Published 28 March 2006
Tax is, well, taxing! As it's a very specialised field, about a year ago I brought in some help. Tax Accountant Tony Tesciuba (who also happens to be my Uncle) offered to answer personal and small business tax queries.
This has been hugely popular, so much so, that this is now the third instalment of the Tax Tony saga, just in time for the end of this tax-year. The process itself is simple, MoneySavers are invited to ask their question in the Chat Forum (see original link) and then they're collated and answered here in one big article.
Oh and I nearly forgot, it's important to remember the answers below are Tony's not mine, and in return for his hard work I agreed to tell people about his website www.tesciuba.com.
Last week's budget continued HMRC's stated campaign to make tax avoidance not worthwhile by 2008. Caught up in the cross fire this time are families that innocently want to set up trusts to pass wealth to their children only when they are old enough to manage it themselves. Accumulation and maintenance trusts will now carry an IHT charge unless the beneficiaries can get their hands on the dosh no later than age 18.
The favorable tax climate for small companies that we enjoy now may not last for ever. Hidden away in paragraphs 5.85 and 5.86 of the Red Book is a policy statement to target employment income disguised as dividends. I believe the Chancellor when he says he is aiming at mass-marketed managed service company schemes. But if one day he puts National Insurance on dividends, this will hurt small companies across the board. Anyway, for now he has left things as they are.
Those of you struggling to get your tax return filed by 31 January will not welcome the news that from 2008 the filing deadline is to move to 30 November if you file on line and 30 September if you use snail mail.
Otherwise, this was a fairly quiet budget, with lots of detail, but no major headlines. It does nothing to end the scandal that sees people on low wages paying a whopping 70% marginal tax rate when you take into account income tax, National Insurance and the withdrawal of tax credits.
HMRC's official budget site is here. My fan site is here.
Thanks again for this chance to meet so many MoneySavers and answer their tax questions.
I hope my answers are informative and interesting. I guess most of the questions are from people who do not use professional help. It's very instructive to me to learn what issues concern you most. It is a great shame that our tax system has become so complicated that so many people are unsure of their obligations and even of how to start their relationship with the tax authorities.
If you need professional help, but genuinely cannot afford it, try TaxAid. TaxAid is a
The inevitable disclaimer (well he is an accountant – Martin)
The answers to these questions are based on tax law at 
Should I tell the tax man? Companies & corporation tax Employed or self-employed How much tax will I pay? Dealing with the taxman What can I claim for? How can I pay less tax?
See Taxing Times 1 See Taxing Times 2
The law requires any person who is chargeable to income tax or capital gains tax for any year of assessment to tell HMRC within six months of the end of the year, even if they do not receive a tax return. Newly unincorporated businesses must register with HMRC within three months of starting to trade. Questions can arise when what started as a hobby drifts into being a trade or if a business is not making any money.
Generally speaking, if you are wondering if you are required to notify HMRC, almost certainly you should. Telling them cannot generate a liability that does not otherwise exist and can save a great deal of trouble later. You may also want to claim exemptions and reliefs that might be lost if you miss deadlines.
The situation is slightly different for companies, because HMRC automatically get to know about all new registrations at Companies House. The company still has to let HMRC know when it has “come into the charge for corporation tax”, normally when it starts trading.
There are some useful booklets for new businesses on the HMRC site.
I have some fact sheets about setting up in business on my website.
When hobbies turn into jobs
MoneySaver's Question:
I've been DJ-ing for a couple of years now. It started as a hobby in my spare time, but in the last few months its really taken off and I pretty much live on the earnings from it now, relying less and less on my occasional employed shift work which used to be my main income source.
I always get paid for my DJ work in cash or cheque. Hence I don't pay income tax on this portion of my income and I'm obviously concerned about the Inland Revenue catching up with me one day.
I want to register to pay tax but I am unsure if I should just ask to fill in a tax return each year or register as a sole trader to take advantage of offsetting tax against all my expenses as a DJ. I'm also worried that the Revenue might want to go back through previous income and I don't have the records I need or the money to pay them. In the last few months I have started saving all my invoices and receipts.
Oh dear. If being paid in cash exempted you from paying tax, Tesco would be a lot better off.
I'm afraid I can only advise you to make a clean breast of it right now and get registered as self employed immediately. Putting it off will only make things worse. They generally do not shout at people who come to them voluntarily and will agree estimated profits for earlier years (what else can they do?). You can't just start filling in tax returns in future, as you do have to state specifically when you started trading and lying about that is a very bad idea.
Depending on when you started trading, it might be that only one tax year's income is missing and perhaps the tax is not yet much overdue.
Get professional help if anything more than pin money is involved.
Property abroad
MoneySaver's Question:
Last year my wife and I bought a small property in
The flat is about to be rented out and will generate an income of about £300pcm. We have set ourselves up as tax payers in
Yes you do, because as
A simple phone call to your tax office will suffice to inform them. They will then issue the appropriate pages with your tax return.
