Tax Glossary

Additional rate tax

Income Tax at 45 per cent.

Agricultural relief

Only relates to Inheritance Tax. Either a 50 per cent or 100 per cent reduction in the value of the agricultural property in the UK, Channel Isles or Isle of Man can be applied when listing the asset values for probate or valuing lifetime gifts.

AIM (Alternative Investment Market)

This is a Stock Exchange sub-market whereby investors can deal in shares in unquoted companies. It was previously called the ‘Unlisted Securities Market’.

Annuity

An annual payment to an individual, usually resulting from a capital investment. The regular annual sums cease on death. Due to the payment mainly consisting of a return of capital, only a small part of the annuity usually bears tax at the basic rate.

Bare trust

A bare trust is one in which the beneficiary has an absolute entitlement to the income and the capital at any time.

Basic rate tax

Income Tax at 20 per cent.

Benefit in kind

Otherwise known as ‘perks’ received by a director or an employee which are nearly always taxed as employment income.

Blind Person's Allowance

An allowance of £2,500 (2020/21 figure) which registered blind people can claim.

Bond

Bonds are investments provided by insurance companies with apparently favourable tax treatment on both annual payment and final maturity. The annual payments and maturities are called ‘chargeable events’ by the taxman.

Capital allowance

These allowances are given to businesses for the purchase of capital assets (usually industrial buildings, plant, machinery and motor vehicles) whereby the cost of the assets can be written down against tax over a period of years.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is a tax on either the sale or gift of an asset, charging to tax the difference between the original cost and the value (sale proceeds) at disposal. If you make any capital gains as an individual, the first £12,300 (2020/21 figure) gains are exempt from Capital Gains Tax.

Class 1A National Insurance Contribution

These are special National Insurance Contributions payable by employers on employees’ benefits.

Corporation Tax

Tax levied on profits of limited companies.

Discretionary trust

A type of trust whereby the trustees are given discretion as to the way in which they distribute income and capital to the various potential beneficiaries. In the case of other (non-discretionary) trusts the trustees are bound to pay the income over to the named beneficiaries.

Dividend

A dividend is a cash sum paid out of profits to shareholders of a company based on the number of shares they hold.

Domicile

The country or state which is your natural home. Professional advice should be sought over this, but someone who has a foreign domicile doesn’t regard the UK as their real home.

Earned income

Earned income is the income of an individual which is derived from their physical, personal or mental labours. It also includes most pensions.

Emolument

Emolument is a formal name given to salary, remuneration, bonuses and other income deriving from an employment of a director or employee.

Enterprise Investment Scheme

The Enterprise Investment Scheme is a scheme under which individuals receive favourable Income Tax and Capital Gains Tax treatment when investing in qualifying unquoted trading companies.

Filing date

31 January, being the date following the end of the tax year by which your Self-Assessment Tax Return must have been submitted electronically to HM Revenue & Customs if you are to avoid an automatic £100 penalty. The filing date is 31 October if you send in a paper return.

Gift Aid

Gift Aid covers individual single donations to charities from which, so long as enough basic rate tax has been paid by the donor, the charity is entitled to reclaim the tax. A form has to be filled in and handed to the charity.

Gross income

Income from which no tax is deducted at source, even though tax may still have to be paid.

Higher rate tax

Income Tax at 40 per cent.

Holdover relief

This is tax relief given to a donor, or other transferor of business assets, whereby the gain is not charged to tax but deducted from the cost of the asset in the hands of the recipient.

Indexation allowance

Now available only to companies. This allowance provides for that element of a capital gain which is attributable to inflation.

Inheritance Tax (IHT)

Inheritance tax is the 40 per cent tax payable on assets transferred on death and by way of lifetime gift, although estates (including transfers in the previous seven years) don’t pay tax on the first £325,000.

Inheritance Tax exemption

It’s possible to give away £3,000 each year (the annual exemption) with no Inheritance Tax implications. If you didn't use the previous year’s exemption, it’s also possible to go back one year and include that as well, thereby doubling up the exemption to £6,000.

ISA

Individual Savings Account. Provided that certain rules are observed, these accounts enjoy tax benefits.

National Insurance

This is a levy applied to employment income and self-employment income, the contributions going towards the state pension on retirement and other contributory benefits.

Overlap relief

Where a self-employed person suffers tax more than once on a particular year’s profits, a figure of overlap relief should be calculated so that, in due course, usually on the cessation of the business, this overpayment of tax may be taken into account.

PAYE (Pay As You Earn)

The compulsory system for employers to use whereby tax is deducted more or less evenly over the year resulting in the correct amount of tax being paid by the end of the tax year on an individual’s earnings.

Potentially exempt transfer (PET)

A gift made by an individual that, so long as the donor lives for a further seven years, won’t attract Inheritance Tax.

Private residence relief

This is the relief that exempts any gain on the sale of the home of an owner-occupier from Capital Gains Tax.

Rent a room relief

Special relief for individuals who let rooms to lodgers in their homes.

Rollover relief

This is a Capital Gains Tax relief that is available to an individual, partnership or company which disposes of one business asset and uses the proceeds to acquire a replacement business asset during a specified qualifying period.

Stamp Duty

Stamp Duty is the duty payable on transfers of shares (full name Stamp Duty Reserve Tax) and properties (Stamp Duty Land Tax).

Tax avoidance

Legally arranging your affairs in such a way as to reduce your tax liability.

Term assurance

A cheap form of life assurance whereby, on the death of an individual within a certain specified time, a capital sum will be paid. This can be useful for providing for possible Inheritance Tax liabilities.

Trust

Also known as a settlement. Property is held in trust where the owner has passed it to trustees who hold it and manage it under the terms of the legal deed (called the ‘trust deed’) for the benefit of the beneficiaries.

Unearned income

Income from investments and property as opposed to income earned.

Unit trust

An investment fund investing the combined contributions from individual investors and paying them dividends in proportion to their holding.

Venture Capital Trust

A type of investment trust for investing in unquoted trading companies with significant tax advantages for the investor.

Wasting asset

An asset that has an anticipated useful life of less than 50 years.

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