Taxation Liability and Capital Gain Relief

This assignment provides a comprehensive examination of taxation liability for individuals in the UK. It calculates the tax liability for Nina and Patrick based on their income and expenses, and then analyzes the impact of raising Patrick's salary by £25,000. Additionally, it explores the benefits of partnership agreement between Nina and Patrick, with different profit-sharing ratios. The assignment also delves into capital gain relief, including rollover relief for business assets and plant in general and special pools. A thorough understanding of taxation concepts and calculations is required to complete this assignment.

TAXATION

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
PART 2............................................................................................................................................3
(A)...........................................................................................................................................3
(B)...........................................................................................................................................3
PART 3............................................................................................................................................5
(A)...........................................................................................................................................5
(B)...........................................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In order to promote public welfare and economic growth, UK has a taxation system
wherein various kinds of taxes are being charged by the government such as income tax,
corporate tax, capital gain tax and many others. UK government obtain maximum revenue
through income tax evidencing it from the year 2016/17, it had collected total of £182 billion
(Income tax, 2016). Income tax is levied by the government on personal income of the
individual. It follows progressive structure wherein as the level of income increases, tax rates
also goes up. The current assignment study will apply various taxation rules and regulations to
determine tax liabilities.
PART 1
Personal tax computation
As per the case study provided, Nina Simon (Aged 43) had married Patrick (Aged 46)
and has two children, Suzie (aged 16) and Anthony (aged 14). Patrick is playing the role of
administrator and dealing duties around payroll, bookkeeping and debtor/creditor management.
According to the draft budget, expected budgeted figure for the year ended 5th April 2017 is
£198,300 and Patrick is getting a salary of £28,000 during this period. Personal tax liability of
both Nina and Patrick is performed below:
For taxation year 2016/17, sole trader’s tax-free allowance is £11,000 but subjected to the
restriction that income must not go beyond the total limit of £100,000. The tax band for the sole
trader is as follows:
Band Taxable income Taxation rate
Basic rate £0 to £32,000 20%
Higher rate £32,001-£150,000 40%
Additional rate Over £150,000 45%
Being a sole trader; it is necessary for Nina to register herself under National Insurance
Contribution with HMRC (Her Majesty Revenue and Custom) and pay class 2 & class 4 NICs if
profit goes beyond the limit of £5,965 and £8,060 a year for FY 2016/17.
Personal tax contribution of Nina Simon
Particulars Working Amount
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Expected trading profit for the
year 2016/17
£198,300
Less: Tax
Personal tax allowance Not available because
198300>100,000
-
Tax
£0 to £32,000@20% £32,000*20% £6,400
£32,001-£150,000@40% £118,000*40% £47,200
Over £150,000@45% £48,300*45% £21,735
Total tax liability due £75,335
National Insurance
Contribution
Class 2 NICs£198,300>£5,965 £2.80/week*52 £145.6
Class 4 NICs
Until profit of £8,060 Nil -
£8,060 - £43,000 @ 9% £34,940 * 9% £3,144.6
Above £43000 @ 2% (£198,300 - £43,000)*2% £3,106
Total NICs £6,396.2
Total deductions £81731.2
Net income £116,568.8
Personal tax contribution of Patrick
Particulars Working Amount
Income from salary £28,000
Less: Tax-free allowance £11,000
Taxable amount £17,000
Tax
£0 to £32,000@20% £17,000*20% £3,400
National Insurance
contribution (NIC)
(£28,000-£8040)*12% £2,392.8
Page 2 of 13

