UK Financial Services, regulations and ethics

Individuals who are UK resident and domiciled for tax purposes are liable to income and capital gains tax on all their income, wherever it arises in the world. A person’s liability to inheritance tax depends entirely on their domicile. If UK domicile (or deemed domicile – see below), they will be subject to IHT on their worldwide assets. The scope of this module only allows us to concentrate on UK resident and domiciled individuals.

A person is regarded as UK resident for tax purposes in a tax year on the basis of a statutory test of residence . The tax year runs from 6 April to the following 5 April  and the statutory test consists of three parts:

Automatically not resident in the UK

Automatically resident in the UK

Sufficient UK ties test

Automatically not resident in the UK

This applies to any individual who:

Is in the UK for fewer than 16 days in the tax year

Is not reside...

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...he UK for at least 7 out of the previous 9 tax years is £30,000, increasing to £60,000 for those resident for in at least 12 of the previous 14 tax years. The annual charge does not apply if the unremitted foreign income and gains in a tax year is less than £2,000 or the individual is under age 18.

UK residents who are not UK domiciled and are claiming the remittance basis are not entitled to a personal allowance and once deemed UK domiciled (after 15 years) the remittance basis can no longer be used.

UK residents are liable for capital gains tax on gains made anywhere in the world that the assets are held and if they are domiciled or deemed domiciled in the UK on the date of their death inheritance tax will be charged on assets held worldwide. Those not domiciled or deemed domiciled are only liable for inheritance tax on assets held within the UK.

We will now go on to consider the main forms of individual taxation.

In this section, we summarise the main rules relating to taxation of income.

Calculation process

When working out an individual’s income tax liability, one must first calculate their taxable income for the year.

The tax (fiscal) year for individuals runs from 6 April to 5 April the following year. Income can arise from a number of sources, and where it is regarded as taxable income, it is placed in a set order of priority before any tax is calculated. Certain income - such as that from some social security benefits (see chapter 8), ISAs, some National Savings products, gambling and lottery wins - is tax free and would not be included within the income tax calculation.

The first layer of income subject to tax will include non-savings income such as that from employment and pensions, as well as self-employed profits and property rental income

The next layer of income subject to tax will include savings interest income from investments like bank and building society accounts or interest from gilts and corporate bonds (in excess of the Personal Savings Allowance)

The next layer after that will be dividends from shares (in excess of the Dividend Allowance)

The top layer is taxable profits from life assurance policies – such as the chargeable event gains arising from single premium investment bonds

Once these figures have been established, deductions can be made including certain allowances (e.g. personal allowance), charges (e.g. loans to companies) and reliefs (e.g. gross pension contributions). These are deducted from total income in a prioritised order whereby the reliefs and allowances are first set against non-savings income. Only after they have been used up are they then applied against savings income followed by dividends.

Everyone qualifies for a personal allowance (£12,570 in 2023/24) However, for those with income in excess of £100,000 in the 2023/24 tax year, the personal allowance will be reduced by £1 for every £2 of income over £100,000. This means that anyone with income over £125,140 [£100,000 + (£12,570 x 2)] wi...

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...ment return and completes it, giving details of all income (and capital gains) following the tax year in which it arises. The form is then returned to HMRC for assessment of tax due. If the individual wishes HMRC to calculate the tax due for them, they need to return a paper-based form no later than 31 October following the tax year of assessment (though this date can be extended to the following 31 January if the return is completed online). If the individual wishes to calculate their own liability they do not need to submit their return until 31 January.

Tax due via self assessment is made in two payments. The first payment becomes due on the 31 January. At this date, a payment on account for the tax year of assessment is made and any balancing charge due from the previous year. The second payment date is the 31 July whereby a payment on account is made for the tax year of assessment ending the previous 5 th April. The payments on account are based on 50% of the previous year’s liability. An example of how this works will best demonstrate this system:

In 2022/23 Veronica’s tax liability was £10,000. In 2023/24 her liability amounts to £12,000. Her tax payments for 2023/24 will be made in the following way:

31 January 2024 - £5,000 payment on account based on 50% of the 2022/23 liability (plus any balancing charge due from the previous year)

31 July 2024 £5,000 payment on account based on 50% of the 2022/23 liability

31 January 2025 - £2,000 balancing charge due for 2023/24 plus a payment on account of £6,000 for 2024/25 based on 50% of the 2023/24 liability

Income tax planning issues

One should not get involved with illegally evading tax due but one can assist a client in legally avoiding tax.

Such planning considerations that could be looked into are:

Maximising use of personal allowances and the lowest tax bands

Ensuring that clients claim all available reliefs and allowances due to them

Selecting appropriate tax free (or advantaged) investments

Selecting investments that provide tax reliefs, e.g. registered pension schemes

In this section, we summarise the main rules relating to taxation of capital gains.

Liability to UK capital gains tax

Where a UK resident and UK domiciled individual disposes of a capital asset, any capital gain that arises could be subject to UK capital gains tax (CGT). CGT is charged on net gains, i.e. total chargeable gains realised during a tax year after deducting total allowable losses realised in the year. The net gains that exceed the annual exemption (up to £6,000 of net gains realised during 2023/24 by an individual are tax-free) are then taxed as if they were the top slice of the individual’s income.

For instance, Brigitte sold two different properties and some shares in 2023/24. She made a chargeable gain of £20,000 on one property, an allowable loss of £5,000 on the other and a chargeable gain of £13,000 on the shares. Her net gains for the year were therefore £28,000. The annual exemption of £6,000 is deducted from this amount, leaving £22,000 to be taxed.

