ACCA F6 FA09 Study Text 2010

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Chapter 15: Capital gains tax reliefs

 Periods of actual and deemed occupation since 31 March 1982 are determined

and PPR relief is deducted from the gain.

 If the property has been let, letting relief is calculated and deducted from the

remaining gain.

Example

Barbara sold her house on 16 March 2010 for £850,000. She purchased the house on

16 April 1997 for £231,240.

She occupied the property as her home until 16 April 2001 when she went to live

with her invalid mother for two years. She reoccupied the house following her

mother’s death on 16 April 2003. She lived there until 16 October 2005 when she

moved into her boyfriend’s house and put her house up for sale.

The property remained empty and was not let during her periods of absence.

Required

Calculate the chargeable gain arising on the sale of Barbara’s home.

Answer

Gross sale proceeds (March 2010) 850,000

Less Cost (April 1997) (231,240)

–––––––––––––––––––––––––––––––––

–

Gain before PPR 618,760

Less PPR relief (W)

£618,760 × (138/155)

(550,896)

–––––––––––––––––––––––––––––––––

–

Gain after PPR 67,864

–––––––––––––––––––––––––––––––––

–

Working: PPR relief

Notes

Total

(mths)

Exempt

(mths)

Chargeable

(mths)

16.04.1997 to 16.04.2001 Owner occupied

16.04.2001 to 16.04 2003 Empty (1) 24

16.04.2003 to 16.10.2005 Owner occupied

16.10.2005 to 16.03.2010 Empty (2) 53

155

138

Notes

(1) As the property is Barbara’s PPR and she actually occupied the property at

some time both before and after the period of absence, these 24 months are

exempt under the ‘three years for any other reason’ rule.

(2) The last 36 months of ownership are always exempt, provided the property

has been Barbara’s PRP at some time.

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The remaining 12 months of the ‘three years for any reason’ is not allowed as

Barbara does not reoccupy the property at some time after the period of

absence. (Note that the concession does not apply as it only applies to periods

of work-related absence.)

5.5 Letting relief

Letting relief may be available if the property:

 has been let to tenants as residential accommodation, and

 qualifies for PPR relief, but not all of the gain is exempted under the PPR rules.

The amount of letting relief available is the lowest of:

(i) An amount equivalent to the PPR relief

(ii) That part of the remaining gain (after PPR relief) which relates to a period of

letting

(iii) Maximum of £40,000.

Example

Judith purchased a house for £69,379 on 31 March 1988.

She occupied the property as her home until 1 April 1992 when she went to work

overseas. She let the property to tenants.

On 1 January 2002 she returned to the UK and was required by her employers to

work in a different city. On 1 March 2003 she returned to her home town but lived

with relatives until 1 July 2003 when she could reoccupy her house on the

termination of the tenancy agreement.

On 1 January 2006 Judith purchased another house and elected for it to be her PPR

from that date. She let her original house to tenants until it was sold on 31 March

2010 for £384,000.

Required

Calculate the chargeable gain arising on the disposal of Judith’s house.

Answer

Gross sale proceeds (March 2010) 384,000

Less Cost (March 1988) (69,379)

–––––––––––––––––––––––––––––––––

–

Gain before PPR 314,621

Less PPR relief (W1)

£314,621 × (249/264)

(296,745)

–––––––––––––––––––––––––––––––––

–

Gain after PPR 17,876

Less Letting relief (W2) (17,876)

–––––––––––––––––––––––––––––––––

–

Chargeable gain Nil

–––––––––––––––––––––––––––––––––

–

Chapter 15: Capital gains tax reliefs

Working

(1) PPR relief

Notes

Total

(mths)

Exempt

(mths)

Chargeable

(mths)

Let

(mths)

01.04.1988 – 01.04.1992 (1)

01.04.1992 – 01.01.2002 (2)

117

01.01.2002 – 01.03.2003 (3)

01.03.2003 – 01.07.2003 (4)

01.07.2003 – 01.01.2006 (5)

01.01.2006 – 31.03.2010 (6)

264

249

Notes

(1) Owner occupied – therefore exempt

(2) Working overseas – exempt as she occupied the property as her PPR at

some time before and after this period of absence.

(3) Working elsewhere in the UK – periods totalling up to four years are

exempt as she occupied the property as her PPR at some time before

and after this period of absence.

(4) In home town but living with relatives – periods totalling up to three

years are exempt for ‘any reason’ as the property is occupied as her PPR

both before and after the period of absence.

