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This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Taxation – United Kingdom (TX-UK) (F6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting TX-UK (F6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Taxation – United Kingdom (TX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be F6 Taxation (UK). Since this name change takes place during the validity of this article, TX-UK (F6) has been used throughout.

You can expect to see questions set at TX-UK (F6) which focus on higher skills. Typically, such a question will cover more than one syllabus area or more than one tax, bridging the gap between TX-UK (F6) and ATX-UK (P6). However, where a question covers more than one tax you will be given clear guidance notes as to exactly which taxes you need to consider.

Income tax, corporation tax and national insurance contributions (NIC)

A typical scenario might be consideration of whether an individual should operate as a sole trader or trade via a limited company. The following example is much longer and more detailed than could possibly be set as an exam question, but it does cover several possible scenarios.

Example 1
Newt is going to commence self-employment on 6 April 2017, but is unsure whether to run his business as a sole trader or to trade via a limited company, Amphibian Ltd.

In either case, Newt’s tax adjusted trading profit for the year ended 5 April 2018 will be £100,000 (before taking account of any director’s remuneration or employer’s class 1 NIC if trading via a limited company).

If Newt trades via a limited company, then he is considering three alternative approaches to extracting profits from Amphibian Ltd:

  • The entire profits will be withdrawn as director’s remuneration (after allowing for employer’s class 1 NIC of £11,137 (Amphibian Ltd is not entitled to the NIC annual employment allowance)).
  • The entire net of tax profits will be withdrawn as dividends (after allowing for corporation tax).
  • Newt will pay himself gross director’s remuneration of £8,000 and dividends of £45,000. Amphibian Ltd will make a pension contribution of £10,000 into a company pension scheme on behalf of Newt, with the balance of the profits remaining undrawn within the new company.


Self-employment

  • Newt’s income tax liability will be:
                                                                              £ 
Trading profit100,000 
Personal allowance(11,500) 
Taxable income88,500 
   
Income tax:  33,500 at 20%
                     55,000 at 40%
6,700
22,000
 
Income tax liability28,700 


  • Class 2 NICs will be £148 (52 x 2.85).
  • Class 4 NICs will be:
 £ 
36,836 (45,000 – 8,164)
at 9%

3,315
 
55,000 (100,000 – 45,000)
at 2%

1,100
 
 4,415 


Limited company – director’s remuneration

  • Newt’s income tax liability will be:
 £ 
Director’s remuneration (100,000 – 11,137)
88,863
 
Personal allowance(11,500) 
Taxable income77,363 

Income tax: 33,500 at 20%
                   43,863 at 40%

6,700
17,545
 
Income tax liability24,245 


  • Newt’s employee class 1 NICs will be:
 £ 
36,836 (45,000 – 8,164)
at 12%

4,420
 
43,863 (88,863 – 45,000)
at 2%

877
 
 5,297 


  • There is no corporation tax liability for Amphibian Ltd because the entire profits of the company have been withdrawn.


Limited company – dividends

  • There will be no class 1 NIC.
  • Amphibian Ltd’s corporation tax liability will be £19,000 (100,000 at 19%).
  • Dividends of £81,000 (100,000 – 19,000) will be paid to Newt.
  • Newt's income tax liability will be:
 £ 
Dividend income81,000
Personal allowance(11,500)
Taxable income69,500
Income tax:  
5,000 at 0%
28,500 (33,500 – 5,000) at 7.5%
36,000 at 32.5%

0
2,137
11,700
Income tax liability13,837


Limited company – mixed remuneration package

  • Newt's income tax liability will be:
 £
Director’s remuneration8,000
Pension contribution0
Dividends income45,000
 53,000
Personal allowance(11,500)
Taxable income41,500
Income tax:
5,000 at 0%
28,500 (33,500 – 5,000) at 7.5%
8,000 at 32.5%

0
2,137
2,600
Income tax liability4,737


  • There will be no class 1 NICs because the earnings of £8,000 are below the NIC lower threshold.
  • Amphibian Ltd’s corporation tax liability will be:
 £ 
Trading profit100,000 
Director’s remuneration(8,000) 
Pension scheme contribution(10,000) 
Taxable total profits82,000 
Corporation tax
(82,000 at 19%)