Total deductions £5,792.8
Net income £22,207.2
PART 2
(A).
If Patrick’s salary is increased by £25,000 with total salary of £53,000, then Nina would
be able to minimize its trading profit further by £25,000. Thus, due to the reduction of trading
profit from the business, she can reduce its taxation liability by (£25,000*45%) = £11,250 shows
a significant decline (Boczko, 2016). Thus, it is a way available to her to reduce its taxation
liability. However, on the other side, paying high salary above the market rate will increase
Patrick’s taxable income and as a result, he would need to pay high tax. In such case, Patrick will
need to pay 20% on £15000 and on rest £10,000, he will pay an increased tax rate @ 40%.
(B).
Partnership is a business that is owned, administrated and managed by two or more
person. All the partners run the business jointly and held combined responsibility to run the
operation and share profits equally or in agreed profit/loss sharing ratio. All the partners are
accountable to pay income tax on their respected profit gained (Browne and Phillips, 2017). In
the given situation, Nina can involve Patrick as a partner in the business from 6th April 2016 and
after the partnership, business profit will be share in the ratio of 70:30. The rate of income tax for
partners is mentioned below:
Taxable income (FY 2016/17) Rate
£0 to £32,000 20%
£32,001-£150,000 40%
Above £150,000 45%
In UK, Partners usually pay NIC on their respected profitability share from the
partnership. It is a compulsory or mandatory payment required to be made by them against
certain state based benefits (Egger and et.al., 2015). Individuals above 16 years need to make
contribution to NI at following rates:
Type of NI
contribution
Amount needs to be paid for FY 2016/17
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Class 2 NIC A flat or fixed rate @ 2.80 GBP each week, when share in the partnership
profitability exceeds the limit of £5,965 every year
Class 4 NIC Based on partner’s profitability, 9% for the share in profit in the range of
£8,060 - £43,000 and contribution @ 2% for profit beyond the limit of
£43,000
Personal tax contribution of Nina Simon
Particulars Working Amount
Expected trading profit for the year
2016/17
£198,300
Add: Not allowed expenses
Salary paid to Patrick when he was an
employee
£28,000
Total profit from partnership £226,300
Share in profit (70%) £226,300*70% £158,410
Less: Tax
£0 to £32,000@20% £32,000*20% £6,400
£32,001-£150,000@40% £118,000*40% £47,200
Over £150,000@45% £8,410*45% £3,784.5
Total tax liability due £57,384.5
National Insurance Contribution
Class 2 NICs £158,410 > £5,965 £2.80/week*52 £145.6
Class 4 NICs
Until profit of £8,060 Nil -
£8,060 - £43,000 @ 9% £34,940 * 9% £3,144.6
Above £43000 @ 2% (£158,410 - £43,000) =
£115,410*2%
£2,308.2
Total NICs £5,598.4
Total deductions £62,982.9
Net income £95,427.1
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By involving Patrick in partnership, Nina’s taxation liability would be decrease from
£75,335 to £57,384.5. It is because, out of total business profit, only 70% is taxed and 30% is
taxed on Patrick (Baumann and et.al., 2017).
Personal tax contribution of Patrick
Particulars Working Amount
Expected trading profit for the year
2016/17
£198,300
Add: Not allowed expenses
Salary paid to Patrick when he was an
employee
£28,000
Total profit from partnership £226,300
Share in profit (30%) £226,300*30% £67,890
Less: Tax
£0 to £32,000@20% £32,000*20% £6,400
£32,001-£150,000@40% £35,890*40% £14,356
Total tax liability due £20,756
National Insurance Contribution
Class 2 NICs £67,890> £5,965 £2.80/week*52 £145.6
Class 4 NICs
Until profit of £8,060 Nil -
£8,060 - £43,000 @ 9% £34,940 * 9% £3,144.6
Above £43000 @ 2% = £16,820*2% £336.4
Total NICs £3,626.6
Total deductions £24,382.6
Net income £43,507.4
PART 3
(A)
Calculation of revised income tax liability for Nina for FY 2016/17
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In the given case, Nina purchased a free hold factory in 2010 worth £160,000. Moreover, in
2010, she had invested £320,000 in Plant & Machinery in the factory as on 5th April 2016 and the
tax written down values on general P&M pool and special rate pool were £24,800 and £41,000
respectively. If she accepted competitor’s offer approached to purchase the factory immediately
& plant and machinery at total price of £300,000, apportioned to Building, Plant in general pool
and plant in special rate pool at £260,000, £15,000 and £25,000, then, capital gain tax will be as
follows:
Particulars Amount
Freehold factory (£260,000-£160,000) £100,000
Plant in General pool (£15000- £24800) (£9,800)
Plant in Special rate Pool (£25000-£41000) (£16,000)
Total capital gain/Chargeable gain £74,200
Less: Annual Exemption £11,100
Taxable gain £63,100
Particulars Working Amount
Expected trading profit for the year
2016/17
£198,300
Add: capital Gain £63,100
Total income £135,200
Tax on capital gain @ 20% £63,100*20% £12,620
Less: CGT relief on Rollover of
business assets
£250,000
Tax liability on capital gain Nil
Tax
£0 to £32,000@20% £32,000*20% £6,400
£32,001-£150,000@40% £118,000*40% £47,200
Over £150,000@45% £48,300*45% £21,735
Total tax liability due £75,335
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According to the calculations performed, there will be no impact on the new business
opportunity on Nina’s taxation liability because all the capital gain she used to replace other
factory and plant & machinery, hence, she would not be liable to pay any tax on the same
(Griffith, Hines and Sørensen, 2010). As a result, her tax liability remains fixed to that of earlier
worth £75,335.
(B)
As per capital gain calculation, she can get CGT relief on the plant in general and special
pool as she had incurred capital loss of £9,800 and £16,000 on such assets that can be set off
from the chargeable gain worth £100,000 on freehold property. Thus, overall, only chargeable
gain worth £74,200 will be taxed (Bankman and et.al., 2017).
CGT rules in UK provide relief on rollover/handover, as per which, if CGT is used to
replace with a new business assets before three years after the disposal then tax relief is available
on the same (Capital Gain Tax, 2017). Here, in the case, out of the money received through sale,
if she purchase a 52-year lease in nearby replacement factory worth £200,000 and additionally
pay a cost of £50,000, then, she can easily get tax relief on the same. Other CGT relief includes
rollover that is incorporation relief, means if chargeable assets is transferred to another company
for trade, Disincorporation means transfer of goodwill & land & property in business transfer to
shareholders (Capital Gains Tax relief, 2017). Besides this, entrepreneur’s relief and holdover
gifts are also the tax reliefs available on CGT.
CONCLUSION
From the discussion, it is clear that as per current situation, Nina and Patrick are liable to
pay tax worth £75,335 and £3,400. If she raised Patrick salary by £25,000, than Nina can reduce
its taxation liability by £11,250. However, if couple decided to make partnership agreement in
70:30, then Nina can reduce its taxation liability from £75,335 to £57,384.5 and Patrick would
need to pay tax worth £20,756. Lastly, it is examined that on capital gain, Nina is allowed to set
off losses on plant in general and special pool against profit earned on freehold property.
Moreover, she can get CGT relief on rollover of business assets.
Page 7 of 13

