Investment income. chapter 2. Contents

Transcription

1 chapter 2 Investment income Contents Introduction Examination context Topic List 1 Property income 2 Individual Savings Accounts (ISAs) 3 Enterprise Investment Scheme (EIS) 4 Venture Capital Trusts (VCT) Summary and Self-test Technical reference Answers to Self-test Answer to Interactive question 23

2 Taxation Introduction Learning objectives Describe the principal aspects of the taxation of property income, including rent-a-room relief and premiums on short leases Identify investments which produce non-taxable income and/or capital gains and recognise when they might be appropriate for individuals Identify investments and expenditure which reduce tax liability and recognise when they might be appropriate for individuals Identify investments which produce non-taxable income and/or capital gains and recognise when they might be appropriate for businesses Identify investments and expenditure which reduce tax liability and recognise when they might be appropriate for businesses Tick off Specific syllabus references for this chapter are 2(d), 2(u), 2(v), 1(x), 1(y). Practical significance The increase in UK property prices has led to an explosion in the number of taxpayers keen to invest in property. The profits from letting together with profits on sale of buy-to-let property must all be declared on the Tax Return. There are different rules for income from letting a room in your own home and there are also differences between letting furnished and unfurnished property. Other investment vehicles, such as the Enterprise Investment Scheme (EIS) and using Venture Capital Trusts (VCT), also attract tax relief and can be very useful schemes for smaller businesses seeking new finance from outside investors. Stop and think Most likely you have been paying tax on your various sources of income and gains. Have you stopped to think about whether you could reduce this tax bill? For example do you regularly invest in tax free savings accounts? Working context Many of you will come across clients who have invested in property even if you do not work in general practice or personal tax. You will need to be able to apply the rules to determine when income is taxable and what allowances for expenditure can be claimed. Not all of these are intuitive and you will be able to add considerable value to a client s business by advising on how to claim deductions at the most appropriate time and knowing what extra incentives are available. For example, generous deductions are given for expenditure on energy efficient products such as cavity wall insulation. The topics covered in this chapter will help you to understand the tax treatment of various types of investment and how this might influence a person s decision to invest. The rules explained in this chapter cover the basic principles, but in practice the detailed rules for the EIS and VCT schemes are considerably more complex and contain pitfalls for the ill advised investor. Syllabus links None of the topics in this Chapter were covered in the Principles of Taxation study manual in any detail. 24

3 INVESTMENT INCOME 2 Examination context Exam requirements In the examination candidates may be required to: Calculate the total property income assessment of an individual, including dealing with 'rent a room' and lease premiums. Give advice to an individual about investments in ISA s, subscriptions in EIS shares and VCT shares. Show how income tax and capital gains tax relief is given for investments in EIS or VCT shares. Examiner's comments on how students tackle questions In past examinations candidates have found lease premium calculations difficult. It is essential that time is spent understanding the methods for calculating lease premiums. Better candidates have previously been able to pick up valuable marks by offering advice on tax efficient investments. Candidates who can differentiate between the different types of investment available do well on these questions. 25

4 Taxation 1 Property income Section overview Property income is taxed on the amount accrued in a tax year. Allowable expenses are deductible, including a wear and tear allowance for furnished property. Losses are carried forward and set against the first available property income. Rent a room relief applies to lettings in the taxpayer's own home. Qualifying holiday accommodation is generally treated as a trade carried on by the taxpayer. Real Estate Investment Trusts (REITs) allow a taxpayer to spread his investment in property. Part of the premium received by a landlord on the grant of a short lease is taxable property income. 1.1 Property income The main type of property income is rental income from the letting of unfurnished or furnished property. Rental income specifically includes any amounts receivable for the use of furniture if the property is furnished property. Rental income is taxed on the amount accrued in a tax year. Therefore, for 2007/08 the rental income taxable is the amount accrued between 6 April 2007 and 5 April 2008, after allowable expenses. Expenses are also allowable on an accruals basis. Worked example: Property income accruals basis Susan rents out an unfurnished house. Until 30 June 2007, rent is 1,250 per calendar month, payable on the last day of each month. Thereafter the rent is increased to 1,500 per month. The rent is usually paid promptly, but the payment due on 31 March 2008 was not received until 10 April Susan paid an insurance premium of 1,600 on 1 January 2007 for the year to 31 December 2007 and an insurance premium of 1,800 on 1 January 2008 for the year to 31 December Susan had other allowable expenses of 6,020 accrued in 2007/08. Requirement Calculate Susan's taxable property income for 2007/08. Solution Susan Property income Rent accrued April June , ,750 July 2007 March , ,500 17,250 Less: insurance premium April December ,600 9/12 1,200 January March ,800 3/ other expenses Taxable property income 6,020 (7,670) 9,580 Note that the fact that the March 2008 rental payment is not received until 2008/09 is not relevant the amount due is accrued in 2007/08 and is therefore taxable in that year. 26

