Business Planning: Taxation

Professional Level
Course Notes
For exams in 2024

ISBN: 9781 5097 9862 9

HB2023

1 Chapter 1: Tax implications

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 ISBN: 9781 5097 9862 9

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HB2023

2
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 CONTENTS
Course
Note Workbook
Page Chapter

Introduction 5

1. Personal Taxation 7
Income Tax and NIC 9 2
Employee Remuneration 17 3
International Aspects 28 8

2. Capital Taxes 49
Capital Gains Tax 51 5
Capital Gains Tax Reliefs 56 6
Inheritance Tax 74 7

3. Unincorporated Businesses & Trading Losses, 99

VAT and Stamp taxes
Unincorporated Businesses 101 4
VAT 111 17
Stamp Taxes 117 18

4. Issues for Owner Managed Businesses 129

Employment v Self-Employment and 131 12
Use of Intermediaries
Unincorporated business disposals and Incorporation 141 21
Close Companies 151 12

5. Corporation Tax 165

Corporation Tax for a Single Company and Losses 167 9,11
Raising Finance 198 10
Companies – Special Situations 206 16

6. Further Corporation Tax 233

Groups and Consortia 235 13
International Expansion 253 14
Corporate Anti-Avoidance 263 15
7. Business Planning and Corporate 299
Reorganisations
Choice of Business Structure 301 19,20
Disincorporation 313 21
Corporate Reorganisations 318 22

HB2023

Contents 3
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 8. Ethics 345
Ethics in Relation to a Tax Practice 347 1
Law and Guidance in ICAEW Code 356 1

Appendix A
Additional reading 367

Appendix B
Tax compliance proformas 369

Appendix C
Split year treatment illustration 395

Step 5 and 6 Questions

HB2023

4 Contents
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 MODULE AIM
The aim of this paper is:
To enable students to apply technical knowledge and professional skills to identify and
resolve taxation issues that arise in the context of preparing tax computations and to
advise on tax-efficient strategies for businesses and individuals.
Students will be required to use technical knowledge and professional judgement to
identify, explain and evaluate alternative tax treatments and to determine the
appropriate solutions to taxation issues, giving due consideration to the needs of clients
and the interaction between taxes. The commercial context and impact of
recommendations will need to be considered in making such judgements, as will ethical
and legal issues.

SPECIFICATION GRID
The broad syllabus headings and their relative weightings are:

Topic Weighting

Ethics and law 5-10%

Taxation of corporate entities 35-45%

Taxation of owner managed businesses 20-30%

Personal taxation 15-25%

The relative weighting between knowledge and skills are:

Weighting

Knowledge 25-35%

Skills 65-75%

HB2023

Introduction 5
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 LINKS WITH OTHER PAPERS
The knowledge base that was put into place in the Principles of Taxation module is
developed further in the Tax Compliance module, which enables you to prepare tax
computations for individuals and companies, again in straightforward scenarios, and
recognise the ethical issues which can arise in the course of performing tax work.
The Business Planning: Taxation module requires you to apply technical knowledge and
professional skills to identify and resolve tax issues that arise in the context of preparing
tax computations and to advise on tax-efficient strategies for businesses and individuals.
The Advanced Level module of Corporate Reporting requires you to apply the technical
knowledge you have built at Professional Level, along with analytical techniques and
professional skills, to resolve compliance and business issues that arise in the context of
the preparation and evaluation of corporate reports and from providing audit services. At
the Strategic Business Management module, you will need to demonstrate quantitative
and qualitative skills to make realistic business recommendations in complex scenarios.
You will also need to demonstrate business awareness at strategic, operating and
transactional levels.

EXAM
 2.5 hours
 3 questions – Q1 will be a scenario for 40%
 Open book – Access to personal Online Bookshelf for digital materials. Any written
or printed materials may be taken into the exam

APPRENTICESHIP SKILLS AND

BEHAVOURS
The ICAEW Professional Level Business Planning Taxation course will provide the
knowledge you are required to demonstrate when studying towards the ICAEW ACA
qualification as part of a Level 7 Apprenticeship. You are also required to develop skills
and behaviours as part of the Apprenticeship. Throughout these course notes, you will
find short explanations of how knowledge of the technical content can help you to
demonstrate the required skills and behaviours.

For example

Understanding the principles of revenue recognition will help you to demonstrate

professional scepticism as revenue is an area that is susceptible to manipulation,
particularly where contracts are complex or revenue growth is measured as a
performance target.

HB2023

6 Introduction
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 1
PERSONAL TAXATION

Learning outcomes
 Determine, explain and calculate the tax liabilities for individuals including income
tax, NIC and aspects of capital gains tax
 Advise and calculate the impact of tax efficient schemes including ISAs, EIS, SEIS
and VCTs
 Identify legitimate tax planning measures to minimise tax liabilities
 Advise on the tax implications of remuneration packages, including share schemes,
termination payments and allowable deductions
 Advise on the taxation of foreign assets, income and gains
international
 00 of residence, non-residence, deemed domicile
Evaluate and advise on the impact
and domicile on an individual's tax liabilities

00
Analyse and explain the implications of individuals leaving and coming to the UK as

mind
well as the special tax position for non-UK domiciled individuals
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions

HB2023

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 TOPIC OVERVIEW

a
tax efficient
thanpaying cash

HB2023

8 Topic 1: Personal taxation

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 INCOME TAX AND NIC
VENTURE CAPITAL schemes to encourage dualsto sayshares in
companies
There are 3 examinable tax efficient investment schemes which are available to

I
individuals who provide venture capital finance to companies:
ea.es
 Enterprise Investment Scheme (EIS) shares
 Seed Enterprise Investment Scheme (SEIS)
 Venture Capital Trusts (VCT) to
Venture capital schemes - qualifying conditions
EIS SEIS 843 714 84 VCT
ENTER ARE EEE
O
 Subscribe for new, fully
paid up ordinary shares
 Subscribe for new, fully
paid up ordinary shares
 Subscribe for new,
ordinary shares in a
(or other shares where EELHAE in a qualifying company quoted company that
dividend is at company for cash
discretion) in a qualifying  Company must have
invests in qualifying
companies (a VCT) LIFEL.ms
company for cash objectives to grow and  Company must have
 Company must have develop over long term objectives to grow and
objectives to grow and and investment must develop over long term
develop over long term carry risk that the and investment must
and investment must investor will lose capital carry risk that the
carry risk that the investor will lose capital
investor will lose capital
Qualifying company Qualifying company Qualifying company
 Unquoted UK Co with a  Unquoted UK Co with a  Investee companies =

and.EE
qualifying trade 'new' qualifying trade
 'New'= the trade has
as for EIS

GEBETAE
been carried on for less

fe BmeT
than 3 years
Qualifying trade Qualifying trade Qualifying trade
 Commercially trading  Mainly as for EIS with the  Investee companies =
with view to a profit following differences: as for EIS
 NOT carrying on an  Gross assets of no more
excluded activity. than £350,000 before the
Excluded activities share issue
include: AFFELLsmaller
 <25 full time employees
 dealing in shares,  Not previously raised
commodities or land funds under EIS or VCT
 property
 Raised no more than
development
1
EYE
£250,000 under SEIS
 farming
 financial activities
C
 Co uses money within 3
 operating or years of share issue
managing hotels
 generating or
exporting energy or
producing gas or fuel
 providing legal or
accountancy services

HB2023

Topic 1: Personal taxation 9

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 EIS SEIS VCT
 Does not control/notFEET.LI
under control of another A
Co (Qualifying
Standalone
subsidiaries permitted)
 Gross assets of no more
than £15 million before
(£16 million after) the
share issue
 <250 full time
employees (<500 if
knowledge intensive
company (KIC))
 Raised no more than
£5 million (£10 million if

II
KIC) under EIS and VCT
in past 12 months
 Raised no more than
£12 million in total under
EIS/VCT (£20 million if
KIC)
FEI
 Co uses money within 2
years of share issue IEE.EE
 First EIS/VCT monies

indecently 7
raised are within 7 years
of first commercial sale
(10 years from turnover
of £200,000 if KIC)
setup
188m
f
Qualifying investor
 Cannot be connected
with company: 0
so Esky forinvestors
Qualifying investor
 As for EIS
Qualifying investor
 Age 18
 At the time of the
– Connected = investor investment the
+ associates hold individual should hold
>30% OSC/votes, (or no other shares in the
E'ee/non-qualifying company
grandparents director) in 2yrs
before and up to 3 29 139
Lithaiffen yrs after investment
– Qualifying director –
receives either no or
reasonable w
remuneration
(including benefits)
estmetm.hn
from the Co
 At the time of the
ares
4
investment the individual
should hold no other

or four shares in the company

HB2023

10 Topic 1: Personal taxation

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 Venture capital schemes - reliefs
whatyoupaid forthesharesIncome tax relief
t.EEshffIfEIiits
jof
Income tax relief Income tax relief
 Tax reducer max  Tax reducer max  Tax reducer max
£1 million (£2 million if £200,000 50% (reduce £200,000 30% lessrisky
KIC) 30% (reduce IT IT to nil, no repayment) (reduce IT to nil, no less

medicio
to nil, no repayment)
 Tax relief in tax yr of
 Tax relief in tax yr of
investment or c/back to
repayment)
PY
 Tax relief in tax yr of
Ethene

CY
investment or c/back to
py previous tax yr
previous tax year investment – no c/back
keeptrack
4on
 No relief can be claimed  Claw back of relief if
 Claw back of IT relief if until the company has sold within 5 years (by
sold within 3 years (via either spent at least 70% adjusting the
special assessment) of the funds invested assessment for the year
QEEEFE.EE
 Dividends taxable  Claw back of IT relief if of relief)
 Can use share loss relief sold within 3 years (by funds
3s7o7
 Dividends exempt (from
capital loss to offset capital loss adjusting the assessment first £200,000 of VCT
against income of for the year of relief) shares purchased p.a.)
trading losscurrent year and/or prior  Dividends taxable  VCT relief given first
year  Can use share loss relief then EIS then SEIS
 Need not be UK resident to offset capital loss
for IT relief against income of current 1118s
ifeng.tt year and/or prior year

CGT Exemption CGT Exemption CGT Exemption

 Gain exempt if held for  As for EIS  Gain exempt from CGT
3 years (no minimum holding
FETISH
 Capital losses allowable
(no min. holding period 84 period)
unit
 Capital losses not
& cost reduced for EIS allowable
x̅
relief not withdrawn)
EIS reinvestment relief
YEE.fi ht xveliefreceived
SEIS reinvestment relief
 Investor UK Resident  Gain on disposal of an
 Sell ANY asset asset is EXEMPT if there
 Reinvest GAIN in EIS is a SEIS investment

Effff sharesmm
 1 year before and up to
during the year
samayat
 Maximum relief is 50% of
3 years after disposal the SEIS investment, to a

if
 Gain NOT taxed maximum of £200,000.
y deferral
 Held over and taxed:
Income tax relief must haemount
also be claimed
Freeze – when EIS shares sold,
 Maximum exempt gain
OR
pa is therefore (50%
– if cease to be UK
£200,000) = £100,000
resident <3years
 If the SEIS IT relief is
– if shares no longer
withdrawn the
eligible <3yrs, or co
reinvestment relief is
no longer qualifies
also withdrawn (by
<3yrs quoted adjusting the
In
 Can be connected withcompanycomputation for the year
co for deferral relief of the original disposal)

HB2023

Topic 1: Personal taxation 11

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 Understanding the rules for the investor and the company, together with the various tax
implications for EIS, SEIS and VCT tax investment schemes will help you demonstrate
problem solving and decision making skills to gather the appropriate facts in order
to make appropriate tax planning decisions effectively.

EIS & VCT – JOE 3500

exempt 307
do
In June 2023, Joe won £60,000 on the National Lottery. He wished to invest this money
tax efficiently and, following professional advice, he subscribed £35,000 for an EIS
investment in June 2024. He wishes to carry back the investment to 2023/24. Joe also

00
subscribed £25,000 to a VCT in August 2024.
Joe has asked you to calculate his tax liabilities for 2023/24 and 2024/25 and has given
you the following information:
4000 307 2023/24 2024/25
£ £
Salary 60,000 60,000
Dividends received from EIS investment 6,000
Distribution from VCT 2,800
Requirements
Exempt
a) Calculate Joe's income tax liabilities for 2023/24 and 2024/25. within 34s
b) Explain the effect of selling his EIS and VCT shares in either (i) May 2027 or (ii)
September 2027.
after3
Assume tax rates and allowances for 2023/24 apply in future years. dawback

SOLUTION

23124 26125
60000 60000
salary
dividends from EIS 6000

Up exempt
Net income 60000 66000
IP AI 1125707 12570
taxable income 47430 53630
2344
NSI 45 NSI DZ
377006 207 7560 9763 60000
14630 37701 0607 3892 d
1632 1000 0
11432 3379.9
HB2023
500
12 Topic 1: Personal taxation
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1688
 ACTIVITY ANSWERS

EIS & VCT – JOE

a) Income tax computations
2023/24 2024/25
£ £
relief
Salary
Dividends
EIS
taxable when f9 me tax 60,000
to clawbach F
60,000

6,000
VCT – exempt –
Net income
PA
memo T.fi hIs'exempt 60,000
(12,570)
66,000
(12,570)
Taxable income 47,430 53,430
Income tax
£ £ £ £
37,700 / 37,700 @ 20% 7,540 7,540
9,730 / 9,730 @ 40% 3,892 3,892
–
–
/
/
2,000
4,000 8 @
@
0%
33.75%
–
1,350

anteaterLess: EIS relief

47,430 / 53,430 11,432 12,782
t
£35,000
VCT relief £25,000
30%
30% carry back_ (10,500)
(7,500)
Income tax liability 932 5,282 5620
b) Effect of selling EIS and VCT shares
 Disposal of EIS shares:
i) If the EIS shares are sold within three years of their issue (May 2027):
– A gain or loss can arise; and
– The income tax relief given of £10,500 will be clawed back.
ii) If the shares are sold after three years (September 2027):
–
–
Any gain is exempt;
ASHEE.eÑ
No recovery of income tax relief takes place; and
– Any capital loss is allowed but reduced by the income tax relief
given.
 Disposal of VCT shares: t.ie fstroatonskIes
i) No gain/loss arises on disposal of the VCT shares regardless of how
long the shares are held.
ii) However, if sold within five years of issue (May or September 2027)
the income tax relief given is clawed back.

HB2023

40 Topic 1: Personal taxation

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 EIS – REINVESTMENT RELIEF – REX
On 4 July 2023, Rex realised a gain of £95,000. 19 39
reinvestmetenef
On 4 October 2023, he subscribed £100,000 for ordinary shares which qualified for EIS
relief.
Rex has taxable income for 2023/24 of £80,000. highrate taxpayer
Requirements
a)
1
How much reinvestment relief should Rex claim, assuming he makes no other
disposals in 2023/24?
b) When will the deferred gain become chargeable?

SOLUTION
95000
lower of gain
cost of
EISShane β
100000

FEIEAEAo.MY detfqooo

deal
FREE
o
EIS – CRYSTALLISING A DEFERRED GAIN – RENATA
Renata had owned 75% of the shares in Rene Ltd, an unquoted trading company that FTW
she worked for, since 1966. Renata sold all of her shares in Rene Ltd for £349,984 in
June 2020 realising a gain of £124,000. Renata made no other disposals in 2020/21.
In August 2021, Renata subscribed for a 25% ordinary shareholding in Star Ltd, an
BADI
unquoted UK trading company, for £250,000. The shares qualified for EIS relief.
Reinvestment relief of £112,300 was claimed in respect of the gain on the Rene Ltd
250000 307
defferedgain
shares.
sale of EIS shares
In September 2023, Renata sold her Star Ltd shares for £320,000.
Esthan Requirement deferredgain crystallise
39s Compute the chargeable gain arising in 2023/24.
Assume 2023/24 rates and allowances apply throughout.
beetmes table

E 320000
sale of proceeds
94.5.9 10001
HB2023

14 Topic 1: Personal taxation

gig 70000

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O SOLUTION qualify for BADR

of sale of EIS itself

HE
arise
to chargeable gain
A.fifEBADR
B'adeferredgain crystalise
THAT1139 17 BADRI
SEIS REINVESTMENT RELIEF – BEVERLEY entitlement
In September 2023, Beverley invested £50,000tax
same year 50 income tax
in shares qualifying for SEIS relief, which
she intends to keep as a long-term investment. In January 2024, she disposed of a 50000 relief
holiday home, realising a gain of £68,800.
residential 50.9
Beverley had taxable income of £95,000 in 2023/24.
property
Requirements
her taxpayer
a) Calculate Beverley's capital gains tax liability for 2023/24, assuming that she made
no other taxable disposals.
b) Explain the effect of selling the SEIS shares in January 2027.
after 38s
SOLUTION

HB2023

Topic 1: Personal taxation 15

t.FM FcaT
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解雇偿 的类型
雇员在终 雇佣关系时收到的付款分为三类。完全免征所得税的付款包括
• 因雇员死亡、受伤或残疾 付的款项
• 注册养老 计划下的 次性付款
SUMMARY
应全额征税的付款包括
• 服务酬 ，例如，terminal bonus
• 按合同规定应得的或有合理预期的离职补偿，例如，按合同规定的或与基本 资数额相等的

通知期付款
当雇主终 雇佣关系时，可以采取三种不同的 法。

HB2023

16 Topic 1: Personal taxation

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 EMPLOYEE REMUNERATION
TERMINATION PAYMENTS

Types of termination payment

a) Fully exempt from income tax and National Insurance:
 Payments made on death, injury or disability
 Lump sum payments under registered pension schemes
b) Fully taxable and subject to Class 1 National Insurance:
 Payment as reward for services, eg terminal bonuses

f
 Gardening leave payments
Peatployment  Compensation for loss of office which was either a contractual entitlement or
there was a reasonable expectation of payment, eg many types of payments
home in lieu of notice (PILONs)
 Payments during, or in respect of, notice periods which are equivalent to the
employee's basic salary ('post-employment notice pay', or PENP)
c) Partly exempt from income tax, with the taxable amount liable to only
Class 1A National Insurance:
 Discretionary payments (ex gratia payments) as compensation for loss of
office
 Continued receipt of benefits, eg use of a car
 Payments in respect of a notice period that are in excess of PENP
The exemption applies up to £30,000. If the employee receives statutory s
g fÑÑ
redundancy pay, the amount of statutory redundancy pay received reduces the
£30,000 exemption.
EH 3000
9s tax
The excess above the exemption is treated as the top slice of the individual's
a
Iii
income, charged to income tax using non-savings income rates and is not liable to
employee NIC - the employer suffers Class 1A on the taxable amount.
The actual payment received by the employee is received:
EEEE.EE
EEE
a) Net of income tax via PAYE if paid on leaving employment; or
b) Net of basic, higher and additional rates of tax as appropriate, if paid after the
cessation of employment.

POST-EMPLOYMENT NOTICE PAY – SAMIRA

EXAMPLE Samira resigned from her job at JAG Plc. Her contract specified a two-month notice
period and her annual salary was £48,000. JAG Plc asked her to leave without notice and
made a payment of £26,000.
post employment
Requirement
Explain how the payment of £26,000 is treated for tax and NIC.
notiffy 2
26000 800
category A category C
HB2023
for 78000
Topic 1: Personal taxation 17
PEUPtaxable expiffffa termination
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fully
 PAYE falls within 300
class Inge
IEP
SOLUTION

TERMINATION PAYMENT – KAREN

EXAMPLE Karen was made redundant on 31 December. She received a redundancy package as
follows:
ExemptStatutory redundancy pay mpTT
ix £1,680
Discretionary payment for loss of employment
Terminal bonus under employment contract Eninni
i.gg
Use of car until the end of the tax year (annual benefit £4,800)
£35,200
£6,100

a Requirement 95
Calculate Karen's taxable redundancy package and explain how it will be taxed.

SOLUTION

Is p
p meatincome

1
met 0
Anything in lategory 14
3773000To reducedby

exemption statutory
redundan
pay
topslice of income
income tax
lacs A NIC employer
HB2023

18 Topic 1: Personal taxation

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share scheme是奖励和激励员 的 种 式。某些符合特定条件并向英国税务与海关总署（HMRC
）申报的计划具有显著的税收优惠。
• tax advantaged schemes使雇员在授予和 使时无需缴纳所得税或NIC（除非 EMI 计划以折扣价发
）。处置股票时将产 资本收益。
• tax advantaged schems在授予时既不征收所得税，也不征收NIC。 使时须缴纳所得税和NIC。出售
股票时须缴纳资本利得税。
• 税收优惠计划主要有四种：
• 公司股份期权计划（CSOP）
• 企业管理奖励（EMI）
• 储蓄即所得（SAYE）
• 股权激励计划（SIP）
• CSOP、EMI 和 SAYE 都是以股票期权为基础的计划。SIP 是 项复杂的计划，它允许发 免费股
票（ 不是股票期权）和/或由员 从 资总额中购买股票。
 Tax liabilities may arise at any or all of the stages of the scheme depending on its status. The most
signi cant di erence between the terms of tax-advantaged schemes and other schemes is that for a tax-
advantaged scheme, the exercise price must normally be at least equal to the market value of the shares
at the date of grant. For other schemes, the exercise price may be heavily discounted or may even be nil.
SHARE SCHEMES 0
Three stages:
1 Grant – the option to buy the shares at a future date is granted to the employee
Exercise – when the employee actually buys the shares un
1 2
3 Sale – the sale of the shares

Non tax-advantaged share option schemes

Grant Exercise Disposal

Non tax- No tax Taxed as employment Capital gain on increase in value of

advantaged income: shares since exercise date:
schemes £ £
MV on exercise X Proceeds X
Cost (X) Cost (X)
X Amount charged to
Taxable
income tax on exercise (X)
Gain X
Note. The holding period for business asset disposal relief begins with the exercise of
the option. However, see later for the exception to this rule for EMI shares where
holding period begins at grant. CSOP 和 EMI 计划都以向关键员 授予option to buy为基础。
公司股份期权计划（CSOP）：根据公司股票期权计划，公司可
Tax-advantaged share schemes 向选定的董事/员 授予股票期权，每个 的最 价值为 60,000
Four main schemes exist: 英镑（2022/23： 30,000 英镑）。授予时或 使时无需缴纳所得
 Company Share Option Plan (CSOP) 税和 NIC。
 企业管理奖励（EMI）：根据企业管理奖励，公司可向选定的董
Enterprise Management Incentives (EMI)
 Save As You Earn (SAYE) 事/雇员授予股票期权，授予 的个 最 价值为 250,000 英镑。
 Share Incentive Plan (SIP) 如果股票不是以折扣价发 的，则授予时和 使时均无需缴纳所
得税和 NIC。
CSOP EMI SAYE
keyemploy
Qualifying May restrict to key May restrict to key Must be open to all
employees employees only employees only (must own (no maximum

gfffffffastr
(must own ≤30%) ≤ 30% & work for holding)
substantial amount of time
for company)
Maximum £60k £250k (reduced by value £5 – £500 per
total value at of any shares held under a month may be
grant per CSOP) saved per employee
employee Company may only have from net income
£3m in issue at any one
time
Conditions No discount at May issue at a discount Maximum 20%
grant Exercisable ≤ 10 years discount
MEI Exercisable ≥ 3
years and ≤ 10
Company must have gross

Yin
assets ≤ £30m, be trading,
years may be quoted or
unquoted
Company group must
have < 250 employees at
time of grant

HB2023

Topic 1: Personal taxation 19

These materials are provided by BPP
 储蓄即收入（SAYE）股票计划： 种储蓄计划，允许员 在三年或五年内每 将其净收入的 定 比例储蓄
起来，然后 这笔储蓄购买股票或领取现 红利。可在储蓄期开始时发放股票期权，使雇员能够在储蓄期
结束时以固定价格购买股票。在储蓄期结束 时，储蓄可与免税奖 （即利息） 起使 ，也可 于按股票
期权价格购买股票。
CSOP EMI SAYE

Tax treatment No income tax or No income tax or NIC No income tax or

at grant NIC NIC
123
Tax treatment No income tax or If issued at a discount, the No income tax or
at exercise NIC discount is taxable NIC
employment income:
£
494 175 MV at grant X
Exercise price (X)
Taxable X
Or the difference between
the MV of shares at
0.5 exercise and the exercise
price, if lower
o
Tax treatment Normal capital Normal capital gain based Normal capital gain
at disposal gain based on on: based on proceeds
proceeds less £ less exercise price

HEAT exercise price Proceeds X

sale TERCI
Exercise price (X)
Amount taxable
at exercise (X)
Effes
Gain X

BAPR.FI 5TEEEEfi
Business asset disposal
relief requirements relaxed
for EMI shares ie no
minimum 5% holding and
the two year holding
period runs from the grant
of the option
Z3A E I
Share incentive plan (SIP):
SIPs are complex share plan arrangements which provide up to four different ways of
providing shares (as opposed to share options) to employees.
All shares are held in the plan in trust for the employees rather than owned personally by
each employee.
Employers may use one, some or all of the following ways of issuing shares to reward
their employees:
onlyapplied
Free shares Partnership Matching Dividend
shares shares shares

Limits Up to £3,600
per tax year
Up to £1,800
per tax year or
10% of salary if
Up to 2
matching it
shares for each
No limit

lower partnership
share bought
Holding period At least 3 years None At least 3 years 3 years from
from award from award purchase

HB2023

20 Topic 1: Personal taxation

These materials are provided by BPP
2.2.3 SIP

Definition
Share Incentive Plan (SIP): SIPs are complex share plan arrangements which provide up to four
different ways of providing shares (as opposed to share options) to employees.

Employers may use one, some or all of the following ways of issuing shares to reward their
employees:
• Free shares – An employer can give up to £3,600 worth of shares a year to an employee.
• Partnership shares – An employee can buy shares out of pre-tax remuneration up to a value of the
lower of £1,800 and 10% of salary per year.
• Matching shares – An employer can match the partnership shares bought by the employee by
giving them up to two free shares for every partnership share purchased.
• Dividend shares – An employee can use dividends received from the plan shares to reinvest in
further plan shares.
All shares are held in the plan in trust for the employees rather than owned personally by each
employee. To benefit from the tax advantages, all the shares except partnership shares must be held
in the plan for at least three years.

yammer
mum
If an employee ceases to be employed the shares will leave the plan and then be owned by the
employee personally, the tax advantages will then be lost and may be clawed back depending on
how long the shares have been owned:
• Held < 3 years – income tax and NIC payable based on market value of the shares at withdrawal.
For dividend shares the original dividend is taxable instead.
• Held 3–5 years – income tax and NIC payable based on lower of market value of the shares at
withdrawal and market value at grant. Dividend shares may be removed from the plan after three
years with no income tax or NI payable.
• Held > 5 years – no taxable benefit.
Capital gains tax is not payable on shares disposed of after five years if still held in the plan ie, the
individual is still employed. Otherwise the base cost for capital gains tax purposes is the market value
at the date the shares leave the plan ie, the date the employee leaves the company.

2.2.4 Summary of all four schemes

CSOP EMI SAYE SIP

Qualifying Restrict to key Restrict to key Must be open to Must be open to

58
employees employees only employees only all (no maximum all (no maximum)
(must own ≤ (must own ≤ 30% holding) Possible to award
30%) and work for free shares
substantial amount based on
of time for performance
company) criteria

Maximum total £60,000 £250,000 (reduced £5–£500 per Free = £3,600 pa

value at grant by value of any month may be Partnership =
per employee shares held under saved per £1,800 pa (max
a CSOP) employee from 10% salary)
Company may net income
Matching = up to
only have £3 two for each
million in issue at
withdrawal any one time
partnership share
Dividend = use
dividends from

grant SIP shares to buy

more shares

No Ca
106
in
Business Planning: Taxation ICAEW 2024
 Free shares Partnership Matching Dividend
shares shares shares

Tax on award None None – tax None None

relief for salary
used to buy
shares
Tax on removal On market On market On market Original
of shares from value when value when value when dividend taxable
plan within 3 taken out taken out taken out but in year
years of award when shares
taken out of
plan, if removed
within holding
period
Tax on removal On lower of: On lower of: On lower of: None
between 3 and – value at – salary used to – value at
5 years of award & buy shares & award &
award – value on – value on – value on
removal removal removal
Tax on removal None None None None
after 5 years Δ
CGT on removal None None None None
– any time
CGT base cost MV at removal MV at removal MV at removal MV at removal

NIC and share schemes

If there is an income tax charge, Class 1 National Insurance Contributions (NIC) may also
be due but only if the shares are 'readily convertible assets', ie they can be sold on a
stock exchange. toshares
topquotedcompany
Employers’ corporation tax liabilities
The cost of providing shares via tax-advantaged share schemes is an allowable deduction
for the purposes of corporation tax for employers provided: we
 Shares are ordinary shares with no special rights; and
 The shares are in a listed company (or one of its subsidiaries); or
 The shares are in a company not under the control of another company.
Deduction = MV of shares at exercise – Actual exercise price
Given in accounting period of exercise.
Employees usually given options/shares in parent company to ensure deduction
available.
The majority of running costs for a SIP are an allowable deduction for the company.

Understanding share schemes, in particular tax advantaged share schemes, will help you
demonstrate business insight skill to influence the impact of business decisions when
considering how to reward employees.

HB2023

Topic 1: Personal taxation 21

These materials are provided by BPP
 CSOP OR NON-TAX-ADVANTAGED
Adrian Black, an employee, is granted an option in October 2016 toconvertible
readilyacquire 1,000 shares
in his employing company, a quoted trading company, before 1 October 2024 at £8 each.
When the option is exercised in November 2023 the shares are worth £22 each. Adrian
buys and sells the shares on the same day for their market value.

I 1
Adrian is a higher rate taxpayer who normally earns at least £70,000 pa and has no other
capital disposals in 2023/24.
Requirements bothFEE MIC 2
FEE
Calculate the tax charges on the exercise of the option and on the disposal of the shares
assuming: 0 o
a) The share option scheme is a tax-advantaged Company Share Option Plan; or
b) The scheme is non-tax advantaged.

a
SOLUTION
sop
it exercise of option No tax charges
ii sell shares proceeds 22 2200 exercise of
Less cost exercise option
price 800 based on the
158 1000 14000
increase of
employmentincome
LessAEA
taxase fee
CSOP
Nth
II NW
tf
e
exercise price

JE
Eff proceeds
cost

V
o

HB2023

22 Topic 1: Personal taxation

These materials are provided by BPP
 SHARE OPTION SCHEMES – STAN
Stan Lee is a member of two share option schemes. His transactions in the shares of
Spider plc (his employer) were as follows:
 1 June 2023 – exercised non-tax advantaged share options to acquire 3,000
shares for £1.50 each. The options were granted in June 2020 when the value of a
share in the company was £1.50 and had to be exercised before 1 June 2024. The
market value of a share in the company on 1 June 2023 was £4.05.
 1 January 2024 – exercised options to acquire 2,000 shares for £2.80 each under
the company's SAYE scheme. The market value of a share in the company on
1 January 2024 was £4.20.
Requirement
State the tax treatment of the share transactions.

SOLUTION 1

HB2023

Topic 1: Personal taxation 23

These materials are provided by BPP
 调整后收入：计算 法为所得税计算步骤 2 中的净收入（即未扣除个 免税额）加上纳税 对职业养老 计划的供款，
再加上雇主对职业或个 计划的所有供款。
临界收入：净收入减去个 向个 养老 计划缴纳的养老 总额。
PENSION SCHEMES

Employer contributions deductible

Large one-off employer contributions may be deductible from profits over a number of
accounting periods. HMRC can require that such contributions of more than £500,000 are
spread over up to 4 years.
Auto enrolment
5850011 THE
Employers must set up a scheme.
Eligible employees are automatically enrolled (although can opt out).
The employer is obliged to contribute to the scheme.

Annual allowance
Appendix B gives an overview of TC assumed knowledge regarding tax relief for pension
contributions.
The Annual Allowance is £60,000 (2022/23: £40,000). If total contributions into an
1
individual’s pension scheme exceeds this allowance, there is an annual allowance charge
added to the taxpayers’ income tax liability which means HMRC recovers some of the tax
relief already given.
0
The annual allowance is restricted if the taxpayer has:

THE
 adjusted income of more than £260,000 (2022/23: £240,000); and
 threshold income of more than £200,000in the tax year.

Adjusted income AM
In Month
Net income before PA X
收入个 不能全额享受
+ TP’s contributions to OCCUPATIONAL scheme Tate
+ ER’s contributions to OCCUPATIONAL or PERSONAL scheme
X
X 60,000 英镑的年度免税
额。个 调整后收入每超
54 49contrif
X
过 2 英镑，60,000 英镑
的 年度免税额就减少 1
Threshold income 英镑。 260,000英镑到
Net income before PA X 10,000英镑的最低年度免
Gross contributions to PERSONAL scheme (X) 税额，即调整后收入 少
X
为360,000英镑。
taper
The restriction reduces the annual allowance by £1 for every £2 the taxpayer’s adjusted
income exceeds £260,000 (2022/23: £240,000).
mum minimum
It cannot reduce the annual allowance to less than £10,000 (2022/23: £4,000).
If unused, an annual allowance may be carried forward for up to 3 years. The current
year's annual allowance is used first, and then the prior year's unused allowances are
used on a FIFO basis.
Item.EEEzfEnsionusavaieasa
Contributions in excess of the available annual allowance are liable to an 'annual
low does
allowance charge' which effectively claws back the income tax relief give on the

fork
excessive contribution, by charging it to income tax at 20, 40 or 45%. This is added to
Ef.EEff
sites p p
the individual's income tax liability for the year.
在以下两种情况下，个 将被视为 收入： • 纳税年度的 "调整后收入 "超过 26 万英镑；以及 • 纳税年度的 "起征点收入 "超
过 200,000 英镑（即 260,000 英镑 - 全部年度免税额）。 在 2023/24 年度之前，年度免税额为每年 40,000 英镑，最低限额
为 4,000 英镑。 调整后的收入 槛为 24 万英镑。 NSZ rates
结转未使 的年度津贴：个 可以将未使 的年度免税额结转三年，并以先进先出的 式增加任何 年的减免额。结转可以
从个 作为注册养老 计划成员的任何 年开始，无论该年是否缴费或养老 投入额为零。 先抵消当年的免税额，然后优
HB2023

24 Topic 1: Personal taxation

先抵消三个纳税年度中最早年度未使 的免税额。 如果某 是 收入个 ，那么在计算是否有未使 的年度免税额可结转
These materials are provided by BPP
时，将使 其在相关纳税年度的减免年度免税额。
如果养老 投入 额（缴费 额）超过年度免税额，则需要缴纳个 所得税。这种情况可能发 在个 收入超过年度免税额的
情况下，也可能发 在雇主超额缴费的情况下。 年度免税额费 将取消超过年度免税额的养老 投入所获得的税收减免。根
据个 的应纳税收入， 这可能是全部或部分 45%、40% 或 20%。 税费将计入个 当年的所得税应纳税额。 就 NIC ，
雇主缴费不被视为收入或应税福利。因此，雇主直接向养老 计划缴费， 不是向个 付资 让其缴费，即使适 该费 ，
也会略有好处。
ANNUAL ALLOWANCE CHARGE – JULIA
EXAMPLE Julia is a member of a money purchase personal pension scheme. In the tax year
2023/24, she has taxable earnings of £360,000. During the year, she makes a
contribution of £120,000 to the pension scheme and her employer makes further
contributions of £130,000 to the scheme. Julia has no other taxable income in the year.
She has £10,000 of unused annual allowance from each of tax years 2019/20 and
2020/21.
Requirement
QY.EE 84E
Calculate Julia's income tax liability for 2023/24.
ANZ
Any
SOLUTION Net incomebeforeDA Th044
any

Threshold income net incomebefore D A

9
Apsond
pers4189Taid 23 24
AA 60000

Left
f TO

If
10000
pintal
2000

of
finite more contributions
E makeavailable
than annual allowance

HB2023

Topic 1: Personal taxation 25

These materials are provided by BPP
 7092949 nce charge

Small self administered scheme (SSAS)

occupational
I D
Type of occupational pension scheme which is subject to most of the rules applicable to
all occupational pension schemes. Designed for small companies which are likely to be
owner-managed. imm
 May borrow up to 50% of the fund value

I
 May also lend up to 50% of the fund value to its own company
 May also invest up to 5% of the net pension fund in its own shares raise capital
 May not invest in residential property unless held in a real estate investment trust
(REIT) or in tangible moveable property, eg fine wines

Self-invested personal pension (SIPP)

penonal
Type of personal pension plan subject to all the normal rules of any personal pension
plan.
 May borrow up to 50% of the fund value
 May not lend money

I
 May purchase shares in any company without limit including those companies in
which the person investing in the pension also owns shares
 May not invest in residential property unless held in a REIT or in tangible moveable
property, eg fine wines
l
Commercial property held by a SSAS or a SIPP
A SSAS or a SIPP may be set up specifically to hold commercial property used in the
business of the sponsoring company (SSAS) or pension investor (SIPP).
The main advantages of doing so are:

me
No tax paid on capital gains realised on the eventual disposal of the building as
pension funds do not pay tax.
1 4321
I
 Rent paid by the company/business will be deductible from trading profits and will
not be taxable on the pension fund.
 Property will also be protected from creditors.

8476SSAsSepp
suggest
extraadvantage

HB2023

26 Topic 1: Personal taxation

These materials are provided by BPP
 SUMMARY

No tax grant
No tax exercise
cap disposal
Gonly
ops depicone
Adv Morerules PPC Net ofBR
better tax
t t
2

fat
as
earnings
generals
class me Montisagga
Bottom of
27computation
s

1
as
to
5782
More flexible
excess No tax adv
taxable
to Mu exercise
cost
top
lassia
non savingsincense CC on to
disposal

HB2023

Topic 1: Personal taxation 27

These materials are provided by BPP
Summary

Termination payments

Taxable in full (incl C1 Fully exempt: Partly exempt (IT and

NIC): • Death, injury or C1A NIC on excess
• Reward for services disability over £30,000):
• Post-employment • Pension lump • Non contractual
notice pay (PENP) at sums (ex-gratia) payments
basic salary rate / benefits
• Statutory redundancy
pay (exempt but uses
up £30,000 limit)

Share schemes

Tax-advantaged

• CSOP • EMI • SAYE • SIP

• Key employees • Key employees £250,000 • All employees • All employees
• £60,000 max on max value of options held • £5–£250 per • Free shares £3,600 pa
value of options • Discount allowed on month invested • Partnership shares
held exercise price in SAYE account £1,800 pa
• No discount on • Relaxation of business asset • Max 20% • Matching shares 2:1
exercise price disposal relief conditions: discount on • Dividends tax free if
no 5% minimum and exercise price reinvested
holding period runs from • No discount an exercise
date of grant price

Income tax and NIC

Tax-advantaged Other schemes

No IT or NIC Grant No IT or NIC

No IT or NIC (unless Exercise IT on increase in value of

EMI at a discount) shares since grant NIC due
if shares are RCAs
Normal CGT on
increase in MV since Disposal Normal CGT on increase
grant (BADR in value since exercise
requirements relaxed
for EMI shares)

110 Business Planning: Taxation ICAEW 2024

 IMPACT OF RESIDENCE AND DOMICILE ON THE TAXATION OF INCOME
AND GAINS (APPENDIX 11)

UK Resident?
0 NO

感品器 品gains 器 YES

eg.Ukreatalppe
租比
niteiii
Income: UK only
Gains: None*
(arising basis)
*Except UK residential

o
UK Domicile/ property (after April '15)

然然uiigesena
YES
deemed domicled? and UK commercial property
(after April 19)
NO
ˇˇ
Income: WW
Gains: WW worldaide Cross
L
(arising basis)
as it is received
Total unremitted
Income and gains
<£2,000?
YES
动
ben 因为是⾃动的，切收入微不⾜道，
Automatic Remittance Basis
所以没有任何remittance basis
Income: UK and remitted O/S
NO Gains: UK and remitted O/S charge

管
⾔率
就只⽤付uk的部分和汇到英国的海外收入或利得，

1sinnnin.mil
所以不汇过来，就不⽤为offshore的那些交英国的税

每年⾃迭要不要
Don't claim remittance basis Claim remittance basis

品 Income: WW
Gain: WW
(arising basis)
还是 为所有 Income: UK and remitted O/S
Gains: UK and remitted O/S
• no PA/AE
HMRC还是想收⼀部分钱
• Remittance basis charge 所以⾃⼰选Remittance basis
7y/9y = 30k 12y/14y = 60k 后果是没有PA和AE
还有remittance basis charge

ǎn9esimdencozialculationsicwdiniggigisn.gg
gains

0kt remitted I G 0 S

f remittancebasis charge 30K160k

choose the best
⼆

HB2023

Topic 4: Capital gains tax 187

These materials are provided by BPP
 INTERNATIONAL ASPECTS
TAXATION OF UK AND OVERSEAS INCOME AND GAINS
An individual’s income tax and capital gains tax position depends on, amongst other

o
things, their residence and domicile status.

Income tax
UK-resident and UK-Resident but
UK-domiciled not UK-domiciled Not resident
(R&D) (R&ND) (NR)
UK income Arising basis Arising basis Arising basis
Overseas income Arising income Arising basis BUT Not taxable
may apply the
remittance basis

Capital gains tax

ww incomegains
UK-resident and UK-Resident but
UK-domiciled not UK-domiciled Not resident
(R&D) (R&ND) (NR)

o_0
UK gains Arising Arising Not taxable
BUT there are
exceptions
Overseas gains Arising basis Arising basis BUT Not taxable in

Idnuatyou.gg
may apply the UK
mums remittance

Exception
dukbing
NR are subject to UK CGT if disposals of:
 Assets used in a trade in the UK
 UK land and buildings
 Assets acquired when UK-resident but disposed of during a temporary period of
non-residence o o
4state
DETERMINING RESIDENCE AND DOMICILE

Residence
Generally, an individual is treated as either UK-resident or non-UK resident for the tax
year. To determine the residence status of an individual, the statutory residence tests
must be applied to the individual’s circumstances for the tax year under consideration.
The SRTs are performed in the following order and the first one that is satisfied
determines the status of the individual.
1 Conclusively overseas tests
2 Conclusively UK test
3 Sufficient ties test

HB2023

28 Topic 1: Personal taxation

These materials are provided by BPP
 OVERSEAS ASPECTS OF INCOME TAX
AND CAPITAL GAINS TAX

RESIDENCE, DOMICILE AND DEEMED DOMICILE

An individual’s residence and domicile will determine their liability to UK tax.

查 Residence physicalpresence 居⺠ statutory residence Test

The following tests apply to determine whether an individual is UK resident for a tax year:
IS RT
1 2 3
川炎器
Conclusively overseas
resident for the tax year if:
Automatically
Conclusively UK resident
for the tax year if:
overseas residence auto uk
• Resident in UK in at least • Present in UK ≥183 days;
Sufficient UK ties:

residedFamily tie
Spouse/Civil partner/child
器
days
one tax year in previous or under 18yo who is UK-resident
three and present in UK

以全
<16 days; or • Only home is in the UK Accommodation tie
ie. 唯⼀
所在 以 A place to live in UK for
• Resident in UK in none
of the previous 3 tax
- period of 91 consecutive
days of which 30 in the
鼎
开 continuous period ≥91 days in
tax year AND spend at least
years and present in UK tax year; or one night in tax year there.

i 䲜䲜
<46 days; or
• Full-time work in UK Work tie
• Full-time work overseas (FTWUK) Work > 3 hours per day on at
(FTWOS) least 40 day in tax year

90-day tie
>90 days present in UK in
NOT UK RESIDENT UK RESIDENT either of 2 previous tax years
if any of above applies if any of above applies
Country tie (only if UK-res
OTHERWISE go to OTHERWISE go to in any of the 3 previous
Conclusive UK test sufficient ties test tax years)
Present in UK more days than
any other country

no
rated FTwo

HB2023

182 Topic 4: Capital gains tax

These materials are provided by BPP
 Feelings
Not thesame as nationality citizenship
or where
you hold a passport
Domicile:
permanenthome
origin Actual domicile is determined by:

annum Origin dependency or choice

choice
Ideemed RE
Difficult to change
Deemed domicile for income tax and capital gains tax:
i

Despite having an actual domicile overseas, an individual may be deemed to be UK

domicile for income tax and capital gains tax. It applies when the individual meets either
of the following two conditions either:
1 UK R for 15 of previous 20 tax years; or
2 Is all 3 of the following:
i) UK R in the current tax year;
ii) was born in the UK and
iii) had UK domicile of origin.
Transitional rules apply so that an individual who would be deemed UK domiciled under
the '15 out of 20' years test is not treated as UK domiciled if they have not been UK
resident in any tax year from 2017/18 onwards.
Assume that any reference to UK domicile includes both actual and deemed domicile
throughout this chapter.

RESIDENCE – HARRY
Harry Hobbit was born and raised in the UK and has always been UK resident. However,
in December 2022 he lost his job. His mother (his only surviving close relative – he is
unmarried) sold the family home and moved into a nursing home. Harry has therefore
decided to take the opportunity to go travelling for an extended period. He does not
intend to work while he is away.
23.4.26 20 6 tax year 23 20
He will leave the UK on 24 April 2023 and expects not to return to the UK until June
2024. His plans are vague but he intends to start with a six week tour of Australia.
He has decided that he does not want to let his house out while he is away, so it will es
remain empty.
Requirement
2b 51 7.1 8 t
fail 19
Explain whether Harry Hobbit will be UK resident in 2023/24.

SOLUTION

7744218P.lt it fail

HB2023

30 Topic 1: Personal taxation

These materials are provided by BPP

fail accommodation tier o tier

 UK statutory residence test: flow chart for individuals

Not UK resident in all 3 previous tax years & fewer than 46 days in UK in current tax year YES Not resident
NO

UK resident in one or more of 3 previous tax years & fewer than 16 days in UK current tax year YES Not resident
NO
Conclusive tests

Works abroad full-time & fewer than 91 days in UK & of those fewer than 31 days working in
YES Not resident
UK in current tax year
NO

183 days or more in UK in current tax year YES Resident

NO

Only home(s) in UK & visited that home in current tax year on 30 days or
YES Resident
more (or UK home & overseas home but visits to overseas home minimal)
NO

Works in UK full-time & more than 75% of working days are in the UK YES Resident
NO

Determine arriver or leaver status, count number of UK ties and count number of days in UK in tax year

Arriver: Leaver:
Arriver/
leaver

Not resident in UK in any of 3 previous UK resident in one or more of 3 previous

tax years tax years

More 'midnights' in UK than in any other country

Count number of UK ties

Spouse/civil partner/cohabitee or minor child resident in UK

(minor child only a tie if spend at least 61 days in UK with the child)
Non-conclusive tests

Accommodation available in UK for 91 days or more in tax & spend at least one night there

Work (3 hours or more) in UK on 40 or more days in tax year

More than 90 days in UK in either of previous 2 tax years

Arrivers Days in UK in tax year Leavers

Not resident 0–15 Not resident

Residency test

Not resident 16–45 Resident if 4 ties

Resident if 4 ties 46–90 Resident if 3 ties

Resident if 3 ties 91–120 Resident if 2 ties

Resident if 2 ties 121–182 Resident if 1 tie

Resident 183 or more Resident

Figure 8.1: Statutory residence flowchart

The full-time work overseas test is satisfied in a tax year if all of the following conditions are met:
• The taxpayer works an average of 35 hours a week overseas. This is calculated excluding annual
leave, sick leave, gaps of up to 15 days between employments and any days when they work in
the UK.
• There are no significant breaks of more than 30 days in their overseas work (excluding annual
leave and sick leave).
• They have less than 31 UK work days.
• They spend fewer than 91 days in the UK.
The full-time UK work test is satisfied if all of the following conditions are met:
• There is a 365-day period, all or part of which falls within the tax year, when the taxpayer works an
average of 35 hours a week in the UK. This is calculated excluding annual leave, sick leave, gaps
of up to 15 days between employments and days when they work overseas.
• Within that 365-day period, there are no significant breaks of more than 30 days when they do not
work in the UK (excluding annual leave and sick leave).

246 Business Planning: Taxation ICAEW 2024

UK residence三个测试查HTT
domicile: origin, dependency, choice, deemed domicile
Remittance basis 汇款基础：只有在英国享受的外国收入/利得（汇 英国）才在英国应税。这
部分按照NSI（无论来源如何）进 税收。

是否能选择这个basis取决于 份：
• residence and domicile - 无法使 汇款基础
• residence but non domicile - 可以使 汇款基础， 于海外收入和利得
• 如果留在海外的收入/利得<£2,000，则 动进 ，无负 后果
• 如果留在海外的收入/利得≥£2,000 要 claim选择，会导致
（1）留在海外的收入和利得不交UK tax，只有remitted 部分要交
（2）失去PA和AEA
（3) RBC 如果在过去的9个税年中 少居住了7年：£30,000； 如果在过去的14个税年中 少居
住了12年：£60,000

REMITTANCE BASIS PLANNING practical advice to clients

Remittance basis - automatic application
mum Remittance basis
The remittance basis applies automatically (without having to make a claim) for a UK-
resident non-UK domiciled taxpayer where their unremitted overseas income and gains
do not exceed £2,000 in the tax year. In this case, the taxpayer retains their personal

Iinnnii iiti
allowance and annual exempt amount, and no remittance basis charge applies.

nnei.ee
Remittance basis claims
As the remittance basis needs to be claimed for each tax year, those eligible to make the
claim will need to decide whether to:
a) Claim the remittance basis, which will mean:
i) paying UK tax on foreign income and gains remitted to the UK;
RBC
P. T
ii) paying the £30,000 or £60,000 remittance basis charge (RBC); and
9ys iii) losing entitlement to personal allowances and the annual exempt amount; or No
is AEA
b) Not claim the remittance basis, which will mean:
hey
i) paying UK tax on all foreign income and gains,
ii)
cow
receive UK personal allowances and the annual exempt amount and
iii) avoid the RBC.

HB2023

Topic 1: Personal taxation 31

These materials are provided by BPP
 proved which monies have been remitted.

Exemption for certain remittances to the UK

gs
In all cases, it is important that remittance basis users separate funds so that it can be

以下情况可免予作为remittance处理：
There is an exemption from being treated as a remittance for:
带到英国 于贷款或投资于非上市贸易公司（包括 AIM）股票的资 ，该公司或为英国居 ，或在英国拥有 PE，条件是该资
1
在 45 天内进 投资 Funds brought to the UK to make a loan or invest in shares in an unquoted trading
company (including AIM) which is either UK resident or which has a UK PE
provided the funds are invested within 45 days; or
Assets brought into the UK to be sold in the UK, provided proceeds received by 1st
2
anniversary of 5 January following tax year in which property sold and the sale
proceeds are taken offshore within 45 days of receipt.
带入英国准备在英国出售的资产，条件是在出售资产的纳税年度下 年 1 5 的 周年 之前收到收益，并且在收到收益后
Overseas capital losses
45 天内将出售收益带走。
If an individual has never used the remittance basis for capital gains, overseas losses are
always allowable.
In the first year that an individual uses the remittance basis they can only obtain relief

mm
for overseas capital losses if they make an irrevocable losses election.
If an election is made, they must set UK and overseas losses against gains in the
to 9 41
following order:
1 Against remitted overseas gains; then
2 Unremitted overseas gains; then
3 UK gains.
If an election is not made in that first year, relief is never given for overseas losses.
a
The election automatically no longer applies if an individual becomes deemed UK
domiciled.

REMITTANCE BASIS – KATE

RBC
79
Kate is 29 years old. Kate has been UK resident for tax purposes since 6 April 2016 but is
non-UK domiciled. In 2023/24, Kate has the following income and gains (no gains relate
to residential property):
£
UK trading income 100,000
UK gains 15,000
Foreign trading income 90,000
Foreign gains 20,000
Requirements
a) State (1) whether the remittance basis would be available for Kate under each of
the following scenarios, either automatically or as a claim, (2) whether the UK
personal allowances and the UK annual exempt amount would be available and (3)
if the remittance basis charge might apply.
Scenarios:
unremitted
i)

ii)
foreign gains. D
Kate remits all of her foreign income to the UK and all but £1,500 of her

Kate remits £10,000 of her foreign trading income to the UK and £6,000 of craftomata
her foreign gains. unremixed 8000 1 00 8 99 6

HB2023

32 Topic 1: Personal taxation

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 b) Facts as in (a)(ii) above.
Determine whether Kate should claim to use the remittance basis in 2023/24.
c) Advise Kate of the circumstances under which the remittance basis would no
longer be available to her should she remain UK resident.

SOLUTION

PA AEA

30k 79 94
SPLIT YEAR TREATMENT
add to
Individuals are normally resident or non-resident for a complete tax year for income tax
and capital gains tax purposes.
Income
TL
In certain scenarios, an individual can 'split' the tax year and be treated as resident for
part of a tax year and non-resident for the remainder.

Leaving the UK for FTWOS

There are three circumstances where a tax year can be split into two parts for an
individual. In one part the taxpayer would be treated as UK resident and in the other
part, non-resident:
 Leaving the UK for full-time work overseas (FTWOS)
 Leaving the UK with a partner who is going to work full-time overseas (FTWOS)
 Leaving the UK and ceasing to have a UK home.

HB2023

Topic 1: Personal taxation 33

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 No remittance basis claim made
Kate's taxable income:
Non-savings
income
£
UK trading income 100,000
Non-UK trading income 90,000
Total income 190,000
Less personal allowance (restricted as > £125,140) Nil
Taxable income 190,000

£37,700 20% 7,540

£87,440 40% 34,976
£125,140
£64,860 45% 29,187
£190,000
71,703
Kate's taxable gains:
£
UK gains 15,000
Non-UK gains 20,000
35,000
Less annual exempt amount (6,000)
Taxable gains 29,000

CGT liability will be:

£29,000 20% 5,800
Kate's total income tax and capital gains tax liability:
£(71,703 + 5,800) £77,503

Therefore, Kate should claim the remittance basis for 2023/24.

c) The remittance basis would no longer be available if Kate were to obtain UK
domicile of choice at any time, or if she were to become deemed UK domiciled.
Kate will have been UK resident for 15 years in the tax year 2030/31. Therefore
from 6 April 2031 (tax year 2031/32) she will satisfy the first 'deemed domicile'
test, that of being UK resident for at least 15 of the previous 20 years. The
remittance basis would no longer be available to her unless she had less than
£2,000 of unremitted foreign income and gains and was still non-UK domiciled
under general law at that time.

HB2023

46 Topic 1: Personal taxation

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 Leaving the UK for FTWOS is the key examinable reason.

FTWOS
FTWOS has the same definition as for the statutory residence tests (SRTs):
Splitting the tax year of departure into (1) UK-resident part and (2) a non-UK resident
part requires the following conditions to be satisfied.
The individual must: C
1. Be UK resident in the tax year of departure by virtue of the SRTs.
2.
YBe UK resident in the previous tax year too
pe
3.
l
Meet the FTWOS conditions in the tax year of departure after they have started
work overseas.
09
4.
1 1
NOT Be UK resident in the following tax year because they are FTWOS

Coming to live in the UK

If an individual is coming to live in the UK, we can split the tax year of arrival into UK-
resident and non-UK resident parts if the individual is:
 Starting full-time work in the UK (FTWUK); or
 Returning to UK after ceasing FTWOS

Starting FTWUK
If the taxpayer is starting to FTWUK they must be UK resident by virtue of the FTWUK
conditions in the SRT and NOT have sufficient ties in the UK before starting to FTWUK.
The individual will then be considered UK resident only from the date they start work in
the UK

Ceasing FTWOS
If the taxpayer is returning to UK after ceasing FTWOS, the splitting of their tax year is
possible if they:
1. Are UK resident in the year of arrival;
2. Are NOT UK resident in the previous tax year because FTWOS conditions met;
3. Have been resident in UK in one or more of the four tax years immediately before
the last full FTWOS year; aimm
The individual will then be considered UK resident only from the day after the period
which satisfies the FTWOS criteria.

HB2023

34 Topic 1: Personal taxation

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 Worked Example Jenny
Jenny has always been resident in the UK for tax purposes. On 1 January 2024
she began to work full time for a company in Denmark. According to her contract
she works 37 hours per week and her first day was 1 January 2024 when she
worked four hours. Her contract will end on 30 June 2026.

Lionths

 Jenny’s year of departure is 2023/24.

 She is UK resident in the year before (2022/23).

py
She is present in the UK for more than 183 days so is UK resident in
2023/24.
automatic teet 4g
Assuming she will meet the FTWOS conditions from 1 January 2024 to 5 April
2024 and also throughout the tax year 2024/25 then Jenny will be treated as UK
resident only up to 31 December 2023.

A On her return to the UK on 30 June 2026 we can split 2026/27 into two parts
because:
 She is returning to the UK because she is ceasing to FTWOS and would be
resident in the UK because she will be present in the UK for more than 183
days in 2026/27 and presumably resident in 2027/28.
attack residency
MITTEEEE
 She was not resident in the UK in 2025/26 because of the FTWOS
condition.
 She was resident in the UK in at least one tax year before the last full
FTWOS year
2526

Further illustrations are available in Appendix C.

DISPOSAL OF UK LAND AND BUILDINGS BY NON-RESIDENTS

If a non-resident individual disposes of UK land and buildings that were acquired from 6
April 2019 onwards, a chargeable gain or allowable loss arises, calculated in the normal
way. However, if the property was acquired prior to 6 April 2019, the nature of the asset
determines its CGT treatment.

UK Residential property 019 6.6

Since 6/4/15, NR individuals have been subject to CGT (at 18% or 28%) on disposals of
UK residential property.

HB2023

Topic 1: Personal taxation 35

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 cost成本基于2015年4 5 的市场价值
The default method to calculate the gain or loss is the difference between proceeds and
the market value in April 2015 (C-B in the diagram below). However, two elections are
possible to change the calculation method: um
 Ignore rebasing and base the gain on original cost (C-A in the diagram); or
 The total gain on the property is time apportioned, with only the post 5/4/15 gain
taxable (C-A ×E/(D+E)).
I IEEEE.EE
Illustration - UK residential property sold by non-resident

commericalpropertyproperty and 'property rich assets'

Non-residential Khareholder
47
Similar rules apply to the disposal by non-resident individuals of non-residential property
and UK property rich assets on or after 6 April 2019.
youthcompany property
A property rich asset is an entity (usually a company or group of companies), in which
a non-resident person has held at least a 25% stake, whose gross asset value is derived
at least 75% from UK land.
Individuals are liable to capital gains tax at 10/20% on the disposal of such assets.
The gain chargeable is either:
 The increase in value of the property from market value at 6/4/19 to sale (C - B in
the diagram below); or
 By election, the total gain on the property based on original cost (C- A).
Illustration - UK non-residential property (NRP) or property-rich asset (PRA)
sold by a non-resident

If a capital loss arises on a non-residential property

i
due to this election, the loss is

0
allowable, however such capital losses on property rich assets are not. In any case, such
losses are ring-fenced for individuals so that they may only be used against gains on the
disposal of UK land and buildings.
e.to ssetaganst
CGT payment If agahfEne
Normal CGT payment date is 31 January after the tax year of disposal. However, shorter
CGT deadlines apply to liabilities arising from disposals of UK land and buildings as
follows.
LEER

HB2023

36 Topic 1: Personal taxation

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 Residence status Property From 27 October 2021

Residential 60 days from completion

Non-UK resident
Non-residential 60 days from completion
state
Residential 60 days from completion
UK resident
Non-residential 31 January following tax year

These rules have applied to non-UK resident individuals since 6 April 2019 and to UK-
resident individuals since 6 April 2020. Before 27 October 2021 the 60 day deadline was
30 days.
Because the CGT payment date is potentially payable before the end of the tax year, the
payment is based on an estimate of taxable income and the use of losses and the annual
exempt amount.

Non-resident companies
Since April 2019, companies have been liable to corporation tax on the disposal of UK
residential land, non-residential land and property-rich assets. Details of this will be
covered in Topic 6.

TEMPORARY NON-RESIDENCE
Where an individual:
 Ceases to be UK resident;
 Has been resident in the UK for at least 4 out of the last 7 tax years; and
 Is non-resident for less than 5 years,
then the following income and gains will be taxable in the tax year they return to the UK:
 Capital gains and losses on assets acquired when UK resident and sold while non-
resident, except where already taxed under the rules relating to the disposal of UK
land and buildings and property-rich assets; and
 Income taxed on the remittance basis which accrued during a period of UK
residence but remitted during period of temporary non-residence.
Illustration - temporary non-residence

mum

HB2023

Topic 1: Personal taxation 37

These materials are provided by BPP
 TEMPORARY NON RESIDENCE – PAUL
Paul, a higher rate taxpayer, has always been UK resident until, on 6 April 2023, he
leaves the UKmum
f
to work full-time overseas. He expects to return to the UK to start work on
6 April 2027. He intends to undertake the following capital o
transactions during his
absence:
 Δ March 2025 sell an asset for £180,000 bought in May 2014 for £65,000.
 June 2026 sell an asset for £20,000 bought in May 2023 for £50,000.
we bought
Neither of these assets is eligible for business asset disposal relief nor are they UK land Eldence
or property rich assets.
Requirements UK
say
a)
b) O
State Paul's liability to UK capital gains tax when he leaves the UK.
Calculate UK capital gains tax liability, assuming current rates and allowances

c)
o
continue to apply and state when he can expect to pay any tax charge.
State how he could minimise his tax liability.
in
SOLUTION
Aslet bought
ftp
5 asset 2 bought
It sided
at
IEEE.tv
least 4 out of last 7years qfihkku
Less than 5years

HB2023

38 Topic 1: Personal taxation

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 TEMPORARY NON RESIDENCE – PAUL
a) UK capital gains tax
Paul is leaving the UK to work overseas, and expects to be working full time
overseas in 2023/24.
FTWO
The conditions to be treated as working full-time overseas for the purposes of the
UK residence rules are that:
 He works on average at least 35 hours a week overseas (excluding annual
leave, sick leave and UK workdays).
 There are no significant breaks of more than 30 days in the tax year
(excluding annual leave) when he does not work at least three hours
overseas.
 He has no more than 30 UK workdays in the tax year, and
 He spends fewer than 90 days in the UK in the tax year.
Paul is likely to be non-resident because he meets the full time work
overseas test in 2023/24, 2024/25, 2025/26 and 2026/27. In 2027/28, he
returns to the UK and will be resident for that tax year assuming he meets
the conditions for full time work in the UK.
This would mean that while Paul is non-UK resident he will be taxed in the
UK on his UK income only, and would not be liable to UK CGT.
Δ
 However, because Paul will be non-UK resident for less than 5 years, any
chargeable gains arising on assets which he held at the time when he ceased
to be UK resident will be taxed on him in the year of his return to the UK
(2027/28). Mmmmm
Therefore, the gain on the asset he intends to sell in March 2025 will be
liable to UK taxation on his return as he owned the asset before he left the
UK in April 2023. However, the asset that is both bought and sold during his
absence will not be liable to UK capital gains tax.
b) Capital gains tax liability
o
Paul's return in April 2027 means that the gain on the asset he intends to sell in
March 2025 is taxable in the UK in the tax year 2027/28 based on the rates and
allowances that apply in that year.
Δ due for payment on 31 January 2029. The
The capital gains tax liability will be
liability will be:
£
UK gains (£180,000 – £65,000) 115,000
Less AEA (6,000)
Taxable gains 109,000
CGT liability:
£109,000 20% 21,800
It is assumed that in 2027/28 Paul will have taxable income in excess of the basic
rate band and that therefore all of his gains will be taxable at the higher rate of
20%. If any of the basic rate band remains after his income is taxed, then that
amount of gains can be taxed at the lower rate of 10%.

