Define a sole trader.
An individual who controls their business alone and is personally liable for its debts
Sole traders are considered ‘self-employed’ and do not have a separate legal identity from their business.
What tax do sole traders pay on their business profits?
- Income tax
- Capital gains tax (CGT)
- Class 4 National Insurance contributions (NICs)
Sole traders pay income tax directly to HMRC twice a year.
True or false: Sole traders have a separate legal identity from their business.
FALSE
The law does not distinguish between the individual and the business itself.
What is the tax position for employees of a sole trader?
- Income tax under PAYE
- Class 1 NICs
Employees’ tax is treated separately from the sole trader’s tax obligations.
In a partnership, how is income tax liability determined?
Each partner pays tax on their share of the partnership’s profits, usually 50%
Partners are still considered self-employed and have unlimited liability for the partnership’s debts.
What distinguishes a limited liability partnership (LLP) from a traditional partnership?
An LLP is a separate legal person and partners have limited liability for its debts
LLPs are subject to similar registration and accounting requirements as companies.
What is a key feature of limited companies (Ltd)?
They have a separate legal identity from their owners (shareholders)
This means the company is responsible for its own debts, not the shareholders.
What type of tax do limited companies pay on profits?
Corporation tax
Limited companies do not pay income tax or CGT; they pay corporation tax on all forms of profit.
What are the requirements for a public limited company (PLC)?
- At least two directors and two shareholders
- Name must end with ‘public limited company’ or PLC
- Issued share capital of at least £50,000
- Company Secretary with necessary qualifications
- Annual return and accounts must be filed
PLCs can offer shares to the public and must adhere to stricter regulations.
What is the liability of partners in a traditional partnership?
Unlimited, joint and several liability for the partnership’s debts
Each partner is solely liable for their own tax and cannot be held liable for another partner’s tax.
What is the difference in tax treatment between Ltd and PLC?
No difference; both pay corporation tax on profits
The distinction lies in the ability of PLCs to offer shares to the public.
What is a benefit of using a trust with life insurance?
The sum insured is outside the estate of the life insured, so is not subject to inheritance tax (IHT)
This allows for quicker distribution of funds to beneficiaries.
Define a trust.
A means by which someone (the settlor) gives away an asset for the benefit of others (the beneficiaries)
Control over the asset is held by trustees.
Who can be a settlor in a trust?
- A trustee
- A beneficiary
- Both
However, being both a settlor and a beneficiary can lead to inheritance tax liabilities.
What is a bare trust?
A trust where the beneficiary cannot be changed and the trustee’s only duty is to look after the trust property until it can be transferred to the beneficiary
This type of trust offers no discretion to the trustees.
What is a discretionary trust?
A trust that includes discretionary classes of beneficiary, allowing trustees to choose who will benefit and to what extent
This provides flexibility in managing the trust.
True or false: The trustees can treat the trust property as their own personal property.
FALSE
Trustees must use the property for the benefit of the beneficiaries according to the trust terms.
What does freehold ownership mean?
Ownership of both the building and the land it stands on until sold or the owner dies
The owner has ‘title absolute’ in the land registry.
What does leasehold ownership entail?
The land is leased from the freeholder for a fixed period, typically 99 or 125 years
At the end of the lease, ownership reverts to the freeholder.
What is commonhold?
An alternative to leasehold where unit-owners own their flats in perpetuity and are members of a Commonhold Association
The Association manages the property and common areas.
What did the Leasehold Reform (Ground Rent) Act 2022 accomplish?
Ended ground rents for most new, long residential leasehold properties
The Act came into force on 30 June 2022.
What is the significance of the Leasehold and Freehold Reform Act 2024?
It simplifies lease extension, allows easier freehold purchases, and increases standard lease extension term to 990 years
The Act became law in May 2024.
What is a joint tenancy?
A form of joint ownership where neither individual can sell without the other’s agreement, and the survivor inherits the other’s share upon death
Commonly used by spouses or civil partners.
What is a tenancy in common?
Each owner holds their share separately and can dispose of it as they wish; shares do not automatically pass to the other owner upon death
Useful for non-spousal joint ownership.