(5) Owner occupied – therefore exempt.

(6) The property was not Judith’s PPR for the 51 months before the sale –

but the last 36 months are always exempt if the property has been the

PPR at some time. The remaining period of 15 months can not be

covered by the ‘any reason’ rule as the property is not Judith’s PPR at

that time and she does not reoccupy the property at some time after the

period of absence. However, during this period the property is let to

tenants and therefore letting relief is available for this period.

(7) Letting relief is not available in periods (2), (3) and (4) as these periods

are already exempt under the PPR rules.

(2) Letting relief

Lowest of: £

(i) PPR relief 296,745

(ii) That part of the remaining gain (after PPR relief) which

relates to a period of letting (W1) £314,621 × (15/264) 17,876

(iii) Maximum 40,000

5.6 Restriction of relief for business use

PPR relief is not available to exempt the portion of the gain relating to exclusive

business use. The portion of the gain relating to exclusive business use is calculated

as follows:

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Situation Apportionment

(1) Where the whole of the house is used for

business purposes for part of the period of

ownership.

Time apportionment

(2) Where part of the house is used for business

purposes for the whole period of ownership.

The individual lives in the remaining part.

Usually based on

percentage of floor

space

(3) Where part of the house is used for business

purposes for part of the period of ownership.

The individual lives in the whole house for

part of the period of ownership and in the

non-business part only for the remaining

period of ownership.

Usually based on time

apportionment and

percentage of floor

space

Note that the periods of deemed occupation are not allowed against the business

portion of the gain. However, the last 36 months exemption will apply to the whole

property if the business part of the property was at some time used as the

individual’s main residence (i.e. Situations (1) and (3) above).

Example

Mary purchased a three storey house on 1 August 1999 to use as her main residence

and sold it on 31 October 2009, giving rise to a gain before PPR relief of £295,000.

Required

Calculate the business portion of the gain which becomes chargeable assuming:

(a) Mary used the top floor for business purposes throughout the entire period of

ownership

(b) Mary used the top floor for business purposes from 1 August 2003 to the date

of sale.

Answer

(a) Top floor used for business purposes throughout the entire period of

ownership

Business use of a third of the building for the whole period, therefore the last

36 months are not exempt.

Business portion of the gain = (£295,000 × 1/3) = £98,333

(b) Top floor used for business purposes for part of the period of ownership

Length of ownership (01.08.1999 – 31.10.2009) = 123 months

Business use (01.08.2003 – 31.10.2009) = 75 months

As the top floor was used as Mary’s main residence at some time, the last 36

months are exempt.

Chargeable business use = (75 – 36) = 39 months

Business portion of the gain = (£295,000 × 1/3) × (39/123) = £31,179.

Paper F6 (UK)

Taxation FA2009

CHAPTER

Introduction to corporation tax

Contents

1 The scope of corporation tax

2 Overview of a corporation tax computation

3 The statement of profits chargeable to

corporation tax (PCTCT)

4 The corporation tax liability

5 Special rules applying to the corporation tax

liability

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The scope of corporation tax

 The basic charging rules

 Determining the residence status of a company

1 The scope of corporation tax

1.1 The basic charging rules

A company is liable to pay UK corporation tax on its profits chargeable to

corporation tax (PCTCT) for a chargeable accounting period (CAP). Both public

limited companies and private limited companies are liable to corporation tax on

their profits.

To calculate the corporation tax liability, it is first of all necessary to calculate the

amount of profits chargeable to corporation tax. To determine a company’s PCTCT,

it is important to establish whether or not the company is resident in the UK. The

residence status of a company is important because:

 A UK resident company is liable to UK corporation tax on all of its profits,

generated anywhere in the world (worldwide PCTCT).

 A non-UK resident company is only liable to UK corporation tax on profits that

have been generated in the UK through a permanent establishment situated in

the UK (for example, profits earned by a branch or an agency). Its foreign

income (profit earned in other countries) is not taxable in the UK.

1.2 Determining the residence status of a company

A company is UK resident, and therefore liable to UK corporation tax on its

worldwide PCTCT, if one of the following conditions applies:

 it is incorporated in the UK, or

 its centre of management and control is situated in the UK.

To determine where the centre of management and control for a company is

situated, HMRC look at where the directors hold their regular board meetings.

Chapter 16: Introduction to corporation tax

Overview of a corporation tax computation

 The profits chargeable to corporation tax

 The chargeable accounting period

 Preparation of a corporation tax computation

2 Overview of a corporation tax computation

2.1 The profits chargeable to corporation tax

A company is liable to pay corporation tax on its profits chargeable to corporation

tax (PCTCT) for a chargeable accounting period (CAP).

