F6 chapter 3

Chapter3PropertyandinvestmentincomeSavingsincomereceivednetof20%tax•Theamountreceivednetof20%taxisgrossedupbymultiplyingby100/80andincludedgrossintheincometaxcomputation.•Forcalculation:interestreceived*100/80•Maintypes:Bankinterest,buildingsocietyinterest•ExampleIfnetbuildingsocietyinterestis£1,600,calculatetheamountshouldbeincludedintheincometaxcomputation.•Thetaxdeductedatsourceisdeductedincomputingtaxpayabletoavoiddoubletaxpaymentandmayberepaid.receivedgross•Somekindsofsavingsincomeisreceivesgross(P48).•Theseincomeisincludeddirectlyintheincometaxcomputation.Ratesoftaxonsavings•No“otherincome”-thefirst£2,710oftaxablesavingsincomeistaxedat10%•“otherincome”below£2,710-savingincomefallingintotheremainderofthefirst£2,560istaxedat10%•“otherincome”inexcessof£2,710-the10%rateisnotapplicableNote:Togivethehighesttaxsaving,PAandreliefsaredeductedfromincomeinthefollowingorder:-otherincome-savingsincome-dividendincomeDividendsincome•Receivednetofa10%taxcredit•Forcalculation:dividendreceived*100/90•Thetaxcreditcanbedeductedincomputingtaxpayabletoavoiddoubletaxpaymentbutitcannotberepaid.RatesoftaxondividendsDividendsfallingintothe:RateoftaxBasicrateband(first£34,370)10%Higherrate(£34,371-£150,000)32.5%Additionalrate(over£150,000)42.5%Test2&3PropertyincomeMaintopic:•Propertybusinessprofitfromrental•Propertybusinesslosses•Premiumsreceivedongrantingleaserental•Commerciallettingsoffurnishedholiday•RentaroomPropertybusinessprofitIncomefromlandandbuildingsinUKasnon-savingsincomeinataxyear.Calculationformatfirstforeachproperty￡rentalincome×Less：relatedexpenses(×)propertybusinessprofit×thenpooled.Notes：-calculationforeachproperty,thenpooledprofitsandlossesfromallproperties-rentalanddeductibleexpenseonaccrualbasis,irrelevantofpaymentAllowabledeductions*irrecoverablerentasimpaireddebtareallowable*insurance*agentsfeesandothermanagementexpenses*advertisingfeeforattractingtenants*repairs*interestonloanstobuyorimproveproperties*„wearandtear‟allowance*depreciationisnotanallowabledeductionNotes:capitalexpenditurecannotdeducted,suchasimprovementcostorenlargingcost,butrepairingexpensecanbedeductible.Wearandtearallowance•Normalcapitalallowancecannotbeclaimedforexpenditureonplantandmachineryforuseinadwellinghouse.•Conditionforallowance:reliefforexpenseofrenewingfurnituretothesamestandard.(unfurnishednowearandtearallowance)•Originalcostandreplacementcostisdisallowed.•deductibleasanexpense•Computationofwearandtearallowance=10%*(rentsreceived–counciltax-waterrates)cashbasisTest5ExampleTomownsacottagethatheletsoutfurnishedatanannualrentof￡3,600,payablemonthlyinadvance.During2012/13,heincursfollowingexpenditure:May2013replacementofonebrokenkitchenunit￡275withaunitofsimilarstandardJune2013insuranceforyearfrom5July(previousyear￡420)￡480November2013drainclearance￡380May2013redecoration(workcompletedinMarch2011)￡750ThetenanthadvacatedthepropertyduringJune2013,withouthavingpaidtherentdueforJune.Tomwasunabletotracethedefaultingtenant,butmanagedtoletthepropertytonewtenantsfrom1July2013.Calculatethepropertybusinessprofitfor2012/13,assumingTomclaims10%wearandtearallowance.Answer￡￡Propertyaccrued3,600Expenses-repairtokitchenunits(note)275-irrecoverabledebt(1/12*3,600)300-insurance(3/12*420+9/12*480)465-drainclearance380-redecoration750-wearandtearallowance10%*(3,600-300)330(2,500)Propertybusinessprofit1,100Notes:thereplacementofonebrokenkitchenunitistreatedasallowablerepair.PropertybusinesslossesIflandlordownsmorethanoneproperty,profitsandlossesonallpropertiesareaggregatedtocalculatetheprofitbusinessprofit/(loss)inthetaxyear.Ifthereisoverallloss,thepropertyincomeforthetaxyearisnil.Alossfrompropertybusinessiscarriedforwardtosetagainstfuturepropertybusinessprofits.PremiumonleasespremiumreceivedApremiumisapaymentmadebythetenanttothelandlordinconsiderationforgrantingalease.Whenapremiumorsimilarconsiderationisreceivedonthegrantofashortlease(leasewithatimeperiodoflessthan50years),partofpremiumistreatedasrentreceivedintheyearofgrant.premiumistreatedaspropertybusinessincomeP–(P×2%×(n–1))where:P=totalpremiumn=durationofleaseinyears(numberofcompleteyears,ignorepartofayear)ExampleJackgranted21-yearleasetoCharleson1July2013,forapremiumof￡10,500.Calculateofpropertybusinessincome￡Premium10,500Less:10,500*2%*(21-1)(4,200)propertybusinessincomefor12/136,300Premiumsforgrantingsublease•Whereatenantisgrantedashortleaseonapropertyandthengrantsasub-leasetoasubtenant,premiumreceivedonsubleaseistreatedaspropertybusinessincome.•Additionalreliefforpremiumpaidforheadleasedurationofsubleasedurationofheadleasetaxablepremiumforheadlease×ExampleCharlesgrantedaleasetoDavidon1March2003foraperiodof20years.Davidpaidapremiumof£20,000.On1March2013DavidgrantedasubleasetoEdwardforaperiodof5years.Edwardpaidapremiumof£24,000.calculatetheamounttreatedasrentoutofthepremiumreceivedbyDavidin2012/13.Answer£Premiumreceivedbysublease24,000Less:24,000*2%*(5-1)(1,920)22,080Less:reliefforpremiumpaidonheadlease12,400*5/20(working)(3,100)Propertybusinessincomefor2012/1318,980Working:premiumpai