5 INVESTMENT INCOME 2 If more than one property is let, all income and expenditure is pooled to calculate a single amount of taxable property income. However if one or more properties satisfy the conditions to be treated as qualifying holiday accommodation, the income from such lettings is taxed separately (see later in this section). 1.2 Allowable expenses Allowable expenses include the following: Legal, professional and administrative costs Interest paid eg on loans to buy property, overdraft interest relating to property letting Rates and taxes paid by the landlord eg council tax, water rates Ancillary services provided by the landlord eg cleaning, gardening Insurance for the property (in all cases) Furnishings (if let furnished) see 1.4 below Repairs and maintenance eg painting, redecoration Landlord energy saving allowance up to 1,500 per dwelling house for installing loft/cavity wall/floor insulation, draught proofing and hot water system insulation. From 6 April 2007 if a building contains more than one dwelling, the 1,500 applies per dwelling. If a property is partly owner-occupied and partly let, expenses relating to periods of owner-occupation are not allowable. 1.3 Bad debt relief Rental income is taxed on an accruals basis. If a tenant does not pay the rent, the income is still taxable. However, if the debt remains unpaid and the debt is written off by the landlord, relief is given for the amount written off. 1.4 Capital expenditure Capital allowances are only available on the cost of plant and machinery used for the repair or maintenance of the property. Capital allowances are therefore not available for most items of plant and machinery, furniture and other equipment provided for use in a furnished property. Instead, where a property is let furnished, the landlord can choose between the renewals basis and a wear and tear allowance. Under the renewals basis, there is no deduction for the cost of the first furniture provided. However, the cost of replacement furniture is treated as an allowable expense. The wear and tear allowance is calculated as 10% of rents accrued less any amounts paid by the landlord which are legally the responsibility of the tenant (eg water rates and council tax). The allowance is given for the period when the property is available for letting. 27

6 Taxation Interactive question 1: Taxable property income Lee owns a flat which he lets out furnished at a weekly rental of 125. [Difficulty level: Exam level] During 2007/08, the flat was let out for 34 weeks, occupied by Lee for 9 weeks and then let out for the remaining 9 weeks to a new tenant. Lee had the following expenditure during the year: Repairs 460 Council tax 680 Water rates 255 Redecoration 500 Insurance 240 Gardening and cleaning (during tenanted period only) 440 Advertising for new tenant 25 Lee claims the wear and tear allowance. Requirement Using the standard format below, compute the taxable property income for Lee. Income Expenses Allowable in full: Allowable for let period:....../52 Wear and tear allowance: 10% [...].../52 ( ) Taxable property income See Answer at the end of this chapter. 1.5 Losses In each tax year, all property letting income and expenditure is pooled. As a result, a single overall profit (or loss) figure is calculated for that tax year. If a loss arises, there is no taxable property income in that tax year. The loss is carried forward and set, as far as possible, against the first available future property income. The deduction is made at Step 2 of the income tax liability computation (Chapter, 1 Section 1.5) in arriving at net income. 1.6 Rent a room relief If an individual lets out part of his home, he will receive taxable property income. However, rent a room relief may apply. To be eligible for the relief, the accommodation let to the tenant must be furnished and part of the individual taxpayer's only or main domestic residence (ie house or flat). The tax treatment of rental income depends on the level of gross annual rents. 28

