A paper for paper takeover or reorganisation is not a chargeable disposal. The new shares simply take the place of
the original shares, and are deemed to have been purchased at the same time and for the same cost. Where more
than one class of new share is acquired as a result of the takeover/reorganisation, the original cost is apportioned
according to the market values of the new shares immediately after the takeover/reorganisation.
Example 6
On 28 March 2015 Rita sold her entire holding of 1 ordinary shares in Sine plc for 55,000. Rita had originally
purchased 10,000 shares in Sine plc on 5 May 2012 for 14,000. On 7 August 2013 Sine plc had a reorganisation
whereby each 1 ordinary share was exchanged for two new 1 ordinary shares and one 1 preference share.
Immediately after the reorganisation each 1 ordinary share in Sine plc was quoted at 2.50 and each 1 preference
share was quoted at 1.25.
Ritas chargeable gain for 201415 is as follows:
Disposal proceeds
Cost
55,000
(11,200)
43,800
On the reorganisation Rita received new ordinary shares valued at 50,000 (2 x 10,000 x 2.50) and
preference shares valued at 12,500 (10,000 x 1.25).
The cost attributable to the ordinary shares is 11,200 (14,000 x 50,000/(50,000 + 12,500).
Where cash is received on a takeover then the normal disposal rules will apply.
Example 7
Cherry purchased 12,000 1 ordinary shares in Alphabet Ltd on 27 July 2007 for 23,900. On 15 July 2014 Alphabet
Ltd was taken over by ABC plc, and Cherry received 6 for each of her shares in that company.
Cherrys chargeable gain for 201415 is as follows:
Disposal proceeds
(12,000 x 6)
Cost
72,000
(23,900)
48,100
Where a takeover is partly for shares and partly for cash then the part disposal rules will apply.
Example 8
Richard purchased 10,000 1 ordinary shares in Split plc on 21 July 2011 for 23,100. On 28 August 2014 Split plc
was taken over by Combined plc. For each of his 1 ordinary shares in Split plc, Richard received two 1 ordinary
shares in Combined plc plus 2.50 in cash. Immediately after the takeover Combined plcs 1 ordinary shares were
quoted at 4.00.
Richards chargeable gain for 201415 is as follows:
Disposal proceeds
(10,000 x 2.50)
25,000
Cost
(5,500)
19,500
On the takeover Richard received new ordinary shares valued at 80,000 (2 x 10,000 x 4.00) and cash of
25,000.
The cost attributable to the cash element is 5,500 (23,100 x 25,000/(25,000 + 80,000)).
ROLLOVER RELIEF
Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds of the old asset are
reinvested in a new asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset.
To qualify for rollover relief both the old asset and the new asset must be qualifying assets. The most relevant types of
qualifying asset as far as Paper F6 (UK) is concerned are:
Land and buildings
Fixed plant and machinery
Goodwill
It is not necessary for the old asset and the new asset to be in the same category.
Example 9
What are the conditions that must be met in order that rollover relief can be claimed?
The reinvestment must take place between one year before and three years after the date of disposal.
The old and new assets must both be qualifying assets and be used for business purposes.
The new asset must be brought into business use at the time that it is acquired.
Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not reinvested
reduces the amount of chargeable gain that can be rolled over. Therefore if the amount not reinvested is greater than
the chargeable gain no rollover relief is available.
Where the new asset is a depreciating asset, then the gain does not reduce the cost of the new asset but is instead
held over. A depreciating asset is an asset with a predictable life of less than 60 years. The only types of depreciating
asset that you need to be aware of are fixed plant and machinery and short leaseholds.
Example 10
Violet sold a factory on 15 August 2014 for 320,000, and this resulted in a chargeable gain of 85,000. She is
considering the following alternative ways of reinvesting the proceeds from the sale of her factory:
A freehold warehouse can be purchased for 340,000.
A freehold office building can be purchased for 275,000.
A leasehold factory on a 40-year lease can be acquired for a premium of 350,000.
A freehold factory can be purchased for 230,000.
The reinvestment will take place during November 2014.

Freehold warehouse
The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be rolled over.
The base cost of the warehouse will be 255,000 (340,000 85,000).
The sale proceeds are not fully reinvested, and so 45,000 (320,000 275,000) of the chargeable gain
cannot be rolled over.
The base cost of the office building will be 235,000 (275,000 (85,000 45,000)).
Leasehold factory
The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be held over.
The factory is a depreciating asset, and so the base cost of the factory is not adjusted.
The chargeable gain is held over until the earlier of November 2024 (10 years from the date of acquisition),
the date that the factory is sold, or the date that it ceases to be used in the business.
Freehold factory
No rollover relief is available as the amount not reinvested of 90,000 (320,000 230,000) exceeds the
chargeable gain.
The base cost of the factory will remain at 230,000.
When the asset disposed of was not used entirely for business purposes then the proportion of the chargeable gain
relating to the non-business use does not qualify for rollover relief.
Example 11
Willow sold a freehold factory on 8 November 2014 for 146,000, and this resulted in a chargeable gain of 74,000.
The factory was purchased on 15 January 2012. 75% of the factory had been used for business purposes by Willow
as a sole trader, but the other 25% was never used for business purposes. Willow purchased a new freehold factory
on 10 November 2014 for 156,000.
Willows chargeable gain for 201415 is as follows:
Gain
74,000
Rollover relief (74,000 18,500)
(55,500)
18,500
The proportion of the chargeable gain relating to non-business use is 18,500 (74,000 x 25%), and this
amount does not qualify for rollover relief.
The sale proceeds are fully reinvested, and so the balance of the gain can be rolled over.
The base cost of the new factory is 100,500 (156,000 55,500).
HOLDOVER RELIEF
Holdover relief allows a chargeable gain to be deferred (held over) when a gift is made of a qualifying business asset.
The deferral is achieved by deducting the chargeable gain of the donor who has made the gift from the base cost of
the donee who has received the gift.
Holdover relief is also available when a sale is made at less than market value (ie a partial gift). In this case there will
be an immediate charge to capital gains tax (CGT) where the sale proceeds exceed the original cost of the asset.
For Paper F6 (UK) the most relevant types of qualifying business asset are as follows:
Assets used for trade purposes by a sole trader.
Shares in a personal company (where the individual has at least a 5% shareholding).
Shares in unquoted trading companies.
Remember that the market value of an asset is used rather than the actual proceeds when a gift is made between
family members since they will be connected persons.
Example 12
On 15 August 2014 Xia sold 10,000 1 ordinary shares in Yukon Ltd, an unquoted trading company, to her daughter
for 75,000. The market value of the shares on that date was 110,000. The shareholding was purchased on 10 July
2013 for 38,000. Xia and her daughter have elected to hold over the gain as a gift of a business asset.
Xias chargeable gain for 201415 is as follows:
Deemed proceeds
110,000
Cost
(38,000)
72,000
Holdover relief
(72,000 37,000)
(35,000)
37,000
Xia and her daughter are connected persons, and therefore the market value of the shares sold is used.
The consideration paid for the shares exceeds the allowable cost by 37,000 (75,000 - 38,000). This amount
is immediately chargeable to CGT.
The daughters base cost will be 75,000 (110,000 35,000).
If a gift is going to result in an immediate chargeable gain, it might be possible to restrict the gain to the amount of the
annual exempt amount or any available capital losses.
Example 13
Bertie has a holding of 6,000 1 ordinary shares in Gift Ltd, an unquoted trading company, which he had originally
purchased for 3.50 per share. The current market value of the shares is 8.50, but Bertie is going to sell some of the
holding to his son at 6.00 per share during 201415. Bertie and his son will elect to hold over any gain as a gift of a
business asset.
The consideration paid for each share will exceed the allowable cost by 2.50 (6.00 3.50), and this amount
will be immediately chargeable to CGT.
The annual exempt amount for 201415 is 11,000, so Bertie can sell 4,400 shares (11,000/2.50) to his son
without this resulting in any CGT liability.
Where entrepreneurs relief is available, it may not be beneficial to claim holdover relief.
Example 14
On 10 April 2014 Pia made a gift of her entire holding of 60,000 1 ordinary shares (a 60% shareholding) in Zuper
Ltd, an unquoted trading company, to her daughter, Rita. Pia had purchased the shares on 1 June 2004 for 60,000,
and was an employee of the company from that date until 10 April 2014. The market value of the shares on 10 April
2014 was 260,000.
Rita sold the 60,000 1 ordinary shares in Zuper Ltd on 28 March 2015 for 270,000. She has never been an
employee or a director of the company.
Both Pia and Rita are higher rate taxpayers, and neither of them made any other chargeable gains during the tax year
201415.
No election for holdover relief
Pias CGT liability for 201415 is as follows:
Deemed proceeds
260,000
Cost
(60,000)
200,000
(11,000)
189,000
Capital gains tax:
189,000 at 10%
18,900
Rita will not have a CGT liability for 201415 as her chargeable gain of 10,000 (270,000 260,000) is less
than the annual exempt amount.
Election for holdover relief

Ritas CGT liability for 201415 is as follows:
Disposal proceeds
270,000
Cost
260,000
Held over again
200,000
(60,000)
210,000
(11,000)
199,000
Capital gains tax:
199,000 at 28%
55,720
Ritas disposal does not qualify for entrepreneurs relief as she is not an officer or an employee of Zuper Ltd,
and she has not met the qualifying conditions for one year prior to the date of disposal.
A claim for holdover relief will result in an overall CGT liability of 55,720 compared to 18,900 if no claim is
made. A claim is not therefore beneficial.
Where the disposal consists of shares in a personal company, holdover relief will be restricted if the company has
chargeable non-business assets.
Example 15
On 5 October 2014 Zia made a gift of her entire holding of 20,000 1 ordinary shares in Apple 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 2012 for 140,000. On 5 October 2014 the market value of Apple Ltds chargeable assets
was 150,000, of which 120,000 was in respect of chargeable business assets. Zia and her daughter have elected
to hold over the gain as a gift of a business asset.
Zias chargeable gain for 201415 is as follows:
Deemed proceeds
Cost
200,000
(140,000)
60,000
Holdover relief
(48,000)
12,000
Holdover relief is restricted to 48,000 (60,000 x 120,000/150,000), being the proportion of chargeable
assets to chargeable business assets.
IN THE EXAM
A Section B question may ask you to just calculate a persons chargeable gains or taxable gains rather than
their CGT liability. If this is the case then do not waste time calculating the liability, as there will be no marks for
doing so.
Make sure you identify any exempt disposals so that you do not waste time performing unnecessary
calculations.
A Section B question may tell you that a certain relief is not available for a particular disposal. Make a careful
note of such guidance or you will waste time and might also lose marks as well.
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 persons basic rate tax band is available. Remember that a taxable
income figure is after the personal allowance has been deducted.
Example 16
On 13 July 2014 Dear sold 1,000 of her 3,000 1 ordinary shares in XYZ plc for 6,600. She died on 5 April 2015,
and the remaining 2,000 shares were inherited by her daughter. On that date these shares were valued at 15,600.
The holding of 3,000 shares had been purchased on 20 June 2007 for 4,800.
There is no CGT liability on the sale of the XYZ plc shares as the gain of 5,000 (6,600 (4,800 x
1,000/3,000)) is less than the annual exempt amount (note that it should be obvious that where sales proceeds
are just 6,600 then there is no CGT liability).
The transfer of the XYZ plc shares on Dears death is an exempt disposal.
CORPORATE CHARGEABLE GAINS

OVERVIEW
You have seen how individuals are subject to CGT. Although there are a lot of similarities in the way in which the
chargeable gains of a limited company are taxed, there are also some very important differences:
A limited companys chargeable gains form part of the taxable total profits. They are not taxed separately.
The annual exempt amount is not available.
Indexation allowance is given when calculating chargeable gains for a limited company.
Limited companies can only benefit from rollover relief, and this is applied after taking account of any
indexation allowance. They cannot benefit from entrepreneurs relief or holdover relief for the gift of business
assets.
BASIC COMPUTATION
The basic computation for a limited company is virtually the same as for an individual. However, you may also be
expected to calculate the indexation allowance:
The indexation allowance is given from the month of acquisition up to the month of disposal.
The indexation factor is normally rounded to three decimal places.
The indexation allowance cannot be used to create or increase a capital loss.
Because the indexation allowance is not available in respect of the incidental costs of disposal, it is
necessary to show these separately in the computation.
Example 17
Delta Ltd sold a factory on 15 February 2015 for 400,000. The factory was purchased on 24 October 1995 for
164,000, and was extended at a cost of 37,000 during March 1997.
Delta Ltd incurred legal fees of 3,600 in connection with the purchase of the factory, and legal fees of 6,200 in
connection with the disposal. Retail price indices (RPIs) are as follows:
October 1995
149.8
March 1997
155.4
February 2015
260.0
Disposal proceeds
Incidental costs of disposal
400,000
(6,200)
393,800
Cost
Incidental costs of acquisition
164,000
3,600
167,600
37,000
(204,600)
189,200
Indexation
Cost 167,600 x 0.736
123,354
Enhancement
37,000 x 0.673
24,901
(148,255)
40,945
The indexation factor for the cost is 0.736 ((260.0 149.8)/149.8), and for the enhancement expenditure it is
0.673 ((260.0 155.4)/155.4).
When a limited company has a capital loss, it is first set off against any chargeable gains arising in the same
accounting period. Any remaining capital loss is then carried forward and set off against the first available chargeable
gains of future accounting periods.
Although chargeable gains are included as part of a companys taxable total profits, capital losses are never set off
against other income.
Example 18
Even Ltd has the following results:
Trading profit/(loss)
Property business profit
Year ended
31 March
2014
Year ended
31 March
2015
56,000
(17,000)
4,000
10,000
(8,000)
85,000
Chargeable gain/
(capital loss)
The corporation tax liability of Even Ltd for the years ended 31 March 2014 and 2015 is as follows:
Year ended
31 March
2014
Year ended
31 March
2015
56,000
4,000
10,000
_____
77,000
60,000
87,000
Loss relief
_____
(17,000)
Taxable total profits
60,000
70,000
Trading profit
Chargeable gain
Corporation tax at 20%
Year ended
31 March
2014
Year ended
31 March
2015
12,000
14,000
The capital loss for the year ended 31 March 2014 is carried forward, and so the chargeable gain for the
year ended 31 March 2015 is 77,000 (85,000 8,000).
SHARES
For limited companies, disposals of shares are matched with purchases in the following order:
Shares purchased on the same day as the disposal.
Shares purchased during the nine days prior to the disposal.
Shares in the 1985 pool.
When calculating indexation allowances for the 1985 pool, the indexation fraction is not rounded to three decimal
places.
Example 19
On 15 June 2014 Fair Ltd sold 70,000 1 ordinary shares in Gong plc for 380,000. Fair Ltd had originally purchased
40,000 shares in Gong plc on 10 June 1995 for 110,000, and purchased a further 60,000 shares on 20 August 1999
for 180,000. Retail price indices (RPIs) are as follows:
June 1995
149.8
August 1999
165.5
June 2014
256.0
Chargeable gain
Disposal proceeds
380,000
Indexed cost
(326,489)
53,511
1985 Pool
Purchase June 1995
Number
Index cost
40,000
110,000
Indexation to
August 1999
110,000 x
(165.5 149.8)/149.8
11,529
121,529
Purchase
August 1999
60,000
180,000
100,000
301,529
Indexation to
June 2014
301,529 x
(256.0 165.5)/165.5
164,884
Number
Index cost
466,413
Disposal June 2014