15,580
 


Conclusion
The total tax and NIC cost under each alternative is:

 £ 
Sole trader
(28,700 + 148 + 4,415)

33,263
 
Limited company

   Director’s remuneration
   (11,137 + 24,245 + 5,297)  

   Dividends (19,000 + 13,837)

   Mixed package
   (4,737 + 15,580)



40,679

32,837


20,317
 


The mixed remuneration package appears to be the most beneficial, although £21,420 (100,000 – 8,000 – 10,000 – 45,000 – 15,580) of Amphibian Ltd’s profits remain undrawn within the company. This is not an issue if profits need to be retained within the company (maybe to fund future capital expenditure), but otherwise distorts the comparison.

Also, Newt will not receive any benefit from the £10,000 pension scheme contribution until he retires. However, this approach to pension saving is more beneficial than Newt personally making contributions out of his taxed income.

The pension contribution reduces Amphibian Ltd’s taxable total profits (obtaining corporation tax relief at 19%) and there are no tax implications for Newt personally.

The total tax and NIC cost of a mixed remuneration package could be further reduced if Newt restricted his dividends to a level so that there was no 32.5% higher rate income tax liability, but this would mean retaining even more profit within Amphibian Ltd.

The following scenarios could all be examined based on what has been covered in example 1:

  • Deciding whether an individual should operate as a sole trader or as a limited company.
  • Deciding whether to incorporate a sole trader business.
  • Deciding how much profits to extract from a limited company by way of salary compared with taking dividends.


A scenario need not necessarily relate to a single person, and could, for example, deal with the incorporation of a partnership.

To keep a question at the appropriate length, you will often be given some aspects of the answer. For example, you might be given the tax and NIC cost if an individual operates as a sole trader, and then have to calculate the cost of operating as a limited company. Alternatively, you might be given some of the separate tax or NIC costs. It is very important that you appreciate what figures you have already been given so that you do not waste a lot of time calculating them for yourself.

The interactions involved in this type of question can often cause problems. For example, note that director’s remuneration reduces the taxable total profits of Amphibian Ltd, but is then taxed as income in the hands of Newt. In contrast, the payment of dividends does not affect the calculation of Amphibian Ltd’s corporation tax liability. There are a couple of basic principles that you should remember:

  • If all of a company’s profits are paid out as director’s remuneration (and related employer’s class 1 NIC) then there will not be any corporation liability.
  • If profits are only drawn as dividends (or if director’s remuneration is below the NIC lower threshold) then there will be no NICs.

Inheritance tax (IHT) and capital gains tax (CGT)

Although the interaction of IHT and CGT is not examinable at TX-UK (F6), the two taxes could be examined within the same question and the information given could be relevant to both taxes.

For a lifetime gift of unquoted shares, the IHT transfer of value will be based on the diminution in value of the donor’s estate. In contrast, for CGT purposes the valuation will be based on the market value of the shares gifted.

Example 2
On 4 May 2017, 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 Ltd’s issued share capital of 100,000 £1 ordinary shares. ABC Ltd’s shares are worth £18 each for a holding of 60%, £10 each for a holding of 45% and £8 each for a holding of 15%.

Although Daniel’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Daniel’s transfer of value is calculated as follows:

 £ 
Value of shares held before
the transfer   60,000 x £18

1,080,000
 
Value of shares held after
the transfer    45,000 x £10

450,000
 
Value transferred630,000 


In contrast, for CGT purposes the valuation will be based on the market value of the shares gifted, which is £120,000.

As far as tax planning is concerned, a lifetime gift can avoid or reduce the IHT that would arise if assets were retained until death. However, the potential IHT saving must be weighed against any immediate CGT cost. There are no CGT implications if assets are retained until death because transfers on death are exempt disposals. CGT is not an issue if a cash gift is made.

Example 3
On 20 October 2017, Craig made a gift to his grandson of a residential property valued at £250,000. The gift of the property resulted in a chargeable gain of £145,000.

The value of the property is expected to increase to £300,000 by 31 December 2021, and to £340,000 by 31 December 2026.

