Personal taxation R03 2022-23 STUDY TEXT Personal taxation R03: 2022–23 Study text RevisionMate Provided as part of an enrolment, RevisionMate offers online services to support your studies and improve your chances of exam success. Access to RevisionMate is only available until 31 August 2023. This includes: • Printable PDF and ebook of the study text • Student discussion forum – share common queries and learn with your peers. • Examination guide – practise your exam technique. To explore the benefits for yourself, you can access RevisionMate via your MyCII page, using your login details: ciigroup.org/login Updates and amendments to this study text This edition is based on the 2022–23 tax year and examination syllabus which will be examined from 1 September 2022 until 31 August 2023. Any changes to the exam or syllabus, and any updates to the content of this study text, will be posted online so that you have access to the latest information. You will be notified via email when an update has been published. To view updates: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided Under ‘Unit updates’, examination changes and the testing position are shown under ‘Qualifications update’; study text updates are shown under ‘Learning solutions update’. Please ensure your email address is current to receive notifications. © The Chartered Insurance Institute 2022 All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part including photocopying or recording, for any purpose without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given to anyone else. Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The publication has been produced solely for the purpose of examination and should not be taken as definitive of the legal position. Specific advice should always be obtained before undertaking any investments. Print edition ISBN: 978 1 80002 505 9 Electronic edition ISBN: 978 1 80002 506 6 This edition published in 2022 Editorial Director Danby Bloch, Taxbriefs Ltd Acknowledgement We gratefully acknowledge the contributions of the following to the production of this study text: Carol Colledge Sue Cox (Cox Training Ltd) Neil Dickey BSc (Hons) FPFS Jon Dunckley MSc FCII FPFS Sonia Gable David Harrowven Tessa Roberts MSc BSc (Hons) Cathy Russell Mark Thewlis The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook: www.handbook.fca.org.uk/handbook ) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this publication, or the material or views contained within it. While every effort has been made to trace the owners of copyright material, we regret that this may not have been possible in every instance and welcome any information that would enable us to do so. Unless otherwise stated, the authors have drawn material attributed to other sources from lectures, conferences, or private communications. Typesetting, page make-up and editorial services CII Learning Solutions. Printed and collated in Great Britain. This paper has been manufactured using raw materials harvested from certified sources or controlled wood sources. 2 R03/July 2022 Personal taxation Using this study text Welcome to the R03: Personal taxation study text which is designed to support the R03 syllabus, a copy of which is included in the next section. Please note that in order to create a logical and effective study path, the contents of this study text do not necessarily mirror the order of the syllabus, which forms the basis of the assessment. To assist you in your learning we have followed the syllabus with a table that indicates where each syllabus learning outcome is covered in the study text. These are also listed on the first page of each chapter. Each chapter also has stated learning objectives to help you further assess your progress in understanding the topics covered. Contained within the study text are a number of features which we hope will enhance your study: Activities : reinforce learning through practical exercises. Key points : act as a memory jogger at the end of each chapter. Be aware : draws attention to important points or areas that may need further clarification or consideration. Key terms : introduce the key concepts and specialist terms covered in each chapter. Case studies : short scenarios that will test your understanding of what you have read in a real life context. Refer to: Refer to : extracts from other CII study texts, which provide valuable information on or background to the topic. The sections referred to are available for you to view and download on RevisionMate. Consider this : stimulating thought around points made in