7 INVESTMENT INCOME 2 Where gross rental income is not more than 4,250 per tax year: [Hp5] The income and expenses arising in relation to the letting are ignored for income tax; Similarly, no property losses arise unless the taxpayer elects to set aside the rent a room rules for a particular tax year and so claim a property loss. Where gross rental income is more than 4,250 per tax year: The normal property income rules usually apply; Alternatively, the taxpayer can elect to be assessed under the rent a room rules on the gross rents in excess of the rent a room limit of 4,250. However, in this case, there is no relief for expenses. This election applies for subsequent tax years until the election is withdrawn or the gross rents do not exceed the rent a room limit. Where two or more people, including husband and wife/civil partners, share a home each has rent a room relief of 2,125 ( 4,250/2). Worked example: Rent a room relief Gina let out a room in her house at a rent of 120 a week throughout 2007/08. Her allowable expenses for the year were 5,100 (including a wear and tear allowance). Requirement Show the tax position of Gina if: (a) the normal property income rules apply; or (b) she has made an election in 2006/07 to use the rent a room rules. Based on your computations, what advice would you give to Gina? Solution (a) Normal property income rules Rent received ,240 Less: expenses (5,100) Taxable property income 1,140 (b) Rent a room rules Gross rents 6,240 Less: rent a room limit (4,250) Taxable property income 1,990 Gina should withdraw her election to use the rent a room rules, as the normal property income rules give a lower taxable amount of property income. 1.7 Qualifying holiday accommodation Income from qualifying holiday accommodation is taxed as property income. However, for certain purposes, it is treated as taxable trading income. Therefore, a record of income and expenditure for qualifying holiday accommodation must be kept separate from ordinary lettings. 29

8 Taxation Qualifying holiday accommodation must be: Situated in the UK; and Furnished; and Let on a commercial basis with a view to the realisation of profits; and Available for letting to the public as holiday accommodation for at least 140 days in the tax year; and Actually let for at least 70 days during the same tax year; and Not normally occupied for periods of 'longer-term occupation' (more than 31 consecutive days to the same person) for more than 155 days in a tax year. The key income tax advantages are: Profits are relevant earnings for pension scheme purposes, so pension contributions may be made in respect of such profits; Losses are trading losses under the trading income rules, not property income losses. Therefore they can be set against other income and not restricted to property income only; Capital allowances are available on all plant and machinery including furniture (instead of the renewals basis or the wear and tear allowance). The main capital gains tax advantage is that the property is treated as a business asset. This entitles the individual to the associated capital gains tax reliefs, such as taper relief and relief for replacement of business assets. For inheritance tax, business property relief may be available, although the test for that relief to apply is slightly different to that for the other taxes (see later in this text). 1.8 Real Estate Investment Trusts (REITs) On or after 1 January 2007 a company can be treated as a Real Estate Investment Trust (REIT). Investing in a REIT rather than an individual property enables the investor to spread his investment over a number of properties. The shares should be more marketable than a property would be, but the investor is still exposed to fluctuations in the property market. Some income generated by a REIT is tax-exempt, other income may not be tax-exempt. REITs are exempt from corporation tax on their property income and gains. Amounts paid out of taxexempt property income or gains to a shareholder of a REIT are taxable on the shareholder as property income and are paid net of basic rate tax at 22%. Amounts paid out of non tax-exempt property income or gains to a shareholder of a REIT are taxable as normal dividends and are grossed up by 100 / 90. Gains on disposals of shares are subject to capital gains tax in the normal way (see later in this text). 1.9 Lease premiums taxed as property income If a lease is granted by a landlord to a tenant, the landlord may receive a capital payment from the tenant. This is called a premium. If the lease is a short lease (50 years or less), part of the premium is taxable as property income. The amount of the premium taxable as property income is: [Hp38] 50 Y P 50 Where: P = total premium paid Y = complete number of years of the lease minus one 30