466,413 x 70,000/
100,000
Balance carried forward
(70,000)
(326,489)
30,000
139,924
IN THE EXAM
Remember that limited companies are not entitled to the annual exempt amount.
Remember that chargeable gains are part of a limited companys total taxable profits. They are not taxed
separately.
When dealing with shares it is important to look carefully at the dates to see if same day or nine-day
matching applies.
GROUPS
RELATED LINKS
ASSOCIATED COMPANIES
A question may require you to identify the number of associated companies in a group, or it may tell you how many
associated companies there are and then ask you to justify this number. Unless answering a Section A multiplechoice question, make sure you explain why companies are both included and excluded when answering this type of
question.
The lower and upper corporation tax limits are divided by the number of associated companies, thus affecting the rate
of corporation tax. Do not forget to include the parent company in the number of associated companies.
Example 1
Music plc has the following shareholdings:
Shareholding
Alto Ltd
25%
Bass Ltd
60%
Cello Ltd
100%
Drum Ltd
100%
Echo Inc
100%
Flute Ltd
100%
Music plcs shareholding in Cello Ltd was disposed of on 31 December 2014, and the shareholding in Drum Ltd was
acquired on 1 January 2015. The other shareholdings were all held throughout the year ended 31 March 2015.
Echo Inc. is resident overseas. The other companies are all resident in the United Kingdom.
All the companies are trading companies except for Flute Ltd which is dormant.
Alto Ltd and Flute Ltd are not associated companies as Music Ltd has a shareholding of less than 50% in
Alto Ltd, and Flute Ltd is dormant.
Bass Ltd, Cello Ltd, Drum Ltd and Echo Inc. are associated companies as Music Ltd has a shareholding of
over 50% in each case, and they are all trading companies.
For associated company purposes, it does not matter where a company is resident. Echo Inc. is therefore
included despite being resident overseas.
Companies that are only associated for part of an accounting period, such as Cello Ltd and Drum Ltd, count
as associated companies for the whole of the period.
Including Music Ltd there are five associated companies, so Music Ltds lower and upper corporation tax
limits are reduced to 60,000 (300,000/5) and 300,000 (1,500,000/5) respectively.
DEFINITION OF A 75% GROUP

There are two types of group relationship:
The 75% group relationship that is necessary to claim group relief.
The 75% group relationship that is necessary for chargeable gains purposes.
The definition of a 75% subsidiary company for chargeable gains purposes is looser than that for group relief
purposes. This is because the required 75% shareholding need only be met at each level in the group structure.
Example 2
Fruit Ltd is the parent company for a group of companies. The group structure is as follows:
Fruit Ltd
|
100%
|
Apple Ltd
|
80%
|
Banana Ltd
|
80%
|
Cherry Ltd
For the year ended 31 March 2015 Fruit Ltd has an unrelieved trading loss.
Group relief
For group relief purposes, one company must be a 75% subsidiary of the other, or both companies must be
75% subsidiaries of a third company.
The parent company must have an effective interest of at least 75% of the subsidiarys ordinary share
capital.
The parent company must also have the right to receive at least 75% of the subsidiarys distributable profits
and net assets on a winding up.
Fruit Ltd will therefore be able to group relief its trading loss to Apple Ltd and/or Banana Ltd.
Fruit Ltd does not have the required 75% shareholding in Cherry Ltd (100% x 80% x 80% = 64%).
Chargeable gains
Companies form a chargeable gains group if at each level in the group structure there is a 75%
shareholding.
However, Fruit Ltd, the parent company, must have an effective interest of over 50% in each subsidiary
company.
Fruit Ltd, Apple Ltd, Banana Ltd and Cherry Ltd therefore form a chargeable gains group.
GROUP RELIEF
Remember that group relief is not restricted according to the percentage shareholding. Therefore, if a parent company
has a trading loss then 100% of that loss can be surrendered to a 75% subsidiary company, and if a 75% subsidiary
company has a trading loss then 100% of that loss can be claimed as group relief by the parent company.
Unlike other loss relief claims, the claimant company claims group relief against its taxable total profits after the
deduction of any qualifying charitable donations.
Example 3
For the year ended 31 March 2015 Ballpoint Ltd has a trading profit of 510,000, a chargeable gain of 32,000, and
paid qualifying charitable donations of 2,000.
Ballpoint Ltd has a 100% subsidiary company, and for the year ended 31 March 2015 claimed group relief of 40,000
from this company.
During the year ended 31 March 2015 Ballpoint Ltd received dividends of 27,000 from an unconnected company,
and dividends of 18,000 from its 100% subsidiary company. Both figures are the actual cash amounts received.
The corporation tax liability of Ballpoint Ltd for the year ended 31 March 2015 is as follows:
Trading profit
Chargeable gain
510,000
32,000
542,000
Qualifying charitable donations
(2,000)
540,000
Group relief
(40,000)
500,000
Franked investment income (27,000 x 100/90)
30,000
Augmented profits
530,000
Corporation tax at (500,000 at 21%)
105,000
Marginal relief
1/400 (750,000 530,000)
x 500,000/530,000
(519)

104,481
Ballpoint Ltd has one associated company, so the upper corporation tax limit is reduced to 750,000
(1,500,000/2).
Group dividends are not included as franked investment income.
When the accounting periods of the claimant company and the surrendering company are not coterminous, then
group relief may be restricted. There may also be a restriction where an accounting period is less than 12 months
long.
Example 4
Sofa Ltd owns 100% of the ordinary share capital of both Settee Ltd and Futon Ltd. For the year ended 31 March
2015 Sofa Ltd had a trading loss of 200,000.
For the year ended 30 June 2014 Settee Ltd had taxable total profits of 240,000, and for the year ended 30 June
2015 will have taxable total profits of 90,000.
Futon Ltd commenced trading on 1 January 2015, and for the three-month period ended 31 March 2015 had taxable
total profits of 60,000.
The accounting periods of Settee Ltd and Sofa Ltd are not coterminous. Therefore, Settee Ltds taxable total
profits and Sofa Ltds trading loss must be apportioned on a time basis.
For the year ended 30 June 2014 group relief is restricted to a maximum of 50,000, being the lower of
60,000 (240,000 x 3/12) and 50,000 (200,000 x 3/12).
For the year ended 30 June 2015 group relief is restricted to a maximum of 67,500, being the lower of
67,500 (90,000 x 9/12) and 150,000 (200,000 x 9/12).
Futon Ltd did not commence trading until 1 January 2015, so group relief is restricted to a maximum of
50,000, being the lower of 60,000 and 50,000 (200,000 x 3/12).
As well as trading losses, it is possible to surrender unrelieved property business losses and qualifying charitable
donations. Only current year losses can be group relieved, so no relief is available for trading losses brought forward
from previous years.
In working out the taxable total profits against which group relief can be claimed, the claimant company is assumed to
use any current year losses that it has, even if such a loss relief claim is not actually made.
Example 5
Lae Ltd owns 100% of the ordinary share capital of Mon Ltd. The results of each company for the year ended 31
March 2015 are as follows:
Lae Ltd
Mon Ltd
Trading loss
(18,100)
(11,200)
Property business profit/(loss)
(26,700)
60,900
Loan interest receivable

Capital loss
Qualifying charitable donations
Lae Ltd
Mon Ltd
1,600
3,300
(19,200)
(4,800)
(3,200)
All the loan interest receivable is in respect of loans that were made for non-trading purposes.
Maximum claim by Mon Ltd
The group relief claim by Mon Ltd is calculated after deducting qualifying charitable donations, and on the
assumption that a claim is made for the current year trading loss.
The maximum amount of group relief that can be claimed by Mon Ltd is therefore 49,800 (60,900 + 3,300
3,200 11,200).
Maximum surrender by Lae Ltd
The property business loss and the qualifying charitable donations can be surrendered to the extent that
they are unrelieved, so 29,900 of these can be surrendered (26,700 + 4,800 1,600).
It is not possible to surrender capital losses as part of a group relief claim.
The maximum potential surrender by Lae Ltd is 48,000 (18,100 + 29,900).
The maximum group relief claim is therefore 48,000.
The most important factor to be taken into account when considering group relief claims, is the rate of corporation tax
payable by the claimant companies. Group relief should therefore be surrendered as follows:
Initially to companies subject to corporation tax at the marginal rate of 21.25%.
Surrender should then be to those companies subject to the main rate of corporation tax of 21%.
The amount surrendered should be sufficient to bring the claimant companys augmented profits down to the
small profits rate limit.
Any remaining loss should be surrendered to those companies subject to corporation tax at the small profits
rate of 20%.
The loss making company may of course be able to relieve the loss itself. In this case consideration will also have to
be given to the timing of the relief obtained (an earlier claim is generally preferable), and the extent to which relief for
qualifying charitable donations will be lost.
Remember that unlike other loss relief claims, it is possible to specify the amount of group relief that is to be
surrendered. The surrendering company can therefore restrict group relief so that it retains sufficient losses in order to
bring its augmented profits down to the small profits rate limit.
Example 6
Colour Ltd owns 100% of the ordinary share capital of both Orange Ltd and Pink Ltd. The results of each company for
the year ended 31 March 2015 are as follows:
Trading profit/(loss)
Colour Ltd
Orange Ltd
Pink Ltd
(135,000)
650,000
130,000
120,000
Colour Ltd had franked investment income of 10,000.

The corporation tax liability of each of the group companies for the year ended 31 March 2015 is as follows:
Trading profit
Colour Ltd
Orange
Ltd
Pink Ltd
650,000
130,000
120,000
Loss relief
(30,000)
Group relief
_______
(75,000)
(30,000)
90,000
575,000
100,000
Franked investment income
10,000
100,000
575,000
100,000
Augmented profits
Corporation tax
at 20%
18,000
Corporation tax
at 21%
_______
20,000
120,750
_______
There are three associated companies in the group, so the lower and upper corporation tax limits are
reduced to 100,000 (300,000/3) and 500,000 (1,500,000/3) respectively.
Colour Ltds trading loss has been relieved so as to reduce both its own and Pink Ltds augmented profits
down to the lower limit. Note that it is the augmented profits that are relevant, and not the taxable total profits.
The balance of the loss has been surrendered to Orange Ltd as this saves corporation tax at the main rate of
21%.
CHARGEABLE ASSETS
It is important to remember that capital losses cannot be group relieved.
Example 7
Why would it be beneficial for all of the eligible companies in a chargeable gains group to transfer assets to one
company prior to them being disposed of outside of the group?
The transfers will not give rise to any chargeable gain or capital loss.
Arranging that wherever possible, chargeable gains and capital losses arise in the same company will result
in the optimum use being made of capital losses.
These can either be offset against chargeable gains of the same period, or carried forward against future
chargeable gains.
However, an asset does not actually have to be moved between companies in order to match chargeable gains and
capital losses. It is possible for two companies in a chargeable gains group to make a joint election so that matching
is done on a notional basis.
The election has to be made within two years of the end of the accounting period in which the asset is disposed of
outside the group, and will specify which company in the group is treated for tax purposes as making the disposal.
The advantages of the election compared to actually transferring an asset between group companies (prior to
disposal outside of the group) are as follows:
The two-year time limit for making an election means that tax planning regarding the set off of capital losses
and chargeable gains can be done retrospectively.
The two-year time limit also means that it is possible for chargeable gains to be treated as being made by
the company in the group with the lowest rate of corporation tax.
The administrative and legal costs involved with an actual transfer of an asset can be avoided.
Example 8
Rod Ltd owns 100% of the ordinary share capital of Stick Ltd. For the year ended 31 March 2015 Rod Ltd will pay
corporation tax at the main rate of 21% while Stick Ltd will pay corporation tax at the small profits rate of 20%.
On 15 August 2014 Rod Ltd sold an office building, and this resulted in a chargeable gain of 120,000. On 20
February 2015 Stick Ltd sold a factory and this resulted in a capital loss of 35,000.
As at 1 April 2014 Stick Ltd had unused capital losses of 40,000.
Rod Ltd and Stick Ltd must make a joint election by 31 March 2017, being two years after the end of the
accounting period in which the disposal outside of the group occurred.
Stick Ltds otherwise unused capital loss of 35,000 and brought forward capital losses of 40,000 can be
set against the chargeable gain of 120,000.
It is beneficial for the balance of the gain of 45,000 (120,000 35,000 40,000) to arise in Stick Ltd as this
company only pays corporation at the small profits rate of 20%.
CONCLUSION
With groups it is important that you know the group relationship that must exist for reliefs to be available. Where a
Section B question involves a group you can expect to spend more time than normal planning your answer. However,
working through the examples in this article will prepare you for what could be set in the exam.
INHERITANCE TAX, PART 1
RELATED LINKS
Read part 2
The Paper F6 (UK) syllabus requires a basic understanding of inheritance tax (IHT), and this two-part article
covers those aspects that you need to know. It is relevant to candidates sitting Paper F6 (UK) in an exam in
the period 1 April 2015 to 30 June 2016, and is based on tax legislation as it applies to the tax year 201415
(Finance Act 2014).
The scope of inheritance tax
IHT is paid on the value of a persons estate when they die, but it also applies to certain lifetime transfers of assets. If
IHT did not apply to lifetime transfers it would be very easy for a person to avoid tax by giving away all of their assets
just before they died.
As far as Paper F6 (UK) is concerned the terms transfer and gift can be taken to mean the same thing. The person
making a transfer is known as the donor, whilst the person receiving the transfer is known as the donee.
Unlike capital gains tax where, for example, a principal private residence is exempt, all of a persons estate is
generally chargeable to IHT.
A person who is domiciled in the UK is liable to IHT in respect of their worldwide assets. As far as Paper F6 (UK) is
concerned people will always be domiciled in the UK.
As far as Paper F6 (UK) is concerned, 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.
TRANSFERS OF VALUE
During a persons lifetime, IHT can only arise if a transfer of value is made. A transfer of value is defined as any
gratuitous disposition made by a person that results in a diminution in value of that persons estate. There are two
important terms in this definition:
Gratuitous: Poor business deals, for example, are not normally transfers of value because there is no
gratuitous intent.
Diminution in value: Normally there will be no difference between the diminution in value of the donors
estate and the increase in value of the donees estate. However, in some cases it may be necessary to compare
the value of the donors estate before the transfer, and the value after the transfer in order to compute the
diminution in value. This will usually be the case where unquoted shares are concerned. Shares forming part of
a controlling shareholding will be valued higher than shares forming part of a minority shareholding.
Example 1
On 4 May 2014 Daniel made a gift to his son of 15,000 1 ordinary shares in ABC Ltd, an unquoted investment
company. Before the transfer Daniel owned 60,000 shares out of ABC Ltds issued share capital of 100,000 1
ordinary shares. ABC Ltds shares are worth 8 each for a holding of 15%, 10 each for a holding of 45%, and 18
each for a holding of 60%.
Although Daniels son received a 15% shareholding valued at 120,000 (15,000 x 8), Daniels transfer of value is
calculated as follows:
Value of shares held before the transfer
1,080,000