the text for which there is no absolute right or wrong answer. Reinforce : encourages you to revisit a point previously learned in the course to embed understanding. Examples : provide practical illustrations of points made in the text. Sources/quotations : cast further light on the subject from industry sources. In-text questions : to test your recall of topics. On the Web : introduce you to other information sources that help to supplement the text. At the end of every chapter there is also a set of self-test questions that you should use to check your knowledge and understanding of what you have just studied. Compare your answers with those given at the back of the book. By referring back to the learning outcomes after you have completed your study of each chapter and attempting the end of chapter self-test questions, you will be able to assess your progress and identify any areas that you may need to revisit. Not all features appear in every study text. Note Website references correct at the time of publication. 3 Personal taxation Purpose At the end of this unit, candidates will have investigated the: • basic structure of the UK tax system; • main taxes on income and capital that may be charged on individuals and trusts, the self assessment system and how tax liabilities are computed; • taxation of investments as relevant to the needs and circumstances of individuals and trusts. Summary of learning outcomes Number of questions in the examination * 1. Understand the UK tax system as relevant to the needs and circumstances of individuals and trusts 15 standard format 2. Analyse the taxation of investments as relevant to the needs and circumstances of individuals and trusts 8 standard format/ 7 multiple response 3. Analyse the role and relevance of tax in the financial affairs of individuals and trusts 6 standard format/ 4 multiple response 4. Apply the knowledge of personal taxation to the provision of investment advice 10 standard format * The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within the range plus or minus 2 of the number indicated. Important notes • Method of assessment: 50 questions: 39 standard format and 11 multiple response questions. 1 hour is allowed for this examination. • This syllabus will be examined from 1 September 2022 to 31 August 2023. • Candidates will be examined on the basis of English law and practice in the tax year 2022/2023 unless otherwise stated. • It should be assumed that all individuals are domiciled and resident in the UK unless otherwise stated. • This PDF document is accessible through screen reader attachments to your web browser and has been designed to be read via the speechify extension available on Chrome. Speechify is an extension that is available from https://speechify.com/ . If for accessibility reasons you require this document in an alternative format, please contact us on ukcentreadministration@cii.co.uk to discuss your needs. • Candidates should refer to the CII website for the latest information on changes to law and practice and when they will be examined: 1. Visit www.cii.co.uk/qualifications 2. Select the appropriate qualification 3. Select your unit from the list provided 4. Select qualification update on the right hand side of the page Published June 2022 ©2022 The Chartered Insurance Institute. All rights reserved. R03 5 Examination syllabus 1. Understand the UK tax system as relevant to the needs and circumstances of individuals and trusts 1.1 Explain the main features of Income Tax. 1.2 Explain the main features of National Insurance Contributions (NICs). 1.3 Explain the main features of Capital Gains Tax (CGT). 1.4 Explain the main features of Inheritance Tax (IHT). 1.5 Explain the implications of residence and domicile on UK tax liability. 1.6 Explain the main features of UK tax compliance. 1.7 Explain Stamp Duty Reserve Tax and Stamp Duty Land Tax. 1.8 Describe the rules and impact of Value Added Tax (VAT) and Corporation Tax. 2. Analyse the taxation of investments as relevant to the needs and circumstances of individuals and trusts 2.1 Analyse the taxation of direct investments. 2.2 Analyse the taxation of indirect investments. 3. Analyse the role and relevance of tax in the financial affairs of individuals and trusts 3.1 Analyse the impact of taxes on individuals, trusts and their investments in different situations. 3.2 Analyse the ways in which key elements of tax planning provide tax efficiency to individuals and trusts. 4. Apply the knowledge of personal taxation to the provision of investment advice 4.1 Calculate basic elements of Income Tax, NICs, CGT, and IHT, including the impact of lifetime transfers and transfers at death. 