Calculation process

CGT can only arise on the disposal of an asset. Usually this will be on its sale. However, a disposal could be a gift or, sometimes, the receipt of compensation for the loss of or damage to an asset.

The value on which the gain (or loss) is bas...

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... bought the house he had to pay stamp duty of £1,200 and legal costs of £450.

His taxable gain is as follows:

    

     

£

£

Disposal proceeds

350,000

Less disposal costs

Estate agent’s fees

(3,500)

Legal costs

(1,600)

Less

Acquisition cost

(120,000)

Stamp duty

(1,200)

Legal costs

(450)

Total

(126,750)

223,250

Less

Annual allowance

(6,000)

Gain chargeable to tax

217,950

Tax £217,950 x 28%* = £61,026

* Gains on property are taxed at either 18% (basic rate) or 28% (higher and additional rate).

Capital gains tax planning issues

As with income tax there are a number of legal ways in which a client could reduce or completely negate his CGT liability. For instance, a few of the more straightforward ones include:

Checking whether losses made in the current or previous year can be offset against other gains

Transferring assets to spouses (or civil partners) before realising gains. A tactic that works especially well where the receiving spouse pays a lower rate of tax than the donor or where they have not utilised their annual exemption in the tax year

Investing in products that produce tax free capital gains such as ISAs

Stamp duty land tax and stamp duty/stamp duty reserve tax (SDRT)

In this section, we summarise the main rules relating to stamp duty land tax, stamp duty and stamp duty reserve tax.

Stamp duty land tax  Stamp duty land tax is a tax on the purchase of land (including houses), payable within 14 days of the completion of the purchase. It is payable by the buyer. The current rates of tax in England and Northern Ireland in the 2023/24 tax year are:

Purchase price (£)

Tax charge

0 - 250,000*

Nil

250,001 - 925,000**

5%

925,001 - 1,500,000**

10%

Over 1,500,000**

12%

* £150,000 for non-residential property / reducing to £125,000 for residential property from 1 April 2025

** Residential property only

Note that a 15% rate applies to properties over £500,000 purchased by those other than individuals.

First-time buyers do not pay any stamp duty on purchases below £425,000 and between £425,000 and £625,000 they pay tax at 5%. No relief is available for purchases in excess of £625,000.

From 1 April 2016, there is an additional 3% charge on top of the normal rate of SDLT if the buyer...

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...0%

750,001 and over 

12%

In April 2018, Land Transaction Tax (LTT) replaced Stamp Duty in Wales. The rates in the current tax year are:

Property purchase (£)

Tax charge

Up to and including 225,000   

0%

225,000 to 400,000  

6%

400,001 to 750,000 

7.5%

750,001 to 1,500,000

10%

Over 1,500,000

12%

In Scotland there is an additional 6% surcharge for the purchase of second residential homes and in Wales there is a 4% surcharge.  There is also no relief for first-time buyers in Wales.

Stamp duty/stamp duty reserve tax

Stamp duty and stamp duty reserve tax are payable on the transfer of UK registered shares. The tax is paid by the purchaser of the shares.

Stamp duty is charged if the transfer is carried out by way of a stock transfer form. It is rounded up to the next multiple of £5.

Stamp duty reserve tax is charged on paperless transactions taking place through CREST (an electronic settlement and registration system for share transactions) and is rounded up to the nearest penny.

The current rate for both stamp duty and stamp duty reserve tax is 0.5% of the purchase price.

In this section, we summarise the main rules relating to inheritance tax.

Fundamentals of inheritance tax (IHT)

IHT - what is it?

A cumulative tax on dispositions made from a person’s assets either during their lifetime or on death. Individuals who are domiciled or deemed domiciled in the UK will be subject to IHT on their worldwide estate. The first part of an individual’s estate will avoid IHT. This is commonly referred to as the nil rate band and, for 2023/24, this is set at £325,000. Any amount in excess of this will be charged at 40% (in 2023/24, except where 10% or more of a deceased’s estate is left to charity, when the rate charged will drop to 36%).

In the case of married couples, any proportion of unused nil rate band of the first to die can be carried over to the surviving spouse or civil partner and applied to their estate on subsequent death. Since April 2013, individuals who are domiciled outside of the UK but have a UK domiciled spouse or civil partner can elect to be treated as domiciled in the UK for the purposes of IHT. Making this election would allow them to make use of the full spouse exemption when transferring their estate on death. However, it also means that IHT would apply to ...

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...ceeded the nil rate band applicable to that year, then the full rate of IHT will be payable on that proportion. Where the PET was made between three and seven years ago the IHT charge is reduced by a tapering amount (80% to 20%), after which the PET falls out of the calculation of the estate

The balance of the estate on death is chargeable to 40% IHT

Who pays IHT?

Personal representatives of estate (beneficiaries of estate if liability not met)

Donee for Potentially Exempt Transfers

Trustee or Donor for Chargeable Lifetime Transfers

Trustees - Trusts

Example calculation of tax on estate on death

        

£

Estate value

500,000

Less nil rate band (2023/24)

325,000

Estate liable to IHT at 40%

175,000

IHT at 40% on £175,000 = £70,000

IHT Planning

Life assurance can be taken out to cover the IHT liability on the estate arising on death, to recompense estate beneficiaries for any tax payable. This can arise as a result of both lifetime gifts made and the remaining value of the estate at death

Making gifts during lifetime to reduce estate value (often in trust). These will fall out of the death estate altogether if the donor survives seven years