Legitimate tax planning measures: formula sheet

Key formulas

Planning vs avoidance vs evasion

Planning = within the law and its purpose; Avoidance = within the letter, against the purpose; Evasion = illegal, deliberate concealment

Use this line to classify any scenario quickly.

GAAR idea

Tax advantage + abusive arrangement → HMRC can counteract the advantage

Abusive means not a reasonable course of action in relation to the relevant provisions. Do not say all avoidance is caught.

Evasion test

Deliberate false statement or concealment = evasion

Innocent error is not evasion, but it still needs correcting.

Annual exempt amount (CGT)

£3,000 per individual

A standard planning use: spread gains between spouses or tax years.

Reliefs cap

Higher of £50,000 or 25% of income

Planning using reliefs can be restricted by this cap unless otherwise restricted.

VAT late payment penalty

Up to 15 days: none; 16 to 30 days: 3%; over 30 days: 6% plus daily penalty at 10% annual rate

Shows the cost of non-compliance; the tax tables give these figures.

Income tax rates and bands (normal)

Basic £1 - £37,700: 20%; Higher £37,701 - £125,140: 40%; Additional over £125,140: 45%

Bands apply to taxable income, after the personal allowance. Given in the exam tax tables.

Dividend rates

Basic 8.75%; Higher 33.75%; Additional 39.35%

Dividend nil rate band of £500 is taxed at 0% but uses up band space.

Savings nil rate band

Basic rate taxpayer £1,000; higher rate taxpayer £500

Starting rate of 0% on savings income within the first £5,000 of taxable income.

Order of income

Non-savings, then savings, then dividends

Allowances and bands are used in this order, so dividends are taxed at the top.

Personal allowance

£12,570; reduced where adjusted net income exceeds £100,000; zero at £125,140 or more

Reduction is £1 for every £2 of income over £100,000, so full loss happens at £125,140 with a £12,570 allowance.

Marriage allowance transferable amount

£1,260

Only available where the recipient is not a higher or additional rate taxpayer. Check the conditions in the question.

Cap on income tax reliefs

Cap = higher of £50,000 and 25% × income

Applies unless the relief is otherwise restricted. Not every relief is within the cap, so check which reliefs are.

CGT rates (from the tax tables)

Lower rate 18%; higher rate 24%

Gains use any unused basic rate band after taxable income. The part of the gain within the band is taxed at 18%, the rest at 24%.

Annual exempt amount

£3,000 per individual per tax year

Not transferable between spouses and not carried forward. Each spouse or civil partner has their own.

BADR and investors' relief rate

14% on qualifying gains

Use the rate in the tax tables. Lifetime limit is £1,000,000 for BADR and a separate £1,000,000 for investors' relief.

Taxable gain

Net chargeable gains − current-year losses − annual exempt amount (and any brought-forward losses only down to the exempt amount)

Current-year losses must be set off in full first. Brought-forward losses are used only to reduce gains to the annual exempt amount, so the exempt amount is not wasted.

Where to set the annual exempt amount

Set it against gains taxed at the highest rate first

This gives the most tax saved. For example, set it against gains at 24% before gains at 18% or 14%.

BADR qualifying period

2 years before disposal (or before cessation, if disposal is within 3 years of cessation)

Check this for both business and share disposals.

Interspouse transfers

Transfer between spouses or civil partners living together = no gain, no loss

Used to share gains, use two annual exempt amounts and use the lower-rate band of the other spouse.

Nil rate band and rates

NRB = £325,000; tax = (chargeable amount − available NRB) × rate; lifetime rate 20%, death rate 40%

Both figures are in the tax tables given in the exam. Available NRB is £325,000 less chargeable transfers in the previous seven years.

Residence nil rate band

RNRB = £175,000

Given in the tax tables. It applies on death where a home passes to direct descendants. It is reduced for large estates (taper at £1 for every £2 over £2,000,000). Unused RNRB can be transferred to a spouse or civil partner.