REFERENCES
Books and Journals
Bankman, J., and et.al., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.
Baumann, F., and et.al 2017. Tax enforcement and corporate profit shifting. Applied Economics
Letters. 24(13). pp.902-905.
Boczko, T., 2016. Managing Your Money: A Practical Guide to Personal Finance. Palgrave
Macmillan.
Browne, J. and Phillips, D., 2017. Estimating the size and nature of responses to changes in
income tax rates on top incomes in the UK: a panel analysis (No. W17/13). Institute for
Fiscal Studies.
Egger, P. and et.al., 2015. Consequences of the New UK Tax Exemption System: Evidence from
Micro‐level Data. The Economic Journal. 125(589). pp.1764-1789.
Griffith, R., Hines, J. and Sørensen, P.B., 2010. International capital taxation. Dimensions of Tax
Design: The Mirrlees Review. 6(3). pp. 914-996.
Online
Capital Gain Tax. 2017. [Online]. Available through:
<https://www.gov.uk/government/publications/rates-and-allowances-capital-gains-tax/
capital-gains-tax-rates-and-annual-tax-free-allowances>.
Capital Gains Tax reliefs. 2017. [Online]. Available through:
https://www.rossmartin.co.uk/private-client-a-estate-planning/capital-gains-tax/1495-
an-index-to-capital-gains-tax-reliefs.
Income tax. 2016. [Online]. Available through :< https://www.citizensadvice.org.uk/tax/income-
tax-how-much-should-you-pay/income-tax/#h-how-income-tax-is-calculated>.
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