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I’m studying Taxation at the moment and in page 179 BPP’s text book (edition of 2013), there was Mo’s taxable income example.
He has income of £25,000 in 12/13, with personal pension contribution of £242(net)/month. His chargeable gain is 28,500. Calculate the chargeable gain tax for 12/13.
The answer is very clear, that we deduct the annual exempt amount then add together taxable income and taxable gains left.
However, after adjust the basic limit rate for pension contribution, the example continue to calculate tax as below:
CGT:
£(38,000-£25,000)=£13,000@18%= 2,340
£(42,900-£38,000)=£4,900@28%=£1,372
Total CGT payable = £3,712.
I found this weird, so I decided to look up and this is what was written on uk gov website
https://www.gov.uk/capital-gains-tax/rates
Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,300. Your gains are not from residential property.
First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2018 to 2019 tax year the allowance is £11,700, which leaves £600 to pay tax on.
Add this to your taxable income. Because the combined amount of £20,600 is less than £46,350 (the basic rate band for the 2018 to 2019 tax year), you pay Capital Gains Tax at 10%.
This means you’ll pay £60 in Capital Gains Tax.
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So basically the addition of taxable income and taxable gain (after deducting exemption) is to work out the rate to tax the extra amount of capital gains.
Can anyone tell me if this is only the change in policy between 2013 and 2018 or should I do what in BPP’s text book? Because it seems like they took this example out of a test in the previous year.
First of all, i would not recommend using a text from 2013. Its been 5 years & 5 Finance Acts since then. Finance Act 2017 is what will be examined in Sep 18-June 19 examinations.
Secondly, there are some mistakes in this question.
The income of 25,000 is actually Taxable Income.
The pension contribution is not 242/month (net). As per the question, the revised Basic Rate Band is 38,000 which means that Gross Pension Contribution is 4,500 (38,000-33,500). So the Net contribution would be 3,600 (4,500*80%) which is 300/month.
Similarly, as per the CGT calculation, the chargeable gain relates to a Residential Property, because 18% & 28% rates relate to residential properties only. All other gains are taxed at 10% & 20%.
In short, i would suggest using a new study text. Alternatively, you can use OT Lectures along with Lecture Notes. They are more than enough to pass the exam.
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