60,000 x 18
Value of shares held after the transfer
45,000 x 10
450,000
Value transferred
630,000
By contrast, for capital gains tax purposes the valuation will be based on the market value of the shares gifted, which
is 120,000.
As far as Paper F6 (UK) is concerned a transfer of value will always be a gift of assets. A gift made during a persons
lifetime may be either potentially exempt or chargeable.
POTENTIALLY EXEMPT TRANSFERS

Any transfer that is made to another individual is a potentially exempt transfer (PET). A PET only becomes chargeable
if the donor dies within seven years of making the gift. If the donor survives for seven years then the PET becomes
exempt and can be completely ignored. Hence such a transfer has the potential to be exempt.
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 fixed at
the time that the gift is made.
Example 2
Sophie died on 23 January 2015. She had made the following lifetime gifts:
8 November 2007 A gift of 450,000 to her son.
12 August 2012 A gift of a house valued at 610,000 to her daughter. By 23 January 2015 the value of the
house had increased to 655,000.
The gift to Sophies son on 8 November 2007 is a PET for 450,000. As it was made more than seven years before
the date of Sophies death it is exempt from IHT.
The gift to Sophies daughter on 12 August 2012 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 will be charged to IHT
based on the rates and allowances for 201415.
CHARGEABLE LIFETIME TRANSFERS

Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).
There is no legal definition of what a trust is, but essentially a trust arises where a person transfers assets to people
(the trustees) to hold for the benefit of other people (the beneficiaries). 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. 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 fixed 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.
Example 3
Lim died on 4 December 2014. She had made the following lifetime gifts:
2 November 2007 A gift of 420,000 to a trust.
21 August 2012 A gift of a house valued at 615,000 to a trust. By 4 December 2014 the value of the
house had increased to 650,000.
The gift to the trust on 2 November 2007 is a CLT for 420,000, and will be immediately charged to IHT based on the
rates and allowances for 200708. There will be no additional tax liability as the gift was made more than seven years
before the date of Lims death.
The gift to the trust on 21 August 2012 is a CLT for 615,000, and will be immediately charged to IHT based on the
rates and allowances for 201213. Lim has died within seven years of making the gift so an additional tax liability may
arise based on the rates and allowances for 201415.
RATES OF TAX
IHT is payable once a persons cumulative chargeable transfers over a seven year period exceed a nil rate band. For
the tax year 201415 the nil rate band is 325,000, and for previous years it has been as follows:
200506
275,000
200607
285,000
200708
300,000
200809
312,000
200910
325,000
201011
325,000
201112
325,000
201213
325,000
201314
325,000
The rate of IHT payable as a result of a persons death is 40%. This is the rate that is charged on a persons estate at
death, on PETs that become chargeable as a result of death within seven years, and is also the rate used to see if
any additional tax is 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 paper for the financial
year 1 April 2015 to 31 March 2016 is as follows:
1 325,000
Nil
Excess Death rate

Lifetime rate
40%
20%
Where nil rate bands are required for previous years then these will be given to you within the question.
Example 4
Sophie died on 26 May 2014 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%
275,000 at 40%
0
110,000
110,000
Example 5
Ming died on 22 April 2014 leaving an estate valued at 300,000.
On 30 April 2012 she had made a gift of 240,000 to her son. This figure is after deducting available exemptions.
IHT liabilities are as follows:
Lifetime transfer 30 April 2012
Potentially exempt transfer
The PET is initially ignored.
Additional liability arising on death 30 April 2012
240,000

240,000
The PET utilises 240,000 of the nil rate band of 325,000 for 201415. No IHT is payable.
Death estate
Chargeable estate
300,000
IHT liability
85,000 at nil%
215,000 at 40%
0
86,000
86,000
Only 85,000 (325,000 240,000) of the nil rate band is available against the death estate.
Example 6
Joe died on 13 October 2014 leaving an estate valued at 750,000.
On 12 November 2011 he had made a gift of 400,000 to a trust. This figure is after deducting available exemptions.
The trust paid the IHT arising from the gift.
The nil rate band for the tax year 201112 is 325,000.
Lifetime transfer 12 November 2011
Chargeable transfer
IHT liability
325,000 at nil%
75,000 at 20%
400,000
0
15,000
15,000
The gift to a trust is a CLT. The lifetime IHT liability is calculated using the nil rate band for 201112.
Additional liability arising on death 12 November 2011
Chargeable transfer
400,000
IHT liability
325,000 at nil%
75,000 at 40%
0
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 201415.
Death estate
Chargeable estate
750,000
IHT liability 750,000 at 40%
300,000
The CLT made on 12 November 2011 has fully utilised the nil rate band of 325,000.
TAPER RELIEF
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 five years
40
Over five 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 paper.
Example 7
Winnie died on 9 January 2015. She had made the following lifetime gifts:
2 November 2008 A gift of 460,000 to a trust. The trust paid the IHT arising from this gift.
16 August 2011 A gift of 320,000 to her son.
These figures are after deducting available exemptions.

The nil rate band for the tax year 2008-09 is 312,000, and for the tax year 201112 it is 325,000.
Lifetime transfers
2 November 2008
Chargeable transfer
IHT liability
312,000 at nil%
148,000 at 20%
460,000
0
29,600
29,600
16 August 2011
320,000
Additional liabilities arising on

death
2 November 2008
Chargeable transfer
IHT liability
325,000 at nil%
135,000 at 40%
460,000
0
54,000
Lifetime transfers
Taper relief reduction 80%
(43,200)
10,800
IHT already paid
(29,600)
The taper relief reduction is 80% as the gift to the trust was made between six and seven years of the date of
Winnies death.
Although the final IHT liability of 10,800 is lower than the amount of IHT already paid of 29,600, a refund is
never made.
16 August 2011
320,000
128,000
(25,600)
102,400
The taper relief reduction is 20% as the gift to the son was made between three and four years of the date of
Winnies death.
TRANSFER OF A SPOUSES UNUSED NIL RATE BAND

Any unused nil rate band on a persons 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 first 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 first spouse died. Even though the first 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.
Example 8
Nun died on 29 March 2015.
None of her husbands nil rate band was used when he died on 5 May 2004.
When calculating the IHT on Nuns estate a nil rate band of 650,000 (325,000 + 325,000) can be used, as a claim
can be made to transfer 100% of her husbands nil rate band.
Example 9
Win died on 24 February 2015 leaving an estate valued at 800,000. Only 60% of his wifes nil rate band was used
when she died on 12 May 2005.
On 10 May 2012 Win had made a gift of 200,000 to his son. This figure is after deducting available exemptions.
The nil rate band for the tax year 201213 is 325,000
Lifetime transfer 10 May 2012
200,000
Additional liability arising on death 10 May 2012
200,000
No IHT is payable as the transfer is within the nil rate band.
Death estate
Chargeable estate
800,000
IHT liability
255,000 at nil%
545,000 at 40%
0
218,000
218,000
Wins personal representatives can claim the wifes unused nil rate band of 130,000 (325,000 x 40%).
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 2012.
EXEMPTIONS
Transfers to spouses
Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies both to lifetime gifts and
on death.
Example 10
Sophie died on 25 June 2014.
On 12 April 2010 she had made a gift of 400,000 to her husband.
Her estate on 25 June 2014 was valued at 900,000. Under the terms of her will Sophie divided her estate equally
between her husband and her daughter.
Lifetime transfers
The gift on 12 April 2010 is exempt as it is to Sophies husband.

Death estate
Value of estate
Spouse exemption (900,000/2)
900,000
(450,000)
Chargeable estate
450,000
IHT liability
325,000 at nil%
125,000 at 40%
0
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. If a gift is more than 250 then the small gifts exemption
cannot be used, although it is possible to use the exemption any number of times by making gifts to different donees.
Example 11
During the tax year 201415 Peter made the following gifts:
On 18 May 2014 he made a gift of 240 to his son.
On 5 October 2014 he made a gift of 400 to his daughter.
On 20 March 2015 he made a gift of 100 to a friend.
The gifts on 18 May 2014 and 20 March 2015 are both exempt as they do not exceed 250. The gift on 5 October
2014 for 400 does not qualify for the small gifts exemption as it is more than 250. It will instead be covered by
Peters annual exemption for 201415 (see the next section).
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 year. However, the exemption for the current year must be
used first, 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).
Example 12
Simone made the following gifts:
On 10 May 2013 she made a gift of 1,400 to her son.
On 25 October 2014 she made a gift of 4,000 to her daughter.
The gift on 10 May 2013 utilises 1,400 of Simones annual exemption for 201314. The balance of 1,600 (3,000
1,400) is carried forward to 201415.
The gift on 25 October 2014 utilises all of the 3,000 annual exemption for 201415 and 1,000 (4,000 3,000) of the
balance brought forward of 1,600. As the annual exemption for 201415 must be used first, 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 where they
do not become chargeable.
Example 13
Nigel made the following gifts:
On 17 May 2013 he made a gift of 60,000 to his son.
On 25 June 2014 he made a gift of 100,000 to a trust.
The gift on 17 May 2013 utilises Nigels annual exemptions for 201314 and 201213. The value of the PET is
54,000 (60,000 3,000 3,000).
The gift on 25 June 2014 utilises Nigels annual exemption for 201415. The value of the CLT is 97,000 (100,000
3,000). No lifetime IHT liability is payable as this is within the nil rate band for 201415.
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 persons normal
expenditure, is made out of income, and with that person being left with sufficient 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-off gift of 70,000 made by the same
person would probably not be, and would instead be a PET or a CLT.
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.
Example 14
On 19 September 2014 William made a gift of 20,000 to his daughter when she got married. He has not made any
other gifts since 6 April 2013.
The gift is a PET, but 5,000 will be exempt as a gift in consideration of marriage and Williams annual exemptions for
201415 and 201314 are also available. The value of the PET is therefore 9,000 (20,000 5,000 3,000 3,000).
The second part of the article will cover the more difficult aspects of lifetime transfers, the calculation of the value of a
persons estate, and the payment of inheritance tax. It also includes an example of an exam standard Section B
question, plus a test of your understanding.
INHERITANCE TAX, PART 2
RELATED LINKS
Read part 1
Inheritance tax: detailed example
The Paper F6 (UK) syllabus requires a basic understanding of inheritance tax (IHT), and this two-part article
covers those aspects that you need to know. It is relevant to candidates sitting Paper F6 (UK) in an exam in
the period 1 April 2015 to 30 June 2016, and is based on tax legislation as it applies to the tax year 201415
(Finance Act 2014).
The first part of the article covered the scope of IHT, transfers of value, rates of tax and exemptions.
TAX LIABILITY ON LIFETIME TRANSFERS

When calculating the tax liability on lifetime transfers there are three aspects that are a bit more difficult to
understand, and can therefore cause problems for students.
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 has been covered in previous examples. 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.
Example 1
Ali died on 3 March 2015. He had made the following lifetime gifts:
1 August 2012 A gift of 360,000 to his son
21 November 2013 A gift of 240,000 to a trust

The nil rate band for the tax years 201213 and 201314 is 325,000.
Lifetime transfers
1 August 2012
360,000
21 November 2013
Chargeable transfer
240,000
No lifetime IHT is payable as the CLT is less than the nil rate band for 201314.
Additional liabilities arising on death
1 August 2012
360,000
IHT liability 325,000 at nil%

35,000 at 40%
0
14,000
14,000
21 November 2013
Chargeable transfer
240,000

IHT already paid
96,000
(Nil)
96,000
The nil rate band for 201415 of 325,000 has been fully utilised by the PET made on 1 August 2012.
Grossing up
In all the examples so far concerning a CLT the trust (the donee) has paid any lifetime IHT that has arisen. The loss to
the donors estate is therefore just the amount of the gift. However, the donor is primarily responsible for any lifetime
IHT that arises on a CLT. In this case the loss to the donors estate is both the amount of the gift and the related tax
liability. To correctly calculate the amount of IHT payable it is therefore necessary to gross up the net gift.
Any available annual exemptions are deducted prior to grossing up, and it is only necessary to gross up the amount in
excess of the nil rate band.
Example 2
On 17 June 2011 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 2010.
The lifetime IHT liability is calculated as follows:
Value transferred
Annual exemptions
201112
201011
406,000
3,000
3,000
(6,000)
Net chargeable transfer
400,000
IHT liability
325,000 at nil%
75,000 x 20/80
Gross chargeable transfer
0
18,750
418,750
The amount of lifetime IHT payable by Annie is 18,750. This figure can be checked by calculating the IHT
on the gross chargeable transfer of 418,750:
IHT liability
325,000 at nil%
93,750 at 20%
0
18,750
18,750
Once the gross chargeable transfer has been calculated then this figure 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.
Example 3
Continuing with example 2, assuming that Annie died on 12 March 2015.
Additional liability arising on death
17 June 2011

418,750
IHT liability
325,000 at nil%
93,750 at 40%
0
37,500
(7,500)
30,000
IHT already paid

(18,750)
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
As far as Paper F6 (UK) is concerned the most difficult aspect to grasp is the seven year cumulation period.
What the seven-year cumulation period means is that when calculating the IHT on a lifetime transfer (either a PET
becoming chargeable or a CLT) it is necessary to take account of any CLT made within the previous seven years
despite it being made more than seven years before the date of the donors death. Only CLTs have to be taken into
account, as PETs made more than seven years before the date of death are completely exempt.
Example 4
Ja died on 18 March 2015 leaving an estate valued at 450,000. She had made the following lifetime gifts:
1 August 2006 A gift of 200,000 to a trust
1 November 2012 A gift of 280,000 to a trust
These figures are after deducting available exemptions. In each case the trust paid any IHT arising from the gift.
The nil rate band for the tax year 200607 is 285,000, and for the tax year 201213 it is 325,000.
Lifetime transfers
1 August 2006
Chargeable transfer
200,000
No lifetime IHT is payable as the CLT is less than the nil rate band for 200607.
1 November 2012
Chargeable transfer
IHT liability
125,000 at nil%
155,000 at 20%
280,000
0
31,000
31,000
The CLT made on 1 August 2006 is within seven years of 1 November 2012, so it utilises 200,000 of the nil
rate band for 201213.

