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With the self-assessment deadline fast approaching, we present three tax driven examples based on real-life scenarios.

1. Treatment of child benefit in a household earning above £50k in self-assessment

Scenario:

An individual earning less than £50,000 has been receiving child tax credit. The individual is registered for self-assessment. Her partner’s earnings exceeded £50k in 2014-15. He is on payroll and is not registered for self-assessment. He is not the father of the child. The individuals are not married but live together.

Answer:

Families where one parent is earning more than £50,000 a year are no longer be able to claim the total amount of child benefit. The limit applies to total household earnings of two partners, irrespectively of whether they are married or not.

‘Partner’ means someone you’re not permanently separated from who you’re married to, in a civil partnership with or living with as if you were. It does not matter if the child living in the household is the biological child of either of the individuals caring for it.

To work out if your income is over the threshold, you’ll need to work out your ‘adjusted net income’.

Your adjusted net income is your total taxable income before any personal allowances and less deductions such as Gift Aid.

The higher earner in the household will need to register for self-assessment and fill in a tax return, declaring the amount of child benefit received in the tax year. A tax charge will arise on the child benefit received if the income in the tax year exceeded 50,099. HMRC’s child benefit calculator can be used to calculate the charge, which needs to be paid to HMRC.

Once income per household reaches 60,000 the total amount of child benefit will have to be repaid.

It is possible to stop receiving child benefit to avoid returning money to HMRC later. However, filling in a child benefit form even in case where no child benefit is actually received due to exceeded income thresholds, will allow the individual to receive National Insurance credits which count towards the state pension.

2. EIS scheme – treatment of losses in self-assessment

Scenario:

An individual invested £500k in an EIS scheme in tax year 2013-14 and claimed a tax reduction in his income tax liability for that year of £150k (30% of invested amount). In 2014-15 the individual incurred a loss when the company went bust. How is the resulting capital loss treated for tax purposes?

Answer:

The amount of the loss allowable but restricted in this case, due to the sale within 3 years of the purchase is as follows:

Capital loss                               500,000

Less income tax relief given  150,000

Allowable loss                          350,000

The loss can be relieved in the same way as any capital loss:

  1. Against capital gain in the same year; or
  2. Carried forward to be offset against future capital gains;

An additional way to relieve the allowable loss is granted by s131 ITA 2007 as follows:

  1. Against total income in the current year (s131 ITA 2007); or
  2. Carried back against total income in the preceding year (s131 ITA 2007)

Article extracted from ACCA “In Practice” Newsletter