Taper relief on death tax

Tax after taper = death tax on the gift × (100% − reduction)

Reduction: more than 3 but less than 4 years 20%; more than 4 but less than 5 years 40%; more than 5 but less than 6 years 60%; more than 6 but less than 7 years 80%. Gifts made 3 years or less before death get no relief.

Seven-year cumulation

Available NRB = £325,000 − chargeable transfers in the 7 years before the gift

Look back seven years from each gift. A PET that becomes chargeable counts in this total.

Main lifetime exemptions

Spouse/civil partner: exempt (if UK domiciled); annual exemption £3,000 (plus unused amount from the previous year); small gifts £250 per person; normal expenditure out of income

Gifts in consideration of marriage: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else. Charity gifts are exempt. Apply the annual exemption to the earliest gift in the tax year.

Death estate with transferred bands

Total bands = NRB + RNRB + unused bands from a late spouse, less NRB used by gifts in the previous 7 years

Gifts made in the seven years before death use the NRB first. The estate gets only what is left.

Small profits rate

19% where augmented profits ≤ £50,000 (lower limit)

Limits are reduced for short periods and for associated companies.

Main rate

25% where augmented profits > £250,000 (upper limit)

Applies to all taxable total profits.

Marginal relief

(Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits

Deduct from tax at 25% on taxable total profits. The standard fraction is 3/200.

Adjusting the limits

Limit × (months ÷ 12) ÷ (number of associated companies + 1)

Here the count is of associates other than the company itself. This applies to the lower, upper and instalment limits.

Quarterly instalment threshold

Large company if augmented profits exceed £1,500,000

The threshold is also divided by associates and time-apportioned for short periods.

Effective marginal rate

25% + (3/200 × 100%) = 25% + 1.5% = 26.5% on profits between the limits, where taxable total profits equal augmented profits

This applies where taxable total profits equal augmented profits. The extra profit is taxed at 25% plus a 1.5% reduction in relief.

VAT standard rate

Output VAT = taxable supplies (net) × 20%

Standard rate from the tax tables. VAT-exclusive price × 1.20 gives the VAT-inclusive price.

VAT fraction

VAT in a VAT-inclusive price = inclusive price × 20/120 (1/6)

Use when a price is quoted including VAT.

Registration limit

Register if taxable turnover exceeds £90,000

Given in the tax tables. The exam asks you to apply the test to the facts given.

Deregistration limit

Deregistration possible if expected taxable turnover in the next 12 months is £88,000 or less

Limit £88,000 from the tables. Apply to the facts given in the question.

Late payment penalty

Up to 15 days late: nil; 16 to 30 days: 3%; over 30 days: 6% plus a daily penalty at an annual rate of 10%

Taken from the tax tables. Apply to the unpaid VAT.

Net VAT cost of voluntary registration

Cost = output VAT on sales to non-registered customers − input VAT recovered

Compare with staying unregistered, where input VAT is a business cost.

Non-residential SDLT bands

Up to £150,000: 0% | £150,001 to £250,000: 2% | £250,001 and above: 5%

Applied slice by slice. Maximum tax on a price above £250,000 is (£100,000 × 2%) + ((price − £250,000) × 5%) = £2,000 + 5% of the excess.

Stamp duty on shares

Stamp duty = consideration × 0.5%

Flat rate from the tax tables. Do not apply SDLT bands to shares.

Saving from a structure change

Saving = stamp taxes under current route − stamp taxes under alternative route

Compare the total cost to the client, including other taxes, before you recommend.

Interest on underpaid tax

Tax paid late × 8.50% × (months or days late ÷ 12 or 365)

Runs from the due date to the date of payment. Use the rate in the tax tables. Follow the question on whether to count in months or days.

Interest on overpaid tax

Tax overpaid × 3.50% × (time ÷ 1 year)

Runs from the date of payment (or due date, if later) to the date of repayment. Only use the dates the question gives you.

Official rate of interest

3.75%

Used to value a beneficial loan benefit. It is not the rate HMRC charges on late tax.

Benefit of cheap or interest-free loan

Average (or strict) loan balance × (3.75% − interest paid by employee rate) × (months ÷ 12)

Cross-reference with the benefits in kind topic. It is shown here to separate it from late payment interest.

