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Hello
I just came across a question by the name Joe Jones in the Kaplan F6 (UK) exam kit.
The question says that Joe Jones’s employment income has always exceeded 1500,000 GBP until 2012/13. I inferred that as income now NOT exceeding 1500,000 GBP anymore since it’s tax year 2013/14 we need to work for. However, the question considers employment income for the year falling in additional rate band for the required tax year instead. Am I wrong with my understanding of the wording?
Note 3 in the question states that on 1 May 2013, the employer provided Joe with interest free loan of 120,000 GBP. Joe repaid 50,000 GBP on 31 July 2013 and repaid the balance of 70,000 GBP when employment ceased on 31 December 2013.
As per my understanding of the average method formula, loan outstanding at the start of the tax year is added to loan outstanding at the end of the tax year before both figures are divided by ‘2’ and multiplied by the interest saved. Going by those standards, I believe the outstanding loan amount at start of tax year is ‘120,000’ while ‘0’ (since the whole amount is repaid well before the end of the tax year at 31 December 2013) is the loan outstanding at the end of tax year.
However, the solution to the question considers the loan amount outstanding at the end of tax year as 70,000 GBP.
May I know what mistake I am making here, if any?
Thanks in advance.
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Hi It’s been a while since I did P6, I’m not sure I can help you with the wording, but I think I can help with the loan benefit workings.
There are 3 important figures you need to find the average loan outstanding for the year, these are
The Opening Balance (OB)
The Closing Balance (CB)
The amount of months the loan was outstanding during the period. In this case it is 8 months (May – Dec) so the fraction is 8/12You need to take the OB add it to the CB and divide by 2 as you say, however you then also need to multiply this figure by the number of months the loan was outstanding, this step is missing from your formula above. This figure is then multiplied by the interest saved to give you the benefit figure
The OB is the amount outstanding at the start of the tax year, OR the date the loan was made if this is later.
The CB is the amount outstanding at the end of the tax year, OR the amount which was repaid, at the date the loan was repaid in full, if this is before the year end.
Because the loan was both made and repaid during the year, there are no balances at either the year end or the year start so to get the average amount you have to use the balances at the date the loan was issued and the date it was repaid.
The formula therefore is
OB = 120,000
CB = (120,000-50,000) 70,000
Months = 8/12AVG = 8/12 ((120,000 + 70,000)/2)= 63,333
The answer will be the average (63,333) multiplied by the interest saving.
I hope this makes some sense!!
Thanks for your response, snowbored.
I understand all the rest but shouldn’t the closing amount be 0 since even the remainder of 70,000 was repaid by Jones by the end of tax year? Or are you saying it is worked as the earlier of amount outstanding at end of tax year and the last repayment made during the period?
Perhaps I should remember it that way?
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You only use the remainder at the end of the tax year, if there is still a balance at the end of the tax year.
If the loan was settled during the year, then you use the amount that was paid at that date instead
Remeber that if a loan is settled during the year, then you must adjust the beneft by the amount of months the loan was in issue, as it will be less than 12 months.
I would suggest reading this page on the HMRC website which might explain it clearer than I can! (https://www.hmrc.gov.uk/manuals/eimanual/eim26215.htm), Below is an extract.
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1. Find the maximum amount of the loan outstanding on:– 5 April preceding the year of assessment, or
– if the loan was made during the year, the date on which it was made.2. Find the maximum amount of the loan outstanding on:
– 5 April within the year of assessment, or
– if the loan was repaid during the year, the date on which it was repaid.Add together the maximum amounts found at 1 and 2, and divide the result by two. This is the average loan.
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