1 August 2006
Chargeable transfer
200,000
There is no additional liability as this CLT was made more than seven years before the date of Jas death on
18 March 2015.
1 November 2012
Chargeable transfer
IHT liability
125,000 at nil%
280,000

155,000 at 40%
62,000
IHT already paid
(31,000)
31,000
The CLT made on 1 August 2006 utilises 200,000 of the nil rate band for
201415 of 325,000.
Death estate
Chargeable estate
450,000
IHT liability
45,000 at nil%
405,000 at 40%
0
162,000
162,000
The CLT made on 1 August 2006 is not relevant when calculating the IHT on the death estate as it was
made more than seven years before the date of Jas death on 18 March 2015.
Therefore only the CLT made on 1 November 2012 is taken into account, and this utilises 280,000 of the nil
rate band of 325,000.
Example 5
The same situation as in example 4, except that on 1 November 2012 Ja made a gift of 280,000 to her daughter
rather than to a trust.
Lifetime transfers

1 August 2006
Chargeable transfer
200,000
1 November 2012
280,000
1 August 2006
Chargeable transfer
200,000
1 November 2012
IHT liability
125,000 at nil%
155,000 at 40%
280,000
0
62,000
62,000
Death estate
Chargeable estate
450,000
IHT liability
45,000 at nil%
405,000 at 40%
0
162,000
162,000
ADVANTAGES OF LIFETIME TRANSFERS

Lifetime transfers are the easiest way for a person to reduce their potential IHT liability.
A PET is completely exempt after seven years.
A CLT will not incur any additional IHT liability after seven years.
Even if the donor does not survive for seven years, taper relief will reduce the amount of IHT payable after
three years.
The value of PETs and CLTs is fixed at the time they are made, so it can be beneficial to make gifts of assets
that are expected to increase in value such as property or shares.
TAX LIABILITY ON DEATH ESTATE

Until now the examples have simply given a figure for the value of a persons estate. However, it may be necessary to
calculate it.
A persons estate includes the value of everything which they own at the date of death such as property, shares,
motor vehicles, cash and other investments. A persons estate also includes the proceeds from life assurance policies
even though these 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 as these are repaid upon death by the
life assurance element of the mortgage. Repayment mortgages and interest-only mortgages are deductible.
Example 6
Andy died on 31 December 2014. At the date of his death he owned the following assets:
A main residence valued at 425,000. 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 new individual savings accounts valued at 22,000, savings certificates from NS&I (National
Savings and Investments) valued at 19,000, and government stocks (gilts) valued at 34,000.
A life assurance policy on his own life. On 31 December 2014 the policy had an open market value of
85,000, and proceeds of 100,000 were received following Andys death.
On 31 December 2014 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
Mortgage
425,000
(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
Credit card debts
700
Funeral expenses
4,300
(5,000)
Chargeable estate
557,000
IHT liability
325,000 at nil%
232,000 at 40%
0
92,800
92,800
The promise to pay the friends legal fee is not deductible as it is not legally enforceable.
Unlike capital gains tax, there is no exemption for motor cars, new individual savings accounts, saving
certificates from NS&I or for government stocks.
The IHT liability on the life assurance policy could have easily been avoided if the policy had been written
into trust for the beneficiaries of Andys estate. The proceeds would have then been paid direct to the
beneficiaries, and not formed part of Andys estate. However, this aspect is not examinable at Paper F6 (UK).
PAYMENT OF INHERITANCE TAX

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.
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.
Death estate
The personal representatives of the deceaseds 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 specific gift is left to a beneficiary then this gift will not normally bear any IHT. The IHT is therefore usually
paid out of the non-exempt residue of the estate.
Example 7
Alfred died on 15 December 2014. He had made the following lifetime gifts:
20 November 2012 A gift of 420,000 to a trust. Alfred paid the IHT arising from this gift.
8 August 2013 A gift of 360,000 to his son.
Alfreds estate at 15 December 2014 was valued at 850,000. Under the terms of his will he left 250,000 to his wife,
a specific legacy of 50,000 to his brother, and the residue of the estate to his children.
The nil rate band for the tax years 201213 and 201314 is 325,000.
Lifetime transfers
20 November 2012

IHT liability
325,000 at nil%
95,000 x 20/80
420,000
0
23,750
443,750
The due date for the IHT liability of 23,750 payable by Alfred was 31 May 2013.
8 August 2013
360,000
The PET is initially ignored.

20 November 2012
IHT liability
443,750

325,000 at nil%
118,750 at 40%
0
47,500
IHT already paid
(23,750)
23,750
The due date for the additional IHT liability of 23,750 payable by the trust is 30 June 2015.
8 August 2013
360,000
144,000
The CLT made on 20 November 2012 has fully utilised the nil rate band.
The due date for the IHT liability of 144,000 payable by Alfreds son is 30 June 2015.
Death estate
Value of estate
850,000
Spouse exemption
(250,000)
Chargeable estate
600,000
240,000
The due date for the IHT liability of 240,000 payable by the personal representatives of Alfreds estate is 30
June 2015.
Alfreds wife will inherit 250,000, his brother will inherit 50,000, and the children will inherit the residue of
310,000 (850,000 250,000 50,000 240,000).
BASIC INHERITANCE TAX PLANNING

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 benefit, 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 beneficial 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.
Of course such planning depends on the children already having sufficient assets for their financial needs.
EXAM STANDARD QUESTION

The following is typical of an exam question that could be set on IHT in Section B of Paper F6 (UK).
Jing died on 21 January 2015. She had made the following lifetime gifts:
3 March 2007 A gift of 126,000 to a trust.
23 June 2011 A gift of 240,000 to her daughter.
2 September 2011 A gift of 300,000 to a trust.
Jing paid any IHT arising from the gifts to the trusts.
The nil rate band for the tax year 200607 is 285,000, and for the tax year 201112 it is 325,000.
Required:
Calculate the inheritance tax that will be payable as a result of Jings death.
(10 marks)
Jing Inheritance tax computation
Lifetime transfers
3 March 2007
Value transferred
126,000

Annual exemptions
200607
200506
3,000
3,000
(6,000)
Chargeable transfer
120,000
23 June 2011
Value transferred
Annual exemptions
201112
201011
240,000
3,000
3,000
(6,000)
234,000
2 September 2011

IHT liability
205,000 at nil%
95,000 x 20/80
Notes:
300,000
0
23,750
323,750
1.
2.
3.
No lifetime IHT is payable in respect of the CLT made on 3 March 2007 as it is less than the nil rate band for
200607.
The PET made on 23 June 2011 utilises the annual exemptions for 201112 and 201011, therefore there is
no annual exemption left to use against the CLT made on 2 September 2011.
The CLT made on 3 March 2007 is within seven years of the CLT made on 2 September 2011, so it utilises
120,000 of the nil rate band for 201112.

3 March 2007
Chargeable transfer
120,000
23 June 2011
234,000
IHT liability
205,000 at nil%
29,000 at 40%
0
11,600
(2,320)
9,280
2 September 2011
323,750
129,500
(25,900)

103,600
IHT already paid
(23,750)
79,850
Notes:
1.
As regards the PET made on 23 June 2011, the seven year cumulative total is 120,000 so 205,000
(325,000 120,000) of the nil rate band for 201415 of 325,000 is available.
2.
As regards the CLT made on 2 September 2011, the seven year cumulative total is 354,000 (120,000 +
234,000) so the nil rate band for 201415 has been fully utilised.
3.
For both gifts, the taper relief reduction is 20% as they were made between three and four years of the date
of Jings death.
MOTOR CARS
RELATED LINKS
Motor cars have featured in every Paper F6 (UK) exam paper that has been set to date, which is not surprising given
that acquiring, running, or having the use of a motor car can have income tax, corporation tax, value added tax (VAT)
or national insurance contribution (NIC) implications.
PURCHASING A MOTOR CAR

When a sole trader, partnership or limited company purchases a motor car, then capital allowances will be available.
Motor cars do not qualify for the annual investment allowance, although new motor cars with CO emissions up to 95
grams per kilometre qualify for a 100% first-year allowance.
Motor cars qualifying for writing down allowances at the rate of 18% (CO emissions between 96 and 130 grams per
kilometre) are included in the main pool, whilst motor cars qualifying for writing down allowances at the rate of 8%
(CO emissions over 130 grams per kilometre) are included in the special rate pool.
Example 1
Newstart Ltd commenced trading on 1 April 2014. The following new motor cars were purchased during the year
ended 31 March 2015:
Date of
purchase
Cost
CO emission rate
Motor car (1) 3 April 2014
12,400
17,700
16,900
The companys capital allowances for the year ended 31 March 2015 are as follows:
Main
pool
Special
rate
pool
Allowances
Addition qualifying for FYA

Motor car (1)
12,400
FYA - 100%
12,400
_____
12,400
0

Additions
Motor car (2)
Motor car (3)
WDA 18%
WDA 8%
WDV carried forward
Main
pool
Special
rate
pool
17,700
16,900
(3,186)
(1,352)
______
______
14,514
15,548
Allowances
3,186
1,352
_____
Total allowances
16,938
Motor car (1) has CO emissions up to 95 grams per kilometre and therefore qualifies for the 100% first year
allowance.
Motor car (2) has CO emissions between 96 and 130 grams per kilometre, and is therefore included in the
main pool.
Motor car (3) has CO emissions over 130 grams per kilometre and is therefore included in the special rate
pool.
There is no private use adjustment where a motor car is used by a director or an employee an adjustment is only
made where there is private use by a sole trader or a partner. Motor cars with private use are not pooled, but are kept
separate so that the private use adjustment can be calculated.
Example 2
Judith prepares accounts to 5 April. On 6 April 2014 the tax written down values of her plant and machinery were as
follows:
Main pool
36,700
Motor car (1)
15,600
The following new motor cars were purchased during the year ended 5 April 2015:
Date of
purchase
Cost
CO emission rate
Motor car (2) 1 May 2014
11,600
Motor car (3) 1 June 2014
16,400
The following motor cars were sold during the year ended 5 April 2015:
Date of
purchase
Proceeds
Motor car (1)
1 May 2014
13,400
Motor car (4)
1 June 2014
6,600
Motor cars (1) and (2) were used by Judith, and 35% of the mileage was for private journeys. Motor cars (3) and (4)
were used by an employee, and 10% of the mileage was for private journeys. The original cost of motor car (4) was
14,300, and this has previously been added to the main pool.
Judiths capital allowance claim for the year ended 5 April 2015 is as follows:
Main
pool
Motor
car (1)
WDV brought forward
36,700
15,600
Additions
Motor car (2)
Motor car (3)
16,400
Proceeds
Motor car (1)
Motor car (4)
(13,400)
(6,600) _______
46,500
Balancing allowance
Motor
car (2)
Allowances
11,600
2,200
(2,200)
x 65%
1,430
_______
WDA 18%
(8,370)
8,370
Main
pool
Motor
car (1)
WDA 18%
______
WDV carried forward
38,130
Motor
car (2)
Allowances
(2,088) x 65%
1,357
9,512
______
Total allowances
11,157
The private use of motor cars (3) and (4) is irrelevant, since such usage will be assessed on the employee
as a taxable benefit.
Note that with motor car (2), the full writing down allowance is deducted in calculating the written down value
carried forward.
Where partners own their motor cars privately, it is the partnership (and not the individual partners) that make the
capital allowances claim.
Example 3
Auy and Bim commenced in partnership on 6 April 2014. The following new motor cars were purchased during the
year ended 5 April 2015:
Date of
purchase
Cost
CO emission rate
11,400
16,900
Motor car (1) is used by Auy, and 40% of the mileage is for business journeys. Motor car (2) is used by Bim, and 85%
of the mileage is for business journeys.
The partnerships capital allowances for the year ended 5 April 2015 are as follows:
Motor
car
(2)
Addition
16,900
WDA 18%
(3,042) x 85%
Allowances
2,586
Motor
car
(2)
Allowances
Addition qualifying
for FYA
Motor car (1)
FYA - 100%
11,400
(11,400) x 40%
4,560
_______
______
WDV carried
forward
13,858
______
Total allowances
7,146
Unless a motor car is used exclusively for business purposes, input VAT is not recoverable when it is purchased.
Output VAT will then not be due on the disposal. Therefore, for capital allowance purposes, VAT inclusive figures are
used.
LEASING A MOTOR CAR

When calculating a businesss trading profit, no adjustment is necessary where the CO emissions of a leased motor
car do not exceed 130 grams per kilometre. Where CO emissions are more than 130 grams per kilometre, then 15%
of the leasing costs are disallowed in the calculation.
Example 4
When calculating its trading profit for the year ended 31 March 2015, Fabio Ltd deducted the following leasing costs:
Lease of motor car with CO emissions of 150

grams per kilometre
3,280
Lease of motor car with CO emissions of 105

grams per kilometre
2,980

6,260
The disallowance of leasing costs for the motor car with CO emissions of 150 grams per kilometre is 492
(3,280 x 15%).
There is no disallowance for the motor car with CO emissions of 105 grams per kilometre, as this is less
than 130 grams per kilometre.
MOTOR EXPENSES
When calculating the trading profit for a sole trader or a partnership, an adjustment will be necessary for the private
proportion of motor expenses that relate to the sole trader or the partners. No adjustment is necessary where motor
expenses relate to directors or employees.
Example 5
When calculating its trading profit for the year ended 5 April 2015, the partnership of Look & Hear deducted motor
expenses of 4,100. This figure includes 2,600 in respect of the partners motor cars, with 30% of this amount being
in respect of private journeys.
The disallowance for motor expenses is 780 (2,600 x 30%).

Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.
Where fuel is provided then all the input VAT (for both private and business mileage) can be recovered, but the private
use element is then normally accounted for by way of an output VAT scale charge. The scale charge can apply to sole
traders, partners, employees or directors.
Example 6
Vanessa is self-employed, and has a motor car which is used 70% for business mileage. During the quarter ended 31
March 2015 Vanessa spent 1,128 on repairs to the motor car and 984 on fuel for both business and private
mileage. The relevant quarterly scale charge is 470. All figures are inclusive of VAT.
Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2015:
Output VAT
Fuel scale charge
(470 x 20/120)
Input VAT
Motor repairs
(1,128 x 20/120)
Fuel (984 x 20/120)
78
188
164
However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be
calculated on this charge to the employee or director.
Example 7
Ivy Ltd provides one of its directors with a company motor car which is used for both business and private mileage.
For the quarter ended 31 March 2015 the total cost of petrol was 720, with the director being charged 216 for the
private use element. Both figures are inclusive of VAT.
Ivy Ltd will include the following entries on its VAT return for the quarter ended 31 March 2015:
Output VAT
Charge to director
(216 x 20/120)
Input VAT
Fuel (720 x 20/120)
36
120
PROVISION OF A COMPANY MOTOR CAR

When an employee is provided with a company motor car the taxable benefit is calculated as a percentage of the
motor cars list price. The percentage is based on the level of the motor cars carbon dioxide (CO) emissions.
List price: Any discounts given to the employer are ignored. The employee can reduce the figure on which his or her
company car benefit is calculated by making a capital contribution of up to 5,000.
Percentage: The base percentage is 12%, and this applies where a motor cars CO emissions are at a base level of
95 grams per kilometre. The percentage is then increased in 1% steps for each five grams per kilometre above the
base level, subject to a maximum percentage of 35%.
There are two lower rates for company motor cars with low CO emissions. For a motor car with a CO emission rate
of 75 grams per kilometre or less the percentage is 5%. For a motor car with a CO emission rate of between 76 and
94 grams per kilometre the percentage is 11%.
Diesel cars: The percentage rates (including the lower rates of 5% and 11%) are increased by 3% for diesel cars, but
not beyond the maximum percentage rate of 35%.
Reduction: The taxable benefit is proportionately reduced if a motor car is unavailable for part of the tax year.
Contribution: Any contribution made by an employee towards the use of a company motor car will reduce the taxable
benefit.
Pool cars: The use of a pool car does not result in a company car benefit. A pool car is one that is used by more than
one employee, that is used only for business journeys (private use is only permitted if it is merely incidental to a
business journey), and where the motor car is not normally kept at or near an employees home.
Related benefits: The motor car benefit covers all the costs associated with having a motor car such as insurance
and repairs. The only cost that will result in an additional benefit is the provision of a chauffeur.
Example 8
During the tax year 201415 Fashionable plc provided the following employees with company motor cars:
Amanda was provided with a new petrol powered company car throughout the tax year 201415. The motor car has
a list price of 12,200 and an official CO emission rate of 84 grams per kilometre.
Betty was provided with a new petrol powered company car throughout the tax year 201415. The motor car has a
list price of 16,400 and an official CO emission rate of 109 grams per kilometre.
Charles was provided with a new diesel powered company car on 6 August 2014. The motor car has a list price of
13,500 and an official CO emission rate of 137 grams per kilometre.
Diana was provided with a new petrol powered company car throughout the tax year 201415. The motor car has a
list price of 84,600 and an official CO emission rate of 228 grams per kilometre. Diana paid Fashionable plc 1,200
during the tax year 201415 for the use of the motor car. Diana was unable to drive her motor car for two weeks
during February 2015 because of an accident, so Fashionable plc provided her with a chauffeur at a total cost of
1,800.
Amanda
The CO emissions are between 76 grams and 94 grams per kilometre so the relevant percentage is 11%. The motor
car was available throughout 201415, so the benefit is 1,342 (12,200 x 11%).
Betty
The CO emissions are above the base level figure of 95 grams per kilometre. The CO emissions figure of 109 is
rounded down to 105 so that it is divisible by five. The minimum percentage of 12% is increased in 1% steps for each
five grams per kilometre above the base level, so the relevant percentage is 14% (12% + 2% (10 (105 95)/5)). The
motor car was available throughout 201415 so the benefit is 2,296 (16,400 x 14%).
Charles
+ 8% (135 95 = 40/5) = 20% plus a 3% charge for a diesel car). The motor car was only available for eight months
of 201415, so the benefit is 2,070 (13,500 x 23% x 8/12).
Diana
+ 26% (225 95 = 130/5)), but this is restricted to the maximum of 35%. The motor car was available throughout
201415 so the benefit is 28,410 (84,600 x 35% = 29,610 1,200). The contribution by Diana towards the use of the
motor car reduces the benefit. The provision of a chauffeur will result in an additional benefit of 1,800.
If fuel is provided for private use then there will additionally be a fuel benefit. This is also based on a motor cars CO
emissions.
Base figure: For the tax year 201415 the base figure is 21,700.
Percentage: The percentage used in the calculation is exactly the same as that used for calculating the related
company car benefit.
Reduction: The fuel benefit is proportionately reduced if a motor car is unavailable for part of the tax year.
The fuel benefit can also be proportionately reduced where the fuel itself is only provided for part of the tax year.
However, it is not possible to opt in and out depending on monthly use. If, for example, fuel is provided from 6 April to
30 September 2014, then the fuel benefit for the tax year 201415 will be restricted to just six months. This is
because the provision of fuel has permanently ceased. However, if fuel is provided from 6 April to 30 September
2014, and then again from 1 January to 5 April 2015, then the fuel benefit will not be reduced - the cessation was only
temporary.
Contribution: No reduction is made for contributions made by an employee towards the cost of private fuel unless
the entire cost is reimbursed. In this case there will be no fuel benefit.
Example 9
Continuing with example 8.
Amanda was provided with fuel for private use between 6 April 2014 and 5 April 2015.
Betty was provided with fuel for private use between 6 April 2014 and 31 December 2014.
Charles was provided with fuel for private use between 6 August 2014 and 5 April 2015.
Diana was provided with fuel for private use between 6 April 2014 and 5 April 2015. She paid Fashionable plc 600
during the tax year 201415 towards the cost of private fuel, although the actual cost of this fuel was 1,000.
Amanda
The motor car was available throughout 201415 so the fuel benefit is 2,387 (21,700 x 11%).
Betty
Fuel was only available for nine months of 201415, so the fuel benefit is 2,278 (21,700 x 14% x 9/12).
Charles
The motor car was only available for eight months of 201415, so the fuel benefit is 3,327 (21,700 x 23% x 8/12).
Diana
The motor car was available throughout 201415, so the fuel benefit is 7,595 (21,700 x 35%). There is no reduction
for the contribution made since the cost of private fuel was not fully reimbursed.
The employer is responsible for paying class 1A NIC in respect of taxable benefits at the rate of 13.8%.
Example 10
Continuing with examples 8 and 9.
The total amount of taxable benefits for 201415 is 51,505 (1,342 + 2,296 + 2,070 + 28,410 + 1,800 + 2,387 + 2,278
+ 3,327 + 7,595), so Fashionable plc will have to pay class 1A NIC of 7,108 (51,505 at 13.8%).
USE OF OWN MOTOR CAR

Employees who use their own motor car for business travel must use HMRCs authorised mileage allowances in order
to calculate any taxable benefit arising from mileage allowances received from their employer. Employees who use
their motor cars for business mileage without being reimbursed by their employer (or where the reimbursement is less
than the approved mileage allowances), can use the approved mileage allowances as a basis for an expense claim.
The rate of approved mileage allowance for the first 10,000 business miles is 45p per mile, and for business mileage
in excess of 10,000 miles the rate is 25p per mile.
Unlike other taxable benefits which are subject to class 1A NIC, any taxable benefit arising from mileage allowances
is treated as earnings subject to both employee and employers class 1 NICs.
Example 11
Dan and Diane used their own motor cars for business travel during the tax year 201415.
Dan drove 8,000 miles in the performance of his duties, and his employer reimbursed him at the rate of 60p per mile.
Diane drove 12,000 miles in the performance of her duties, and her employer reimbursed her at the rate of 30p per
mile.
Dan
The mileage allowance received by Dan was 4,800 (8,000 at 60p), and the tax free amount was 3,600 (8,000 at
45p). The taxable benefit is therefore 1,200 (4,800 3,600).
The taxable benefit will be included as part of Dans taxable income. It will also be subject to both employee and
employers class 1 NICs.
Diane
Diane can make an expense claim of 1,400 as follows:
10,000 miles at 45p

2,000 miles at 25p
4,500
500

5,000
Mileage allowance received (12,000 at
30p)
Expense claim
(3,600)
1,400
Sometimes, rather than being given the amount of business mileage, you might have to ascertain what it is.
Remember that business mileage does not include:
Ordinary commuting: This is where an employee drives between home and their normal workplace. This includes
the situation where an employee is required to go into work at the weekend or because of an emergency such as to
turn off a fire alarm.
Private travel: This is any journey that is not for work purposes.
Business mileage includes the following:
Travel to visit clients: This is provided the journey is not virtually the same as the employees ordinary commute,
such as where an employee travels from home to a clients premises which are situated near their normal workplace.
Travel to a temporary workplace: A temporary workplace is one where the employee expects to be based for less
than 24 months. Again, there is the provision that the journey must not be virtually the same as the employees normal
commute.
Example 12
During the tax year 201415 Joan used her private motor car for both private and business journeys. She was
reimbursed by her employer, Steam Ltd, at the rate of 40p per mile for the following mileage:
Miles
Normal daily travel between home and Steam Ltds
offices
2,480
Travel between home and a temporary workplace

(the assignment was for 16 weeks)
3,360
Travel between Steam Ltds offices and the

premises of Steam Ltds clients
1,870
Travel between home and the premises of Steam

Ltds clients
Total mileage reimbursed by Steam Ltd
830
8,540
The mileage allowance received by Joan was 3,416 (8,540 at 40p).
Ordinary commuting does not qualify for relief, but the travel to the temporary workplace does qualify as the
24-month limit is not exceeded.
The tax free amount is 2,727 (3,360 + 1,870 + 830 = 6,060 at 45p).
The taxable benefit is therefore 689 (3,416 2,727).
The approved mileage allowances can also be used in other circumstances.

Example 13
Leticia lets out a property that qualifies as a trade under the furnished holiday letting rules. During the tax year 2014
15 she drove 1,180 miles in her motor car in respect of the furnished holiday letting business. She uses HM Revenue
and Customs authorised mileage rates to calculate her expense deduction. The mileage was for the following
purposes:
Miles
Purchase of property
160
Running the business on a weekly

basis
880
Property repairs
140
The mileage that Leticia drove in respect of the property purchase is capital in nature, and therefore does not qualify.
Her mileage allowance is therefore 459 (880 + 140 = 1,020 at 45p).
If a sole trader or partnership uses the cash basis to calculate trading profit, then the business can use approved
mileage allowances to determine the deduction for business mileage.
Example 14
Winifred commenced self-employment as a surveyor on 6 April 2014. On 10 April 2014 she purchased a motor car
with CO emissions of 110 grams per kilometre for 15,600. The motor car is used by Winifred, and 70% of the
mileage is for private journeys. For the year ended 5 April 2015 motor expenses were 4,800, with Winifred driving
8,000 business miles.
For the year ended 5 April 2015 Winifred can claim an expense deduction of 3,600 (8,000 miles at 45p). Capital
allowances and actual motor expenses are not relevant when approved mileage allowances are claimed.
CAPITAL GAINS TAX AND INHERITANCE TAX

The disposal of a motor car is exempt from CGT purposes, but there is no exemption from IHT. Therefore a persons
estate includes the value of any motor cars which they own at the date of death.
EXAM STANDARD QUESTION

The following question has been updated from the December 2010 sitting.
You should assume that todays date is 20 March 2014.
Sammi Smith is a director of Smark Ltd. The company has given her the choice of being provided with a leased
company motor car or alternatively being paid additional directors remuneration and then privately leasing the same
motor car herself.
Company motor car
The motor car will be provided throughout the tax year 201415, and will be leased by Smark Ltd at an annual cost of
27,720. The motor car will be petrol powered, will have a list price of 82,000, and will have an official CO emission
rate of 245 grams per kilometre.
The lease payments will cover all the costs of running the motor car except for fuel. Smark Ltd will not provide Sammi
with any fuel for private journeys.
Additional directors remuneration
As an alternative to having a company motor car, Sammi will be paid additional gross directors remuneration of
28,000 during the tax year 201415. She will then privately lease the motor car at an annual cost of 27,720.
Other information
The amount of business journeys that will be driven by Sammi will be immaterial and can therefore be ignored.
Sammis current annual directors remuneration is 100,000. Smark Ltd prepares its accounts to 5 April, and pays
corporation tax at the main rate of 21%. The lease of the motor car will commence on 6 April 2014.
Required:
(a) Advise Sammi Smith of the income tax and national insurance contribution implications for the tax year
201415 if she (1) is provided with the company motor car, and (2) receives additional directors remuneration
of 28,000.
(5 marks)
(b) Advise Smark Ltd of the corporation tax and national insurance contribution implications for the year
ended 5 April 2015 if the company (1) provides Sammi Smith with the company motor car, and (2) pays
Sammi Smith additional directors remuneration of 28,000.
Notes:
1.
2.
You should assume that the rates of corporation tax for the financial year 2014 continue to apply.
You should ignore value added tax (VAT) and the national insurance contribution employment allowance.
(5 marks)
(c) Determine which of the two alternatives is the most beneficial from each of the respective points of view
of Sammi Smith and Smark Ltd.
(5 marks)
(15 marks)
(a)
Sammi Smith Company motor car
(1) The relevant percentage is restricted to a maximum of 35% (12% + 30% (245 95 = 150/5) = 42%).
(2) Sammi will therefore be taxed on a car benefit of 28,700 (82,000 x 35%).
(3) Sammis marginal rate of income tax is 40%, so her additional income tax liability for 201415 will be 11,480
(28,700 at 40%).
(4) There are no national insurance contribution implications for Sammi.
Note: There is no fuel benefit as fuel is not provided for private journeys.
Sammi Smith Additional directors remuneration