9 INVESTMENT INCOME 2 Worked example: Grant of short lease Sasha grants a 30 year lease to Greg for a premium of 45,000. Requirement Compute the amount of the premium which is taxable as property income. Solution P 50 Y = 45,000 = (30 1) 50 = 18,900 Where a trader pays a premium for a lease, he can deduct an amount from his trading profits in each year of the lease. The deduction is the amount of the premium taxed on the landlord as property income divided by the number of years of the lease. Where the lease starts or ends during the trader s accounting period the deduction is pro rated. [Hp40] Worked example: Lease deduction for trader Sean grants a 25 year lease of a workshop to Fred, who carries on a trade in the workshop. The premium paid by Fred on the grant of the lease is 15,000. Requirement Compute the amount that Fred can deduct each year from his trading profits. Solution Amount taxable on Sean Taxable property income 15, (25 1) 50 = 7,800 Amount deductible each year by Fred 7, If a tenant grants a sublease of the property to a sub-tenant, any premium he receives will also be subject to these rules. If the tenant paid a premium on the grant of the lease to him, he can deduct the appropriate part of the amount taxed on the landlord on the original grant, from the part of the premium he receives which is taxable as property income. 31

10 Taxation Worked example: Grant of sub lease Misha granted a lease to Eleanor on 1 December 2000 for 40 years. Eleanor paid a premium of 80,000. On 1 December 2006, Eleanor granted a 10 year sub-lease to Wayne. Wayne paid a premium of 16,000. Requirement Compute the amount of the premium paid by Wayne to Eleanor taxed on her as property income. Solution Amount taxed on Misha Taxable property income 50 (40 1) 80,000 = 17, Amount taxed on Eleanor Taxable property income 50 (10 1) 16, = 13,120 Less: 17, (4,400) Taxable property income 8,720 2 Individual Savings Accounts (ISAs) Section overview ISAs can contain cash, shares and insurance products. An individual may invest in a maxi-isa or two mini-isas. Income and gains on ISA investments are exempt from tax. 2.1 Investing in an ISA ISAs are available to individuals aged 18 or over. Cash-only ISAs are also available to 16 and 17 year olds. An individual can invest in either or both of the two different components of an ISA: Cash and cash like equity products eg investment of cash in bank and building society accounts; Qualifying stocks and shares and insurance products eg investment on any worldwide stock exchange including shares and securities, gilt-edged securities, unit trusts and investment trusts and investment in insurance products. For each tax year, an individual can choose whether to invest in either a single maxi-isa or one or two mini-isas, one for each component. A maxi-isa must be provided by a single fund provider. It can include both components. A mini-isa provides an investment in one component only. If an individual invests in more than one mini- ISA, a different provider can be used for each component. 32

11 INVESTMENT INCOME Limits on ISA investment There are conditions attached to the amounts that can be invested in each tax year: [Hp35] The annual subscription limit is 7,000 for each tax year; Maxi-ISA: an individual can invest up to 7,000 in stocks, shares and insurance products. Alternatively, he can invest up to 3,000 in cash and cash like equity products and the balance in stocks, shares and insurance products; Mini-ISAs: 3,000 in a cash and cash like equity products mini-isa; 4,000 in a stocks, shares and insurance products mini-isa. 2.3 Tax reliefs for ISAs All income (interest, dividends, insurance proceeds) is exempt from income tax. All gains and losses on disposals of assets (eg shares) are exempt from capital gains tax. 3 Enterprise Investment Scheme (EIS) Section overview An individual may invest in shares under the EIS, and obtain relief on up to 400,000 of the investment. There is an income tax reducer up to 20% of the investment. The income tax relief may be brought back into charge if the individual disposes of the shares within three years. Reinvestment relief is available in relation to investments under the EIS. Gains on EIS shares are exempt if the shares are held for three years. Losses on EIS shares are allowable. 3.1 Investment under the EIS An individual is eligible under the EIS if he subscribes for new ordinary shares in a qualifying company wholly for cash. A qualifying company is an unquoted UK trading company whose gross asset value before the share issue does not exceed 7 million (and 8 million immediately after the share issue). The company must have fewer than 50 full-time employees at the date of issue. The company must have raised no more than 2 million under EIS schemes in the previous 12 months. The maximum amount of investment on which an individual can obtain relief in any tax year is 400,000. The minimum EIS investment required in any one company is 500. [Hp36] 3.2 Income tax relief under the EIS The taxpayer is entitled to a tax reducer, at Step 6 of the calculation of income tax liability (Chapter 1, Section 1.5). It is equal to the lower of: 20% amount invested under the EIS scheme; and The amount which reduces his income tax liability to nil. Where shares are issued before 6 October, a claim can be made to treat up to 50% of the shares as being issued in the previous year. The maximum carry back is 50,