Craig is an additional rate taxpayer. He will not make any other disposals during the tax year 2017–18, and he has not made any previous lifetime gifts. Craig has an estate valued in excess of £2,000,000 for IHT purposes.

CGT liability
Craig’s CGT liability for 2017–18 is:

 £ 
Chargeable gain145,000 
Annual exempt amount(11,300) 
 133,700 
Capital gains tax: 133,700
at 28%

37,436
 


Craig dies on 31 December 2026
The gift of the property is a PET. If Craig lives until 31 December 2026, then the PET will be exempt because he will have survived for seven years. The IHT saving will be £136,000 (£340,000 at 40%), so a lifetime gift would appear to be beneficial despite the immediate CGT cost of £37,436.

Craig dies on 31 December 2021
If Craig were to die on 31 December 2021, the IHT saving (ignoring annual exemptions) would be:

 £ 
Value of house on
31 December 2021

300,000
 
Value of house on
20 October 2017

(250,000)
 
Increase in value50,000 
IHT saved: 50,000 at 40%20,000 


Note that although there will be no IHT liability in respect of the PET, the PET will reduce the amount of nil rate band available against Craig’s death estate.


The lifetime gift no longer appears to be beneficial because the immediate CGT cost of £37,436 outweighs the IHT saving of £20,000.

Investment alternatives

Another type of scenario which could be examined is where you are required to advise an individual on the tax implications of a number of investment options.

Example 4
Tobias has recently inherited the residue of his aunt Mildred’s estate. He will use this inheritance for the following purposes:

Tobias will make the maximum possible amount of additional tax relievable personal pension scheme contribution for the tax year 2017–18, having already made contributions of £10,000 during this tax year. His adjusted income for the tax year 2017–18 will not exceed £150,000. Tobias has been self-employed since 6 April 2015, and has been a member of a personal pension scheme from the tax year 2016–17 onwards. Tobias’ trading profits and gross personal pension contributions since he commenced self-employment have been as follows:

Tax yearTrading
profit
£
Pension
contribution
£
2015–1632,0000
2016–1744,00026,000
2017–1878,00010,000


  • Tobias will make a cash gift of £100,000 to his daughter when she gets married on 29 March 2018. He has not made any previous lifetime gifts.
  • Tobias will invest the maximum possible additional amount into an individual savings account (ISA) for the tax year 2017–18. He has already invested £5,400 into a cash ISA during this tax year, having previously invested £6,200 into a cash ISA during the tax year 2016–17.


Personal pension contribution
Although the maximum contribution which will qualify for tax relief is £68,000 (net relevant earnings of £78,000 less the £10,000 of contributions already made), the maximum amount of tax relievable personal pension contribution will effectively be restricted to the available annual allowances of £44,000.

 £ 
2017–18 (40,000 – 10,000)30,000 
Brought forward 2016–17 (40,000 – 26,000)
14,000
 
 44,000 


Gift to daughter
The gift will be a potentially exempt transfer of £89,000 (£100,000 less the marriage exemption of £5,000 and annual exemptions of £3,000 for 2017–18 and 2016–17).

If Tobias dies before 29 March 2025 (within seven years of making the gift), then the amount of nil rate band available against his estate will be reduced by £89,000.

Individual savings account
Since Tobias has already invested £5,400 into a cash ISA, he can invest a further £14,600 (20,000 – 5,400) into an ISA in 2017–18. This could be in a cash ISA, a stocks and shares ISA, or any combination of the two.

Married couples

Various tax planning opportunities may be available to married couples (and also to a couple in a civil partnership).

As far as income tax is concerned, tax can be saved by allocating savings and dividend income between spouses to make best use of the savings income and dividend nil rate bands. This can be achieved by ether transferring the income producing assets between spouses or by putting assets into joint names.

Once nil rate bands have been utilised, savings and dividend income (and also property income) should be received by the spouse paying the lowest rate of tax.

Example 5
Nigel and Nook are a married couple. For the tax year 2017–18, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £8,000.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2017–18.

Nook has fully utilised her dividend nil rate band of £5,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £3,000 of the dividend income will therefore save income tax of £975 (3,000 at 32.5%) for 2017–18.