HB2023

Topic 1: Personal taxation 47

These materials are provided by BPP
 c) Minimising tax due
The simplest way to minimise the capital gains tax liability due on Paul's return
would be to extend his period of working overseas until April 2028, so that he is
non-resident for at least five years. The capital gain on the March 2025 mm
disposal
would thenmmmm
not be taxable in the UK.

1
If this is not possible, an alternative would be to delay the sale of the second asset
until just after his return to the UK in April 2027 and therefore realise an allowable
loss of £30,000, saving capital gains tax of up to £6,000. It is assumed for this
purpose that in 2027/28 he will have taxable income in excess of the basic rate
band and that therefore all of the gains will be taxable at the higher rate of 20%.
If any of the basic rate band remains after income is taxed, then that amount of
gains can be taxed at the lower rate of 10%.

HB2023

48 Topic 1: Personal taxation

These materials are provided by BPP
 SUMMARY

HB2023

Topic 1: Personal taxation 39

These materials are provided by BPP
 2
CAPITAL TAXES

Learning outcomes
 Calculate capital gains tax liabilities for individuals
 Identify legitimate tax planning measures to minimise tax liabilities
 Recognise the significance for tax purposes of changes in an individual's
circumstances such as marriage, divorce and death
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions
 Calculate inheritance tax liabilities for individuals
 Advise on the taxation of foreign assets, income and gains
 Explain the implications of domicile and deemed domicile for inheritance tax
purposes
 Identify the need for and advise on the use of trusts in tax planning
 Appreciate and calculate, in straightforward scenarios, the tax implications of
creating and using trusts and the tax implications of assets entering or leaving
trusts

HB2023

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 TOPIC OVERVIEW

Capital taxes

Capital gains tax Capital gains tax reliefs Inheritance tax

Business asset
Capital gains tax liability IHT reliefs
disposal relief

Investors' relief Inheritance tax

Deferred consideration
anti-avoidance

Deferral reliefs Variations

Takeovers and Interaction of IHT

reconstructions and CGT

Taxation of trusts

R O B T

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50 Topic 2: Capital taxes

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 CAPITAL GAINS TAX
CAPITAL GAINS TAX LIABILITY

Proforma:
Non- Residential
BADR BADR property
gains gains gains
£ £ £
10% 10/20% 18/28%

Gains eligible for business asset disposal relief X

Other gains X X
Current year capital losses (X)
Net gains X
Annual exempt amount (6,000) (X)
Capital losses b/f (X)
Taxable gains X X X

Rates and due dates of capital gains tax:

Non-BADR Residential property gains
gains (1) (2)
Basic rate tax payer 10% 18%
Higher or additional rate taxpayer 20% 28%

When calculating the amount of unused basic rate band extend it for:
 Gross gift aid donations; and
 Gross personal pension contributions.
1 CGT is due on 31 January following the end of the tax year of disposal
2 CGT is due within 60 days of disposals, based on estimates of taxable income and
availability of capital losses and the AEA.

Business Asset Disposal relief (BADR):

Business asset disposal relief may be available, on certain qualifying disposals, which will
reduce the rate of tax on these gains to 10% (see later).
Capital losses and the annual exempt amount can be deducted in the most beneficial
way as follows:
1 From gains on residential properties taxed at 18/28%; then
2 From gains on other assets taxed at 10/20%; then
3 From gains that qualify for BADR taxed at 10%.
Remember, any unused basic rate band is set against gains qualifying for BADR before
non-qualifying gains.
Any remaining basic rate band can then be used against other assets or residential
properties. The difference between basic and higher rate CGT is the same for both types
of asset (10%).

HB2023

Topic 2: Capital taxes 51

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 CGT LIABILITY – MARY
Mary had gains during 2023/24 on the following assets:
£
Shares in ABC Ltd 16,000
Shares XYZ plc 40,500
Shares held in an ISA 8,340
exempt
The gain on the disposal of the shares in ABC Ltd qualifies for BADR.
Mary had a capital loss brought forward at 6 April 2023 of £5,000. She had taxable
income in 2023/24 of £19,995 and had made a donation to charity under Gift Aid of
£1,040 in December 2023.
Requirement
Calculate Mary's capital gains tax liability for 2023/24.

SOLUTION
other BADR asset
shares in ABC 0000
shares in Ya gon
AZA 60001

capital loss bif 15000

taxable gain 4500 1600

Extended BRB 37700 1060

18 39000
16000
107
3900 9995 16001 107 720
45N 30051
207

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52 Topic 2: Capital taxes

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如果出售资产的部分对价取决于未来事件，则适 特殊规则。如何征税取决于在最初出售资产时是否知道未来对价的 额。
未来的考虑可能有三种类型：
• 分期付款 - 如果不存在实际的或有事项， 只是分期付款，则按照正常收益规则计算单次处置。所 收益为应收收益总额。
如果对价分期 付的时间超过 18 个 ，纳税 可以申请分期纳税。每期税款通常为每期对价的 50%，直 税款全部付清。
• 或有但已知的未来付款--如果或有情况导致
DEFERRED CONSIDERATION 付固定 额，则该 额在出售之 即已知晓，则作为 次disposal。未来付款在
出售时计入收益总额。如果或有事项未得到满 ，则可随后修改计算结果。
There are three possible types of future consideration:
a) Amount payable by instalments:
mm
Eft total
b)
Single disposal calculated under normal gains rules.
Future payment(s) contingent but known:
IC
proceeds f f
Single disposal – the future payment is included in the total proceeds at the time of
sale. If the contingency is not met, the computation may subsequently be
amended.
c) Future payment contingent and unknown:
IC
If the future payment depends on some future event and the amount to be paid
cannot be determined, there are two disposals. Right to future consideration
known as 'chose in action':
• 未来付款或有和未知--如果未来付款取决于某些未来事件，且无法确定 付 额，则作为两次disposal
DISPOSAL OF ASSET DISPOSAL OF CHOSE IN ACTION

£ £
eat bit
Proceeds received
Present value of chose in action
best estimate
X
X
X
testing
Proceeds received X

Less cost (X) Less cost (X)

I Gain X Gain X

44 158
For individuals only, where a loss arises on the sale of the chose in action it may be
carried back and offset against the original gain on the disposal of the asset. There is no
At the time of the sale of the original asset, a gain is calculated using the
equivalent relief for companies.
proceeds actually received and an estimated present value of the chose
Esg fifty p t in action. The receipt of the future consideration is treated as a disposal
of the chose in action and gives rise to a second gain/loss.
DEFERRED CONSIDERATION – CONTINGENT AND
UNKNOWN – MARIAN

Marian acquired 980 shares in Tree plc (a 49% holding) for £63,000 in June 2001. In

a
January 2024, Marian sold her shares to Branch plc for £244,000 in cash and the right to
20% of any profits exceeding the forecast for the year ended 31 December 2024. Tree
plc is a trading company.
contingent consideration
Marian's actual entitlement received in January 2025 was £30,000. The value of the right

O
to receive the additional consideration was agreed by HMRC at £8,000.
Requirement
Calculate the total gains before any reliefs arising from the disposal of shares in Tree plc.

TY 2314
estimate

TT
miss consideration
contingent
HB2023
estimate Topic 2: Capital taxes 53
These materials are provided by BPP
 SUMMARY

Capital gains tax

Capital gains tax liability Deferred consideration

Proforma Instalments
• Single disposal
Current year losses • Include all instalments in
Annual exempt amount proceeds
Brought forward losses
Future payments(s)
Business asset contingent but known
disposal relief • Single disposal
• Include future payment in
• proceeds
• Amend computation if not
received

Future payment contingent

and unknown
• Disposal of asset including
NPV of contingent
unknown amount (chose
in action)
• Disposal on receipt of
chose in action

HB2023

Topic 2: Capital taxes 55

These materials are provided by BPP
 涉及商业资产 的 relief
4.1 Summary of reliefs

Rollover relief
Defèrraí
ME 7
⾅ Gift relief 䨻攣 矕
意
Business asset disposal
relief
Deferral Reducedirate
How does it Disposal of an old asset Gift (or sell at less than Gains eligible for BADR
work? followed by acquisition market value) of qualify for a rate of CGT at
of new asset
置旧
qualifying assets 10% regardless of level of

意 at
taxable income
0
Both old and new asset
must be used in trade
Reinvestment must be
个⼈（赠与⼈）将企业
资产赠与所产⽣的收益
O
Can offset losses and the AEA
against non-BADR assets first
within 12 months before BADR assets are treated as
递延⾄赠受赠⼈⽇后处
and 36 months after using up any remaining BRB
disposal
Y 3 置该资产时交税 in priority to non-BADR assets
c shampitters
What • Land and buildings • Business assets 5 Disposal of:
qualifies? • Goodwill (not • Shares in trading • unle soletrader
unincorporated business

𨰻
个
•
companies)
Fixed plant and fixed
co; unquoted or
minimum 5%
• shares in trading co with
minimum 5% holding and 然
1
holding
machinery pie employee owned for a
合格资产 period of two years

IE TebZYTr
ending with date of
disposal

How much is Where all the proceeds If no cash received,

Ibz assets
Lifetime after
limit eligible
cessation
for CGT
the relief? are reinvested the whole then all the gain is rate at 10% = £1m (£10m for 45 3
of the gain is eligible for deferred disposals before 11/3/20) owned
rollover relief Where some cash
E To
II
Where only some of the received (sale at
β proceeds are reinvested, undervalue) restrict
_qq.nu
0 s ǎǎne品 eten
the amount not deferral by excess of
reinvestreinvested is taxed now -
actual proceeds over
and the balance of the original cost

0 fEEEE.IE
gain is eligible for

519
Where gift of shares,
rollover relief and co owns non-
Relief for business use
EEEEstme FiTA6
business assets restrict
如果赠与资产是⼀家公司的股份，⽽该公司

iffgtinbt.im
only to:
i's relief
在处置前 12 个⽉内都是赠与⼈的个⼈公
CBA/CA × gain 司，那么赠与减免的⾦额就会受到限制。 4B gain
How is relief
given?
pthiaE9
If reinvest in
depreciating asset (UEL
Gain deferred is
deducted from
Not a deferral relief – gain will
be taxed at 10% instead of
of ≤ 60 years) then gain donee’s base cost of possibly 20%
is held over and each asset
折旧资产 becomes chargeable on
earlier of: • ⽤于捐赠⼈或捐赠
Freeze • 10 years from date of ⼈个⼈公司（捐赠⼈
purchase of new 拥有⾄少 5%投票权

鬬
asset
toy 的公司）所经营业务
asset
• cease to use new 的资产 ；
asset in trade mm
• trading company
•
Effff
dispose of new asset
If reinvest in non-
的股份或证券，要不
就是股份unquoted

䩁 息
depreciating asset, then
或 该公司是捐赠⼈
the deferred gain
的个⼈公司。
reduces the base cost of
the new asset 57
⼆ CosI defered gain
358
篮军
Tax Compliance ICAEW 2024
 Summary

Defer BADR
Roll-over relief:
replacement of business
Business asset
disposal relief
tg deter
Gift relief: gift of
business assets

比㖐
不资产
assets

ATT
Available on the disposal
of qualifying assets
(including shares in
Qualifying business
assets eg, land, fixed
plant and machinery
个
热个⼈
companies 个⼈
holding)
with公司
1 5%
5
华idling
No gain for donor on
disposal, gain passes
to donee

in
Time limit for
Qualifying ownership
Restricted relief for:
period must be met
investment: one year
omn
连
Personal company
before, three years after
(CBA/CA);
disposal
Consideration received

限制 没息 然恐
Full relief if amount at
Gain on disposal

O
taxed at 10%
燕台怼您ēnnggJoint election by donor
least equal to proceeds and donee required
⼀⼀
invested in new asset, defer
partial relief otherwise
0
Lifetime limit of £1m
on gains eligible for
relief Investors' relief –
available on qualifying
shares
Claim required
Claim required
reduce base cost of replacement asset
freeze gain if depreciating asset

PRR sh kpatin
意旨
netgain x
Private residence relief:
no gain or loss on disposal

More than one residence: Partial relief: PRR only Business use: no PRR Letting relief: lowest of
election within two years, given for actual and for business part letting gain; PRR:

b
spouses/civil partners only deemed occupation £40,000
one PPR between them, job
related accommodation lettinggain
处置 低者
property
gǎǎudicosts
gainbefore reliefs
PRR 只
点ǎeiipation裂器出名意筋9 朌 x net
Lettingrelief lower of gettinggain
chargeablegain Po

ICAEW 2024 12: Capital gains tax reliefs 365

 CAPITAL GAINS TAX RELIEFS
BUSINESS ASSET DISPOSAL RELIEF

How does it work?

It charges CGT on qualifying disposals at a rate of 10%.

What qualifies?
Qualifying disposals
Sale of all/part of Sale of assets Sale of shares by
trading business used in sole trade an individual
by an individual or partnership
after cessation
Conditions:  Sole trade Assets sold within  Own at least 5%
 Partnership 3 years of cessation of :
 Furnished holiday – OSC;
accommodation – voting rights;
(see Topic 7) and
– rights to
profits and
assets on a
winding up
OR proceeds
on sale of
whole
company
 Officer or
employee
 Trading company
(or holding
company of a
trading group)
Ownership Business owned at Business owned for Above conditions
period (note): least 2 years at least 2 years to satisfied for at least
cessation the 2 years to
disposal

HB2023

56 Topic 2: Capital taxes

These materials are provided by BPP
 Qualifying disposals
Sale of all/part of Sale of assets Sale of shares by
trading business used in sole trade an individual
by an individual or partnership
after cessation
Additional Goodwill will not Relief could be
aspects: qualify for BADR denied if the
where: company has
 Goodwill is substantial non-
disposed of to a trading activities
close company (>20% of turnover,
(eg on assets or staff
incorporation); resources)
and
 The individual For shares issued
disposing of the under an EMI option
business owns at scheme:
least 5% of the
 Ownership period
company.
runs from the
date the options
BADR will be were granted and
available if <28 days  There is no need
of incorporation the for the individual
individual disposes of to hold ≥5%.
the shares to another
unconnected
company (not close,
or close but own
<5%)

Note. Where a sole trade or partnership business is transferred to a company

(incorporated) wholly or partly for shares, the two-year ownership requirement for BADR
on a disposal of the shares by the original trader/partner can include both pre and post
incorporation periods.

Calculating the relief

1 Net off gains and losses in respect of the business disposal.
2 Tax the gain at 10% (after deduction of other losses and the annual exempt
amount).
Cumulative lifetime limit of £1 million (for gains arising from 11 March 2020; previously
£10m) on the amount of gains on which business asset disposal relief may be given.
Claims must be made by 12 months from 31 January following the tax year in which the
disposal is made (31 January 2026 for disposals in 2023/24).

HB2023

Topic 2: Capital taxes 57

These materials are provided by BPP
 BUSINESS ASSET DISPOSAL RELIEF – REETA
Reeta sold her business in May 2023. She had run the business since acquisition in
January 2019. She made the following gains/losses on the disposal:
Gain/(loss)
£
Factory premises 95,000
Retail premises (22,000)
Goodwill 36,000
always qualify for BADRunless incorporated
a
In October 2023, Reeta sold her 11,000 shares in Singer plc making a gain of £15,800.
She had purchased the shares in July 2006. Singer plc has 10,000,000 shares in issue.
She also sold a residential property that realised a gain of £50,800. Reeta is a higher rate
taxpayer.
d
Requirement
Calculate Reeta's capital gains tax liability for 2023/24.
59 Not qualify to BAD

SOLUTION

Shareholdings ceasing to qualify as a personal company

Where an individual's BADR- qualifying shareholding is diluted to below 5%, such that
their shareholding ceases to be classed as a 'personal company', the following elections
are available:
 A deemed disposal of the shares at the date of the diluting share issue, such that a
qualifying gain arises on which BADR can be claimed; and
 A further election to defer the gain on the deemed disposal until the actual
disposal of the shares (election must be made within four years of the end of the
tax year of the deemed disposal). Any further gain on the shares between the
dates of the deemed and actual disposals would not be eligible for BADR.

HB2023

58 Topic 2: Capital taxes

These materials are provided by BPP
 FTTW
BUSINESS ASSET DISPOSAL RELIEF – GARETH
In November 2023 Gareth sold his 1,000 shares in Gables Ltd making a gain of BADR
£520,500. He had set up the company in 1993 and had worked for it full time

I
throughout. He was the sole shareholder. Gables Ltd is a trading company. In
February 2024 he sold quoted shares realising gains of £28,200. Gareth has £8,400
of his basic rate income tax band unused. Tother
Requirement t 斘 不可能57 BADR other
alwaysassure
Calculate Gareth’s capital gains tax liability for 2023/24.
520500 2820
SOLUTION
Ef Y qualityfor 16000
520500
Ep y net offgains 22200

8G other
G 520500 107 52050
22200 209 4440
BE Y IBD tax 56490

注意
always对BADR
100
先⽤Basic rate band
remaining lit the no
limit m 520500
⼆
479500

5 No BADR
Ecg
p
Where a company ceases to be an individual’s personal company
Where the individual’s shareholding is diluted to below 5% as a result of the company
issuing more shares, it is possible to elect for BADR to continue to be available for gains
up to the date of the share issue. If the election is made the individual is deemed to have
sold all of their shares and then immediately reacquired them at the date of the share
issue for their market value. A further election is available to defer the gain on the
notional disposal until their actual disposal.
C 57
Diluie Holding 57
HB2023

174 同时
Topic 4: Capital gains tax BADRU BADR
Elect个1 Ěiat21 These materials are provided by BPP

es
calculate Deter gain
gair from acquisition Until shares Sold
不
架9
箔器
B zonxns gain
USINESS ASSET DISPOSAL RELIEF – PETRI
1Max million1 5 800 57
Petri owns 500,000 £1 ordinary shares in Kirk Ltd, a trading company, which he acquired
at £2.40 per share in July 2000. Petri has been a director of Kirk Ltd since this date. Kirk
has 10,000,000 ordinary shares in issue.
In December 2023 Kirk Ltd issues 50,000 new shares to a new investor. The market
value of each of these shares at this date is £4.50.
In June 2028 Petri sells all his Kirk Ltd shares for £5 per share. 55 6 4.989 5
Requirement NO BADR
Calculate Petri’s capital gains tax liability in 2023/24 and in 2028/29.
deemed to have sold all of their shares and then immediately
SOLUTION reacquired them at the date of the share issue for their market
value. A further election is available to defer the gain on the
notional disposal until their actual disposal.
如做出选择，个⼈将被视为在新股发⾏前立即出售了所有股份，然后立即按市值重
BADR qualifyinguntil 2023.12
新获得股份。这可以被称为名义处置，意味着个⼈可以就截⾄新股发⾏⽇的收益申
请商业资产处置减免。然后选择将名义处置收益递延到将来实际处置股份时，从⽽
避免在实际未处置股份时征税。只要在递延收益开始征税时提出商业资产处置减免
申请，个⼈就可以继续享受递延收益的商业资产处置减免。

deemed

deemedgas
β
BAPqRalifyig

4.5 500000 2250000

deferredgain crystalisation

other

Nowbecomes

Lifetime
i id excess
HB2023

Topic 4: Capital gains tax 175

These materials are provided by BPP
B.AE
 individual 5 of shaves intertellwhole interes
building Trading co partnership
Associated disposals
us by_
tendigits
The conditions for an asset to be an associated disposal (and any gains eligible for
BADR), are:
two qualifies for B ADR
 The individual is disposing of the whole or part of an interest in a partnership or
shares in a company (this must be at least a 5% shareholding or 5% interest in a
partnership*);
 The disposal is made as part of the individual's withdrawal from the business of the
partnership or company; and
 building
The assets
JKEIF.IM F3Ys
being sold have been owned by the individual for three years prior to
their disposal and used for the purpose of the business for two years prior to the
date of the material disposal of business assets or the cessation of the business of
the partnership or company. 2 disposal
* Still treated as a material disposal if disposal is of <5% but disposing of the entire
holding and previously owned at least 5%.

Restriction: rent
Relief is restricted where rent is received by the individual for the use of the asset. This
restriction applies for periods from 6 April 2008 onwards only. Partial relief applies if the
asset was let at a reduced rent.
Fu
Restriction: non-business use T.rsBE
If only part of the asset was used for the business, then only the proportion of the gain
relating to business use will be eligible for business asset disposal relief.
62 use
BUSINESS ASSET DISPOSAL RELIEF (ASSOCIATED
DISPOSAL) – JACKY

Jacky disposes of her 10% shareholding in Wendle Ltd, a trading company, in February

III
2024. Jacky had acquired the shares when she started to work for the company in
January 2011. The gain before reliefs on the shares is £150,000. Jacky is selling her
shares as she is retiring from the company business.
At the same time Jacky also sells the office building that has been used by Wendle Ltd,
but which she owned outright, realising a gain of £56,400. Jacky had let the office
building to Wendle Ltd rent free since she purchased it in 2013.
Jacky makes no other chargeable disposals in 2023/24 and has no capital losses brought
forward.
Requirement
No restriction
a) Calculate the capital gains tax payable on the disposals by Jacky in 2023/24.
b) How would your answer to (a) change if Jacky had charged Wendle Ltd rent which
was set at 40% of the market rate.

HB2023

Topic 2: Capital taxes 59

These materials are provided by BPP
 SOLUTION

BADR

TFEIIBEEE.iq aF.sEdTother
BADR
tax

0 EEa I EIEnuAKeBAPR8ain

INVESTORS' RELIEF

How does it work?

It charges CGT on qualifying disposals at a rate of 10%.
Lifetime limit of £10 million gains on which relief may be given.

What qualifies?
Disposal of shares by an individual. Shares must:
1 have been subscribed for as new ordinary shares by the individual making the
disposal;
2 be in an unlisted trading company, or unlisted holding company of a trading group;
3 have been issued by the company on or after 17 March 2016 and have been held
for period of three years from 6 April 2016; and
4 have been held continually for a period of three years before disposal.
Like BADR gains, IR gains must use up any unused basic rate band before other gains
do.
Unlike for BADR, there is no minimum shareholding percentage and Investors’ relief is
not available to taxpayers who were employees of the company they have invested in.

HB2023

60 Topic 2: Capital taxes

These materials are provided by BPP
 投资者减免：投资者减免适⽤于个⼈出售某些符合条件的股票。投资者减免的结果处置均按 10%的税率征收所得税。
g
合格股份
(a) 已由进⾏处置的个⼈认购为新普通股；

Reduced INVESTORS’ RELIEF

BIT IE TI I (b) 非上市贸易公司，或贸易集团的非上市控股公司；
(c) 公司已于 2016 年 3 ⽉ 17 ⽇或之后发布；以及
rate (d) 处置前已持续持有三年，从收购⽇期和 2016 年 4 ⽉ 6
How does it work? ⽇（以较晚者为准）开始计算。
It charges CGT on qualifying disposals at a rate of 10%.
Lifetime limit of £10 million gains on which relief may be given.
与商业资产处置减免不同，没有最低持股量的要求，投资者
What qualifies? 在持股期间的任何时候都不能是公司的管理⼈员或雇员。
Disposal of shares by an individual, shares must:

s subscribed
1 have been subscribed for as new ordinary shares by the individual making the
disposal;
T trading 终⽣限额为 1,000 万英镑。该限额与BADR是分开的
u unlisted
2 be in an unlisted trading company, or unlisted holding company of a trading group;

he new
3 have been issued by the company on or after 17 March 2016 and have been held
for period of 3 years after 6 April 2016; and
7 39s
4 have been held continually for a period of 3 years before disposal.

INVESTORS’ RELIEF
On 30 June 2023 Prudence sold her entire shareholdings in Apple Ltd, Pear Ltd and
Plum plc. All three companies are trading companies and Prudence is not an employee of
any of the companies.

章
v0
of £20,300. Her holding represented a 3% shareholding. 9
She subscribed for her Apple Ltd shares on 1 January 2016 and made a gain on disposal

⼀
ˇ 2016 and were sold

ˇOtnquoiei
Her 1% holding in Pear Ltd shares were subscribed for 1 May
realising a gain of £22,000.
2016 20.3339s
0
The 1% Plum plc holding was subscribed for on 1 May 2016 and the shares were sold
realising a gain of £24,000. Plum plc is a listed company.
Prudence is a higher rate taxpayer. 0x 必须是 unquoted
Requirement
Calculate Prudence’s capital gains tax liability.

如果有BRB 也是失⽤9 gita's relief

SOLUTION
点

cite time limit

HB2023

176 Topic 4: Capital gains tax

remain y 10m
These materials are provided by BPP 22k
 later
ftp.n 1 0 deferral pay
reduced rate payable now but lower

CAPITAL GAINS TAX RELIEFS

Tamangbusiness
ROLLOVER RELIEF (APPENDIX 9)
must be
deferralRollover relief defers the gain on the sale of qualifying business assets, where the
proceeds of sale are reinvested in replacement qualifying assets. The relief works by
rolling over the gain into the base cost of the replacement asset. It is available to both
individuals and companies.
only one availba to both
Both the old and new assets must be ‘qualifying’ assets used in the trade of the
taxpayer. Qualifying assets include:
oldasset buy

tardff
• Land and buildings
w
d tq
É
• Fixed plant and machinery
• Goodwill (individuals only, not companies)
tag ph 120
12ms Th
The replacement asset must be acquired in the period one year before to three years
36m
after the date of disposal of the old asset.
β 185 184
194
she The relief is restricted in two situations:chargeable ge xgigo
Where there are some non-business periods ofgainuse of theNil I
1
RE
old asset. In this case it
is only the business proportion of the gain that is eligible for relief. j
2 Where not all of the proceeds of sale are reinvested into the replacement asset. In

mute
this case any proceeds not reinvested are taxed immediately, and the balance of
the gain can be deferred. retailer iso
LessRBC
ROLLOVER RELIEF –M ARK
changes.by
Mark is a sole trader. Some years ago, he bought a factory for £195,000. He sold the
factory in May of the current tax year for £230,000 and acquired another factory for

o_o
£210,000 four months later.
Requirement 213⼆bz use
113
Show Mark’s chargeable gain on sale of the first factory and his base cost for the second
non bZ
factory.

SOLUTION
quality asset old e new
U Lt B U Lt B
timings ly before
计算gain
ag NPytg
52 use
fully

Ne it β
reinvested
Not fully for non
bzetemehargeaow
HB2023

166 Topic 4: Capital gains tax

These materials are provided by BPP
 ⼀

salesproceeds
cost Frozen then becomes taxable
gain
Less RR Tx
chargeable
Depreciating assets No 477
Where the replacement asset is a depreciating asset, rollover relief works in exactly the
same way apart from the gain is not rolled over by reducing the base cost of the
replacement asset. Instead, it is ‘frozen’ and deferred until the earliest of:
• The disposal of the replacement asset
• 10 years after the acquisition of the replacement asset
• The replacement asset ceases to be used in the taxpayer’s trade
A depreciating asset is one with an expected life of 60 years or less. Plant and machinery
is always treated as a depreciating asset unless it becomes part of a building, in which
case it will only be depreciating if the building is held on a lease of 60 years or less.
Moldoven relief10)
GIFT RELIEF (APPENDIX
desteral e.es gy
Under general principles, a gift of an asset is a deemed market value disposal. However,
gift relief is available to defer the gain on gifts of business assets. The relief works by
deducting the gain from the base cost of the gifted asset for the donee.
Qualifying business assets for gift relief are:
Tradingbusiness
• ⽤于捐赠⼈或捐赠⼈个⼈公司（捐赠⼈拥有⾄少 5%投
• Assets used in a business carried on by the donor or by the donor’s personal
company (at least 5% of voting rights); or 票权的公司）所经营业务的资产 ；
• trading company的股份或证券，要不就是股份
• Shares or securities* in a trading company where either the shares are:
unquoted 或 该公司是捐赠⼈的个⼈公司。
− Unquoted; or
any amount
Ltd is the donor’s personal company
if quoted 59shareholding
− The company
pls where the donee is a
*Gift relief is not available on the gift of shares or securities
company. 如果受赠⼈是公司，则赠与股份或证券不能享受赠与减免。

This will cause a higher

I sell
P9thethEnIntYsEiTIieEsQ n
p
gain in the future. This

I
T.IE
gain will be taxable on

5EE
the donee, not the
MAFIA.EE
ifeng.aereietut
donor.

HB2023

168 Topic 4: Capital gains tax

These materials are provided by BPP
it
 如果适⽤赠与减免，则赠与⼈在处置资产时不
qualifyingasset Baselost i
会产⽣收益，无需缴纳资本利得税。受赠⼈的
sales proceeds
ME
Lesgaitiǎǒfy
deemed cost of acquisition (MV) is reduced
by the amount of the gain which would have
been chargeable had gift relief not applied.
Revise
The relief is restricted in two situations:
dobie X
1 Where there is a gift of qualifying shares in the donor’s personal company, and the
company holds some investments. In this situation the amount of gain qualifying
for relief is restricted to:
trading company
trade related Chargeable business assets (CBA)
Sbisher
all assets Chargeable assets (CA) gain before relief
number
Chargeable assets are assets which are chargeable to CGT, in other words, a
chargeable gain would arise on their disposal as opposed to, say, trading profits.
如果赠与资产是⼀家公司的股份，⽽该公司在处置前 12 个⽉内
都是赠与⼈的个⼈公司，那么赠与减免的⾦额就会受到限制。
Chargeable assets o_o
Arethey80ᵗʰ8
Chargeable business
在used
assets
Freehold/leasehold premises
Goodwill




兴管
的话就不
是 CBt
Cars  
Exempt
Plant and machinery if 6k  
Investments (shares/property)  
Net current assets  

ei
rash debtors
2
stock
Where actual consideration is received. In this case the excess of any actual
consideration received over the base cost of the asset is immediately chargeable,
and the balance of the gain can be deferred.

GIFT RELIEF (ACTUAL CONSIDERATION) – SHERYL

base cost
Sheryl is a sole trader and a higher rate taxpayer. She acquired a workshop for use in

0
her business in September 2003 for £50,000. Sheryl sold the business by selling the
workshop (her only business asset) to her daughter, Michelle, in the current tax year
MÉTIER
for £77,000. The market value of the workshop was then £90,000. The gain qualifies
for BADR.
Requirement
chargeable Actual consideration basecost
Show the amount of the gain on which gift relief could77000
50000
be claimed, the capital gains tax
payable by Sheryl assuming a gift relief election is made, and the base cost for Michelle.

SOLUTION

before relief

HB2023

Topic 4: Capital gains tax 169

These materials are provided by BPP
 DEFERRAL RELIEFS
Replacement of business Gift relief for business
assets (rollover) relief assets
Available to: Individuals: Individuals
Assets used in:
 sole trade/partnership, or
 a company where individual
owns ≥ 5% voting rights
Companies:
 Asset used in trade of

men
company
Qualifying assets:  Land and buildings  Assets used in a business
(occupied and used for carried on by the donor; or
trade purposes);  Assets used by the donor's
 Fixed plant and fixed personal company (≥5% of
machinery; the voting rights); or
 Ships, aircraft and  Shares or securities in a
hovercraft; trading company where
 Satellites, space stations either the shares are:
and spacecraft; and – unquoted; or
 Goodwill (sole traders and – the company is the
partners only, not donor's personal
companies).
47 company.
Conditions: The old and new asset must Gift or sale at undervalue of
both be used for the purposes qualifying assets
of the trade.
Gift relief not available on gift
The new asset must be of shares/securities if the
acquired in the period of one donee is a company
year before and 3 years after
the date of disposal of the old

How much is the

asset.
24 34
Net proceeds fully reinvested: If no actual proceeds:
deferred gain?:  Whole gain can be deferred  Whole gain deferred
mmmm
pNet proceeds partially If some actual proceeds:
reinvested:  Gain equal to actual
 Gain equal to net proceeds proceeds less cost is taxable
Restricted not reinvested must be immediately
taxed immediately Actual consideration
base
Restrictions: Restrict relief for any non-
business use during period of
If a gift of shares and donor
owns ≥5% relief restricted to: hargia
ownership. Gain CBA/CA
CBA = Chargeable business
asset of co
CA = Chargeable assets of
company
Max sells hissharesto his son for7000
mV
HB2023
ofshares 200000 cost 5000
61
Topic 2: Capital taxes

proceeds IMU
These materials are provided by BPP

I
 15000
gain
immediately 13000
tease
Replacement of business Gift relief for business deferre
assets (rollover) relief assets
How is the gain
deferred?:
New asset is non-depreciating: Deferred gain reduces the base
cost for the donee.
Yetief
 Reduce base cost of
replacement asset by
deferred gain

New asset is depreciating (UEL

< 60 years):
Gain crystallises on earliest of:
 Disposal of replacement
asset
 10 years from purchase of
replacement asset
 Date replacement asset
ceases to be used in the
trade
Claim date: Later of 4 years of the end of A joint election must be made
the tax year (accounting period and signed by both the donor
for companies) in which the and the donee within 4 years
gain is realised or the new from the end of the tax year of
asset is acquired. the gift.
Other: If the replacement asset is Full relief available for gains
depreciating it is possible to arising where there is also an
transfer the deferred gain to a immediate charge to IHT (ie
non-depreciating asset if it is CLT).
acquired before the deferred Testassets BRAFZIHT
All assets qualify.

in
gain crystallises.
Election only needs signing by
donor.

Proforma: relief Flat

Rollover relief Gift relief

Proceeds X Proceeds MV

Cost (X) Cost (X)

Gain X Gain X

Relief (X) Relief (X)

Chargeable now X* Chargeable now X*

HB2023

62 Topic 2: Capital taxes

These materials are provided by BPP
 Rollover relief Gift relief

*Net proceeds not * Actual proceeds less

reinvested cost

NB: gain before relief

needs indexing for a
company

Incorporation relief
sayin ay a

Where an individual transfers their business to a company in exchange for shares, any
chargeable gains arising can be deferred by reducing the CGT base cost of those shares.
Details of this relief (known as 'incorporation relief') will be covered in Topic 4.

ROLLOVER RELIEF WITH NON-BUSINESS USE – EAMONN

Eamonn bought an office building for £300,000 three years ago. The building had four
floors. Eamonn used three floors in his business. He let the fourth floor to an
unconnected business. Eamonn sold the building for £552,000.
One month later Eamonn purchased a new office building for £480,000. This building has
three floors, one of which will be let to an unconnected business.
Requirement
Calculate the gain on the disposal of the office building assuming rollover relief is
claimed.

SOLUTION

ummmm

i
o
HB2023

These materials are provided by BPP

é
Topic 2: Capital taxes 63
 GIFT RELIEF (SHARES IN A PERSONAL COMPANY) –
HENRY
tradingcompany
Henry owns 10% of the shares in A Ltd. He gives his shareholding to Frances. The gain
on the disposal is £20,000. At the date of the disposal, A Ltd has the following assets: Simefore

Factory used in trade

£
300,000
relief
Plant and machinery (all worth over £6,000) 90,000
Stock 45,000
Debtors xp 10,000
Cash at bank 15,000
Shares in B Ltd held as investment 40,000
500,000
Requirement
Show the gain eligible for gift relief.

SOLUTION

chargeable gain
20000 18 100
1860

HB2023

Topic 4: Capital gains tax 171

These materials are provided by BPP
 Interaction of reliefs
In some cases there may be more than one relief available. In this case, the reliefs are
1
taken in the following order:
 Rollover relief
 Incorporation relief (see Topic 4)
 Gift relief
 SEIS reinvestment relief
 EIS deferral relief Anygain
 Business asset disposal relief/investors' relief

TAKEOVERS AND RECONSTRUCTIONS

When one company (Company A) takes over another company (Company B), Company A
acquires the shares of Company B. The shareholders in Company B may receive
consideration for their shares in the form of:
 Shares
 Loan stock
 Cash
Shareholders
share • Shares in Company A
existing b
shares mify •
•
Company A loan stock
Cash
sell B
gain
lapital Effi's
cat Company B Company A

Shares in Company B EE.EE Isideran

Tax treatment mn
Consideration Taxation consequences
shareExchange for New shares stand in shees
Sharefor  The new shares take on the cost and acquisition date(s) of
paper
shares of the the old shares. shakes
paperfor same class
exits Exchange for


immemmmose
No gain arises until the new shares are disposed of.
For example where ordinary shares and preference shares eggastg.se
different classes are received.
of share capital 
asked
The cost of the original sharesgonsideration
is apportioned between the cat
p
new shares by reference to the relative market values of the
new shares.
– For new quoted shares, use the relative market values at
the date of exchange. ELANNU
– For new unquoted shares, use the relative market values
at the date of the first disposal.
 No gain arises until the new shares are disposed of.

HB2023

66 Topic 2: Capital taxes

These materials are provided by BPP
 Consideration Taxation consequences TEEsharesto
Receipt of shares  The cost of the original shares is apportioned.
and cash  If the cash is ≤ 5% of the value of the total consideration, or
≤ £3,000 then
– No gain is charged. Estate.EE
get
ca sohegainsomegaiq
shates
Ésh Rife 
– The cash received is deducted from the base cost of the
shares. reduce basecost
Otherwise, a gain must be computed on a part disposal of
by red
the shares in respect of the cash element of the
gain
deferred consideration.
gain
Receipt of loan
dat If the loan stock is a qualifying corporate bond (QCB):
stock – The cost of the original shares is apportioned between the
components of the consideration received by reference to
their relative market values.
– A gain arises in respect of the loan stock but is deferred.

1
– The deferred gain is charged whenothe loan stock is freeze
disposed of.
1
– On crystallisation, the deferred gain will not qualify for
business asset disposal relief, irrespective of the status of
the original shares.
BADR
– Note the disposal of the loan stock itself (a QCB) is an

 Cmmi
exempt asset for capital gains purposes for an individual.
If the loan stock is not a QCB, it is treated in the same way
as shares.

Qualifying corporate bond (QCB):

For individuals, a QCB is defined as: QB

 Sterling denominated Egypt
 Non-convertible
 Loan stock representing a normal commercial loan
 The interest upon which is neither excessive nor dependent on business
performance.
For a company, a QCB is a loan relationship receivable.

Table for mixed consideration takeover:

MV of consideration Cost of original shares

MV of new shares A =E A/D

wife MV of loan stock

Cash
B
C
=E
=E
B/D
C/D
D E

ltffigi.ie
HB2023

Topic 2: Capital taxes 67

These materials are provided by BPP
 share for share
PAPER FOR PAPER TAKEOVER – DEREK 9 949
Derek made the following acquisitions of ordinary shares in W plc: Hw Z shares
Date

see
in Shares
acquired
Cost

£
is
the old
10 August 1992 1,200 2,400
15 May 1997 Rights 1 for 2 £5 per share
w shares
8 October 2003 700 2,800
W plc was the subject of a takeover by Z plc in May of the current tax year. Derek
received 5 ordinary shares in Z plc for each share that he held in W plc.
ummmm
In December of the current tax year, Derek sold 10,000 shares in Z plc for £12,000.
Requirement
Calculate the chargeable gain on the sale.

SOLUTION
New 2 share inherit base cost
of old w shared

for 2
5

Gremainthesam

o
3
820
S
Sell z shares
Lw

HB2023

68 Topic 2: Capital taxes

These materials are provided by BPP
 TAKEOVER WITH MIXED CONSIDERATION –
ROUNDHOUSE PLC
Roundhouse plc is a quoted company specialising in the manufacture of health foods.
The directors have accepted an offer from Hanover plc, a listed company with a large
chain of health food stores, to purchase the share capital of Roundhouse plc. Its offer for
each £1 ordinary share is as follows: take over
Value
£
shoes
1 Hanover 50p ordinary share defergain stand in shoes 2.80

defergain stand in
1 Hanover 25p preference share 1.20
consider
0
Cash
taxed takeovynlesssmall
4.00

m Madge holds 1,000 Roundhouse plc £1 ordinary shares acquired on 1 June 2008 for
£1.50 each. She does not work for the company.
1000
costs1500
The takeover is finalised on 14 August.
NO BADR
R Requirements
a) How will the takeover be treated for tax purposes for Madge?
95 b) What would the effect be of receiving loan stock instead of the cash?

SOLUTION
ACTS mV of

2 she is
4 1000
000
8000

c
date

I QCB
HB2023

Topic 2: Capital taxes 69

188K These materials are provided by BPP
at take over detente Ehew loan sto
 is deferred 132507 inherit basecost of 750
anygain 42 8ferredsaints when sold
Empt taxed NoBADR ftp.agj.EE ikutYs
TAKEOVER WITH MIXED CONSIDERATION – AMANDA
923450
o
Amanda owned 5,000 shares in Forte Plc, which she purchased for £5 each in March
1995. In June Forte Plc is taken over by Granada Plc. The terms of the takeover are that

O I
the shareholders of Forte Plc are to receive 75p cash for each share held plus 5 new

i
shares in Granada Plc. On the day after the takeover, the Granada shares were quoted at
150p per share.
Calculate the chargeable gain (allowable loss) arising.

SOLUTION
I

taxed takeover

U
L
applyautomatically treat it as a
Disapplication of paper for paper rules on a takeover
disposal
C
An individual may make a claim to disapply the paper for paper rules on a takeover.
In this case, on the takeover, the disposal of the shares in Company B will give rise to a
chargeable disposal.

C
The Company A shares will have a cost equal to their market value at the date of the
takeover.

Why?
For example, the old shares in Company B would, on disposal, have been entitled to
business asset disposal relief, but the disposal of the new shares in Company Aoh
would
not.
mmnfgy.AZ fdABADfff
HB2023

70 Topic 2: Capital taxes

These materials are provided by BPP
 DISAPPLICATION OF PAPER FOR PAPER RULE ON A
TAKEOVER – HAMID
EXAMPLE

BADR 0107
Hamid purchased 1,000 shares in C Ltd in February 2003 as part of a management buy-
out. He has worked for C Ltd since 2001. The shares cost £30,000 and C Ltd had 10,000
ordinary shares in issue. we
In August 2023, C Ltd was taken over by J plc. J plc offered 8 shares in itself for every 8000Shares
share in C Ltd. J plc had 10,000,000 shares in issue after the takeover and each share
was worth £37.
Mv takeover 457 BADR
Hamid plans to sell his J plc shares in September 2024 when they are expected to be
worth £40 each. Hamid has no capital losses brought forward at 6 April 2023. He expects
to make other capital gains in both 2023/24 and 2024/25 sufficient to use his annual
exempt amount. Hamid is a higher rate taxpayer.
events takeover
Requirements 20
8492,4 sale of
Advise Hamid on his capital gains tax payable on the takeover and on the sale of the sharpie
J plc shares in September 2024 if:
a) The paper for paper takeover rules apply.
b) He makes a claim to disapply the paper for paper rules at the date of the takeover.
Assume that all reliefs and rates of tax for 2023/24 continue to apply for 2024/25.

SOLUTION

Pay
BADR

sale ofshares in C Ltd faceover

memo

qualify forBADR

HB2023

Topic 2: Capital taxes 71

NO BADR
These materials are provided by BPP
 Δ

Disapplication of deferral on receipt of QCB consideration

If the shares exchanged for QCBs qualify for Business asset disposal relief' relief (BADR),
this relief will be lost if the gain is deferred until the disposal of the QCBs.

C
An election can be made not to defer the gain on the QCBs.
If the election is made, the whole gain is chargeable at the time of the takeover at the
BADR rate if the shares disposed of meet the conditions for relief.

HB2023

72 Topic 2: Capital taxes

These materials are provided by BPP
 SUMMARY
Capital gains tax reliefs

HB2023

Topic 2: Capital taxes 73

These materials are provided by BPP
 the world's mine oyster, which I with sword will open
made by Yifei
estate 的税率将是 36%而不是 40%

(4) BPR (business property relief)

16. BPR：如果转让了 qualifying business property，则适用减免政策，将

transfer of value 直接减少 100%或 50%。适用于 both lifetime

transfers 和 transfers made on death。
17. 如果还有剩余价值，再用 AE。
100%: 非法人贸易业务，贸易业务中的利息，unquoted trading
company 未上市的控股股票
50%: 上市控股公司的股票转移，Land, buildings, plant, machinery
(business used)同时转移方可以是 partner
You can only get relief if the deceased owned the business or asset for at least
2 years before they died.这个两年包含 spouse ownership
如果 ltd 的资产里有非 business 的，还需要对 BPR 进行进一步限制。

46
 the world's mine oyster, which I with sword will open
made by Yifei

on
mummitt o

47
 INHERITANCE TAX
INHERITANCE TAX RELIEFS
Business property relief (BPR)
Assets qualifying Unincorporated trading business or an interest in a trading business
for 100% relief
W Shares in an unquoted trading company (including AIM)
Securities in an unquoted trading company (including AIM) where the
transferor has control of the company
Assets qualifying Shares transferred from a controlling holding in a quoted trading company
for 50% relief
Land, buildings, plant and machinery owned by the transferor and used for
business purposes by either:
 A partnership in which the transferor was a partner; or
 A company of which the transferor had control immediately before the
transfer.
Ownership 2 years
period
There are some situations where this rule is modified:
a) Replacement business property –combine ownership period
b) Property passed on death from a spouse/civil partner – combine
ownership period
c) Two successive transfers of the same property, one of which was on
death and the first transfer of property qualified for relief
Restrictions Contract in place for sale denies relief
No BPR on excepted assets
An excepted asset is one which was neither:
 Used wholly or mainly for the purposes of the business throughout the
whole of the two year period prior to the transfer; nor
 Is required at the time of the transfer for future use by the business.
Examples of excepted assets include large cash balances, and land or
shares held as investments
Note. Use in the business does not necessarily involve use in the trade
Attributable Apply BPR to value after deducting attributable liability
liabilities
Other points Relevant business property can be held anywhere in the world

BPR will no longer apply at the date of death if:

a) The donee has sold or gifted the property before the death of the transferor
(unless proceeds fully reinvested in replacement qualifying property within
three years); or
b) The property no longer qualifies as business or agricultural property.

HB2023

74 Topic 2: Capital taxes

These materials are provided by BPP
 Lifetime gifts DeathEstate R relevantproperty

㸑 品货 品
BUSINESS PROPERTY RELIEF 器器 sales contract

Relief is available at either 50% or 100% where an individual makes a transfer of value
na
of qualifying business property. The relief applies to lifetime gifts as well as the death
estate. Kmn
R - 必须转让相关商业财产
me
1
If there is any value remaining after the relief has been applied, the usual exemptions
1 are used.
(eg annual exemption) O - 转让⽅的所有权期限
S - 已签订的销售合同拒绝救济
Business Property Relief (BPR)
E - 例外资产减少救济⾦额
Relief %
whole
Sole trader or partnership trading business (not just an asset 100
used in the business)
any amount
火 Shares in an unquoted trading company (including AIM listed)
Shares in a quoted trading company where the donor had control
100
50
Land, buildings, plant and machinery, owned by the individual 50
and used in the trade of their partnership or a company that the
individual controls
507 2年
The asset(s) must have been owned for two years prior to the transfer. However, there
are some exceptions to this:
• Where the property replaces other qualifying property, and together they were

ò •
owned for at least two of the previous five years
For transfers between spouses / civil partners on death, the ownership periods are
combined (not for lifetime transfers between spouses / civil partners)
• Where there are successive transfers of the same property, one of which was on
death and the first transfer qualified for relief
BPR does not apply where:
• The business consists wholly or mainly of dealing in securities, stocks, shares, land
or buildings, or making or holding investments; or
1patnershp agreement
s • There is a contract in place to sell the property.
if any
0ha
partner
BPR is restricted where the business or the business of the company being transferred
holds excepted assets. An excepted asset is one which is neither used wholly or mainly
dog
me
pig
for the purposes of the business throughout the two years prior to the transfer, nor

EY required for future use. For example, large cash balances, or investments.
not
Use the following formula to calculate the value qualifying for relief:
Net assets – investments epei.ee ers
feetm
例外资产的例⼦包括⼤额现⾦余额
BPR ǒagift net assets
以及作为投资持有的⼟地或股票。
EXCEPTED ASSETS – MARCUS eat property

uněessǎngt
Marcus has for many years owned a 20% shareholding in Z Ltd, a manufacturing
company. He gave the shares to his daughter in the current tax year. They were worth
£80,000. At the time of the transfer, Z Ltd had total assets less current liabilities of
£2,185,000. Additionally, there were non-current liabilities of £185,000 due to a long-
term loan.

HB2023
Nex assets
⼆ 2000000
iii 是点Topic 6: Inheritance Tax 265
These materials are provided by BPP
restricted BPR
 RN RB 如果个⼈在 2017 年 4 ⽉ 6 ⽇之后去世，将其死亡遗产中的住房留给
其直系后代，则除NRB外，还有权享受住宅免税额RNRB。
Residence nil rate band

Additional threshold
The residence nil rate band (RNRB) is an additional threshold which means more of a
chargeable death estate can be taxed at 0%. It is in addition to the basic nil rate band.
The estate is entitled to the RNRB if
• The individual dies on or after 6 April 2017;
• Their death estate includes their home (or share of their home);
• The home is inherited by the deceased’s direct descendants.
The RNRB has been £175,000 since 2020/21. gǜdthildren
urn
Home
The home which attracts the RNRB can be any property that:
⼀个⼈的住宅不⼀定是其主要住宅，期限限制。它可以是死者居
• is in the deceased’s death estate;
住过的任何房产，只要在其死亡时计入其遗产即可。死者拥有但
• the deceased lived in.
从未居住过的房产，如租赁房产，将不符合 RNRB 的条件。
There is no minimum ownership or occupation period and the property does not need to
have been the deceased's main home.

Direct (lineal) descendants

直系后裔：⼀个⼈的直系后裔是指
A direct descendant is a child, grandchild, great grandchild or other remoter, lineal
• 该⼈的⼦女、孙⼦女或其他直系⾎亲
descendant.

mmǔǔnx
• 配偶或⺠事伴侣的直系⾎亲
It also includes a spouse or civil partner of a direct descendant.
请注意，直系后裔不包括侄⼦、侄女或兄弟姐妹。
Applying the RNRB

器⽤于
hestate
The RNRB applies to death estates only (not lifetime transfers). It is offset against the
entire death estate (not just the property it relates to).
eat The RNRB applied to the death estate is the lower of:
• the value of the home (or share of it) that is inherited by the direct descendants
(less any liabilities secured on it) and 房屋价值是指房产的公开市值减去任何抵押债务（如按揭）
mor
• the maximum gage
residential threshold when the individual died.
75000
Tapering the RNRB
If the individual's death estate (assets less debts and liabilities, but before exemptions
and reliefs) is valued at more than £2 million the RNRB is tapered by £1 for every £2 by
me
which the estate exceeds £2 million. This can potentially reduce the RNRB to zero.

RESIDENCE NIL RATE BAND

To – DOROTHY
Dorothy died on 24 June 2023 and her estate comprised the following:
£
House in London – lived in by Dorothy at her death 950,000
Other assets 1,250,000

Dorothy's allowable debts and funeral expenses totalled £80,000. She left £100,000 to
charity and the remainder of her estate to her children.
Requirement
Calculate the amount of the RNRB available in her death estate.

HB2023

248 Topic 6: Inheritance Tax

These materials are provided by BPP
 Additional nil rate band for a residence
Applies for individual's death on/after 6 April 2017.
The residence nil rate band (RNRB) is £175,000. This is tapered by £1 for every £2 by
which an individual's estate exceeds £2 million. The deduction is capped at the value of 死者在 2015 年 7
qualifying property in the death estate, net of any outstanding mortgages. 8 之后缩减了
Qualifying property: 房屋 积或不再拥
有房屋，如果保留
a) Has been individual's home at some point, and left to one or more of their direct
descendants; or 该房屋并将价值较
低的房产或其他同
b) Deceased downsized or ceased to own a home after 8 July 2015, the home would
等价值的资产纳入
have qualified for the relief if retained and a less valuable property or other assets of
an equivalent value are included in the death estate and left to direct descendants. death estate并留给
直系后裔，则该房
Any unused residence nil rate band can be transferred to a surviving spouse/civil partner
屋符合减免条件。
(deemed to be 100% if the first spouse died before 6 April 2017).
The RNRB can only be offset against assets in the death estate, not lifetime gifts.
RNRB：看先去世的配偶是否使 ，使 比例
INHERITANCE TAX ANTI-AVOIDANCE 为多少，后 去世 可使 （只给直系亲
属）。只适 于death estate tax，因为RNRB
Gifts with reservation of benefit (GWROB) 本 就是只针对于death estate中的house

Common examples of gifts with reservation of benefit include:

 Gift of a property – living in the property without paying full consideration for
occupation
 Gift of a chattel such as a work of art – retaining possession of the chattel without
paying full consideration for enjoyment
 Gift of income producing asset such as shares – continuing to receive the income
 Gift of any asset to a trust of which the transferor is a beneficiary
Tax treatment if the donor dies using the asset:
mmmm
1 Treat as a PET/CLT as normal when the gift is made.
2 If the transferor continues to benefit until his death, treat the asset as part of his
death estate (based on its value at that time).
in charges to IHT on the same asset, only tax (1) or (2) – whichever results in
To avoid two
the higher amount of IHT being payable.
one THEYcalm
Tax treatment if the transferor ceases to retain a benefit, eg moves out of the
property:
3 treated as making a further PET at the time the reservation ceases (based on value
of the asset at that time).
To avoid two charges to IHT on the same asset, only tax (1) or (3) – whichever results in
the higher amount of IHT being payable.

HB2023

Topic 2: Capital taxes 75

These materials are provided by BPP
 GIFT WITH RESERVATION OF BENEFIT – MARY
Mary gave her house to her son, Phil, on 10 June 2019 when it was worth £340,000.
This was the first transfer of value that Mary had made, apart from using her annual
exemption in April each year. Mary lived in the house by herself without making any At 1
payment for her occupation.
gift with reservationofg.pe
0
Mary died on 16 October 2023. Her death estate was £550,000 (excluding the house)
which she left to Phil. The house was then worth £390,000.
Requirement increased value
treat itCompute
as a P
the IHT payable on Mary's death.
tax
SOLUTION iifetime

I
taperrelief
O

acy
taxable

442

qummaaittate.ie
ignore
EEdith
estate tax taxable
Exceptions
a) If the asset is transferred 'virtually to the entire exclusion of the transferor' –
allows minor benefits to be disregarded.
b) Where the transferor gives full consideration for any right of occupation or
enjoyment.
c) The circumstances of the transferor change in a way that was unforeseen at the
date of the original transfer; and the benefit is for reasonable care and
maintenance of the transferor as an elderly or infirm relative.
a）如果资产的转让 "实际上完全排除了转让 "--允许忽略minor bene ts。
b) 转让 为任何占有权或享有权付出了全部代价。
转让 2:的情况发 了变化， 这种变化在最初转让时是不可预 的；并且该利
HB2023

76 c)Topic Capital taxes

益是 于合理照顾和赡养作为年老或体弱亲属的转让 。 by BPP
These materials are provided
 Pre-owned assets tax charge (POAT) 289 3GWROB.IEPOATES
If the GWROB rules are avoided (for example an individual providing cash to their child,
which is used to purchase an asset which the parent then uses), a pre-owned assets
charge may apply instead.
FEINT.AE IT
An amount will be charged to income tax on the donor for use of the asset, equal to:
mm


For land and buildings, the annual value; and FEELA
For a chattel, its value multiplied by the official rate of interest.
annexe
Any payments made by the transferor for use of the asset may be deducted from the
amount chargeable.
The transferor may elect out of the POAT rules and for the GWROB rules to apply
instead.

Deemed domicile for IHT APIELEA 659

The basis of assessment for IHT depends on an individual's domicile:
 UK Domiciled: worldwide transfers of wealth are chargeable
8
 Non-UK domiciled: UK assets only are chargeable
From 6 April 2017, an individual is deemed to be UK domiciled for IHT purposes (and
therefore non-UK assets are chargeable) if any of the following circumstances apply:
a) UK resident
R for 15 of the previous 20 years prior to the transfer/death, including one of
the four years ending with the year of the transfer or death;
toys
d IÉ b) Individual born in the UK, with a UK domicile of origin, and UK resident in the year
of the transfer/death and one of the two immediately preceding years (known as a
'Formerly Domiciled Resident', or FDR); or
c) Individual was UK domiciled at any point within the three years immediately prior
to the chargeable transfer or death.

VARIATIONS
The terms of a will may be varied by a beneficiary, so long as it is made:
a)
hmmm
By the original beneficiary of the asset under the terms of the will;
b) Within two years of the death;
c) In writing;
d) For no consideration in money or money's worth other than the making of another
variation; and
e) Containing a statement that the variation is to have effect for IHT and/or CGT
purposes.
The inheritance tax and capital gains tax rules apply as if the will had always been
written this way (ie no gift from the original beneficiary to the new beneficiary and the
new beneficiary acquires the asset at probate value).
In statement.
The CGT statement is independent of the IHT
I
Why?
 Tax planning – eg to pass assets down a generation to the grandchildren
 Fairness

HB2023

Topic 2: Capital taxes 77

These materials are provided by BPP
 VARIATION OF A WILL (IHT) – BERNARD

Paris
Bernard died on 17 November 2023. He had made no lifetime transfers and left the
whole of his estate to his daughter Margaret. His estate does not include a residential
property.
c.ly
Bernard's death estate is valued at £463,000. Margaret dies on 13 February 2024 leaving
the whole of her estate to her daughter Rose. Margaret's death estate is valued at
£800,000, including her home worth £200,000 but excluding what she received on the
death of her father Bernard.
Margaret had not made any lifetime transfers.
Requirement
Explain, with calculations, how tax could be saved if a deed of variation were made prior
to Margaret's death to pass Bernard's estate directly to his granddaughter Rose.

SOLUTION

taxable
inherited by margaret 46300
55200 60780
FEB3NRB
or

taxable

79 1 rate fiestate nog

reefanty
c
ly

HB2023

78 Topic 2: Capital taxes

o
These materials are provided by BPP
o REATER T.IM
 The deed of variation should be made before 17 November 2025 and in any event before
the sole beneficiary's death, ie Margaret. It should include the statement that the
variation has the effect for IHT.
£
same Chargeable estate 463,000
Less nil rate band 2023/24 (325,000)

q Excess over nil band

IHT on £138,000 @ 40%

138,000

55,200

Death of Margaret – 13 February 2024

Margaret only has a death estate of £800,000, enabling her RNRB and nil rate band to
offset this and reduce the amount of IHT payable.
£
Chargeable estate Not taxing the new
house 800,000
Less: residence nil rate band 2023/24 (175,000)
nil rate band 2023/24 (325,000)
Excess over nil band taxable 300,000

IHT on £300,000 @ 40% 120,000

Total IHT payable (£55,200 + £120,000) 175,200

No ASR £114,501
Therefore, there is a tax saving of (£289,701 – £175,200)
The deed of variation is not necessary where a spouse/civil partner who has died leaves
his/her estate to the surviving spouse, as the unused nil rate band can be transferred to
the surviving spouse.

IHT AND CGT INTERACTION – KYLIE

The transfer into the discretionary trust is a CLT. There will be an immediate inheritance
tax charge.
As a result the special form of gift relief is available.
Kylies' gain on disposal:
£
Sale proceeds (MV) 500,000
Less acquisition cost (279,000)
Gain 221,000
Less gift relief (221,000)
Chargeable gain NIL
Trustees base cost: £
Market value 500,000
Less gift relief (221,000)
Base cost 279,000

HB2023

Topic 2: Capital taxes 95

These materials are provided by BPP
 yym separately
INTERACTION OF IHT AND CGT

Gifts on death depends on 1,8B 894TPET

deathestate
a) Inheritance tax may be payable on the death estate and on lifetime gifts made
within the previous seven years.
BPR Apr

G
b)
O
Capital gains tax is not payable on the death estate. Donees receive assets at their
probate value (market value at death) and so receive a free capital gains tax uplift
in value.
statein answers
Lifetime gifts – potentially exempt transfers no immediate
No a) Potentially exempt transfers have no immediate inheritance tax charge. death tax
My
C b) The capital gains tax position depends on the asset gifted. The asset may be: 9 5 74
fiftnelief

O
Exempt, for example cash; or

In
Chargeable to capital gains tax.
If the asset is chargeable to capital gains tax, the gain is calculated using market
value for the sale proceeds. The gain may be subject to gift relief if the asset is a
business asset.
IF I joint claim
Lifetime gifts – chargeable lifetime transfers (CLTs)
a) A chargeable lifetime transfer may be subject to an immediate inheritance tax
truytimm.INT
IN charge; and deathtax
CGT b) An immediate capital gains tax charge.
To alleviate this problem, the gain arising on the transfer may be deferred using a special
form of gift relief.

IHT AND CGT INTERACTION – KYLIE

On 1 January 2024, Kylie transferred shares worth £500,000 in Rex plc, a quoted
investment company, into a discretionary trust. The shares had cost Kylie £279,000 in
August 2008. No BPR
Requirement
Calculate the CGT base cost of the shares for the trustees, assuming all beneficial
elections are made.