12 Taxation Worked example: Carry back of EIS relief Graham has a tax liability of 76,254 before EIS relief in 2007/08. He invested 120,000 in EIS shares on 24 August 2008 and intends to make a claim to carry back as much relief as possible to 2007/08. Requirement Show Graham's revised tax liability for 2007/08. Solution Graham Tax liability Original tax liability 76,254 Issued pre 6 October therefore maximum carry back lower of: 50,000; and 50% 120,000 = 60,000 ie 50,000 Tax reduction 50,000 20% (10,000) Revised tax liability 66,254 Income tax relief will be withdrawn if the investor disposes of the EIS shares within three years of issue. Income tax relief is withdrawn by bringing the relief given back into charge in the tax year in which the disposal is made. Income tax relief is only given for the investment in shares: any dividends subsequently received on the shares are taxable in the normal way. 3.3 Reinvestment relief under the EIS Capital gains tax reinvestment relief is available where an investment is made under the EIS scheme. Where any asset is disposed of and new EIS shares are subscribed for within 12 months before and 36 months after the date of the disposal, the chargeable gain arising on the disposal of the asset may be deferred until the later disposal of the EIS shares. [Hp75] The maximum amount of relief available is the lower of: The amount of the gain; and The subscription cost of the new shares. A claim for less than the maximum amount of the relief can be made (eg to maintain the benefit of the annual exemption). On the disposal of EIS shares, a gain or loss may arise on the EIS shares. In addition the amount of the gain for which reinvestment relief was claimed becomes chargeable on the disposal of the EIS shares. The gain is eligible for taper relief based on the qualifying ownership of the original asset up to the date of the disposal of that asset. 3.4 Capital gains tax exemption under the EIS Any gains arising are exempt provided the EIS relief has not been withdrawn. The capital gain exemption does not apply if the investor disposes of the EIS shares within three years of issue. [Hp75] If a capital loss arises on the disposal, it is allowable whether or not the disposal is within three years. In calculating a gain or loss on the disposal of EIS shares themselves, the cost of the shares is reduced by the amount of EIS income tax relief attributable to the shares disposed of. 34

13 INVESTMENT INCOME 2 4 Venture Capital Trusts (VCT) Section overview A VCT allows a taxpayer to invest in unquoted companies through a quoted company. There is an income tax reducer up to 30% of the investment. The income tax relief is withdrawn if the individual disposes of the shares within five years. Gains on VCT shares are exempt. Losses on VCT shares are not allowable. 4.1 Investment in a VCT A VCT is a company quoted on the Stock Exchange, approved by HM Revenue & Customs (HMRC), whose income is derived wholly or mainly from shares and securities in unquoted companies. The company must have fewer than 50 full-time employees at the date of the issue. The company must have raised no more than 2 million under VCT schemes in the previous 12 months. Therefore an individual can obtain an investment in a wide variety of unquoted investments by holding readily marketable quoted shares in a VCT. An individual is eligible for relief if he is at least 18 and subscribes for new ordinary shares in a venture capital trust. The maximum permitted investment for income tax relief is 200,000 per tax year. The individual may invest more than this amount in a VCT, but will not receive tax relief on any further investment. 4.2 Income tax relief for investment in a VCT The relief is a tax reducer at Step 6 of the income tax liability computation (Chapter 1, Section 1.5). It is equal to the lower of: [Hp37] 30% amount invested; The amount which reduces the income tax liability to nil. The tax relief is only available in the tax year the investment is made. The VCT tax reducer is given before any EIS tax reducer. Income tax relief will be withdrawn if the investor disposes of the VCT shares within five years of issue. Income tax relief is withdrawn by bringing the relief given back into charge in the tax year in which the disposal is made. Dividends received from a VCT are exempt if they relate to shares acquired within the 200,000 permitted maximum per tax year. This relief applies even if the shares are sold within five years of issue. 4.3 Capital gains tax relief for investment in a VCT Any capital gain is exempt and any loss is not allowable on the disposal of VCT shares, whenever the shares are disposed of. 35