4.2 Recommend elementary tax plans in the context of investments and pensions advice. Reading list The following list provides details of further reading which may assist you with your studies. Note: The examination will test the syllabus alone. The reading list is provided for guidance only and is not in itself the subject of the examination. The resources listed here will help you keep up-to-date with developments and provide a wider coverage of syllabus topics. CII study texts Personal taxation. London: CII. Study text R03. Books (and ebooks) A modern approach to lifetime tax planning for private clients (with precedents). Christopher Whitehouse, Lesley King. Bristol: Jordans, 2016. Booth and Schwarz: residence, domicile and UK taxation. Jonathan Schwarz. 20th ed. Bloomsbury Professional, 2018. Mastering financial calculations: a step-by- step guide to the mathematics of financial market instruments. 3rd ed. Bob Steiner. Harlow: FT Prentice Hall, 2012. * The Financial Times guide to investing. 4th edition. Glen Arnold. FT Prentice Hall, 2020. Journals and magazines Financial adviser. London: FT Business. Weekly. Available online at www.ftadviser.com Financial times. London: Financial Times. Daily. Available online at www.ft.com Personal finance professional (previously Financial solutions). London: CII. Six issues a year. Money management. London: FT Business. Monthly. Available online www.ftadviser.com/ brand/money-management Money marketing. London: Centaur Communications. Weekly. Available online at www.moneymarketing.co.uk Further articles and technical bulletins are available at www.cii.co.uk/learning/learning- content-hub (CII/PFS members only). Reference materials Harriman’s financial dictionary: over 2,600 essential financial terms. Edited by Simon * Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only). Published June 2022 ©2022 The Chartered Insurance Institute. All rights reserved. 2 of 3 6 R03/July 2022 Personal taxation Briscoe and Jane Fuller. Petersfield: Harriman House, 2007. * Examination guide If you have a current study text enrolment, the current examination guide is included and is accessible via Revisionmate ( ciigroup.org/login ). Details of how to access Revisionmate are on the first page of your study text. It is recommended that you only study from the most recent version of the examination guide. Exam technique/study skills There are many modestly priced guides available in bookshops. You should choose one which suits your requirements. Published June 2022 ©2022 The Chartered Insurance Institute. All rights reserved. 3 of 3 7 R03 syllabus quick-reference guide Syllabus learning outcome Study text chapter and section 1. Understand the UK tax system as relevant to the needs and circumstances of individuals and trusts 1.1 Explain the main features of Income Tax. 1A , 1B , 1C , 1D , 1E , 1F , 1G , 1H , 1I , 1J , 1K 1.2 Explain the main features of National Insurance Contributions (NICs). 2A , 2B , 2C , 2D , 2E , 2F 1.3 Explain the main features of Capital Gains Tax (CGT). 3A , 3B , 3C , 3D , 3E , 3F , 3G , 3H , 3I 1.4 Explain the main features of Inheritance Tax (IHT). 4A , 4B , 4C , 4D , 4E , 4F , 4G , 4H 1.5 Explain the implications of residence and domicile on UK tax liability. 1K , 3I , 4H , 5A , 5B , 5C , 5D , 5E , 5F , 5G , 5H 1.6 Explain the main features of UK tax compliance. 6A , 6B , 6C 1.7 Explain Stamp Duty Reserve Tax and Stamp Duty Land Tax. 7A , 7B 1.8 Describe the rules and impact of Value Added Tax (VAT) and Corporation Tax. 8A , 8B 2. Analyse the taxation of investments as relevant to the needs and circumstances of individuals and trusts 2.1 Analyse the taxation of direct investments. 9A , 9B , 9C 2.2 Analyse the taxation of indirect investments. 10A , 10B , 10D , 10E , 10F , 10C , 10G , 10H , 10I , 10J , 10K , 10L , 10M 3. Analyse the role and relevance of tax in the financial affairs of individuals and trusts 3.1 Analyse the impact of taxes on individuals, trusts and their investments in different situations. 11A , 11B , 11C , 11D , 11E , 11F 3.2 Analyse the ways in which key elements of tax planning provide tax efficiency to individuals and trusts. 11A , 11B , 11C , 11D , 11E , 11F 4. Apply the knowledge of personal taxation to the provision of investment advice 4.1 Calculate basic elements of Income Tax, NICs, CGT, and IHT, including the impact of lifetime transfers and transfers at death. 12A 4.2 Recommend elementary tax plans in the context of investments and pensions advice. 