SOLUTION

HB2023

Topic 2: Capital taxes 79

These materials are provided by BPP
 FGH
LIFETIME TRANSFER V DEATH TRANSFER – LESLEY act
EXAMPLE tradingcompany BE.FI
Lesley owns 4,000 £1 ordinary shares in FGH Ltd, an unquoted manufacturing

relie etate
of which she is a director. Her husband, Frank, owns a further 3,500 £1 ordinary shares
and her sister, Barbara, the remaining 2,500 £1 ordinary shares.
Each shareholder has held their shares since incorporation in 2007 when the shares were T BPR
property issued at their nominal value.
rules cost 1 each zys BADR BPR
Lesley is considering passing half of her shares to her son, Michael, either now or in her
will. In either case, she will give the rest of her estate to Frank in her will (including the gym
fify remaining shares in FGH Ltd).
spouseexemption
The value of shares in FGH Ltd are as follows:
£
7,500 shares 1,500,000

4
5,500 shares 990,000
4,000 shares 600,000
2,000 shares 250,000
BPRrestriction
The company has net assets of £2m, of which £250,000 are excepted assets. It has
chargeable assets amounting to £1.2m, of which £1.0m are used in its business.
Requirement
gftrelief.IE
Show the capital gains tax and inheritance tax implications of:
a)
CaT MVIQset
Lesley making the gift in his lifetime on 31 December 2023, gift relief being
claimed and the shares being retained by Michael;
b) Lesley making the gift in her will. M INT Patteath
994 ath estate
In both cases, assume that Lesley dies on 31 March 2024. She has made no other gifts
charge
other than a gift of £340,000 to a discretionary trust in 2018, and has no other
chargeable assets.
NRB used
AEA
HB2023

80 Topic 2: Capital taxes

These materials are provided by BPP
 LIFETIME TRANSFER V DEATH TRANSFER – LESLEY
EXAMPLE
a) Lifetime gift
Capital gains tax
£
Market value (2,000 shares) 250,000
Less cost (2,000)
Gain before reliefs 248,000
Gain available for gift relief is
£248,000 1.0/1.2 £206,667
Gain left in charge is (£248,000 – £206,667) 41,333
Less annual exempt amount (6,000)
Taxable gain 35,333
CGT @ 10% (eligible for BADR) 3,533

Base cost for Michael: £

Market value of shares 250,000
Less gift relief (206,667)
Base cost 43,333

Inheritance tax £
Before transfer:
4,000/4,000 + 3,500 £1,500,000 800,000
After transfer:
2,000/2,000 + 3,500 £990,000 (360,000)
Transfer of value 440,000
Less BPR £440,000 (2,000,000-250,000)/2,000,000 (385,000)
Transfer after BPR 55,000
Less AE (x2) (6,000)
Potentially exempt transfer 49,000

This is chargeable on Lesley’s death, Nil rate band used by gift to discretionary
trust so IHT payable is:
£49,000 40% £19,600
Total tax payable on gift £2,903 + £19,600 = £22,503

b) Gift on death
Capital gains tax
No capital gains tax
Base cost of shares for Michael £250,000

Inheritance tax £
4,000/(4,000 + 3,500) £1,500,000 2,000/4,000 400,000
Less BPR
£400,000 (2,000,000 – 250,000)/2,000,000 (350,000)
Chargeable transfer 50,000
IHT payable: £50,000 40% £20,000

HB2023

96 Topic 2: Capital taxes

These materials are provided by BPP
 SOLUTION

Understanding the various IHT rules and reliefs around gifting assets during life and on
death will help you demonstrate the adds value behaviour to anticipate an
individual’s future needs and requirements, and to identify opportunities to mitigate an
individual’s IHT liability.

TAXATION OF TRUSTS

0
A trust is an arrangement whereby a person (settlor) transfers property to another
person (trustee) who must manage the property on behalf of specified beneficiaries.

HB2023

Topic 2: Capital taxes 81

These materials are provided by BPP
 在全权信托模式下，受托 可以在委托 的意愿指导下 决定信托财产的分配
式、财产的运作管理 式，受托 拥有更多的 主权，同时承担更多的责任。

Discretionary trusts

A discretionary trust is a trust where no beneficiary has a right to the income or

capital. Distribution of income or assets to beneficiaries are at the discretion of the
trustees. 終 權益信託包括兩種類型的受益 ——終 權益受益 (Life
tenant) 及剩餘權益受益 (Remainderman) ，前者在過世前都可
享有信託利益，但不擁有信託資產也不能出售信託資產；後者則
Interest in possession (life interest) trusts 可以於終 權益受益 過世後得到剩餘的信託利益及資產。
I p ELEGY.IE ime
(IIP) is apost 2213106 before
An interest in possession trust trust where one or more beneficiaries
(life tenants) has the right to income generated by the trust property. The life s zzp
tenant does not have a right to the property itself. When the trust comes to an end
(eg on death of the life tenant) the property is transferred to another beneficiary
(remainderman). H 夫 仍在世的期間擁有房 的居住權，或是可以將房屋出租賺
取租 ，保障兩老的 活。過世後房 及其他資產則能透過信託
L 移轉給剩餘受益 ，也就是這對夫妻的 女及孫 女，達到財富
Relevant property trusts
傳承的 的。

hmm
All discretionary trusts and interest in possession trusts set up during a settlor’s lifetime
since 22 March 2006 are relevant property trusts. This tends to affect the inheritance
tax and capital gains tax treatment of assets entering and leaving the trust.

Bare trusts 裸信托是 种基本信托，通常受益 为未成年 。受托 有责任以谨慎的 式

管理信托资产，按照委托 的指示，以实现受益 的利益最 化。
A bare trust refers to property held by the trustee (nominee) as its legal owner on
behalf of the beneficiary. If the beneficiary is 18 or over, they are absolutely entitled to
income and property held in a bare trust.

Income tax
4
Discretionary trusts
As income arises in a DT, the trustees are liable to income tax.
55 ETek
past The trustees have a £1,000 basic rate band but above that all trust income is taxed at
additional rates of tax.

451 Mms MSL 52 207,02 S759

9 7 When the trustees distribute the income to the beneficiaries, the beneficiaries are liable
There is no deduction of trustees’ expenses.

to income tax on what they receive in the tax year. However, the amount received is net 382
of additional rate tax so must be grossed up by multiplying it by 100/55 before putting it
into the beneficiary’s income tax computation along with the rest of their income that
year. Non-savings rates are applied to the gross trust income. The 45% gross-up is
then deducted from the beneficiary’s income tax liability. Jpatsu
The trustees keep track of the income tax they pay compared with the 45% credits
deducted from the beneficiary’s income tax liability.
 If the income tax paid by the trustees is not enough to cover the 45% credit paid
claimed by the beneficiary, the trustees must pay the shortfall to HMRC.
 If the trustees have paid more income tax than is claimed as a credit by the
beneficiary, the excess is carried forward to future tax years as a tax pool.

HB2023

82 Topic 2: Capital taxes

These materials are provided by BPP
 IIP trusts
As income arises in an IIP, the trustees are liable to basic rate income tax (no PA/
savings or dividend NRB) on that income.
mmf
The beneficiary is taxed on the income paid by the trustees grossed up for the tax the
trustees have already paid to HMRC.
incomeretains its nature as Ns IS DI
The beneficiary’s income tax liability is then reduced for the amount of the gross-up.
If the trustees have to pay a fixed amount each year (an annuity) this is paid net of 20%
income tax.

Inheritance tax IHT

If a settlor transfers assets to a relevant property trust (discretionary trust or an IIP trust
that has been set up in the settlor’s lifetime since 22 March 2006), that transfer is
ppe treated as a chargeable lifetime transfer (CLT).
immediate 1147
deathsyffor.gg
If the property remains in the trust it is subject to a principal charge on every tenth
anniversary of the trust’s creation.
If the trustees pass trust property to a beneficiary there is an IHT charge called the exit
charge.
RPTs not included in the death estate of the beneficiary.

In
However, assets held in an IIP which is not a RPT (so it was created before 22 March
ftp.t 2006 or on the death of the settlor, are treated as if they are owned by the life tenant.
If the life tenant dies the property held in trust is included in the beneficiary’s death
estate.
i settledproperty
Capital gains tax asset
CCT Trust
Gift to a trust
A gift by an individual of a chargeable asset is a disposal at market value.
gain for section
I
Remember cash is not a chargeable asset for CGT.
lumpy
REFERSIf the gift creates an immediate IHT charge because it was a CLT, the settlor can claim
gift relief regardless of what kind of asset it is or whether the trustees agree. The base
mmediate cost for the trustees then becomes the market value at gift less any gift relief claimed.

Iran
Remember that a gift on the donor’s death is not a chargeable disposal, so the settlor
would not have a CGT liability in this situation. The base cost for the trustees would be

FEE
the probate value.
Gifts to an IIP that is not a relevant property trust (created on death or before 22 March
4706749 2006) are treated as gifts direct to the life tenant. Gift relief only available if it is a
transfer of a business asset. I
BEIS Disposal by the trust Trust chargeable person
Mph proceeds
Gain calculated as normal (for individuals).
stenfitity
Trustees have an AEA of £3,000. If there are several trusts set up by the same settlor,
the AEA is shared equally between all the trusts. The minimum AEA is £600.
CGT is charged at 20% or 28% (never 10%). cost
I residential gain
property AEA 3000
HB2023

taxable
Topic 2: Capital taxes 83
These materials are provided by BPP
HR 20.718
 A transfer from a RPT to a beneficiary would be a chargeable disposal by the trustees but
there would also be an IHT charge so gift relief would be available.
A disposal by an IIP trust which is not an RPT this is treated as a disposal by the life
tenant themselves - depending on the asset and assuming the life tenant is alive at the
time this would be a chargeable disposal for CGT purposes.

Taxation of bare trusts Treatedas transparent for all tax purposes


mm
The transfer of assets to a bare trust is treated as a gift - PET for IHT purposes
and chargeable disposal (assuming the gift is a chargeable asset).
 Disposals are taxed on the beneficiary (full AEA)
 Income is taxed on the beneficiary.
h
 Transfers of assets to the beneficiary is not a transfer for IHT or CGT.

FAMILY INVESTMENT9COMPANIES

f
nkeiyeftxsy.zsyp.watetnts tcaya
sy.id.ie mEpEegy
familyinvestments
zy
Family Investment Company (FIC): A Family Investment Company (FIC) is a private
in

CTinstea s
company whose shareholders are family members and which is usually controlled and
men
run by the parents as directors. 家族投資公司 (“FIC”) 是私 有限公司，是家族信託基 以外的
另 個選擇。FIC很靈活，因為它容許創辦 (通常是 ) 創造
Typically, an FIC could be structured as follows: 個可增長和管理家族財富、最後能把公司轉移給後代的架構。
 investment
Parents subscribe for voting shares to maintain control of decisions
the company (usually
these shares would have restricted rights to dividend and capital)
 Additional funds lent to the FIC to fund its investments
interest free
 Possible transfer by parents of shares, property or other investments into the
company
a ownedby company incometeongs to compan
 Children subscribe for shares – non-voting but with rights to dividends and capital
of the company.
 Gift of shares by parent to children at a later date

Tax treatment of set up

 Setting up of FIC not a transfer of value. in still own theshares ofcompan

o 0
Transfers of cash to children to buy shares = PET by parent (no BPR as no trading
activity)
no cat
 Transfers by parent of existing investments = chargeable disposal (connected

sharkygfzgpyaifsetd qpq.EE
person so proceeds deemed at market value) and stamp taxes payable by FIC on
transfers of shares/property mu
Tax treatment
 3935901
FIC likely to be a close investment holding company which pays corporation tax on
intom its income from investments at the main rate which is lower than higher and
additional-rate income tax rates.
property
interests

corporation If FIC borrows to acquire its investments then a deduction is available for the
interest payable (would not be the case for individuals who had borrowed and

ᵗEy bought investments in shares directly and interest on loans to acquire buy-to-let
residential property is relieved at basic rate tax only).
MTLR exp
dividends NOT
HB2023

84 Topic 2: Capital taxes

These materials are provided by BPP
 exempt
251
ftp.tsfg.CAEAI
 Gains on disposal of investments by the FIC subject to corporation tax rather than
capital gains tax
 On extraction of profits, the recipient of dividends will be taxed on this income as
normal. However, if the recipient is under 18 and the dividend comes from an
investment made by their parent, the dividend will be taxed on the parent.
Tc
Young addthis.ttndsuni
Efficient
lower tax I p.FI
aendnRB

HB2023

Topic 2: Capital taxes 85

These materials are provided by BPP
 HB2023

86
EEE

EEE
EE
it i

ii
SUMMARY
EEE

Topic 2: Capital taxes

iii
Family investment
IHT reliefs
companies
iiiiiii

E
É

É
BPR/APR
PR/APR reduce
reduce transfer
transfer • Set-up
of alue b
of vvalue byy 100% o
100% orr 50%
50% • Taxation of the FIC
ii

• Taxation of the shareholders

EEE

gg
i

iiiiiiifi ie
040
i.it

ncome
In come ttax:
ax:
iiii

iiIT Baasic
sic rrate
ate ffor IP
or IIIP

These materials are provided by BPP

Additional
dditional rate
rate for
for
diiscretionary
scretionary e except
xcept
exxpenses
penses a and
nd ££1,000
1,000 BRB
BRB

i.ipiii
i

iii
EE.EE
iiiiif.it iii.ii i
 3
UNINCORPORATED
BUSINESSES & TRADING
LOSSES, VAT AND
STAMP TAXES
Learning outcomes
 Explain and calculate the tax implications involved in the cessation of trade
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions
 Determine, explain and calculate the VAT liabilities for individuals and corporate
entities
 Explain and evaluate the tax implications of business transformations and change
 Evaluate and advise on tax strategies to meet business objectives
 Explain and evaluate the tax implications of group structures
 Determine, explain and calculate the liability for individuals and corporate entities
to stamp taxes and annual tax on enveloped dwellings (ATED)
 Evaluate and advise on alternative tax strategies relating to corporate
transformations

HB2023

These materials are provided by BPP

 TOPIC OVERVIEW

Stamp duty on
incorporation,
liquidation and
purchase of own shares

Stamp tax anti-avoidance

HB2023

100 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 againsttotal⼈
income
before P.A
Summary
⼀个
籝序 是inadditionto
3

f
Trading losses – no taxable trading
income, loss relief available 器都⾼思
结转 pinionat
期初 出 期 未后进失出
s.83 – c/f against
first available
s.64 – set off
against general
s.72 – loss in first
four tax years of 靠
先是 s.89 – loss on
cessation c/b against 3y
trading income income in year of trading c/b against trading income from
of same trade loss and/or general income of same trade of last

Anomain
preceding year preceding three tax tax year and
years on FIFO basis previous three tax

管篮
years on LIFO basis
不 怕定年鉴
剩余可适⽤ Restriction of loss relief made by 额 ⽜算 terminalos
sole trader or partner who does not

Si 墅 103s of a month
devote significant amount of time
to trade. Loss relief capped at
£25,000 Non'active trades to vellap profit
无社正数
Loss relief also restricted calculated by reference to each tax
where the loss arises year falling in the final twelve-month
from tax avoidance
period. If the results for either of the tax
years produces a profit, the profit is
ignored in the terminal loss calculation
Reliefs against total income (incl
s.64 and s.72) limited to the
greater of:
• £50,000; and

I
• 25% of adjusted total
income.
No restriction for overlap profits
or offset against profits of same
trade

880

242 Tax Compliance ICAEW 2024

 Trading Losses HERE DERBY
Apply basis of assessment rules first, then consider loss relief options.
mm
Carry forward (s.83)

• Against trading profits from the same trade

• Automatic
tradingineff
Current year and/or carry back (s.64)

asmgf.si
• Against total income
• All or nothing claim
nmsefovep.A
Extend against capital gains (s.261)
l
• Must offset against income (under s.64) first
went
• Max offset is lower of unrelieved trading loss/CY gains less CY and BF capital
losses

mummies
Early years relief (s.72)

• Loss in first four tax years

ftp Elos making
• Offset against total income of previous 3 years FIFO
• All or nothing claim
4 39
from
Pff
some tax repayment
which is in need
Terminal loss relief (s.89)
fysff
• Loss of final 12 months of trading HERE 5323
• Offset against trading profits from the same trade
• Previous 3 years LIFO
ESA Li HEE'sterminal loss
Calculating the terminal loss:
6 April
Penultimate tax year (PTY) Final tax year (FTY)
12m Cessation

Net profit or loss to 5.4 X Loss 6.4 to cessation X

Overlap profits X
A B
a
Ignore A if result is a net profit

Terminal loss = A + B

HB2023
Exam Focus 29
These materials are provided by BPP
 Restrictions on loss relief
1. Non-active traders - relief against total income (s.64 or s.72) or against gains
restricted to maximum £25,000.
2. Tax avoidance schemes - relief not available against non-trading income or gains
3. Restriction on amount that can be deducted from total income = higher of £50,000
or 25% × adjusted total income. Adjusted total income = total income + amounts
984s deducted under payroll giving - gross personal pension contributions.

Iff If loss set againstnon trading income e ftp.iz

Partnerships

II IEEE profits VIII A SIR profits

Allocate profits
EHIEEAF.BY
Appliy basis
Adjust profits Calculate capital
between period rules for
for partnership allowances
partners each partner

• Allocate 'salary' and • consider loss relief

'interest on capital' options separately
first. Then split for each partner
balance based on
profit sharing ratio
• Reallocate any
notional profits or
losses

Cash Basis

Cash received less allowable

expenses paid
• capital expenses deductible
cap
Maximum £500 deduction
(except cars, buildings, land) fixed rate expenses available per 12m period for loan
• Sales proceeds of capital items interest
included as trading receipt
(except cars, buildings, land)

4 2B tt fEiHa
EffIqe
Full cost of leasing cars Stock taken for personal use
Capital allowances on cars
deductible (even if high = just and reasonable
(not other purchases)
emission) amount e.g. cost

Epallowable
Jul
9840 It
Adjustment income /
Adjustment expense /(income) (expense) on leaving
Cease to use a capital asset - scheme = closing debtors +
market value treated as on joining scheme = opening
debtors + opening stock - closing stock - closing
taxable receipt creditors at date of leaving.
opening creditors
Adjustment income is spread
over 6 years

HB2023
30 Exam Focus

These materials are provided by BPP

mm

27.4.6 25 9 5

ummmm
 UNINCORPORATED BUSINESSES
TRADING LOSSES
A trading loss has two main consequences:
 The amount of taxable trading income for the tax year to which the period of
account relates will be nil; and
 The trader will be eligible for tax relief for the trading loss.
put loss into lossmemo
Use of trading losses
The following table summarises the use of trading losses.
deciff
specialsituations
s.83 s.64 s.261B s.72 s.89 s.86
TCGA
Type of Carry Current year Relief
Early year Terminal
Loss in first Terminal Loss relief on
loss relief forward and / or against 4 tax years loss relief incorporation
prior year gains on

Fat
(in any cessation
order)
Set against Future Total income Gain before Total Trading Income from
trading (usually NS, other capital income profits the company
as much Possible
profits SI then DIV) losses (usually from the
from the
fgygm.gg
NS, SI same trade Eldend
asap same trade
you
then DIV) in
Time limits Carries Current year Current and Carry back Carry back Carry forward
forward and / or / or prior to prior 3 to prior 3 until fully
until fully prior year year (must years on a years on a utilised
utilised or offset using FIFO basis LIFO basis
cease to a s.64 in year
trade of gain first) Ho Ti Fo

5.60
if

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 101
These materials are provided by BPP
 s.83 s.64 s.261B s.72 s.89 s.86
TCGA
Conditions Automatic, Optional but Max loss v Optional Optional Consideration
min
cannot 'all or
nothing' a
mapgains is
lower of:
but 'all or but 'all or on

refant we
restrict use nothing' nothing' incorporation
amap of loss to Can claim in at least 80%
preserve one or both shares
personal years
– Unrelieved
trading loss,
amount +
allowances If used in or Shares held
both years throughout
can be set- – CY gains tax year of
off in any less CY relief
order to capital
maximise losses and
use of ALL BF
personal capital
allowances losses
Must carry
on trade
with a view
to making a
profit
Claim Need to Within Within Within Within 4 Within 4 years
agree the 12 months 12 months 12 months years of of end of tax
amount of from from from the end of year to which
loss within 31 January 31 January 31 January the last tax claim relates
4 years of following the following following year in
end of tax end of the the end of the end of which the
year in tax year in the tax year the tax business
which loss which the in which the year in operated
arose loss arose loss arose which the
loss arose
Total Not Restrict to Not Restrict to Not Not applicable
income applicable higher of applicable higher of applicable
restriction £50,000 or £50,000 or
25% of ATI 25% of
(see App B) ATI (see
App B)
Anti- Not Possible Possible Possible Not Not applicable
avoidance applicable restriction restriction restriction applicable
restrictions for non- for non- for non-
active active active
see example
traders or traders or traders or
partners in partners in partners in
an LLP (see an LLP (see an LLP
App B) App B) (see App
B)

HB2023

102 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 Pro forma 2022/23 2023/24 2024/25
£ £ £
Trading income X Nil X
Less s.83 relief __ __ (X)
X X X
Other income X X X
Net income X X X
Less s.64 relief (X) (X)
Less PA (possibly restricted) (X) (X) (X)
Taxable income X X X

Loss relief on cessation (s.89)

Relief is available for a loss in the last twelve months of trading.
Calculating the terminal loss:

C A year (PTY)
Penultimate tax
6 April
C TLB
Final tax year (FTY)
12m Cessation

Net profit or loss to 5.4 X Loss 6.4 to cessation X

Overlap profits X
Ignore A if result is a net profit A B

Terminal loss = A + B

Choosing which loss relief to use

Consider the following:
 Rate of income tax;
 Wastage of the personal allowance, savings and dividend nil rate bands; and
 The projected level of future profits and tax rates.
in
Choice of loss relief in opening and closing years
Opening years Closing years
Early year
s.72 Carry back 3 tax years s.89 Carry back 3 tax years terminal 101s
s.64 Current or prior year s.64 Current or prior year
s.64 Current or prior year then extended s.64 Current or prior year then
against gains under s.261B extended against gains under s.261B

mine
s.83 Carry forward s.86 Carry forward if incorporating

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 103
These materials are provided by BPP
 LOSS RELIEF PLANNING – JAMES
23126 9m
James commenced to trade on 1 July 2023 and will prepare his first set of accounts to 31
March 2024. He anticipates the business will make a trading loss of £75,000.
He then expects a loss of £25,000 in the year ended 31 March 2025, with the business 415
breaking even in year ended 31 March 2026, before finally becoming profitable in year
ended 31 March 2027.
Before setting up his trade, James was employed. He left his employment on 5 April 2023

Two income
and spent the time before starting his trade on holiday. His employment income for the
last three years is set out below:
£
2022/23 41,000

I
2021/22 45,000
2020/21 61,000

l
James received interest income of £1,000 each year.

EE
Requirements
a) Allocate James's trading loss to tax years using the opening year rules.
b) Set up a pro forma showing net income for James from 2020/21 to 2024/25
c) Explain the options available to James for using his trading losses. Where possible
you should clearly state for each option:
i) Which tax year it will be used in

l
ii) What type of income it will offset
iii) How much loss would be used
iv) The rate of income tax that will be saved
You are not required to determine the optimum strategy.

SOLUTION

HB2023

104 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 ACTIVITY ANSWERS

LOSS RELIEF PLANNING – JAMES

a) Allocate loss to tax years:
£
2023/24 1/7/23 – 5/4/24 (75,000)
2024/25 YE 31/3/25 FIFO (25,000)
b) Pro forma: 175000 25000
2020/21 2021/22 2022/23 2023/24 2024/25
Trading income
Employment income 61,000
co
45,000 41,000
–
–
08 –
–
Bank interest 1,000 1,000 1,000 1,000 1,000
Net income 62,000 46,000 42,000 1,000 1,000

iarryfo.ioEk admak
c) Loss options
s.83
James can carry forward his 2023/24 and 2024/25 trading losses to offset against
first available trading profits from the same trade. It appears trading profits are not
expected until 2026/27. Income
s.64
onlytrading
CAPY
2023/24 loss:
James can relieve the £75,000 loss against his net income in either 2023/24 or
2022/23. Relieving the loss in 2023/24 would not be beneficial as net income is
CY covered by the personal allowance.
23 20 investmentincome 100
Relief in 2022/23 would use £42,000 of loss and save income tax at the basic rate
pre of 20%. The remaining £33,000 will carry forward under s.83 to be used from
2026/27 onwards.
[Tutorial note – the restriction against total income should be considered as the
loss is greater than £50,000, however, it will have no effect as the total income in
2022/23 is less than £50,000].
2024/25 loss:
James can relieve the £25,000 loss against his net income in either 2024/25 or
2023/24. However, in both tax years his income is covered by the personal
allowance so a claim is not beneficial.
s.72
opening year
Both losses are in the first four tax years of trading. This means they can be
carried back 3 tax years on a FIFO basis against net income.
The 2023/24 loss would be relieved as follows:

IEEEreliefsaving tax at 20/40%.

2020/21 uses £50,000 of loss (capped at the higher of £50,000 or 25% of income)

2021/22 uses the remaining £25,000 saving tax at 20%.

to Capm The 2024/25 loss would be relieved as follows (this assumes a s.72 claim has been
made in respect of the 2023/24 loss as above):
2021/22 uses £21,000 of the loss and saves tax at 20% but wastes the personal
allowance.
The remaining £4,000 is used against the 2022/23 net income, saving tax at 20%.

HB2023

122 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 LOSS RELIEF PLANNING – SID
Sid commenced trading in 2005. He has made up accounts to 30 September each year
until 30 June 2023 when he ceased to trade.
His recent tax adjusted profits and losses are:
£
YE 30 September 2019 27,000
YE 30 September 2020 9,000
YE 30 September 2021
YE 30 September 2022
9 months to 30 June 2023
13,500
4,500
(18,000)
I
Sid receives £4,500 property income each tax year in addition to his trade. He created Final
£13,500 of overlap profit when he began trading.
8001 1135001
Requirements
old cyB 1375001
a) Calculate Sid's trading assessments for 2019/20 to 2023/24 before relief for the
trading loss.
b) Calculate Sid's terminal loss under s.89 ITA 2007. Terminal final
c) 12m
Show the most beneficial use of the loss considering all available types of loss of trade
relief.

Ibl SOLUTION
penultimffyear Final tax year
22123 29 5
2314153 2116130
1217 22
9 30

6 118000 1200 3 1800 6000

9 9
3 115 overlapprofits1135001
12 4500
110875 19500

30345
lot of N A trade leased
sly b 564 23120 4500Props
22
ftp.Y
23
nY Fcix5andg
terminal loss
trading 4500

HB2023
relief Lifo vstraponpertindmametfotdfiy.in
Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 105
These materials are provided by BPP
 LOSS RELIEF PLANNING – SID
a) Trading income assessments:
Tax year Basis of assessment £
2019/20 YE 30 September 2019 27,000
2020/21 YE 30 September 2020 9,000
2021/22 YE 30 September 2021 13,500
2022/23 YE 30 September 2022 4,500
2023/24 9 months to 30 June 2023 (18,000)-(13,500) (31,500)
b) Terminal loss
2023/24 £ £
6.4.23 – 30.6.23 3/9 (18,000) (6,000)
Overlap profits (13,500)
(19,500)
2022/23
1.7.22 – 5.4.23 6/9 (18,000) (12,000)
3/12 4,500 1,125
(10,875)
(30,375)
c) Loss relief
The options available to relief Sid's trading loss are:
s.64
CAPY
This gives relief against total income in 2023/24 and/or 2022/23.
Claiming relief in both years would give total relief of £13,500. This leaves £18,000
which, because the loss was incurred in 2023/24, can be carried back on a LIFO
basis against income in 2021/22 and 2020/21. This gives the same outcome as a
claim under s.89.
s.89
The terminal loss would be offset as follows against trading income in the last 3
tax years on a LIFO basis:
£
2022/23 4,500
2021/22 13,500
2020/21 9,000
27,000
This leaves £4,500 (£31,500 – 27,000) unrelieved which can be offset against total
income in 2023/24 or 2022/23 using a s.64 claim.
This approach utilises the full loss and is the most beneficial option for Sid because
any claims under s.64 would save no tax due to the availability of the personal
allowance.
Working
2020/21 2021/22 2022/23 2023/24
£ £ £ £
Trading income 9,000 13,500 4,500 –
Property income 4,500 4,500 4,500 4,500
Total income 13,500 18,000 9,000 4,500

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 123
These materials are provided by BPP
 cease trading Fe to incorporation
loss
52ya keeptrading
INCORPORATION RELIEF – SALLY set against first
mmmm the
Sally incorporated her business on 5 April 2023.23 trading lossfrom
22 The business made aincome of
£18,000 in 2022/23, which Sally wishes to carry forward to 2023/24. company
Sally's income in 2023/24 is as follows:
£
Salary from the new company 15,000
Dividends received from the new company 500
Dividends received from X plc (unconnected) 230

Sally received only shares as consideration on the incorporation of her business.

Requirement I assumedowned
Identify how much of the trading loss is relieved in 2023/24. 23
261
SOLUTION

HB2023

106 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 Use of losses and personal allowance to maximise relief
Usually, we offset s.64 and s.72 loss relief against NSI, SI then DI. EEFE.EE
offset the loss relief against dividend income first.
EFFres
ESf TRB 1EE
If the taxpayer has a savings income nil rate band (£500 or £1,000) it is possible to

FAE rate
USE OF LOSSES AND PERSONAL ALLOWANCE TO
MAXIMISE RELIEF – CLAIRE

Claire is in business making up accounts to 31 March each year. Her business made a
trading loss of £7,500 for the year ended 31 March 2024.
Claire's other income in 2023/24 was as follows:
2314
£
Property income 14,000
Bank interest received 7,300
Dividends received 5,700
Requirement
Calculate Claire's income tax liability for 2023/24, assuming that she offsets losses and
the personal allowance in the most beneficial manner.
MSZ SI DI
SOLUTION

BRTP SMRB
g ooo
Full P.A

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 107
These materials are provided by BPP
 PARTNERSHIP LOSS RELIEF
PSR
Trading losses must be allocated to partners using the profit share arrangement in the
same way profits would be allocated.
Each partner makes his own loss relief claim based on his own circumstances.
mmmmm
PARTNERSHIP LOSSES – GEORGE, HARRY & IMOGEN
George, Harry and Imogen are in partnership. In the year to 31 March 2024, the
partnership had a taxable trading loss of £60,000. In accordance with the profit-sharing
arrangement this was allocated as follows:
Total George Harry Imogen
£ £ £ £
Trading loss (60,000) (16,000) (18,000) (26,000)
The following information relates to the three partners:

HRTP CY
George has been a partner for many years. He has £80,000 of investment income
in 2023/24 arising from an investment property inherited from his uncle during the Recommend

Éclay py.de
year. His income (including his share of the partnership profits) in 2022/23 was

if

approximately £9,000 pa.
p.A weyears. His income in 2022/23 and 2023/24
Harry has also been a partner for many
Yclaim
569
Cly is covered by the personal allowance.
1 No
I Imogen joined the partnership on 1 January tax saving by cly orcas
46 564  2024. She was previously employed
Efsacarry
and had a salary of £100,000 per annum. 23 4
Partnership profits prior to 2023/24 (split equally between George and Harry) have been
approximately £12,000 pa. The partnership is expected to return to profitability for the
year ended 31 March 2025.
Requirement
Determine the most appropriate form of loss relief for each partner.

SOLUTION

26000
20121 21 22 22 23 2314
Imogen
Employment look look 75000
my look
eqfhnta.PT taxpaid

HB2023

108 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
26000 659
These materials are provided by BPP
 Notional profits
If the partnership makes an overall loss and the allocation of that loss results in one or
more of the partners making a notional profit, the loss allocation must be adjusted.
A partner with a notional profit will have a nil amount of taxable trading income.
The notional profit will then be reallocated to the remaining partners in proportion to
the loss initially allocated to them. This is as per notional loss allocation from Tax
Compliance.

Understanding the various loss reliefs for unincorporated businesses will help you to
demonstrate problem solving and decision-making skills by being able to gather
the appropriate facts and evaluate information quickly to determine the best use of
losses for an individual in order to help mitigate their tax liabilities.

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 109
These materials are provided by BPP
 SUMMARY

HB2023

110 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 property transaction可以是
• ⼟地或建筑物的出售、租赁或许可；或
• 提供与⼟地或建筑物有关的服务（如改建现有建筑物）。
对于建筑物，根据是住宅楼还是商业楼，适⽤不同的规则。

SPECIAL RULES FOR VAT

PROPERTY TRANSACTIONS

VAT treatment of land and buildings

The general rule is that the sale or lease of land is an exempt supply. 免UAT
篨靠 ennn
However, this is automatically overridden in certain circumstances and can be changed
by opting to tax for commercial buildings.
Election optto ta
Land and Buildings commercial
propertyonly
不常考
照
上
Sale/construction of Sale/construction of Any other sale or
nye new residential new commercial any lease

minn
building building (<3 years old)

𥳁籲 0% ⾃动 20%

斯䒢品
Exempt
made syoun

iveintentout ⽯品
Builder can recover Purchaser can
Commercial properties

䲜
have the ‘option to tax’

䲜䯥
input VAT recover input VAT if
the building will be

器 篮
used for taxable
supplies eg furniture Charge VAT on later 出
收霜
shop
客207 A
sale or rent (allows
reclaim for input VAT)

比女
Option to tax
Iv
Ain
construction1 咍笖20 VAT 租客 能 reca
有现⾦影响 ˇ
䕑㗊
• Permanent election (6m cooling off period / revocable after 20 years)
• 冷静期
Charge standard rate VAT on all future supplies of commercial property – (rentals,
lease premiums, sales).

Exempx 器
• Per building basis suptgesěntouì 煎
⼿ ǚè
Advantage: Vendor / Landlord can reclaim input tax on original cost and also ongoing

之就
expenses in connection with the property. 收
參然
Disadvantage: If purchaser/tenant is not VAT registered they will not be able to
recover the VAT.

如果有secondsale 娶 真哪 㖙照 No longer new exempt

3 以内就是
如果是 commercial 年 ng

HB2023

Topic 8: VAT and stamp taxes 389

These materials are provided by BPP
 VAT
TRANSFER OF A GOING CONCERN (TOGC)

The relief
74soutput tax
If a business is transferred as a going concern (TOGC), no output tax is charged as
there is no taxable supply of goods or services (i.e. the transaction is outside the scope
of VAT).
When?
 Sale of a business to a third party
 Incorporation

I
Sale of tenanted building if certain conditions are met
VATH.AT

EEpi
For transfers of assets within a VAT group, the transfer will be disregarded for VAT
purposes anyway and so the TOGC rules do not need to be considered.

Conditions
E
All of the following conditions must be satisfied:
in
The transferor must:
 Transfer the whole of the business or a part capable of separate operation; and
 Be VAT registered.
The transferee must:
a) Carry on the same type of business as the transferor; and
b) Be VAT registered, or immediately become liable to be registered for VAT; and
c) Have no significant break in trading.

Incorrect application of TOGC

a) VAT charged in error where TOGC treatment should have applied:
i) Transferee is not entitled to reclaim it as input mm
tax as it has not been
FEE
properly charged; but
ii) May be able to recover from transferor.
b) VAT not charged where should have been as TOGC conditions not met:
i)
mm
Price paid for the assets is VAT inclusive.
78317 3
ii) Transferor may be assessed to VAT.
iii) If contract states price is VAT exclusive and VAT may be chargeable, can in
theory recover from transferee (although consider practical difficulties of
recovering additional sums once a transaction is concluded).

Transfer of VAT registration number

Transferor's VAT registration number can be transferred to transferee.
Outstanding VAT liabilities and records will also transfer along with eligibility for bad
debt relief on the transferor's bad debts.
May be useful where the transferor and transferee are closely connected, eg
w
incorporation.

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 111
These materials are provided by BPP
 Land and buildings

Smew buildingsEFeÑpt
The special rule for the TOGC will not cover:

E 

Buildings aged three years or less; or
Land or buildings which the transferor has opted to tax, taxable
supply
unless the transferee opts to tax these assets.
1 suffer
If the transferee does not make an option to tax then VAT must be charged (and may
supply
not be recoverable by the transferee).

Land and buildings – rental properties tenantedbuilding

A building generating rental income and capable of independent operation constitutes a
business.

mm
Sale qualifies as a TOGC.
If:

I
IE ffI atasfffquput
 It is less than three years old; or
 Vendor has opted to tax the building, then
purchaser needs to opt to tax the building, otherwise VAT is charged on the sale of the
building.

Interaction of the capital goods scheme (CGS) and TOGC rules

CGS item transferred as part of TOGC.
No sale adjustment for vendor.
my
Purchaser continues to apply the CGS for remainder of 10 or 5 year adjustment period.
Δ
Option to tax (OTT), TOGC and the capital goods scheme
If property is <3years old or OTT has been exercised – VAT charged unless purchaser
OTT.
If purchaser OTT:
a) No VAT is charged; and
b) CGS transfers (if exempt trader purchases will need to repay input tax as part of
remaining CGS).
If purchaser does not OTT:
a) VAT is charged;
b) Recoverability depends on type of supplies made by purchaser; and
c) CGS does not transfer.
sale adjustment

HB2023

112 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 Transfers of a
going concern

• Compulsory if
conditions met
EFFECT:

0
L+B All others
assets

• No VAT charged
mnscope)
(outside

New old
< 3 years old all other L+B
commercial eg > 3 years old
or commercial with
OTT: no OTT

Charge VAT on No VAT charged

transfer (buyer takes on
(buyer starts new CGS for remainder
CGS period) of 10 years)

Unless
buyer opts to
tax, then

OPTING TO TAX IN A TOGC – CHARLOTTE

For many years, Charlotte has run a public house in a freehold building that she owns in
London. Charlotte purchased the building new 15 years ago. She has opted to tax this
building for VAT purposes.
On 31 December, which was also the last day of her VAT accounting quarter, she sold
the pub business, including the freehold building, to Edmund. During the two months
ending on that date, the pub had been closed for renovations. Charlotte had originally
D
u

HB2023

u
Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 113
These materials are provided by BPP
 the TOCconditions
ifmetytwesn.to
feaktimetrading
UATqyem 2alg.atProperty if het
intended to reopen the pub after the renovations but a sudden bereavement in the
family caused her to change her plans.
andEdmund
The terms of the sale to Edmund were as follows:
UAFillneed
to be £ 077property
Value of the property
on all
charged1,800,000
Goodwill SDLTOnUAT assets 1,350,000
inclusive price
ffffffe
Chattels 72,000
Stock CAT 344700 209 225,000

Requirements
a) samfkfy.nu I
State the conditions that must be met for the business transfer to be a transfer of
a going concern for VAT purposes.
b)
118m 1.2 2.16m
Compute, giving your reasons, the amount of output VAT chargeable on Edmund
in respect of the transfer.
SDLY
SOLUTION

OPTION TO TAX, TOGC AND THE CAPITAL GOODS

SCHEME – BRAY PLC
new commercial property
Bray plc, a fully taxable company, constructs new business premises for £1.5m plus VAT
on 1 July 2015. Bray plc uses the premises for 100% business use until 31 March 2021.
From 1 April 2021 Bray plc rents out 60% of the premises to an unconnected tenant.
input VAT
adjustmentBray plc decides not to opt to tax the building.
longDecoverable 52 209
cost 250K falls in Cas
HB2023

114 monitor
Topic 3:Unincorporated toys
businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
If ease
 41 31 3124 TOGC
O
On 1 April 2023 Bray plc sells the premises (with the tenant still renting out 60% of the
building) to a VAT-registered property company, Dean plc, for £2m.

Q rent.tn 9f
Dean plc also decides not to opt to tax the building and continues to rent the building to
both the existing and some new tenants.
Both Bray plc and Dean plc prepare VAT returns to 31 March.
Requirement exemptsupply
Explain, with supporting calculations, the VAT implications of the property transactions.taxable use
SOLUTION
initial recovery

VAT Y 3113122 UAT to tenant No

mm
Cas AnnTadjustment
repayable

NO WAY on the sale BD TOGC

uyyyygyyggy.gg
to the new owner Dean Plc

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 115
These materials are provided by BPP
 SUMMARY

VAT

Transfer of a going concern

Outside the scope of VAT if:

Whole/part of a business
transferred as a going
concern
Assets used in same trade
Transferee VAT registered
No significant break in trade

If includes standard rated

property:
Transferee must OTT to pay
no VAT

HB2023

116 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 purchase shares securities
B
STAMP TAXES TC assumed knowledge
TRANSFERS BETWEEN GROUP COMPANIES APP.ITEfErates
Group relief from stamp duty
Relief from stamp duty is available for certain intra group transfers of shares. Relief will
be given where loss group definition met (seen at TC): 75% direct/75% indirect interest
in sub-subsidiaries.

o.EE
Stamp duty relief will be denied once winding-up has commenced.
Transfers of assets in consideration of shareholder's rights in a liquidation are exempt
from stamp duty providing the shareholder does not take over any liabilities of the EE
liquidating company.

TRANSFER BETWEEN GROUP COMPANIES – SPARROW

LTD

Sparrow Ltd owns 88% of the ordinary share capital of Vulture Ltd, which in turn owns
86% of the ordinary share capital of Cuckoo Ltd.
Shares are transferred from Sparrow Ltd to Cuckoo Ltd.
Requirement

D's
Is the transfer liable to stamp duty?

SOLUTION

Transfer of securities to connected companies

Targeted anti-avoidance rules apply to certain transactions.
Where listed shares/securities are transferred between connected parties, stamp

0
duty/Stamp Duty Reserve Tax is payable on the higher of:
 Actual consideration; or
 Market value

mums
Connected for this purpose means under common control.

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 117
These materials are provided by BPP
 in
This rule also applies where unlisted shares and securities are transferred to a
connected company, but only where the consideration includes the issue of new shares.

Group relief from stamp duty land tax (SDLT) e H 7

A An exemption from SDLT also applies on a transfer of land between members of a group
of companies.
43971 Hive down

It
The exemption does not apply if, at the time of the transfer, there are arrangements in
place for either the transferor or the transferee company to leave the group.
a
SDLT will be charged retrospectively on the market value of the land on the date of
transfer if the transferee company leaves the group within three years while still owning
Ycorp
Restructuri
the land transferred.
group 42 degroupin charge
14 Higher
a rate for transfers to companies

8 1 the rate of SDLT is 15% if the buyer is:

04Where an interest in a single dwelling is sold for consideration of more than £500,000

company buyinghigh value building

 A company;
on  A partnership where at least one partner is a company; or
 A collective investment scheme.

STAMP DUTY ON INCORPORATION, LIQUIDATION AND PURCHASE OF

Thares
OWN SHARES
Hoffretain5252avoid
Incorporation
qIEtionreiet 6
III.pt Stamp duty
a pen may
 Not payable on new shares issued

Stamp duty land tax paid

 Charged on market value of land and buildings transferred to new company
FEENY  Based on combined market value of all land and buildings transferred


If transfer is TOGC: % consideration at MV (with no VAT)
If transfer is not TOGC: % VAT inclusive consideration at MV
outside the scope
70 UAT
Liquidation

Stamp duty
 Not charged when shares are cancelled. qietidiniau.es
Stamp duty land tax

Eerie
Not on land transferred to shareholders unless consideration given.

Purchase of own shares by a company

Stamp duty
 Stamp duty charged on repurchase price, unless:
– Redemption of redeemable shares; or
– Capital reduction or Court scheme of arrangement.

HB2023

118 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
虽然以公司名义购买住宅房产， 般不必 付资本利得税（Capital Gains Tax），但却可能要交这个年度住宅物业税
（ATED）。 ATED主要 的是为了降低“通过注册公司”来持有价值比较 的住宅房产，以达到避税的可能性。 ATED主要是针对
拥有英国住宅房产的公司。从2016/2017年开始，只要公司名下的”单个住宅房产“（Single Dwelling）的价值超过50万镑的话，
公司每年都需要缴交这个税。 对於”住宅房产“的定义，根据税局的规定，就ATED的规定来讲， 般只要该物业有 部分是，或
者可以 做住宅 途，那就算是住宅房产（Dwelling）了。
STAMP TAX ANTI-AVOIDANCE Re
Annual Tax on Enveloped Dwellings (ATED) 94 y
Scope
Fxhigh value

hoff.pt
ATED applies to:
ffffffout for book
Owners of interests in an individual dwelling worth more than £500,000, where
 The owner is a company, collective investment scheme, or partnership where at
least one of the partners is a company or collective investment scheme.

Amount of charge
rebasethe value of property
An annual charge (1 April to 31 March) based on the market value of the property on the
later of 1 April 2017 and the acquisition date.
www
The rates are in the tax tables.
EE
Where a property is acquired or sold part way through the year, the charge is pro-rated
based on the number of days when it is owned.
AftAregzy
There are a number of reliefs which eliminate the ATED charge. These include reliefs for:
 Properties exploited as part of a property rental business.
 Property developers and traders.
penalise
Higher rate of SDLT for transfers to companies
Where an interest in a single dwelling is sold for consideration of more than £500,000
the rate of SDLT is 15% if the buyer is: mum
 A company;
 A partnership where at least one partner is a company; or
 A collective investment scheme.

Non-resident surcharge 4 71 90
29chargeAn additional 2% SDLT is applied to the purchase of residential property where the
purchaser is a non-resident individual, company or partnership.
H
For BPT, residence of individuals is determined as per the rules for income tax (see
Topic 1)
A non-resident company is either:
 Non- resident according to the Corporation Tax Acts (ie neither UK incorporated
nor managed and controlled from the UK), or

009
 Is UK resident under the Corporation Tax Acts but is a close company (see Topic 4)
controlled by non-residents
net 78 1 2 FEIFFER
The non-resident surcharge does not apply to the purchase of certain short or low-value
leases.
Δ
company
The surcharge applies in addition to the 3% charge for additional properties and the
15% rate applicable to companies purchasing high-value dwellings. a
d
themforendent

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 119
These materials are provided by BPP
 More than I property being bought in the same transaction
Linked transactions and the purchase of multiple dwellings
Where transactions are linked, eg the purchase of a property portfolio or a block of flats,
SDLT rates are applicablemto the total consideration. However various reliefs are
available:
 Montesi Test Apply her rates
If any non-residential property is included in the linked transactions, non-
residential rates apply to the total consideration (and the 2% surcharge for non-
residents cannot apply)

iat FEET Afffidential
Non-residential rates may also be applied to the total consideration where six or
more residential properties are acquired in a single transaction.
No 27 property
 surcharge
Where more than one residential property is acquired, the purchaser can claim
"multiple dwellings relief". This applies SDLT rates to the average price per
property (which is then multiplied by the number of properties purchased). There
is a minimum overall rate of 1% of the total consideration. The non-resident
surcharge can apply to this relief as residential property rates are used.
m NR surcharge
LINKED TRANSACTIONS - CLAUDE Cpply
Claude, a non-UK resident individual, purchases a block of 8 flats in Manchester for
consideration of £2,500,000 on 1 October 2023. 多套房屋减免(Multiple Dwellings Relief, MDR)，这种
Requirement 式适 在 次性购买多套房的情况，运 多套房屋
减免可能可以减少所需 付的印花税税额。多套房屋
Calculate the total SDLT payable by Claude, assuming: 减免可分为两种状况：
a) the default linked transactions rules apply 状况A： 次性购买2-5套房 —> 可适 住 多套房屋
b) Claude elects for non-residential rates to apply 减免。状况B： 次性购买6套以上房产 或 混合 途
c) Claude claims multiple dwellings relief 房产（mixed-use property） —> 可适 非住 印花
Recommend which form of relief Claude should use. 税税率，该税率将比住 印花税税率低。

SOLUTION 多套房屋减免的概念是将购置房产的总额除以总套数
以获得房产的平均单价。再 平均单价的印花税乘以
总套数来计算整体应 付的印花税税率。

HB2023

120 Topic 3:Unincorporated businesses & trading losses, vat and stamp taxes
These materials are provided by BPP
 SUMMARY

Stamp tax anti-avoidance

15% SDLT applies to purchase of

dwelling costing >£500k by
company
2% surcharge for purchase of
residential property by
non-residents
SDLT applies to total consideration
in linked transactions. Consider:
• Application of non-residential
rates
• Multiple dwellings relief

HB2023

Topic 3: Unincorporated businesses & trading losses, vat and stamp taxes 121
These materials are provided by BPP
 4
ISSUES FOR OWNER
MANAGED BUSINESSES

Learning outcomes
 Evaluate the tax implications of the choice of business structures, including
provision of services through a company
 Explain and evaluate the tax implications of business transformations and change
 Identify legitimate tax planning measures to minimise tax liabilities
 Identify and communicate ethical and professional issues in giving tax planning
advice
 Identify and evaluate the impact of close companies on the taxation of companies
and individuals

HB2023

These materials are provided by BPP

 TOPIC OVERVIEW

Use of intermediaries
- anti-avoidance

Qualifying interest

HB2023

130 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 EMPLOYMENT VERSUS
SELF-EMPLOYMENT AND USE OF
INTERMEDIARIES

EMPLOYMENT VERSUS SELF-EMPLOYMENT

ÉÉ ier
Tax consequences of individual taxpayer's status

Employed us Self-employed
Type of income
Basis of assessment
Employment income
Receipts basis
INSI Trading income
INSI
Choice of accruals (default) or
cash basis (for small
my businesses).
Adjusted profits of the tax 46 75
year are chargeable
irrespective of accounting
reference date.
Income assessed Earnings received from the
employment, including C
All trading profits including
adjustments for private use.
Ex taxable benefits for private

4
remunerations
Allowable expenses
use.
cash
Wholly, exclusively and Wholly and exclusively
4
an
necessarily incurred in the incurred for the purposes of
performance of the duties of the trade.
the employment.
Cash
National insurance  Class 1 primary  Class 2
contributions  Class 1 secondary  Class 4 lower
13.89
Rates 

Class
Class High
1A
1B
er
No NIC for the user
highfhan
Payment of tax and soleviatrader
Monthly PAYE system 
of services freelan
Self-assessment for IT,
NIC class 2 and class 4 NIC –
ter payment by payments on
account and balancing
payment. Cater
 Abolition of the basis
period rules means that
from 2023/24 the
possibility of a taxpayer
delaying payment of
income tax on trading
profits by selecting an
accounting date early in
the tax year is no longer
possible.

HB2023

Topic 4: Issues for owner managed businesses 131

These materials are provided by BPP
 POSS EEE
Criteria to determine employment status POSSER
To determine the employment status of an individual, HMRC will first consider the terms
of the relationship between the individual and the person paying for the work performed.
An employee usually has a contract of employment (service), whereas self-employed
individuals are usually contracted for services.
In either case, the content of the contract is fundamental to determining status. Several
key indicators have been identified through a number of judicial decisions where there
has been doubt over the employment status of an individual.
The following factors should be considered:

IE
 Degree of control
 Mutuality of obligations
 Correction of work aion
 Provision of financial capital (ie degree of financial risk)
 Provision of own equipment assets used
 Payment and disciplinary rulesset employeeptide's
 Client portfolio/exclusivity
employee generally less
PA  Integration into the business organisation
 Right to substitute an alternative worker individualapprich
that party
These factors are not a simple or exhaustive checklist. There is no one clear and decisive
test. The detailed facts in each individual case must be considered, along with the
guidance relating to each of the factors/criteria developed through case law, in order to
form an overall impression before a decision is made.
Check Employment Status for Tax (CEST) is an online tool provided by HMRC and is used
to help determine whether a person is employed or self-employed but this is intended as
an indicative tool for taxpayers rather than an authoritative decision. HMRC have agreed
to stand by the results of the CEST tool provided that answers given to the CEST
questions are accurate.

Understanding the tax differences between the employed vs self-employed, together

with the relevant factors which help to determine if someone has a contract of
employment or not will help you to demonstrate professional scepticism behaviour
and apply a questioning when evaluating information.

USE OF INTERMEDIARIES - ANTI-AVOIDANCE would be an ee

if no intermediary
Anti-avoidance legislation exists to counteract disguised employment arrangements. The
rules operate to prevent taxpayers from avoiding income tax and NIC by purporting to
provide services through an intermediary rather than as an employee. If the rules apply
to an arrangement, employment taxes will apply to the relevant fees in one of two ways,
depending on the nature and size of the client (top company in the below illustration).

HB2023

132 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 overall effect
IT
NIC
I DITHINSZ

fat

resign def
4351disguised

NS
emP
af tship
ee
Eamon partnership
pay at
retainprofits

Sh
Jay
diretto
From 6 April 2021, if the Top co (client) is: dividends
deemed
A small private organisation, the IR35 rules applyemployment

 payment Yu Étes of 2
A public body, large or medium sized private organisation, the Off-Payroll Working
(OPW) rules apply
deemed direct by intermediary
Scope of intermediaries legislation
Paymentfrom
The rules apply to 'relevant engagements', ie where an individual: Topco
a) provides services to a client through an intermediary, or is acting as an officer of a
minus
company and the services relate to the office; and
sale of
b) would be treated as an employee of the client but for the existence of the serup meat is
intermediary (taking into account the employee/self-employed indicators set out in
case law on a case by case basis). This situation is referred to as a 'relevant Ffrmedia
engagement'.
If the intermediary:
a) QIs a company, the rules only apply where the individual controls at least 5% of the
Exam and
ordinary share capital.
usually has 1009
b) Is a partnership, the individual plus his associates must control 60% of the
partnership profits for the rules to apply.
Arrangements using offshore employment intermediaries are also subject to the
legislation.
7 Erukresidents 2235
Application of IR35 legislation – Deemed employment payment
IR35 applies where the client (top co) is a small private organisation (that is not a public
authority). 'Small' is defined as meeting two of the following three criteria:

F
 Turnover not exceeding £10.2 million
 Balance sheet assets not exceeding £5.1 million
 Average of no more than 50 employees
A group of companies is considered to be one entity for this test.
If IR35 applies, the application of employment taxes is the responsibility of the
intermediary. A deemed employment payment is calculated as follows:

IR 35
TOP.fm P.mg
HB2023 payinvoice133
Topic 4: Issues for owner managed businesses
a
issue These materials are provided by BPP
ftp.skvice 88 taxdedud
 admin intermediary

D
deemed
9a £
employment
Income from relevant engagements X
income
Less statutory 5% deduction* (X)
fadsetEfYeEEIsed
ÉmÉfLess:
payment is.fi
expenses allowable under employment income rules*
X
(X)
edut
PAYE
mom capital allowances on expenditure by intermediary
effffy payment
(X) deduct
contributions by intermediary to registered pension scheme (X)
MIC
actual salary/benefits paid to worker No double taxation (X)
employer's NIC on actual payments (see (e) below) (X)
Gross amount of deemed payment
be related G
expense
Employer's NIC on gross deemed payment
(G 13.8/113.8) (X)

Deemed salary payment to worker X

a) Deemed to be paid on 5 April.
b) The net deemed employment payment is taxable as employment income on the
worker - ie subject to income tax as non-savings income and liable to Class 1
Primary NIC. The intermediary must apply PAYE accordingly.
c) The gross deemed employment payment is deductible for corporation tax purposes
in the accounting period in which it is deemed to have been paid. Therefore an
accounting year end of 5 April may be preferred.
d) Dividends paid out of income which has been taxed as a deemed employment
payment will be treated as reduced by the amount which has already been taxed.
e) The employment allowance is not available to personal service companies.
5000
DEEMED EMPLOYMENT INCOME – XYZ LTD
Steve is a computer consultant trading through a personal service company, XYZ Ltd, in
which he owns 99% of the shares. During 2023/24 he is engaged by ABC Ltd (a small
private company) under a contract between XYZ Ltd and ABC Ltd to the value of
£60,000. IRñ
During 2023/24 Steve draws a salary of £25,000 from XYZ Ltd which is taxed via PAYE
and employer's national insurance of £2,194 is due.
If XYZ Ltd did not exist Steve would be treated as an employee of ABC Ltd.
Requirement relevant engagement
Calculate Steve's deemed employment income payment and the income tax and the
employee national insurance contributions due thereon for 2023/24.

SOLUTION

HB2023

134 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 9015 deephydment
payment
I
hnmeiE feiiE.EE
EEE
yep P.EEfa steve
class NIC 42813 salary
taxed on salaryalready
YESEff basic rateband

DEEMED EMPLOYMENT INCOME – PETER

Clo 2M
Peter used to work as a plumber for 'Plumbers 'r' Us' –250
a plumbing company with annual
turnover of approximately £8,000,000 and 35 employees. He resigned in March 2023 and
set up Peter Plumber Ltd, of which he is the sole shareholder and managing director.
In the year ended 5 April 2024, Peter Plumber Ltd received the following income:
£
Plumbers 'r' Us (relevant engagement) 50,000
Sundry income from many other clients 20,000
M ngᵗa h 70,000
f
Peter was paid a salary in 2023/24 of £20,000 pa from Peter Plumber Ltd. Employer's
NIC of £1,504 was due. He incurred qualifying travel expenses of £2,400 in 2023/24
which were reimbursed by Peter Plumber Ltd.
Calculate the deemed employment payment made to Peter on 5 April 2024.

SOLUTION

HB2023
deemed employment payment
Topic 4: Issues for owner managed businesses 135
These materials are provided by BPP
ummm
 0
admin Add to payroll
p top col
hffemfdiireetpaymen rgseff.si.sk
fmiesffornteacededutpAYEinzc
apply intermediary Lot taxableincome
Not tax deductible

gf
salary dividend
i nd Paxpopto individual

Application of OPW legislation

only taxable if DDP
The responsibility for operating the OPW rules (and deducting any taxes) typically lies
with the client, where the client is either:
 A public body.
 A large or medium-sized private organisation where services are provided on or
after 6 April 2021 (services prior to this date are not examinable).
The client is responsible for determining whether the contract falls within the scope of
OPW. They issue a Status Determination Statement to the worker (and any agency the
intermediary may have used to negotiate the contract for services).
Where OPW rules apply, the entity paying the fee to the intermediary (usually the client
but may be an agency) must add the worker to their payroll systems and apply PAYE to a
'Deemed Direct Payment" (DDP), calculated as follows:
£
Amount invoiced (exclusive of VAT) Net X
Less: expenses paid by intermediary or worker allowable under (X)

I
employment income rules, eg travel or subscriptions (optional as
requires information from worker)
Cost of any materials borne by intermediary and used in (X)
performance of services
Deemed direct payment D

Treatment for deemed employer

 The employment allowance is not available to be offset against the DDP
 The DDP is deductible for the purpose of calculating taxable trading profits
 The amount paid to the intermediary will be net of income tax (usually using a BR
(basic rate) tax code) and NIC
 The deemed employer does not have to enrol the worker in a workplace pension
nor provide statutory benefits

Treatment for intermediary and worker

 The cash received by the intermediary is not taxable income, ie is exempt from
corporation tax
 The onward payment to the worker is not deductible

HB2023

136 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
  Remuneration drawn by the worker from the intermediary (salary or dividends) will
be free of PAYE and NICs up to the level of the gross DDP, as the PAYE and NIC
has already been paid by the client
 The worker will include the DDP as employment income on their income tax return
(the client will issue them a P60).

DEEMED DIRECT PAYMENT – KATIE LTD

Katie provides IT services to Westbourne Ltd through her intermediary company, Katie
Ltd.
status
determinate
Westbourne Ltd is a medium-sized UK resident company and has issued an SDS to Katie
stating that the contract falls into the OPW rules. eat
u
d
On 31 December Katie Ltd raises a VAT-inclusive invoice of £12,000 to Westbourne Ltd
for services performed that month. During the month Katie incurred expenses of £400
per month, the cost of which is met by Katie Ltd.
net of VAT 1200 1.2
Of these expenses, £100 is travel costs to the shared office Katie uses as a permanent
base. Katie also provided materials of £250 necessary for the performance of the contract
via Katie Ltd.
10000
Requirement
Home to work travel
Not declartible
Calculate the deemed direct payment and state the tax implications for Westbourne Ltd,
Katie Ltd and Katie.

SOLUTION

DDP
u

receitnetifpixtaxas.ee
past it onto Katie ex tax
g deductible
482

HB2023

Topic 4: Issues for owner managed businesses 137

These materials are provided by BPP
 MANAGED SERVICE COMPANIES (MSCS)
Definition:
CLIENTS

Provides services of workers

MSC

The worker receives payments which

The worker receives the majority of are more than they would have been if
the payments received by the they had been treated as employment
managed service company from the income paid after deduction of IT and
client in relation to their services NIC via PAYE;

A managed service company provider is 'involved' with the company (ie it takes a
percentage of income, or arranges contracts, controls bank accounts or controls the
company's finances generally).
Recruitment agencies and persons providing legal and accounting services are excluded
from being managed service company providers.

Application of MSC legislation

If the definition of a managed service company is met then:
a) Any non-employment income paid out to the workers is to be treated as earnings
for both IT and NIC purposes and the MSC is obliged to operate PAYE.
b) No need to prove the existence of a disguised employment.
c) A deemed employment payment will arise on any actual payments made to the
workers which are not paid out after deduction of IT and NIC via PAYE.
d) The payment is chargeable when the payments are made.

HB2023

138 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 Proforma
£
Income:
The amount received by the worker in respect of services provided
by the worker via the MSC which are not treated as earnings from
the MSC X
Less expenses allowable under employment income rules (X)
Gross amount of deemed payment G
Employer's NIC on gross deemed payment
(G 13.8/113.8) (X)
Deemed salary payment to the worker X

Recovery of IT and NIC

If the IT and NIC due is not paid by the managed service company itself, HMRC can
instead seek to recover the debt from the directors of the MSC or the MSC provider.

Interaction with IR35 and OPW rules

Where both the OPW and MSC rules apply to a particular arrangement, the OPW rules
take precedence. Where both the IR35 and MSC rules apply, the MSC rules take
precedence.

HB2023

Topic 4: Issues for owner managed businesses 139

These materials are provided by BPP
 SUMMARY

Employment v Use of intermediaries - Managed service

self-employment anti-avoidance companies

Importance: Prove disguised employment Definition - A managed

• Self employed have Client is small private serviced company:
lower tax burden organisation: • Services of individual
• Employees have more • IR35 applies workers to third party
rights e.g. redundancy • Deemed employment • Worker receives
etc payment by majority of payments
intermediary to worker: received by MSC in
Factors:
relation to their services
• Control • Relevant engagement
• Mutuality of obligation income less 5%, less • Worker receives
• Correction of work actual salary/NIC and payments which are
• Financial risk expenses more than would be if
• Equipment treated as employment
Client is public body, large
• Payment income
or medium-sized private
• Exclusively org: • Managed service
Factors: • Client issues SDS to provider ‘involved’ with
worker the company
• Basis of assessment
• Types of Income • Client applies PAYE/NIC Deemed employment
• Allowable expenses to DDP: income payment when a
• NICs payment made to worker
• Fee net of VAT, less
• Payment of tax/NICs without PAYE
employment expenses
and materials costs No 5% deduction

HB2023

140 Topic 4: Issues for owner managed businesses

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 UNINCORPORATED BUSINESS
in if
DISPOSALS AND INCORPORATION bonds issuekes offsets
cash
IMPLICATIONS OF BUSINESS DISPOSALS AND INCORPORATION P
and bing.tn ny
When a sole trader or partnership sells their business or incorporates it, there are
significant tax implications.

