BARBRI - Tax Law

What is the corporation tax rate?

19%

What tax rates apply to capital gains made on estate assets during the administration of the estate?

20% on general gains and 28% on residential property.

Which of the following best describes the lifetime tax charge on a CLT payable by the donor?

25% tax is owed only if the net gift exceeds the nil rate band in the year of gift, less any gross chargeable transfers in the prior seven years to this gift and after deducting any available annual exemption.

The UK tax year runs between which dates?

6 April to 5 April

Which of the following do not pay UK CGT on their gains?

A company. A non-UK resident individual without any UK land.

Which of the following chargeable disposals would qualify for Gift Relief?

A gift of shares in a trading company. A gift of land and buildings used in the transferor's personal company. A gift of a plot of farmland.

Which of the following types of transfers by an individual best describes a potentially exempt transfer (PET)?

A lifetime transfer made by one individual to another individual.

Which of the following describes who is liable to UK IHT?

A non-UK domiciled individual on the transfer of any UK assets only. A UK domiciled individual on the transfer of any worldwide assets.

Which of the following would most likely be found to be a wasting asset not subject to CGT?

A prize-winning cow.

Which of the following are treated as 'business property' for purposes of business relief?

A sole trader's business. A 20% shareholding in an unlisted trading company. A 75% shareholding in a quoted trading company. Plant and machinery owned by a partner and used within the partnership.

Which of the following are correct in relation to agricultural relief?

Agricultural relief is available on land or buildings used for the purposes of agriculture situated in the UK, Channel Islands, Isle of Man, or European Economic Area State. Agricultural relief can be withdrawn if the transferor dies within seven years of transfer and the transferee no longer owns the asset and has not replaced it with other qualifying assets.

Which of the following are considered transfers of value for inheritance tax (IHT)?

Any gratuitous disposition by a person resulting in a diminution of the value of his estate.

If a taxpayer sells some UK land on 1 June 2020, when will the CGT be due?

As the disposal of UK land is after 6 April 2020, the CGT due must be reported and paid within 30 days of completion, so 30 June 2020.

At what income level does the Personal Allowance begin to taper and at what rate does it taper?

At £100,000; 1:2

Savings and non-savings rates of tax.

Basic Rate Band: 20% on income between £1 - £37,500 Higher Rate Band: 40% on income between £37,501 - £150,000 Starting Rate Band: 0% on certain interest income between £0- £5,000 for low-income taxpayers

Business Relief

Business Relief reduces the value of a business or its assets when working out how much Inheritance Tax has to be paid. Any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes. You can get Business Relief of either 50% or 100% on some of an estate's business assets, which can be passed on: while the owner is still alive as part of the will

Which of the following expenses would be deductible against trade income as being revenue/income in nature?

Business advertising. Staff wages.

Select which reliefs are available against the death estate.

Business relief. Reduced rate for substantial charity gifts. Quick succession relief.

Which of the following taxes must Personal Representatives settle prior to calculating and finalising the IHT liability?

Capital gains tax. Income tax.

Which one of the following does not usually form part of a company's taxable profits?

Dividend income.

Which of the following is subject to income tax?

Employment income. Interest income. Trade profits.

True or false? Companies pay capital gains tax at the same rate an individual pays capital gains tax, except they are not entitled to an annual exemption.

False in that companies pay corporation tax on net chargeable gains rather than capital gains tax.

True or false? The nil rate band available when calculating a lifetime IHT charge is the nil rate band in the year of gift less any gross CLTs and PETs in the prior seven years.

False, PETs from the prior seven years are not considered.

True or false? Agricultural relief usually provides 100% relief for transfers of farmland and buildings at death only.

False, agricultural property relief is available for both lifetime and death transfers of qualifying agricultural property.

True or false? Additional rate taxpayers are not entitled to a Dividend Allowance.

False, all taxpayers are entitled to the dividend allowance of £2,000.

True or false? When a sole trader has ceased trading, terminal loss relief allows any loss in the last 12 months of trade to be carried back to the previous three years, taking more recent years first.

False, in that terminal loss relief allows the trade loss to be carried back only against trade income (not net income) taking it to later years first.

True or false? The nil rate band available when calculating an IHT charge at death is the nil rate band in the year of gift less any gross CLTs and PETs in the prior seven years.

False, it is the nil rate band in the year of death that is used less gross CLTs and PETs in the prior seven years.

True or false? The due date for the 2020/21 online tax return is 31 October 2021.

False, online tax returns are due on 31 January after the end of the tax year.