12B 9 10 R03/July 2022 Personal taxation Introduction to the UK tax system Tax can make a substantial difference to the returns on savings, investments and many business transactions. Paying more tax than necessary can make all the difference as to whether an investment is worthwhile or whether it should be avoided. A general knowledge of tax is important for all financial advisers, especially: • The ability to calculate the tax liability on the total of an individual's income and gains from all sources, taking into account allowances and deductions. This will tell you what rate of tax an individual will pay on the income and chargeable gains from any investments you recommend. • Knowledge of the rules for taxing the income and gains from the main types of investment. • An understanding of inheritance tax (IHT) in order to advise clients on reducing the impact of tax on the estate they pass on to their heirs. For tax purposes, the UK comprises England, Wales, Scotland and Northern Ireland. It does not include the Channel Islands or the Isle of Man, all of which have their own tax systems. However, there are a few exceptions: • The Scottish Parliament is responsible for administering land and buildings transaction tax (LBTT), replacing stamp duty land tax (SDLT) in Scotland, and Scottish landfill tax. • The Welsh Revenue Authority administers similar taxes (land transaction tax (LTT) and landfill disposals tax) in Wales. • Since 6 April 2017, the Scottish Parliament has been able to set the income tax rates and bands that apply to the non-savings and non-dividend income of Scottish taxpayers. • Since 6 April 2019, the Welsh Revenue Authority has been able to set the income tax rates that apply to the non-savings and non-dividend income of Welsh taxpayers, although so far the Welsh tax rates have been kept the same as for the rest of the UK (excluding Scotland). Tax falls into two broad categories: direct taxes and indirect taxes. 1. Direct taxes are imposed directly on the taxpayer, e.g. income tax, capital gains tax (CGT) and IHT, which are imposed on individuals, and corporation tax, which is imposed on limited companies. National Insurance is not called a tax but it is levied and paid like direct taxes. However, it retains its 'insurance' element in that payment of contributions qualifies an individual for certain State benefits. 2. Indirect taxes are taxes paid indirectly as part of the price of goods or services, e.g. value added tax (VAT), SDLT (or LBTT or LTT) and excise duties. The tax year The tax year, or fiscal year as it is sometimes called, runs from 6 April to the following 5 April. So the tax year 2022/23 runs from 6 April 2022 to 5 April 2023 inclusive. • Most direct taxes on individuals are calculated on a tax year basis, so that the amount of the tax is determined by events and transactions in that tax year. For example, income tax is calculated on the amount of income in a given tax year. • Indirect taxes generally arise on a single transaction, e.g. VAT is levied as a straight percentage of the sale price of an item. • IHT is cumulative in that it depends upon a series of events covering up to 14 years. 11 The R03 examination syllabus requires knowledge and understanding of: • income tax – payable on income (see chapter 1); • National Insurance contributions (NICs) – payable on earnings (the NIC rates for 2022/23 include the new 1.25% health and social care levy introduced from 6 April 2022) (see chapter 2); • CGT – payable on capital gains (see chapter 3); and • IHT – payable on estates at death and certain lifetime gifts (see chapter 4). The following taxes are also included in the R03 syllabus: • SDLT, LBTT and LTT – payable on transactions in land and buildings (see chapter 7); • stamp duty – payable on certain legal documents relating to shares and marketable securities (see chapter 7); • stamp duty reserve tax (SDRT) – payable on paperless transactions in shares and marketable securities (see chapter 7); • VAT – payable on many purchases of goods and services (see chapter 8); and • corporation tax – payable on the profits of companies (see chapter 8). You should be aware that there are several other taxes levied in the UK. The following are the most important: • Air passenger duty – payable by passengers on flights leaving the UK. • Betting and gaming duties – payable on certain forms of gambling. • Business rates – payable on the value of business property. • Council tax – payable by residents, or in some cases non-resident property owners, to finance local government. • Customs duties – payable on imports. • Excise duties – payable on products containing alcohol or tobacco and on vehicle fuels. • Insurance premium tax – payable on general insurance premiums. • Landfill tax, Scottish landfill tax and landfill disposals tax – payable on waste disposed of at landfill sites. • TV licence fee – payable on the use of televisions or the BBC iPlayer (set to be scrapped in 2027). • Vehicle excise duty – payable on the use of motor vehicles. Administration and collection of tax The administration and collection of all of the direct taxes and many of the indirect taxes is undertaken by HMRC. • Some taxes are the responsibility of a specialist agency, e.g. TV Licensing. • The Scottish Parliament is responsible for administering LBTT and Scottish landfill tax, and the Welsh Revenue Authority is responsible for administering LTT and landfill disposals tax. The revenue to the Government from UK taxes The relative importance of various taxes to the Government Exchequer is clear from Table 1, showing estimated revenue. Question 1 What are direct taxes? 12 R03/July 2022 Personal taxation Table 1: Current receipts Source: Office for Budget Responsibility , March 2022 Be aware Rounding in this study text The tax figures shown in some calculations of this study text have been rounded down to the nearest pence or pound, where appropriate. 13 Question answer 1. Taxes imposed directly on the taxpayer. 14 R03/July 2022 Personal taxation Contents 1: Income tax A Types of income 1/2 B Deduction of tax 1/8 C Total income and the amount on which tax is calculated 1/9 D Interest payments 1/10 E Charitable gifts 1/12 F Pension payments 1/14 G Taxation of employee benefits 1/17 H Personal allowances 1/26 I Calculating the income tax charge 1/30 J Income tax and families 1/35 K Income tax and trusts 1/37 2: National Insurance contributions (NICs) A Classes of NICs 2/2 B Directors and employees – class 1 2/3 C Self-employed people – classes 2 and 4 2/14 D Annual maximum contributions 2/17 E Voluntary contributions – class 3 2/18 F NIC planning 2/19 3: Capital gains tax (CGT) A Disposals 3/2 B Disposal consideration and valuation 3/3 C Assets subject to capital gains tax and exemptions 3/5 D Calculation of the gain 3/10 E Calculation of the tax 3/13 F Reliefs 3/15 G Shares 3/19 H Payment of capital gains tax 3/20 I Capital gains tax and trusts 3/21 15 4: Inheritance tax (IHT) A Basic principles of inheritance tax 4/2 B Lifetime transfers and transfers on death 4/6 C Reliefs 4/21 D Gifts with reservation 4/24 E Pre-owned assets tax 4/26 F Valuation of the transfer 4/28 G Liability to inheritance tax 4/29 H Inheritance tax and trusts 4/30 5: Residence and domicile A Residence in the UK 5/2 B Domicile 5/6 C Liability to tax of UK-domiciled individuals 5/8 D Liability to tax of non-UK-domiciled individuals 5/10 E Self assessment 5/14 F Double taxation relief 5/14 G National Insurance contributions 5/16 H Offshore trusts 5/16 6: Tax compliance and self assessment A Self assessment 6/2 B Pay as you earn 6/8 C Tax mitigation 6/15 7: Stamp duties A Stamp duty land tax, land and buildings transaction tax and land transaction tax 7/2 B Stamp duty and stamp duty reserve tax 7/7 8: Value added tax and corporation tax A Value added tax (VAT) 8/2 B Corporation tax 8/8 9: Direct investments A Cash deposits and fixed-interest securities 9/2 B Shares 9/6 C Property 9/7 16 R03/July 2022 Personal taxation 10: Indirect investments A Tax wrappers 10/2 B Registered pension schemes 10/2 C Protected and guaranteed (structured) equity products 10/5 D Individual savings accounts and child trust funds 10/6 E UK collectives 10/10 F Offshore collectives 10/10 G UK (onshore) life assurance policies 10/12 H Offshore life assurance policies 10/24 I Taxation of life assurance policies in trust 10/27 J Special purpose vehicles, shares in listed property companies, real estate investment trusts and collectives 10/30 K Enterprise investment scheme and seed enterprise investment scheme 10/31 L Venture capital trusts 10/34 M Social enterprises 10/35 11: Tax in the financial affairs of individuals and trusts A General tax planning 11/2 B Income tax planning 11/5 C National Insurance contributions planning 11/10 D Pension planning 11/11 E Estate and inheritance tax planning 11/12 F Disposals of direct and indirect investments 11/19 12: Personal tax and investment advice A Personal tax computations 12/2 B Tax planning recommendations in the context of investment advice 12/17 Appendix 1: Tax tables 2022/23 A1/1 Self-test answers i Cases xiii Legislation xv Index xvii 17