Sale of business to a third party Disposal of business to a company

('incorporation')
Not connected to
Income tax  Closing year rules apply –  Closing year rules apply – deduct
deduct overlap profits. overlap profits.
trade
59 are  From 2024/25 the  From 2024/25 the
taxation of unincorporated taxation of unincorporated
DATE businesses will be on the basis businesses will be on the basis
of actual profits generated of actual profits generated
during a tax year. The final during a tax year. The final
assessment will be for profits assessment will be for profits
from 6 April to cessation and from 6 April to cessation and
there will be no overlap profits there will be no overlap profits
to deduct. to deduct.
 Loss relief:  Loss relief:
– Terminal loss relief – Terminal loss relief
– Current or prior year relief – Current or prior year relief vs
vs total income (can extend total income (can extend
claim to chargeable gains) claim to chargeable gains)
– Carry forward against income
from company
 Profit extraction from company as
salary and /or dividends.
 Operate PAYE on profits extracted
as salary after incorporation.
 Personal service company or
managed service company
legislation may apply (but unlikely
if HMRC treated as a trade prior to
incorporation).
Corporation N/A  New company will commence to
tax trade for corporation tax purposes.
 Very likely to be a close company.

HB2023

Topic 4: Issues for owner managed businesses 141

These materials are provided by BPP
 Sale of business to a third party Disposal of business to a company
('incorporation')
Capital  BA/BC on disposal of assets at  BA/BC on disposal of assets at
allowances market value. market value (default).
(plant and
 'Succession' election to transfer
machinery)
assets at TWDV possible if sole
trader now controls the company -
connected persons.
SBAs  No balancing allowance or  No balancing adjustments arise on
charge arises on disposal. disposal.
 Add any SBAs claimed to date  No adjustment to gains calculation
to proceeds in gain calculation. for SBAs claimed by sole trader -
all SBAs added to gain on future
 SBAs continue at same annual
sale by co.
rate for purchaser as vendor.
 SBAs continue at same annual rate
for company as for sole
trader/partnership.
Stock  Disposal at market value =  Disposal at market value = trading
trading income. income (default), or
– Can elect to transfer at higher
of cost and actual sales
proceeds.
Capital gains  Assets disposed of at MV at  Assets disposed of at MV at
tax cessation leading to capital cessation leading to capital gains
gains or losses on chargeable or losses on chargeable assets
assets (usually L&B and GW (usually L&B and GW but also
but also fixed P&M / other fixed P&M / other IFAs).
IFAs).
 Capital losses on plant and
 Capital losses on plant and machinery not allowed, as given
machinery not allowed, as relief via CAs.
given relief via CAs.
 Incorporation relief (IR) defers
 AEA and capital losses may be gains into shares and is automatic
loss available to shelter gains. if conditions met (see below).
 BADR may apply to the net  Can disapply IR (see below).
gains assuming business www tstEsgm
 If consideration not in shares or IR
owned for at least two years.
disapplied – BADR can be claimed
Lifetime limit = £1m.
to reduce CGT to 10% but not in
 Consider the availability of relation to goodwill on
rollover relief, EIS or SEIS relief incorporation unless own <5%.
to defer or exempt gains if
qualifying reinvestment of
proceeds is made. By

HB2023

142 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 Sale of business to a third party Disposal of business to a company
('incorporation')
 Gift relief (GR) available if not all
assets transferred:
– Deduct gains from cost of
assets in company
– Requires gift of relevant asset
to company rather than
exchange for shares
 Consider retaining appreciating
property (will need to use GR
instead of IR for any other assets
transferred).
 On disposal of shares, the two-
year ownership requirement for
BADR to apply to the gain includes
the ownership period of the
business prior to incorporation.
Intangible  Capital gain / loss arises on  Capital gain / loss arises on
fixed assets disposal. disposal.
 Purchase price becomes base  Goodwill is an IFA for the company
cost for purchaser. (topic 5); however, amortisation is
not an allowable expense.
 Other IFAs acquired qualify for
amortisation relief.
Stamp duty/  SDLT payable by purchaser on  Deemed transfer of land at market
Stamp duty consideration paid for L&B. value, giving rise to SDLT on
land tax charge even if no consideration.
VA inclusiveprice  Retain property to save SDLT.
 If building transferred and VAT is
charged, SDLT on gross MV.
 No SD on issue of new shares by
company. 0
Inheritance  BPR available at 100% if owned  Unincorporated business attracted
tax on gift of two years. BPR at 100%.
business  Shares in company should attract
BPR at 100%.
 No BPR on property used by but
not owned by company unless
owner has control of company –
BPR at 50%.

HB2023

Topic 4: Issues for owner managed businesses 143

These materials are provided by BPP
 Sale of business to a third party Disposal of business to a company
('incorporation')
Value added  TOGC treatment likely to apply.  TOGC treatment likely to apply.
tax  Consider VAT implications of  Consider VAT implications of any
any property included in TOGC property included in TOGC and
and CGS if appropriate. CGS if appropriate.
 Company can take over VAT
registration number of
unincorporated business.

INCORPORATION RELIEF

Conditions

I
Incorporation relief applies automatically to defer chargeable gains arising on the
transfer to a company of chargeable assets used in a sole trade or partnership, provided
the following conditions are met:
The business is transferred as a going concern.
won
All the assets of the business (except cash) are transferred to the company.

twitter.eet
The consideration received is wholly or partly in shares.

Effect of the relief

Deferred gains reduce the base cost of the shares received.

If consideration is wholly in shares, full relief is given, ie all gains are deferred.

MV shares mm
If consideration is partly in shares, the gain deferred is:
× net gains
Total consideration

Hoffa 381 capitalloss AEA

Cash consideration may be manipulated to leave a gain covered by a capital loss or the
annual exempt amount.

Pro-forma:
g Q what.at fasuh
MEt
shouldbe
For each asset transferred:
Proceeds MV

Cost (X)

Gain / (loss) X/(X)

Add together for all assets:

Net gains X

MV shares (X)
Relief: × net gains
Total consideration
Chargeable now X

HB2023

144 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 Base cost of shares:

MV of share consideration at incorporation X

mm
Less: Incorporation relief (X)

CGT base cost X

INCORPORATION RELIEF – PRATISH

Pratish is a sole trader. He has been running his business for many years and it has
always been profitable.
option 1
In December he wants to either dispose of his business to a third party now, or
we in exchange for
alternatively transfer his business as a going concern to a company
70,000 shares valued at £10 each. He then plans to dispose of the shares in a few years'
P p.it time.
The assets of the business are currently:
100000

Asset MV at transfer Cost

Warehouse £300,000 £120,000
Shop £50,000 £55,000
Fixed plant & machinery (TWDV £40,000) £60,000 £80,000
Goodwill £150,000 nil
Stock £50,000 £40,000
exempt
SEE p
Debtors £60,000 n/a
Cash at bank £30,000 claimedn/a
£700,000
All the assets will either be sold or transferred.
Requirement
everything
a)
o
Outline the CGT and income tax implications of Pratish selling his sole trade
business to a third party as a going concern.
b)
o
Assuming Pratish decides to incorporate, explain any elections available in respect
of his income tax position and show the base cost of the shares after incorporation
relief.
c) Show the base cost of the shares after incorporation relief if Pratish receives
60,000 shares (MV £10 each) and £100,000 left outstanding on a loan account
with the company.

SOLUTION T.TK
MV

Canul

I
HB2023

Topic 4: Issues for owner managed businesses 145

These materials are provided by BPP
 Net gains (£180,000 – 5,000 + 150,000) £325,000
The overall net gains of £325,000 will be chargeable to capital gains tax in the tax
year of the disposal. These gains will be reduced by any available capital losses or
BADR annual exempt amount and are likely to be taxed at 10% due to the availability of

7
business asset disposal relief (BADR). BADR is available (subject to the lifetime
limit of £1 million) as Pratish has run his sole trade business for at least two years.
Income tax 72 EEE in lifetimelimit
Pratish will cease trading at the date of disposal. Closing year rules will apply to his

ÉIq's
final taxable profits for the tax year 2023/24 which will be reduced by any available

Attestor
overlap relief.
E A profit of £(50,000 – 40,000) =tagascost
trading profits
£10,000 will arise on the sale of his trading stock,
stock Is P Mand a balancing charge of £(60,000 – 40,000) = £20,000 will arise on the disposal
of his plant and machinery.
on P M
trading Both of these amounts will increaseBC 1 accounting allowance
the taxable profit of his finalcapital
wfits.EEb)
period. No elections are available as the disposal is to a third party.
Income tax
topam
TWDV 40K
8.34T sell 60k
Elections would be available in respect of the transfer of both the plant and
machinery and stock.
BC 0K
Because Pratish would control the company to which his business is being
transferred, a succession election can be made to transfer the plant and machinery
at its tax written down value of £40,000. This would eliminate the £20,000
421k balancing charge but reduce the writing down allowances available to the
company.
Pam
ftp.sento
party
An election would be available to transfer the stock for the higher of its cost
(£40,000) and the actual sale proceeds (£50,000), ie £50,000. Therefore, this
thirdtrading election would have no effect unless the incorporation terms were altered to stock
reduce the consideration paid for the stock.
ask.ieIaEff afiia
protits930
CGT
All gains, based on the market value of each chargeable asset (£325,000 per (a))
are deferred under incorporation relief as 100% of the consideration is in the form
of shares.
B ftp.asiets ptransfer
Base cost of shares DEEP259 pHsharesER £charge
5941007 defer again
Value of shares received 70,000 £10 700,000
Less net gains (325,000)
Base cost after incorporation relief 375,000

c) If £100,000 were left on a loan account, only a proportion of the gains can be
deferred.

Effed
£
consideration Net gains 325,000
Less 325,000 600,000/(600,000 + 100,000) (278,571)
book shares Gain chargeable
incorporation 46,429

look loan akount

relief

HB2023

160 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 Disapplication of IR

This can be useful if either: o 1

IR automatic if conditions met, but an election can be made to disapply the relief.


O
net gains are covered by the AEA and available capital losses, or

e
The unincorporated business qualifies for BADR, and the individual plans to sell their
shares under circumstances where BADR would not be available on their disposal.
However, BADR cannot be claimed on gains relating to goodwill on an incorporation,
unless the individual's shareholding in the new company will be less than 5%.

CGT RELIEF ON INCORPORATION – AMANDA

EXAMPLE
Amanda is thinking of incorporating her sole trade business on 31 January 2024.
The assets and liabilities of the business are expected to be as follows on 31 January
2024:
MV at 31/1/24 Potential gains
£ £
Freehold property 300,000 60,000
Goodwill 120,000 120,000 BASE
Plant and machinery 25,000 – BADR
80000
HB2023

146 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 MV at 31/1/24 Potential gains
£ £
Stock 10,000 –
Debtors 30,000 –
Cash at bank 20,000 –
Creditors (15,000) –
490,000

If the incorporation goes ahead Amanda will receive 100,000 ordinary shares in A Ltd
(valued at £1.50 each) and the balance of the consideration would be in the form of a
loan.
Amanda is a higher rate taxpayer and uses her annual exempt amount each year.
Requirement
Calculate Amanda's capital gains tax on the incorporation if:
a) Amanda does not make any elections.
b) Amanda claims business asset disposal relief. B'ATR on BAPR assets
c) Amanda elects to disapply incorporation relief and elects to claim business asset
disposal relief.
d)
claim BADR on everything
Amanda keeps the freehold property in her personal ownership and transfers all
the other assets to A Ltd and makes a gift relief claim for the gain arising on the
goodwill. Assume that the goodwill is gifted to the company and that the other
assets are transferred into the company in exchange for shares.
No ER to 44K
SOLUTION Epasset
7153715elections
Edith37VR

or

HB2023
4136base cost
Topic 4: Issues for owner managed businesses 147
These materials are provided by BPP
revisedbasecost
taxablegain
BADR
Non BADR

221 disapply IR

FAIR
um
EEEE
BADR IF BADRI
DISAPPLYgov
INCORPORATION RELIEF? – THORNE
B KSHETE share
Thorne started a construction business on 1 April 2005. On 1 July 2023 he transferred
the business to a newly formed company, Cullen Ltd, in exchange for shares. The value
of the assets transferred and the gains arising are as follows:
ItL
I
Value Gain
£ £
Freehold property 260,000 80,000
Goodwill 70,000 70,000
Plant and machinery 150,000 –
Net current assets 20,000 –
500,000 150,000
0 12424175
On 5 January 2024, Thorne sold his shares in Cullen Ltd for £680,000. At the date of
to
II pseijointdisposal, Cullen Ltd had substantial non-trading assets (investment properties) making
up 30% of its balance sheet value.
claim a
ifThorne has made no other chargeable disposals in 2023/24 and has taxable income in
gift relief
excess of £50,000.

on Requirement
gunDetermine whether Thorne should elect to disapply incorporation relief.

SOLUTION
4 2 base cost

HB2023

148 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 DISAPPLY INCORPORATION RELIEF? – THORNE
Thorne started a construction business on 1 April 2005. On 1 July 2023 he transferred
the business to a newly formed company, Cullen Ltd, in exchange for shares. The value
of the assets transferred and the gains arising are as follows:
Value Gain
£ £
Freehold property 260,000 80,000
Goodwill 70,000 70,000
Plant and machinery 150,000 –
Net current assets 20,000 –
500,000 150,000

On 5 January 2024, Thorne sold his shares in Cullen Ltd for £680,000. At the date of
disposal, Cullen Ltd had substantial non-trading assets (investment properties) making
up 30% of its balance sheet value.
Thorne has made no other chargeable disposals in 2023/24 and has taxable income in
excess of £50,000.
Requirement
Determine whether Thorne should elect to disapply incorporation relief.

SOLUTION

HB2023

148 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 Incorporation relief or gift relief?
Substantial chargeable gains likely on goodwill and land and buildings but:
 If gain on any goodwill is small – may be covered by the annual exempt amount.
 If land and buildings retained outside of the business, it may then only be
necessary to use gift relief on any plant and machinery not otherwise exempt.
 Where incorporation relief is preferred it is possible to:
– Grant a lease on the property to the unincorporated business.
– Transfer lease to the company (ensures all assets transferred for IR).
– Retain freehold outside of the business.
Gift relief allows some assets to be transferred and others to be retained personally.
The most likely asset to be retained is land and buildings. This:
 Avoids SDLT.
 Avoids double tax charge on eventual sale of property.
 Enables profit extraction in the form of rent.
– But rent may restrict the availability of BADR on the sale of the property as
an associated disposal to the sale of the shares.
– Rent is not subject to national insurance.
– It is subject to income tax at a maximum rate of 45%.
– Allowable expense against corporation tax, unlike dividends.

Understanding the various tax implications on the sale of an unincorporated business vs

the incorporation of an unincorporated business, together with the potential CGT
reliefs, will help you to demonstrate both business insight skill and the adds value
behaviour to assist with business decisions and identify opportunities that can add
value in assisting cash flows by mitigating tax.

HB2023

Topic 4: Issues for owner managed businesses 149

These materials are provided by BPP
 HB2023

150
Unincorporated business
disposals and incorporation

Implications of business
Incorporation relief
disposals and incorporation
SUMMARY

Gains on incorporation
deferred if:
Income Tax VAT SDLT CT (incorporation only) CGT
• Going concern,
all assets transferred
Cease to trade • Outside the scope Applies to purchase Commence to trade • Gains / losses arise of (except cash)
• CYR apply. of VAT if a TOGC price of L&B disposal of chargeable
Overlap profits Close company assets at MV Consideration wholly in shares:
• Incorporation: • Incorporation:
deducted use MV of all • Gains fully deferred
consider transferring Goodwill: • Reduce by available
P&M disposal VAT registration L&B transferred
creates BA/BC • Amortisation losses / AEA
to the company Consideration partly in shares:
• Incorporation: disallowed
• Partial deferral
elect to transfer
(MV shares/MV total
at TWDV

Topic 4: Issues for owner managed businesses

consideration)
Stock disposal Reliefs: Business Reliefs: Incorporation
= trade profit/loss sold to 3rd party
Automatic if conditions met
• Incorporation:
• BADR • Incorporation relief • Can elect to disapply
Elect to transfer
• Rollover
at higher of cost – All assets transferred
• EIS
or actual proceeds wholly / partly for shares
• SEIS
Trading losses: c/y, c/b, – Shares acquired at
offset vs gains or TLR MV of assets less relief
– Co owns assets at
• Incorporation: can also
MV at incorporation
c/f vs income from

These materials are provided by BPP

company (s86)
• Business asset disposal relief
– Disposal of a business
run for at least 2 years
– Incorporation relief
applies first if conditions
met (and not disapplied)
– Goodwill unlikely to qualify

• Gift relief
– Gain reduces base
cost in company
(acquire at MV less relief)
– Low base cost of shares
– Useful if want to leave
an asset outside company
 CLOSE COMPANIES
DEFINITION OF A CLOSE COMPANY
A close company is one which is under the control of:
a)
b) 0
Five or fewer participators; or
Participators (any number) who are also directors.
A company is not close where it is: shareholders
a) A quoted company with at least 35% of the voting power controlled by the public;
or
b) Controlled by one or more other companies which are themselves not close
companies.
entiregroup closer 4 27 x 327
Participator: A person who has a share or interest in the capital or income of the
company including:
can be a company
Director: Includes:
a) Any person occupying the position of director (whatever name is given to that
position); and
7911 704director
b) Any person who is a manager and owns 20% or more of the ordinary share capital
of the company.

Associates
The interests of associates of a participator are added to the interest of the participator
when determining whether control of the company exists:
a) Relatives (no in-laws)
Parents and
remoter forebears

Brothers and Shareholder Spouse

sisters (including civil partners)

Children and
remoter issue
b) Business partners.
c) Trustee(s) of any settlement if shareholder or relative (living or dead) was creator.
d) The trustees of any trust or personal representatives of an estate which has shares
or obligations of the company where the participator has an interest in those
shares or obligations.

HB2023

Topic 4: Issues for owner managed businesses 151

These materials are provided by BPP
 CLOSE COMPANY – HAPPY FAMILIES LTD
The share capital of Happy Families Ltd is 30,000 ordinary shares of £1 each, with each
share carrying one vote. The shareholdings, which have been unchanged for several
years, are as follows:
No. of shares
Gladys Bunn 4,500
George Bunn (husband of Gladys Bunn) 2,000
Mary Sole (sister of Gladys Bunn) 800
Brienne Tape 2,400
Alfred Soot 3,000
Tamra Alami (sister of Alfred Soot's wife) 1,700
Eileen Over (business partner of Tamra Alami) 400
40 other equal shareholders 15,200
Gladys and George Bunn are the only directors of the company. 40 380
Requirement

go.yafggmm.gg
Determine whether Happy Families Ltd is a close company.

SOLUTION
mm yea
hemmmed

mmmm

HB2023

152 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 LOANS AND BENEFITS TO PARTICIPATORS Antiavoidance against
close company
Tavern closecompany

Company pays notional tax

sumu @ 33.75% on normal due date

44899kg next write off

a genuineloan In g
g
me

a 0
Pff
off
income tax at 8.75% income tax at 8.75%
33.75% or 39.35% 33.75% or 39.35% pense
Not deductible
Loans for CT purpose
A notional tax applies when a close company makes a loan to:
 5h or to an associate of a participator;
One of its participators SHor

O
The trustees of a settlement where either trustee or beneficiary is a participator or
an associate of a participator; or
 An LLP or partnership in which a participator or an associate of a participator is a
partner.
The tax charge is 33.75% of the value of the loan and is payable with the corporation tax
liability. ummm

Due date for notional tax (S.455 tax):

o
 Large companies – instalments regime.
 Companies which are not large – 9 months and 1 day after the end of the
accounting period in which the loan is made.

If the loan is repaid by the due date the S.455 tax is not payable.
If the loan is repaid or written off the tax charge is repayable on the normal corporation
tax due date for the accounting period of write off or repayment.
S.455 tax does not apply to: FEA penalty tax charge
 A loan made in the ordinary course of the company's business of money lending;
 Money owed for goods or services supplied by the company (unless credit >
6 months); or

HB2023

Topic 4: Issues for owner managed businesses 153

These materials are provided by BPP
  A loan to a director or employee if:

aim
Do
– Loans to that borrower do not exceed £15,000; and
– The borrower works full-time for the close company; and
– The borrower (on his own or with his associates) does not have a material
interest (>5%) in the company.
If the participator is an employee, there may be two charges to tax:
 s.455; and
taxable benefit if cheap taxable loan.beneficial

ff oficialinterestnate
If the participator is an employee and the loan is written off, the amount written off will
2
by
be liable to Class 1 NIC, even though charged to income tax as a dividend.

LOANS TO PARTICIPATORS – PILLING LTD

Pilling Ltd (a close company) lent Marvin, a participator, £118,000 on 1 May 2022. Marvin
repaid £37,000 on 1 May 2025 but because of his financial position, the company agreed
to waive the balance of the loan in December 2025. The company's year-end is 30 June,
ummmm
it has augmented profits of approximately £500,000 each year and no associated
companies. Marvin has total taxable income of £160,000 pa excluding the loan related
transactions.
Requirement No pay by instalments
AR p
Calculate and explain the taxation consequences of the loan. (You should assume that
Marvin pays interest at commercial rates on the loan).

6 payable by
SOLUTION 9EEIYEEE.GE PillirgLtd to Har

o fully outstancy
on CTpayment date

a company claim
Preaptifment
back from HMRC

1
118000 37000 81000
Anti-avoidance
the b ask.ua
If:
Haddedbackincthgyumpany's
EYE  There is both a repayment of at least £5,000 of a loan made in an earlier
accounting period and a new loan of at least £5,000 is made within the same 30
day period then the repayment is treated as a repayment of the new loan.
 stopightikey
The loan balance before a repayment was at least £15,000 and at the time of the
repayment it was intended that a new loan would be made then the repayment is
treated as a repayment of the new loan. 5 55Chang
HB2023

154 fA'pEntd s treat as repayment

cnn.ge
Topic 4: Issues for owner managed businesses
of
These materials are provided by BPP new loan
Esthan 30
 In either case, the repayment is only taken into account to the extent that it exceeds the
amount of the new loan.
2322Tcharge
The rules do not apply if the repayment gives rise to an income tax charge, for example
where a dividend is declared to clear a loan balance.
FEA
LOAN REPAYMENTS – DAVINA
Davina set up a company to provide IT services, called DP Tech Ltd, of which he is the
sole shareholder.
It has a 30 September year end. In February 2023, Davina borrowed £20,000 from the
company and, in September 2023, an additional £10,000. On 15 January 2024, the loan
balance was cleared by a payment out of Davina's personal savings account. However, at
the time she made the repayment, Davina intended to borrow a further £38,000, from
the company to pay her tax via self-assessment at the end of January 2024.
Requirement EEA.FR old loan TERETEanti avoidance
treated
Explain how much tax will be payable by DP Tech Ltd under
rules as a result of these transactions.
the loans toas
repayment of
participators
the new loan
SOLUTION 20000 1000
due date
2 9.30 p

an

5478931821 A floantotharge
BENEFITS FOR PARTICIPATORS – JONATHAN
Jonathan is a participator of a close company but is neither a director nor employee.
Throughout the current tax year, he is provided with a car by the company for which the
equivalent benefit is £6,200. Jonathan is required to make a contribution of £400 to the
company towards the benefit of using the car. Jonathan is a higher rate taxpayer and the

Lenefit
provision of the benefit is not part of an arrangement to avoid tax.
Requirement
Calculate and explain the taxation consequences of providing the car.

co No CT relief
taxed as Jonathan
no C A expenses
iempdiiyihffuigk.me stenefit no deductible
NO MIC

HB2023

EK 5981574dividendum in É
Topic 4: Issues for owner managed businesses
e
155
t
These materials are provided by BPP
income MRB
 SOLUTION

Benefits
Anti-avoidance
Where a benefit is conferred directly or indirectly on a participator or an associate of a
participator as part of a tax avoidance arrangement, and an income tax charge would not
otherwise apply, a corporation tax charge of 33.75% of the taxable value of the benefit
applies.

QUALIFYING INTEREST
If a participator:
 Owns at least 5% of the share capital; or
 Works full-time in the management of a close company; and
 Takes out a loan to buy shares in or make a loan to a close company, then income

I
tax relief is available on any interest paid as a deduction from their total income
(subject to the income tax relief restriction seen earlier in notes).
This relief is not available if the shares have already been given relief under EIS.

HB2023

156 Topic 4: Issues for owner managed businesses

These materials are provided by BPP
 SUMMARY

sociates
I
50
33.75%

up
spouse

pasting whildren
I

HB2023

Topic 4: Issues for owner managed businesses 157

These materials are provided by BPP
 5
CORPORATION TAX

Learning outcomes
 Determine, explain and calculate the corporation tax liabilities for corporate entities
 Identify legitimate tax planning measures to minimise tax liabilities
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions
 Explain and calculate the tax implications involved in the cessation of trade
 Evaluate the taxation implications of financing existing and new businesses
 Evaluate the taxation implications of returns to investors
 Evaluate and advise on tax strategies to meet business objectives
 Evaluate and advise on alternative tax strategies relating to corporate
transformations
 Explain and evaluate the tax implications of business transformations and change

HB2023

These materials are provided by BPP

 TOPIC OVERVIEW

Computation of
corporation tax

HB2023

166 Topic 5: Corporation tax

These materials are provided by BPP
 CORPORATION TAX FOR A SINGLE
COMPANY AND LOSSES

COMPUTATION OF CORPORATION TAX

The rate of corporation tax depends on the financial year in which the accounting period
falls.

Financial Main rate Small profits Marginal Marginal

year rate relief fraction effective rate
FY17-FY22 19% n/a n/a n/a
FY23 25% 19% 3/200 26.5%

The main rate was 19% for FY22 and this increased from FY23, (ie profits arising after 1
April 2023) to 25%.
The rate of corporation tax will depend on the size of the company's augmented profits.
Where augmented profits are up to £50,000 pa (the lower limit), the rate of corporation
tax will continue to be 19% (the 'small companies rate').
Where augmented profits are £250,000 (the upper limit) or more, the rate of corporation
tax will be 25% (the main rate).
The £50,000 and £250,000 limits will be divided by the number of associated companies
- active companies in the worldwide group that are under common control (Appendix B).
The limits are also scaled down if the accounting period is less than 12 months.
Companies with profits between these limits will be taxed at 25% minus 'marginal relief',
which is calculated as:
3/200 × (U – A) × N/A
Where:
 U is the upper limit (£250,000 divided by the number of associated companies)
 A is augmented profits (TTP plus non-group dividend income)
 N is the company's TTP
The effective marginal rate of tax on profits between the upper and lower limits will be
26.5% - this can be used to assess the marginal effect of a course of action, eg carrying
a loss forward to profits that will fall between the upper and lower limit.
Where an accounting period straddles the change in rate, taxable total profits and
augmented profits are time apportioned between the financial years. The limits for
marginal relief will also need to be scaled down accordingly.

Illustration - calculation of CT for a marginal relief company:

H Ltd has taxable total profits of £160,000 for the year ended 31 March 2024. It has no
associated companies and no dividend income.
Its corporation tax liability will be:
£
£160,000 × 25% 40,000
Less: marginal relief
3/200 × (£250,000 – £160,000) (1,350)
CT liability 38,650

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 This can also be calculated using marginal rates as:
£
Up to lower limit: £50,000 × 19% 9,500
Remaining profits at 26.5%: 29,150
(£160,000 – £50,000) × 26.5%
CT liability 38,650

Close investment-holding companies (CIHCs)

The small companies rate and marginal relief will not apply to close investment holding
companies - they will suffer the main rate of corporation tax (25%) irrespective of the
level of profits.
A CIHC is a close company whose main activities are none of the following:
 Trading
 Letting land to unconnected third parties
 Holding company of a trading or letting group

DIVIDENDS RECEIVED
All dividends received, whether received from UK companies or overseas companies, are
subject to the same rules. Almost all dividends received by UK companies are exempt
from corporation tax (ie excluded from TTP).
Generally speaking, dividends received by small companies are exempt if they are:
a) Received from a UK company or a company resident in 'qualifying territory'*; or
b) Paid out of chargeable profits which have been subject to an apportionment under
the CFC rules; and
c) In either case, not part of a scheme to obtain a tax advantage.
A company is small if it has fewer than 50 employees and either an annual turnover not
exceeding €10 million or a balance sheet total not exceeding €10 million.
Dividends received by companies which are not small are exempt if they fall under one of
five exempt categories:
 Received from a company controlled by the recipient; or
 Related to non-redeemable ordinary shares; or
 Received from a portfolio holding (<10%); or
 Related to a transaction not designed to reduce UK tax; or
 Related to shares accounted for as liabilities which are not held for an unallowable
purpose.
Exempt dividends are included as 'Exempt ABGH distributions' in arriving at Augmented
profits unless received from a company which is a 51% subsidiary (either of the receiving
company or of the receiving company's parent company).
*UK has a double tax treaty with a non-discrimination clause

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 RESEARCH AND DEVELOPMENT EXPENDITURE

Where an accounting period straddles 1/4/23, companies need to apportion their R&D
expenditure on a time basis (this can be calculated in months).

Externally provided workers & subcontracted expenditure

If a company:
 Subcontracts to (or hires workers from) an unconnected company – 65% of the
payments qualify.
 Subcontracts to (or hires workers from) a connected company – qualifying amount
is the lower of:
– Provider's expenditure; or
– The company's payment to the provider
The paying company can elect for any provider to be treated as a connected company. If
a SME has work contracted to them by a large company (or other person who does not
qualify for SME relief) the SME can only claim large company relief. SME must carry out
work itself or be undertaken by a university or individual who would not qualify in own
right.

Capital expenditure on R&D

100% capital allowances are available in the year of purchase on assets used wholly for
R&D purposes (eg microscopes, laboratory). This includes computer hardware (computer
software is dealt with under qualifying eligible expenditure).
Alternatively, for expenditure on main pool plant and machinery between 1 April 2021
and 31 March 2023, the company can claim a 130% super-deduction (see later in this
section). This will maximise tax relief.

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 Small or medium sized enterprise (SME) for R&D: A company which has:
 Fewer than 500 employees; and
 Either:
– An annual turnover not exceeding €100 million (approximately £87m);
or
– An annual balance sheet total not exceeding €86 million
(approximately £75m).

R&D tax credits (for SMEs only)

If a SME has a surrenderable loss in an accounting period in which it is entitled to an
additional deduction from trading profits then it may convert all or part of that loss into a
R&D tax credit.

Surrenderable loss: Lower of:

a)
mm
Trading loss for the accounting period after:
– Any s.37(3)(a) CTA 2010 current period relief that could be claimed
potential
against other income and gains (regardless of whether it is actually claimed)
– Any other loss relief actually obtained
– in under group relief to group or consortium
Any amount surrendered
members; and
b)
total 1307 100
230% of the qualifying R&D expenditure (for expenditure prior to 1/4/23) plus
186% of qualifying expenditure from 1/4/23.
867 10 7
R&D tax credit Cashin
e D
10% of the surrenderable loss in relation to R&D incurred from 1/4/23 (14.5% pre this
date). Where an accounting period straddles 1/4/23, the amount of credit paid at 14.5%
and at 10% is apportioned on a time basis.
The tax credit remains at 14.5% for R&D intensive companies (companies whose
qualifying R&D expenditure is at least 40% of total expenditure).
This payment is usually paid by HMRC (or is offset against any outstanding corporation
tax liability) and is not a taxable receipt.
A cap applies to the repayable tax credit of (£20,000 + (3 × total PAYE and Class 1 NIC
payable for the AP)). The cap does not apply where:
 The company's employees are creating, preparing to create, or managing
intellectual property, and
 No more than 15% of qualifying R&D expenditure is subcontracted to connected
persons, including the provision by connected persons of externally provided
workers.
The trading loss carried forward is reduced by the loss surrendered to obtain the tax
credit.

不 定就是最好的选择，因为比如 掉CY， PY trading loss relief，那省的税 少是19%的

CT， surrendable loss可能没有那么有利，不过surrednable loss得到的是cash in，所以有
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170 Topic 5: Corporation tax
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 R&D TAX CREDIT – P LTD
P Ltd is a small company. In the year to 31 December 2023, it has the following results:
£
Trading profit (before taking into account R&D expenditure) 162,500
Qualifying R&D expenditure:
Incurred February 2023 100,000
Incurred June 2023
Bank interest receivable
Chargeable gain
is 170,000
5,000
70,000
P Ltd’s total PAYE and NIC liability for the year was £10,000.
None of the R&D expenditure is subcontracted, P Ltd’s staff manage any intellectual
property created, and the R&D expenditure makes up 30% of P Ltd’s total P&L expenses.
Requirement Icapis notapplicable
Compute the R&D tax credit that P Ltd may claim.

SOLUTION
deductions
super
um

1011
758 PETIT relief
38370

1
15
FEET 988 surrendedloss
R&D TAX CREDIT – ABC LTD
loss
you
ABC Ltd is a small company. In the year to 31 March 2024, it has theremaining
following results:
£
Trading loss (before R&D expenditure) (450,000)
Qualifying R&D expenditure:
In-house R&D 350,000
Subcontracted R&D 150,000
ABC Ltd’s total PAYE and NIC liability for the period totalled £18,000. The R&D
expenditure makes up 20% of ABC Ltd’s total P&L expenses.
Requirement
Calculate the R&D tax credit.

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Topic 5: Corporation tax 171

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 SOLUTION

R&D expenditure credit (RDEC) for large companies

Large companies can make an election for the tax credit regime to apply to their R&D
expenditure.
The credit is intended to be recorded 'above the line' (ie in arriving at pre-tax profits) for
accounts purposes.
Once an election is made it remains in place for future periods.

How it works
The credit is 20% of the qualifying R&D expenditure from 1/4/23 (13% for expenditure
incurred prior to this date).

Where an accounting period straddles 1/4/23, companies need to apportion their R&D
expenditure on a time basis (this can be calculated in months).
It is included in the calculation of the company's Taxable Total Profits.
It is then applied to reduce the company's corporation tax liability.

LARGE COMPANY R&D EXPENDITURE CREDIT – P PLC

P plc (a large company for R&D purposes) has trading profits of £2,500,000 in the year
ended 30 September 2023.
Included in the calculation of trading profit is qualifying R&D expenditure of £500,000, of
which £150,000 was incurred prior to 1 April 2023.
P plc will claim the RDEC.
Requirement
Calculate P plc's corporation tax liability for the year ended 30 September 2023.

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itb.ES
get repayment
I 657
 Refundable RDEC

The RDEC increases the company’s trading profits subject to corporation tax (or
decreases a trading loss).
If the tax liability is less than the RDEC it is offset/repayable using the following steps:

992507
As far as possible, the credit is treated as
paying the current year CT liability TEEPEE
RDEC rate
NA
Cap the remaining credit at the current
year credit less notional CT at the main rate EEE The excess is carried forward
158000 15800 23.5 and treated as an R&D credit of
the following year or surrendered
Cap the remaining credit at the amount
120870
1974001 of the company’s PAYE and NIC on TIE
to group members
workers engaged in R&D 97400
c
f unused
The capped credit is then treated as paying RAEC to next year
NA any CT liabilities of other periods
1850
99250 97400
NIA The balance is used to offset any
other amounts due to HMRC

Any remaining credit is paid by HMRC to

1974007 the company

Notional tax amounts are offset against the CT liabilities of future periods before credits
arising in the future periods.
No amounts are payable by HMRC if:
 The company is not a going concern at the time when the claim is submitted; or
 The company has outstanding PAYE or NIC liabilities.
Capped amounts (regardless of which cap they arise under) are treated as credits of the
next period or can be surrendered to group members (if a member of a group).

LARGE COMPANY R&D EXPENDITURE CREDIT – Q PLC

Q plc is a large company and part of a large group. In the year to 31 December 2023, it
has a trading profit of £600,000, before deduction of R&D expenditure. The qualifying
R&D expenditure for the year is £860,000, of which £200,000 was incurred prior to 1
April 2023.
Q plc has historically made trading losses, leaving no CT liabilities outstanding for earlier
years. It also has no other liabilities to HMRC other than corporation tax on a gain of
£250,000 in the year to 31 December 2023.
Its PAYE and NIC costs for employees engaged in R&D for the year to 31 December 2023
are £97,400.
00000
triggers
Less R D exp 1860000
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174 Topic 5: Corporation tax

Add RPEC
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1200000 13 4 660000 207 158000

 Revisedtrading101s 1102000

Assume any current year trading losses will be surrendered via group relief and that
there are no brought forward losses available to shelter the chargeable gain.
Requirement
Compute the R&D expenditure credit that Q plc can claim assuming it has elected into
the large company R&D expenditure credit regime and explain how it will be used.

SOLUTION
CTcomputation
tradingincome MM
chargeable gain 250000

TTP
CTpayable
25000
EEx97 5870
ggg25t m

INTANGIBLE FIXED ASSETS (IFAS)

Examples of IFAs
Copyrights, trademarks and patents. For corporation tax purposes, also includes goodwill.

Tax treatment
Tax treatment normally follows the accounting treatment

Examples of:
Debits relating to IFAs Credits relating to IFAs
Payment of patent royalty Receipt of patent royalty
Amortisation Profit on sale
Loss on sale Revaluation

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 Step 3:
CAP PAYE/NIC liabilities £97,400 n/a £99,250 > £97,400

Repayable capped credit (£97,400)

Working £
Trading profit before R&D expenditure 600,000
Less R&D expenditure (860,000)
Add RDEC (13% £200,000 + 20% £660,000) 158,000
Trading profit/(loss) (102,000)

Note
The average main rate for the year ended 31 December 2023 is 23.5% (3/12 × 19% +
9/12 × 25%).
The current year CT liability is 23.5% of the chargeable gain ie, £58,750.
At step 1 the credit pays the current year liability. The remaining credit is therefore
£99,250.
At step 2 the first cap is applied: The net value of the set–off amount is £120,870 ie
(£158,000 – (£158,000 23.5%))), so there is no cap.
At step 3 the PAYE and NIC cap is then applied to the remaining credit. As the PAYE and
NIC is less than the remaining credit, there is a cap of £97,400 and the excess credit of
£1,850 (£99,250 – £97,400) is carried forward to the next period to be used as an RDEC
credit.
Therefore, the capped credit of £97,400 is payable by HMRC to the company.
Tutorial note:
If Q PLC had made a current year claim for its trading losses instead of surrendering
them as group relief, the refundable RDEC would have been higher as less of it would
have been offset against the current year corporation tax.

IFA ROLLOVER – SOAP LTD

a) £ £
Sale proceeds 4,000,000
e NBV
Accounting profit
Sales proceeds IFA1
D
4,000,000
(990,000)
3,010,000 0
Cost of IFA1
Rollover against IFA2 59 No
(2,800,000)
adjustfffix
(1,200,000)
Taxed now 1,810,000
deductible
Cost of IFA2 4,500,000
Less rollover from IFA1 (1,200,000)
try p Base cost of IFA2 for tax purposes 3,300,000 taxasa
tradingprot
PI after
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 Trading IFAs

Effete
Include all accounting credits and debits in trading income (no adjustment required).

Non-trading IFAs:

1
Net credit is taxed as miscellaneous income.
D
Alternative to the accounting treatment
Companies may elect to disallow any accounting debits.
Instead, may elect to deduct a straight-line WDA of 4% pa.
Election must be made within two years of the end of the accounting period in which the
asset is created or acquired.

Special rules for Goodwill

Goodwill may be purchased or internally generated.
The treatment of goodwill for corporation tax is different to other IFAs. It depends on
when the goodwill was created/acquired. um
Acquired/ Amortisation Profit or loss on
created sale
01/04/2002 - Deductible Trading profit or
02/12/2014 loss
03/12/2014 - Change of rules re Not deductible for As above
08/07/2015 goodwill acquired acquirer
from a related party
Eg. incorporation
09/07/2015 - Above rule change also Not deductible for Loss = non-trade
31/03/2019 applies to ALL purchased acquirer debit
goodwill (from related Profit = trading
party or not) profit
From Amortisation at
01/04/2019 6.5% of cost (see normal
note1 below) EH
Note 1. where goodwill is acquired from an unrelated party with other intellectual
property (IP) (eg patents, licences) in a business acquisition after 1 April 2019,
amortisation of goodwill is allowed at rate of 6.5% straight line on the lower of:


0
The cost of the goodwill; or
The cost of the other IP multiplied by 6. 1 1122
No election is required. 59 900 IP 5.20 6 0

Realisation of a profit/loss on an IFA 11 4 53 6 amortisation

 A realisation occurs when an IFA:
– Is sold; or
– Becomes valueless; or
– Effectively ceases to exist.

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 The profit/loss on realisation of an IFA will be calculated as follows:
Accounting treatment followed: Alternative 4% WDA claimed:
Proceeds X Proceeds X
NBV
metboon value (X) TWDV
Fff 4.7 17 (X)
Profit/(loss) X/(X) Profit/(loss) X/(X)

Rollover relief for reinvestment in new IFAs

A profit on the realisation of an IFA may be deferred where the company re-invests in a
new IFA (either directly or through the purchase of qualifying shares).
Rollover relief operates as follows:
a) Deducted from the cost of the new asset.
b) The reinvestment must be made within one year before and three years after the
disposal.
c) Maximum rollover:
Proceeds – original cost

hmmm
d) Where the proceeds are not fully reinvested, the relief is:
Cost of IFA 2 – Cost of IFA 1 = rollover

IFA ROLLOVER – SOAP LTD

Soap Ltd sells IFA 1.
£
Sale proceeds 4,000,000
Original cost 2,800,000
NBV in accounts 990,000
Soap Ltd acquires IFA 2 one year later.
Calculate the profit on disposal of IFA 1 and the base cost of IFA 2 assuming the
maximum claim for rollover is made and that IFA 2 cost:
a) mn
4,500,000; or
b) 3,500,000.
not fully reinvested.tt proceedsiE400
fcostot
SOLUTION A 00

p
follower
cost taxable
Defer
re
b

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Topic 5: Corporation tax 177

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 onlyallowed
taxable admit
Defer
v8 Eest IFA ROLLOVER – DEF LTD
DEF Ltd disposed of an IFA it acquired after 1 April 2002 for £40,000. In the same
accounting period it acquired a replacement IFA for £37,000.
DEF Ltd had charged amortisation totalling £15,000 to the profit and loss account over
the life of the disposed of IFA. It had originally cost DEF Ltd £20,000.
Requirement
Calculate the base cost of the replacement asset assuming a claim for rollover relief is
made.

SOLUTION

CAPITAL ALLOWANCES - ADDITIONAL FIRST YEAR ALLOWANCES

AVAILABLE TO COMPANIES

Super-deductions and FYAs

Temporary enhanced capital allowances were available to companies for expenditure on
new (not second-hand) qualifying plant and machinery (not cars) between 1 April 2021
and 31 March 2023:
 130% super-deduction for main pool assets
 50% first year allowance for special rate pool assets
The AIA, if available, should be claimed in priority to the 50% FYA for special rate pool
assets (with the balance of expenditure in excess of the AIA qualifying for 50% FYAs).
6% WDA is not available in same AP as 50% FYA.

Acquisitions prior to 1 April 2023 but within an accounting period ending after
31 March 2023
For example, if machinery is acquired on 20 February 2023, within the accounting period
30 June 2023:
Asset must be acquired pre-1 April 2023 to qualify for enhanced CAs.
 50% FYA still available on SRP assets up to 31/3/26.
 130% super-deduction is apportioned: 100% + 30% × (period before
1.4.23/length of AP)
For y/e 30.6.23 the super deduction is therefore: 100% + (30% × 9/12) = 122.5%

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 Disposals of assets on which enhanced CAs claimed
An immediate balancing charge arises:
For main pool assets on which super-deduction claimed, balancing charge depends on
date of disposal:
 130% of disposal value if sale in AP ending before 1 April 2023
 100% of disposal value if sale in AP starting after 1 April 2023
 For disposals in AP straddling 1 April 2023: balancing charge = disposal value x
100% +30% × (period before 1.4.23/length of AP)
For SRP assets on which 50% FYAs claimed: balancing charge = 50% of disposal value.
Balance of disposal value allocated to the SRP.
Disposal value = proceeds limited to original cost on which enhanced FYA was claimed.
Apportion proceeds if FYAs not claimed on full acquisition cost.

Full expense relief (from 1 April 2023)

A temporary first year allowance at 100% which is known as ‘full expense relief’ is
available to companies from 1/4/23 to 31/3/26 on new (not second hand) main rate
qualifying plant and machinery (not cars or assets purchased for purpose of leasing).
Unlike the AIA, the full expense allowance is not capped.
The AIA will be claimed on qualifying additions in preference to full expensing. While
there is no difference on the initial allowance given via the AIA or full expense relief, the
AIA avoids any balancing charge on disposal of the asset.
The 50% FYA still available on SRP assets up to 31/3/26.

Disposals of assets on which full expense relief has been claimed

An immediate balancing charge arises, equal to the lower of disposal proceeds and
original cost.

ENHANCED CAPITAL ALLOWANCES - HOWARD LTD

EXAMPLE Howard Ltd, a single company, prepares its accounts to 31 December each year. It
acquires the following new assets in February 2023 in its year ended 31 December 2023:
£'000
Production machinery 400
Air conditioning system 1,300
Requirement
Explain the maximum capital allowances available to Howard Ltd on the acquisition of
these assets, and the impact of selling each asset for proceeds of £300,000 on 30 June
2024.

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 SOLUTION

FULL EXPENSE RELIEF - OAK LTD

EXAMPLE Oak Ltd, a single company, prepares its accounts to 30 June each year. At 1 July 2022,
Oak Ltd had a TWDV of £450,000 in the main pool and £300,000 in the special rate pool.
During the year ended 30 June 2023 it made the following acquisition and disposal:
£
1.4.23 Acquisition of new fleet of lorries 1,400,000
1.2.23 Disposal of a printing press 100,000
(acq 1.7.21 for £200,000 and 130% super deduction claimed)
Requirement
Calculate the capital allowances available to Oak Ltd for the year ended for the year
ended 30 June 2023. Ignore VAT.

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 SOLUTION

Understanding the special rules for companies around R&D, IFAs and enhanced capital
allowances will help you to demonstrate both the adds value and continuous
improvement behaviours. As you learn new skills and knowledge you can better
understand an organisation’s needs and identify opportunities where the business can
save tax by using the tax reliefs and allowances available.

COMPANIES WITH INVESTMENT BUSINESS

Companies with investment business

Any company the business of which consists wholly or partly of making of

investments.

Corporation tax is applied to companies with an investment business in the normal way.

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 X Ltd: Accounting Period ended (maximum = 12 months)
£
Trading income (if any) X

Property income X

Non-trading loan relationships (investment interest) X

Miscellaneous income X

X
Chargeable gains (net gains, after rollover relief and losses)
X

Less management expenses, eg

Directors' remuneration X
Office costs X
CAs on P&M used for investment business X
(X)
Qualifying charitable donation (X)

Taxable Total Profits (TTP) X

Management expenses
Overhead expenses incurred in managing investments.
Deductible as expenses of management from total profits and gains (provided not held
for an unallowable purpose) before qualifying charitable donations or losses.
Expenses relating directly to other sources of income are deducted in the normal way, eg
property expenses set against property income.
Non-trading loan relationships expenses and losses are dealt with under the loan
relationship rules, not as an expense of management.

Excess expenses of management

Unrelieved amount may be carried forward indefinitely against future income and gains
as if they were expenses of management of that later period.
A claim is required to use brought forward management expenses arising after 1 April
2017 (see later). Losses and management expenses arising prior to 1 April 2017 are not
examinable in the Business Planning: Tax exam.
Excess expenses of management may be group relieved.

Change in ownership – anti-avoidance legislation

Similar rules apply as for changes in ownership explained later in notes.
Losses affected by these measures:
 Expenses of management
 Property business losses
 Non-trading loan relationship deficits
 Non-trading losses on intangible fixed assets.

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 EXCESS EXPENSES OF MANAGEMENT – BETA LTD
The principal income of Beta Ltd is derived from investments in other UK companies. It
also derives income from rented properties and debenture interest. Beta Ltd's results for
the eight months ended 31 March 2024 show the following:
£
Dividends received from other (non-group) UK companies 1,080,000
Rental income 59,400
Rental expenses 16,400
Debenture interest received 60,000
Beta Ltd incurs management expenses of £52,500 in the period. In addition, it has
excess expenses of management of £23,100 from the year ended 31 July 2023. Beta Ltd
is a small company for the purposes of the exempt dividend income rules.
Requirement
Calculate the corporation tax payable by Beta Ltd for the eight months ended
31 March 2024. State when this should be paid.

SOLUTION

Loss on sale of shares by an investment company

Where a company:
 Has been an investment company for at least six years, or has never been a
trading company; and
 Realises a loss on the disposal of subscriber shares in a trading company
(according to the legislative definition given in the EIS rules); then

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Topic 5: Corporation tax 183

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 The loss can be offset against:
 Other income in the accounting period of the loss; then
 Other income in the previous 12 months.
This relief is only available to 'investment companies' – those whose principal income is
derived from investments and excludes the holding company of a trading group. A claim
for relief must be made within two years of the end of the year of the loss.

SUBSTANTIAL SHAREHOLDING EXEMPTION (SSE)

SSE
If a company disposes of shares in a trading company (or holding company of a trading
group) in which it has a substantial shareholding:
a) Any capital gain arising is exempt from corporation tax; and
b) Any capital loss is not allowable.

Substantial shareholding
a) Investing company owns at least 10% of the ordinary share capital; and
b) Is beneficially entitled to at least 10% of the distributable profits; and
c) Is beneficially entitled to at least 10% of the assets on a winding up.

Conditions for the relief

a) The 10% shareholding conditions must have been satisfied for a continuous period
of twelve months during the six years preceding the disposal
b) The investee company must have been a trading company (or the holding
company of a trading group) throughout the period beginning with the start of the
latest 12-month period in which the SSE conditions were satisfied.
The exemption applies to the disposal of the whole or part of the substantial
shareholding, and to any other shares held by the investing company in the investee
company (for example preference shares).

SUBSTANTIAL SHAREHOLDING – BALLYHOO LTD

Answer plc acquired 200,000 ordinary shares (a 20% holding) in Ballyhoo Ltd, a trading
company, on 1 January 2016.
Answer plc sold 150,000 shares on 31 January 2020 with the remaining shares being sold
on 31 May 2023.
Requirement
Explain whether the substantial shareholding exemption applies to each of the disposals.

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 SOLUTION

Share for share relief

Treatment of gains where shares or securities are received in consideration depends on
whether the SSE applies.
SSE takes precedence over the share for share rules. This means that the share for share
rules are ignored and the base cost of the new shares are their market value at the time
of acquisition

SSE OR SHARE FOR SHARE RELIEF? – COMPANY A

Company A has held 15% of the shares in company B since 1 January 2007. Company B
is taken over by company C in the current accounting period. Company A receives shares
in company C in exchange for its shares in company B. Companies A and B are both
trading companies.
Requirements
Does the substantial shareholding exemption apply?

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 SOLUTION

CORPORATION TAX LOSSES

Trading loss relief
Current year and carry back relief
 Set off against total profits in same AP the loss arose – s.37(3)(a)
And then:
 Set off against total profits in previous 12 months (must make a CY claim first)
 s.37(3)(b) - C/b extended to 36 months for terminal loss relief – s.39 CTA 2010
 Current-year or carry-back claims made within 2 years of end of AP of loss - no
partial claim - offset as much loss as possible against the total profits (even if this
wastes QCDs)

Carry forward
Carry forward against total profits in future APs - s45A
 A claim is required within 2 years of end of AP of relief.
 Claim specifies the amount (does not have to be all of loss or profits)
 C/f losses may only be offset against total profits as long as:
– the trade that generated the loss continues and
– it was not small/negligible in the previous period.
Otherwise, the loss can only be offset against profits from the same trade - s45B
(automatically but can claim to restrict the offset)
 Carried forward losses may be subject to a limited offset due to the deductions
allowance (see later)

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 Trading loss relief pro forma
The following pro forma is used to allocate trading losses and will be used throughout
this chapter.

YE YE YE
31/12/22 31/12/23 31/12/24
Trading income X Nil X
Non-trading loan relationships X X X
Miscellaneous income X X X
Property income X X X
Chargeable gains (net of capital losses) X X X
Total profits X X X
Current year trading loss (X)
Carry back 12m trading loss (extended to (X)
36m on cessation)
Carry forward losses (X)
Less qualifying charitable donations (X) (X) (X)
TTP X X X
Group relief (see topic 6) (X) (X) (X)
Revised TTP X X X

S37 AND S45A LOSS RELIEF – JUMPER LTD

Jumper Ltd has the following results:

y/e y/e y/e
31.3.21 31.3.22 31.3.23
Trading income 10,000 (35,000) 14,000
Property income 2,000 2,000 2,000
Chargeable gains 3,000 –
Qualifying donation 1,000 1,000 1,000
Requirement
Compute the Taxable Total Profits of all years, assuming the company wishes to claim
loss relief as early as possible and show any qualifying donations that become
unrelieved.

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 SOLUTION

TERMINAL LOSS RELIEF – COUNT LTD

Count Ltd ceased to trade on 30 June 2023. Its recent results are:
y/e y/e y/e y/e p/e
31.3.20 31.3.21 31.3.22 31.3.23 30.6.23
Trading income 65,000 81,000 34,000 (250,000) (129,000)
Chargeable gains – 22,000 – – 12,000
Profit on non-trading
loan relationships 15,000 15,000 17,000 18,000 10,000
Requirement
Show how the losses should be relieved using terminal loss relief.

SOLUTION

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 RESTRICTIONS ON CARRIED FORWARD LOSS RELIEF

Deductions allowance
There is a restriction on the amount of profits that can be relieved by carried forward
losses. Broadly the cap (the 'relevant maximum') is a maximum of £5 million per year
(the deductions allowance or DA) plus 50% of profits in excess of that £5 million.
Companies with brought forward losses of less than £5 million will therefore be
unaffected by these provisions.
The restriction also applies to the use of capital losses brought forward against
chargeable gains that arise on or after 1 April 2020.
How the cap operates depends on the type of losses that are brought forward:
Scenario 1: No capital losses brought forward
Brought forward losses can be offset against total profits (on making a claim), and are a
maximum of:
£5 million + 50% (TTP - £5 million)
TTP is calculated after deduction of current period losses and group relief.
Scenario 2: Only capital losses b/f
 Allocate the deductions allowance to chargeable gains
 Maximum offset vs chargeable gains = £5m + 50% (gains - £5m).
Scenario 3: capital losses and other losses brought forward
a) Allocate the deductions allowance to maximise use of b/f losses: prioritise
chargeable gains to use up large capital losses b/f.
b) Calculate the maximum offset against each type of available profit:
i) Capital losses b/f: Allocated DA + 50% (gains - allocated DA)
ii) Other losses: Maximum offset vs total profits = £5m + 50% x (TTP - £5m),
less amounts offset in step (i)

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 RESTRICTION ON CARRIED FORWARD TRADING LOSSES
– DRAKE LTD

Drake Ltd, a single company, has trading losses brought forward at 1 April 2023 of
£12 million. The losses arose in the year ended 31 March 2023.
The company has the following results:
y/e y/e
31.3.24 31.3.25
£m £m
Trading profit /(loss) 6 15
NTLR profit 2 3
Requirement
Explain how the brought forward losses can be relieved.

SOLUTION

Interaction of loss restriction with current year losses

If there are both:
 capital losses and other losses brought forward, and
 current year losses over which a current year claim will be made (eg trading losses
or non-trade loan relationship deficits)
The current year loss can be offset against whichever type of profit (ie income or gains)
as gives the maximum relief for brought forward losses.

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 Companies with substantial capital losses brought forward should generally offset current
year losses against non-chargeable gains elements of TTP, in order to maximise the
relevant maximum for capital gains.

RESTRICTION OF CARRIED FORWARD LOSSES –

DIFFERENCE TYPES OF LOSSES – EGBIRD LTD

Egbird Ltd, a single company, has the following brought forward losses:
A trading loss of £5 million
A capital loss of £7 million
The company has the following results for the year ended 31 March 2024:
y/e
31.3.24
£m
Trading profit 7
Chargeable gain 10
NTLR deficit (1.4)
Requirement
Explain how the losses may be relieved and determine the amount of unrelieved losses.
Explain where the deductions allowance should be allocated.

SOLUTION

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 Brought forward trading losses on cessation of trade
A brought forward trading loss that is unrelieved on the cessation of a trade may be
set against profits of the three years to the end of the period of cessation, ie if a trade
ceases in the period to 31 December 2023, relief is available against the profits of the
three years from January 2021 to 31 December 2023.
Terminal loss relief for brought forward losses is only available against profits that are
subsequent to the original loss-making period. Losses are relieved fully (no partial claims)
on a LIFO basis.

TERMINAL LOSS RELIEF FOR CARRIED FORWARD

LOSSES – MALLARD LTD

Mallard Ltd has trading losses brought forward at 1 April 2022 of £36 million. The losses
arose in the year ended 31 March 2022 and the maximum current year and carry-back
claims were made.

The company had the following results:

y/e 31.3.23 y/e 31.3.24 y/e 31.3.25

£m £m £m
Trading profit 8 13 10
NTLR profit 3 2 3

Mallard Ltd ceases to trade on 31 March 2025.

Requirement
Show how the losses should be relieved using terminal loss relief.

SOLUTION

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 Change of ownership and conduct of trade
Restrictions on the use of losses may apply where there is a change in ownership of a
company and either:
a) There is a major change in the nature or conduct of the business within:
i) For trading losses, a five year period of the change of ownership, starting
not more than three years prior to the change in ownership; and
ii) For other losses, a period of eight years beginning three years prior to the
change in ownership.
b) After the company's trading activities have become small or negligible, there is a
change in ownership followed by a considerable revival of the trade.
Examples of a major change in the nature or conduct of the trade include changes to:
 Services or facilities provided in the trade
 Nature of customers of the trade
 Nature of assets traded in
 Location of business premises
 Methods of manufacturing

Restrictions on losses
The restriction applies to:
a) Pre-acquisition brought forward trading losses.
b) Post-acquisition trading losses carried back.
c) Terminal loss relief for carried forward losses.
d) Pre-acquisition non-trading loan relationship deficits, IFA losses, and property
business losses brought forward.
It does not apply to capital losses.

Losses brought forward Losses carried back

3 years before Change of ownership 5 years after

Major changes in nature or conduct of the trade within this eight-year period

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 CHOICE OF LOSS RELIEF

Factors affecting the choice of loss relief

In choosing which loss relief option to use, the following factors should be taken into
account:
 The timing of the relief
 The corporation tax rate
 The loss of relief for qualifying charitable donations
 The impact on instalment payments
Instalments due (earlier than normal due date) if Augmented Profits >£1.5m (even
earlier if 'very large', i.e. Augmented Profits>£20m). Losses can be used to reduce
Augmented Profits below £1.5m and out of instalment regime, or below £20m and into
'normal' instalments.
The corporation tax large companies rate is 25% from 1 April 2023. Therefore, carrying
forward a loss is likely to generate higher tax savings, particularly if the company is likely
to be a 'marginal' or 'large' company when losses are relieved.
Due to the flexibility of carried forward losses, there is less likelihood of wasted QCDs/
double tax relief when carrying forward a loss.
It will usually be preferable to obtain relief as soon as possible to generate tax
repayments to help cash flow.

LOSSES, SAVING TAX AND CASH FLOWS – LM LTD

EXAMPLE
LM Ltd is a trading company. It has made up its accounts to 31 March each year.
The company had the following results:
Y/E 31.3.23 Y/E 31/3/24
(projected)
£ £
Trading profit/(loss) 506,500 (117,485)
Profit on non-trading loan relationships 30,749 6,289
Chargeable gain Nil 17,595
Qualifying charitable donation paid (11,250) (8,750)
The company has trading losses brought forward at 1 April 2022 of £15,400. LM Ltd
anticipates making tax adjusted trading profits in the year ended 31 March 2025 of
£245,000, with no dividends received.
Requirement
Show how the loss for the year ended 31 March 2024 may be used and calculate the tax
saving for each option.

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 SOLUTION

Understanding the different loss reliefs for a company, and also being able to
distinguish between loss reliefs for a company vs unincorporated businesses, will help
you to demonstrate both the business insight and problem solving and decision
making skills, enabling you to evaluate information, consider all relevant issues, and
make the best decision for the use of losses, in order to save tax and assist with cash
flows for the business.

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 SUMMARY

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 RAISING FINANCE
LOAN RELATIONSHIPS

Accounting methods
If a company's accounts are prepared in accordance with IAS/IFRS or UK GAAP, no
adjustments should be required for taxation purposes for amounts which relate to loan
relationships.

Distinction between trading and non-trading purposes

Distinction between trading
and non-trading purposes

EXAMPLES OF INCOME AND EXPENDITURE

Give examples of types of income or expenses (other than interest) which fall under the
loan relationship rules.

SOLUTION

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 Deficit (net debit) on non-trading loan relationships
A net deficit on non-trading loan relationships may be:
 Group relieved;
 Offset in the current year against total profits;
 Offset in the previous year against profits on non-trading loan relationships; or
 Carried forward against total profits.

Unallowable purpose
No deduction is available where a loan is for an unallowable purpose, ie:
a) It is for the purposes of tax avoidance; or
b) It is for a purpose which is outside the scope of UK corporation tax, eg a UK
branch of a non-resident company paying interest on a loan taken out for the
benefit of its parent.

Withholding tax on interest

UK companies pay interest:
 To other UK companies, or on listed Eurobonds or gilts, gross; and
 To most individuals net of 20% income tax (gross payments may be permissible in
respect of certain types of interest and to non-UK residents under some Double
Tax Treaties).

Connected party loans

Two companies are connected if one is under the control of the other.
Anti-avoidance provisions apply if two parties to a loan are connected:
a) Late payment of interest.
 Interest only deductible when actually paid if more than 12 months after end
of AP
 Applies where creditor is:
– Not subject to UK corporation tax (could be an individual); and
– Connected.
 Definition of 'connected' extended for this rule to participators in close
company.
 Where lender is a company, rules apply if resident in a 'non-qualifying
territory', ie a tax haven.
b) Relief for impairment losses (ie bad debts) is not available to a lender in respect of
a loan to a connected party.
c) Loan waivers:
 Expense not deductible for lender.
 Borrower's corresponding credit is not subject to tax (same principle applies
to trade debts).

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 FOREIGN EXCHANGE

Foreign exchange gains Taxation treatment

or losses on

Settled trading Trading income/expense

transactions
Monetary items Credits or debits with loan
(receivables, cash, relationships as they are
payables, overdrafts, loans) recorded in the accounts,
as trading or non-trading
loan relationships as
appropriate.
Non-monetary items Part of capital profit/loss on
(capital assets) sale

LEASES
Accounting treatment
Leases are classified into two types:
 Operating leases; and
 Finance leases.
Use of IFRS16 Leases is assumed for the purpose of the BPT exam.
Accounting (and tax) treatment for the lessee is the same for both types of lease,
however for the lessor there remains a distinction between the two types for accounting
purposes, and therefore different adjustments are required.