True or false? Personal Representatives are not bound by the normal self-assessment rules.

False, returns are still filed by 31 January after the tax year.

True or false? A person who was absent from their home because they were working elsewhere in the UK will be deemed to have occupied their home during the absence so long as they lived in the home before and after the absence.

False, the deemed occupation period cannot exceed four years.

True or false? A person who was absent from their home for a reason other than working will be deemed to have occupied their home during the absence so long as they lived in the home before and after the absence.

False, the deemed occupation period cannot exceed three years.

True or false? Under the 'wholly and exclusively' test for determining whether an expense is deductible from gross income to determine trade income, if the expense has a personal element, it is not deductible.

False, the expense is deductible, but only to the extent of the business aspect and only if the expense is not materially for a personal or non-business purpose.

True or false? Business Asset Disposal Relief is available on qualifying gains of up to £10 million.

False, the limit is £1 million.

True or false? A UK taxpayer will always be deemed to have occupied their primary residence their last 18 months of ownership for purposes of Principal Private Residence Relief.

False, the period of deemed occupation is only the last nine months of ownership.

True or false? There is always a lifetime IHT charge when a PET exceeds the available nil rate band.

False, there is never any lifetime IHT charge on a PET. A PET becomes chargeable only if it is made within seven years prior to death.

True or false? Capital losses can be offset against either a taxpayer's income or gains.

False, they can be used only to offset capital gain

True or false? Business property relief is available only if the donor owned the property for at least two years before the transfer.

False; there are exceptions to the general rule when the business property asset is replaced with another within three years of the transfer or the business property was inherited from one's spouse.

Which of the following are exempted from the death estate?

Gifts to charity. Gifts to a UK domiciled spouse.

A higher rate taxpayer has a capital loss of £20,000. What would be the most tax efficient way to allocate the loss?

Offset against a gain on a residential property.

Which of the following best describes the expenses which may be deducted against gross income to determine the trading income of a business?

Only revenue-related expenses that are recurring.

Which of the following correctly describes why overlap profits can arise for a sole trader in the first few years of trade?

Overlap profits arise when the tax year and the sole trader's accounting period do not coincide, resulting in some profit being taxed twice.

An exemption is available on the occasion of a lifetime gift on marriage.

Parent: Up to the first £5,000. Bride, groom, or grandparent: Up to the first £2,500. Anyone else: Up to the first £1,000. C.

Which of the following pay income tax (rather than corporation tax) on their trade profits?

Partner of a limited liability partnership. Sole trader. Partner of an ordinary partnership.

Which of the following would be a fully exempt transfer?

Private school fees paid regularly out of grandparents' income on behalf of their grandchildren. A cash gift to a registered charity. A gift of £200 to a friend.

Quick succession relief

QSR is a relief under s141 of the Inheritance Tax Act 1984. It is intended to alleviate cases where the same assets in an estate would otherwise be subject to Inheritance Tax (IHT) twice within a relatively short period of time (5 years). The relief is given by reducing the tax payable on the death estate and is calculated with reference to the: amount of tax on the earlier chargeable transfer; benefit to the deceased on that transfer; and period of time between that transfer and the death. It essentially allows a percetage of the tax paid on the first death to be credited against the IHT paid on the second death. The percentages are: 100% if death occurs within 1 year of the first death; 80% if death occurs between 1 and 2 years; 60% if death occurrs between 2 and 3 years; 40% if death occurs between 3 and 4 years; 20% if death occurs within 4 and 5 years.

Which of the following CGT reliefs defer the gain?

Replacement Business Asset Relief/Roll-Over Relief. Gift Relief. Incorporation Relief. Enterprise Investment Scheme Reinvestment Relief.

Which of the following are aims of the general anti-abuse rule (GAAR)?

The GAAR is designed to deter taxpayers from entering schemes that abuse the tax system and promoters of such schemes. The GAAR allows HMRC to set aside a tax arrangement if it cannot reasonably be regarded as a reasonable course of action.

Which of the following would be deductible when calculating the gain on a disposal of a chargeable asset?

The asset's probate value if the asset was inherited. Any stamp duty land tax originally incurred on the purchase of the asset.

Which of the following conditions must be satisfied for the Marriage Allowance to be available?

The couple must be married or in a civil partnership. The transferring spouse's income must be less than the Personal Allowance. Only 10% of the Personal Allowance can be transferred. The recipient spouse must be a basic rate taxpayer.

When is the lifetime IHT due for a CLT?

The later of six months from the end of the month in which the CLT was made and 30 April after the tax year in which it was made.