As far as CGT is concerned, tax can be saved if one spouse has not utilised their annual exempt amount and/or basic rate tax band for a particular tax year. An asset could be transferred to that spouse before its disposal, or put into joint names prior to disposal.

Example 6
Adam and Zoe are a married couple. Before taking account of any tax planning measures, you have prepared a forecast of the couple’s tax position for the tax year 2017–18.

Adam
Adam will have an income tax liability of £29,775. This is based on total income of £106,000, consisting of gross director’s remuneration of £94,000 and dividend income from quoted shares of £12,000.

He has an unused capital loss of £11,200 brought forward from the tax year 2016–17.

Zoe
Zoe will have an income tax liability of £1,300. This is based on total income of £18,000, consisting entirely of employment income.

She will also have a CGT liability of £3,440. This is in respect of the disposal of quoted shares which will result in chargeable gains of £42,000. The disposal will not qualify for entrepreneurs’ relief.

Tax planning measures
After a meeting with Adam and Zoe, you have identified two tax planning measures which the couple could undertake for the tax year 2017–18:

  • Adam’s quoted shares will be put into joint names so that Zoe receives 50% of the dividend income of £12,000.
  • Zoe’s quoted shares will be put into joint names prior to their disposal.


After taking account of the tax planning measures, the couple’s revised tax liabilities will be:

Adam – Income tax computation 2017–18

 £
Director’s remuneration94,000
Dividend income
(12,000 x 50%)      

6,000
 100,000
Personal allowance(11,500)
Taxable income88,500
Income tax:
33,500 at 20%
49,000 (94,000 – 11,500 – 33,500) at 40%
5,000 at 0%
1,000 (6,000 – 5,000) at 32.5%

6,700
19,600
0
325
Income tax liability26,625


Adam – CGT computation 2017–18

 £ 
Chargeable gains
(42,000 x 50%) 

21,000
 
Capital losses brought forward
(21,000 – 11,300)

(9,700)
 
Annual exempt amount(11,300) 
 0 


Zoe – Income tax computation 2017–18

 £ 
Employment income18,000 
Dividend income
(12,000 x 50%)

6,000
 
 24,000 
Personal allowance(11,500) 
Taxable income12,500 

Income tax:
6,500 (18,000 – 11,500) at 20%
5,000 at 0%    
1,000 (6,000 – 5,000) at 7.5%


1,300
0
75
 
Income tax liability  1,375 


Zoe – CGT computation 2017–18

 £ 
Chargeable gains
(42,000 x 50%)

21,000
 
Annual exempt amount(11,300) 
 9,700 
Capital gains tax:
9,700 at 10% 

970
 


Tax saving
The overall tax saving for 2017–18 if Adam and Zoe undertake the two tax planning measures is £6,451:

 £ 
Income tax
(29,775 + 1,300 –
26,625 – 1,375)


3,075
 
Capital gains tax
(3,440 – 970)

2,470
 
Tax saving5,545 


Working at the margin

Questions could be set where you are expected to work at the margin – using a taxpayer’s marginal rate of tax rather than preparing full tax computations.

Working at the margin will not only be much quicker, but will also make it easier to keep track of the various figures, especially when it comes to drawing a conclusion.

Example 7
Harold and Ingrid are a married couple.

Harold is currently self-employed, and his forecast trading profit for the year ended 5 April 2018 is £100,000. He does not have any other income. Ingrid does not have any income, although she does a considerable amount of unpaid work for Harold’s business.

The couple want to know if it would be beneficial to form a partnership from 6 April 2017, with profits being shared 75% to Harold and 25% to Ingrid.

Harold – Tax saving 

 £ 
Reduction in trading profit (100,000 x 25%)25,000 
   
Income tax saving
(25,000 at 40%)
10,000 
Class 4 NIC saving
(25,000 at 2%)
500 
 10,500 


Ingrid – Tax cost

 £ 
Income tax ((25,000 – 11,500) at 20%)2,700 
Class 2 NIC (52 x 2.85)148 
Class 4 NIC ((25,000 – 8,164) at 9%)1,515 
 4,363 


The overall tax saving for the tax year 2017–18 is therefore £6,137 (10,500 – 4,363).

Written by a member of the TX-UK (F6) examining team

Last updated: 22 Feb 2018