Accounting treatment Tax treatment

Tax treatment for

lessors
Operating leases:

Income statement shows Tax the lease rentals per the income statement
rent receivable less
depreciation
(Add back depreciation and claim CAs / SBAs on
qualifying assets)

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 Accounting treatment Tax treatment

Finance lease:

Income statement shows Tax the lease rentals and deduct capital allowances
interest income
(Deduct interest income and add the lease rentals in the
adjustment of profits, and claim capital allowances)
Tax treatment for
lessees
All leases:

Income statement shows Allow the depreciation and interest charge recorded in
depreciation plus an the income statement
interest charge
(No tax adjustments needed for BPT exam purposes –
assume all depreciation is allowable, do NOT add back
depreciation per income statement)

Taxation treatment of other leases

Leases of high emissions cars

For leases of cars where CO2 emissions of more than 50g/km:
 15% of the rentals (including any irrecoverable VAT) are disallowed for tax
purposes.

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 DEBT VERSUS EQUITY – TAXATION IMPLICATIONS

Example:
A company paying corporation tax rate at rate
of 19% pays interest on its debt of £10,000
gross.

The cost to the company is as follows.

£
Interest payable 10,000
Corporation tax saving @19% (1,900)
£8,100

Return on
investment

Interest Dividends

• Interest is taxable @ 40% • Dividends taxed at an effective rate

for a HR taxpayer or 45% of 33.75% for a HR taxpayer and
for AR taxpayer 39.35% for AR taxpayer (subject to
the dividend nil rate band)

Example: Example:
If a HR investor receives the £10,000 as If a HR investor receives the £10,000 as a
interest (gross), the tax to be paid is as dividend, the tax to be paid is as follows.
follows. £
£ Dividend 10,000
Investment income 10,000 Tax @ 33.75% to pay 3,375
Tax @ 40% to pay 4,000

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 Understanding the differences between debt vs equity for a company to raise finance
will help you to demonstrate flexibility behaviour as you assist an organisation to
manage its conflicting priorities (the need to raise additional funds and not be highly
geared vs diluting existing shareholdings with an issue of shares) as circumstances
change.

DEBT OR EQUITY? – BOB

Bob is the sole shareholder of B Ltd. B Ltd needs to raise £100,000 finance. Bob will
either subscribe for additional shares in the company to provide the finance or make a
loan to the company for the amount required.
If he subscribes for shares, he will expect to receive an additional dividend of £5,000
each year. If he makes a loan to the company, he will charge the company interest at
5% per annum.
Bob is an additional rate taxpayer and has used his dividend nil rate band.
Requirement
Calculate Bob's net disposable income under each option.

SOLUTION

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 SUMMARY

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 COMPANIES – SPECIAL SITUATIONS
COMPANY PURCHASE OF OWN SHARES
It is possible for a shareholder to sell shares back to the company, rather than to an
external third party.

Repurchase of shares from a corporate shareholder

Where a corporate shareholder sells shares back to the issuing company, it will always be
treated as a capital transaction and calculated as follows:
Proceeds X
Cost (X)
Indexation allowance (X)
Capital gain/loss X/(X)

If the substantial shareholding exemption applies, the gain or loss will be exempt.

Repurchase of shares from an individual shareholder

The payment to an individual for the repurchase of shares by the company may be
treated either:
 As an income distribution; or
 As a capital distribution.
Income distribution treatment Capital treatment
Proceeds X Proceeds X
Subscription price (X) Cost (X)
Dividend X Capital gain/(loss) X/(X)

If cost of shares does not = If conditions are satisfied, the capital

subscription price treatment is mandatory.
Subscription price X
Cost (X)
Capital gain/(loss) X/(X)

PURCHASE OF OWN SHARES – BINA

Bina owned 45% of the shares in Sonnalple Ltd which is a property investment company.
She wished to sell her shares but the other shareholders did not want outside
shareholders to own shares in the company. The company agreed to a purchase of own
shares. Bina has never worked for the company.

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 4,500 shares, representing Bina's entire holding, were repurchased by the company. Bina
is a higher rate taxpayer and has used her dividend nil rate band. The relevant details
relating to the shares are as follows:
1 January 1991 Subscription £3
1 January 1997 Purchase by Bina £5
1 January 2024 Sale to company £23

Requirement
Compare the tax consequences of the purchase of own shares under the income and
capital distribution routes assuming either route could apply.

SOLUTION

Advantages of each route:

Income distribution:
 Only 8.75% tax to pay if remain a basic rate taxpayer after the distribution.
 Use of the dividend nil rate band, if available, to exempt the first £1,000.
Capital distribution:
 Annual exempt amount.
 Possible business asset disposal relief.

Capital distribution route

The capital distribution route is mandatory where either:
 The repurchase is for the benefit of the trade (and conditions are met); or
 The proceeds are used to settle an inheritance tax liability.

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 Repurchase for the benefit of the trade
All of the following conditions must be met for the capital route to apply:
 The company (purchaser) must:
– Be an unquoted trading or holding company of a trading group (AIM =
unquoted);
– Be purchasing the shares for the benefit of the trade; and
– Not be using the purchase as part of a scheme to avoid tax.
 The shareholder (vendor) must:
– Be resident in the UK;
– Have owned the shares for at least five years prior to sale (three years if
inherited);
– Not hold more than a 30% share (including associates*) in the purchaser or
any other company in the same 51% group immediately after the sale; and
– Have substantially reduced his shareholding (including associates) by holding
75% or less of the pre-sale holding.
*Associate includes spouse/civil partner and minor children.

SUBSTANTIAL REDUCTION IN SHAREHOLDING – WILMA

Wilma owns 16,000 of the 32,000 issued shares in A Ltd. The company buys back 4,000
of Wilma's shares.
Requirement
Is the substantial reduction in shareholding test met?

SOLUTION

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 SUBSTANTIAL REDUCTION IN SHAREHOLDING – BECKY
Becky owns 8,000 of the 20,000 issued shares in Luke Ltd. Luke Ltd has agreed to
repurchase half of her shares.
Requirement
Show whether Becky will meet the reduction in shareholding tests or not?

SOLUTION

Repurchase in order to settle IHT liability

Where the following conditions are satisfied, the capital route must apply:
 The person receiving the payments must use all, or virtually all, of the proceeds to
pay an IHT liability falling on him as a result of a death; and
 The IHT paid could not otherwise have been paid without causing undue hardship,
ie the sale of the shares back to the issuing company is the last resort; and
 The payment of the tax must be within two years of the death.

Permissible capital payment

A limited company may only purchase its own shares out of:
 Distributable profits of the company; or
 The proceeds of a fresh issue of shares made for the purpose of financing the
purchase.
A private company may make a payment out of capital on the purchase of its own shares
provided there is a directors’ statement and auditor’s report that support the payment,
together with a special resolution.
The permissible capital payment is shown below. Note that the company still needs
sufficient capital reserves.
£
Cost of redemption/purchase X
Less: proceeds of fresh share issue (X)
available distributable profits (X)
Permissible capital payment X

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 TAX IMPLICATIONS OF ADMINISTRATION & LIQUIDATION
A company which is in financial difficulty or is insolvent may proceed in one of four ways:
 Enter into a voluntary arrangement;
 Have an administrative receiver appointed;
 Enter administration; or
 Liquidate.
Detailed study of these procedures was included in the Knowledge Level Law syllabus
and is not repeated here; a brief revision of the definition of each procedure is provided
in your study manual.
From a tax perspective, only the appointment of an administrator or liquidator is
relevant.
Effect on accounting periods of appointing an administrator
On the appointment of an administrator:
 current accounting period ends; and
 a new period begins.
Future accounting periods end on the company's accounting date and when the company
ceases to be in administration.

Effect on accounting periods of winding up a company

a) An accounting period (AP) ends and a new one begins when winding up
commences.
b) Thereafter, APs end on each anniversary of the commencement to wind up the
company.
c) The final AP will end when the winding up is complete.
d) Ceasing to trade after a winding up has commenced will not bring an AP to an end.
e) Corporation tax is still charged on the profits arising during the winding up of a
company.
f) The liquidator becomes the beneficial owner of the company's assets. This is not
treated as a disposal for chargeable gains purposes.

ACCOUNTING PERIODS ON COMMENCEMENT OF

WINDING UP – TAYLOR LTD

Taylor Ltd has December year end and ceased trading 5 July 2022. The members passed
a resolution to wind up the company on 18 October 2022 and the winding up was
completed 2 February 2024.
Requirement
Show the accounting periods from 1.1.22 to completion of winding up.

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 SOLUTION

ACCOUNTING PERIODS ON COMMENCEMENT OF

WINDING UP – TAYLOR LTD (2)

How would your answer to the previous example change if the members passed the
resolution to wind the company up on 2nd June 2022 instead of 18th October 2022?

SOLUTION

Ceasing to trade
a) BA/BC in respect of plant and machinery.
b) Trading profits on sale of inventory.
c) Loss relief for trading losses (see below for use of losses on winding up).
d) Gains on disposal of chargeable assets which may be increased by SBAs claimed
on qualifying buildings.
e) Interest paid by individuals on loans to purchase shares in a close company will
cease to qualify for income tax relief.
Where cessation occurs in the 1st AP of liquidation, this rule applies from the start
of the next AP.
f) A close company whose trade has ceased will be liable to corporation tax at the
main rate (25%) from 1 April 2023 onwards.

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 TAX PLANNING WHEN WINDING UP A COMPANY

Uses of losses on winding up

a) Trading losses cannot be carried forward (although terminal loss relief may be
available for certain brought forward losses – see earlier in the Notes).
b) CY trading losses can be offset against total profits including gains.
– Realise gains prior to cessation, if possible, in order to offset the trading losses.
c) Terminal loss relief is available upon cessation.
d) Group relief - only losses accrued up to the date of commencement of the winding
up can be group relieved.
e) Capital losses - the restriction on the use of brought forward capital losses that
applies from 1/4/20, does not apply to gains arising on the disposal of a company's
assets during an insolvent liquidation.

f) Redundancy costs will increase the current year losses.

Distribution of assets in a winding up

Where the liquidation is not a result of insolvency, tax planning for the distribution of
assets is very important.
The final distribution of cash/assets to the shareholders on a winding up of a company
will have income tax, capital gains tax and corporation tax implications.
Distributions before winding up Distributions after winding up
commences commences
Treated as a normal dividend Treated as a capital disposal
Individual shareholder: Individual shareholder:
Income tax: Effective rate Capital gains tax:
BRT 8.75% BRT (No BADR) 10%
HRT 33.75% HRT/ART (No 20%
BADR)
ART 39.35% BADR* 10%

Corporate shareholder: Corporate shareholder:

No CT – dividends are exempt Gain chargeable to CT unless SSE applies

*Disposal must be within 3 years of

cessation and shares held for 2 years to
date of cessation

Striking off
Solvent companies can distribute their assets to their shareholders prior to applying to be
struck off, avoiding the need to appoint a liquidator (saves liquidation costs).

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 Distributions will be capital providing certain conditions are met:
a) The company intends to collect its debts and pay off its creditors in full (or has
already done so); and
b) The total amount of the distributions potentially within the scope of these
provisions is no more than £25,000.
If the distribution is more than £25,000 it will be treated as income. In this situation a
formal liquidation would be necessary for the capital treatment to apply.

VOLUNTARY LIQUIDATION – PARKER LTD

Parker Ltd is an unquoted trading company owned and run by three individuals.
The company was put into liquidation and the net asset value for distribution is as
follows:
£
Factory 255,000
Inventories, receivables, cash 171,000
426,000
Payables (21,000)
405,000
The share capital of the company is held as follows:
Number Cost %
£
Paula (acquired May 1984) 150,000 60,000 75
Peter (acquired August 1992) 42,000 26,000 21
Penelope (acquired September 1994) 8,000 1,800 4
In January 2024 the liquidators distributed the net assets of Parker Ltd.
In May 2023 each shareholder received a dividend of £1,000, being the final dividend for
the previous year.
Paula is an additional rate taxpayer and claimed £900,000 of business asset disposal
relief on a gain realised in October 2018. The October 2018 claim was the first time
Paula had claimed business asst disposal relief.
Peter is a higher rate taxpayer and has no other gains in 2023/24.
Penelope has property income of £12,570 but no other gains for 2023/24.
The RPI for December 2017 is 278.1.
Requirement
a) Explain the tax consequences of the liquidation for Paula and Penelope.
b) Consider whether the tax liabilities could have been reduced via a pre-liquidation
dividend payment.
c) Outline the difference in treatment if a UK company had owned the 8,000 shares
instead of Penelope.

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 SOLUTION

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 VOLUNTARY LIQUIDATION – PARKER LTD (2)
Using the information in the previous example:
Requirement
a) Explain the tax consequences of the liquidation for Peter.
b) Consider whether his tax liability could have been reduced via a pre-liquidation
dividend payment.

SOLUTION

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 SUMMARY

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 b) £ £
Sale proceeds 4,000,000
NBV (990,000)
Accounting profit 3,010,000
Sale proceeds IFA1 4,000,000
Cost of IFA1 (2,800,000)
1,200,000
Less not reinvested 4,000,000 – 3,500,000 (500,000)
Rolled over against IFA2 (700,000)
Taxed now 2,310,000

Cost of new IFA 3,500,000

Less rollover from IFA1 (700,000)
Base cost of new IFA for tax purposes 2,800,000

IFA ROLLOVER – DEF LTD

Disposal of IFA: £
Proceeds 40,000
Less NBV (20k – 15k) (5,000)
Profit 35,000
Less rollover relief (37k – 20k) (17,000)
Profit chargeable 18,000
Replacement IFA:
Cost 37,000
Less rollover relief (17,000)
Base cost 20,000

ENHANCED CAPITAL ALLOWANCES – HOWARD LTD

Capital allowances for the year ended 31 December 2023
Howard Ltd has purchased the production plant which qualifies for the 130% super
deduction during an accounting period which ends after 1 April 2023. The super
deduction % is apportioned as follows:
(100% + (30% 3/12)) = 107.5%
The super deduction available is £430,000 (£400,000 107.5%)
The air conditioning system is an integral feature, and as such would be allocated to the
special rate pool. The AIA of £1,000,000 should be allocated to part of this expenditure,
with the remaining £300,000 eligible for 50% FYA.
Therefore £1,150,000 (£1,000,000 + 50% × £300,000) allowances may be claimed in
the year ended 31 December 2023.

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 The balance of expenditure (£150,000) is allocated to the special rate pool and will be
eligible for 6% writing down allowances in the following period.
Disposal of each asset for £300,000 in the year ended 31 December 2024
As the accounting period commenced after 1 April 2023, selling the production machinery
will trigger an immediate balancing charge equal to the lower of disposal proceeds and
cost.
The balancing charge is therefore £300,000.
The disposal of the air conditioning system will trigger a balancing charge in relation to
the proportion of expenditure on which the FYA was claimed (£300,000/1,300,000) =
23%.
The balancing charge is therefore 23% × 50% × £300,000 = £34,500
The remainder of the proceeds (£265,500) would be deducted from the special rate pool.

FULL EXPENSE RELIEF - OAK LTD

FYA Main Pool SRP C/As

£ £ £ £
Y/E 30.6.23
TWDV b/f 450,000 300,000
Addition:
1.4.23 fleet of lorries 1,400,000
AIA (1,000,000) 1,000,000
Full expensing FYA 100% (400,000) 400,000

Disposal:
1.2.23 Printing press
B/C (W1) 1.225 100,000 (122,500)

WDA @ 18%/6% 0 (81,000) (18,000) 99,000

TWDV c/f 369,000 282,000

Total C/As 1,376,500

(W1) As the printing press was sold in an accounting period straddling 1 April 2023, the
balancing charge was calculated as an apportioned percentage of the number of months
before 1 April 2023 (100% + (30% 9/12)) = 122.5%, using the lower of disposal
proceeds and original cost.
Note. the AIA is claimed in priority to full expensing relief.

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 EXCESS EXPENSES OF MANAGEMENT – BETA LTD
Corporation tax computation for year ended 31 March 2024.
£
Property income (£59,400 – £16,400) 43,000
Profit on non-trading loan relationship 60,000
103,000
Less expenses of management – current period (52,500)
– brought forward (claim) (23,100)
Taxable Total Profits 27,400
Add Exempt ABGH distributions 1,080,000
Augmented profits 1,107,400
Corporation tax payable
£27,400 25% 6,850

Augmented profits for the accounting period are higher than £250,000 8/12 =
£166,667, so despite relatively low TTP the tax rate is 25%.
As the large company limit is also prorated for the short accounting period to £1 million
(£1.5 million 8/12) the company should pay CT in instalments. However, as the total
liability is less than £6,667 (£10,000 8/12) instalments are not required.

SUBSTANTIAL SHAREHOLDING – BALLYHOO LTD

Shareholding history
%
1 January 2016 20
31 January 2020 (15)
5
31 May 2023 (5)
NIL
31 January 2020
In the six year period prior to the disposal on 31 January 2020 Answer plc held at least
10% of the shares in a trading company for at least 12 months. The 10% test is
therefore satisfied, and the substantial shareholding exemption applies to this disposal.
31 May 2023
Answer plc held only 5% of Ballyhoo Ltd on 31 May 2023. However, there is a 12-month
period in the previous six years (32 months from 1 June 2017 to 31 January 2020) when
it held at least 10%.
The substantial shareholding exemption therefore applies to this disposal.

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 SSE OR SHARE FOR SHARE RELIEF? – COMPANY A
Yes.
Company A has received shares in C in exchange for shares in B and therefore normally
this would qualify under the share for share relief rules. The shares in C would then be
treated as having been acquired at the same price and on the same date as the original
shares in B.
However, if A had sold the shares for cash the substantial shareholding exemption
would have applied. As the SSE takes precedence, A is treated as having sold its shares
in B giving rise to an exempt gain or loss and having acquired the shares in C at their
market value.

S37 AND S45A LOSS RELIEF – JUMPER LTD

y/e y/e y/e

31.3.21 31.3.22 31.3.23
Trading income 10,000 Nil 14,000
Property income 2,000 2,000 2,000
Chargeable gains 3,000 – –
15,000 2,000 16,000
Less: s37 (3)(a) current year (2,000)
s37(3)(b) carry back (15,000)
s45A (15,000)
Nil Nil 1,000
Less qualifying donations Nil Nil (1,000)
Taxable Total Profits Nil Nil Nil
Unrelieved qualifying donations 1,000 1,000
Trading loss working
Loss of Y/E 31.3.22
Loss 35,000
Less: used under s37(3)(a) y/e 31.3.22 (2,000)
used under s37(3)(b) y/e 31.3.21 (15,000)
18,000
Claimed under s45A in Y/E 31.3.23 (15,000)
Remaining loss unrelieved – carried forward under s45A 3,000

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 TERMINAL LOSS RELIEF – COUNT LTD
As the company has ceased to trade, its losses cannot be carried forward. Thus, the best use
must be made of the losses under current year, carry back and terminal loss relief rules.
Note that losses of earlier accounting periods must be used before losses of later
accounting periods. It therefore follows that in exam questions losses should be dealt
with in chronological order.
Terminal loss relief
Losses occurring in the final twelve months of trade are eligible for carry back against
total profits of the previous three years on a LIFO basis. Some of the loss of the y/e
31.3.23 occurred in the final twelve months of trade and is eligible for terminal loss relief
(TLR). As some of the losses of the last twelve months occurred in the period 1.4.22 –
31.3.23, they may be carried back for three years from the start of that period which
means that the terminal losses may be carried back against profits arising in the full
period 1.4.19 – 31.3.20.
The loss of the last twelve months is:
y/e 31.3.23 = 9/12 £250,000 = £187,500
p/e 30.6.23 = £129,000
Loss of y/e 31.3.23
The losses relating to the y/e 31.3.23 must be dealt with first:
 £62,500 of the loss is not eligible for TLR and should be offset in the current year
and then carried back under s.37(3)(a) and (b) CTA 2010.
 The remaining £187,500 of the loss may be carried back to the previous three
years under s.39 CTA 2010.
Loss of P/E 30.6.23
The losses relating to the p/e 30.6.23 can be dealt with next:
 The full loss of £129,000 is eligible for TLR or extended carry back under s37(b)
but there are no profits left in the prior three years and so it cannot be carried
back.
 Instead, £22,000 of the loss may be offset in the current accounting period and
the remaining loss is unrelieved.
Trading loss
y/e y/e y/e y/e p/e
31.3.20 31.3.21 31.3.22 31.3.23 30.6.23
Trading income 65,000 81,000 34,000 – –
Chargeable gains – 22,000 – – 12,000
Profit on NTLR 15,000 15,000 17,000 18,000 10,000
80,000 118,000 51,000 18,000 22,000
CY – s.37(3)(a) – y/e 31.3.23 (18,000)1
CB – s.37(3)(b) – y/e 31.3.23 (44,500)2
TLR – s.39 – y/e 31.3.23 (63,000)5 (118,000)4 (6,500)3
CY – s.37(3)(a) – p/e 30.6.23 (22,000)6
Taxable Total Profits 17,000 – – – –

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 Loss of Y/E 31.3.23 £
Loss 250,000
1 Set off in current year – s.37(3)(a) CTA 2010 (18,000)
2 Set off in prior year – s.37(3)(b) CTA 2010 (44,500)
3 TLR – y/e 31.3.22 (6,500)*
4 TLR – y/e 31.3.21 (118,000)*
5 TLR – y/e 31.3.20 (63,000)*
*NB there is no need to prorate the profits, the profits of the whole
accounting period are available to offset the loss
Remaining loss unrelieved Nil
Loss of P/E 30.6.23 £
Loss 129,000
6 Set off in current year – s.37(3)(a) CTA 2010 (22,000)
NB TLR is not possible as no profits remaining in the three years prior to
the start of the AP –
Remaining loss unrelieved 107,000

RESTRICTION ON CARRIED FORWARD TRADING LOSSES

– DRAKE LTD
Drake Ltd can make a claim to offset the losses against the total profits of the year
ended 31 March 2024. The profits that can be relieved are restricted to £5 million plus
50% of £3 million (£6m + £2m – £5m) = £6.5 million, ie the relevant maximum.
The remaining losses of £5.5 million (£12m – £6.5m) can be offset (by a claim) against the
total profits of the year ended 31 March 2025 without restriction. Maximum profits to be
relieved equal £5 million plus 50% of £13 million (£15m + £3m – £5m) = £11.5 million.

RESTRICTION OF CARRIED FORWARD LOSSES –

DIFFERENT TYPES OF LOSSES – EGBIRD LTD

The company has a trading loss brought forward which can be relieved against total
profits and a capital loss brought forward which can only be used against capital gains.
The current period deficit is considered first, and a claim is made for current year loss
relief. It can be relieved against any profits, in this case relieve against other trading
profit, reducing it to £5.6 million (£7m – £1.4m).
Then consider the capital gain and the capital loss which can only be used against this
capital gain:
• If we allocate the deductions allowance against capital gains the relevant
maximum is £5 million plus 50% of £5 million (£10m – £5m), ie £7.5 million.
• Therefore, all of the capital loss brought forward may be used to relieve the capital
gain to £3 million (£10m – £7m).
• If the deductions allowance had been allocated against trading profits then the
relevant maximum for capital gains would have been £5 million (50% of £10m)
and £2 million of the capital loss would have been carried forward.

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 • If the current period deficit had been allocated against capital gains the gain would
have reduced to £8.6 million (£10m – £1.4m) and the relevant maximum to £6.8
million (£5m + 50% × £3.6m). The £3.6m is from £8.6m – £5m. Again, this would
have resulted in some of the capital loss being carried forward (£0.2m).
Finally, consider the total profits remaining of £8.6 million (£5.6m + £3m) and the
trading loss which can be used to relieve these under a s.45A claim.
• The relevant maximum is £5 million plus 50% of £10.6 million (£17m total profits –
£1.4m current year deficit – £5m), ie £10.3 million.
• The relief against total profits is limited to the relevant maximum less capital gain
already relieved by carried forward losses above, ie £3.3 million (£10.3m – £7m).
• £3.3 million of the trading loss is therefore relieved against total profits, reducing
them to £5.3 million (£8.6m – £3.3m). The remaining unrelieved trading loss is
£1.7 million (£5m – £3.3m) which is carried forward.
Generally, it is better to carry forward losses other than capital losses because their use
is much more flexible (ie against total profits) than capital losses (just against chargeable
gains).
The taxable total profits for the year ended 31 March 2024 of £5.3 million are subject to
corporation tax at 25%.

TERMINAL LOSS FOR CARRIED FORWARD LOSSES –

MALLARD LTD
Under the normal carried forward loss relief rules for ongoing trades, the loss relief in the
years ended 31 March 2023, 2024 and 2025 is restricted to the relevant maxima of (£5m
plus 50% of excess) in each case i.e, £8m in the year ended 31 March 2023, £10m in
2024 and £9m in 2025.
This would leave £9m of the loss remaining at 31 March 2025 which may be relieved
under the terminal loss relief rules in s.45F CTA 2010 against profits arising from 1 April
2022 (note the difference to the terminal loss relief rules for losses incurred in the 12
months prior to cessation).
£4m of the loss would be used in the year ended 31 March 2025 and the remaining £5m
in the year ended 31 March 2024.

y/e 31.3.23 y/e 31.3.24 y/e 31.3.25

£m £m £m
Total profits 11 15 13
Carried forward losses
(s45A restricted) (8) (10) (9)
Carried forward losses
(s45F) (5) (4)
Taxable total profits 3 0 0

Terminal loss relief for brought forward losses is only available against profits that are
subsequent to the original loss-making period. Losses are relieved fully (no partial claims)
on a LIFO basis.

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 LOSSES, SAVING TAX AND CASH FLOWS – LM LTD
Use of loss relief – CY then PY
LM Ltd must first make a claim under s.37(3)(a) to set its loss for the year ended 31
March 2024 against its total profits for that period before it is able to make a claim under
s.37(3)(b) to carry back the loss to the prior year:
Y/E 31.3.24
£
Profit on non-trading loan relationships 6,289
Chargeable gain 17,595
23,884
Less current year loss relief (23,884)
Taxable Total Profits Nil
Qualifying charitable donation unrelieved 8,750

Loss available for carry back:

(£117,485 – £23,884) 93,601
This would waste the tax relief on the qualifying charitable donation and would therefore
only save tax at 19% on £15,134 of the loss (£23,884 – £8,750). The overall tax saving
would be £2,875.
It could then make a claim under s.37(3)(b) to carry back the remainder of the loss to
the year ended 31 March 2023:
Y/E 31.3.23
£
Trading profit 506,500
Profit on non-trading loan relationships 30,749
491,100
Less b/f trading loss (15,400)
Less carry-back loss relief (93,601)
428,248
Qualifying charitable donations paid (11,250)
Taxable Total Profits 416,998
This would save corporation tax at 19% on £93,601. It would save tax of £17,784.
A current year claim followed by a carry back claim would therefore save total tax of
£20,659 (£2,875 + £17,784). It would mean there would be no corporation tax liability
for the year ended 31 March 2024 and lead to a repayment of part of the corporation tax
liability for the year ended 31 March 2023, if it has been paid yet. The liability for the
year ended 31 March 2023 was due to be paid on 1 January 2024.
Use of loss relief – carry forward
The loss could be carried forward and set against total profits of the year ended 31
March 2025. The profits would be subject to a higher rate of taxation.
LM Ltd is a marginal rate company (augmented profits between £50,000 and £250,000)
based on its projected TTP in the year ended 31 March 2025 of £245,000 and no
dividend income. With loss relief of £117,485, TTP would be £127,515, which is still in
the marginal rate. The offset of the loss would therefore save tax at 26.5% of £117,485
= £31,134. This tax is not due to be paid until 1 January 2026.

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 Conclusion
A current period claim and a carry back claim is 'all or nothing', ie you cannot choose
how much loss to offset in any year. The maximum amount of loss must be offset. There
is insufficient loss to make a current year and prior year claim and then allow some loss
to be carried forward. The whole loss would be offset by a current period/prior year
claim saving total tax of £20,659.
Given the low rate of tax saving in the current year (due to wasted qualifying charitable
donations), there is no tax advantage in making a current period claim and then carrying
forward the remainder. However, if cash flow is a serious problem this may be preferable
to having to borrow cash in order to pay the tax due on 1 January 2024.
Carrying forward the whole loss saves tax of £31,134, ie an effective rate of 26.5%.
This is a much greater saving than current period and carry back. However, it is later
relief and therefore we should determine the company’s cash flow requirements, ie
would they prefer earlier relief or a greater overall tax saving of £10,475 (£31,134 –
£20,659).

EXAMPLES OF INCOME AND EXPENDITURE

Debits – examples Credits – examples
 Foreign exchange losses  Foreign exchange gains
 Loan write-off  Profit on disposal
 Premium on a loan liability  Discount on a loan liability
 Incidental costs
 Impairment loss on an unpaid business payment

DEBT OR EQUITY? – BOB

Subscribe for shares Loan to company
£ £
Dividend received 5,000 Interest received 5,000
Income tax at 39.35% (1,968) Income tax (45% × 5,000) (2,250)
Net disposable income 3,032 Net disposable income 2,750

PURCHASE OF OWN SHARES – BINA

Income distribution route
Dividend income = 4,500 (£23 – £3) = £90,000
Tax charge (higher rate taxpayer) = 33.75% £90,000 = £30,375
Allowable loss
£
Proceeds (4,500 £23) 103,500
Less distribution (4,500 (£23-£3)) (90,000)
Deemed proceeds 13,500
Less cost (4,500 £5) (22,500)
Allowable loss (9,000)

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 Note. This allowable loss only arises under the income distribution route where the
shareholder originally paid more for the shares than their subscription price.
Capital distribution route
Chargeable gain
£
Proceeds (4,500 £23) 103,500
Less cost (4,500 £5) (22,500)
Gain 81,000
Tax charge = 20% (£81,000 – £12,300) = £13,740
As Bina is a higher rate taxpayer, none of the basic rate band is available to tax the gain
at 10%. Therefore, after deduction of the annual exempt amount, the balance of the
gain is taxable at 20%.

SUBSTANTIAL REDUCTION IN SHAREHOLDING – WILMA

Wilma Others Total
Before 16,000 16,000 32,000
Purchase by company (4,000) – (4,000)
After 12,000 16,000 28,000

Percentage before: 16,000/32,000 50%

Percentage after: 12,000/28,000 43%
75% of percentage before 37½%
As the post-sale holding is more than 75% of the pre-sale holding the test is not met and
the income distribution route will apply instead.

SUBSTANTIAL REDUCTION IN SHAREHOLDING – BECKY

Becky Others Total
Before 8,000 12,000 20,000
Purchase by company (4,000) – (4,000)
After 4,000 12,000 16,000

Percentage before: 8,000/20,000 40%

Percentage after: 4,000/16,000 25%
75% of percentage before 30%

As the post-sale holding is less than 75% of the pre-sale holding the test is met.

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 ACCOUNTING PERIODS ON COMMENCEMENT OF
WINDING UP – TAYLOR LTD

1.1.22 – 5.7.22 To the date trade ceased

6.7.22 – 17.10.22 Commencement of winding up brings an AP to an end
18.10.22 – 17.10.23 AP cannot exceed 12 months
18.10.23 – 2.2.24 Find AP ends when winding up complete

ACCOUNTING PERIODS ON COMMENCEMENT OF

WINDING UP – TAYLOR LTD (2)

1.1.22 – 1.6.22 Commencement of winding up brings an AP to an end

2.6.22 – 1.6.23 AP cannot exceed 12 months (ignore cessation)
2.6.23 – 2.2.24 Find AP ends when winding up complete

VOLUNTARY LIQUIDATION – PARKER LTD

a) Tax consequences of liquidation on individual shareholders
A chargeable gain arises on the disposal of shares
Paula Penelope
£ £
Consideration (£405k 75%/4%) 303,750 16,200
Cost (60,000) (1,800)
Gains 243,750 14,400
Less annual exempt amount (6,000) (6,000)
Gains 237,750 8,400

Paula has a further £100,000 of the business asset disposal relief lifetime limit
remaining which he may use to offset against this gain. The first £100,000 of the
gain will therefore be taxed at 10%. The balance will be taxed at 20%.
Penelope is not eligible for business asset disposal relief as her holding is less than
5%. However, as her income is offset by her personal allowance, she has her
whole basic rate band remaining and so her gain will be taxable at 10%.
Paula Penelope
Capital gains tax 37,550 840

b) If a pre-liquidation dividend had been paid to the shareholders

 Each individual would have been assessed on the dividend income. Penelope
would have tax to pay at 8.75% as she would be a basic rate taxpayer.
Paula would have tax to pay at 39.35%.
 The company would have then had fewer net assets to distribute after the
commencement of the winding up, which would have reduced the
chargeable gain on the final distribution.

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  The effective rate of tax on Paula's proceeds is less than 12%
£(37,550/303,750) taking into account the effect of business asset
disposal relief and the annual exempt amount. This is preferable to the
effective rate of tax of 39.35% that would have been charged on a pre-
liquidation dividend received by an additional rate taxpayer. The marginal
rate of tax on Paula's gains is only 20%, so therefore post-liquidation
distributions are preferable.
 Penelope pays income tax at a marginal rate of 8.75% on dividends,
whereas her marginal tax on gains is 10%. Receiving up to £8,400 in
pre-liquidation distributions would be beneficial to her, as this would
reduce the gain (taxable at 10%) to £nil and replace it with income
(taxed at 8.75%).
c) If a UK company owned 8,000 shares in Parker Ltd
 On a final distribution a chargeable gain of £12,748 would arise on the
company as indexation allowance runs to December 2017:
Company
£
Consideration (£405k 4%) 16,200
Cost (1,800)
14,400
Indexation to December 2017
(278.1 – 145)/145 £1,800 (1,652)
Indexed gain 12,748

 The gain would be subject to corporation tax. If the UK company had

owned at least 10% of Parker Ltd for 12 months out of the previous six
years, the substantial shareholding exemption would have been available
to exempt the gain. However, as this is only a 4% holding the gain would
be taxable.
 If a pre-liquidation dividend payment were made, the dividend receipt would
not be taxable in the hands of the company, although it could affect the tax
payment date as it would be treated as an exempt ABGH distribution.
 As a result, the final distribution gain would also be reduced. This would save
the company tax at its marginal rate.
 However, if Parker Ltd were to make a pre-liquidation dividend payment, it
could not be discriminatory. All shareholders would receive a dividend, which
in this case is not in the best interests of Paula.

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 VOLUNTARY LIQUIDATION – PARKER LTD (2)
a) Tax consequences of liquidation on individual shareholders
A chargeable gain arises on the disposal of shares
Peter
£
Consideration (£405k 21%) 85,050
Cost (26,000)
Gains 59,050
Less annual exempt amount (6,000)
Gains 53,050
Peter's entire gain will be taxable at 10% as it is eligible for business asset disposal
relief.
Peter
Capital gains tax 5,305

b) If a pre-liquidation dividend had been paid to the shareholders

 Peter would have been assessed on the dividend income. Peter would have
further tax to pay at 33.75% of the cash received.
 The company would have then had fewer net assets to distribute after the
commencement of the winding up, which would have reduced the
chargeable gain on the final distribution.
 The effective rate of tax on Peter's proceeds is less than 6% considering the
effect of business asset disposal relief and the annual exempt amount. His
marginal rate of tax on post-liquidation proceeds, ie amounts chargeable to
CGT, is 10%. This is preferable to the tax rate of 33.75% that would have
been charged on a pre-liquidation dividend received by a higher rate
taxpayer.
 Therefore, Peter would be worse off if he received a pre-liquidation dividend.

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 6
FURTHER CORPORATION
TAX

Learning outcomes
 Explain and evaluate the tax implications of group structures
 Identify legitimate tax planning measures to minimise tax liabilities
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions
 Calculate the impact of international expansion on UK tax liabilities
 Explain the taxation issues relating to business start-ups
 Explain the tax implications of inward investment in the UK
 Recognise the implications of double tax treaties, the OECD Model Tax Convention
and the OECD BEPS project
 Apply and advise on double taxation relief
 Apply, explain and evaluate issues relating to transfer pricing
 Determine, explain and calculate the corporation tax and diverted profits tax
liabilities for corporate entities
 Evaluate and advise on tax strategies to meet business objectives

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 TOPIC OVERVIEW

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 GROUPS AND CONSORTIA
GROUP RELATIONSHIPS

Group relief group

A group exists where:
 One company is a 75% subsidiary of another company; or
 Both companies are 75% subsidiaries of a third company.
A group relief group may include non-UK resident companies but losses may normally
only be surrendered between UK resident companies (exceptions covered later).

Chargeable gains group

A group includes:
 A 'principal company' and its 75% subsidiaries and their 75% subsidiaries and so
on.
 Each subsidiary must also be an 'effective 51% subsidiary' of the principal
company.
Note. A subsidiary company cannot also be a principal company for chargeable gains
groups; hence a company may be part of more than one group relief group but only one
gains group.
All companies, regardless of UK residency status, may belong to a chargeable gains
group (exceptions to reliefs covered later).

GROUP RELATIONSHIPS – J LTD

J Ltd owns 75% of the ordinary shares in K Ltd and 85% of the ordinary shares in L Ltd.
K Ltd owns 80% of the ordinary shares in M Ltd.
M Ltd owns 75% of the ordinary shares in O Ltd.
Requirement
Identify the group relief and chargeable gains group/s.
How many related 51% group companies does J Ltd have?

SOLUTION

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 Current period group relief
Set off the loss of the surrendering company against the TTP of the claimant company
(net of any other losses that are required to be offset first).
Group relief can be surrendered for the current year in respect of the following:
1 Trading losses;
2 Deficit (ie net debit) on non-trading loan relationships;
3 Excess qualifying charitable donations;
4 Excess property business losses; and
5 Excess expenses of management of a company with investment business.
Losses carried back cannot be group relieved. Brought forward losses can be surrendered
as group relief, subject to certain conditions (see later).
A surrendering company can surrender any amount of (1) and (2) above without using
these items against its own profits first.
Payment for group relief (up to £1 for every £1 of loss surrendered) is ignored for tax
purposes.
Overlapping (corresponding) accounting periods
The surrendering company's losses can only be set against the available profits of the
claimant company for a corresponding accounting period.
If group companies prepare accounts to different dates then losses and profits will need
to be time apportioned.

'A' is the overlapping (corresponding) period for which a claim can be made.

Carried forward group relief

The following types of brought forward losses may be group relieved:
1 Trading losses available for offset against total profits;
2 Deficit (ie net debit) on non-trading loan relationships;
3 Property business losses; and
4 Management expenses of an investment business.
The surrendering company may surrender any amount of the above, however, brought
forward losses may only be surrendered if they could not be used by the surrendering
company (ie only excess brought forward losses can be surrendered as group relief)
The claimant company's available profits are calculated after the deduction of current
period group relief and its own brought forward losses.

Group deductions allowance

Each group of companies is only entitled to one deductions allowance for a 12 month
period. The allowance can be allocated in any way between the group members. If a
company is a member of one group and the ultimate parent of another, it may only be
allocated a share of the deductions allowance for the group of which it is a member.
If companies in the group have different accounting reference dates, the maximum
allocated deductions allowance must be pro-rated appropriately.

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 Brought forward loss relief for the group as a whole is capped at a maximum of the
deductions allowance of £5 million plus 50% of profits in excess of this.

GROUP RELIEF – CARRIED FORWARD LOSSES – E PLC

E plc has a wholly owned subsidiary, F Ltd.
In the year ended 31 March, the companies' results are:
E plc F Ltd
£m £m
Trading income 23 15
NTLR profits 6
Property income 2
Trading loss brought forward (23) (6)

E plc, the nominated company, has allocated £4m of the deductions allowance to its
trading profits and £1m to F Ltd's trading profits.
Requirement
Calculate and explain the maximum amount of group relief that F Ltd can claim from E
Plc.

SOLUTION

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 Group transformations
Companies joining or leaving a group
Only profits or losses arising after a company joins or before it leaves are available for
current period group relief purposes.
Profits and losses are normally time apportioned.
The maximum group deductions allowance to be allocated to the joining or leaving
company must be pro-rated to correspond with the period that company was part of the
group.
If there are 'arrangements' for sale in place prior to the date of sale of shares, group
relief will cease at that earlier date.

Change in ownership with or without a major change in the trade

Where there is a change in ownership of a company, it may have brought forward losses
eligible for group relief at the acquisition date.
Such losses are ineligible for carried forward group relief for five years following the
change in ownership, after which they will become eligible for relief unless there is a
major change in the nature or conduct of the trade (see earlier in these Notes).
There is no such restriction for losses surrendered to the acquired company from its new
group.

The impact of a chargeable gains group

Nil gain/nil loss transfers

Transfer of a chargeable asset from one group company to another is deemed to take
place at no gain and no loss to the transferor company:
Deemed proceeds A+B
Cost to transferor (A)
Indexation allowance for transferor up to date of transfer (or (B)
December 2017 if earlier)
NG/NL
Where assets qualifying for SBAs are transferred between members of a chargeable
gains group, no SBA adjustment is made on the transfer. Instead, the receiving company
is treated as if they had always owned the asset, and all SBAs claimed by the group are
added to the proceeds on an eventual disposal to a third party.

Reallocation of chargeable gains or losses to other group companies

An election can be made to reallocate a chargeable gain or an allowable loss (or any part
of the gain/ loss) made by one group company to another group company.
This enables the group to utilise capital losses.
Both the companies involved in the election must be members of the group at the time
the gain/loss being allocated arose.
Joint election by both group members within two years of the end of the accounting
period in which the actual disposal was made.

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 Group wide rollover relief
a) Group companies treated as carrying on a single trade for rollover relief purposes.
b) Gain on a qualifying asset realised in one group Co can be rolled over against
purchase of a qualifying asset in another group Co.

Company leaving the group – degrouping charge

A degrouping charge (or allowable loss) arises when:
a) A company ceases to be part of a gains group within six years of a nil gain/nil loss
transfer; and
b) The departing company either:
 Still owns the asset; or
 Owns a replacement asset against which a gain on the first asset has been
rolled over.
Proceeds = MV at NG/NL transfer X
Cost to transferor (X)
Indexation allowance for transferor up to date of NG/NL transfer (or (X)
December 2017 if earlier)
Degrouping charge X
The departing company acquires at the market value at the date of the no gain/no loss
transfer.
See below for treatment of the degrouping charge.

Treatment of the degrouping charge

Degrouping charge as a result of a qualifying share disposal

The degrouping gain or loss is treated as follows:
a) A degrouping gain is added to the sales proceeds received on the disposal of the
shares; and
b) A degrouping loss is added to the allowable cost on the disposal of the shares.

Qualifying share disposals

A share disposal is qualifying if it is:
a) Within the corporation tax regime; or
b) Made by a non-resident company which could have claimed the substantial
shareholding exemption had it been subject to UK corporation tax.
Interaction with substantial shareholding exemption
If the qualifying share disposal is exempt as a result of the substantial shareholding the
degrouping charge will also be exempt.

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 QUALIFYING SHARE DISPOSAL – F LTD
F Ltd acquired a freehold property in April 1992 for £60,000. On 31 August 2017, the
property was transferred to G Ltd, a wholly-owned subsidiary of F Ltd, when the
property was valued at £140,000. G Ltd's only assets are investment properties. On
30 December 2023, F Ltd sold its shares in G Ltd to an arm's-length purchaser for £1.5m.
The companies prepare accounts to 31 December each year.
Assume an indexation factor of 0.905 from April 1992 to August 2017.
Requirement
a) Explain, with calculations, the effect of the transactions.
b) How would your answer to (a) change if F Ltd and G Ltd were both trading
companies?

SOLUTION

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 QUALIFYING SHARE DISPOSAL – D LTD
D Ltd has two wholly owned subsidiaries, E Ltd and G Ltd. On 1 November, D Ltd sold its
shares in G Ltd.
At this date G Ltd owned a property transferred to it four years earlier by E Ltd, worth
£700,000. At the date of transfer, it had an indexed cost of £150,000 and was worth
£500,000.
Requirement
Explain the corporation tax consequences, in relation to the property, of the sale of the
shares in G Ltd by D Ltd and identify any reliefs that may be available.

SOLUTION

Interaction with share for share rules

If the disposal of shares is in exchange for shares in another company, the effect is as
follows:
 A degrouping gain is deducted from the base cost of the original shares; and
 A degrouping loss is added to the original cost.

Degrouping charge with no qualifying share disposal

Where a company leaves the group other than by a qualifying share disposal, for
example, by the company or its parent issuing shares to someone other than its existing
shareholder, in this case the degrouping charge arises in the company which leaves the
group.

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 Just and reasonable claim
A company may make a claim to reduce a degrouping charge if it is just and reasonable
to do so. A claim will be successful where the amount of degrouping gain is reflected in
the consideration for the shares.

Exemptions from the degrouping charge

a) Demergers/mergers (subject to certain conditions - see later in notes)
b) Group company ceases to exist (eg parent company leaves group when subsidiary
is liquidated)
c) Transferor and transferee companies leave the group together

Assets standing at a loss

If a degrouping loss arises as a result of a qualifying share disposal to which the SSE
applies, the loss will not be allowable.
It is possible to plan against this if the disposal of shares can be done in such a way as it
is not a qualifying share disposal and so the degrouping loss arises in the company
leaving the group (ie SSE will not apply to the loss).

Surrender of degrouping charge

A degrouping charge may be surrendered within a group in the same way as any other
gain or loss.

Pre-entry capital losses

An allowable capital loss on an actual disposal made before the company joins the group
is a realised pre-entry loss.

Determining the pre-entry capital loss

Where a company deducts losses from gains in an accounting period, restricted losses
are those which were realised when it joined the group.

Using a pre-entry capital loss

A pre-entry loss can only be set off against a gain arising either:
a) Before the company joined the group; or
b) From the disposal of an asset owned when the company joined the group; or
c) From the disposal of an asset acquired after the company joined the group, where
that asset was both:
 Acquired from outside the group; and
 Used by the company for the purposes of its trade.

Capital loss buying – Targeted anti-avoidance rule

Change in ownership as part of an arrangement designed to give rise to a tax advantage
in relation to the offset of capital gains and losses:
 Targeted anti-avoidance rule instead of the pre-entry loss rules outlined above.
– No losses can be offset against pre-entry gains and pre-entry losses are not
allowable losses.

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 Liquidation of holding company:
Group relief group ceases when liquidator appointed.
Capital gains group continues.

Liquidation of a subsidiary:
Parent company owns shares until final dissolution.
Subsidiary remains part of group for all purposes until final dissolution.

TAX PLANNING
Chargeable gains groups
Capital gains should be offset against capital losses where available.
Identify acquisitions within the group that allow group rollover relief to defer a gain.
If any gains are being charged in a large company, consider reallocating them to a
company that does not pay tax by quarterly instalments for a cash flow advantage.
Group relief
You need to be able to identify the optimal relief available.
Issues to consider when allocating relief in a group:
 Do not waste double tax relief. Leave sufficient taxable profits to ensure full double
tax relief is available.
 Loss relief in one particular company may remove the need for instalment
payments if AP fall below the upper limit. It may also mean instalments are paid
later if a company can be removed from 'very large' status.
 If companies have non-coterminous year ends, relief in an earlier period may assist
with cash flow.
 Loss relief should prioritise the companies in which the parent company has a
higher shareholding as loss relief to a 100% subsidiary (as opposed to, say, an
80% subsidiary) will generate a higher tax saving for the group's shareholders.
 Allocation of the deductions allowance between group members should maximise
relief for capital losses, which can only be offset against chargeable gains.
 Where profits and losses exceed £5m each company should, if possible, use its
"relevant maximum".
 Carrying losses forward may be beneficial due to the rising rates of corporation tax
from 1 April 2023; however this must be weighed against the cash flow
advantages of immediate loss relief

Understanding group relationships will help you to demonstrate adds value behaviour
as you anticipate the various companies needs and requirements, you will be able to
identify opportunities to use losses and reliefs in the most tax efficient manner in order
to save the group tax and assist with cash flows.

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 TAX PLANNING WITH GROUP RELIEF – U LTD
U Ltd owns 100% of V Ltd and W Ltd. All group companies have been members of the
group for several years. All prepare accounts to 31 March each year and the results for
the year ended 31 March 2024 are as follows:
U Ltd V Ltd W Ltd
£ £ £
Trading income/(loss) 160,000 550,000 (75,000)
Property income 5,000 20,000 NIL
Chargeable gains NIL NIL 65,000
Qualifying donations (3,000) (11,000) NIL

V Ltd had taxable total profits of £800,000 and W Ltd had taxable total profits of £20,000
in the year ended 31 March 2023.
Requirement
Show the options for using the loss made by W Ltd. Identify the most tax efficient use of
the loss, assuming that the loss is to be relieved as soon as possible, and show the
taxable total profits for each company after relief.

SOLUTION

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 GROUP TAX PLANNING – ALPHA LTD GROUP
EXAMPLE Alpha Ltd is a UK resident company. It has a 31 March year end. It owns the following
subsidiaries:
Bravo Ltd Acquired 1/1/1990 March year end 100%
Charlie Ltd Acquired 30/4/2007 December year end 80%
Delta Ltd Acquired 1/4/2023 March year end 80%
Charlie Ltd owns 80% of Echo Ltd which it acquired before it joined the Alpha Ltd group.
The most recent results for the group are as follows:
Alpha Ltd YE 31/3/24 Trading loss £(140,000)

Bravo Ltd YE 31/3/24 Overseas property income (gross) £100,000

Capital gain 1/2/24 £120,000

Charlie Ltd YE 31/12/23 Trading income £110,000

Delta Ltd YE 31/3/24 Trading profit £150,000

UK property income £100,000
Capital loss bf at 1/4/23 £(30,000)
BF Trading loss (200,000)

Echo Ltd YE 31/12/23 Trading loss £(10,000)

Capital loss 30/9/23 £(40,000)
Bravo Ltd's overseas property income was subject to tax overseas of £17,100.
Bravo Ltd's gain arose on the sale of a factory used in its trade for £500,000. Shortly
after Bravo Ltd sold its factory, Alpha Ltd acquired a new office building for £440,000.
Alpha Ltd would like the group to utilise its losses for the benefit of the group as soon as
possible.
Requirement
You are required to calculate the TTP for each company assuming beneficial claims and
elections are made. Explain your treatment of the losses in the group.

SOLUTION

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 OVERSEAS ASPECTS OF GROUPS

Group loss relief

A group relief group may include non-UK resident companies but losses may normally
only be surrendered between UK resident companies (see exceptions below).

UK permanent establishment of non-resident company

Non-resident company which trades in the UK through a PE, has income from a UK
property business after 6 April 2020 or has a chargeable disposal of UK land from 6 April
2019 can:
 Claim group relief against its chargeable profits from other UK group members
 Surrender losses relating to UK chargeable activities to other UK group members*
*This is provided that the loss is not available for relief overseas.

Chargeable gains group

All companies, regardless of UK residency status, may belong to a chargeable gains
group.
But reliefs only apply to:
 UK resident companies; and
 Chargeable assets owned by non-resident companies where the gain would be
within the charge to corporation tax, eg UK assets used in a trade carried on by a
UK branch of an overseas company.

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 CONSORTIUM RELIEF

Main principles
Any amount eligible for group relief (including brought forward losses) can also be
surrendered from or to a consortium company.
A consortium exists where:
 20 or fewer companies ('consortium members');
 each own at least 5%; and
 jointly own at least 75% of the ordinary share capital of another UK resident
company ('consortium company').
Losses may be surrendered, in either direction, between a consortium member and the
consortium company.
Losses may not be surrendered between the consortium members.
All companies, whether resident or non-resident, may be taken into account in
establishing a consortium.

Loss in consortium company

Where the consortium company makes a loss, the maximum surrender is the lower of:
 Available loss = consortium member's % holding in the consortium
company consortium company loss
 Available profits = all of the taxable total profits of the consortium member
If the consortium company has a trading loss:
 Assume a current year claim is made against any other profits in that company
before a consortium claim is made. (No current year claim need actually be made.)

CONSORTIUM RELIEF – LOSS IN THE CONSORTIUM

COMPANY – PURCELL LTD (1)

Purcell Ltd is owned by a consortium of companies as follows:

Handel Ltd Bach Ltd Vivaldi Ltd

15% 45% 40%

Purcell Ltd

These companies' results in the year to 31 March are:

Tax adjusted trading
profit/(loss)
Handel Ltd £28,000
Bach Ltd £48,000
Vivaldi Ltd £6,020
Purcell Ltd £(36,000)

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 Requirement
a) What is the maximum amount of consortium relief that Purcell Ltd can surrender to
each of the consortium members?
b) How would your answer to (a) change if Purcell Ltd has property income of
£20,000 in addition to its trading loss of £36,000?

SOLUTION

Loss in consortium member

Where the consortium member incurs a loss, the maximum surrender is the lower of:
a) Available loss = all of the loss of the consortium member
b) Available profits = consortium member's % holding in the consortium
company consortium company taxable total profits

CONSORTIUM RELIEF – LOSS IN THE CONSORTIUM

MEMBER – PURCELL LTD (2)

Following on from the previous example (ignoring part (b)), in the next year, Handel Ltd
makes a tax adjusted trading loss of £100,000 and Purcell Ltd makes a taxable trading
profit of £50,000.
Assume that any losses not surrendered via consortium relief were carried back by
Purcell Ltd.
Requirement
What is the maximum amount of loss that Handel Ltd can surrender to Purcell Ltd?

SOLUTION

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 CONSORTIUM RELIEF – S LTD
A Ltd B Ltd C Ltd D Ltd
30% 30% 20% 20%

S Ltd
S Ltd has a trading loss of £1 million. A Ltd has profits of £500,000.
Requirements
a) What is the maximum consortium relief claim possible by A Ltd?
Same structure as above but S Ltd has a trading profit of £500,000 and A Ltd has a
trading loss of £100,000.
b) What is the maximum consortium relief claim?

SOLUTION

SUBSTANTIAL SHAREHOLDING EXEMPTION FOR GROUPS

Trading group

Investing company
The investing company must:
a) Own a substantial shareholding for
b) ≥ 12m of last 6 years

Company invested in
The company invested in must be either a:
a) Trading company; or
b) The holding company of a trading group or subgroup
at the times referred to above.

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 Trading company:
≤ 20% of turnover, profits, management time etc relating to investment activity.

Trading group
a) Include subsidiaries where own > 50% shares
b) Aggregate group activities for 20% test
c) Subsidiaries where own ≤ 50% treated as an investment
d) A subgroup exists where a group of companies would be a trading group except
for the fact that one of them is a 51% subsidiary of another company.

Nil gain, nil loss transfers of shares

SSE does not apply.
Treated as a no gain/no loss disposal in the same way as the disposal of any other asset.
Where shares are subsequently disposed of outside of the group, aggregate the group
ownership period. This can also include ownership by a non-UK resident group company
(even though the NG/NL rule would not have applied to the share transfer).

Group share ownership and transfers of trade between group

members

Ownership percentage
The interests of group companies can be aggregated when determining if a 'substantial
shareholding' is held.
Group means 51% subsidiary as above.

Length of ownership
Where a trade is transferred between 75% group members (a 'hive down'), the length of
ownership condition for SSE will be deemed to be satisfied where the trade had been
carried out in the group for at least 12 months prior to the transfer of the trade. We will
see this issue again in Topic 7.

Share for share relief in a chargeable gains group

SSE does not apply to share transfers in a gain group – no gain/no loss applies.
However, if the transfer takes place in exchange for shares, the no gain/no loss rule
cannot apply so paper for paper treatment applies.
Illustration:
Company A owns 100% of company B and C.
Company A transfers its shareholding in company B to company C in exchange for an
issue of shares in company C.
There is a disposal of shares by company A. The SSE cannot apply as the disposal takes
place in a gains group.
The consideration is in the form of shares so the paper for paper treatment takes priority
over the no gain/no loss rules. The new shares company A acquires in company C are
treated as standing in the shoes of the company B shares.
Company C acquires the shares in company B at market value.

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 TRANSFER OF OTHER ASSETS

Transfer of assets to or from trading stock

Capital asset transferred to trading stock

Co A Co B
NG/NL

Capital asset Trading Stock

‘Sold’ at MV to stock
Stock cost = MV
Gain = MV – NG/NL cost
If elect transfer at Cost + IA
Gain = trading profit when stock sold

INTRA-GROUP TRANSFER FROM FIXED ASSET TO

TRADING STOCK – ALPHA LTD

A chargeable asset costing £65,000 (including indexation) is to be transferred from Alpha

Ltd to Beta Ltd when its value is £78,000. Alpha Ltd holds it as a fixed asset but it will be
trading stock for Beta Ltd, which will sell it for £88,000.
Requirement
What are the tax consequences of this transfer?

SOLUTION

Trading stock transferred to capital asset

Co C Co D
NG/NL

Trading Stock Capital asset

‘Sold’ at MV to capital
Trading Profit = MV – Cost
Cost of capital asset = MV

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 HB2023

252
Groups and consortia
SUMMARY

Overseas aspects Substantial shareholding

Group relationships Tax planning Consortium relief Transfer of other assets
of groups exemption for groups

Group relief groups Chargeable gains groups Reallocate gains v Losses normally only 75% owned by no more Not applicable if NG/NL applies Transfer to/from trading
capital losses surrendered between than 20 companies each stock have special rules

Topic 6: Further corporation tax

75% direct and indirect Transfer capital assets UK companies. owning 5% Takes precedence over share
interest at NG/NL Move trade/other losses for share relief
considering: If NR company has UK Consortium company and
Surrender any amount of: Can elect to transfer Rising tax rates in future PE or UK land gains consortium member may Applies if trade assets used
Trading losses CY capital gain Avoid wasting DTR can use relief surrender/claim losses within same group for 12
NTLR deficits or loss to any company Avoid paying by months are transferred to the
restricted by potential CY
in gains group: instalments company (e.g. Hive down)
claim
Surrender excess: • Utilise capital losses
QCDs • Ensure net gains
Property losses taxed in non-large
Management expenses company

Utilise against
Rollover relief:
corresponding accounting
period • Gains group treated as
single unit for ROR
Foreign aspects: • Applies to tangible assets
and IFAs

These materials are provided by BPP

UK PE of non-res
company can group
relieve Degrouping charge:
• If leave group < 6 years of NG/NL
• Gain computed as at date of NG/NL
• Adjust sale proceeds if part of
qualifying share disposal
• Degrouping charge will be exempt
if SSE applies

Pre-entry losses:
• Not available to the group
Restricted use
 INTERNATIONAL EXPANSION
COMPANY RESIDENCE

UK residence
A company is liable to UK corporation tax on its worldwide profits if it is resident in the UK.

UK resident: A company is UK resident if either:

 It is incorporated in the UK; or
 Its real business is carried on in the UK. The real business is carried on where
central management and control is situated.

A company is not resident in the UK for all tax purposes if it is treated as non-UK resident
by any double taxation arrangement.

Residence and e-commerce

For corporation tax purposes, a country will charge tax on the profits of a permanent
establishment (PE) based in that country.
The current situation for corporation tax purposes may be summarised as follows:
Website software/data Server equipment location
location
OECD model agreement Not PE Could be a PE
UK Not PE Not PE

NON-UK RESIDENT COMPANIES

Corporation tax charge

A non-UK resident company is liable to corporation tax in the UK only if:
 it is carrying on a trade in the UK through a PE; or
 it has UK property income or profits of dealing in/developing land in the UK (even
if no PE in the UK); or
 it has chargeable gains on assets that are UK land or property-rich assets.
A company has a PE when either:
a) It has a fixed place of business through which the business of the company is
wholly or mainly carried on; or
b) An agent acting on behalf of the company has, and habitually exercises, authority
to do business on behalf of the company.

Charge to corporation tax - trading through PEs

Profits charged to corporation tax comprise:
a) Trading income;
b) Income from property or rights held by the PE; and
c) Chargeable gains on assets situated in the UK used in or for the purposes of the
trade/PE at or before the time when the gain accrued.

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 CHARGE TO UK CORPORATION TAX
EXAMPLE Which of the following activities would be within the charge to UK corporation tax?
Seventrees SARL, which operates a workshop in the UK producing porcelain dining
services which are then exported to overseas customers.
Global IT Sp zoo provides global IT solutions to customers. The company employs a
sales agent – Zofia – in the UK who visits customer locations, negotiates, and signs
contracts. As Zofia works from customer sites, she does not have a permanent office.
Greenhouse Inc which has a UK warehouse used for the storage of goods sold to UK
customers via its website.
Fiesta SA which owns an office block in Bristol that it rents out to local businesses

SOLUTION

Charge to corporation tax on gains - UK land and property rich

assets
The gain arising will depend on whether the asset sold is residential land, or non-
residential land or a property rich asset.

UK non-residential
UK residential land land or property rich
assets
Gain arising after 1 April 2015 1 April 2019
Calculation (default) Proceeds - MV on 1/4/15, Proceeds - MV on 1/4/19,
or cost if acquired later or cost if acquired later
Alternative calculations Gain or loss for full period Gain or loss for full period
(election) of ownership, or of ownership (note 1)
Whole gain time
apportioned, with gain
post-1/4/15 chargeable

Note 1. If this election is made and a loss arises, the loss is allowable for land but not
for property-rich assets.

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 CHARGE TO INCOME TAX
Income from sources within the UK which is not subject to corporation tax is subject to
income tax.

ESTABLISHING AN OVERSEAS BUSINESS

Permanent establishment abroad

Any company resident in the UK is liable to UK corporation tax on its worldwide income.
A UK company will usually suffer double taxation on trading profits accruing to any 'PE'
which it maintains abroad.

Permanent establishment or subsidiary abroad?

Overseas permanent
establishment (PE) Overseas subsidiary
Legal status Part of UK company = single Separate legal entity
entity
Additional related No Yes
51% group
company?
Income taxed in PE profits Dividends received
the UK company = Trading profits unless = Usually not taxable
election made to exempt
profits from UK CT
Basis of Arising (accruals) basis Remittance basis if in unlikely
assessment event dividends are taxable
Profits taxed Yes Yes
overseas? DTR available in UK DTR available in UK if
dividends taxable
Overseas trading Unrelieved losses offset against Overseas losses cannot be
losses UK company's profits in surrendered to a UK company
accordance with UK loss relief
rules if PE is part of UK trade
and election to exempt not
made
If PE is separate trade
operating wholly overseas,
then losses may only be offset
against future profits from that
PE's trade
Capital allowances UK allowances available unless Overseas allowances available
election to exempt profits as per local rules. No UK
made allowances available
Transfer of assets No gains or losses arise. No Gains/losses and balancing
to the foreign balancing adjustments adjustments arise
entity

If the foreign country has a lower rate of company taxation than the UK:
 Non-UK resident subsidiary if profits are anticipated; but
 Use a PE if losses are likely to arise.

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 Election to exempt income and losses
A company may elect to exempt all its foreign PEs Taxable Total Profits or Losses from
UK corporation tax.
The election applies to all the foreign PEs of that company and is irrevocable.
No relief available for foreign PE losses.