Which of the following statements are true with respect to transferability of the nil rate band?

The unused proportion of an individual's nil rate band can be transferred to their surviving spouse on their death. It is possible to transfer unused nil rate band from up to two spouses, but no more than two times the nil rate band in the year of death may be used. The transferable nil rate band can be used in any death tax calculation but not when calculating the lifetime tax on CLTs.

Which of the following chargeable disposals would qualify for Business Asset Disposal Relief?

To qualify for relief, both of the following must apply for at least 2 years up to the date you sell your business: you're a sole trader or business partner you've owned the business for at least 2 years Shares of a trading company sold by a taxpayer who is a director of the company and who has owned 5% of the company for the last five years. Part of a business sold by a sole trader that has been run as a trading business for the last 10 years.

True or false? An individual resident in the UK is subject to capital gains tax on disposal of a chargeable asset regardless of where in the world it is located, but a non-UK resident is subject to CGT only on assets disposed of within the UK.

True as to UK residents only.

True or false? Businesses are entitled to an annual investment allowance which allows them to deduct 100% of their capital expenditures annually, up to the amount of the annual allowance, but excluding cars.

True in all respects

True or false? If the death estate has produced income, Personal Representatives will not be entitled to a personal allowance, personal savings allowance, or dividend allowance. However, if any assets are sold during the administration period, Personal Representatives will be entitled to an annual exemption.

True in all respects.

True or false? Additional rate taxpayers are not entitled to a Personal Savings Allowance.

True, additional rate taxpayers are not entitled to a Personal Savings Allowance.

True or false? Under Replacement Business Asset Relief/Roll-Over Relief, gain on the sale of a business asset will be deferred by reducing the acquisition cost of a replacement business asset by the amount of gain invested if the replacement asset is purchased within one year before or two years after the replaced asset is sold.

True, but the taxpayer has up to three years after the sale in which to replace the asset.

True or false? The effect of Hold Over Relief is that, when the donee disposes of the asset, they are charged to CGT not only on their own gain, but also on that of the donor.

True, if a joint election is made for hold over relief, the donor's gain defers to the donee by deducting the deferred gain from the donee's deemed acquisition cost.

True or false? The death estate is the sum of all assets held less any debts or liabilities owned by the individual at the date of death.

True, nothing is exempt from IHT at death, so all assets must be valued at death and then outstanding debts and reasonable funeral expenses are deducted to value the estate.

True or false? When a sole trader has claimed current year or prior year loss relief for a trade loss against net income, any excess loss can then reduce their capital gains of the same tax year.

True, provided a claim has been made to use the trade loss against their net income, any remaining loss can be used to reduce the taxpayer's capital gains tax.

True or false? A business is taxed on the profits made during the accounting period that ends in the tax year to 5 April.

True.

True or false? A partnership does not pay income tax but must still nominate a partner to fill in a Partnership Tax Return.

True.

True or false? A person who was absent from their home because they were working overseas will be deemed to have occupied their home during the absence so long as they lived in the home before and after the absence.

True.

True or false? If 10% or more of the deceased's net estate has been left to a charity, the taxable estate is charged at 36% instead of the normal 40%.

True.

True or false? If a company's profits exceed £1.5 million, they must pay their taxes in quarterly installments.

True.

True or false? If a taxpayer's gains can be covered by either their capital losses or their Annual Exempt Amount, the taxpayer must offset their capital losses first

True.

True or false? If an asset is disposed of by gift or the transaction is with a 'connected person,' we use market value instead of the price that was paid to calculate the proceeds of the sale.

True.

True or false? Net income is the total of all gross income (excluding any exempt income) after deducting payments of interest on some qualifying loans.

True.

True or false? Non-savings income (that is, trading income, rental profits, employment income, and pension income) and interest earned by Personal Representatives during the administration period are taxed at the basic rate of 20% regardless of the amount of income.

True.

True or false? Penalties may be imposed of up to 100% if a taxpayer deliberately falsifies or omits their income.

True.

True or false? Principal Private Residence Relief will be reduced proportionately based on the time the owner was not in occupation of the home unless the owner was in deemed occupation.

True.

True or false? Sole traders are required to make two payments on account, each based on 50% of the previous year's tax liability.

True.

True or false? The residence nil rate band is available only when a 'qualifying residential interest' in the deceased's estate is left to a lineal descendant.

True.

True or false? The residence nil rate band is tapered by £1 for every £2 by which the estate's net value exceeds £2 million.

True.

True or false? The trustees of a trust will receive credit for any lifetime tax paid on a CLT.