14 Taxation Summary and Self-test Summary Property income: income and expenses accrued in tax year Furnished property: No CAs on furnishings, instead renewals basis or wear and tear allowance Losses: c/f and set off against first available property income Qualifying holiday accommodation: keep separate, generally treated as a trade Rent a Room relief: Letting room in own house gross rents up to 4,250 per year Premiums on short leases: part of premium taxed as property income Tax efficient investments ISAs: Maxi/mini, cash, stocks & shares & insurance products, up to 7,000 EIS: tax reducer on investment, reinvestment relief, gain exempt if held 3 years, loss always allowable VCT: tax reducer on investment, dividends exempt, gains exempt, losses not allowable 36

15 INVESTMENT INCOME 2 Self-test Answer the following questions. 1 Harry owns a property which he lets for the first time on 1 November 2007 at a rent of 6,000 a year, payable in four equal instalments on 1 November, 1 February, 1 May and 1 August. Harry paid an insurance premium of 1,200 on 1 November 2007 for the year to 31 October He had other expenses of 900 relating to the letting. What is Harry's taxable property income for 2007/08? A 900 B 1,100 C 1,625 D 3,900 2 Jane received property income as follows in 2007/08. (1) House first let furnished on 1 August Rent of 4,200 accrued in the period to 5 April Expenses of 649 related to the same period. Council tax and water rates are paid by the tenant. (2) 4,000 from letting a furnished room in her home. Jane claims the wear and tear allowance. What amount of taxable property income does Jane have? A 3,131 B 7,131 C 3,551 D 7,551 3 Which one of the following statements about maxi-isas is true? A The maximum investment in cash and cash like equity products is 7,000. B Any amount invested is deducted in computing the taxpayer's income tax. C No income tax is payable on income generated by ISA until the income is withdrawn. D The maximum investment in stocks, shares and insurance products is 7, Which of the following statements about the EIS are true? (1) The gross assets of the company must be more than 7m before the investment and 8m after the investment. (2) Dividends received from an EIS investment are taxable (3) As long as the shares are held for three years, any gain on disposal is exempt A B C D All of them (1) and (2) only (1) and (3) only (2) and (3) only 5 Which of the following statements about a VCT investment are true? (1) The maximum investment is 200,000 per tax year. (2) Relief for income tax is a tax reducer of 30%. (3) As long as the shares are held for five years, there is no capital gains tax on disposal. A B C D All of them (1) and (2) only (1) and (3) only (2) and (3) only 37

16 Taxation 6 Jonas Jonas is aged 35. In 2007/08 he had the following income and expenses: Trading income 12,150 Building society interest received: Deposit account 485 Mini cash ISA 120 UK dividends: Quoted company 360 EIS company 738 VCT (from 30,000 investment) 675 Property income (letting of furnished flat): Rent received 10,720 Redecoration 700 Insurance 600 Agent's fees 500 Water rates 360 Interest on loan to buy flat 6,000 Jonas claims the wear and tear allowance. In January 2008, Jonas invested 5,000 under the Enterprise Investment Scheme. Requirement Calculate the tax payable by Jonas. (10 marks) Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these objectives, please tick them off. 38