Making an election
Effective from the start of the accounting period after the one in which the election is
made.
Exempt profits include any capital gains attributable to the foreign PE and taxable under
the treaty.

Considerations in making an election

As the election to exempt profits of foreign PEs is irrevocable once made, the following
points should be considered:
a) Future profit projections.
b) Losses of PEs to which an election applies are not deductible for UK tax purposes.
c) Likely to be beneficial if the company has low tax PEs which do not fall foul of the
anti-diversion rule.
d) Even if the company has high tax PEs, if it has UK losses an election may be
beneficial, as in that case the election will preserve the UK losses for use against
future UK profits rather than being wasted against overseas profits which would be
fully sheltered by DTR.

Incorporating an overseas permanent establishment

1 Set up a new company resident abroad and
2 Transfer the PE's net assets into the new company in exchange for shares.
3 PE will then cease to trade.
Implications:
a) BA/BC on the plant and machinery transferred to the non-UK company.
b) Chargeable gains or losses in the hands of the UK company on disposal of the
assets of the PE.
Incorporation relief for incorporation of an overseas permanent establishment
Chargeable gains on incorporation can be postponed where:
a) The trade of a foreign PE is transferred to a non-UK resident company with all the
assets used for that trade except cash; and
b) The consideration for the transfer is wholly or partly securities (shares or shares
and loan stock); and
c) The transferring company owns at least 25% of the ordinary share capital of the
non-UK resident company; and
d) A claim for relief is made.
Consideration is wholly securities = Full postponement of the net gains
Part of the consideration is in a form other than securities (eg cash) defer:

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 MV of securities at date of transfer
Net gain
MV of total consideration at date of transfer
The postponement may be indefinite.

Crystallising of deferred gains

The gain becomes chargeable on the UK company which owned the PE if:
a) It disposes of any of the securities received on the transfer (at any time). If only
some of the shares are disposed of, the same proportion of the deferred gain will
become chargeable; or
b) The non-UK resident company within six years of the transfer disposes of any of
the assets on which a gain arose at the time of the transfer.
gain on asset at incorporation
Remaining balance of net gain deferred
gross gains at incorporation
Similar provisions apply to intangible fixed assets which were originally acquired on or
after 1 April 2002.

INCORPORATING A FOREIGN PE – GRAPE LTD (1)

Grape Ltd, a UK resident company, used to trade through a foreign branch in Mexico.
This trade was transferred to a US subsidiary, Raisin Inc, in 2019. The terms were that
Raisin Inc would issue shares (valued at £600,000) for 90% of the consideration and pay
the balance in cash. On transfer of the trade the chargeable capital assets gave rise to
gains of £375,000 and losses of £75,000.
In 2021, Grape Ltd sold 55% of the shares it received in Raisin Inc for £825,000. In
January 2024, Raisin Inc sold assets on which gains amounting to £150,000 arose on the
transfer in 2019.
The substantial shareholding exemption does not apply.
Requirement
Show the amounts of any gains that become chargeable. Ignore indexation.

SOLUTION

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 INCORPORATING A FOREIGN PE – GRAPE LTD (2)
Using the information in the example above.
Requirement
Calculate the chargeable gain that will arise if, a month later, Raisin Inc sells assets on
which a gain of £75,000 arose in 2019.

SOLUTION

COMPANY MIGRATION

Changing UK residence
There are two ways a company can 'migrate', ie become non-UK resident:
 A company which is incorporated outside the UK but which is managed and
controlled in the UK will migrate if it relocates its central management and control
outside the UK and will cease to be UK resident.
 A UK - incorporated company can become resident in another country under that
country's tax law, and non-UK resident due to terms contained within the double
tax agreement.

Implications of migration

Chargeable gains on migration

Deemed disposal and reacquisition of all assets at market value – 'exit charge'
There is no deemed disposal of assets which:
a) Are situated in the UK immediately after the company becomes non-UK resident;
and
b) Are used at any time thereafter in a trade carried on in the UK through a PE, or are
UK investment properties / property-rich assets.

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 A charge to tax does not arise on these assets which remain within the UK trade or
property investment business until:
a) The UK assets are actually disposed of; or
b) The UK PE trade / property business ceases; or
c) The assets become situated outside the UK.
Thus the exit charge is confined to those assets which leave the scope of UK corporation
tax on migration (ie overseas assets) or are held as investments.

CHARGEABLE GAINS ON MIGRATION - MELONE SA

Melone SA, a company incorporated in Argentina, migrated from the UK on 1 October

2023 when its central management and control was moved from London to Buenos
Aires. At that date it held two chargeable assets.
1. An investment property in Argentina on which a gain of £335,000 would have
arisen if sold for its market value.
2. A factory in the UK which it used for its trade and on which a gain of £784,000
would have arisen on an arm’s-length sale.
Requirement
State which, if either, of the gains becomes chargeable on the migration.

SOLUTION

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 Migration procedures
Advance notification of HMRC of the intended migration must be given.
Must pay all UK tax liabilities.
Penalties for non-compliance may apply.
An accounting period also comes to an end when a company ceases to be resident in the
UK.
 An apportionment of profits must be made between UK resident and non-UK
resident accounting periods if during a period of account.

DOUBLE TAX RELIEF

Covered in the Tax Compliance paper:
a) Treaty relief – tax according to specific double tax treaty with other country
b) Unilateral relief – credit against UK CT liability based on lower of:
 UK tax on each source of overseas income
 Overseas tax on each source of income.
c) Expense relief – Include overseas income net, useful if due to losses or donations
the UK tax liability is nil or very small.

Interaction of donations, loss reliefs, management expenses & DTR

Where a company has deductions from total profits, for example:
 Qualifying charitable donations;
 Brought forward losses;
 Group relief; or
 Expenses of management,
it can choose to offset them in such a manner as to maximise its DTR.
Offset the deductions against UK income first followed by foreign income which has suffered
the lowest marginal rate of overseas tax.

Understanding the tax implications of international expansion and maximising DTR will
help you to demonstrate flexibility behaviour in assisting an organisation to
determine the best business medium to operate overseas as the business grows and
changes.

UNILATERAL RELIEF, MULTIPLE SOURCES OF INCOME –

PAF LTD

PAF Ltd has received rental income from two properties situated in Utopia and
Overlandia. It also has trading losses brought forward of £210,000.

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 PAF Ltd has the following results for the year ended 31 March 2024:
£
Trading income 200,000
Property income (gross Utopian rental income) 100,000
Property income (gross Overlandian rental income) 100,000

Foreign tax has been suffered as follows

Property income (Utopian rental income) 10,000
Property income (Overlandian rental income) 40,000
Requirement
Calculate PAF Ltd's corporation tax liability for the year ended 31 March 2024.

SOLUTION

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 HB2023

262
International expansion
SUMMARY

Establishing a business
Company residence Non-UK resident companies Company migration Double tax relief

Topic 6: Further corporation tax

overseas

UK resident if: Liable to UK CT on: PE: If incorporated in UK cannot Exemption method, treaty
Incorporated in UK, or Part of UK company migrate relief or unilateral relief
Incorporated overseas and Trading profits of UK PEs
Include in parent trading
managed & controlled in Income from property profits If incorporated outside UK Expense relief:
UK letting and development Automatic loss relief and central M&C leaves UK Deduct foreign tax as an
can migrate expense from income
Gains on UK assets used in Assets transfer at NG/NL
UK CT on worldwide profits
PE or property business, Gains and losses arise on
UK land and property Unilateral relief:
Can elect to exempt Subsidiary: assets no longer used in UK Include income gross of
rich assets trade (overseas assets)
profits/losses of overseas PEs Separate legal entity overseas tax
Liable to IT on other Dividends to UK normally Relief for lower of:
exempt UK tax on overseas
UK income income
No loss relief

These materials are provided by BPP

N o UK CAs or
Asset transfers chargeable Overseas tax

Set up PE i f loss making -

incorporate when profit
making

Incorporation of overseas PE:

Gains/losses
BA/BC on P&M
Relief for gains similar to
CGT incorporation relief
 CORPORATE ANTI-AVOIDANCE
VALUE SHIFTING

Avoiding a chargeable gain on disposal of shares

Where Company A intends to dispose of shares in Company B and the SSE does not
apply to that disposal, it is possible for Company A to reduce the chargeable gain on the
eventual disposal by:

Execute
Getting Company
Getting Company transactions which
B to sell one of its
B to pay an increase the base
assets within the
inflated dividend to cost of Company
group at an
Company A A’s shares in
undervalue
Company B

These transactions will reduce the chargeable gain and generate an exempt dividend
distribution of unrealised profit. It is possible that a just and reasonable adjustment
(increase) has to be made to Company A’s eventual sale proceeds for its shares in
Company B.
An adjustment is made if all three of the following apply:
 Arrangements have been made which materially reduce the value of the shares or
securities disposed of, or any asset owned by a member of the same group as the
company being sold;
 A main purpose of the arrangements is to obtain a tax advantage; and
 The arrangements do not consist solely of the making of an exempt dividend (ie
other transactions occur too)

VALUE SHIFTING - PILEA LTD

Pilea Ltd owns 100% of the shares in Lotus Ltd, a property investment company, which
were originally subscribed for in 2002. The share capital consists of 500,000 £1 shares
which were issued at par. The company has performed well and Pilea Ltd has received
an offer from Rose plc to purchase the entire share capital of Lotus Ltd for £10 million.
The sale is expected to take place on 1 September 2024.
In advance of the sale, Lotus Ltd intends to:
• issue an additional 9.5 million ordinary £1 shares at par to Pilea Ltd;
• redenominate the £1 shares as 1p shares and credit the reduction of £9.9 million
to distributable reserves; and
• pay a dividend of £9.9 million to Pilea Ltd.
Requirement
What are the tax consequences of the above transactions for Pilea Ltd?

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 SOLUTION

Depreciatory transactions
The depreciatory transaction rules may restrict capital losses on disposal of a subsidiary.
They apply when there is

A disposal of The disposal

Due to a transfer
shares where the results in a capital
of assets by
value of the shares loss that would be
companies which
has been allowable because
are members of a
materially reduced the SSE does not
gains group
prior to sale apply

COMPANY A
EXAMPLE Company A bought company B for £24 million. Since acquisition the value of B’s assets
has declined from £24 million to £17.6 million for genuine commercial reasons. B sells to
A for £5 million a property with a current market value of £9.8 million. A then sells the
shares in B at their market value £12.8 million.
Requirement
Explain how much of the loss on the disposal of the shares is an allowable loss.

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 SOLUTION

TRANSFER PRICING

Transfer pricing rules

Transactions between connected parties must be at arm's length for tax purposes.
If they are not, profits could be transferred from one party to another to take artificial
advantage of, for example:
 Losses brought forward; or
 A lower effective rate of tax.
The rules require profits for tax purposes to be computed as if carried out at arm's length
(provided this is not less than market value). If the accounting profit is not stated at
arm's length prices, adjustments must be made to TTP to reflect this.
Transfer pricing legislation applies where such a transaction results in a tax advantage to
one of the parties.
Applies equally to transactions between two UK companies or between a UK and a non-
UK company.
Covers the supply of goods and services as well as the provision of loan finance.
The rules apply to all large companies.
a) A company is large if it has:
 At least 250 employees; or
 Revenue of at least €50 million (approximately £44 million) and total assets
of at least €43 million (approximately £38 million).
b) Where the company is a member of a group, it is large if the group as a whole
exceeds the above limits.
Advance Pricing Agreements (APAs)
In order to remove the uncertainty that comes with the risk of transfer pricing
adjustments, a taxpayer can enter into an Advance Pricing Agreement (APA) with HMRC,
which sets out how particular transactions will be treated before a return is submitted.

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 TRANSFER PRICING – JJ GROUP
EXAMPLE JJ Ltd has two wholly owned subsidiaries, H Ltd and O Inc. They are manufacturing
companies operating in the automotive industry.
O Inc is an overseas company and pays a low rate of corporation tax of 12% in its
overseas tax jurisdiction.
During the year ended 31 March 2024 JJ Ltd’s revenue is a follows:
Sales to: Gross profit margin
£’000 %
H Ltd 24,650 25
O Inc 22,400 10
Other UK customers 3,950 25
51,000

The board of directors of JJ Ltd agreed to sell goods to O Inc at a lower gross profit
margin than normal to take advantage of the law rate of tax paid by O Inc.
Requirement
Explain the transfer pricing consequences of the sales to O Inc and calculate the
necessary transfer pricing adjustment

SOLUTION

THIN CAPITALISATION
The transfer pricing rules and rules relating to APAs also apply to the provision of loan
finance between large, connected companies. The rules apply to both the amount of the
loan and the rate of interest charged.
Applies where loan finance by a connected Co. Loan > an independent 3rd party would
provide.

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 Parent Co (Australia)

Interest >50% Loan

paid on loan OSC provided

Sub Co (UK)

Interest
deductible

must be
on loan a 3rd party
would provide

Interest on excess is not an

allowable expense

HMRC looks at gearing & interest cover to decide

whether a company is thinly capitalised
Check that:
i) Loan not excessive; and
ii) Interest rate is not excessive; and
iii) Loan could reasonably be expected to be obtained from a 3rd party.
Thin capitalisation rules may extend to third party loans which are supported with a
guarantee from a group member.

THIN CAPITALISATION - CHELSEA LTD

EXAMPLE Chelsea Ltd is a UK-resident subsidiary of Little Rock Inc, a company resident in the
Utopia.
Chelsea Ltd is in the process of expanding its operations for its year ended 31 March
2024 and intends to acquire machinery at a cost of £2,700,000.
Little Rock Inc loaned £2,700,000 to Chelsea Ltd on 1 April 2023. Interest is charged on
the loan at 7% pa.
The maximum amount Chelsea Ltd could have borrowed from an unconnected, third-
party bank would have been £1,500,000 at an interest rate of 7%.
Chelsea Ltd pays corporation tax at the main rate.
Requirement
Explain the corporation tax implications for Chelsea Ltd of the loan from Little Rock Inc in
the year ended 31 March 2024.

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 SOLUTION

CORPORATE INTEREST RESTRICTION (CIR)

As a result of the OECD BEPS project, companies in large groups may suffer a restriction
in the amount of finance costs they can deduct in calculating their UK taxable profits.
The rules apply whether the interest is a trading or non-trading expense.
Transfer pricing, thin capitalisation and hybrid mismatch rules (see later) apply before a
restriction under this legislation.
Profits for the purpose of the deductions allowance for brought forward losses are
computed after applying any CIR restriction.

Calculating the net interest expense

For the CIR to apply, the group's net interest expense must exceed £2million per year.
Where the net interest expense exceeds £2million, there will be a cap on interest
deductions.

Net interest expense

1) For each UK group company, compare the taxable interest income to the tax
deductible interest expense (after adjusting for other anti-avoidance legislation).
2) Aggregate these figures and compare to the £2million threshold:
 If aggregate net tax-interest expense is <£2m, or net income, no CIR applies
 If aggregate net tax-interest expense >£2m, calculate 'Interest capacity'

NET TAX- INTEREST EXPENSE – L PLC GROUP

For the year ended 31 March, the UK companies in the L Plc group have the following
tax-interest income and expense amounts:
Tax-interest expense Tax-interest income
£'000 £'000
L Plc 2,000 400
R Ltd 500 1,100
E Ltd 800 300
G Ltd 1,100 200

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 Requirement
Determine whether the L Plc group is subject to the corporate interest restriction rules
for the year ended 31 March.

SOLUTION

Interest capacity
Interest capacity is the current accounting period interest allowance plus any unused
allowance from the previous five years.

Current period interest allowance

There are two methods to calculate the current period interest allowance:

Fixed ratio method (default) Group ratio method (election if

gives higher allowance)
Lower of: Lower of:
1) 30% of aggregate tax-EBITDA (total 1) 'Group ratio percentage' of group
group UK taxable profits BEFORE tax-EBITDA – the group ratio
interest, IFA amortisation, capital looks at the actual group
allowances, and losses) relationship of interest to profits,
and will be given in the exam if
needed
2) The fixed ratio debt cap: adjusted net 2) The group ratio debt cap –
interest expense of the worldwide adjusted interest expense in the
group (will be given in a scenario) group consolidated accounts

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 FIXED RATIO METHOD – M PLC GROUP
TRY For the year ended 30 June, the M plc group has the following results:
£m
Aggregate net tax-interest expense 29
Aggregate tax-EBITDA 120
Fixed ratio debt cap 140
The group has no brought forward unused interest allowance.
Requirement
Determine whether the M plc group has a corporate interest restriction for the year
ended 30 June.

SOLUTION

FIXED RATIO METHOD – L PLC GROUP

TRY Continuing the example L Plc group, the group has the following results for the year
ended 31 March:
£m
Aggregate net tax-interest expense 2.4
Aggregate tax-EBITDA 7
Fixed ratio debt cap 6
The group has no brought forward unused interest allowance.
Requirement
Determine the amount of disallowed interest, if any, under the corporate interest
restriction rules for the L Plc group for the year ended 31 March.

SOLUTION

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 CONTROLLED FOREIGN COMPANIES (CFCS)

What is a CFC?
A company is within the scope of the CFC rules if it is:
 Resident outside the UK; and
 Controlled by persons resident in the UK.
A company is under UK control if:
 A UK person, or persons, controls the company (ie >50%, or de facto control
measured by legal or economic tests); or
 Is at least 40% controlled by a UK resident and at least 40% but no more than
55% by a non-UK resident; or
 A UK resident company (with any associated enterprises*) directly or indirectly has
an investment of more than 50% in the company.
*An entity is an associated enterprise if they either own 25% of the UK company, are
owned at least 25% by the UK company, or another person has at least a 25%
investment in them both.
If a company is a parent company under FRS 2 it is deemed to have control.

THE CONTROL TEST – ALPHA AG

Alpha AG is resident in Germany and is owned as follows:

Orange Ltd 35%
Lemon Ltd UK resident companies 15%
Lime Ltd 25%
Pomegranate Ltd (Resident in the Bahamas) 25%
100%
Beta Ltd is resident in Ireland and is owned as follows:
Apple GmbH (resident in Switzerland, 80% owned by Orchard plc which is 60%
UK resident)
Pear SpA (resident in Italy) 40%

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 100%
Gamma Ltd is resident in Jersey and is owned as follows:
Tiny SA (also resident in Jersey) 56%
Big plc (UK resident) 42%
Mr Average (resident in Guernsey) 2%
100%
Requirement
Explain which of the companies are CFCs.

SOLUTION

THE CONTROL TEST – DELTA LTD

Delta Ltd is resident in France and is owned as follows:

Small SA (resident in Italy) 48%
Huge plc (UK resident) 42%
Mr Bloggs (resident in Portugal) 10%
100%
Epsilon Ltd is resident in Rwanda and is owned as follows:
MS Inc (resident in the USA) 40%
Mega plc (UK resident) 30%
Mrs Sweet (resident in Australia) 30%
100%
Mrs Sweet also owns 35% of Mega plc.
Requirement
Are Delta Ltd and Epsilon Ltd CFCs?

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 SOLUTION

Consequence of being a CFC

Where the CFC charge applies it is only charged on UK companies with an interest of
25% in the CFC:
a) Apportion profits according to shareholding.
b) Any apportioned amount is subject to UK corporation tax.
c) Add to UK tax liability as follows:
£
TTP X

Tax on TTP X
Tax on CFC apportioned profit X
Total tax payable X
Double tax relief is given for any local taxes suffered on the profits.

Does a CFC charge apply?

Once it is established that a foreign company is a CFC, you then need to determine
whether a CFC charge arises. There is a CFC charge if (and only if):
1 There is a UK company which (together with connected companies) holds an
interest of at least 25%;
2 No CFC exemptions apply; and
3 The CFC has 'chargeable profits' (apply the gateway tests).

Exemptions
If a company falls entirely within one of the exemptions, there will be no CFC charge and
it is not necessary to consider 'chargeable profits' (the gateway tests):
 Exempt period – 12 month period to give companies time to restructure during
which the rules do not apply
 Excluded territories – 'Good' territories – A company resident there generally
not liable to CFC charge
 Low profits – (<£500,000 total, maximum £50,000 non-trading)
 Low profit margin – (≤ 10%)
 Tax exemption – Local tax ≥ 75% UK tax

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 Chargeable profits
If none of the exemptions are satisfied, a CFC charge can only apply if the CFC has
chargeable profits that pass through the gateway tests.
The tests identify business profits that have been diverted from the UK through tax
avoidance arrangements.
Only the parts of the foreign company's profits that 'pass through' the gateway are
'chargeable profits' potentially subject to apportionment.
Excluded from chargeable profits are:
 Chargeable gains; and
 Property income.

Gateway for profits attributable to UK activities

No profits will pass through the gateway (and therefore no CFC charge) if:
 The CFC has no assets or risks deriving from tax planning schemes; or
 None of the CFC's assets or risks are managed from the UK; or
 The CFC has the ability to manage its own business if any UK management of
assets and risks were to stop.

Trading profits exemption

Excludes companies which only have a limited UK connection.

For profits that pass through the gateway

Determine extent to which profits have been diverted from the UK.
If any active decision-making is carried on in UK by a connected person:
 Profits attributable to UK active decision-making ('significant people functions')
pass through the gateway = chargeable profits.

CFC GATEWAY ENTRY CONDITIONS – GLADBAGS PLC

Gladbags plc had carried out manufacturing operations in Overland for a number of years
through a branch. Two years ago, it incorporated the branch into a company, Gladbags
Manufac SA, which was incorporated in Overland. Companies which are incorporated in
Overland are regarded as tax resident there and are taxed at a headline rate of 11%.
The company's operations are manufacturing bags and other accessories for both group
companies and third parties. All of the services are provided through its two factories in
Overland and all of its customers are based either there or in nearby Underland. It also
sources its materials locally.
The UK group management has some involvement in the strategic direction of the
company and is critical in negotiating agreements with several other groups with which
the Gladbags group works on a global basis (local subsidiaries of which provide nearly
50% of Gladbags Manufac SA's turnover). However, this is largely limited to board level
input and the related costs are only a small fraction of the company's overall
management costs.
Requirement
Explain whether Gladbags Manufac SA meets the entry conditions which would result in
none of its trading profits passing through the CFC gateway.

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 SOLUTION

CFC CHARGE – BUBBLE LTD

Bubble Ltd is a trading company, which is resident in Erehwon. Its trading profits for the
year ended 31 March 2024 are £1 million, and the overseas corporation tax payable on
these profits is £52,000. For many years Bubble Ltd has been owned 55% by Fizz Ltd,
30% by Pop Ltd and 15% by UK resident individuals. Fizz Ltd and Pop Ltd are UK
resident companies. Erehwon is not an excluded territory for CFC purposes.
Bubble Ltd was originally set up in Erehwon to significantly reduce the total corporation
tax liability of the Fizz group. All of Bubble Ltd's significant people functions take place in
the UK.
Requirement
Explain (with calculations where you have the information to do so) the corporation tax
payable in the UK in relation to Bubble Ltd's trading profits.

SOLUTION

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 CFC Steps:
Step 1: Is there a non-UK resident company
controlled from the UK? No = Stop

Yes = Go to step 2

Step 2: Do any exemptions apply?

No = Go to step 3 Yes = Explain which

apply, then stop

Step 3: Consider business profits:

Will any profits pass through the No = Explain why, then

'Gateway for profits attributable to UK stop
activities'?

Yes = Explain why, then go to step 4

Step 4: Is active decision-making in the UK? No = Explain

why, then stop

Yes = Profits related to UK active

decision-making = CHARGEABLE

DIVERTED PROFITS TAX (DPT)

When does DPT apply?

DPT is intended to counter profit-shifting avoidance behaviour and will apply if either of
the following situations applies:
 Arrangements avoiding a UK permanent establishment (PE) – the first rule.
 Transactions with a 'lack of economic substance' – the second rule.
In both situations, DPT does not apply if both parties are SMEs.

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 The first rule: non-UK resident companies
The first rule applies where all of the following conditions are met:
 There is a non-UK resident company carrying on a trade;
 A person ('the avoided PE') is carrying on an activity in the UK in connection with
supplies of services, goods or other property by the non-UK resident company;
 It is 'reasonable to assume' that the activity of the avoided PE is designed to
ensure the non-UK resident company does not carry on a trade in the UK for
corporation tax purposes; and
 The 'mismatch condition' or the 'tax avoidance condition' is met.
Exception: If total sales from all supplies of goods and services to UK customers do not
exceed £10m, or total expenses relating to the UK activity do not exceed £1m.
'Mismatch condition' – arrangements involving transactions between connected
parties which (a) lack economic substance and (b) result in an increase in one party's tax
liabilities which is less than 80% of the reduction in the other party's tax liabilities (the
"effective tax mismatch outcome").
'Tax avoidance condition' - Arrangement relates to the supply of goods, services or
property with the main purpose (or one of the main purposes) being the avoidance or
reduction in corporation tax.
Illustration – Avoided PE

XYZ INC
(US Parent Co)

Online purchases XYZ CO

UK (Non UK Res.)
Customers

• Resident in a tax
• XYZ Co owns haven-little CT on
UK warehouses profits
(not UK P.E.’s as
• All UK sales
no sales staff
recorded as
or contracts agreed in UK)
income in XYZ Co
• Goods distributed
• Contracts made
to UK customers
outside UK

• CT < 80% of UK
equivalent

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 The second rule: UK resident companies or UK PEs
The second rule applies where all of the following conditions are met:
 There is a UK resident company or a UK PE of a non-UK resident company carrying
on a trade;
 The company has an arrangement by way of a transaction or series of transactions
with another person;
 The two parties are connected (defined as for transfer pricing);
 The arrangement causes an 'effective tax mismatch outcome’ (see above) between
the two parties which is not a loan relationship; and
 The 'insufficient economic substance condition' is met: either
1 The arrangements were designed to avoid tax and the tax savings are higher than
any other financial benefits; or
2 A party to the transaction was involved only for tax reasons.
Illustration – Lack of economic substance

S Inc
(Non UK • High CT rate
Resident)
100%

100%

Royalty S BV
S (UK) Ltd
Payments

• Sales of goods • Owns the

to UK customers Brand I.P.
• Uses group • Charges group
brand name companies
copyright royalties
• Pays + claims
CT relief for • Pays little/no tax
royalties paid on royalty income

Mismatch

Consequences of DPT
DPT is calculated as 31% of 'taxable diverted profits' from 1 April 2023. The rate was
25% for profits arising before 31 March 2023.
Calculation depends on whether first or second rule applies:

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 Arrangement avoiding a UK PE (the first rule)
Where tax avoidance condition met = 'Taxable diverted profits' are based on the
'notional PE profits' (ie the profit that would have been chargeable to CT if there had
been a UK PE).
Where mismatch condition met = Notional PE profits + additional UK taxable income
(income of other connected companies that could be assumed would have arisen in the
UK if tax issues were not considered)

Transactions with a 'lack of economic substance' (the second rule)

'Taxable diverted profits' are based on the 'notional PE profits'.

Administration
Notify HMRC within 3 months of AP end if potentially within the scope of DPT.
HMRC may issue preliminary notice within two years of AP end (four years if company
has failed to notify) which includes estimate of taxable diverted profits.
Taxpayer has 30 days to make representations to HMRC. Having considered any
representations, HMRC must either issue charging notice or confirm that no charging
notice will be issued within 30 days of end of representations period.
DPT is not self-assessed. Pay tax within 30 days of HMRC issuing a charging notice.
May appeal against charging notice within 30 days.
HMRC review all charging notices within 15 months.
During the first 12 months of the review period, the company can amend the corporation
tax return to bring profits within the charge to corporation tax and reduce the taxable
diverted profits subject to DPT.

DIVERTED PROFITS TAX – APRICOT INC

Apricot Inc, a large company resident in Utopia (a tax haven), bought goods from an
unconnected company to sell to UK customers via Mango Ltd, a UK company within the
same group. For tax purposes, Apricot Inc ensures that Mango Ltd never concludes these
contracts with the UK customers, although some support services are offered to
customers. Apricot Inc generates income of approximately £15m in sales to UK
customers.
Requirement
Explain whether DPT applies to this arrangement.

SOLUTION

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 HYBRID MISMATCH
Anti-avoidance legislation that will counteract arrangements that aim to achieve either
double deduction for an expense, or deduction by one entity with no corresponding
income on another.
Hybrid mismatch arrangements typically arise cross-border as they aim to exploit
differences in tax treatments between two countries.
For example:
Company A is a UK company that has two subsidiaries, Company B (a UK company) and
Company C, resident outside the UK in country C. Company C has a finance branch (PE)
in country D.
Company B has borrowings from the finance branch in country D, it pays interest to the
finance branch.
Company C has a PE exemption from tax over the finance branch and country D does not
tax the income arising in the PE.
Therefore, Company B has an interest deduction, but the income is untaxed. It is likely
the hybrid mismatch rules would deny a deduction for the interest in Company B.

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 Illustration – Hybrid mismatch

A Plc
UK R

• Exemption for
B Ltd C Co branch profits
UK R Res = CTY C
• No tax on interest
income
Loan

Claims CT
relief for Interest
interest paid Finance
branch • No tax in
CTY D country D

Mismatch

Consequence: D/A interest paid in B Ltd

Understanding the different corporate anti avoidance rules will help you to demonstrate
both the ethics and integrity skill and professional scepticism behaviour. It is
important to be able to identify ethical dilemmas and apply a questioning mind to
establish if tax is being avoided and determine the corrective action necessary.

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 SUMMARY

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 Corporate anti-avoidance

Controlled foreign
companies

Non-UK resident Exemptions No trading profits pass Apportion chargeable profits

& Exempt period through the gateway where
Controlled from UK Excluded territories any entry condition met: To UK companies owning at
(or 40% test) Low profits (£500,000 No assets deriving from least 25% of the CFC
total, £50,000 non- tax planning, or
trading) No risks/assets managed Tax apportioned profits at
Low profit margin (<10%) from the UK, or main rate of CT
Local tax >75% UK tax CFC able to manage own less
business if UK
management stopped DTR for creditable tax

Trading profits which pass

through the gateway =
amount attributable to UK
significant people functions

See apportionment (right)

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 ACTIVITY ANSWERS

GROUP RELATIONSHIPS – J LTD

J Ltd
75% 85%

K Ltd L Ltd

80%

M Ltd

75%

O Ltd

Group relief group:

J Ltd is in a group with K Ltd and L Ltd. M Ltd and O Ltd are not included. Despite K Ltd's
75% interest, J Ltd's indirect interest is less than 75% (75% 80% = 60%).
K Ltd and M Ltd will form an additional group relief group but O Ltd will not be included
due to K Ltd having an indirect interest of less than 75%.
M Ltd and O Ltd will form a group relief group.
There is one capital gains group here:
J Ltd (principal company), L Ltd, K Ltd and M Ltd. O Ltd is not a member of the group
because, although M Ltd has a 75% interest in it, J Ltd's indirect interest in it is 75%
80% 75% = 45%. However, M Ltd is a member of the group because K Ltd has a 75%
or more interest in it and J Ltd's indirect interest in it is 75% 80% = 60% which is over
50%.
As M Ltd is a subsidiary company of J Ltd's capital gains group, it cannot also be the
principal company in a gains group with O Ltd. Thus, in this case, there is only one gains
group. If O Ltd had a 75% subsidiary called P Ltd, they could form a capital gains group
with O Ltd as the principal company and P Ltd as the subsidiary.
J Ltd has 4 related 51% associated group companies. A 51% effective interest is required
in sub-subsidiaries, which is not the case for O Ltd.

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 GROUP RELIEF – CARRIED FORWARD LOSSES – E PLC
E Plc
The loss available for group relief for carried forward losses is calculated as follows:
The relevant maximum for E Plc is: £4m + 50% £(23m + 6m – 4m) = £16.5m
E Plc must first relieve its own profits as far as possible:
£m
Trading profits 23
NTLR income 6
TTP 29
Less b/f loss relief (16.5)
TTP 12.5

The losses remaining are (£23m – £16.5m) = £6.5m, which are available for group relief.
F Ltd
F Ltd has a relevant maximum of:
£1m + (50% (£17m – £1m)) = £9m
Before claiming group relief for carried forward losses, F Ltd must also first relieve its
brought forward losses, ie £6m, against total profits. This is within the relevant
maximum.
Therefore, F Ltd is able to claim £3m (£9m – £6m) of carried forward losses from E Plc.
The remaining £3.5m (£6.5m – £3m) of losses will be carried forward to future
accounting periods for E Plc for relief within that company and/or surrender to F Ltd.

QUALIFYING SHARE DISPOSAL – F LTD

a) There is a deemed disposal of the freehold property:
£ £
Market value on 31.8.17 140,000
Less: Cost to F Ltd 60,000
Indexation to 31.8.17
£60,000 0.905 54,300 (114,300)
Degrouping gain 25,700

As the sale of the shares by F Ltd is a disposal of shares within the charge to
corporation tax, it is a qualifying share disposal. Therefore, the degrouping gain
will be added to the sales proceeds from the disposal of the shares of £1.5m.
The proceeds will therefore become £1.526m. The base cost carried forward by
G Ltd is £140,000 (deemed acquisition date of 31.8.17).
b) The disposal of share by F Ltd will be exempt under the substantial shareholding
exemption, therefore the degrouping charge will also be exempt.

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 QUALIFYING SHARE DISPOSAL – D LTD
The corporation tax consequences are as follows:
 A degrouping charge will arise when G Ltd leaves the 75% group on 1 November.
 This is because the departure takes place within six years of the no gain no loss
transfer and the asset is still owned by G Ltd.
 The degrouping charge will be £350,000 (£500,000 – £150,000).
 It will be assessed by being added to the sale proceeds received on the disposal of
the shares in G Ltd.
 The degrouping charge should be exempt as the sale of the shares in G Ltd is likely
to be exempt under the substantial shareholding exemption.

TAX PLANNING WITH GROUP RELIEF – U LTD

Taxable total profits before loss relief
U Ltd V Ltd W Ltd
£ £ £
Trading income 160,000 550,000 NIL
Property income 5,000 20,000 NIL
Chargeable gains NIL NIL 65,000
165,000 570,000 65,000
Less: qualifying donation (3,000) (11,000) (NIL)
Taxable total profits 162,000 559,000 65,000

Limit for payment by instalments: £1,500,000/3 = £500,000

Small companies rate limit: £50,000/3 = £16,667
Main rate limit: £250,000/3 = £83,333
Options for loss relief
1 Relieve loss in W Ltd under s.37(3)(a) and s.37(3)(b)
s.37(3)(a) tax saving: £48,333 26.5% + £16,667 19% = £15,975
s.37(3)(b) tax saving: £10,000 19% = £1,900
Total tax saved: £17,875
Corporation tax payment dates:
U Ltd – 1.1.2025
V Ltd – Instalments starting 14 October 2023
W Ltd – No tax payable and a tax repayment of £1,900
2 Group relief – most efficient claim
Surrender losses to V Ltd to reduce the quarterly instalments, followed by a current
year loss claim in W Ltd to reduce profits to the small companies’ rate.

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 Surrender to V Ltd:
Available loss £75,000
Available profits £559,000
Surrender £26,667 to reduce taxable total profits/augmented profits to £532,333.
Tax saving: £26,667 25% = £6,667
Surrender to W Ltd:
Use the remaining £48,333 via a s.37(3)(a) current year claim, saves tax at the
marginal rate.
Tax saving: £48,333 26.5% = £12,808
Total tax saved: £19,475

Conclusion
The most tax efficient use of the loss is to make a claim for group relief as shown in
Option (2), followed by the current year claim in W Ltd. Group relief to V Ltd in priority to
U Ltd is more beneficial from a cash flow perspective as V Ltd pays tax in quarterly
instalments.
Taxable total profits after group relief
U Ltd V Ltd W Ltd
£ £ £
Trading income 160,000 550,000 NIL
Property income 5,000 20,000 NIL
Chargeable gains NIL NIL 65,000
165,000 570,000 65,000
Less s.37(3)(a) relief (48,333)
Less qualifying donation (3,000) (11,000) (NIL)
162,000 559,000 16,667
Less group relief (0) (26,667) (0)
Taxable total profits 162,000 523,333 16,667

TAX PLANNING EXAMPLE – ALPHA LTD GROUP

EXAMPLE
Alpha Ltd Bravo Ltd Charlie Ltd Delta Ltd Echo Ltd
YE 31/3/24 YE YE 31/12/23 YE YE 31/12/23
31/3/24 31/3/24
£ £ £ £ £
Trading profit – – 110,000 150,000 –

UK property
Income 100,000
Overseas property
Income – 100,000 – – –
Capital gain (W1) 20,000 – – –

TTP – 120,000 110,000 250,000 –

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 Less own loss b/f
(200,000)
Group relief
From E Ltd (10,000)
From A Ltd (51,600) (82,500) (5,900)
Revised TTP – 68,400 17,500 44,100 –
Loss memo:
Alpha Ltd Trading loss £
Trading loss 140,000
To B Ltd (51,600)
88,400
To C Ltd (82,500)
5,900
To D Ltd (5,900)
–
Group relief:
Alpha, Bravo, Charlie and Delta form a group for loss relief purposes as Alpha Ltd owns
at least 75% of each. Echo Ltd cannot be in the group as Alpha Ltd's indirect interest is
less than 75% at 64% (80% 80%).
Echo and Charlie Ltd form their own group for loss relief purposes thanks to Charlie Ltd
owning at least 75%.
Gains group:
Alpha, Bravo, Charlie, Delta and Echo form one chargeable gains group.
Associated Companies:
Limits for corporation tax rates, based on the number of associated companies during
the accounting period.
Small companies’ rate: £50,000/5 = £10,000
Main rate: £250,000/5 = £50,000
Limit for paying tax in quarterly instalments, based on the number of associated
companies on the last day of the previous accounting period.
£1,500,000/4 = £375,000
Use of trading losses:
Echo Ltd has a trading loss of £10,000 and this can be group relieved in Charlie Ltd to
utilise the loss as soon as possible.
The Y/E 31/3/24 trading loss in Alpha Ltd can be surrendered to either Bravo, Charlie or
Delta Ltd.
Surrendering the loss to Bravo Ltd would have the most benefit to the group as it is
100% owned by Alpha Ltd. However, relief needs to be restricted to ensure that double
tax relief is not wasted.
The gain in Bravo Ltd can be reduced in full without affecting double tax relief and the
overseas property income can be reduced to £68,400 (£17,100/0.25). Full double tax
relief will still be available for the overseas tax. Bravo Ltd pays tax at the main rate.
Double tax relief reduces the tax liability by the lower of overseas tax (£17,100) and UK
tax on the overseas income. If the UK income falls below £68,400, the DTR will be less

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 than £17,100 and therefore not fully relieved. Group relief is therefore restricted to
£51,600 (£120,000 – £68,400).
As much of the remaining loss as possible (£82,500 – see W2) should then be relieved in
Charlie Ltd as it has the earliest finishing accounting period and will therefore assist cash
flow earlier than an offset in Delta Ltd.
Charlie Ltd has a 31 December 2023 year end, therefore its TTP will have to be
apportioned between FY22 where 3 months of profits will be taxed at 19%, and FY23
where the small companies rate and main rate will have to be scaled down by 9 months
to £7,500 (£10,000 9/12) and £37,500 (£50,000 9/12) respectively and Charlie Ltd
will pay tax at the marginal rate of 26.5%.
Finally, to ensure the loss is used as soon as possible the remaining £5,900 should be
offset in Delta Ltd. Delta Ltd will also pay tax at the marginal rate of 26.5% for its year
ended 31 March 2024.
The brought forward trading loss in Delta Limited can, and should, be claimed against
TTP in the current accounting period. This claim is unaffected by the ownership of Delta
Ltd changing as there is no indication of a major change in the nature or conduct of
Delta Ltd's trade. Note that this loss cannot be surrendered as group relief as it arose
before Delta Limited joined the Alpha group and Delta Ltd has not yet been in the Alpha
Group for five years. Furthermore, only excess brought forward losses can be group
relieved and Delta has sufficient current period profits to absorb the loss.
Workings
1 Capital gain in Alpha Ltd
All the companies for a chargeable gains group as Alpha Ltd has a direct interest of
at least 75% and an indirect interest of more than 50% in Echo Ltd.
The gain in Bravo Ltd can be rolled over using the acquisition of a property by
Alpha Ltd. £60,000 of gain remains chargeable representing the proceeds not
reinvested (£500,000-£440,000).
The capital loss in Echo Ltd can be transferred to Bravo Ltd to reduce the gain to
£20,000.
Delta Ltd's capital loss brought forward is pre-entry as it arose before the company
joined the Alpha Ltd group therefore cannot be used.
2 Charlie Ltd group relief
Charlie Ltd has a 31 December year end. The profits available for group relief are
£110,000 9/12 = £82,500. The maximum loss available in Alpha Ltd is £140,000
9/12 = £105,000.

CONSORTIUM RELIEF – LOSS IN THE CONSORTIUM

COMPANY – PURCELL LTD (1)

a) The maximum consortium relief surrenders which Purcell Ltd may make to the
consortium members are:
Handel Ltd £36,000 15% = £5,400
Bach Ltd £36,000 45% = £16,200
Vivaldi Ltd £36,000 40% = £14,400 – Max £6,020 – Profits in Vivaldi Ltd

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 b) If Purcell Ltd had property income of £20,000 as well as the trading loss of
£36,000, each consortium member would be entitled to claim its share of £16,000
(£36,000 – £20,000) only and subject to the profits of the consortium member.

CONSORTIUM RELIEF – LOSS IN THE CONSORTIUM

MEMBER – PURCELL LTD (2)

The maximum amount of loss which Handel Ltd may surrender to Purcell Ltd is restricted
to £50,000 15%, ie £7,500.

CONSORTIUM RELIEF – S LTD

a)
Lower of: (i) A Ltd's profit ie 500,000
(ii) 30% S Ltd's loss ie 300,000
So £300,000
b)
Lower of: (i) A Ltd's loss ie 100,000
(ii) 30% S Ltd's profit ie 150,000
So £100,000

INTRA-GROUP TRANSFER FROM FIXED ASSET TO

TRADING STOCK – ALPHA LTD

For Alpha Ltd, the transfer takes place at the nil gain/nil loss price, ie £65,000.
Beta Ltd realises a capital gain of £13,000 plus a trading profit of £10,000 or, if Beta Ltd
elects under TCGA 1992 s.161(3), it has neither a chargeable gain nor an allowable loss
but realises a trading profit of £23,000 on sale of the asset.

CHARGE TO UK CORPORATION TAX

Seventrees SARL has a fixed place of business (the workshop) in the UK which is an
integral part of the production process. This would likely be considered a PE and
therefore Seventrees SARL would be within the charge to UK corporation tax on the
deemed income for the PE.
Although Global IT Sp zoo does not have a fixed place of business in the UK, Zofia
appears to have the power to do business on behalf of the company as she can bind it to
contacts. Therefore, Global IT Sp zoo would have a PE and be within the charge to UK
corporation tax.
The storage of goods for onward sale would likely be considered an auxiliary activity so
would not result in a UK PE of Greenhouse Inc. Greenhouse Inc would not be within the
charge to UK corporation tax.

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 Fiesta SA has a UK property letting business so would be within the charge to UK
corporation tax.

INCORPORATING A FOREIGN PE – GRAPE LTD (1)

Chargeable gains of Grape Ltd £

In 2019: Gains on disposal of assets 375,000

Less losses on disposal of assets (75,000)
Net gains on transfer of trade 300,000
Less net gains deferred (90% × £300,000) (270,000)
Immediately chargeable gain 30,000
Balance of net gains deferred 270,000
In 2021, Grape Ltd disposes of 55% of its holding in Raisin Inc. 55% of the remaining
balance of net gains becomes chargeable in addition to the gain on the disposal of the
shares.
£
Sale proceeds of 55% of the shares received in Raisin Inc 825,000
Cost: 55% £600,000 (330,000)
Chargeable gain (before indexation) 495,000
Deferred gain now chargeable (55% £270,000) 148,500
Total amount taxable 643,500
Balance of net gains deferred £270,000 – £148,500 121,500
In January 2024, Raisin Inc disposes of assets on which gains were deferred at
incorporation within six years of that incorporation. The proportion of the remaining
balance of net gains deferred which relates to that asset now becomes chargeable on
Grape Ltd.
In January 2024: Proportion of balance of deferred gains

150,000
£121,500
375,000 *

48,600
Chargeable gain
Deferred gains c/fwd (£121,500 – £48,600) 72,900

* Note. The denominator is the gross gains arising on the transfer of trade before
deducting losses.

INCORPORATING A FOREIGN PE – GRAPE LTD (2)

The proportion of the remaining gain that will become chargeable:
£72,900 75,000/375,000 = £14,580

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 CHARGEABLE GAINS ON MIGRATION – MELONE SA
The gain on the investment property becomes chargeable on Melone SA immediately
before it becomes non-UK resident. Provided the company continues to trade in the UK
through a branch or agency, the gain on the factory is not chargeable. The factory will
give rise to a chargeable gain at its then market value if it is actually sold, or if the UK
trade ceases.

UNILATERAL RELIEF, MULTIPLE SOURCES OF INCOME –

PAF LTD
Corporation tax computation – year ended 31 March 2024
£
Trading income 200,000
Property income Utopia 100,000
Property income Overlandia 100,000
400,000
Loss brought forward (210,000)
Taxable total profits 190,000
Corporation tax @ 25% 47,500
Less marginal relief: 3/200 (£250,000 – £190,000) (900)
Corporation tax before DTR 46,600
(Average rate: £46,600/£190,000 = 24.526%)
DTR (Working) (34,526)
Corporation tax liability 12,074

Workings
Trading Property Property
income income income Total
Utopia Overlandia
£ £ £ £
Profits 200,000 100,000 100,000 400,000
Loss b/f (200,000) (10,000) – (210,000)
Taxable total profits – 90,000 100,000 190,000
Corporation tax @ 24.526% – 22,074 24,526 46,600
Double tax relief
Lower of – £22,074
– £10,000 – (10,000) – (10,000)
Lower of – £24,526 – – (24,526) (24,526)
– £40,000
Corporation tax payable – 12,074 – 12,074

The unrelieved overseas tax of £15,474 (£40,000 – £24,526) from the Overlandian rental
income is lost.
Note. If the surplus losses of £10,000 had been offset against the Overlandian source of
property income, the double tax relief would be reduced to £22,074 on that source.

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 VALUE SHIFTING – PILEA LTD

Pilea Ltd would receive a dividend of £9.9 million which would be exempt income.
On sale of the Lotus Ltd shares the chargeable gain for Pilea Ltd would be:
£m
Proceeds 10.0
Cost (0.5)
Additional subscription (9.5)
Gain NIL

However, an adjustment is needed because:

 The dividend has materially reduced the value of the Lotus Ltd shares ahead of
their sale;
 The main purpose appears to be to secure a tax advantage (there does not seem
to be a commercial motive); and
 The dividend was accompanied by the creation of distributable reserves and the
redenomination of the share capital.
Therefore the proceeds, and therefore the gain too, would be increased by the £9.5m
additional subscription.

COMPANY A
Company A has realised a commercial loss of £11.2 million (£12.8m – £24m) on the
disposal of the shares in B. Of the total loss of £11.2 million, £6.4 million (£24m –
£17.6m) represents the decline in value of B’s assets attributable to external commercial
factors, and £4.8 million (£9.8m – £5m) results from the depreciatory transaction
whereby A extracted value from B. Legislation does not allow such distortion by reducing
capital losses to the extent that these result from depreciatory transactions. Thus, A’s
allowable capital loss is restricted on a ‘just and reasonable’ basis to £6.4 million.

TRANSFER PRICING – JJ GROUP

The group is large for the purpose of the transfer pricing rules as JJ Ltd’s revenue
exceeds £50 million and the requirement is that the revenue for the group as a whole
must exceed this limit. Therefore, a transfer pricing adjustment must be made by JJ Ltd
to adjust for the tax advantage it has gained by selling goods to O Inc at a lower profit
margin that in an arm’s length sale.
The sales revenue of JJ Ltd to O Inc is understated by [(£22,400,000 90%)/0.75] –
£22,400,000 = £4,480,000.
JJ Ltd’s sales revenue and hence taxable profit should be increased by this amount. This
will result in additional tax of £1,120,000 (£4,480,000 25%) payable by JJ Ltd.
Under corporation tax self-assessment JJ Ltd must self-assess the additional tax liability
as a result of this transfer pricing adjustment.

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 THIN CAPITALISATION – CHELSEA LTD
As Chelsea Ltd has used the loan to purchase assets for its trade, the loan interest paid,
in principle, is deductible in arriving at Chelsea Ltd’s trading profits. The amount
allowable for tax would usually follow the accounting treatment.
However, whilst the interest rate paid on the loan to Little Rock Inc is the same as what
an unconnected third-party bank would charge, the loan itself exceeds the amount that
an unconnected third-party bank would be willing to lend. As a result, thin capitalisation
rules apply and only the amount of interest which would be payable on an arm’s length
loan will be allowable as a deduction in arriving at Chelsea Ltd’s trading profits.
Interest on the amount Chelsea Ltd could have borrowed at arm’s length would be
£105,000 (£1,500,000 7%). This is the maximum amount that is tax deductible for
Chelsea Ltd.
Interest charged on the loan from Little Rock Inc is £189,000 (£2,700,000 7%).
Under thin capitalisation rules, the interest on the excess loan of £84,000 (£2,700,000 –
£1,500,000) 7% must be added back, increasing Chelsea Lt’s trading profits and
therefore the corporation tax liability by £21,000 (84,000 25%) in the year ended 31
March 2024 and also in future periods.
In addition, as interest is paid to Little Rock Inc, a non-UK company, 20% income tax
must be deducted by Chelsea Ltd.

NET TAX-INTEREST EXPENSE – L PLC GROUP

L Plc R Ltd E Ltd G Ltd Group

total
£'000 £'000 £'000 £'000 £'000
Tax-interest expense (2,000) (500) (800) (1,100)
Tax-interest income 400 1,100 300 200
Net tax-interest expense (1,600) (500) (900) (3,000)
Net tax-interest income 600 600
Aggregate net-tax interest (2,400)
expense
The aggregate net tax-interest expense exceeds £2million, so the L plc group is subject
to the corporate interest restriction.

FIXED RATIO METHOD – M PLC GROUP

The aggregate net tax-interest expense exceeds £2million so the group falls within the
CIR rules.
Basic interest allowance is the lower of:
£m
30% of aggregate tax-EBITDA (30% £120m) 36
Fixed ratio debt cap 140
Lower is 36m
As there is no brought forward allowance the interest capacity is also £36m.

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 The aggregate net tax-interest expense of the group (£29m) is less than the interest
capacity (£36m), so there is no corporate interest restriction.
The unused interest allowance of £7million (£36m-£29m) is carried forward to the
following year.

FIXED RATIO METHOD – L PLC GROUP

The aggregate net tax-interest expense exceeds £2million, so the group falls within the
CIR rules.
Basic interest allowance is the lower of:
£m
30% of aggregate tax-EBITDA (30% £7m) 2.1
Fixed ratio debt cap 6
Lower is 2.1m
As there is no brought forward allowance the interest capacity is also £2.1m.
The aggregate net tax-interest expense of the group (£2.4m) is more than the interest
capacity (£2.1m), so there is a corporate interest restriction of (£2.4m - £2.1m) =
£300,000.
The group must disallow £300,000 of interest expense in their UK corporation tax
computations.

THE CONTROL TEST – ALPHA AG

Alpha AG is a CFC because it is 75% owned by UK residents.
Beta Ltd is a CFC because, although Orchard plc only has a 48% 'effective' interest,
Orchard plc can control it as a matter of fact. This is because it controls Apple GmbH,
which in turn controls Beta Ltd.
Gamma Ltd is not a CFC. This is because although there is a UK shareholder (Big plc)
with a shareholding of at least 40%, and also a non-UK shareholder with a shareholding
of at least 40% (Tiny SA), the non-UK shareholder has a holding of more than 55%.
Note. That if Tiny SA's shareholding had been 55% or less, Gamma Ltd would be a CFC
under the 40% test.

THE CONTROL TEST – DELTA LTD

Delta Ltd is a CFC. This is because there is a UK shareholder (Huge plc), with a
shareholding of at least 40%, and also a non-UK shareholder, with a shareholding of at
least 40% (Small SA) but less than 55%.
Epsilon Ltd is also a CFC. Although its UK resident shareholder (Mega Plc) only has a
30% shareholding in its own right, the shares in Epsilon Ltd owned by Mrs Sweet must
be included. This is because Mrs Sweet and Mega Plc are associated due to Mrs Sweet's
>25% shareholding in Mega Plc. The shares owned by Mega Plc and its associated
enterprises are 60% of Epsilon Ltd, which gives Mega Plc "control" for the purpose of this
test.

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 CFC GATEWAY ENTRY CONDITIONS – GLADBAGS PLC
It is unlikely that Gladbags Manufac SA meets the entry conditions which would result in
none of its trading profits passing through the CFC gateway. This is because the
incorporation of the original Overland branch is likely to constitute an arrangement
designed to reduce UK tax. Its assets and risks are managed from the UK to some
extent. It will be a question of fact as to whether the company could continue to run its
business without the UK management input, but the nature of that involvement suggests
that it could not.

CFC CHARGE – BUBBLE LTD

Bubble Ltd
Bubble Ltd is a CFC as it is non-UK resident and controlled by persons resident in the UK.
A CFC charge arises if:
 none of the exemptions apply; and
 chargeable profits pass through the gateway.
Exemptions
Assuming that the profit margin is not small (ie more than 10%), it appears that none of
the exemptions apply:
 Exempt period – Bubble Ltd has been in the group for many years
 Excluded territory – Erehwon is not an excluded territory
 Low profits – trading profits alone are at least £500,000
 Tax – the tax on Erehwon is 5.2% (£52,000/£1 million) and so less than 75% of
the UK tax payable (at 25%)
Chargeable profits
As the company was set up as part of a series of arrangements to reduce UK tax and UK
significant people functions have created all of the profits, a CFC charge arises on UK
companies (not individuals) owning at least 25% of Bubble Ltd.
The CFC charges are as follows:
UK CT on Apportioned Net UK
apportioned creditable tax CT payable
profits
£ £ £
Fizz Ltd (£1,000,000 25% 55%) 137,500 (28,600) 108,900
Pop Ltd (£1,000,000 25% 30%) 75,000 (15,600) 59,400

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 DIVERTED PROFITS TAX – APRICOT INC

It appears that arrangements are in place to avoid having a UK PE. Mango Ltd is taking
on the role of the 'avoided PE' by carrying on an activity in the UK in connection with
supplies of goods by Apricot Inc, a non-UK resident company.
It is 'reasonable to assume' that the activity of Mango Ltd is designed to ensure the non-
UK resident company does not carry on a trade in the UK for corporation tax purposes, ie
Apricot Inc ensures that Mango Ltd never concludes a contract on its behalf, and so the
tax avoidance condition (and possibly the mismatch condition) is fulfilled.
As Apricot Inc is not an SME and the income generated exceeds £10m, DPT will apply to
the taxable diverted profits.

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 7
BUSINESS PLANNING AND
CORPORATE
REORGANISATIONS

Learning outcomes
 Evaluate the tax implications of the choice of business structures
 Explain the taxation issues relating to business start-ups
 Identify legitimate tax planning measures to minimise tax liabilities
 Evaluate and advise on tax strategies to meet business objectives
 Recognise, explain and communicate opportunities to use alternative tax
treatments arising from past transactions
 Explain and evaluate the tax implications of business transformations and change
 Evaluate and advise on alternative tax strategies relating to corporate
transformations
 Identify and communicate ethical and professional issues in giving tax planning
advice
 Explain and calculate the tax implications involved in the cessation of trade

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 TOPIC OVERVIEW

Business planning and

corporate reorganisations

Choice of business
Disincorporation Corporate reorganisations
structure

Tax advantages of Disposing of a corporate

Choice of trading entity business
corporate status

Choice of entity for Tax implications of

Sale of shares
property businesses 'disincorporation'

Withdrawing profits from Sale of trade and assets

the business

Transfer of a company’s
trade within a 75% group

Hive downs

Management buyout

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 CHOICE OF BUSINESS STRUCTURE
CHOICE OF TRADING ENTITY

Unincorporated or corporate business?

Unincorporated business Company
Status  Sole trader or partnership  Corporate body
 Probably a close company –
liable to penalty tax on loans to
participators
Taxation of  All profits subject to income tax  Profits of the company subject
profits at maximum of 45% to corporation tax at 19% if
small and 25% for large
companies from 1.4.23. Marginal
relief for companies between the
relevant limits.
 Extracted profits subject to
income tax in the hands of the
shareholders at their marginal
rate (see below).
 Gains on the sale of shares
subject to CGT for individual
shareholders.
 Enhanced FYAs available for
new P&M purchased before
1.4.23 (130% for main pool,
50% for SRP items). Full
expensing for new P&M acquired
from 1.4.23.
NIC  Class 2 & 4 at 9% and then 2%  Class 1 at 12% and then 2%
(employee) + 13.8% (employer)
 Overall NIC bill could be higher
Payment of  Payments on account  Operate PAYE on employment
tax 31 January in tax year and income, payable monthly
31 July following tax year end  Corporation tax payable
 Balancing payment 31 January 9 months + 1 day after AP end
following tax year end (although large companies pay
in instalments)

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 Unincorporated business Company
Pension  Personal pension scheme (PPS)  Company can contribute to a
only PPS and/or an occupational
pension scheme (OPS)
 If a Small Self Administered
Scheme (SSAS), may lend
money to the company (the PPS
equivalent, a SIPP, cannot lend
money)
Losses  Use of losses is more flexible,  Use of losses is normally against
eg losses in first four tax years total profits of CY and PY and
of trade can be set against total then carry forward against total
income of previous three years profits.
Losses can only be used against
profits and gains made by the
company, not the business
owner.
Disposal of  The trader owns the assets so it  Disposal of assets owned by the
assets is a disposal by them which will company will be subject to
be subject to CGT at a corporation tax
maximum of 20%  If the funds are then extracted,
they will be subject to tax again
in the hands of the individual
shareholder, ie double taxation
charge
Exit strategy  Disposal of business as a going  Sell shares back to company
concern and cease to trade  Sell shares to a third party
 Disposal of separate assets and  Solvent liquidation
cease to trade  Insolvent liquidation
 Simply cease to trade
Disposal of  Disposal of each individual asset  Disposal of shares by individual
business for CGT purposes shareholders is subject to CGT
 Business asset disposal relief  Business asset disposal relief
may be available to reduce CGT may be available
rate to 10% up to £1m of gains
in lifetime.
IHT on gift  A transfer of the whole business  A transfer of shares in an
of the is eligible for BPR at 100% unquoted trading company will
business  A transfer of an asset used in a always be eligible for BPR at
partnership is only eligible for 100% (NB if quoted, BPR is at
BPR at 50% 50% providing transferor has
 A transfer of an asset used in a control)
business or partnership may  A transfer of an asset owned
qualify for 100% BPR if HMRC personally and used in a
accepts that transfer results in company he controls is only
reduction of net value of the eligible for BPR at 50%.
business [Nelson case]

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 Understanding the different tax implications between an unincorporated business and a
company will help you to demonstrate flexibility behaviour in determining the best
business medium for an organization to operate, and also to be able to consider
alternative structures as the business changes and grows.

PROPERTY BUSINESSES
Investment in property has become increasingly popular and hence the subject of recent
changes to tax legislation. The tax implications of buy- to- let investments will depend on
the type of property, how it is used and whether it is held by an individual or a company.
Residential property letting
Owned by an individual Owned through a
company
Stamp duty land  Stamp duty land tax will be  Stamp duty land tax will
tax (SDLT) payable at residential property usually be payable at
rates. residential property rates.
[This only applies  An additional 3% of  There is a 3% additional
in England and consideration applies to all charge (unless the 15%
Northern Ireland properties – unless costing less rate applies).
– different than £40,000 or a lease not  If the single dwelling costs
regimes apply in exceeding 21 years (assuming more than £500,000 then
Scotland and the individual already owns a a 15% rate of SDLT
Wales] residential property as their applies.
own residence).  Non-residents pay an
 Non-residents pay an additional 2% from 1 April
additional 2% from 1 April 2021.
2021.
Annual tax on  Does not apply to individuals.  Payable by companies on
enveloped a dwelling worth more
dwellings (ATED) than £500,000
 Relief available for
genuine property letting
businesses.

VAT  Purchase/sale of a new  As for owned by an

residential property is zero- individual.
rated.
 Purchase/sale of an existing
residential property is exempt.
 Most leases of residential
property (eg, rent) are
exempt.
 There is no option to tax for
residential property.

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 Owned by an individual Owned through a
company
Income tax/  Cash basis default if property  Accruals basis
Corporation tax receipts <£150,000, otherwise  Allowable deduction for
accruals. replacement of domestic
 Property allowance of £1,000 items (eg, freestanding
pa available instead of furniture and household
expenses. appliances).
 Allowable deduction for  Finance costs are treated
replacement of domestic items a non-trading loan
(eg, freestanding furniture and relationship debits (and
household appliances). may give rise to deficits).
 Restriction on finance costs for  Profits of a property
residential properties (see business are subject to
below). corporation tax.
 If the property is also the  Extracted profits subject
owners' home then rent-a- to income tax in the
room relief is available up to hands of the shareholders
£7,500. (see below).
 Profits of a property business
are taxed as non-savings
income at 20%, 40% and 45%
Losses  Property profits and losses are  Property profits and
pooled on a tax year. losses are pooled in an
 A resulting loss is carried accounting period.
forward against future  A resulting loss is first
property profits. relieved against total
income in the accounting
period. Any remaining
loss is carried forward for
use against total income
in future accounting
periods.
 NTLR deficit on finance
costs is available for
relief.
Tax on gains on  Capital gains tax is charged on  Corporation tax is charged
disposal gains on disposal at 18%/28% on disposal.
 CGT payable within 60 days of  CT payable on normal
completion. due date.

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 Owned by an individual Owned through a
company
Inheritance tax  On death of the individual, a  On death of the
property will form part of the shareholder, the shares
death estate and will not be will form part of the death
subject to the residence nil estate.
rate band (assuming it is not  Inheritance tax planning
the individual's main may be easier if
residence). properties are held in a
 BPR is not available as this is company as shares can be
an investment business. transferred piecemeal.
 BPR is not available as
this is an investment
business.

Furnished Holiday Accommodation (FHA)

Furnished holiday accommodation is a special type of letting business that is treated
similarly to a trade. The following tax advantages apply to such properties:
 Profits are treated as relevant earnings for pension contributions;
 Capital allowances are available on furniture (including initial furnishing of the
property, not just replacement costs);
 Finance costs are fully deductible from FHA profits;
 CGT business reliefs are available on disposal, eg gift / rollover/ BADR; and
 IHR BPR is available if owner has substantial involvement in the letting.
To qualify as FHA, a property must be:
 Available for commercial letting for at least 210 days in the tax year; and
 Actually let for periods lasting less than 31 days per tenant, for a total of at least
105 days in the tax year.

