Taxation - Chapter 6 Course Notes

Hi revilon

Hope the studying is still going ok

Some short responses to the points you mention:

1 Yes it is referring to carrying out reinsurance business. No, it's not covered by the SA2 syllabus.

2 Yes. Indexation is usually applied to the amounts of gain (eg a gain of 100 reduced by an inflation index might become a gain of 60) rather than to a rate of return, i, but that doesn't affect the principle.

3 Suppose a company has BLAGAB acquisition expenses of 700 (I like easier numbers!) this tax year, year X. Then 700/7=100 of these will be deducted in this year's BLAGAB assessment. (There will also be 1/7 of the acquisition expenses of each of the preceding 6 years in this assessment.)

Next year's tax assesment will include a further 100 of this 700. It will also include 1/7th of year X+1s BLAGAB acquisition expenses and also still 1/7 of the acquisition expenses of each of the 5 years before X.

All of each year's acquisition expenses are therefore used eventually. It's not that tax relief is only available on 1/7th of the acquisition expenses, it's just that the tax relief on the remaining 6/7ths is postponed.

4 The solution really does mean "capital gain". It's making the point that as there may be many investors who prefer capital gain over income for tax reasons, the overall return on assets that give lots of income/little gain may be higher (as there may then be less demand for these assets). Then, this higher investment return might compensate for the tax disadvantage.

Hope these help
Lynn