This article is relevant to those of you who are taking TX-UK in an exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).
The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.
You can expect to see questions set at TX-UK 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 and ATX-UK. However, where a question covers more than one tax you will be given clear guidance as to exactly which taxes you need to consider.
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.
The following scenarios could all be examined based on what has been covered in example 1:
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 which 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, 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 impact on the calculation of Amphibian Ltd’s corporation tax liability. There are a couple of basic principles that you should remember:
Although the interaction of IHT and CGT is not examinable at TX-UK, 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.
As far as tax planning is concerned, a lifetime gift can avoid or reduce the IHT which 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 for CGT purposes. CGT is of course not an issue if a cash gift is made.
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.
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.
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.
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 normally be much quicker, and will also make it easier to keep track of the various figures; especially when it comes to drawing a conclusion. However, a full income tax computation will be equally acceptable should you opt for that approach.
You could be required to consider more than one tax year. Although this might seem complicated, the tax rates and allowances for the tax year 2023-24 will always be used throughout, so it may be easier to think of this in terms of having to cover two or more different scenarios for the current year.
Written by a member of the TX-UK examining team