Accounting: Calculation of Taxes, Inheritance Tax, Capital Gain Tax, Loss Relief Claims and Revised Tax Liability

Accounting

INTRODUCTION
Accounting is a recording and summarizing of the financial data. It can be classified into
the various fields such as financial, management, cost and tax accounting. This report includes to
calculate the taxes that are income generated by people of various sources. Taxes are levied by
the government to meet the common welfare expenditure of the society. There are two types of
taxes such as direct and indirect taxes. The reason for levy of taxes is that they constitute the
basic source of revenue to the government. The levy of direct tax in UK is governed by the
Income-tax Act.
TASK
Tax levied on the total income of previous year of every person. Person includes individual,
undivided family, Association of person (AOP), body of individual (BOI), firm and company.
Total income and tax payable
Tax is payable on the total income of assessee. Total income has to be computed as per UK
income laws. There are many steps to calculate the tax liability which are as follows:
step1
Determination of residential status – it has to be determined to ascertain which income to be
included in computing the total income. The residential status as per income tax act can be
classified as under
 in case of an individual, the duration for which he is present in UK determines his
residential status. The status of a person ascertain the taxability of income.
Step 2
Classification of income under different heads – A person may earn income from different
sources. for example, a salaried person earns income by way of salary. Person also gets interest
from saving account. Apart from this, if the assessee has invested in shares, he would be getting
dividend and when shares are sold then profit can be earn on such sales. If someone holds a
residential property which is let out then also rental income would be earned. According to
income tax act, the calculation of total income, all income of tax payer are classified into five
different heads of income they are as follows -
 Salary head includes salaries, pensions, bonus and incentives.
 Income from house property includes rental income.

 Income from business or profession includes income deriving from carrying business or
profession.
 Income from capital gain includes profit derive from sale proceed of capital assets.
 Income from other sources includes interest, dividend, winning of horse races and
lottery.
Step 3
computation of income under each head – Income is to be computed in accordance with the
provision governing a particular head of income.
Exemption – There are certain income which are wholly exempt from income tax e.g agriculture
income and some income which are partially exempt from income tax. For example, house rent
and education allowance.
Deductions – while calculation income there are many deductions and allowance available under
each head of income.
Step 4
Set off and carry forward of losses – an assessee may have different sources of income under the
same head of income. He may have profit from one source and loss from other source.
Income head Carry forward years Set off
Income from salary 8 years Not adjustable with other
heads.
Income from house property 8 years Adjustable with any other
heads except salary head.
Income from business or
professions
Speculative business losses
8 years
4 years
Adjustable with all heads of
income except salary head.
Speculative business losses
can be set off only the
speculative income
Income from capital gain:
long term capital gain
Short term capital gain
8 years
8years
Long term capital losses set off
only with long term capital
gain but short term capital
losses can be set off both

capital gain incomes.
Income from other sources 8 years It can be set off any other
heads but except salary head.
Casual losses can be set off
only casual incomes.
Question 2
Computation of inheritance tax which will be payable after Olivia's death
Inheritance tax
It is an amount of tax which is levied on estate of someone who got died. Here, estate consists of
property, possessions and money. The standard rate of inheritance tax is applicable 40 percent
after above of the threshold limit of 325,000. If property received of children then threshold limit
is 500,000.
Particulars Pere Phil
Gift received from Olivia 440000 440000
Less : threshold limit -325000 -440000
Taxable income 115000 Nil
calculation of tax liability in hands of Pere
Income Slab rate Tax liability
Upto 12570 0.00% Nil
12570 – 50270 20.00% 7540
50271 - 115000 40.00% 25891.6
Total tax liability 33431.6