(1) Sammis additional income tax liability for 201415 will be 11,200 (28,000 at 40%).
(2) The additional employees class 1 NIC liability will be 560 (28,000 at 2%).
Note: Sammis directors remuneration exceeds the upper earnings limit of 41,865, so her additional class 1 NIC
liability is at the rate of 2%.
(b)
Smark Ltd Company motor car
(1) The employers class 1A NIC liability in respect of the car benefit will be 3,961 (28,700 at 13.8%).
(2) The motor car has a CO emission rate in excess of 130 grams per kilometre, so only 23,562 (27,720 less 15%)
of the leasing costs are allowed for corporation tax purposes.
(3) Smark Ltds corporation tax liability will be reduced by 5,780 (23,562 + 3,961 = 27,523 at 21%).
Smark Ltd Additional directors remuneration
(1) The employers class 1 NIC liability in respect of the additional directors remuneration will be 3,864 (28,000 at
13.8%).
(2) Smark Ltds corporation tax liability will be reduced by 6,691 (28,000 + 3,864 = 31,864 at 21%).
(c)
Most beneficial alternative for Sammi Smith
(1) Under the directors remuneration alternative, Sammi will receive additional net of tax income of 16,240 (28,000
11,200 560).
(2) However, she will have to lease the motor car at a cost of 27,720, so the overall result is additional expenditure of
11,480 (27,720 - 16,240).
(3) If Sammi is provided with a company motor car then she will have an additional tax liability of 11,480, so she is in
exactly the same financial position.
Most beneficial alternative for Smark Ltd
(1) The net of tax cost of paying additional directors remuneration is 25,173 (28,000 + 3,864 6,691).
(2) This is more beneficial than the alternative of providing a company motor car since this has a net of tax cost of
25,901 (27,720 + 3,961 5,780).
VALUE ADDED TAX, PART 1
RELATED LINKS
Value added tax, part 2
This two-part article is relevant to candidates sitting Paper F6 (UK) in an exam in the period 1 April 2015 to 30
June 2016, and is based on tax legislation as it applies to the tax year 201415 (Finance Act 2014).
STANDARD RATE OF VAT

The standard rate of VAT is currently 20%.
Example 1
Zoe is in the process of completing her VAT return for the quarter ended 31 March 2015. The following information is
available:
Sales invoices totalling 128,000 were issued in respect of standard rated sales.
Standard rated expenses amounted to 24,800.
On 15 February 2015 Zoe purchased machinery at a cost of 24,150. This figure is inclusive of VAT.
VAT Return Quarter ended 31 March 2015
Output VAT
Sales (128,000 x 20%)
25,600
Input VAT
Expenses
(24,800 x 20%)
4,960
Machinery
(24,150 x 20/120)
4,025
(8,985)
16,615
VAT REGISTRATION
A business making taxable supplies must register for VAT if during the previous 12 months the value of taxable
supplies exceeds 81,000. However, VAT registration is not required if taxable supplies in the following 12 months will
not exceed 79,000. These figures are exclusive of VAT. Remember that both standard rated and zero-rated supplies
are taxable supplies.
Example 2
Albert commenced trading on 1 January 2014. His sales have been as follows:
Standard
rated
Zerorated
January
3,200
February
2,800
March
3,300
April
5,100
600
May
2,700
June
3,700
400
July
3,900
200
August
5,500
100
September
4,300
12,100
November
6,900
700
December
8,200
300
January
8,800
900
February
13,500
1,200
2014
October
2015
Albert will become liable to compulsory VAT registration when his taxable supplies during any 12-month
period exceed 81,000.
This will happen on 28 February 2015 when taxable supplies will amount to 82,400 (3,300 + 5,700 + 2,700
+ 4,100 + 4,100 + 5,600 + 4,300 + 12,100 + 7,600 + 8,500 + 9,700 + 14,700).
Albert will have to notify HM Revenue and Customs by 30 March 2015, being 30 days after the end of the
period.
Registration is required from the end of the month following the month in which the limit is exceeded, so
Albert will be registered from 1 April 2015 or from an agreed earlier date.
A business must also register for VAT if there are reasonable grounds to believe that taxable supplies will exceed
81,000 during the following 30 days. Again the figure is exclusive of VAT.
Example 3
Bee commenced trading on 1 October 2014. Her sales have been as follows:
2014
2015
October
4,600
November
5,400
December
23,900
January
97,700
Bees sales are all standard rated.

On 1 January 2015 Bee realised that her sales for January 2015 were going to exceed 95,000, and therefore
immediately registered for VAT.
Businesses must register for VAT if at any time they expect their taxable supplies for the following 30-day
period to exceed 81,000.
Bee realised that her taxable supplies for January 2015 were going to be at least 95,000. She was
therefore liable to register from 1 January 2015, being the start of the 30-day period.
Bee had to notify HM Revenue and Customs by 30 January 2015, being 30 days from the date that the
expectation arose.
If a business continues to trade after the date that it should have registered for VAT, then output VAT will still be due
from this date.
It is important that you appreciate the distinction between making standard rated supplies, zero-rated supplies and
exempt supplies. Only standard rated supplies and zero-rated supplies are taxable supplies.
Example 4
Cathy will commence trading in the near future. She operates a small aeroplane, and is considering three alternative
types of business. These are (1) training, in which case all sales will be standard rated for VAT, (2) transport, in which
case all sales will be zero-rated for VAT, and (3) an air ambulance service, in which case all sales will be exempt from
VAT.
For each alternative Cathys sales will be 80,000 per month (exclusive of VAT), and standard rated expenses will be
15,000 per month (inclusive of VAT).
Standard rated supplies
Cathy will be required to register for VAT as she is making taxable supplies.
Output VAT of 16,000 (80,000 x 20%) per month will be due, and input VAT of 2,500 (15,000 x 20/120) per
month will be recoverable.
Zero-rated supplies
Cathy can apply for exemption from registration for VAT since she is making zero-rated supplies, otherwise
she should still register as these are taxable supplies.
Output VAT will not be due, but input VAT of 2,500 per month will be recoverable.
Exempt supplies
Cathy will not be required or permitted to register for VAT as she will not be making taxable supplies.
Output VAT will not be due and no input VAT will be recoverable.
VOLUNTARY VAT REGISTRATION

A business may decide to voluntarily register for VAT where taxable supplies are below the 81,000 registration limit,
or where it is possible to apply for exemption. This will be beneficial when:
The business makes zero-rated supplies. As seen in example 4, output VAT will not be due but input VAT will
be recoverable.
The business makes supplies to VAT registered customers. Input VAT will be reclaimed, and it should be
possible to charge output VAT on top of the pre-registration selling price. This is because the output VAT will be
recoverable by the customers.
However, it will probably not be beneficial to voluntarily register for VAT where customers are members of the general
public, since such customers cannot recover the output VAT charged. If selling prices cannot be increased, the output
VAT will become an additional cost for the business.
Example 5
Continuing with example 3, assume that Bees sales are all made to VAT registered businesses, and that input VAT
for the period 1 October to 31 December 2014 was 12,400. This input VAT would not be recoverable were Bee to
register for VAT on 1 January 2015.
Bees sales are all to VAT registered businesses, so output VAT can be passed on to customers.
Her revenue would therefore not have altered if she had voluntarily registered for VAT on 1 October 2014.
It would therefore have been beneficial for Bee to have voluntarily registered for VAT on 1 October 2014
since additional input VAT of 12,400 would have been recovered.
Whether or not output VAT can be passed on to customers is also an important factor when deciding whether to
remain below the VAT registration limit, or whether it is beneficial to accept additional work that results in the limit
being exceeded.
Example 6
Danny has been in business for several years. All of his sales are standard rated and are to members of the general
public. He is not registered for VAT.
At present, Dannys annual sales are 79,500. He is planning to put up his prices, and this will increase annual sales
to 85,000. There is no further scope for any price increases. Dannys standard rated expenses are 12,700 per year
(inclusive of VAT).
Prior to putting up his prices, Dannys net profit is 66,800 (79,500 12,700).
If Danny puts up his prices, then he will exceed the VAT registration limit of 81,000, and will have to register
for VAT.
Output VAT will have to be absorbed by Danny, as sales are to the general public and there is no further
scope for price increases.
The revised annual net profit will be:
Income (85,000 x 100/120)
70,833
Expenses (12,700 x 100/120)
(10,583)
Net profit
60,250
This is a decrease in net profit of 6,550 (66,800 60,250), and so it is not beneficial for Danny to put up his
prices.
PRE-REGISTRATION INPUT VAT

Input VAT incurred prior to registration can be recovered in certain circumstances.
Example 7
Elisa commenced trading on 1 January 2015, and registered for VAT on 1 April 2015. She had the following inputs for
the period 1 January to 31 March 2015:
January
February
March
Goods purchased
3,400
14,200
26,400
Services incurred
2,600
3,000
3,600
64,000
Non-current assets
On 1 April 2015 Elisa had an inventory of goods that had cost 13,800.
The above figures are all exclusive of VAT.
Input VAT of 2,760 (13,800 x 20%) can be recovered on the inventory at 1 April 2015.
The inventory was not acquired more than four years prior to registration, nor was it sold or consumed prior
to registration. The goods must have been acquired for business purposes.
The same principle applies to non-current assets, so input VAT of 12,800 (64,000 x 20%) can be recovered
on the non-current assets purchased during January 2015.
Input VAT of 1,840 (9,200 (2,600 + 3,000 + 3,600) x 20%) can be recovered on the services incurred from 1
January to 31 March 2015.
This is because the services were not supplied more than six months prior to registration. The services must
have been supplied for business purposes.
The total input VAT recovery is 17,400 (2,760 + 12,800 + 1,840).
VAT DEREGISTRATION
A business stops being liable to VAT registration when it ceases to make taxable supplies. HM Revenue and Customs
must be notified within 30 days, and the business will then be deregistered from the date of cessation or from an
agreed later date.
A business can also request voluntarily VAT deregistration.
There is a deemed supply of business assets such as plant, equipment and inventory when a business ceases to be
registered for VAT.
However, the transfer of a business as a going concern does not normally give rise to any VAT implications.
Example 8
Fang is registered for VAT but intends to cease trading on 31 March 2015. On the cessation of trading Fang can either
sell his non-current assets and inventory on a piecemeal basis to individual purchasers, or he can sell his entire
business as a going concern to a single purchaser.
Sale of assets on a piecemeal basis
Upon the cessation of trading Fang will cease to make taxable supplies, so his VAT registration will be
cancelled on 31 March 2015 or an agreed later date.
He will have to notify HM revenue and Customs by 30 April 2015, being 30 days after the date of cessation.
Output VAT will be due in respect of non-current assets and inventory on hand at 31 March 2015 on which
input VAT has been claimed (although output VAT is not due if it totals less than 1,000).
Sale of business as a going concern
If the purchaser is already registered for VAT then Fangs VAT registration will be cancelled as above.
If the purchaser is not registered for VAT then it can take over Fangs VAT registration, though from a
commercial point of view this may be inadvisable.
A sale of a business as a going concern is not treated as a taxable supply, and therefore output VAT is not
due.
GROUP VAT REGISTRATION

Two or more companies can register as a group for VAT purposes if they are under common control (such as a parent
company and its subsidiary companies) and each of them is resident in the UK.
A VAT group is treated for VAT purposes as if it was a single company registered for VAT on its own. Group VAT
registration is made in the name of a representative member, and this company is then responsible for completing
and submitting a single VAT return and paying VAT on behalf of the group. However, all the companies in the VAT
group remain jointly and severally liable for any VAT liabilities.
Example 9
Yung Ltd and its two 100% subsidiaries are considering registering as a group for VAT purposes.
The advantage of group VAT registration is that there will be no need to account for VAT on goods and
services supplied between group members. Such supplies are simply ignored for VAT purposes.
It will also only be necessary to complete one VAT return for the whole group, so there should be a saving in
administrative costs.
THE TAX POINT

It is very important to correctly identify the date of supply or tax point, as this determines when output VAT will be due.
Example 10
Explain the VAT rules that determine the tax point in respect of (1) a supply of goods, and (2) a supply of services.
The basic tax point for goods is the date that they are made available to the customer.
The basic tax point for services is the date that they are completed.
If an invoice is issued within 14 days of the basic tax point, the invoice date will usually replace that given
above.
If an invoice is issued or payment received before the basic tax point, then this becomes the actual tax point.
With the supply of services there may be more than one tax point.
Example 11
Denzil is a self-employed printer who makes standard rated supplies. For a typical printing contract he receives a 10%
deposit at the time that the customer makes the order. The order normally takes 14 days to complete, and Denzil
issues the sales invoice three to five days after completion. Some customers pay immediately upon receiving the
sales invoice, but many do not pay for up to two months.
The tax point for each 10% deposit is the date that it is received.
Invoices are issued within 14 days of the basic tax point (the date of completion), so the invoice date is the
tax point for the balance of the contract price.
OUTPUT VAT AND INPUT VAT