Restriction on finance costs for residential properties

For individuals incurring finance costs in relation to residential property loans, the
deduction from property income is restricted. From 2020/21, none of the finance costs
are deductible against property income. Instead, the costs are given relief as an income
tax reducer at 20%.
This restriction does not apply to properties held by a company, or to commercial
property or FHLs. Possible options for landlords to avoid this cap are to:
 Sell one property and repay their loans;
 Refocus their business on commercial or FHL accommodation; or
 Transfer property to a company (ie incorporate) although this may be costly in
terms of SDLT and CGT. Incorporation relief may be available to defer CGT if the
property business is 'actively managed'.

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 Cap on relievable interest
For an individual with one property business, the amount of interest given tax relief as a
tax reducer is capped at the lowest of:
1 The amount of interest paid plus any unrelieved amounts from prior years;
2 The property profit for the year, net of brought forward losses; and
3 ATI: Income from all sources, less savings and dividend income, less personal
allowances.
Any interest unrelieved as a result of this cap is then carried forward to obtain relief in
the following years in 1) of the above calculation.

PROPERTY FINANCE COSTS RESTRICTION – JOHN

In 2023/24, John has income from self-employment of £9,000. In addition, he has a
property letting business with rental income of £10,000 with associated interest of
£3,000 and other allowable expenses of £3,600. John has no other income. There is no
brought forward relief.
Requirement
a) Calculate the amount of finance costs on which John can obtain basic rate relief in
2023/24 and determine the amount of carried forward finance costs.
b) Calculate John's income tax liability for 2023/24.

SOLUTION

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 WITHDRAWING PROFITS FROM THE BUSINESS

Extracting profits from a company

Method of Treatment for company Treatment for individual
extracting shareholder/director
funds
Salary, bonus,  Cost to company :  Employment income treated as part
commission, £ of relevant earnings for pension
benefits Bonus X purposes.
Plus: ER NIC X  Net income retained:
Gross cost X £
Less CT relief (X) Bonus X
Net cost X Less: IT 20/40/45% (X)
 Can discriminate and make NIC 12%/2% (X)
payments to selected directors
Net cash X
only.
 Employer's NIC applies to
salary & benefits with no upper
limit.
Dividend  Not an allowable deduction for  Subject to income tax at a max rate
CT purposes. of 39.35%
 Cost to company is dividend  First £1,000 of dividends is subject to
paid. the dividend nil rate band ie taxed at
 Must be paid to all 0%
shareholders of same class,  Not part of relevant earnings for
including minority pension purposes.
shareholders. Cannot  No employee's NIC.
discriminate payments Net income retained:
between shareholders (unless
different classes of shares are £
issued). Dividend paid X
 Must be paid out of retained Less IT @ (X)
earnings. If the company 0/8.75/33.75/39.35%
never makes a profit, Net cash X
dividends may not be payable.
 No employer's NIC arises.
Pension  Employer's contributions are  Employer's contributions are an
an allowable deduction for CT exempt benefit.
purposes. Reduces CT payable.  Funds in scheme grow tax-free.
 Cost to the company is gross  No employees' NIC.
contribution less CT relief.  Pension income is taxable on
 Can discriminate between retirement although max 25% (max
individual employees. of 25% £1,073,100) of may be
 No employer's NIC. taken as a tax-free lump sum.

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 SOLE TRADER VS COMPANY – NORMA (1)
Norma is intending to start a new business on 6 April 2025 and anticipates a profit of
£60,000 in the first year of trade. She will prepare accounts to 31 March each year. She
is undecided whether to:
a) Operate as a sole trader; or
b) Operate as a limited company, draw a salary of £20,000 p.a. and draw out all the
remaining profits as a dividend.
Requirement
Compare the tax and national insurance resulting from each alternative and calculate the
net cash retained by Norma in each situation. If Norma operates through a company, she
will be the only employee.

SOLUTION

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 SOLE TRADER VS COMPANY – NORMA (2)
Use the information above relating to Norma.
Another option has been suggested to her: Take a salary of £9,100 and draw out all the
remaining profits as a dividend.
Requirement
Calculate the tax and national insurance resulting from the above suggestion and
calculate the net cash retained by Norma.

SOLUTION

Allocating dividend income

Care may need to be taken if setting up a company with spouses/civil partners as
shareholders.
Provided the transfer of shares is an outright gift, however, HMRC should not challenge
the taxation of dividends individually on each spouse. Jones v Garnett or 'Arctic Systems'
(2007).

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 SALARY/BONUS OR DIVIDEND – COST TO THE COMPANY
– STEVE
Grant and Steve are directors of Klub Ltd, a company in which they each own 50% of the
shares. They receive salaries from Klub Ltd of £52,000 and £12,570 respectively and
have no other income.
Klub Ltd's taxable total profits for the year ending 31 March 2024, ignoring any additional
payments made, are £40,000. No dividends have yet been paid in the year to
31 March 2024.
Requirement
Calculate the cost to Klub Ltd of paying additional salary or a dividend to Steve in
2023/24 such that he receives additional income, net of all taxes and deductions, of
£6,000 and recommend a course of action.

SOLUTION

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 SALARY/BONUS OR DIVIDEND – COST TO THE COMPANY
– GRANT
Requirement
Using the information in the previous example calculate the cost to Klub Ltd of paying
additional salary or a dividend to Grant in 2023/24 such that he receives additional
income, net of all taxes and deductions, of £6,000 and recommend a course of action.

SOLUTION

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 SUMMARY

Choice of business
structure

Choice of entity for Withdrawing profits from

Choice of trading entity
property businesses the business

Sole trader: Individual ownership: Remuneration:

IT@ max 45% • IT on profits (NSI) Trading deduction for
Class 4 NIC • Finance cost restriction company (inc Er’s NIC)
POA 31 Jan in tax year & 31 • SDLT@ max 15% (£1.5m+) Cash: IT up to 45% NIC
July following the tax year • Losses vs property income only E’ee and E’er
Balance following 31 Jan • CGT @18%/28% on sale Benefits: Taxable IT/Class
CGT payable by owner on 1A NIC
disposal of assets Corporate ownership: Exempt options available
BPR for IHT if transfer • CT on profits
whole business • Further IT on extracted profit Dividends:
• Losses vs TTP No trading deduction
Company: • SDLT@ max 15% (£500k+) Extra IT at dividend rates
CT on taxable profits after • ATED if MV>£500k No NIC
salary/ER NIC • NTLR for interest (unrestricted) Company must have
Extract profits at IT rates • CT on gain distributable profits
Assets sold subject to CT,
proceeds extracted at IT IT on profits (NSI): Pensions:
rates • FHA has tax advantages Trading deduction for the
BPR on any number of company
(treated as business)
shares in unquoted trading No IT or NIC
company Funds grow in scheme tax
free

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 DISINCORPORATION
TAX ADVANTAGES OF CORPORATE STATUS
IT, NIC and CT saved with corporate status will decrease as corporation tax rates rise.
Some tax incentives are available only to companies, eg:
 Intangible fixed assets reliefs (although restricted in relation to goodwill);
 Research and development expenditure and tax credits; and
 The substantial shareholdings exemption.
Tax saved has to be balanced against the increased administration and legal formalities
required and the obligation to make certain information publicly available.

TAX IMPLICATIONS OF 'DISINCORPORATION'

When a company 'disincorporates', there are significant tax implications. The following
table assumes that the 'disincorporation' is undertaken to enable the owner/director to
revert to being a sole trader and that it is a solvent company.

Corporation tax  Company will cease to trade - end of an AP.

 CT will be due 9 months and 1 day after cessation.
 Will probably be a non-trading close company after cessation:
– Any loans to purchase shares by shareholder/director will
no longer be eligible for interest relief
– Liable to CT at large companies' rate from 1 April 2023
Trading losses  Trade losses cannot be carried forward and will be lost
unless:
– Carry back losses of final 12 months up to three years
against total profits
 Unrelieved brought forward losses can be offset against total
profits in the three years to the date of cessation.
 Advisable to transfer assets prior to cessation if trading losses
in final AP to offset against total income including gains.
Capital  BA/BC on transfer of assets at MV.
allowances  Can elect to transfer at TWDV - shareholder and company are
connected persons.
Intangible fixed  Disposal at MV:
assets – Gain if chargeable asset
– Trading profit if new IFA
 IFAs will be chargeable assets for sole trader (potential for
rollover relief into purchased goodwill, no further amortisation
relief).
Stock  Disposal at market value = trading income.
– Can elect to transfer at higher of cost and actual sales
proceeds

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 Income tax &  Commence to trade –notify HMRC as soon as possible for both
NIC IT and NIC to avoid a penalty.
 A 31 March accounting date will avoid the need to time-
apportion profits to tax years.
 Unlikely that large redundancy payments will be acceptable to
HMRC as exempt from IT nor as allowable for CT purposes.
Company's  Deemed proceeds at market value:
chargeable gains – Sole trader and company connected
– Capital gains or losses for company
 Net gains substantial if gift relief was used at incorporation
(low base cost of assets).
Capital gains tax  The disposal of the shares via liquidation/striking off (see
below) = capital gain.
 If IR used at incorporation – deferred gain crystallises.
Stamp duty land  SDLT may be payable if any consideration paid by
tax shareholder to company for L&B.

Stamp duty  No SD if shares cancelled.

Value added tax  TOGC will apply if conditions met.

 If not a TOGC, transfer of assets may be taxable supply of
goods.

Winding up the company

The owner/director has a number of choices as to what to do with the company:
 Allow the company to become dormant – still need to comply with company law
requirements.
 Liquidation – time-consuming and can be expensive.
 Striking off – less expensive means of dissolving a company.

DISINCORPORATION – HELEN
Helen has decided that she is tired of the administration required to operate her
company including the need to operate PAYE for just herself. She has therefore decided
to revert to being a sole trader on 1 January 2024.
At incorporation on 1 January 2017, the only chargeable assets were the goodwill and
the property used in the business (sole trader business commenced 1 January 2016). At
incorporation Helen transferred all of the assets of the business in exchange for shares
with a nominal value of £1,000. Helen is the sole shareholder.
Helen used incorporation relief to defer her gains.
Helen, who has always been an employee of her company, has decided to dissolve the
company. She has appointed a liquidator and is therefore seeking to make a capital
distribution of all the assets in the company.

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 Cost MV at MV at
incorporation disincorporation
£ £ £
Property 25,000 80,000 130,000
Goodwill – 40,000 70,000
Other net assets 18,000 30,000 65,000
Total 43,000 150,000 265,000

The property was originally purchased on 1 January 2016.

The other net assets of £65,000 available at disincorporation include a cash balance of
£22,000 and an amount of corporation tax payable of £2,445 as a result of adjustments
for the sale of stock to Helen and the balancing adjustments arising on the transfer of
plant and machinery. Each item of plant and machinery included in the other net assets
figure originally cost less than £6,000 and has not appreciated in value.
Helen has always been a higher rate taxpayer and has already used her annual exempt
amount for 2023/24. Helen’s company has an accounting reference date of 31 March.
Assume that Helen’s company has profits of £100,000 per annum (before any
adjustments arising from the transfer of the assets to Helen).
Requirements
a) Calculate the total value of the assets the company should transfer to Helen at
disincorporation assuming all reserves are distributable.
b) Calculate the capital gains tax payable by Helen on the disposal of the shares
assuming incorporation relief of £95,000 was available and not disclaimed.
c) Calculate the cash cost of disincorporation.
Note. Ignore SDLT.

SOLUTION

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 SUMMARY

Disincorporation

Tax advantages of Tax implications of

corporate status disincorporation

IT, NIC and CT saved decreases Corporation tax:

as CT rates rise Cease to trade
IFA, R&D and SE only BA/BC on P&M unless
available to companies TWDV election

Tax saved must be balanced by BF trade losses wasted if

increased administration and unused in final AP, unless
legal formalities TLR available for loss
CT on gains
CGT:
On shares disposed of via
liquidation/striking off
BADR may be available
Outside scope if TOGC
SLDT:
Charged on land and
buildings transferred if
consideration
IT:
Commence to trade
Trading profits taxable
at NSI rates and subject
to Class 4 NIC

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 CORPORATE REORGANISATIONS
DISPOSING OF A CORPORATE BUSINESS
May take the form of:
1 Sale of shares; or
2 Sale of trade and assets by the company.

SALE OF SHARES

SALE OF SHARES – MR A
Company A is owned 100% by Mr A. Mr A has found a purchaser (Company P) for his
shares in Company A and plans to dispose of them for consideration wholly in cash.
a) You are required to set out the tax implications for Mr A, Company A and the
purchaser of the proposed sale. You should consider how any tax liabilities arising
could be mitigated.
b) How would your answer to (a) change if Company A was owned by Company B?

SOLUTION

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 Dividend stripping
The practice of removing funds from a company by way of a dividend:
 An effective tax-planning tool – reduce the value of the company's shares prior to
its sale/liquidation.
 Must be paid from distributable reserves.

Corporate vendor
If shares do not meet SSE conditions – Dividend is exempt:
 HMRC may attack the dividend as a form of value shifting.

Individual vendor
If shares do not qualify for BADR:
BRT – 8.75% rate on dividend v 10% on capital gain
HRT – 33.75% rate on dividend v 20% on capital gain
ART – 39.35% rate on dividend v 20% on capital gain
Also consider availability of dividend nil rate band.

For purchaser
Reduction in share price will save the purchaser 0.5% stamp duty.

Demerger relief
Makes it easier to divide and put into separate ownership the trading activities of a
company or group of companies when no new controlling owner is involved.

Examples of a demerger:
1 A plc owns 100% of the shares in X Ltd.
 A plc distributes the shares in X Ltd to its own shareholders.
 A plc shareholders now own 100% of the shares in both A plc and X Ltd
directly:

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 Shareholders

A plc X Ltd

2 A plc owns 100% of the shares in X Ltd.

 A plc creates a new company, Newco Ltd, and transfers the shares in X Ltd
to Newco Ltd.
 In exchange, Newco Ltd issues shares in itself to the shareholders of A plc:

Shareholders

A plc Newco Ltd

X Ltd

The tax effects are:

 Distribution is exempt (i.e. not treated as income or ABGH distribution in the hands
of the recipient).
 Degrouping charges do not apply to a company leaving a group solely as a result
of the demerger.
 HMRC will 'consider sympathetically' the application of the major change in nature
or conduct of trade provisions.

SALE OF TRADE AND ASSETS

Sale of trade and assets of a company

SALE OF TRADE AND ASSETS – COMPANY C

Company C owns 100% of Company D, a manufacturing company that operates from its
own freehold premises. Company C is going to sell the trade and assets of Company D to
Company E.
You are required to set out the tax implications of the sale. You should consider how any
tax liabilities arising could be mitigated.

SOLUTION

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 What happens next?
The shareholders have a number of choices as to what to do with the company:
 Allow the company to become dormant – still need to comply with company law
requirements.
 Liquidation – time-consuming and can be expensive.
 Striking off – less expensive means of dissolving a company.

Allocation of consideration
Can be tax efficient but must also be commercially justifiable.
HMRC has the power to make a 'just and reasonable' apportionment.
Where the disposal includes property which contain fixtures:
 The vendor and purchaser may jointly elect to treat some of the consideration as
relating to the fixtures (known as a s.198 election).
 A s.198 CAA 2001 election may only be made where capital allowances have been
claimed on the fixtures.
 The allocated consideration cannot exceed the original cost.
 Vendor will end up with balancing charges, which can then be offset against
brought forward or current year (non-capital) losses.
Where consideration is not in the form of cash, its value will be equal to the market value
of the assets transferred.

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 SALE OF ASSETS OR SHARES – HENRY'S HATS LTD
Henry set up Henry's Hats Ltd on 1 April 2016, when he subscribed for 100,000 £1
ordinary shares, using his inheritance following the death of his uncle. Since that date,
the company has been making couture hats.
Henry has been approached by Bravo Ltd, which has expressed an interest in purchasing
the business.
Henry's Hats Ltd has the following assets at 31 March 2024.
Cost TWDV MV
£ £ £
Stock 85,000 n/a 100,000
Plant 300,000 150,000 250,000
Factory 800,000 n/a 550,000

Henry's Hats Ltd has a trading loss of £250,000 carried forward at 31 March 2024.
Bravo Ltd has offered to either:
a) Purchase the assets of the business from Henry's Hats Ltd for £1,130,000. If this
option is followed, Henry will immediately put the company into liquidation
(assume the costs of liquidation are negligible and no outstanding creditors at
31 March 2024).
b) Purchase the Henry's Hats Ltd shares directly from Henry for £1,115,000.
Henry has never made any previous claims for business asset disposal relief.
Requirement
Assuming that any sale will take place on 1 April 2024, advise Henry of the option he
should accept (ignore the annual exempt amount).

SOLUTION

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 TRANSFER OF A COMPANY'S TRADE WITHIN A 75% GROUP

Introduction
H Ltd

100% 100%

Trade
S1 Ltd S2 Ltd
There are special rules if the trade remains in substantially the same ownership.
This is normally referred to as a succession.

A qualifying succession
A 'succession' occurs if a trade carried on by one company (the 'predecessor') is
transferred to another company (the 'successor') in substantially the same
ownership.
This test is met if the same persons hold an interest of at least 75% in the trade
both:
a) At some time during the 12 months prior to transfer; and
b) At some time during the 24 months following the transfer; and
c) Throughout those periods the trade is carried on by a company chargeable
to tax in respect of it.

Implications of a succession

General
 An accounting period ends on the date of transfer.
 If S1 Ltd becomes dormant, then H Ltd will have one fewer related 51% group
company.

Chargeable gains
Degrouping charges will arise on S2 Ltd if it is sold within six years of the transfer.
If a qualifying share disposal it will adjust the sale proceeds of the sale of S2 Ltd and may
be exempt if the substantial shareholding exemption applies.
If S2 sells any SBA-qualifying assets, all SBAs claimed by the group to date will be added
to the proceeds on disposal.

Capital allowances on plant and machinery

 The predecessor may claim capital allowances in the final accounting period as if
no transfer had taken place.
 The successor takes over the plant and machinery at their TWDV. SBAs are
claimed by the successor as if they had always owned the asset.

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 SDLT
As it is a 75% group, SDLT is not payable on the transfer of any land and buildings.
A subsequent sale of S2 Ltd within three years will mean the withdrawal of this
exemption and the SDLT will then have to be paid.

Transfer of trading losses

 The successor can claim relief for trading losses not used by the predecessor. The
offset is against total profits. The predecessor is not entitled to terminal loss relief.
No other losses are transferred.

Restriction of loss carried forward

The trading losses transferred by the predecessor is restricted where the predecessor's
'relevant liabilities' exceed its 'relevant assets'.
The losses available to carry forward are as follows:
£ £
Losses b/f at date of succession X
Less relevant liabilities X
relevant assets (X)
(X)
Losses available to successor X

Relevant assets
 Assets which are not transferred to the successor; plus
 The consideration paid in respect of the transfer of the trade.
Valued at their open market price immediately before the predecessor ceases to carry on
the trade.
Relevant liabilities
Liabilities which are not transferred to the successor, ie are retained by the predecessor.
Does not include the predecessor's share capital, share premium account, reserves and
relevant loan stock.
Where 'relevant loan stock' (not treated as a relevant liability) is secured on a 'relevant
asset', the value of the asset is reduced by the amount of the relevant loan stock.

SUCCESSION OF TRADE – LOSS RESTRICTION – FIG LTD

Fig Ltd transferred its primary trade to a 75% subsidiary, Date Ltd. Fig Ltd had unutilised
trading losses of £36,000 arising from the transferred trade.
Fig Ltd retained the following:
 the lease on its factory premises valued at £28,000,
 an overdraft of £42,000 and
 £8,000 81/2% loan stock secured on the factory premises.
All other assets and liabilities were transferred to Date Ltd, which paid £15,000 for the
trade.

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 Note. Fig Ltd carries on other activities and is not insolvent, the overdraft relates entirely
to the trade transferred.
Requirement
Calculate the losses that can be transferred from Fig Ltd to Date Ltd on the transfer of
trade.

SOLUTION

HIVE DOWNS
Typically involves the transfer of trade and assets of one company to a new subsidiary in
which it has beneficial ownership (Newco) prior to a sale of Newco to a third party.
It provides some of the tax advantages of a share sale whilst avoiding some of the
disadvantages.
a) Trading losses transfer with the trade and are relievable by Newco subject to
MCINOCOT rules.
b) Capital allowances (and SBAs) continue unaffected ie no balancing adjustments
arise.
c) Purchaser acquires a company containing the assets it requires and a clean
compliance history.
d) The shares in the new company will qualify for the substantial shareholding
exemption if:
 The assets transferred were held and used in the trade of another group
company for the 12 months before the transfer and were used in the trade
of the new company at the time of the share sale.
 The degrouping charges will be added to the proceeds on the sale of the
shares and be exempt. IFA degrouping charges will not apply if SSE applies.
e) A gain may arise on the sale of the Newco shares.

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 HIVE DOWN – ZEK LTD
Zek Ltd, an internet bookseller, began trading in 2001. Its only chargeable assets for
capital gains purposes are as follows:
Market value Indexed cost
£m £m
Warehouse 1.5 0.9
Office 2.0 1.0
Its other net assets are worth £0.5 million. Zek Ltd has been trading at a loss and has
accumulated brought forward trading losses of £2 million.
Zek Ltd's parent company, Duke plc, wishes to sell Zek Ltd and has found a possible
purchaser, Alpha plc, which is prepared to pay £4 million. Alpha plc would like the benefit
of Zek Ltd's brought forward losses but is not keen on buying the shares of Zek Ltd due
to a negligence claim pending against the company.
Requirement
Explain how a hive down may provide a suitable method for sale.

SOLUTION

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 MANAGEMENT BUYOUT
The business of an existing company is bought by its managers, with or without the
assistance of external financiers.
Normally follows the hive down route – tax consequences above are relevant.
There are three additional taxation considerations:

Close company status

The newly formed company will often satisfy the definition of a close company.

Taxation consequences of issuing shares to managers

Income tax implications and a NIC liability if any advantage due to employment.
If shares acquired at less than the perceived market value, the difference will give rise to
assessable employment income.
If shares are acquired partly paid deemed to be due to employment, the amount
outstanding will be treated as a beneficial loan until outstanding amount paid.
Managers may be issued with share options to acquire shares in the new company –
subject to the normal share option rules.

Relief available for financing a MBO

The MBO team will almost certainly need to raise finance to purchase an interest in the
business and the company may also need to borrow to continue operations.
Managers
Qualifying loan interest relief against income if a loan is taken out to buy shares in the
company providing:
a) Hold more than 5% of the ordinary share capital; or
b) Full-time working officers or employees involved in the management of the
company and own some shares; or
c) The company is employee-controlled.
This relief is not given if income tax relief has been claimed under EIS.
The restriction on income tax reliefs against total income may apply (see earlier in
notes).
Company
Interest on finance raised by the company will be allowable as a trading expense or non-
trading loan relationship debit.

Understanding the possible options for a corporate reorganisation will help you to
demonstrate both problem solving and decision-making skills and adds value
behaviour as you ensure all relevant information is considered to identify the most tax
efficient reorganisation option for a business.

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 SUMMARY

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 ACTIVITY ANSWERS

PROPERTY FINANCE COSTS RESTRICTION – JOHN

a)
Lowest of: 2023/24
£
Finance costs 3,000
property income £(10,000 – 3,600) 6,400
'ATI' = £9,000 + £6,400 – £12,570 2,830
The amount on which John can claim relief in 2023/24 is 2,830
The £2,830 qualifies for relief in the current year, given as a tax reducer at the
basic rate. The remaining £170 (£3,000 – £2,830) is carried forward to 2024/25.
b)
Trading profit: 9,000
Property income (as above) 6,400
Less PA (12,570)
2,830

IT: 2,830 20% 566

Less interest relief (£2,830 20%) (566)
Income tax liability 0

SOLE TRADER VS COMPANY – NORMA (1)

a) Sole trader £ £
Income tax:
Trading profit 60,000
Less PA (12,570)
47,430

IT: 37,700 20% 7,540

9,730 40% 3,892
£11,432

Class 2 NIC: 52 weeks £3.45 £179

Class 4 NIC: 9% (50,270 – 12,570) 3,393

2% (60,000 – 50,270) 195
£3,588

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 Net cash retained: £
Profit 60,000
Less: income tax (11,432)
class 2 NIC (179)
class 4 NIC (3,588)
£44,801

b) Limited company – Salary £20,000, rest as £ £

dividend
Calculate dividend:
Profits 60,000
Less: salary (20,000)
E'ers NIC (20,000 – 9,100) 13.8% (1,504)
38,496
CT at 19% (TTP < £50,000) (7,314)
Profits after tax = dividend paid £31,182

Income tax: NSI DIV

£ £
Employment income 20,000
Dividend 31,182
Less PA (12,570)
7,430 31,182

Tax: £
7,430 20% 1,486
1,000 0% 0
29,270 8.75% 2,561
37,700
(31,182 – 1,000 – 29,270) 33.75% 308
4,355

EE’ NIC: (20,000 – 12,570) 12% 892

Net cash retained: £

Salary 20,000
Dividend 31,182
Less: income tax (4,355)
EE’ NIC (892)
£45,935

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 SOLE TRADER VS COMPANY – NORMA (2)
Salary £9,100, rest as dividend:

Calculate dividend: £
Profits 60,000
Less: salary (9,100)
ER’s NIC (–)
50,900
CT at 25% 12,725
Less marginal relief: 3/200 (£250,000 – £50,900) (2,987) (9,738)
Profits after tax = dividend paid £41,162

Income tax: NSI DIV

£ £
Employment income 9,100
Dividend 41,162
Less PA (9,100) (3,470)
– 37,692

IT: (1,000 0%) + 36,692 8.75% 3,211

EE NIC: Salary less than primary threshold Nil

Net cash retained: £

Salary 9,100
Dividend 41,162
Less: income tax (3,211)
EE’s NIC (–)
£47,051

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 SALARY/BONUS OR DIVIDEND – COST TO THE COMPANY
– STEVE

Payment of dividend
Net cost to the company Steve
£
Net dividend required 6,000

Gross income
BR taxpayer (£1,000 + (£5,000 100/91.25) 6,479
Less income tax liability
1,000 0% + £5,479 8.75% (479)
Net income 6,000

Cash dividend to be paid by the company

£1,000 + (£5,000 100/91.25) 6,479

Total net cost to company £6,479

Payment of additional salary/bonus in 2023/24
Steve is a basic rate taxpayer. Accordingly, his effective IT + NIC rate is 32% (20% +
12%). Therefore, gross up at 100/68.
Net cost to the company Steve
£
Net salary required 6,000

Gross employment income at effective IT and NIC rate

BR taxpayer (£6,000 100/68) 8,824
Less: income tax payable
(£8,824 20%) (1,765)
Primary Class 1 NIC
(£8,824 12%) (1,059)
Net income 6,000
Payment to be made by the company
Gross salary 8,824
Employer's secondary Class 1 NIC
£8,824 13.8% 1,218
10,042
Less: corporation tax saving:
£10,042 19% (1,908)
Net cost to the company 8,134
Advice
It is cheaper for Klub Ltd to pay dividends as opposed to additional salary.

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 SALARY/BONUS OR DIVIDEND – COST TO THE COMPANY
– GRANT
Payment of dividend
Net cost to the company Grant
£
Net dividend required 6,000
Gross income
HR taxpayer (£1,000 + (£5,000 100/66.25) 8,547
Less income tax liability
1,000 0% + 7,547 33.75 % (2,547)
Net income 6,000

Cash dividend to be paid by the company 8,547

Total net cost to company £8,038
Payment of additional salary/bonus in 2023/24
Grant is a higher rate taxpayer and his earnings exceed the upper earnings limit for NIC
purposes. Accordingly, his effective IT + NIC rate is 42% (40% + 2%). Therefore, gross
up at 100/58.
Net cost to the company Grant
£
Net salary required 6,000

Gross employment income at effective IT and NIC rate

HR taxpayer (£6,000 100/58) 10,345
Less: income tax payable
(£10,345 40%) (4,138)
Primary Class 1 NIC
(£10,345 2%) (207)
Net income 6,000

Payment to be made by the company

Gross salary 10,345
Employer's secondary Class 1 NIC
£10,345 13.8% 1,428
11,773
Less: Corporation tax saving:
£11,773 19% (2,237)
Net cost to the company 9,536
Advice
It is cheaper for Klub Ltd to pay dividends as opposed to additional salary.

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 However, there is a slight problem as the directors need to receive different amounts of
dividend. This could be difficult in practice as they each own 50% of the company's
shares.

DISINCORPORATION – HELEN
a) Helen can distribute all the assets of the business to herself as a capital
distribution. This will constitute a disposal by the business of any chargeable assets
giving rise to further corporation tax on any gains arising. She should transfer the
assets less the corporation tax liability:
£
Property
Proceeds 130,000
Less: cost (market value at incorporation) (80,000)
IA 1 January 2017 to December 2017 = (278.1 – 65.5)/265.5
= 0.047 × £80,000 (3,760)
Chargeable gain 46,240

Goodwill (Note 1)
Proceeds 70,000
Less cost (market value at incorporation) (40,000)
Trading profit 30,000

Total gains/profits = £46,240 + £30,000 76,240

CT @ 26.5% (Note 2) 20,204

Distributable assets to transfer = £265,000 – £20,204 244,796

Note 1. The goodwill arises after 3 December 2014. Therefore, no deduction

would have been allowed for amortisation and there is a trading profit based on
the proceeds less original cost.
Note 2. The additional profits will fall in the marginal rate band (as the company
already has profits of £100,000), suffering corporation tax at the marginal rate
of 26.5%.
b) Helen would also incur a gain on the disposal of the shares with deemed proceeds
equal to the market value of the assets transferred:
£
Proceeds 244,796
Less cost (W) (55,000)
189,796

CGT @ 10% (BADR available) 18,980

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 Working
£
Base cost of shares
Market value of assets transferred 150,000
Less incorporation relief (given) (95,000)
55,000

c) There would be a cash cost of £2,445 + £20,204 + £18,980 = £41,629.

SALE OF SHARES – MR A
a) Tax implications of the sale of Company A by Mr A:
Mr A

Sale of shares to a third party by an individual:

Gain or loss on shares  Capital losses
 Annual exemption
 Consider BADR
– Are conditions met?
– Reduces CGT rate to 10%
 Consider delaying/advancing to mitigate CGT
 Consider pre-sale dividend to reduce gain
 EIS deferral relief to defer gain if subscribe for
shares in EIS company
 Seed EIS investment can exempt a gain up to
£100,000 if subscribe for SEED EIS shares
VAT  Sale of shares is exempt

Company A

Taxation consequences of share sale for company being

sold
Pre-entry  Brought forward trading losses will continue to be carried
trading forward and can be set against future profits from the same
losses trade.
 If rules relating to major change in nature or conduct of the
trade apply, losses brought forward will be wasted as they
will not be available for future offset.
 Pre-entry trading losses are not usually eligible for surrender
to a new loss relief group, if applicable.

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 Taxation consequences of share sale for company being
sold
Pre-entry  Brought forward capital losses will continue to be carried
capital forward and can be set against future gains within the
losses company being sold.
 Pre-entry capital losses cannot be relieved against gains on
assets owned by a new chargeable gains group, if any (eg by
deemed transfers before sale).

Capital  Assets stay with the company being sold at their tax written
allowances down value and will continue to receive allowances as
normal.
Company P

Taxation consequences of share purchase by a company

Stamp duty  Stamp duty will be payable on the transfer of shares at 0.5%.
Dividends  Assuming the acquiring company holds over 50% of the
shares any dividends received are unlikely to have any
corporation tax implications. Most dividends are exempt from
corporation tax and exempt dividends from associated group
companies are not included in ABGH distributions.
Pre-entry  Pre-entry trading losses are not usually eligible for group
trading relief.
losses  The acquisition of a company with brought forward trading
losses is subject to anti-avoidance legislation.
 Any brought forward losses cannot be carried forward after
the date of the change in ownership if either:
– There is a major change in the nature or conduct of the
trade within three years before to five years of the
change in ownership.
– After the company's trading activities have become small
or negligible, there is a change in ownership followed by a
considerable revival of the trade.
 Consider the implications of proposed changes on the future
availability of losses.
Pre-entry  Affects all realised capital losses at the time of the change in
capital ownership.
losses  Pre-acquisition losses may only be used against:
– Gain made before the company is acquired;
– Gain on asset owned at the time the company is
acquired; or
– Gain on asset purchased from a third party since joining
the group and used in the trade it carried on at the time
it joined the group.

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 Where a company changes ownership as part of an arrangement which is designed
to give rise to a tax advantage in relation to the offset of capital gains and losses,
a targeted anti-avoidance rule applies instead of the pre-entry loss rules outlined
above. Under these rules no losses can be offset against pre-entry gains and
pre-entry losses are not allowable losses.
b) Company B
Sale of shares to a third party by a company:
Gain or loss on  Capital gain or loss arises (deduct IA, no AEA)
shares
 Exempt disposal if SSE available
– Are conditions met?
 Consider pre-sale dividend to reduce gain
VAT  Sale of shares is exempt
Company A – additional implications:

Group implications of share sale for the corporate vendor

Dividends  If the corporate vendor retains some shares (<50%), any
exempt dividends received will become ABGH distributions
(and might therefore impact on the CT payment date).
VAT group  If a company leaves a VAT group, HMRC should be notified
and any subsequent sales between the group and the
departed member are liable to VAT.
Group relief  Eligibility for group relief ceases from the date 'arrangements'
to sell a company exist. Where 'arrangements' come into
force part way through an accounting period, profits and
losses of that accounting period need to be prorated (see
earlier in notes).
Gains group  A degrouping charge arises when a company leaves a gains
group within six years of a previous intra-group transfer of a
tangible or intangible asset, whilst still owning the asset
transferred.
The degrouping charge will be added to the sales proceeds
received on the disposal of the shares if it is as a result of a
qualifying share disposal and will be exempt if SSE applies.
 Any gain arising is chargeable on the departing company in
the accounting period in which the company leaves the group
if it is not as a result of a qualifying share disposal. Demerger
relief may mean that no degrouping charge arises.
 For intangible fixed assets, the deemed sale and reacquisition
of the asset on the date of the intra-group transfer gives rise
to a profit/loss. The adjustments create a debit or credit
which is chargeable or allowable in the accounting period in
which the company leaves the group. However, no
degrouping charge arises if the company is leaving the group
due to a share disposal which qualifies for SSE.

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 SALE OF TRADE AND ASSETS – COMPANY C
Company D

Chargeable gains Trading profits

 Gains/losses on each chargeable asset  Cessation of trade ends the accounting
eg property. period.
 Gains on SBA qualifying assets  Profit or loss on post April 2002
increased by SBAs claimed to date. goodwill.

 Some assets eligible for rollover relief.  Balancing charges or allowances on

 If part of a gains group eligible on a assets qualifying for capital allowances.
group wide basis.
 Capital losses continue to carry forward  Unused trading losses will lapse unless
after cessation of trade. terminal loss relief is available or losses
are transferred with the trade under
s.944 (see successions rules in this
Topic).
 Sale of inventory will give rise to
trading profits/ losses. If buyer
connected, can elect to transfer at the
higher of cost or price paid by buyer.

VAT – Transfer of the business as a going concern rules (TOGC) mean it is not a supply
of goods for VAT
Company E
Taxation consequences of purchase of a company's assets:

Asset Capital Revenue

Land and buildings  Price paid is base cost for  SBAs continue at the same
future disposal. annual amount for the
 Qualifying business assets purchaser as the vendor,
for rollover relief if used for (assuming construction on
trade purposes. / after 29 October 2018
and used for qualifying
purpose).
Plant and machinery  Price paid is base cost for  Capital allowances based
future disposal. on the price paid.
 Fixed plant or fixed
machinery qualifies for
rollover relief.
Goodwill (companies  Qualifying asset purchase  None unless purchased
only) for deferral of profits on from an unconnected
sale of any intangibles. person from 1 April 2019
along with other IFAs
(6.5% amortisation).

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 Asset Capital Revenue
Investments  Price paid is base cost for  None except for profits or
future disposal. losses on loan stock taxable
under loan relationship
rules.
Inventories  None  Part of future cost of sales.
Receivables  None  None

VAT  The acquisition of individual assets may give rise to irrecoverable

VAT, depending on the circumstances of the purchaser.
 SDLT (see below) is chargeable on the VAT-inclusive price of
property assets.
SDLT or Stamp  Asset purchases that include land and property assets may
Duty generate an SDLT liability for the purchaser. Share purchases will
generate a stamp duty liability in respect of the shares.
 SDLT is payable on any property included in the assets
purchased at up to 5% (commercial)/15%(residential). Stamp
duty on shares is only 0.5% but it would be payable on the full
market value of the business purchased. Overall, the amount
payable may not be substantially different depending on the
nature of the assets included in the business.
Commencement  Where the acquiring company is not already trading, the
of trade acquisition and subsequent commencement of a trade brings
about the end of an accounting period and the start of a new
one.

Company C
Assuming D Ltd then becomes a dormant company, it will no longer be an associated
group company.
Company C can extract the proceeds of the sale as follows:
 Dividend – Exempt from CT; or
 Liquidation/striking off – Exempt if share disposal meets SSE conditions.

SALE OF ASSETS OR SHARES – HENRY'S HATS LTD

a) Option 1 – sale of assets followed by winding up of the company
£
Dividend (capital proceeds) (W1) 1,108,575
Cost (April 2016) (100,000)
Chargeable gain 1,008,575

Taxable proceeds: 1,008,575

Less CGT £1,000,000 10% + £8,575 20% (101,715)
(BADR applies to the first £1m of gain)
Net proceeds 906,860

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 Workings
1. Impact of asset sale by Henry's Hats Ltd
£
Trade profits:
Sale of stock £100,000 – £85,000 15,000
Profit on disposal of goodwill (W3) 230,000
BC on plant £250,000 – £150,000 100,000
Trading profits 345,000

Chargeable gains nil

Less trading loss brought forward (250,000)
Taxable total profits 95,000

CT @ 25% 23,750
Less marginal relief: 3/200 (£250,000 – £95,000) (2,325)
CT due 21,425

Therefore, on winding up, proceeds = £1,130,000 – £21,425 £1,108,575

2. Factory
The loss on the disposal of the factory of £250,000 (i.e. £550,000 –
£800,000) is lost as there is no chargeable gain in the same accounting
period and it is not possible to carry an allowable capital loss back to
previous accounting periods.
3. Goodwill
£
Price paid for assets 1,130,000
MV of assets (900,000)
Price paid for goodwill 230,000

b) Option 2 – sale of shares

£
Proceeds 1,115,000
Cost (April 2016) (100,000)
Chargeable gain 1,015,000
Proceeds: 1,115,000
Tax £1,000,000 10% + £15,000 × 20% (business asset disposal
relief applies) (103,000)
Net proceeds 1,012,000

Henry should accept Option 2 as the net proceeds are higher.

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 SUCCESSION OF TRADE – LOSS RESTRICTION – FIG LTD
Date Ltd will be able to use the unrelieved trading losses of Fig Ltd subject to a
restriction:
Relevant Assets: £ £
Lease 28,000
Less 8½% Loan Stock (see note) (8,000)
20,000
Consideration for transfer of trade 15,000
35,000
Relevant Liabilities:
Overdraft (42,000)
Excess of relevant liabilities over relevant assets (7,000)
Losses available to B Ltd: £36,000 – £7,000 29,000

Note. This is 'relevant loan stock' which is not a relevant liability. However, as the loan is
secured on the lease, which is a relevant asset, the value of the relevant asset is reduced
by the amount of the loan.

HIVE DOWN – ZEK LTD

Alpha plc does not wish to buy shares in Zek Ltd.
Alpha will not get the benefit of Zek Ltd's losses if it only buys the assets of Zek Ltd.
A compromise solution is a hive down.
Step 1 Zek Ltd incorporates a new trading company, say Newco Ltd.
Step 2 Zek Ltd transfers its trade and assets to Newco in return for the issue of
Newco's shares to Zek Ltd. The succession rules apply and hence Zek Ltd's
losses are transferred with the trade. Chargeable assets are transferred at no
gain/no loss.
Step 3 Alpha plc buys the shares of Newco from Zek Ltd. This will not give rise to a
gain as the base cost of Newco will equal its market value.
Step 4 Newco is now a subsidiary of Alpha plc. It has the trade, assets and losses of
Zek Ltd but none of its 'history'.
Step 5 When Newco is sold, a degrouping charge arises on the assets transferred
from Zek Ltd.
Warehouse (£1.5m – £0.9m) = £0.6 million
Office (£2.0m - £1.0m) = £1.0 million
These gains will be added to the sale proceeds of the shares in Newco. Zek
Ltd will have increased proceeds of £1.6m.
As the trade and assets had been used in the trade of Zek Ltd for 12 months
before the transfer, the shares in Newco will be treated as having been held
for 12 months and it will be treated as having traded for the previous
12 months. The shares in Newco will qualify for the substantial shareholding
exemption.

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 The degrouping charges which are added to the proceeds on the sale of the
shares will be exempt.
Factors to watch
1 Newco has undergone a change of ownership. If major changes are made to the
nature or conduct of the trade carried on, the losses brought forward will lapse.
2 A transfer of assets between 75% group members is normally free of stamp duty
land tax. However, the relief is not available where there are arrangements in
place for the company to be sold or if the company actually leaves the group
within three years of the transfer.
3 It should be noted that where a sale of the transferee company has been agreed
prior to the hive down, the benefits of the succession rules may be lost.
4 Stamp duty is payable on the purchase of the shares of Newco at 0.5%.

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 5 107
one ethital dilema 8
ETHICS

Learning outcomes
 Identify and communicate ethical and professional issues in giving tax planning
advice
 Recognise and explain the relevance, importance and consequences of ethical and
legal issues
 Recommend and justify appropriate actions where ethical dilemmas arise in a given
scenario
 Design and evaluate appropriate ethical safeguards
 Recognise and advise when a tax-avoidance scheme is notifiable to HMRC and
distinguish between planning, avoidance and evasion and their consequences

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 TOPIC OVERVIEW

Ethics

Ethics in relation to a Law & guidance

Tax practice in ICAEW code

Money laundering and

Fundamental Principles
terrorist financing

Conflicts of interest Tax evasion v

tax avoidance

Ethical conflict resolution General anti-abuse rule

Disclosure of information
and confidentiality

Errors

Client acceptance and

regulatory requirements

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 ETHICS IN RELATION TO A TAX
PRACTICE

FUNDAMENTAL PRINCIPLES
The five fundamental principles of a professional accountant are:
 Integrity


Objectivity parties
Professional competence and due care
 Confidentiality
client acceptance
 Professional behaviour
Identifying instances where threats arise to the fundamental principles is necessary if the
professional accountant is to handle ethical issues appropriately.

Threats
Must evaluate threats as soon as know, or should be expected to know, of existence.
Most threats to compliance with the fundamental principles which an accountant may
experience fall into the following categories:
 Self-interest threats
 Self-review threats
 Advocacy threats
 Familiarity threats
 Intimidation threats

Safeguards

Created by profession, In the work environment

legislation or regulation

Include Include

! Effective complaints system

! Education/training/ ! Duty to report breaches of
experience for entry requirements
! CPD requirements
! Corporate governance
regulations
! Professional standards/
monitoring and disciplinary Professional judgement to
procedures conclude ifun
safeguards would be
! External reviews perceived as acceptable

Understanding the five fundamental principles will help you demonstrate the ethics
and integrity skill to identify ethical problems, understand the legal implications of the
issue, and assess if appropriate safeguards can be implemented.

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 THREATS AND SAFEGUARDS
You have just been asked to produce a quote for undertaking some tax work for a
potential client. The fee that you quote is significantly less than the fee quoted by one of
your competitors. m
Requirement
Discuss the potential threat to compliance with the fundamental principles arising from
the level of fees quoted and the safeguards to be adopted to reduce the threat.

SOLUTION

G D

elfinterestnreat

Standards for tax planning Reducing Indeed'posure

Professional Conduct in Relation to Taxation (PCRT) supplements the Fundamental
Principles with 5 'standards for tax planning':
 Client specific: planning must be specific to a client's circumstances
 Lawful: Accountants and clients should act lawfully and with integrity. If
uncertainty in the law exists, make client aware of this. Professional accountants
should consider taking further advice, especially where litigation is likely.time challenge

ffÉfff
 Disclosure and transparency: disclose all relevant facts to HMRC; tax advice
cannot rely on lack of disclosure of facts to HMRC
 Tax planning arrangements: Accountants should not be involved in tax
planning arrangements that either:
– Aim to achieve results clearly not intended by Parliament;ettesp.mn
or ofYow

–
o
Are highly artificial and seek to exploit legal loopholes
Professional judgement and appropriate documentation: keep Ab
dance
documentation of rationale for judgements exercised in giving tax planning advice

CONFLICTS OF INTEREST
tax advice
The threat of a conflict of interest
This S.jp
Take reasonable steps to identify circumstances that could pose a conflict of interest.
IIs' suYeiusselle
A conflict may arise between the firm and the client or between two conflicting clients
being managed by the same firm.

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 Safeguards
Depend on the circumstances giving rise to the conflict butut should ordinarily include:
a) Notifying client that firm's business interest or activities may represent a conflict of
interest;
Ask for permission
b) Notifying all parties that accountant is acting for two or more parties; or
c) Notifying client that accountant is not acting exclusively.
The accountant must obtain consent of parties to act.
Where a conflict of interest:
 Poses a threat to one or more of the fundamental principles; and

e
 It cannot be eliminated or reduced to an acceptable level through the application
of safeguards; then
the professional accountant should conclude that it is not appropriate to accept a specific
engagement or that resignation from one or more conflicting engagements is required.

ETHICAL CONFLICT RESOLUTION

Conflict resolution process

Consider the following:
in affected serious
a



Relevant facts
Relevant parties Is
Ethical issues involved
threat


Fundamental principles related to the matter in question
Established internal procedures
typesof
 Alternative courses of action Safeguards resolveissue
ultimately
If matter remains unresolved, resignation
but notalways
consult with other appropriate persons within the firm or
organisation for help in obtaining resolution.
Document the issue and details of any discussions held in good time.
If a significant conflict cannot be resolved, a professional accountant may wish to obtain
professional advice from the relevant professional body or legal advisors.
If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant should, where possible, refuse to remain associated with the
matter creating the conflict.

Understanding how a conflict of interest can arise, together with the safeguards and
ethical conflict resolution will help you demonstrate both problem solving and
decision-making skills and also the ethics and integrity skill. It is important to
evaluate the facts of a situation quickly to draw an accurate conclusion as to how to
address an ethical dilemma.

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 ETHICAL CONFLICT RESOLUTION
You are an ICAEW Chartered Accountant employed by a large accountancy firm but
currently on a six month secondment to a client. You report to a relatively new financial
controller named Jo Soames (who has trained in tax but is not an accountant). She has
drafted the corporation tax returns of the group of companies and included the effects of
some new measures implemented in the recent Finance Act. She has asked you to look
at the tax returns to ascertain whether the new measures work in favour of the group.
Jo has asked the following in an email:
'We need a report to the Board of Directors that shows how these new measures will
work, as I previously indicated to the Board that they are likely to be favourable for the
group. Are there any particular companies within the group which would benefit? If we
focus on these in the report, that would be helpful.
You may not have realised, but I'm not actually particularly knowledgeable about
corporation tax –when I joined I exaggerated my knowledge and experience to get the
post. I'm therefore hoping you'll write most of the report? – which we can then say we
prepared together.'
Requirement
Prepare notes which document any ethical implications for yourself arising from Jo
Soames's email and state the actions you should take.

SOLUTION

DISCLOSURE OF INFORMATION AND CONFIDENTIALITY

Disclosure of information

When to disclose
May disclose if:
a) Permitted by law and authorised by client or employer
b) Required by law
c) Professional duty to disclose, when not prohibited by law.

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 Factors to consider regarding disclosure
Factors to consider:
a) Harm to interested parties
b) All relevant information known and substantiated
c) Type of communication expected and to whom addressed
d) Whether the information is privileged
e) Legal and regulatory obligations
f) All facts have been confirmed and recorded.

ERRORS

Errors in a client's tax affairs

Adviser must act appropriately in respect of all errors and mistakes, whether made by
the client, the member, HMRC or any other party in a client's tax affairs ranging from the
innocent to those that may amount to fraud.

Errors leading to overpayment of tax

Client should be informed as soon as possible once accountant becomes aware.
Client should be advised about making a repayment claim and have regard to any
relevant time limits.

Errors leading to underpayment of tax

A mistake made by HMRC may give rise to an underpayment of tax or an over-
repayment of tax.
Clients or accountants may be able to claim for additional professional costs incurred in
correcting such mistakes from HMRC.
Bear in mind the legislation on money laundering and need to notify the firm's
professional indemnity insurers.
Records should be kept of discussions and advice regarding errors.

Understanding how and why a client’s error has occurred will help you to demonstrate
professional scepticism behaviour and apply a questioning mind to the facts to
determine if there has been any misstatement of financial information and take the
appropriate course of action.

REPORTING ERRORS
You have just received the following email from your client.
'I am preparing the latest VAT return. I cannot see that there has been any adjustment
to reflect a change in use of the company's computer training building. Mark Charles, the
finance director, has told me that it is unlikely that HMRC will pick up the change in use
and to ignore it for now but if notice of an inspection by HMRC is received we will pay
the outstanding VAT on the next return before the VAT inspector arrives. However, I am
worried we will be open to penalties.
The amount of VAT is in the region of £80,000 – please could you advise me on how to
report this matter.'

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 Requirement
Discuss the action you should take and the advice you should give to your client.

SOLUTION

CLIENT ACCEPTANCE AND REGULATORY REQUIREMENTS

Client and engagement acceptance

Before accepting a new client, determine whether acceptance would create any threats
to compliance with any of the fundamental principles.
Contractual relationship should be governed by a letter of engagement, which should
include:
 Scope of client's and accountant's responsibilities; and
 Authority to disclose HMRC errors.

Agent or principal
Important to understand the difference.

Agent
a) Merely prepares and submits documents on behalf of client.
b) Client retains responsibility for the accuracy of the document.
c) Written evidence of client's approval of return should be retained.
d) Relatively lower risk activity.

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 Where an agent has engaged in dishonest conduct, HMRC can issue them a 'conduct
notice' and a 'file access notice'. A dishonest agent may also be liable to pay a penalty
and HMRC may publish their details. HMRC may also refuse to deal with a tax agent who
has been found to act dishonestly.

Principal
a) Provides advice to the client as to the taxation consequences of different courses
of action.
b) The accountant takes full responsibility for the advice given and may be liable to
the taxpayer in the event the advice turns out to be incorrect or inappropriate.
Note, however, that the client still bears primary responsibility to HMRC for the
accuracy of resulting tax returns and payments.
c) Relatively higher risk activity.

Professional indemnity insurance (PII)

Every qualified member of the ICAEW who is in public practice and resident in the UK or
Ireland is required to have PII.
Minimum amount of indemnity (set by ICAEW):
 Gross fee income of a firm is less than £600,000, the minimum limit of indemnity
must be equal to two and a half times its gross fee income, with a minimum of
£100,000.
 Otherwise, the minimum is £1.5 million.
Employed members will normally be covered by their employer's insurance policy.
A member ceasing to be in public practice should ensure that cover remains in place for
at least two years (recommended to maintain for six years).

Data protection and security

Anyone who handles personal information has a number of legal obligations to protect
that information under the General Data Protection Regulation.
Most businesses that have large scale monitoring of individuals or processing of data and
public authorities must have a data protection officer.
Every organisation that processes personal data must register with the Information
Commissioner's Office (ICO) unless it is exempt.
Failure to notify is a strict liability criminal offence.
To prevent unauthorised access to client information on computer or online, HMRC
guidelines recommend precautions such as:
 keeping passwords and computer equipment secure; and
 alerting HMRC to unexpected activity on a client's online records and to phishing
emails.

Accountability of senior accounting officers (SAO)

SAO of qualifying companies are required to take reasonable steps to establish and
monitor accounting systems within their companies that are adequate for the purposes of
accurate tax reporting.
Qualifying companies are required to notify HMRC of the name of their senior accounting
officer (SAO).

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 The SAO is required to:
 Certify annually that the accounting systems in operation are adequate for the
purposes of accurate tax reporting; or
 Specify the nature of any inadequacies.
A qualifying company is defined as a company with a turnover of greater than £200
million and/or a balance sheet total of greater than £2 billion.
Penalties may be charged for failure to:
a) Establish and maintain appropriate tax accounting arrangements;
b) Provide an annual certificate to HMRC or for providing a certificate that contains a
careless or deliberate inaccuracy; and/or
c) Notify HMRC of the name of the SAO.
In each case the penalty is £5,000. In the case of (c) the penalty is payable by the
company in the other cases the SAO is personally liable for the penalty.

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 HB2023
Ethics in relation to a Tax practice
SUMMARY

Ethical conflict Disclosure of Client acceptance and

Fundamental principles Conflict of interest Errors
resolution information regulatory requirements

Fundamental principles: Take reasonable steps to Consider: Disclose when: Overpayment of tax Client engagement and
Integrity identify Relevant facts Permitted by law and Inform client acceptance
Objectivity Relevant parties authorised Advise to claim Any threat to
Professional May arise between: Et hic al issues Required by law repayment fundamental
c ompet enc e and due Firm and client Fundamental Professional duty and principles
care Two clients principles not prohibited by law Underpayment of tax Engagement letter
Confidentiality Internal procedures May be able to claim
Professional behaviour Put safeguards in place Courses of action for costs of correcting Agent or principal
from HMRC
Threats: Professional indemnity
Self review interest insurance
Self review threats
Advocacy threats Data protection

These materials are provided by BPP

Familiarity threats
Intimidation threats Accountability of senior
accounting officers
Safeguards:
Professional, legislative
and regulatory
In the workplace
Professional
judgement

Supplemented by PCRT’s
standards for tax planning

Topic 8: Ethics
355
 LAW & GUIDANCE IN ICAEW CODE
MONEY LAUNDERING AND TERRORIST FINANCING
Includes possessing the proceeds of tax evasion (or any other crime) including terrorist
financing offences.
Where a professional accountant suspects that a client is involved in money laundering
or terrorist financing (MLTF) he should report this to the National Crime Agency (NCA) in
the form of a suspicious activity report (SAR).

Defences
 The individual does not actually know or suspect MLTF has occurred and has not
been provided by his employer with the training required, although this is then an
offence on the part of the employer.
 The privilege reporting exemption.
 There is reasonable excuse for not making a report.
 Not unlawful under the criminal law of the country where it is occurring (this
defence is not available for failure to report suspicions of terrorist financing
offences).

Anti-money laundering procedures

a) Register with appropriate supervisory authority
b) Appoint MLRO
c) Prepare and maintain a whole-firm written risk assessment
d) Train and assess staff
e) Establish internal procedures relating to risk assessment
f) Customer due diligence on new clients and monitor existing clients (KYC)
g) Verify identity of new clients and maintain evidence
h) Report suspicions to NCA using SAR.

Tax-related offences
Tax evasion

Concealing taxable
Understating Overstating activities from HMRC
income expenses

If accountant is aware
of tax evasion

Risks committing Client authority not needed to disclose

offence himself under confidential information
money-laundering legislation

set up anti-money
laundering procedures

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 Reporting
A professional accountant with knowledge or suspicion of MLTF must make a report to
Money Laundering Reporting Officer (MLRO).
MLRO decides whether the information needs to be relayed to NCA if so, they compile
and despatch the SAR.

Supervisory bodies
The regulations require all businesses to be supervised by an appropriate anti-money
laundering supervisory authority.
ICAEW is one of the approved supervisory authorities for the accountancy sector.

TAX EVASION V TAX AVOIDANCE

Tax planning
Tax payers may try to reduce their tax in various ways, eg:
 An individual with capital gains uses the annual exempt amount in the most
beneficial way; or
 A multinational group locates its headquarters in a country with a low rate of
corporation tax.
Tax planning can be uncontroversial and the Government offer incentives such as EIS or
ISAs which allow tax payers to reduce their liabilities.
Professional Conduct in Relation to Taxation (PCRT) advises that tax planning is legal and
taxpayers are entitled to enter into transactions that reduce tax. However, the client and
the adviser need to bear in mind HMRC may challenge their analysis and issue tax
assessments accordingly. While HMRC's interpretation can still be appealed through the
tax tribunal, even if they feel likely to be successful the client and advisor should consider
the reputational issues that may arise from media and stakeholder criticism of what is
sometimes referred to as 'aggressive' tax planning.

Tax avoidance
No single definition. Refers to legal methods of reducing tax burden using tax provisions,
and sometimes loopholes, in legislation.
The term tax avoidance is often interchangeable with tax planning, including structuring
taxpayers' affairs to make use of available reliefs as they are intended. Examples might
include:
 Use of posthumous deed of variation to reduce inheritance tax by amending a
taxpayer's will after their death; and
 A group of companies shifting profits to a country with a low rate of corporation
tax.
The first of these may be called either tax planning or tax avoidance, while the current
trend would be to call the latter tax avoidance.
HMRC's position on the distinction between tax planning and avoidance is:
'Tax avoidance involves bending the rules of the tax system to gain a tax advantage that
Parliament never intended.'
'Tax planning involves using tax reliefs for the purpose for which they were intended'.

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 PCRT uses the term tax planning for a large range of legal mitigation activities, whether
these are within the intention of the law or not.
When giving tax advice, a professional accountant should both understand HMRC's
position and consider the extensive guidance given in PCRT in this area.

Tax evasion
a) Illegal
b) Suppressing information to which HMRC is entitled
c) Providing HMRC with deliberately false information.
Minor cases may result in penalties.
Serious cases may lead to prosecution and result in fines and/or imprisonment.

Distinguishing tax evasion from tax avoidance

Distinction between evasion and unacceptable avoidance has become blurred.
The fact that a taxpayer is not acting illegally does not mean that steps taken to
minimise tax will necessarily be acceptable to HMRC or to the general public (consider
reputational issues).

Measures to deter tax avoidance and evasion

Each successive Finance Act typically introduces additional anti-avoidance measures,
often arising as a result of disclosures. FA2022 introduced new powers for HMRC to
publish information about tax avoidance schemes and persons suspected to be
promoters of those schemes, and also to seek an order to freeze assets where
proceedings for a penalty under DOTAS or POTAS have commenced or are about to
commence. Other provisions include the following:
Large UK companies must publish their UK tax strategies online. There is a penalty
for non-compliance.
Enablers of offshore tax evasion will be issued with a penalty and HMRC also have the
power to publish information about them.
Relevant bodies, including accountancy firms, can be held criminally liable if they
fail to prevent facilitation by their employees or partners, of actual or attempted tax
evasion by clients.
Company directors can be held jointly and severally liable for tax liabilities and / or
penalties owed to HMRC by the company, if the company is subject to insolvency
procedures and one of the following situations applies:
 The director was responsible for, or benefitted from, tax avoidance or evasion
carried out by the company
 The individual was a director at a time that the company received a penalty for
facilitation of avoidance or evasion
 The individual has been a director of at least two previous companies that have
been declared insolvent in the previous five years, as well as the current insolvent
company, and each carried on the same kind of business. One of the previous
companies must have had outstanding tax liabilities of at least £10,000.

The tax gap and data analytics

The tax gap is the difference between the total taxes owed to, and received by, the
government – this is caused by taxpayer error or misinterpretation, criminal attacks, tax
evasion and tax avoidance.

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 HMRC use data analytics to identify, for example, understated income. This is aided by
the compulsory online filing of VAT and PAYE information and will be further enhanced
following the implication of Making Tax Digital for Business (MTDfB).

Different roles of a tax adviser

PCRT outlines the ways in which a professional accountant may be involved in tax
planning arrangements:
 Advising on a planning arrangement: as the primary adviser, advise the client on
risks and implications and advise accordingly, considering the Promoters of Tax
Avoidance Schemes (POTAS) regime (see Chapter 1, section 10 of the Workbook)
and financial/reputational risks.
 Introducing another adviser's planning arrangement: Ensure commissions are
disclosed to the client. Consider POTAS. The introducing accountant should
appraise the arrangement themselves if they have sufficient expertise.
 Providing a second opinion on a third party's planning arrangement: The
accountant must not accept commission for this service and must consider his
expertise before accepting the work. If accepted, consider POTAS and Disclosure
of Tax Avoidance Schemes (DOTAS), or Disclosure of tax Avoidance Schemes for
VAT and Other Indirect Taxes (DASVOIT) obligations.
 Compliance services in relation to returns including planning arrangements:
Accountant is not responsible for advising on the implications of the arrangement,
however they should consider whether the arrangement is sustainable, taking
specialist advice if necessary.

Understanding the money laundering rules, tax evasion and tax avoidance will help you
to demonstrate both ethics and integrity skills and professional scepticism
behaviour in looking at the facts of a particular situation to establish if there has been
any fraud or misstatement of information and to take the appropriate reporting actions.

GENERAL ANTI-ABUSE RULE (GAAR)

This is an additional means for HMRC to counteract tax advantages arising from 'abusive
tax arrangements', ie arrangements that involve obtaining a tax advantage as (one of)
their main purpose(s).

Abusive arrangements
Examples of abusive arrangements include those that result in:
a) Significantly less income, profits or gains;
b) Significantly greater deductions or losses; or
c) A claim for the repayment or crediting of tax (including foreign tax) that has not
been, and is unlikely to be, paid.

Tax advantage
A tax advantage includes:
a) Relief or increased relief from tax;
b) Repayment or increased repayment of tax;
c) Avoidance or reduction of a charge to tax;
d) Avoidance of a possible assessment to tax;
e) Deferral of a payment of tax or advancement of a repayment of tax; and
f) Avoidance of an obligation to deduct or account for tax.

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 GAAR Advisory panel
The GAAR Advisory Panel is an independent panel of tax experts.
Their role is to:
 Give opinions on cases taken to court; and
 Review and approve HMRC guidance on application of the GAAR.

Advice to clients in the light of the GAAR

Where the GAAR applies, tax planning arrangements will be ineffective and clients should
be advised accordingly. In addition to GAAR, legal precedent exists for courts to strike
down tax planning by applying purposive construction to relevant statutory provisions
(i.e. looking at the intention of the legislation). See Ramsay v IRC.
Measures which may be considered within an accountancy practice to deal with the
GAAR include:
 Training
 Technical briefing or guidance material linking to and potentially supplementing
HMRC's GAAR guidance
 Protocols to ensure the quality and consistency of treatment. If unsure or do not
have the expertise to advise seek specialist input externally or refer the client to a
specialist adviser
 Awareness raising with clients through client alerts etc
 Caveat language to use in advice on the GAAR to explain that the GAAR is new
with no precedent and there is therefore a level of uncertainty as to how it will be
applied, cannot guarantee that it will not be applied
 Transmittal letters for returns might refer to the GAAR for clients whose affairs
may be more complex or who may undertake planning with other advisers
 Updating existing knowledge materials to ensure that they refer to the GAAR
where appropriate
 Reviewing any existing planning in place/offerings which might be affected by the
GAAR
 Monitoring of GAAR panel

The GAAR penalty

A penalty of 60% of the counteracted tax may apply.