17 INVESTMENT INCOME 2 Technical reference Legislation Property income References are to Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) Charge to tax ss Calculation of profits s.272 Furnished lettings s.308 Rent a room relief s.309 Qualifying holiday accommodation ss Premiums on short leases s.277 ISAs References are to Individual Savings Account Regulations 1998 (SI 1998/1870) (as amended) General conditions for accounts and subscriptions to accounts General investment rules reg.4 reg.6 Qualifying investments regs.7-9 Exemption from tax EIS References are to Income Tax Act 2007 (ITA 2007) reg.22 Eligibility for relief s.157 Qualifying companies ss.142, 180 Maximum and minimum subscriptions ss Form of relief s.158 Loss of relief on disposal of shares References are to Taxation of Chargeable Gains Act 1992 (TCGA 1992) Reinvestment relief Exemption from CGT VCTs References are to Income Tax Act 2007 (ITA 2007) Entitlement to claim relief Loss of relief on disposal of shares Reference is to Taxation of Chargeable Gains Act 1992 (TCGA 1992) Capital gains tax exemption ss Sch 5B s.150a ss ss s.151a 39

18 Taxation HMRC manual references Property Income Manual (Found at Income chargeable: overview PIM 1051 Deductions: general rules: introduction PIM2005 Venture Capital Schemes Manual (Found at EIS: general: structure of the scheme and the guidance VCM20010 VCT scheme: general: what is a VCT? VCM60020 This technical reference section is designed to assist you when you are working in the office. It should help you know where to look for further information on the topics covered in this chapter. You will not be examined on the contents of this section in your examination. 40

19 INVESTMENT INCOME 2 Answers to Self-test 1 B 1,100 Rent accrued November 2007 March ,000 5/12 2,500 Less: insurance premium November 2007 March ,200 5/ other expenses Taxable property income 900 (1,400) 1,100 2 A 3,131 House Rent 4,200 Less: expenses 649 wear and tear 10% 4, (1,069) Property income 3,131 Room in own house Exempt under rent a room (gross rent less than 4,250) 3 D The maximum investment in stocks, shares and insurance products is 7,000. The maximum investment in cash and cash like equity products is 3,000. There is no tax deduction on an ISA investment. Income tax relief applies whether income is withdrawn or not. 4 D Dividends received from an EIS investment are taxable and as long as the shares are held for three years, any gain on disposal is exempt. The gross assets must be less than 7m, not more than 7m. 5 B The maximum investment is 200,000 per tax year and relief for income tax is a tax reducer of 30%. VCT shares are exempt from capital gains tax regardless of the period of ownership. 41

20 Taxation 6 Jonas Tax payable Non-savings Savings Dividend income income income Total Trading income 12,150 Property income (W) 1,524 BSI / Dividends: / / Net income 13, ,220 15,500 Less: PA (5,225) (5,225) Taxable income 8, ,220 10,275 Tax 2,230 10% 223 6,219 22% 1, % 121 1,220 10% ,275 1,834 Less: tax reducer EIS investment 5,000 20% (1,000) Tax liability 834 Less: tax deducted at source % (121) 1,220 10% (122) Tax payable 591 Interest on ISA and VCT dividends are exempt from income tax. WORKING Income Rent received 10,720 Expenses Redecoration 700 Insurance 600 Agent's fees 500 Water rates 360 Interest 6,000 Wear and tear allowance: 10% [ 10, ] 1,036 (9,196) Taxable property income 1,524 42

21 INVESTMENT INCOME 2 Answer to Interactive question Answer to Interactive question 1 Income Rent received (34 + 9) = ,375 Expenses Allowable in full: Gardening and cleaning 440 Advertising for new tenant Allowable for let period: Repairs 460 Council tax 680 Water rates 255 Redecoration 500 Insurance 240 2,135 43/52 1,765 Wear and tear allowance: 10% [ 5,375 (( ) 43/52) ] 460 (2,690) Taxable property income 2,685 43

22 44 Taxation