There are several important points regarding output VAT and input VAT that should be remembered:
For VAT purposes there is no distinction between revenue and capital items as there is for income tax and
corporation tax.
VAT is only chargeable on the net amount where a discount is offered for prompt payment, regardless of
whether payment is made within the specified time for the discount to be received.
Relief for an impairment loss is only available if the claim is made more than six months from the time that
payment was due, and the debt has been written off in the businesss books.
Input VAT cannot be recovered in respect of business entertainment (unless it relates to the cost of
entertaining overseas customers) or the purchase of a motor car (unless the car is used 100% for business
purposes).
Output VAT is charged where goods are taken from a business for non-business purposes, and similarly
where services are used for non-business purposes.
An apportionment is made where goods or services are used partly for business purposes and partly for
private purposes.
Example 12
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2015. The following information
is available:
Cash sales amounted to 50,400, of which 46,200 was in respect of standard rated sales and 4,200 was
in respect of zero-rated sales. All of these sales were to non-VAT registered customers.
Sales invoices totalling 128,000 were issued in respect of credit sales to VAT registered customers. These
sales were all standard rated. Gwen gives her customers a 3% discount for payment within 30 days of the date
of the sales invoice, and 80% of the customers pay within this period.
Standard rated materials amounted to 32,400, of which 600 were taken by Gwen for her personal use.
Standard rated expenses amounted to 24,800. This includes 1,200 for entertaining UK customers.
On 15 March 2015 Gwen sold a motor car for 9,600, and purchased a new motor car at a cost of 16,800.
Both motor cars were used for business and private mileage, but no fuel was provided for private mileage.
These figures are inclusive of VAT where applicable.
On 28 March 2015 Gwen sold machinery for 3,600, and purchased new machinery at a cost of 21,600.
She paid for the new machinery on this date, but did not take delivery or receive an invoice until 6 April 2015.
These figures are inclusive of VAT where applicable.
On 31 March 2015 Gwen wrote off impairment losses in respect of three invoices that were due for payment
on 15 August 2014, 15 September 2014 and 15 October 2014 respectively. The amount of output VAT originally
paid in respect of each invoice was 340.
During the quarter ended 31 March 2015 600 was spent on mobile telephone calls, of which 40% relates to
private calls.
VAT Return Quarter ended 31 March 2015
Output VAT
Cash sales
(46,200 x 20%)
9,240
Credit sales (128,000 x 97% (100 3) x

20%)
24,832
Motor car
Machinery
(3,600 x 20/120)
600
Goods for personal use

(600 x 20%)
120
Input VAT
Materials
(32,400 x 20%)
6,480
Expenses
(24,800 1,200 = 23,600 x 20%)
4,720
Motor car
Machinery
(21,600 x 20/120)
3,600
Impairment losses
680
72
______
(15,552)
(340 + 340)
Telephone
(600 x 60% (100 40) x 20%)
19,240
The calculation of output VAT on sales must take into account the discount for prompt payment, even for
those 20% of customers that do not take it.
Input VAT would not have been recovered in respect of the motor car sold as it was not used exclusively for
business purposes. Therefore, output VAT is not due on the disposal. Similarly, input VAT cannot be recovered
in respect of purchase of the new motor car.
Output VAT is charged on the materials that Gwen has taken out from the business for her personal use.
Input VAT on business entertainment is not recoverable unless it relates to the cost of entertaining overseas
customers.
Gwen can recover the input VAT in respect of the new machinery purchased in the quarter ended 31 March
2015 because the actual tax point was the date that the machinery was paid for.
Relief for an impairment loss is not given until six months from the time that payment is due. Therefore relief
can only be claimed in respect of the invoices due for payment on 15 August 2014 and 15 September 2014.
An apportionment is made where a service such as the use of a telephone is partly for business purposes
and partly for private purposes.
REFUNDS
The refund of VAT that has been overpaid is normally subject to a four-year time limit.
Example 13
Hedge Ltd is completing its VAT return for the quarter ended 31 March 2015. The company has discovered that it has
not been claiming for the input VAT of 35 that it has paid each quarter for the rental of coffee machines since 1
January 2005.
Claims for the refund of VAT are subject to a four-year time limit.
In addition to the input VAT incurred during the quarter ended 31 March 2015, Hedge Ltd can also claim for
the input VAT incurred during the period 1 January 2011 to 31 December 2014.
The total amount of input VAT refunded on the VAT return for the quarter ended 31 March 2015 will therefore
be 595 (35 x 17).
GOODS SUPPLIED FREE OF CHARGE

When goods are supplied free of charge then output VAT must normally be accounted for. However, there is generally
no output VAT on services supplied free of charge, regardless of whether they are supplied to an employee or a
customer.
MOTOR EXPENSES
Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.
Where fuel is provided then all the input VAT (for both private and business mileage) can be recovered, but the private
use element is then normally accounted for by way of an output VAT scale charge. The scale charge can apply to sole
traders, partners, employees or directors. The scale charge will be given to you in the exam, if required.
Example 14
Vanessa is self-employed, and has a motor car which is used 70% for business mileage. During the quarter ended 31
March 2015 Vanessa spent 1,128 on repairs to the motor car and 984 on fuel for both business and private
mileage. The relevant quarterly scale charge is 470. All figures are inclusive of VAT.
Vanessa will include the following entries on her VAT return for the quarter ended 31 March 2015:
Output VAT
Fuel scale charge
(470 x 20/120)
Input VAT
Motor repairs (1,128 x 20/120)
Fuel (984 x 20/120)
78
188
164
However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be
calculated on this charge to the employee or director.
Example 15
Ivy Ltd provides one of its directors with a company motor car which is used for both business and private mileage.
For the quarter ended 31 March 2015 the total cost of petrol was 720, with the director being charged 216 for the
private use element. Both figures are inclusive of VAT.
Ivy Ltd will include the following entries on its VAT return for the quarter ended 31 March 2015:
Output VAT
Charge to director
(216 x 20/120)
Input VAT
Fuel (720 x 20/120)
36
120
The second part of the article will cover VAT returns, VAT invoices, penalties, overseas aspects of VAT, and special
VAT schemes, plus a test of your understanding.
RELATED LINKS
VAT RETURNS
VAT returns are normally completed on a quarterly basis. Each return shows the total output VAT and total input VAT
for the quarter to which it relates.
VAT returns have to be filed online within one month and seven days of the end of the relevant quarter. Any VAT
payable is due at the same time, and must be paid electronically.
Example 1
For the VAT quarter ended 31 March 2015 Jet has output VAT of 12,400 and input VAT of 7,100.
Jets VAT return for the quarter ended 31 March 2015 will have to be submitted online by 7 May 2015, being
one month and seven days after the end of the quarter.
VAT of 5,300 (12,400 7,100) is payable electronically, and this will be due on 7 May 2015 when the VAT
return is submitted.
Because VAT is a self-assessed tax, HM Revenue and Customs can make control visits to VAT registered companies.
The purpose of a control visit is to provide an opportunity for HM Revenue and Customs to check the accuracy of VAT
returns.
VAT INVOICES
A VAT registered business will usually have to issue VAT invoices in respect of standard rated supplies. VAT invoices
must contain certain information.
Example 2
Keen Ltd registered for VAT on 1 March 2015.
The company only sells goods, and at present issues sales invoices that show (1) the invoice date and invoice
number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Keen Ltds name and
address, and (5) the name and address of the customer. Keen Ltd does not offer any discount for prompt payment.
The company wants to know the circumstances in which it is and is not required to issue a VAT invoice, the period
during which such an invoice should be issued, and the additional information that it will have to show on its sales
invoices in order that these are valid for VAT purposes.
Issue of VAT invoices
Keen Ltd must issue a VAT invoice when it makes a standard rated supply to a VAT registered customer.
A VAT invoice is not required if the supply is exempt, zero-rated, or if the supply is to a non-VAT registered
customer.
A VAT invoice should be issued within 30 days of the date that the supply of goods is treated as being made.
Additional information
The following information is required:
Keen Ltds VAT registration number
The date of supply (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
SIMPLIFIED VAT INVOICES

A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than 250.
Example 3
Jude is registered for VAT, but only a few of her customers require a VAT invoice. All of Judes sales are for less than
250.
A simplified invoice should be issued when a customer requests a VAT invoice. This must show the following
information:
Judes name and address
Judes VAT registration number
A description of the goods or services supplied
The VAT inclusive total
The rate of VAT
THE DEFAULT SURCHARGE

A default occurs if a VAT return is not submitted on time or if VAT is paid late. If the default involves the late payment
of VAT then a surcharge may be incurred.
Example 4
Li has submitted her VAT returns as follows:
Quarter ended
VAT paid
Submitted
30 September 2013
6,200
Two months late
31 December 2013
28,600
One month late
31 March 2014
4,300
On time
30 June 2014
7,600
On time
30 September 2014
1,900
On time
31 December 2014
3,200
On time
Quarter ended
VAT paid
31 March 2015
6,900
Submitted
Two months late
Li always pays any VAT which is due at the same time that the related VAT return is submitted.
The late submission of the VAT return for the quarter ended 30 September 2013 will have resulted in HM
Revenue and Customs issuing a surcharge liability notice specifying a surcharge period running to 30
September 2014.
The late payment of VAT for the quarter ended 31 December 2013 will result in a surcharge of 572 (28,600
x 2%).
In addition, the surcharge period will have been extended to 31 December 2014.
Li then submitted four VAT returns on time.
The late submission of the VAT return for the quarter ended 31 March 2015 will therefore only result in a
surcharge liability notice (specifying a surcharge period running to 31 March 2016).
ERRORS IN A VAT RETURN

A VAT registered business that makes an error in a VAT return that results in the underpayment of VAT, can be subject
to both a penalty for an incorrect return and penalty interest.
Example 5
During March 2015 Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three motor cars
when completing its VAT return for the quarter ended 31 December 2014.
If the error is less than the higher of 10,000 or 1% of Zoo Ltds turnover for the quarter ended 31 March
2015, then the error can be voluntarily disclosed by simply entering it on the VAT return for the quarter ended 31
March 2015.
If the error exceeds the limit, then it can be voluntarily disclosed but disclosure must be made separately to
HM Revenue and Customs.
There will only be penalty interest where separate disclosure is required, but a penalty for an incorrect return
might be imposed in either case.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a
taxpayers behaviour.
Example 6
HM Revenue and Customs will not charge a penalty if Zoo Ltd has taken reasonable care, provided the
company informs them of the error.
However, claiming input VAT on the purchase of motor cars is more likely to be treated as careless, since
Zoo Ltd would be expected to know that such input VAT is not recoverable.
The maximum amount of penalty will therefore be 30% of the amount of input VAT incorrectly claimed, but
this penalty could be reduced to nil if unprompted disclosure is made to HM Revenue and Customs.
IMPORTS AND EXPORTS
When a UK VAT registered business imports goods into the UK from outside the European Union, then VAT has to be
paid at the time of importation. This VAT can then be reclaimed as input VAT on the VAT return for the period during
which the goods were imported.
Example 7
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing 1,000 (exclusive
of VAT) from either a UK supplier or from a supplier situated outside the European Union.
If Yung Ltd purchases the goods from a UK supplier then it will pay the supplier 1,200 (1,000 plus VAT of
200 (1,000 x 20%)), and then reclaim input VAT of 200.
If the goods are instead purchased from a supplier situated outside the European Union, then Yung Ltd will
pay 1,000 to the supplier, 200 to HM Revenue and Customs, and then reclaim input VAT of 200.
In each case Yung Ltd has paid 1,200 and reclaimed 200.
Regular importers can defer the payment of VAT on importation by setting up an account with HM Revenue and
Customs. It is necessary to provide a bank guarantee, but VAT is then accounted for on a monthly basis.
When a UK VAT registered business exports goods outside of the European Union then the supply is zero-rated.
TRADING WITHIN THE EUROPEAN UNION

When a UK VAT registered business acquires goods from within the European Union, then VAT has to be accounted
for according to the date of acquisition. The date of acquisition is the earlier of the date that a VAT invoice is issued or
the 15th day of the month following the month in which the goods come into the UK.
This VAT charge is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT
return (this is known as the reverse charge procedure). Therefore for most businesses there is no VAT cost as the
output VAT and the corresponding input VAT contra out. 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.
Example 8
Continuing with example 7
Yung Ltd also has the option of purchasing goods from a supplier situated in the European Union.
Yung Ltd will pay 1,000 to the supplier. Then on its VAT return the company will show output VAT of 200
and input VAT of 200.
The end result is the same as with an import from outside the European Union, but with a European Union
acquisition there is no need to actually pay the VAT subsequent to its recovery as input VAT.
When a UK VAT registered business supplies goods to another VAT registered business within the European Union
then the supply is zero-rated.
INTERNATIONAL SERVICES
Services supplied to a VAT registered business are generally treated as being supplied in the country where the
customer is situated. Therefore, where a UK VAT registered business receives international services the place of
supply will be the UK.
Example 9
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT
registered businesses situated elsewhere within the European Union. As business to business services these are
treated as being supplied in the UK.
VAT will be accounted for on the earlier of the date that the service is completed or the date it is paid for.
The VAT charged at the UK VAT rate should be declared on Wing Ltds VAT return as output VAT, but will
then be reclaimed as input VAT on the same VAT return.
The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT
as the place of supply will be outside the UK.
THE CASH ACCOUNTING, ANNUAL ACCOUNTING AND FLAT RATE SCHEMES