True.

True or false? To qualify for agricultural relief, the agricultural property must have been occupied by the transferor for the purposes of agriculture throughout the two years prior to the transfer.

True. 2 years if occupied by the owner, a company controlled by them, or their spouse or civil partner; 7 years if occupied by someone else

True or false? Transfers to either a discretionary trust or an interest in possession trust will always be a CLT.

True. Discretionary Trust - A trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. Interest in Possession - An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust or the right to enjoy the trust assets for the present time in another way

True or false? A chargeable lifetime transfer (CLT) may suffer both a lifetime IHT charge and an additional IHT on death.

True. If a CLT exceeds the available nil rate band, there will be a lifetime tax charge and a further death tax charge if the donor dies within seven years of making the gift.

A taxpayer has taxable income of £65,000, including £1,000 of building society interest, after the Personal Allowance has been deducted. Is the interest taxable and at what rate?

Yes, at 40% on the interest that exceeds the Personal Savings Allowance.

If a non-wasting asset is sold for a profit, is the profit chargeable to CGT?

Yes, but only if the non-wasting asset is sold for more than £6,000.

Are Personal Representatives entitled to claim any annual exempt amount against the estate's capital gains?

Yes, for the year of death and the following two years only.

Are taxes on overlap profits ever relieved?

Yes, relief is available for this double payment either when the taxpayer changes their accounting date closer to 5 April or when the taxpayer ceases to trade.

Is any deduction from gross income available if a business purchases capital assets at a cost that exceeds the annual investment allowance?

Yes, the cost goes into a pool and a percentage of the amount in the pool may be deducted from the pool and the trading profits each year. This is known as the Writing Down Allowance.

Is any nil rate band available to reduce tax liability on a death estate?

Yes, the nil rate band in the year of the death is available, but it will be reduced by any gross CLTs and PETs made in the seven years prior to death.

Is an individual entitled to exempt any capital gains annually?

Yes, £12,300.

Is there an exemption available to reduce the IHT value for lifetime transfers?

Yes, £3,000 per year.

What qualifies for Business Relief?

You can get 100% Business Relief on: a business or interest in a business shares in an unlisted company You can get 50% Business Relief on: shares controlling more than 50% of the voting rights in a listed company land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled land, buildings or machinery used in the business and held in a trust that it has the right to benefit from You can only get relief if the deceased owned the business or asset for at least 2 years before they died.

A sole trader ceases business. His final accounting period is 12 months to 31 March with a trade profit of £12,000. He also has overlap profits brought forward of £3,200. What is his final tax adjusted trade profits?

£8,800

Which of the following best describes a wasting asset for purposes of CGT?

Moveable property with an expected life of less than 50 years.

If a company's profits do not exceed £1.5 million, what is the deadline for a company to pay its corporation tax?

Nine months and a day after the end of its accounting year.

If a person sells a collectible car at a profit, is the profit subject to CGT?

No because car sales are exempt from CGT.

A UK taxpayer has lived in their home as their primary residence the entire time they owned their home. They sell the home at a gain. Will the taxpayer have to pay CGT on the gain?

No, because of Principal Private Residence Relief.

A taxpayer has not made a chargeable lifetime transfer in any previous tax year. This year, they make a chargeable transfer of £4,000. May they carry forward any annual exemption into the next tax year?

No, because the current year's annual exemption of £3,000 must be used first.

Will the lifetime transfer of an asset by a transferor always lead to the 'gift with reservation of benefit' rules when the benefit is retained?

No, not if it is either an insignificant benefit or if market rate consideration is given by the transferor in return for the benefit to the transferee. For inheritance tax (IHT) purposes, a gift that is not fully given away because the person making the gift (the donor) keeps back some benefit for himself.

Personal Representatives distribute an estate asset to a beneficiary in settlement of a legacy under a will. Does this give rise to a CGT liability?

No, the beneficiary will be deemed to have acquired the asset at probate value, and any subsequent increase in value is ignored.

Which of the following are true of 'self-assessment'?

Individuals are responsible for reporting their taxable income and gains to HMRC. Individuals may not need to self-assess if all their taxes are collected through PAYE. Taxes due are paid directly to HMRC.

Which type of taxpayer is more likely to pay the majority of their income tax via PAYE?

Individuals with employment income. Individuals with pension income.

Which of the following best describes when taper relief is available against IHT?

It is available on any CLTs and PETs that were made more than three years prior to death.

As a general rule, on what is an asset's probate value based?

Its acquisition cost by the decedent. Its market value on the date of the decedent's death.