Saving from deferral

Tax deferred × 8.50% × (months deferred ÷ 12)

A rough measure of the interest saved. Use a different rate only if the question tells you the business borrows or earns at another rate.

Quick revision

• Tax evasion is illegal. Tax avoidance may be legal but can be challenged. Tax planning uses reliefs as intended.
• CGT rates are 18% and 24%, with an annual exempt amount of £3,000.
• Business asset disposal relief taxes qualifying gains at 14% up to a £1,000,000 lifetime limit.
• Income tax basic rate band is £37,700. Higher rate runs to £125,140, then 45% applies.
• Reliefs are capped at the higher of £50,000 or 25% of income, unless otherwise restricted.
• IHT nil rate band is £325,000 and residence nil rate band is £175,000. Death rate is 40%, lifetime rate 20%.
• Taper relief on death applies only after more than 3 years, from 20% up to 80%.
• Corporation tax: 19% small profits rate, 25% main rate, limits £50,000 and £250,000, marginal relief fraction 3/200.
• Marginal relief = (Upper limit − Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits.
• VAT registration limit is £90,000 and deregistration limit is £88,000.
• Late VAT payment: no penalty up to 15 days, 3% for 16 to 30 days, 6% plus a daily penalty after 30 days.
• Error penalties depend on behaviour: deliberate and concealed up to 100%, deliberate not concealed 70%, careless 30%.

Common mistakes

• Treating avoidance and evasion as the same thing. Fix: State that avoidance is legal but may be challenged, while evasion is criminal and involves dishonesty.
• Saying all tax avoidance is illegal or caught by the GAAR. Fix: Say the GAAR targets abusive arrangements only. Ordinary planning using reliefs as intended is not abusive.
• Applying 20%, 40% and 45% to dividends Fix: Use the dividend rates of 8.75%, 33.75% and 39.35% for dividends. Savings use the normal rates.
• Treating the nil rate bands as extra band space Fix: Nil rate band income still uses up the basic rate band. It only changes the rate on that slice.
• Applying the 14% rate to every gain on a business sale Fix: Split the gain by asset. Assets not used in the business, or investment assets, may not qualify. Apply 14% only to the qualifying gain and tax the rest at 18% or 24%.
• Skipping the two-year ownership or business period Fix: Count the period from the start date to the disposal (or cessation). For shares, check the officer or employee status and the 5% holdings throughout the period.
• Applying taper relief to the value of the gift or to gifts within the NRB. Fix: First calculate tax at 40% on the part above the NRB. Then apply the percentage reduction to that tax. If the tax is nil, there is nothing to reduce.
• Giving the death estate a full £325,000 NRB when PETs were made in the previous seven years. Fix: Work out the cumulative total of gifts in the seven years before death. Subtract it from the NRB before taxing the estate.
• Using the unadjusted £50,000 and £250,000 limits for a company with associates. Fix: Check for associates before anything else. Divide the limits by the number of companies, including the company itself.
• Using taxable total profits instead of augmented profits to test the limits. Fix: Add them to profits for the limit test. Use taxable total profits only as the numerator in the relief formula.

Exam tips

• Always classify first, then justify using the facts. A bare label earns few marks.
• Add the ethical response in every answer: integrity, advice to disclose, and ceasing to act if the client refuses.
• Do not overstate the GAAR. Say it counters abusive arrangements, not all tax saving.
• Use the tax tables for any figures, such as the £3,000 exempt amount, the reliefs cap or the 8.50% interest on underpaid tax.
• Earn professional skills marks by giving a clear, client-friendly recommendation with a lower-risk alternative.
• Show each person's computation in a clear layout, with non-savings, savings and dividends on separate lines. Marks are given for method even if one figure is wrong.
• Quote the rates from the tax tables provided, and use the dividend rates for dividends. Do not rely on memory for band limits.
• In planning questions, state the recommendation, the saving, and the risks or conditions. Professional skills marks reward a clear, reasoned recommendation addressed to the client.