The figure of profits chargeable to corporation tax (PCTCT) consists of:

 taxable income generated from all sources, plus

 capital gains from the disposal of chargeable capital assets, after deducting

 gift aid donations.

Taxable income is listed in a Statement of PCTCT according to its nature and source.

The rules for the preparation of this statement are explained later in this chapter.

2.2 The chargeable accounting period

A chargeable accounting period (CAP) for corporation tax purposes is usually the

same as the period of account, i.e. the period for which the company prepares its

financial accounts.

 A CAP commences on:

− the commencement of trade

− the date the profits of the company first become liable to corporation tax

− the day following the end of the previous CAP.

 A CAP ends on the earliest of:

− 12 months after the beginning of the CAP

− the end of the company’s period of account

− the date the company ceases to trade.

Paper F6 (UK): Taxation FA2009

2.3 Preparation of a corporation tax computation

There are three steps in the preparation of a corporation tax computation as follows:

Step 1: Prepare a statement of PCTCT for the CAP

The first step is to prepare a statement listing all the income and capital gains that

are chargeable to corporation tax in the CAP, and then deducting any gift aid

payments.

Step 2: Determine the appropriate rate of corporation tax

The next step is to determine the appropriate rate of corporation tax that should be

applied. The rate of tax applicable to a company is based on the amount of its profits

compared with statutory limits fixed for the appropriate financial years.

Step 3: Calculate the corporation tax liability

The final step is to calculate the corporation tax liability on the PCTCT. In an

examination, you may also be required to state the due dates of payment and the

date for filing the corporation tax return with the tax authorities.

Chapter 16: Introduction to corporation tax

The statement of profits chargeable to corporation tax (PCTCT)

 Overview of the PCTCT statement

 Dividends

3 The statement of profits chargeable to corporation

tax (PCTCT)

3.1 Overview of the PCTCT statement

The first step in preparing a corporation tax computation (a statement of PCTCT) is

to produce a list of the sources of income and chargeable gains which are taxable.

The list should be presented as follows.

Name of company

Corporation tax computation – year ended dd.mm.yy £

Income

Trading income (adjusted proﬁts less capital allowances) X

Interest income X

UK property income X

Foreign income (excluding dividends) X

Capital gains

Net chargeable gains (chargeable gains less allowable losses) X

Gift Aid donations (X)

Proﬁts chargeable to corporation tax (PCTCT) X

It is important to list each source of income separately. This is because the rules for

determining the amount of income that is chargeable to corporation tax are different

for each source of income. The detailed rules are explained later.

3.2 Dividends

It is important to note the following points when preparing a PCTCT statement:

(1) Dividends received from non-associated companies

For the purpose of the F6 examination, dividends from both UK and overseas

companies are ignored in computing PCTCT. However, dividends from non-

associated companies are classed as franked investment income and are

therefore taken into account in determining the recipient company’s ‘profits’

(see later).

Paper F6 (UK): Taxation FA2009

A company is associated with another if one controls the other or both are

under the control of the same person. (Associated companies will be covered

in more detail later in this chapter.)

(2) Dividends received from associated companies

Dividends received from associated companies are classed as ‘group income’.

They are not taken into account in determining the recipient company’s

‘profits’.

(3) Dividends paid

Dividends paid by the company to its own shareholders are excluded from the

PCTCT statement.

Example

A Ltd is preparing its accounts for the year ended 31 December 2009. It has received

income from various sources and made some payments, as listed below. All income

is shown gross.

Rental income from letting a warehouse in London 12,000

Dividends from a French company 3,600

Profits from the trade 460,000

Chargeable gain on the disposal of a showroom 23,500

Bank deposit interest 2,800

Dividends from a UK company 6,200

Debenture interest from a UK company 21,000

Gift Aid donation paid 4,000

Dividends paid to shareholders 5,500

Required

Prepare a PCTCT statement for A Ltd for the year ended 31 December 2009.

Answer

A Ltd: Corporation tax computation – year ended 31 December 2009

Trading income 460,000

Interest income (£2,800 + £21,000)

23,800

UK property income

12,000

Net chargeable gains

23,500

–––––––––––––––––––––––––––––––––––

519,300

Gift Aid donation

(4,000)

–––––––––––––––––––––––––––––––––––

PCTCT 515,300

–––––––––––––––––––––––––––––––––––