The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful that
the schemes are not confused, as they are completely different from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be
beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The
disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.
Example 10
Ming is registered for VAT. She has annual standard rated sales of 800,000. This figure is inclusive of VAT. Ming
pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her
customers have recently defaulted on the payment of their debts.
Ming can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not
exceed 1,350,000 exclusive of VAT.
In addition, she must be up to date with her VAT returns and VAT payments.
Output VAT will be accounted for three months later than at present since the scheme will result in the tax
point becoming the date that payment is received from customers.
The recovery of input VAT on expenses will not be affected as these are paid in cash.
The scheme will provide automatic relief for an impairment loss should a customer default on the payment of
a debt.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to
submit one VAT return each year.
Example 11
Newt Ltd is registered for VAT. The company has annual standard rated sales of 950,000. This figure is inclusive of
VAT. Because of bookkeeping problems Newt Ltd has been late in submitting its recent VAT returns.
Newt Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12
months does not exceed 1,350,000 exclusive of VAT.
In addition the company must be up to date with its VAT payments.
Under the scheme only one VAT return is submitted each year. This is due within two months of the end of
the annual VAT period.
The resulting reduced administration should mean that default surcharges are avoided in respect of the late
submission of VAT returns.
Nine monthly payments are made on account of VAT commencing in month four of the annual VAT return
period. Any balancing payment is made with the VAT return.
Each payment on account will be 10% of the VAT payable for the previous year. This will improve both
budgeting and possibly cash flow where a business is expanding.
The flat rate scheme can simplify the way in which small businesses calculate their VAT liability.
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total
income. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the VAT inclusive total income figure (including exempt supplies) with no input
VAT being recovered. The percentage varies according to the type of trade that the business is involved in, and will be
given to you in the exam.
Example 12
Omah registered for VAT on 1 January 2015. He has annual standard rated sales of 100,000, and these are all
made to the general public. Omah has annual standard rated expenses of 16,000. Both figures are exclusive of VAT.
The relevant flat rate scheme percentage for Omahs trade is 13%.
Omah can join the flat rate scheme if his expected taxable turnover (excluding VAT) for the next 12 months
does not exceed 150,000.
He can continue to use the scheme until his total turnover (including VAT, but excluding sales of capital
assets) for the previous year exceeds 230,000.
The main advantage of the scheme is the simplified VAT administration. Omahs customers are not VAT
registered, so there will be no need to issue VAT invoices.
Using the normal basis of calculating the VAT liability, Omah will have to pay annual VAT of 16,800
(100,000 16,000 = 84,000 x 20%).
If he uses the flat rate scheme then Omah will pay VAT of 15,600 (100,000 + 20,000 (output VAT of
100,000 x 20%) = 120,000 x 13%), which is an annual saving of 1,200 (16,800 15,600).
CONCLUSION
There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. You will
normally find that several different topics are covered within each Section B VAT question, and so it is important that
you cover the whole subject area.
RELATED LINKS
VAT RETURNS
VAT returns are normally completed on a quarterly basis. Each return shows the total output VAT and total input VAT
for the quarter to which it relates.
VAT returns have to be filed online within one month and seven days of the end of the relevant quarter. Any VAT
payable is due at the same time, and must be paid electronically.
Example 1
For the VAT quarter ended 31 March 2015 Jet has output VAT of 12,400 and input VAT of 7,100.
Jets VAT return for the quarter ended 31 March 2015 will have to be submitted online by 7 May 2015, being
one month and seven days after the end of the quarter.
VAT of 5,300 (12,400 7,100) is payable electronically, and this will be due on 7 May 2015 when the VAT
return is submitted.
Because VAT is a self-assessed tax, HM Revenue and Customs can make control visits to VAT registered companies.
The purpose of a control visit is to provide an opportunity for HM Revenue and Customs to check the accuracy of VAT
returns.
VAT INVOICES
A VAT registered business will usually have to issue VAT invoices in respect of standard rated supplies. VAT invoices
must contain certain information.
Example 2
Keen Ltd registered for VAT on 1 March 2015.
The company only sells goods, and at present issues sales invoices that show (1) the invoice date and invoice
number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Keen Ltds name and
address, and (5) the name and address of the customer. Keen Ltd does not offer any discount for prompt payment.
The company wants to know the circumstances in which it is and is not required to issue a VAT invoice, the period
during which such an invoice should be issued, and the additional information that it will have to show on its sales
invoices in order that these are valid for VAT purposes.
Issue of VAT invoices
Keen Ltd must issue a VAT invoice when it makes a standard rated supply to a VAT registered customer.
A VAT invoice is not required if the supply is exempt, zero-rated, or if the supply is to a non-VAT registered
customer.
A VAT invoice should be issued within 30 days of the date that the supply of goods is treated as being made.
Additional information
The following information is required:
Keen Ltds VAT registration number
The rate of VAT for each supply
The VAT-exclusive amount for each supply
The total VAT-exclusive amount
The amount of VAT payable
SIMPLIFIED VAT INVOICES

A simplified (or less detailed) VAT invoice can be issued where the VAT inclusive total of the invoice is less than 250.
Example 3
Jude is registered for VAT, but only a few of her customers require a VAT invoice. All of Judes sales are for less than
250.
A simplified invoice should be issued when a customer requests a VAT invoice. This must show the following
information:
Judes name and address
Judes VAT registration number
A description of the goods or services supplied
The VAT inclusive total
The rate of VAT
THE DEFAULT SURCHARGE

A default occurs if a VAT return is not submitted on time or if VAT is paid late. If the default involves the late payment
of VAT then a surcharge may be incurred.
Example 4
Li has submitted her VAT returns as follows:
Quarter ended
VAT paid
Submitted
30 September 2013
6,200
Two months late
31 December 2013
28,600
One month late
31 March 2014
4,300
On time
30 June 2014
7,600
On time
30 September 2014
1,900
On time
31 December 2014
3,200
On time
Quarter ended
VAT paid
31 March 2015
6,900
Submitted
Two months late
Li always pays any VAT which is due at the same time that the related VAT return is submitted.
The late submission of the VAT return for the quarter ended 30 September 2013 will have resulted in HM
Revenue and Customs issuing a surcharge liability notice specifying a surcharge period running to 30
September 2014.
The late payment of VAT for the quarter ended 31 December 2013 will result in a surcharge of 572 (28,600
x 2%).
In addition, the surcharge period will have been extended to 31 December 2014.
Li then submitted four VAT returns on time.
The late submission of the VAT return for the quarter ended 31 March 2015 will therefore only result in a
surcharge liability notice (specifying a surcharge period running to 31 March 2016).
ERRORS IN A VAT RETURN

A VAT registered business that makes an error in a VAT return that results in the underpayment of VAT, can be subject
to both a penalty for an incorrect return and penalty interest.
Example 5
During March 2015 Zoo Ltd discovered that it had incorrectly claimed input VAT on the purchase of three motor cars
when completing its VAT return for the quarter ended 31 December 2014.
If the error is less than the higher of 10,000 or 1% of Zoo Ltds turnover for the quarter ended 31 March
2015, then the error can be voluntarily disclosed by simply entering it on the VAT return for the quarter ended 31
March 2015.
If the error exceeds the limit, then it can be voluntarily disclosed but disclosure must be made separately to
HM Revenue and Customs.
There will only be penalty interest where separate disclosure is required, but a penalty for an incorrect return
might be imposed in either case.
The amount of penalty is based on the amount of VAT understated, but the actual penalty payable is linked to a
taxpayers behaviour.
Example 6
HM Revenue and Customs will not charge a penalty if Zoo Ltd has taken reasonable care, provided the
company informs them of the error.
However, claiming input VAT on the purchase of motor cars is more likely to be treated as careless, since
Zoo Ltd would be expected to know that such input VAT is not recoverable.
The maximum amount of penalty will therefore be 30% of the amount of input VAT incorrectly claimed, but
this penalty could be reduced to nil if unprompted disclosure is made to HM Revenue and Customs.
IMPORTS AND EXPORTS
When a UK VAT registered business imports goods into the UK from outside the European Union, then VAT has to be
paid at the time of importation. This VAT can then be reclaimed as input VAT on the VAT return for the period during
which the goods were imported.
Example 7
Yung Ltd is registered for VAT in the UK. The company has the choice of purchasing goods costing 1,000 (exclusive
of VAT) from either a UK supplier or from a supplier situated outside the European Union.
If Yung Ltd purchases the goods from a UK supplier then it will pay the supplier 1,200 (1,000 plus VAT of
200 (1,000 x 20%)), and then reclaim input VAT of 200.
If the goods are instead purchased from a supplier situated outside the European Union, then Yung Ltd will
pay 1,000 to the supplier, 200 to HM Revenue and Customs, and then reclaim input VAT of 200.
In each case Yung Ltd has paid 1,200 and reclaimed 200.
Regular importers can defer the payment of VAT on importation by setting up an account with HM Revenue and
Customs. It is necessary to provide a bank guarantee, but VAT is then accounted for on a monthly basis.
When a UK VAT registered business exports goods outside of the European Union then the supply is zero-rated.
TRADING WITHIN THE EUROPEAN UNION

When a UK VAT registered business acquires goods from within the European Union, then VAT has to be accounted
for according to the date of acquisition. The date of acquisition is the earlier of the date that a VAT invoice is issued or
the 15th day of the month following the month in which the goods come into the UK.
This VAT charge is declared on the VAT return as output VAT, but can be reclaimed as input VAT on the same VAT
return (this is known as the reverse charge procedure). Therefore for most businesses there is no VAT cost as the
output VAT and the corresponding input VAT contra out. 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.
Example 8
Continuing with example 7
Yung Ltd also has the option of purchasing goods from a supplier situated in the European Union.
Yung Ltd will pay 1,000 to the supplier. Then on its VAT return the company will show output VAT of 200
and input VAT of 200.
The end result is the same as with an import from outside the European Union, but with a European Union
acquisition there is no need to actually pay the VAT subsequent to its recovery as input VAT.
When a UK VAT registered business supplies goods to another VAT registered business within the European Union
then the supply is zero-rated.
INTERNATIONAL SERVICES
Services supplied to a VAT registered business are generally treated as being supplied in the country where the
customer is situated. Therefore, where a UK VAT registered business receives international services the place of
supply will be the UK.
Example 9
Wing Ltd is registered for VAT in the UK. The company receives supplies of standard rated services from VAT
registered businesses situated elsewhere within the European Union. As business to business services these are
treated as being supplied in the UK.
VAT will be accounted for on the earlier of the date that the service is completed or the date it is paid for.
The VAT charged at the UK VAT rate should be declared on Wing Ltds VAT return as output VAT, but will
then be reclaimed as input VAT on the same VAT return.
The supply of international services by a UK VAT registered business will generally be outside the scope of UK VAT
as the place of supply will be outside the UK.
THE CASH ACCOUNTING, ANNUAL ACCOUNTING AND FLAT RATE SCHEMES

The cash accounting, annual accounting and flat rate schemes are all available to small businesses. Be careful that
the schemes are not confused, as they are completely different from each other.
The cash accounting scheme enables a business to account for VAT on a cash basis. The scheme will normally be
beneficial where a period of credit is given to customers. It also results in automatic relief for impairment losses. The
disadvantage is that input VAT will only be recovered when purchases and expenses are paid for.
Example 10
Ming is registered for VAT. She has annual standard rated sales of 800,000. This figure is inclusive of VAT. Ming
pays her expenses on a cash basis, but allows customers three months credit when paying for sales. Several of her
customers have recently defaulted on the payment of their debts.
Ming can use the cash accounting scheme if her expected taxable turnover for the next 12 months does not
exceed 1,350,000 exclusive of VAT.
In addition, she must be up to date with her VAT returns and VAT payments.
Output VAT will be accounted for three months later than at present since the scheme will result in the tax
point becoming the date that payment is received from customers.
The recovery of input VAT on expenses will not be affected as these are paid in cash.
The scheme will provide automatic relief for an impairment loss should a customer default on the payment of
a debt.
In contrast, the advantage of the annual accounting scheme is mainly administrative, since a business only has to
submit one VAT return each year.
Example 11
Newt Ltd is registered for VAT. The company has annual standard rated sales of 950,000. This figure is inclusive of
VAT. Because of bookkeeping problems Newt Ltd has been late in submitting its recent VAT returns.
Newt Ltd can apply to use the annual accounting scheme if its expected taxable turnover for the next 12
months does not exceed 1,350,000 exclusive of VAT.
In addition the company must be up to date with its VAT payments.
Under the scheme only one VAT return is submitted each year. This is due within two months of the end of
the annual VAT period.
The resulting reduced administration should mean that default surcharges are avoided in respect of the late
submission of VAT returns.
Nine monthly payments are made on account of VAT commencing in month four of the annual VAT return
period. Any balancing payment is made with the VAT return.
Each payment on account will be 10% of the VAT payable for the previous year. This will improve both
budgeting and possibly cash flow where a business is expanding.
The flat rate scheme can simplify the way in which small businesses calculate their VAT liability.
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage to total
income. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the VAT inclusive total income figure (including exempt supplies) with no input
VAT being recovered. The percentage varies according to the type of trade that the business is involved in, and will be
given to you in the exam.
Example 12
Omah registered for VAT on 1 January 2015. He has annual standard rated sales of 100,000, and these are all
made to the general public. Omah has annual standard rated expenses of 16,000. Both figures are exclusive of VAT.
The relevant flat rate scheme percentage for Omahs trade is 13%.
Omah can join the flat rate scheme if his expected taxable turnover (excluding VAT) for the next 12 months
does not exceed 150,000.
He can continue to use the scheme until his total turnover (including VAT, but excluding sales of capital
assets) for the previous year exceeds 230,000.
The main advantage of the scheme is the simplified VAT administration. Omahs customers are not VAT
registered, so there will be no need to issue VAT invoices.
Using the normal basis of calculating the VAT liability, Omah will have to pay annual VAT of 16,800
(100,000 16,000 = 84,000 x 20%).
If he uses the flat rate scheme then Omah will pay VAT of 15,600 (100,000 + 20,000 (output VAT of
100,000 x 20%) = 120,000 x 13%), which is an annual saving of 1,200 (16,800 15,600).
CONCLUSION
There is quite a lot to remember when studying VAT, although the subject itself is not particularly complicated. You will
normally find that several different topics are covered within each Section B VAT question, and so it is important that
you cover the whole subject area.

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FINANCE ACT 2014

150,001 and over

Born between 6 April 1938 and 5 April 1948

Born before 6 April 1938

Personal allowance (born before 6 April 1948)

Building society interest

Tax suffered at source

Income tax: 17,840 at 20%

Company car benefit

75 grams per kilometre or less

76 grams to 94 grams per kilometre

95 grams per kilometre

Plant and machinery

Special rate pool

CO emissions between 96 and

Annual investment allowance

Purchased motor car (1)

Purchased motor car (2)

Purchased motor car (3)

Purchased motor car (4)

Sold motor car (2)

NEW INDIVIDUAL SAVINGS ACCOUNTS

Pension scheme limit

Annual allowance charge

Small profits rate

Financial year 2013

Financial year 2013

Financial year 2014

CAPITAL GAINS TAX

He has taxable income of 8,000 for the tax year 201415.

Shareholding in Green Ltd

Annual exempt amount

Capital gains tax: 789,000 at 10%

Freehold office building

Gains qualifying for entrepreneurs

Freehold office building

Capital losses brought forward

Annual exempt amount

Capital gains tax:

Capital gains tax

Annual exempt amount

Principal private residences

Inheritance tax: tax rates

Inheritance tax: taper relief

Years before death

Over 3 but less than 4 years

Over 4 but less than 5 years

Over 5 but less than 6 years

Over 6 but less than 7 years

NATIONAL INSURANCE CONTRIBUTIONS

1 7,956 per year

7,957 41,865 per year

41,866 and above per year

1 7,956 per year

7,957 and above per year

Company motor car

The class 1 and class 1A NIC liabilities are as follows:

Employee class 1 NIC

50,000 41,865 = 8,135 at 2%

Employers class 1A NIC

13,525 (6,300 + 5,425 + 1,800) at 13.8%

Class 2 and class 4 national insurance contributions

1 7,956 per year

7,957 41,865 per year