Base erosion and profit shifting

Base erosion and profit shifting (BEPS): Base Erosion and Profit Shifting
(BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax
rules between countries to artificially shift profits to low or no-tax locations where
there is little or no economic activity, resulting in little or no overall corporate tax
being paid.

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 BEPS in the UK
Some of the BEPS framework has been embedded in UK legislation:
 CFC provisions
 Transfer pricing rules
 Diverted profit tax
 Hybrid mismatch rules
BEPS 2.0 and taxation of online activities
The main purpose of BEPS 2.0 is to address the challenges created by the digitalisation
of the global economy. BEPS 2.0 proposes two pillars of action:
• Pillar 1 seeks to address how to deal with entities that make profits from
jurisdictions in which they might not have a physical presence. When implemented
it will apply only to the largest, profitable groups (those with turnover >€20bn pa).
A proportion of their profits will be subject to reallocation to other jurisdictions
where economic activity takes place.
• Pillar Two imposes a global minimum tax rate of 15%. This second pillar of BEPS 2
has been introduced into UK law via F(2)A 2023, which contains two new taxes:
the Multinational top-up tax and Domestic top-up tax. This legislation aims to
ensure a minimum rate of tax of 15% of accounting profits, in every jurisdiction in
which a business operates. It applies to companies and groups with turnover
>€750m pa, for accounting periods starting on or after 31 December 2023. Neither
of these new taxes are examinable in detail.
BEPS 2.0 aims to address the difficulty in determining the residence or location of e-
commerce activities. Most countries rely at least partially on the concept of a permanent
establish to determine whether a company’s profits should be taxed in a particular
jurisdiction.
For example, A company incorporated and resident in Canada, but which trades in the
UK via a shop in London (a permanent establishment) will be taxed in the UK on the
profits of its UK PE.
In this context, therefore, what if the Canadian company above trades in the UK via a
website? Is that a PE? It is more difficult to determine the location for these purposes.
The UK government does not accept a website or a server is sufficient to be a permanent
establishment. The OECD, however, believes that a server could be.

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 SUMMARY

Money laundering and

terrorist financing

NCA

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 ACTIVITY ANSWERS

THREATS AND SAFEGUARDS

There may be a self-interest threat to professional competence and due care if an
adviser attempts to undercut a fee quote which is so low that it would be difficult to
perform the tax work in accordance with relevant technical and professional standards.
Safeguards to be adopted should include:
 Making the client aware of the terms of the engagement, especially the basis of
charging fees and the services covered by those fees; and
 Assigning appropriate time and qualified staff to the task.
In addition, to ensure professional behaviour is maintained, care should be taken not to
make disparaging references or unsubstantiated comparisons to the competitors who
have quoted for the same work.

ETHICAL CONFLICT RESOLUTION

I will need to consider the following points:
The relevant facts and the ethical issues, the fundamental principles related to the issue,
the internal procedures available, alternative courses of action.
The relevant facts and identification of the ethical issue
Jo deceived her employer when applying for her post
Jo has confessed to telling an untruth during her interview. The extent of corporation tax
knowledge needed in her role may be more than she has, however, this is not clear. It is
possible that that this was not the deciding factor for her obtaining her post. Therefore in
respect of this comment, other than being careful when considering information that Jo
provides in the future, there is no ethical conflict for me to resolve.
Jo is prepared to take credit for work she has not done
Jo is not a qualified chartered accountant therefore she is not bound by the fundamental
principles in the ICAEW Code of Ethics. However, I must consider my own position if I
am party to the deception and consider the ICAEW ethical principles as follows:
Objectivity – If I allow Jo to influence me in this matter, I may not be capable of acting
objectively in the future.
I am clearly facing a self-interest threat and an intimidation threat since Jo is ultimately
my immediate superior and I am on a temporary secondment. Should I not do as she
asks, my secondment may be terminated.
Jo is looking to complete a report which may not show the true picture
Jo is not a qualified chartered accountant therefore she is not bound by the fundamental
principles in the ICAEW code of ethics. However, I must consider my own position if I am
party to the deception and consider the ICAEW ethical principles as follows:
Integrity – If I allow Jo to influence me and produce a report which does not show the
true picture and either omits or conceals facts and conclusions which would result from
proper, unbiased reporting on the whole group of companies, this would be a breach of
integrity.

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 This is again a self-interest threat and a possible intimidation threat.
A sensible safeguard to put in place is that I insist on reporting fairly on all group
companies. If this was not established at the outset of the secondment, it should be
now.
The parties involved
The group could incur extra tax costs and penalties if Jo acts beyond her capability in
taxation resulting in badly prepared computations and/or reports to the board without
giving proper and accurate guidance on the implications of the new measures. My
employer and I would also be exposed to risk of being associated with work that was of
insufficient quality or at worst, untruthful.
The internal procedures available, alternative courses of action
Initially, I should inform Jo that I am not prepared to be part of her deception and that
she should not put her name to the work I have prepared. I should suggest she seek
further training and discuss the issue of her lack of corporate taxation knowledge with
her line manager. If she refuses I should seek to identify any internal procedures within
the group for reporting my concerns.
I may also speak to my line manager at my employer firm. I should consider carefully
whether I wish to continue to work with Jo or whether I ask for the secondment to be
cut short.

REPORTING ERRORS

Reporting the VAT error

The potential error is large and therefore cannot simply be adjusted on the next VAT
return.
Having established the facts are correct, the client should be advised to make a voluntary
disclosure of the error (by either a Form 652 or by writing to HMRC) and to pay the VAT
due.
HMRC may reject disclosure of errors made after the date an inspection visit has been
arranged if it is considered that disclosure is prompted solely by the visit or by enquiries
made by HMRC prior to the visit. Therefore, Mark Charles' suggestion has no validity.
The client should be advised of the consequences of not making a disclosure, in
particular that:
a) If HMRC discover the error, a penalty for the submission of an incorrect return will
be charged. The penalty will be greater where the error has been deliberately
concealed.
b) Having knowledge of the error without acting upon it may be construed as a
criminal offence or a civil fraud.
c) Interest may accrue up to the time the VAT is paid.
Ethical issues for the adviser's firm
If the client declines to disclose, the firm should confirm the above advice in writing and
consider whether it is appropriate to continue to act in respect of VAT affairs or indeed
all affairs. The fundamental principle of integrity requires that a chartered accountant is
not associated with omitting information which leads to less VAT being paid.
Clients with an inappropriate attitude to compliance with tax law may not be appropriate
clients for the firm.

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 Money laundering
All facts should be confirmed and recorded.
Fiscal offences can also amount to money laundering. Tax evasion is a crime.
Consideration should be given to whether there is an obligation to make a report via the
Money Laundering Reporting Officer to NCA.
Where a report is made, the client must not be informed where this would be considered
'tipping off'.
Advising the client to stop breaking the law by evading tax does not amount to 'tipping
off'.
Detailed file notes should be maintained of all discussions regarding this matter.
Our firm does not agree with the clients' view regarding the potential error and this
needs to be made clear to the client in writing and recorded on our files.

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 APPENDIX A – Additional
reading

Subject: Workbook chapter and section:

The Ramsay doctrine and BEPS 1. Ethics – section 9.4-9.5
Disclosure of tax avoidance 1. Ethics – section 8.5 and 10
schemes (DOTAS and DASVOIT)
Devolved taxes 2. Income tax and NIC - revision from TC –
section 1.5
ISAs 2. Income tax and NIC - revision from TC –
section 1.6
Optional remuneration 2. Income tax and NIC - revision from TC –
arrangements section 2.3 - section 3
Basis periods and transitional rules 2. Income tax and NIC - revision from TC -
section 3
Pensions lifetime allowance 2. Income tax and NIC - revision from TC –
section 5.3
Basis period transition reliefs 4. Unincorporated businesses - further aspects -
section 1
Payment of IHT and interest 7. Inheritance tax- section 2
Using trusts and income tax for 8. Personal tax - additional aspects – section
trusts 3.2.1
Relief for deficits on non-trading 9. Corporation tax - revision from TC – section
loan relationships 4.6
Group payment arrangements and 13. Groups and consortia – section 1.8 & 1.9
group tax surrenders
Anti-diversion rule 14. International expansion – section 4.2.5
DTR on taxable foreign dividends 14. International expansion – section 5.9 & 5.10
an unrelieved foreign tax
OECD Model convention 14. International expansion – section 6
Incorporation of buy-to-let 19. Property businesses – sections
property business, residential 3 and 4
property development and
investing in commercial property
Corporate structure 20. Choice of business structure – section 3
Bankruptcy 21. Transformation of owner managed
businesses- section 3

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 APPENDIX B – Tax compliance
proformas

INCOME TAX

Proforma income tax computation

The proforma income tax computation is as follows:
A Taxpayer, Income tax computation – 2023/24
Non-savings Savings Dividend
income income income Total
Income £ £ £ £
Employment income/Trading X
income/Property income
Interest X
Dividends X
Total income X X X X
Qualifying interest payments/gifts of
assets to charity (X) (X)

Net income before losses X X

Reliefs
Losses (X) (X)
Net income X X X X
Personal allowance (Note 3) (X) (X)
Taxable income X X X X

Tax £
Non-savings income @ 20/40/45% X
Savings income @ 0/20/40/45% (Note 1) X
Dividends @ 0/8.75/33.75/39.35% (Note 2) X
X
Less tax reducers (ie VCT relief, EIS relief, SEIS relief, relief for married
couples, property finance costs) (X)
Add additional charges (ie child benefit charge, pension charges) X
Less DTR (X)
Income tax liability X
Less tax deducted at source (X)
Add income tax retained on patent royalties paid net of BRIT X
Income tax payable X

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 Notes
1 Starting rate band of 0% for savings income up to £5,000. The starting rate band
is not available if non-savings income exceeds £5,000.
The first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of savings
income above that taxed at the starting rate is covered by the savings nil rate
band. It is taxed at 0%. Savings income taxed within the starting rate band or
covered by the savings nil rate band still counts towards the basic and higher rate
bands.
2 The first £1,000 of dividend income (for all taxpayers) is covered by the dividend
nil rate band and is taxed at the dividend nil rate of 0%. This income counts
towards the basic and higher rate bands.
3 Up to £1,260 of unused personal allowance can be transferred to an individual's
spouse/ civil partner provided the transferee is a basic rate taxpayer and neither of
the couple of claiming the married couple's allowance.

Exempt income

The main types of exempt income are:

 Interest on National Savings Certificates
 Income from Individual Savings Accounts (ISAs)
 Dividends received on shares held in a Venture Capital Trust (VCT) subject to
conditions
 Betting, lottery and Premium Bond winnings
 Some social security benefits such as housing benefit and child benefit
 The first £30,000 of statutory redundancy pay and compensation received for
loss of employment
 First £7,500 of gross annual rents from letting under the rent-a-room scheme
 Scholarships

NATIONAL INSURANCE CONTRIBUTIONS

Class 1 NIC

Primary Class 1 contributions are paid by employees on their gross employment

income received in cash.
Secondary Class 1 contributions are paid by employers on their employees' gross
employment income received in cash.
Employers can claim the employment allowance to reduce total class 1 secondary
contributions payable to HMRC by £5,000 pa. It is not available where the director
is the only employee.
Employer contributions are reduced to 0% for earnings up to £50,270 (13.8%
above that) where employee is an apprentice and under 25 years old.

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 Class 1A and Class 1B NIC

Class 1A contributions are payable by employers on taxable benefits provided to

employees.
Class 1B contributions are payable by employers on the grossed-up value of
earnings included in a PAYE settlement agreement.

Class 2 NIC

Class 2 contributions are payable by self-employed individuals at a flat rate of £3.45

per week if accounting profits for the fiscal year exceed the small profits threshold
(£6,725). For profits between £6,725 and £12,570 the liability will be reduced to nil
but the taxpayer will accumulate NIC credits. Therefore, Class 2 will only be paid on
profits above £12,570.

Class 4 NIC

Class 4 contributions are also paid by self-employed individuals and are based on
taxable trading income.

OVERSEAS EMPLOYMENT

Full time work overseas

Split year treatment may apply:
 Non-resident from date first work at least 3 hours overseas; and
 UK tax liability limited to UK source income once non-resident.

Relief for expenses when employed abroad

Expenses paid by employer not treated as a benefit:
 The cost of board and lodging abroad;
 Any number of return trips home; and
 Travel expenses of his spouse/civil partner and minor children to visit him where
he is abroad for 60 days or more. Only two return visits per person per year are
permitted.

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 TAXABLE AND EXEMPT BENEFITS
The following is a summary of the main provisions that you have met during your previous
studies:

Taxable?

Assets
Use of company's assets by employees (other than cars, vans, YES
certain computers, mobile telephones and accommodation – see
below) Benefit = 20% original value of asset
Gift of company's assets to an employee YES
(cost to employer)
Beneficial loans
>£10,000 & interest charged at below the HMRC official rate YES
Canteen facilities (subsidised)
If available to all employees and not provided by salary sacrifice NO

Company cars & private fuel

Car: List price % (based on CO2 emissions) YES
Fuel: Standard amount % YES
Vehicle-battery charging facilities (at or near work for all NO
employees)

Childcare facilities NO (conditional)

Company vans
Private use at flat rate of £3,960 (£nil for zero emission vans) + YES
£757 for fuel
Travel to/from work not private use
Living accommodation
Job-related NO
Not job-related YES
Facilities connected with living accommodation
Repairs, heating etc
 Job-related YES (10% limit)
 Not job-related YES
Medical insurance YES
(unless for
overseas duties)
Mobile telephone (one per employee) NO

Options other than share options YES

Payments to registered pension schemes NO

Profit sharing YES

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 Taxable?

Reasonable relocation expenses

Removal costs, stamp duty land tax, solicitors' fees, etc NO
(but £8,000 limit)
Recommended medical treatment NO
Employer payments of up to £500 to meet the cost of treatment
recommended by occupational health.
Subscriptions
Many subscriptions may be deducted YES
Homeworker's additional household expenses
Up to £6 per week with no supporting evidence NO

Certain expenses paid to or reimbursed to employees by their employers are exempt

provided they would be fully allowable deductions for employment income purposes. This
removes the need to report these expenses on a P11D and for the employee to claim a
deduction through self-assessment. This applies to actual payments made to/for
employees and also to amounts paid in line with HMRC approved flat rates, including
travel and meals.
For employee contributions to be deductible from the taxable value of benefits, the
employee must make the payment to their employer by 6 July following the end of the
relevant tax year.

PENSION SCHEMES
Occupational Scheme Personal Scheme
Eligible to Employees Employed, self-
contribute employed or
unemployed
Examples of Final salary/defined benefit scheme Group personal
scheme Money purchase/defined contribution pensions
scheme Any privately arranged
Small self administered schemes (SSAS) personal pension
Self invested personal
pensions (SIPP)
Maximum Employee contributions:
contributions Higher of:
eligible for tax  Total relevant earnings; and
relief  £3,600 (gross)
(total employee
Relevant earnings = employment income + trading profits
+ employer)
+ income from furnished holiday accommodation
Employee and employer contributions:
Subject to the annual allowance –
maximum relief for total combined pension contributions is £60,000
(2022/23: £40,000), but subject to possible restriction for high-income
earners

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 Occupational Scheme Personal Scheme
Tax relief for Net pay arrangements Tax relief at source
individual's Paid from gross income Treated as paid net ie
contribution maximum cash
Deduct from employment income
payment = 80% of
gross contribution
Do not deduct from
employment income,
instead extend basic
rate band by gross
amount of contribution
Tax relief for Not a taxable benefit, paid gross
employer Deductible from trading profits in year in which paid
contribution
Contributions in  If contributions for which relief has been given in respect of an
excess of annual individual's schemes, including:
allowance limit – All individual contributions
– All employer contributions
exceed the annual allowance limit, then an excess contributions
charge is made.
 The annual allowance limit can be increased by unused annual
allowance from the three previous tax years on a FIFO basis.
 The annual allowance will be abated if adjusted income exceeds
£260,000 (2022/23: £240,000), to a minimum of £10,000
(2022/23: £4,000).
 This charge is calculated as:
Marginal tax rate × (Excess of total contributions for which relief
has been given over the annual allowance).
 The charge is added to the individual's income tax liability.

Retirement age 55 (to increase to 57 from 2028/29)

Tax free lump On retirement up to 25% of the pension fund may be taken as a TFLS
sum on (max 25% x £1,073,100).
retirement
(TFLS)
Annuity/Draw- The fund balance can either be used to buy an annuity or be subject
down to annual draw-downs.
Pension fund's The pension fund itself is not subject to taxation.
tax liability
Pension income Pension income is taxable as non-savings income at 20/40/45%.
Lifetime This was the maximum value for a pension fund, and historically
allowance charges would arise if the lifetime allowance was exceeded. The
lifetime allowance charge has been abolished from 2023/24.

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 CAPITAL GAINS TAX LIABILITY
Pro forma:
Disposal consideration (or market value of asset if X
sold for less)
Less incidental costs of disposal (X)
X
Less allowable costs ie
acquisition cost (X)
incidental costs of acquisition (X)
enhancement expenditure (X)
valuation fees (X) (X)
Capital gain/(loss) X/(X)

Exempt assets include:

 Cars
 Some chattels
 Investments held in ISAs.

Part Disposals:
Where part of an asset is sold, the allowable base cost for calculation of the gain or loss
is:
A
Cost
A +B
where A is the market value of the part disposed of and B is the market value of the part
that is retained.
Any incidental costs relating wholly to the part disposal are deductible in full.

Relatives:
Spouses/civil partners are taxed separately. Disposals between spouses/civil partners
are on a no gain/no loss basis.
An individual is connected with certain close relatives. Disposals to connected persons
(other than a spouse/civil partner) are at market value.

Annual Exempt Amount:

Each individual is entitled to an annual exempt amount (£6,000 for 2023/24).

Current year losses:

Must set off against current year gains in full.
An overall loss is carried forward and set off against gains in future years.

Brought forward losses:

Must set these against the first available net gains.
Offset is after the annual exempt amount.

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 Losses and connected persons:
A loss incurred on a disposal to a connected person (apart from their spouse/civil
partner) can only be set off against gains made on disposals to the same connected
person in the same year or in future years.

Proforma:
BADR Non BADR Residential
gains gains property gains
£ £ £
10% 10/20% 18/28%

Gains eligible for BADR X

Other gains X X
Current year capital losses (X)
Annual exempt amount (£6,000) (X)
Capital losses b/f (X)
Taxable gains X X X
Payment date 31/1/25 31/1/25 60days from
completion*

* CGT required based on:

 Estimate of taxable income
 Any other residential property disposals already arisen in tax year
 Availability of capital losses and the annual exempt amount, taking into account
allowable losses to date on any asset.

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 INHERITANCE TAX

Principles of IHT

Scope of IHT and

Lifetime IHT on gifts Death IHT on gifts IHT on the death estate
overseas aspects

Transfer of value by Step 1 - Value gifts Proforma Proforma

chargeable person Loss to donor
UK Dom: Worldwide assets Exclude transfers outside Gifts made within 7 years All assets owned
Non-Dom: UK assets only the scope of IHT of death at death
DTR lower of:
• Overseas tax Step 2 - Exemptions Start on GCT/PET value Less
• Average IHT% X foreign Spouse/Charity/Political liabilities
asset party Deduct Fall in Value relief funeral expenses
Marriage exemption (MV @ gift less MV @ Exempt transfers
Small gifts death)
Normal Expenditure (consider availability of residence NRB)
Annual Exemption Reallocate NRB Deduct Available NRB
(CY/PY)
Available NRB NRB at death X
Step 3 - Classify Gifts
PET (gifts to individuals) NRB at death X Less CLTs @ GCT value and
- No lifetime tax failed
CLT (gifts to trusts) - Less CLTs @ GCT value
Lifetime tax to be and failed PETs in the 7 years
calculated before death (X)
PETs in the 7 years before
Step 4 - Calculate Tax the gift (X) IHT @ 40%/36%
Proforma payable by personal
IHT @ 40% X representatives
Deduct available NRB
Less taper relief (X)
NRB at gift X
Less lifetime tax (X)
Less CLTs @ GCT
value in the 7 years Payable by recipient
before the gift (X)

IHT on the excess @

20/25%

Step 5 - Assess gift value

for future cumulation and
death tax purposes

GCT value = net gift after

exemptions plus DONOR
paid tax

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 /RNRB

Use when calculating death IHT on

lifetime gifts (unused NRB only)
and IHT on the death estate
(unused NRB and RNRB)

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 TRADING PROFITS –PROFORMA AND CASH BASIS

Pro forma
£
Net profit/(loss) for accounting period as per profit and loss account X/(X)

Add back disallowed expenditure

eg depreciation, client entertaining X

Deduct: non-trading income (X)

eg rental income, bank interest
Capital allowances (see below) (X)
Adjusted profit/(loss) for the accounting period X/(X)

Allocate profit/(loss) to tax years using the tax year basis rules

Cash basis
Traders with turnover of less than £150,000 can choose to be taxed on the cash basis.
This means:
 Interest in excess of £500 is not deductible; and
 Expenditure on capital assets which qualify for plant and machinery capital
allowances (excluding cars and land) is deducted on a cash basis.

Adjustments to profit
You are already familiar with the following adjustments to profit:

Item Treatment

Capital expenditure Disallowable – add back.

Distinguish between repairs (allowable as revenue
expenditure) and improvements (disallowable as capital).

Depreciation Disallowable – add back.

Appropriation of profit Disallowable – add back.
Examples include payment of 'salary' to sole trader or
payment of his pension contributions, payment of his tax
liabilities and payment of excessive salary to family
member.

General provision eg for stock Disallowable – add back.

or debts Distinguish from a specific provision which is allowable.

Non-trade bad debts – specific Disallowable – add back.

provision or written off Distinguish from trade debts which are allowable.
Non-staff entertaining Disallowable – add back.
Distinguish from staff entertaining which is allowable
(note that it may be a taxable benefit for employees).

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 Item Treatment

Gifts Disallowable – add back except:

 Gifts to employees (but must be wholly and
exclusively for trade purposes);
 Gifts of trade samples (not for resale); and
 Gifts to customers if they incorporate a conspicuous
advertisement for the business, are not food, drink,
tobacco or vouchers exchangeable for goods and
the total cost per customer is no more than £50.
Donations and subscriptions Disallowable – add back except:
 Small donations to local charities;
 Trading stock or plant gifted to charities or UK
educational establishments; and
 Subscriptions to trade and professional associations.
Fines and penalties Disallowable – add back except:
 Employee parking fines.
Interest on late payment of Disallowable – add back.
tax
Legal and professional fees Disallowable – add back except:
relating to capital  Legal costs relating to renewal of short lease (up to
50 years);
 Costs of registration of patent or copyright for trade
use; and
 Incidental costs of raising long-term finance.
Irrecoverable VAT If relates to disallowable expenditure: disallowable – add
back.
Employment payments and Generally allowable. However, on cessation of trade,
pensions payments in addition to redundancy payments are only
allowable up to 3 statutory redundancy pay.
Leased cars If the leased car (not motorcycle) has CO2 emissions:
 In excess of 50g/km then
the disallowance is 15% hire charge; or
 No more than 50g/km then
the hire charge is fully allowable.
Pre-trading expenditure Allowable deduction if incurred within seven years of the
start of trade and would have been deductible after start
of trade.
Eg distinguish between rent payable before trading starts
(allowable) and entertaining prospective customers
(disallowable).

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 Item Treatment

Trading income not shown in Eg goods are taken from the business by the owner for
accounts personal use without reimbursing the business with the
full value. If nothing recorded in accounts: add back
selling price. If entered at cost: add back profit.
Non trading income in Eg rental income, profit on disposal of fixed assets.
accounts Deduct.
Expenditure not shown in Eg business expenditure paid personally by the owner.
accounts Allowable and so make deduction.
Lease premium paid by trader Allowable deduction: premium taxed on the landlord as
on grant of short lease property income divided by the number of years of the
lease.
Trade related patent royalties Allowable deduction: the gross amount after grossing up
for basic rate tax.

Capital allowances on plant and machinery

AIA/F Main Special Private Short life Allowances
YA pool rate pool use asset
asset8
£ £ £ £ £ £
Period of accounts
TWDV b/f X X X
Acquisitions qualifying X
for AIA/FYA (cost ×
130% if 130% FYA):
FYA @ 130%5 (X) X
FYA @ 100%3&7 (X) X
AIA(SRP in priority) 2&5 (X) X
FYA @ 50%5 (X) X
Acquisitions (non-AIA X X X
and FYA) – cars1
Disposals (proceeds (X) (X) (X)
restricted to cost)
Transfer to pools6 (X) X X
X X X X
Balancing allowance (X) X
WDA @ 18% (X) X
@ 6% (X) X
@ 18% or 6% (X) × X
bus%
T/fer to sp. rate pool6 (X) X
TWDV c/f X X X –
Total allowances X

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These materials are provided by BPP
 Notes.
1 The rate of WDA is dependent on the type of asset (for example, the CO2
emissions of a car)
2 The limit of the AIA is £1 million per 12-month accounting period. Companies in a
group are only entitled to one AIA per group and the limit is apportioned for non-
12 month accounting periods
3 100% FYA available for plant and machinery in enterprise zones, capital
expenditure on R&D (for companies only) and cars with zero CO2 emissions.
4 For cars, if CO2 emissions are 1–50g/km then add to the main pool; if CO2
emissions are more than 50g/km them add to special rate pool. Keep separate if
used privately by the sole trader.
5 The 130% FYA is only available for companies (not unincorporated businesses),
between 1/4/21 and 31/3/23. Only available on new assets, not cars. The 50%
FYA for SRP assets is available until 31/3/26 and the AIA should be claimed in
preference to the 50% FYA.
6 The 50% balance of special rate pool expenditure for companies which does not
get the 50% FYA must be transferred back to the special rate pool after the AIA
and WDA have been deducted - it cannot qualify for these. Other expenditure in
excess of the available AIA can be transferred back to the main/special rate pool
before the WDA is calculated.
7 Full expensing is available on main pool expenditure from 1/4/23 for companies
(not unincorporated businesses). The allowance is a 100% FYA which is not
capped (unlike AIA) and is only available on new assets (not second hand or cars),
which are not purchased for the purpose of leasing.
8 Private use adjustment for sole traders/partnerships only (not companies).

STRUCTURES AND BUILDINGS ALLOWANCES (SBAS)

SBA is available on eligible construction costs, incurred due to contracts on/after 29
October 2018, on new non-residential structures and buildings used by a business for
qualifying purposes - broadly used in the trade or rented out as part of a letting
business. This includes offices, retail and wholesale premises, factories, warehouses,
walls, tunnels etc, but not workplaces that are an integral part of a dwelling, such as a
home-office.
The relief is calculated on a straight-line basis for 33 1/3 years as:
Eligible construction costs 3% pa.
Eligible construction costs include expenditure on:
 the construction of a building (not including land)
 renovation or conversion of a building (including demolition costs and land
alterations necessary for construction)
 cost of a ready built structure purchased from a developer (excluding the cost of
land)
The allowance can be claimed from when the qualifying asset first comes into use. If a
structure or building is renovated or converted a different 33 1/3-year period begins for
the new expenditure.

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 The SBA is apportioned where:
 a chargeable period is less than or more than one year
 the business only qualifies for SBA for part of the period
 the structure/building is purchased/sold part way through the period
 the structure/building is used partly for qualifying and partly for non-qualifying
purposes.
SBA expenditure does not qualify for the AIA.
If a qualifying asset falls into disuse the SBA continues to be available.
On sale of a qualifying asset there is no balancing adjustment. The purchaser takes over
the remaining allowances, over the rest of the 33 1/3-year period. Relief is apportioned
in the period of disposal. For chargeable gains purposes the SBA qualifying expenditure is
an allowable deduction in calculating the gain/loss and the amount of the SBA given to
the seller is added to the sale proceeds.
On demolition of a qualifying asset, any unrelieved expenditure is a deduction in the
capital gains computation and no further capital allowances are claimed.

BASIS PERIODS – CYB, OPENING YEARS AND CESSATION FOR TAX

YEARS UP TO 2022/23
The rules are summarised below.
In the exam you will not be expected to apply the basis period rules in detail, however
you do need an understanding of the old basis period rules as they are needed in
applying the transitional rules in 2023/24 for both existing businesses, and those ceasing
trade post 6 April 2023.
Current year Basis (CYB)
This rule applied to continuing businesses and the basis period for the tax year was the
profits of the 12-month accounting period ending in that tax year.
Commencement of trade: opening year rules
You are not expected to know the previous opening year rules. You should, however,
understand that under the previous opening year rules some of a trader’s early profits
could end up being taxed twice where they did not apply a 31 March or 5 April
accounting year end date.
The profits being taxed twice were referred to as ‘overlap profits’ and relief for this
double taxation may be given using the transitional rules in 2023/24 (below), or on
cessation of trade in 2023/24.
Any overlap profit to be relieved on cessation of trade, or on transition to the new rules
in 2023/24, will be provided in the exam.
TAX YEAR BASIS RULES (TYB)
From 2024/25, the basis period rules will be abolished and unincorporated businesses
will instead be taxed on the profits arising in a tax year from 6 April to 5 April,
irrespective of the accounting year end date for the business.
This means that previous planning around the choice of accounting date for existing
businesses, and those commencing trade, will no longer be effective in delaying the
payment of income tax on trading profits by adopting an accounting date early in the tax
year.

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These materials are provided by BPP
 Basis of assessment
Where an accounting date of 31 March is used, profits for the 12-months will be taxed
the same as a 5 April accounting date, ie there is no need to apportion the 5 days’ profits
from 1 April to 5 April.
Where a business uses an accounting date other than 31 March or 5 April, profits will
have to be apportioned to the tax year eg:
A sole trader has tax-adjusted trading profits for the year ended 31 December 2024 of
£30,000 and for the year ended 31 December 2025 £36,000.
Using the tax year basis, they will be taxed on their profits from 6 April 2024 to 5 April
2025.
£
2024/25 trade profits
6 April 2024 to 31 December 2024 = 9/12 × £30,000 22,500
1 January 2025 to 5 April 2025 = 3/12 × £36,000 9,000
31,500
Transitional rules
A transitional period applies in 2023/24 meaning businesses are taxed on their 12-month
period of account as usual, plus a transition element based on the profits from the end of
their period of account to 5 April 2024. Any overlap profits must be offset against the
transitional profits of 2023/24.
This is a 6-step calculation:

Step 1: Calculate the profit/loss of the ‘standard part’ of the basis period.
Step 2: Calculate the profit/loss of the ‘transition part’ of the basis period.
Step 3: Deduct overlap profits from the ‘transition part’ from step 2.
Step 4: Add together the resulting ‘standard part’ and ‘transition part’ (outcomes
from Steps 1 and 3).
• If Step 3 and/or Step 4 result is nil, or a loss, this is the total
profit/loss for the basis period.
• Otherwise, continue to step 5

Step 5: Calculate the amount of the total transition profit. This is the lower of:
• the amount given by Step 3; and
• the amount given by Step 4.
The amount to be taxed as the transition profit will usually be 20% of the
total transition profit unless an election is made.
The total transition profit will usually be spread, and taxed, equally across
five tax years.
Step 6: The taxable profit for 2023/24 is then:
• the amount from Step 5, if Step 1 gave nil or a loss; or
• the sum of the amounts given by Steps 1 and 5, if Step 1 gave a
profit.

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 PARTNERSHIPS

Step 1: Adjust the accounting profit of the partnership for the accounting period:
Add back – disallowed expenditure
Deduct – non trading income.
Step 2: Calculate the capital allowances available for the accounting period.
Step 3: Deduct the result of Step 2 from the adjusted profit calculated in Step 1.
This will give you the taxable trading profit of the partnership for the
accounting period.
Step 3a: Additional step for partnerships:
Allocate the partnership profits for the accounting period to each partner
using the partnership agreement.
 firstly allocate 'salary' and 'interest on capital'
 then the balance of profits should be split using the profit sharing
ratio (PSR)
Step 4: For tax years up to 2022/23: apply the basis period rules for each partner to
allocate the taxable trade profits for the accounting period to the relevant
tax year.
For the tax year 2023/24: continuing partners will apply the transitional
rules, using the 6-step calculation. A new partner will be taxed on their
share of the profits from the date they joined to 5 April. A partner leaving
will be taxed on profits from the end of the basis period for the penultimate
tax year to the date of cessation less overlap profits.
For tax years from 2024/25: the tax year basis will be used, taxing the
profits arising in a tax year from 6 April to 5 April.

HB2023

Appendix 385
These materials are provided by BPP
 LOSS RELIEF – ANTI-AVOIDANCE

Non-active traders
Loss relief will be restricted if a trader spends on average less than 10 hours per week
personally involved in running the business on a commercial basis, with a view to making
a profit.
The loss relief will be restricted to:
 £25,000 when making a loss claim against total income (under s.64 or s.72) or
against capital gains.
The loss can be carried forward against future profits of the same trade under s.83
without restriction.

Non-active partners
Sideways loss relief (ie against non-trading income) is restricted to:
 The partner's capital contribution (for losses sustained in the first four years of
trading)
 Subject to a maximum of £25,000 per annum.

Tax avoidance schemes

Loss relief is not available for offset against non-trading income or gains where the loss
has arisen as a result of tax avoidance.

Restriction on loss relief in a limited liability partnership

In general, the partners of an LLP are entitled to loss relief in the same way as partners
in an unlimited liability partnership.
However, there is a restriction on the amount of loss that a LLP partner may claim
against income other than that from the partnership. In this case, the loss relief cannot
exceed the amount of capital that the partner has contributed to the partnership.

RESTRICTION ON INCOME TAX RELIEFS AGAINST TOTAL INCOME

The limit for relief against total income is the higher of:
 £50,000; and
 25% of the adjusted total income for the tax year in which the deductions are
offset.
Adjusted total income is:
Total income X
Plus
Amounts deducted under payroll giving schemes X
Less
Grossed up value of personal pension contributions made under the
relief at source rules (X)
Adjusted total income X

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These materials are provided by BPP
 The amounts which are subject to restriction in this way include:
 Relief for trading losses against total income under s.64 and s.72 ITA 2007.
There is no restriction if the losses either relate to a deduction for overlap profits
(on cessation or a change of accounting date), or are deducted from profits of the
trade which generated them.
 Relief for losses on unquoted trading company shares (eg EIS shares)
 Relief for property losses against general income.
 Loan interest on loans taken out to invest in a close company.

VAT

VAT ON PROPERTY TRANSACTIONS

3 Situations:

Sale of Any other commercial property transaction Construction

new (< 3 yrs) eg Sale of old commercial building/ and first sale of
commercial building grant of lease/rental income residential property/
building for
charitable purpose
Standard Exempt
rated
Zero rated

Unless
Subsequent transactions
Opt to tax eg sale/rent

Standard
rated Exempt
(no option to tax)

Option to tax – planning issues

When deciding whether to opt to tax a building, consideration must be given to the likely
VAT status of any future purchaser.
For example:
a) Once the option is exercised, any future disposal of the building will be standard
rated (although note rules to allow revocation within 6 months or after 20 years if
certain conditions are met).
b) If potential purchasers are exempt traders, the cost of the building will be higher
to them.
c) The purchase of an 'opted' building may be less desirable than one upon which the
option to tax has not been exercised.
d) Where potential purchasers are likely to be partially exempt only some of the VAT
on the building will be recoverable. The Capital Goods Scheme will also apply.

HB2023

Appendix 387
These materials are provided by BPP
 In addition, consideration must be given to the proposed use of the building.

PARTIAL EXEMPTION
Taxable Exempt
supplies supplies
Input tax directly attribute £X £X
Input tax not directly attributable £X

£X £X
Supplies of taxable items
= X%
Total supplies
Round up to nearest whole % £X £X

Fully Irrecoverable unless

recoverable de minimis ie
! £625 pm on average
and
! 50% of total input
VAT for period

Simplified partial exemption tests

If a business meets one of the simplified tests below then they may recover the input
VAT relating to exempt supplies in that period without doing the detailed standard partial
exemption test.

Test One

a) Total input VAT ≤£625 pm on average, and

b) Exempt supplies ≤50% of total supplies for period.

Test Two
Only do if Test One failed.

a) Total input VAT less input tax directly attributable to taxable supplies ≤£625
pm on average, and
b) Exempt supplies ≤50% of total supplies for period.

Annual adjustment
At the end of each year an annual calculation (using the simplified tests and/or the
standard calculation) is also required. A VAT year ends on 31 March, 30 April or 31 May.

CAPITAL GOODS SCHEME

Applies to:
a) Single computer costing ≥ £50k, exclusive of VAT
b) L & B costing ≥ £250k, exclusive of VAT
c) Aircraft, ships, boats and other vessels costing ≥ £50K, exclusive of VAT.

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 In the year of purchase
Initial recovery based on usage in the period of purchase:
a) Wholly taxable business – 100% recoverable
b) Partially exempt business – taxable % recoverable
c) Wholly exempt business – no input tax recoverable.
Year 2 onwards – Annual Adjustment per VAT year
Capital Goods Scheme applies for:
a) 10 years for land and buildings
b) 5 years for computer hardware, aircraft, ships, boats and other vessels.
No adjustment needed where there have been no changes in use since acquisition.
If in any VAT year there has been:
a) More taxable use – recover more input VAT from HMRC
b) Less taxable use – repay some input VAT to HMRC.

Total input VAT

× taxable % usage now – original taxable % usage
10 or 5 intervals

Adjustment on sale
In the VAT year of sale there are two adjustments to be calculated:
a) The annual adjustment for the year of sale as per the previous section;
and
b) A sale adjustment for all remaining years in the adjustment period.
Sale adjustment
a) If VAT is charged on the sale –taxable usage is 100% for the remaining period
b) If no VAT is charged – taxable usage is 0% for the remaining period.

VAT GROUPS

Eligibility
Companies under common control (>50%) are eligible to be treated as members of a
group.
A VAT group can be formed between:
 an individual carrying on a business and one or more UK companies, where the
individual controls each company and the individual's business is established or has
a fixed establishment in the UK; and
 a partnership carrying on a business and one or more UK companies, where the
partnership controls each company and the partnership's business is established or
has a fixed establishment in the UK.

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Appendix 389
These materials are provided by BPP
 Effect
A VAT group is treated as one entity for VAT purposes.
The representative member is responsible for preparing and submitting the VAT returns
on behalf of the group.

Choice of group members

Group registration is optional and not all group entities have to join the VAT group.
It is sometimes preferable to exclude some entities.

Advantages and disadvantages

Advantages of group registration Disadvantages of group registration
No VAT is charged on intra-group Jointly and severally liable for the VAT of
supplies. the group as a whole.
Only one VAT return required, saving Having to make one return may cause
administration costs. administrative difficulties in collecting
information.
If a relatively small wholly exempt Bringing in an exempt or partially exempt
company is included in the group, it may entity may lead to a restriction of
be possible to recover its input tax under recovery of input tax for the other
the de minimis partial exemption rules for members of the group.
the group as a whole.

OVERSEAS ASPECTS OF VAT

Supplies of goods:

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390 Appendix
These materials are provided by BPP
 From 1 January 2021, VAT registered businesses are able to account for (and recover
where relevant) the VAT on their VAT returns rather than on entry to the UK (known as
'postponed accounting'). This gives a cashflow advantage to businesses as there will no
longer be a delay between paying VAT on entry and recovering it on the VAT return.

Supplies of services
Supply of services
UK Overseas

If customer is a business If customer is not a business

Not a UK taxable UK taxable supply

supply (charge output tax)

Supply of services
UK Overseas

UK VAT registered trader

accounts for output VAT on
receipt of service

Treated as input VAT

VAT neutral

Northern Ireland Protocol

As part of the UK’s Withdrawal Agreement from the EU, the Northern Ireland (NI)
Protocol to the Withdrawal Agreement provides that NI remains subject to EU VAT rules
on a supply of goods (but not services). As such, NI will be treated as a member of the
EU where goods are supplied between NI and an EU member state. However, the UK is
responsible for the implementation and collection of the tax due and is not required to
remit this to the EU.
When goods move between NI and GB, they are treated for VAT purposes as imports
and exports. However, HMRC has confirmed that VAT continues to be accounted for as it
always has been on goods sold between GB and NI, except in certain specific
circumstances (which are outside the scope of the BPT syllabus). This means that,
generally, the supplier charges VAT as normal and the customer recovers VAT subject to
the normal input tax rules.

HB2023

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These materials are provided by BPP
 STAMP TAXES – BASICS

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These materials are provided by BPP
 CORPORATION TAX COMPUTATION

Computing Taxable Total Profits

You have already dealt with the basic computation of taxable total profits at Tax
Compliance:

X Ltd: Accounting Period ended (maximum = 12 months)

£
Trading income X

Property income X

Non-trading loan relationships (investment interest) X

Miscellaneous income X

Chargeable gains (net gains, after rollover relief and losses) X

Qualifying charitable donation (X

Taxable total profits (TTP) X

Computation of corporation tax

The rate of corporation tax depends on the financial year (FY) those profits fall in.

FY 2017 to FY 2023
FY22
The main rate (augmented profits more than £250,000) 19% 25%
Small profits rate (augmented profits up to £50,000) 19% 19%
Marginal relief fraction n/a 3/200

PAYMENT OF CORPORATION TAX AND ASSOCIATED COMPANIES

Payment of corporation tax

A large or very large company is required to pay corporation tax in instalments. Other
companies are required to pay corporation tax nine months and one day after the end of
the accounting period end.
Augmented profits of a company are used to determine whether tax should be paid in
instalments.
Augmented profits: Taxable total profits plus exempt ABGH distributions.
Exempt ABGH distributions: Exempt dividends received from UK and overseas
companies. Exempt ABGH distributions, other than those received from companies which
are 51% subsidiaries of the receiving company, or 51% subsidiaries of a company of
which the receiving company is a 51% subsidiary, are added to taxable total profits to
give augmented profits.

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These materials are provided by BPP
 A large company has augmented profits exceeding £1,500,000 and a very large company
has augmented profits exceeding £20 million. These limits are for a single company, with
a 12-month accounting period. The limits are scaled down if:
 the accounting period is less than 12 months; and/or
 the company had 'associated companies' at the end of the previous accounting
period (or if there was no previous accounting period, on the commencement of
this accounting period).
For a 12-month accounting period, quarterly instalments are due on the 14th of:
 Months 7,10,13 and 16 from the start of the accounting period, for a large
company; or
 Months 3,6,9 and 12 of the accounting period, for a very large company.

Associated companies
Companies A and B are associated companies if:
 One company is under the control of another; or
 Both are under common control of a third party (individual, partnership or another
company).
Control means over 50% of the issued share capital; or voting power; or distributable
profits; or assets if the company ceases to exist.
Sub-subsidiaries, ie where one company controls another, which in turn controls another,
are also included as associated companies.
Dormant companies are excluded.
Passive holding companies are excluded:
Conditions to qualify as passive holding company:
 It has no assets other than shares in its 51% subsidiaries;
 has no income in the period other than exempt dividends which are all paid out as
dividends to its own shareholders;
 has no chargeable gains in the period; and
• is not entitled to deduct any expenses of management or qualifying charitable
donations in the period.

Corporation tax rates

Unlike the rules for determining if a company is large/very large for purposes of paying
corporation tax in instalments, where the £1.5m limit and the £20m limits, are divided by
the number of associated companies on the last day of the previous accounting period.
When calculating the rate of corporation tax and marginal relief, the upper and lower
limits are divided by the number of associated companies during the accounting period,
therefore including companies bought and sold during the year, which are only
associated for part of the accounting period.

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394 Appendix
These materials are provided by BPP
 APPENDIX C – Split year
treatment

Split year treatment illustrations

Leaving the UK for full time work overseas:

2023/24 2024/25

Non-resident as
meet full time work

1/1/24 overseas conditions

Start work overseas
Can this part of
2023/25 be NR?

1 2
Are they NR in 2024/25 due to Are full time work overseas
full time work overseas? conditions met for 2023/24 from
= Yes 1/1/24 to 5/4/24?

Pro-rate 30 and 91 day test for

number of complete months
before start work overseas
(including the month start
work):

6/4/23 – 1/1/24 (inclusive) = 9

months
3 months left for test

UK workdays between 1/1/24-5/4/24 no more than: 30 3/12 = 7 days

UK days between 1/1/24-5/4/24 less than: 91 3/12 = 22 days

If YES to 1 and 2 = NR from 1/1/24

HB2023

Appendix 395
These materials are provided by BPP
 Arriving in the UK after full time work overseas:

2023/24 2024/25

Non-resident as met
full time work 30/6/24 return to
overseas conditions UK

Can this part of

24/25 be NR?

1 2 3 4
Are they Were Do they Are they
NR in they UK satisfy UK R for
23/24 due R in 1 of the full 24/25?
to full 4 tax time work
time work years overseas
overseas? before test for
23/24? 6/4/24 –
30/6/24

Pro-rate 30 and 91 day test for

number of complete months
after return to UK:

Complete calendar months

before returning to the UK
inclusive of the month
returning.

April to July inclusive is 4

months to be used for the
tests:

UK workdays between 6/4/24-30/6/24 no more than: 30 4/12 = 10 days

UK days between 6/4/24-30/6/24 less than: 91 4/12 = 30 days

If YES to ALL = NR 6/4/24-30/6/24

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These materials are provided by BPP
 Arrive in UK to work:

2023/24 2024/25

Non-resident
1/7/24 arrive in
UK to work

Can this part of

24/25 be NR?

1 2
Does not have sufficient UK ties 365 day period starting in 24/25
6/4/24-30/6/24 when meet full time work in UK
test
Pro-rate
days in
table
Days x No of whole months before
begin work (including that
month)
12

If YES to BOTH = NR 6/4/24-30/6/24

HB2023

Appendix 397
These materials are provided by BPP
HB2023

398 Appendix
These materials are provided by BPP
 ICAEW
Business Planning:
Taxation FA23
Achievement Ladder Step 5
Questions
2024

HB2023

These materials are provided by BPP

 ICAEW takes no responsibility for the content of any supplemental training materials supplied by the
Partner in Learning.
The ICAEW Partner in Learning logo, ACA and ICAEW CFAB are all registered trademarks of ICAEW
and are used under licence by BPP PQ.
ICAEW learning materials © ICAEW 2024
All rights reserved. Reproduced by BPP PQ with the permission of ICAEW

HB2023
ii
These materials are provided by BPP
 1 Kay
Kay owns 10,000 ordinary shares (a 20% holding with equivalent voting rights) in Apple Ltd. Apple Ltd
manufactures organic fruit juice from a small farm in Devon. Kay paid £6,000 for the shares and has
owned them since she joined the company as its finance director in 2001.
The shareholders of Apple Ltd have decided to sell Apple Ltd and have received two different offers. Kay
would like to understand the impact of the offers on her capital gains tax position:
Offer 1
Blueberry Ltd will acquire all of Apple Ltd’s shares with the following consideration:
 2 ordinary shares in Blueberry Ltd in exchange for each share in Apple Ltd; and
 40p cash for each ordinary share in Apple Ltd.
Blueberry Ltd shares are expected to be worth £1.30 each at the date of the takeover if it proceeds.
Kay’s holding in Blueberry Ltd will be 3% of the issued share capital.
Offer 2
A local entrepreneur, Steve Blunt, has offered to pay £2.50 per share in cash plus 1% of the profits
made by Apple Ltd in the 12 months after the share sale if they exceed £1m. The present value of Kay’s
right to this future amount is estimated at £10,000.
Kay has never made any other chargeable disposals and does not anticipate any other than the disposal
of her Apple Ltd shares. In addition to her income from Apple Ltd, Kay is the beneficiary of a
discretionary trust that provides her with income of at least £60,000 each year.
Requirement
Prepare briefing notes that:
(a) Explain the capital gains tax implications if Kay accepts offer 1.
(b) Explain the capital gains tax implications if Kay accepts offer 2. (15 marks)

HB2023
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 2 Yellow Ltd
You are employed in the corporation tax department of a firm of ICAEW Chartered Accountants that act
for Yellow Ltd.
Yellow Ltd is a UK resident trading company that manufactures components for a local car maker. Its
share capital is owned equally by Andy Timms and Brian Selby who are also directors of the company.
Yellow Ltd has the following shareholdings in the issued share capital of its UK subsidiary companies:
Orange Ltd 100%
Red Ltd 75%
Green Ltd 60%
These shareholdings are all owned directly by Yellow Ltd. The other shareholders in Green Ltd are 2 UK
resident companies.
All companies have an accounting period ended 31 December. The shares in Red Ltd were acquired on
1 July 2023 otherwise the shareholdings remained unchanged during the year.
In October 2023 Yellow Ltd lent Andy £12,000. The balance was still outstanding in full at 31 December
2023. Andy may repay some or all of the loan before the end of September 2024.
Yellow Ltd is considering setting up a wholly owned trading subsidiary overseas, in Upland. The car
maker they supply has a factory there and commercially they feel the business would benefit from
having a presence in Upland. The corporation tax rate in Upland is 11%. If the plan goes ahead the
Upland-resident directors of the new subsidiary would have full autonomy to run the business as they
see fit. One of Brian’s friends (an ICAEW qualified Chartered Accountant) has suggested that there
could be anti-avoidance legislation that would apply in this situation so the directors would like more
information about this.
Requirement
(a) Explain the corporation tax implications of the loan made to Andy.
(b) Explain the anti-avoidance rules that may apply to the proposed subsidiary in Upland.
(c) The finance director of Yellow Ltd would like you to explain:
1 Which companies Yellow Ltd will form a chargeable gains group with.
2 How Yellow Ltd can make use of the losses and investments incurred by its subsidiaries, as
set out in Exhibit 1, to mitigate corporation tax on its chargeable gain. (For this part of the
question you should ignore Green Ltd’s trading loss).
3 How Yellow Ltd can obtain relief for Green Ltd’s trading loss.
(25 marks)
Exhibit 1
Extracts from the corporation tax computations of the companies for the year ended 31 December 2023
are shown below:
£
Yellow Ltd
Chargeable gain 465,000

Orange Ltd
Trading losses brought forward (42,000)
Capital loss brought forward (108,000)

Red Ltd
Capital loss (asset sold 1 March 2023) (50,000)

Green Ltd
Trading loss (100,000)
Capital loss (80,000)

Yellow Ltd’s gain arose on the disposal of a factory used in its trade for £600,000 on 1 November 2023.
In December 2023, Red Ltd acquired a new freehold property for use in its trade for £350,000.

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 3 Jack
Jack is a long-standing client of your firm. He has been approached by the shareholders of FJT Ltd with
a view to him investing £100,000 in the company in 2024/25.
FJT Ltd is an unquoted trading company that manufactures UPVC windows. It has gross assets of £10m
and 200 employees. They require the £100,000 for new machinery as the company has long term plans
to grow its business. They have approached Jack as he is friends with one of FJT Ltd’s directors and
has expressed an interest in making a tax-efficient investment following a recent lottery win.
Jack would like more information from your firm on how he can make a tax-efficient investment in FJT
Ltd. One of the directors has mentioned he may be able to save income tax and capital gains tax but he
thinks this sounds too good to be true. He is also considering whether he should accept the company’s
offer of becoming a director if the share investment goes ahead.
Jack is a higher rate taxpayer and anticipates his 2024/25 income tax liability to be in the region of
£50,000. In 2023/24, he sold a holiday cottage realising a chargeable gain of £45,000.
Requirement:
You are required to explain how Jack can obtain income tax and capital gains tax relief through an
investment in FJT Ltd and any conditions that would need to be satisfied for the relief to be available.
(10 marks)

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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written
permission of BPP Learning Media Ltd.

The contents of this book are intended as a guide and not professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty
that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this book.

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 ICAEW Business Planning:
Taxation FA23
Achievement Ladder Step 6
Questions
2024

HB2023

These materials are provided by BPP

 ICAEW takes no responsibility for the content of any supplemental training materials supplied by the
Partner in Learning.
The ICAEW Partner in Learning logo, ACA and ICAEW CFAB are all registered trademarks of ICAEW
and are used under licence by BPP PQ.
ICAEW learning materials © ICAEW 2024
All rights reserved. Reproduced by BPP PQ with the permission of ICAEW

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 1 Datta plc
Assume it is December 2024. You work for a firm of ICAEW Chartered Accountants specialising in
company transformations. Your firm has been asked to represent E-Line Training Ltd and its
shareholders in the proposed sale of its business to Datta plc, which is a quoted company with gross
assets of £50 million which does not currently have any subsidiaries.
The shareholders in E-Line Training Ltd are brothers, Nathan Smith (aged 55) and Jordan Smith (aged
68), who have been running the business since January 2003. Nathan and Jordan have agreed with
Datta plc that they will continue to work in the business after the sale but, at present, they are unsure
how the sale should be structured.
Your files show that E-Line Training Ltd is an internet company which provides training entirely online.
The E-Line Training business was started by Nathan and Jordan Smith in January 2003 as a
partnership. On 1 January 2023 the brothers incorporated their partnership and received 5,000 shares
each in exchange for the following partnership assets:
Market value Market value
(projected) at at
1 February 2025 1 January 2023 Cost
£ £ £
Office building 360,000 500,000 500,000 (31 December 2022)
Plant and equipment 50,000 100,000 120,000 (April 2008)
Goodwill 750,000 700,000
1,160,000 1,300,000
The office building was purchased new from the developer on 31 December 2022 at a cost of £500,000
(including land of £290,000).
The brothers used incorporation relief to defer any chargeable gains arising on the incorporation of their
partnership. No other reliefs were claimed at the time of incorporation.
The proposed date for the sale of the business is 1 February 2025. Cash consideration for the sale has
been agreed in outline to be £1.16 million, the market value of the assets at that date.
Jordan has indicated that he wishes to retire Spring 2026. He has an illness which may in time become
life threatening and has asked whether it would be tax efficient to gift his shares in
E-Line Training Ltd to his daughter before the sale to Datta plc. Alternatively, Jordan would like us to
consider the implications of making a gift of cash to his daughter after the deal is complete, instead of
gifting the E-Line Training Ltd shares. Jordan's daughter is a higher rate taxpayer.
Information about E-Line Training Ltd's projected results is attached as an Exhibit.
Following a recent telephone call, your manager Davina Clary has also sent you the following email:
To: Peter Hampton
From: Davina Clary
Peter,
In a telephone conversation today Nathan Smith implied that E-Line Training Ltd had received a tax
repayment in error, and that this was a good thing because it would boost the sales price for the
company. I couldn't quiz him about it at the time as we were about to be joined on a conference call by
the Datta plc team, but from what he said it sounded as if the company had submitted correct returns
and a repayment that they were not due had just appeared in the company's bank account. This is
clearly a very sensitive area: could you please look into the current guidance and prepare notes on what
we should do?
Many thanks.

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 Requirements
1.1 Prepare extracts for a report to Davina Clary setting out:
(a) A comparison of the tax implications of the deal proceeding as a sale of the trade and assets
of E-Line Training Ltd, or as a sale of Nathan and Jordan's shares in E-Line Training Ltd.
(Your report should be from the vendors' perspective only ie, not include issues relating to the
purchaser.)
(b) Specific tax advice to Jordan covering the capital gains tax and inheritance tax consequences
of his proposals for making a gift to his daughter.
1.2 Prepare the notes which Davina has requested in relation to the potential HMRC overpayment.
Total: 40 marks
Exhibit – E-Line Training Ltd – Actual and projected tax-adjusted trading profit/loss
£'000
Year ended 31 December 2023 (after deduction of capital allowances) Nil
Year ended 31 December 2024 (after deduction of capital allowances) (114.5)
Year ended 31 December 2025 (before deduction of capital allowances) 925.0
E-Line Training Ltd broke even in the year ended 31 December 2023.
Additional information
(1) The tax written down value of plant and equipment transferred to E-Line Training Ltd on
incorporation at 1 January 2023 was as follows:
£'000
Main pool 152
No additions of assets qualifying for capital allowances were purchased in the two years ended 31
December 2024.
(2) In February 2024 a sewage plant was built on land adjacent to the office building, this had an
immediate impact on the market value of the building which was then valued at only £420,000.
Further deterioration in the area has eroded the market values of commercial property and as a
consequence the office building is expected to have a market value at 1 February 2025 of
£360,000.

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 2 Ambridge plc
You have recently transferred to the tax department of Printer & Co, a firm of ICAEW Chartered
Accountants, and have started working on the Ambridge plc account.
The group structure of the Ambridge plc group is set out below.
Ambridge
plc

100% 45% 100% 16%

Borchester Clarrie Darrington Endsleigh
Ltd Inc Inc Ltd

Ambridge plc manufactures agricultural machinery at its factory in London. Borchester Ltd, Clarrie Inc
and Darrington Inc all manufacture combine harvesters. Endsleigh Ltd manufactures tractors. Ambridge
plc, Borchester Ltd and Endsleigh Ltd are incorporated in the UK, with Clarrie Inc and Darrington Inc
incorporated overseas.
The Clarrie Inc shares are non-redeemable ordinary shares.
Darrington Inc has four directors, three of whom are resident in the UK. The board meetings are held in
the UK and all key strategic and commercial decisions are made at these meetings.
The remaining non-redeemable ordinary shares in Endsleigh Ltd are owned equally by six UK resident
companies.
In the year ended 31 December 2023 Ambridge plc had tax adjusted trading profits of £650,000 and a
chargeable gain of £475,000.
The gain arose on the sale of its head office for proceeds of £1,040,000 in August 2023.
Ambridge plc received interest of £64,616 from Clarrie Inc. Clarrie Inc is resident in Umbrovia, a small
country in South America which does not have a double tax treaty with the UK. Umbrovia has
withholding tax of 18% on payments of interest and dividends.
Endsleigh Ltd has suffered from increasing market competition and made a trading loss of £112,000 for
the year ended 31 December 2023. Endsleigh Ltd's only other income was property income of £20,000.
Borchester Ltd purchased fixed plant and machinery at a cost of £930,000 in October 2023. Borchester
Ltd had trading income for the year ended 31 December 2023 of £60,000. It had also made a disposal of
shares in June 2022 realising a capital loss of £143,000.
Darrington Inc prepares accounts to September each year. It made a trading loss of £320,000 in the
year ended 30 September 2023, having previously being profitable. It hopes to breakeven in the year
ended 30 September 2024.
The managing director of Ambridge plc has indicated that the company plans to take out a bank loan of
£40 million in the year ended 31 December 2024. It is estimated that interest payable on this will be £2.6
million. The adjusted net group-interest expense is expected to be £3.1 million for the same period, and
the group aggregate tax-EDITDA is budgeted to be £12 million.
In addition, the group is considering two other capital transactions:
(1) The purchase of a 100% interest in Delphine SARL, an Aldovian company which manufactures
specialist agricultural equipment (it has only trading assets). If the acquisition takes place, it seems
likely that several key members of the management team of the Aldovian company will leave. In the
medium term, the group will be looking for replacements. However, in the short term it is likely that
staff of Ambridge plc would step in. They would carry out most of their activities relating to the
Aldovian company from the UK, but would travel to Aldovia for board meetings as the group is keen
to keep two of the existing Aldovian directors on the board because of their knowledge of the
Aldovian market.
(2) To partially fund the purchase of Delphine SARL, Ambridge plc is expecting to sell the factory in
London and replace it with a smaller factory in Essex. The company is in discussion with Konin plc,
an unconnected company, with a view to selling the freehold factory for £4 million. The factory was
originally purchased in August 2000 as a newly constructed building. The accounts show that the
original cost of the factory was £1.1 million (including land of £500,000). The new factory will be

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 bought directly from the developer for £1 million (VAT exclusive). The transactions are expected to
take place in December 2024.
Requirements
2.1 Calculate the corporation tax payable by Ambridge plc for the year ended 31 December 2023 on
the assumption that the group's tax position is optimised as far as possible. You should include
explanations with the workings so that they can be easily followed by colleagues reviewing your
work. These should include details of how any available losses should be set off.
2.2 Prepare brief notes for the Tax Manager on the account setting out:
(a) The key points that she needs to bring to the attention of the Ambridge directors regarding the
tax deductibility of the interest on the proposed bank loan.
(b) The key UK tax issues which the group need to be aware of if Ambridge plc staff assist in the
management of Delphine SARL as proposed.
(c) The tax consequences for Ambridge plc of the sale of the London factory and purchase of the
Essex factory and the amount of cash generated from these transactions..
Total: 35 marks

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 3 Caroline
Caroline had been trading as a shopkeeper selling toys and games for a number of years, drawing up
her books to 28 February each year. However, she found that caring for her elderly mother was not
leaving her enough time to spend on the business which, as a result, started to make losses. On
31 December 2023 she therefore agreed to sell the business to Playtime Ltd, which already owned toy
shops in other towns in the area.
The consideration for the sale is £500,000. Of this £20,000 related to stock, £10,000 to fixtures and
fittings, £300,000 to the freehold shop and the balance to goodwill. The stock was recorded in Caroline's
accounts at cost of £15,860.
Your files show that the shop was acquired in 2007 for £165,000. The files also show a brought forward
balance on her main capital allowances pool of £2,740 at 1 March 2023.
Caroline's recent trading profit/(loss) had been as follows:
£
Year ended 28 February 2020 45,960
Year ended 29 February 2021 49,870
Year ended 28 February 2022 41,260
Year ended 28 February 2023 23,820
Period ended 31 December 2023* (50,320)
* The loss is before adjustments relating to the sale.
She had unrelieved overlap profits of £17,250 brought forward.
Caroline had also inherited shares in a UK resident investment company from her father. On
30 November 2023 Caroline sold the shares realising a gain of £24,370.
According to your files, Caroline's only other income in 2022/23 and 2023/24 consisted of dividends
received from UK quoted shares of £16,800 and £12,900 respectively (she had no investment income in
earlier periods), and she expects to start drawing a pension of £22,650 per annum when she turns 55 in
May 2024.
Requirements
3.1 Calculate Caroline's 2023/24 CGT liability, ignoring the trading loss.
3.2 Prepare notes in preparation for a meeting with Caroline which sets out the alternative ways for
relieving the trading loss, and identify (with calculations) which is the most beneficial and the
amount of the tax saved.
Total: 15 marks

HB2023
vii
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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written
permission of BPP Learning Media Ltd.

The contents of this book are intended as a guide and not professional advice. Although every effort has been made to
ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty
that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any
person acting or refraining from acting as a result of the material in this book.

HB2023
viii
These materials are provided by BPP