Declaring overseas income
MoneySaver's Question:
I'm wondering if I or my wife needs to declare any overseas income in our tax returns. I am British, my wife is Greek. We live and work in the
The foreign properties are in my wife's name in
What is our tax position?
I am befuddled by your Greek property being in your wife's name, but the income being taxed as joint. What are you paying tax on income that is not yours for?
So far as your wife is concerned, her
Non-domicile is claimed on form DOM1 and on the non-residence pages of her tax return. Taxable income from abroad is reported on the foreign pages.
Domicile has important implications for various
Working full time and being self employed
MoneySaver's Question:
A friend has started working for himself. He has only done a few jobs worth around £300. He has had to buy in services such as web hosting. He has also bought and sold around 60 items with a small profit, (50p here, £2 there) to enable the labour side of the work to take place. He hasn't declared himself self employed and is aware that he will have a £100 fine. Can the £100 be a business expense next year?
As he works full time too what requirements are there: taxes, NI etc, are there any others? I have given him the CWF1, is it just a case of sending this off?
Get the CWF1 in as soon as possible. You can do it over the phone if that's easier. They just might overlook the £100 fine, but otherwise, it is not a deductible expense.
Ask them at the same time about the Small Earnings Exemption from Class 2 NI and about deferring Class 4 NI.
The only other things you need to think about immediately are whether IR35 might apply and about registering for VAT either voluntarily or when you have to at £61,000 turnover.
Moving to self-assessment
MoneySaver's Question:
I recently started freelancing on top of my normal job. As I began this in February, after the deadline for self assessment, will I have any tax liabilities in this financial year? I have been told I will not be liable for any tax until April 2007. Is this correct? How do I go about moving to self assessment? Sorry this all seems a bit simple but I've always been on PAYE before.
The increasing complexity of the
Share dealing
MoneySaver's Question:
I do quite a lot of share dealing. I know I have not exceeded my capital gains allowance but my level of dealing is such that I am supposed to report it all. This is a pointless chore. If I don't report it and HMRC find out, is there any penalty, given that no tax was payable anyway?
You have to complete the capital gains pages if you disposed of chargeable assets, such as shares, worth more than £32,800. There is no exemption merely because no tax is payable. Although in theory there would be no penalty if no tax was lost, omitting information from your return on the grounds that it was “a pointless chore” is an extremely bad idea. You are encouraging them to wonder what else you might have omitted.
They will know about your share dealing either from your broker or from the dividend income on your return.
You could avoid the tax consequences by spread betting or by dealing within an ISA wrapper.
A property business?
MoneySaver's Question:
I live with my partner and we own our own home. Recently my parents retired and moved into rented property after selling their home in order to release the equity. They were paying rather a lot of rent so I bought another house, which I pay the mortgage on, as a long term investment as pensions are performing relatively poorly. My parents have moved into this other property now and pay their own bills, council tax etc. and give me a token amount (I suppose which could be construed as rent). This amount does not cover anywhere near the money I pay out each month on the mortgage, term assurance and buildings insurance. However, I am not concerned at that because the second home was bought for investment and hopefully will provide my partner and me a reasonable pension (and give our impending new arrival some inheritance).
Where do I stand regarding tax being as I am paying out more than I am getting from my parents?
It is a debatable point whether or not you are carrying on a property business that needs to be reported to HMRC at all. You have no tax to pay and (having their cake and eating it) HMRC might well deny you the use of the losses you are running against future profits, on the grounds that you are not carrying on the business commercially.
It certainly costs you nothing other than time and effort to report the rent and expenses on the land and property pages of your return. I suggest that you do, as it would make you bomb proof if HMRC ever enquired into your return and otherwise you will never be able to use the losses for certain.
Of course, if the token amount ever exceeds the properly deductible expenses, you certainly have to report the income.
Renting properties for no profit
MoneySaver's Question:
I have been renting a residential property out for over two years. Do I need to declare this for tax purposes? I am not making any profit on the income. If so, is there a problem that I haven't declared it for two years?
You will want to claim the loss as a deduction against future profits, so it is in your interests to report these to the HMRC. If you are too late for a return, a letter giving the same information will do. HMRC is unlikely to make a fuss, as no tax has been lost.
Closing companies
MoneySaver's Question:
I started a limited company over 2 years ago but only traded for the first six months. However I haven't told the Inland Revenue about the couple of hundred we made. How should we go about trying to make it legal or is the easiest going to be closing it down?
HM Revenue & Customs will object if you just try to strike off the company without having ever done a corporation tax return. Sounds like your profits were made at the time the rate of corporation tax on profits below £10,000 was 0%. So I don't expect any problems. Just write a letter to the company's tax inspector explaining what has happened and providing simple accounts. If she's happy, you can then ask Companies House to strike the company off the register.
Rental income
MoneySaver's Question:
I recently moved in to my partner's house. I own another flat which I am now renting out. My rental income is about £80 less than my mortgage payment. Am I liable to tax as I'm not even covering my mortgage? I have a young baby now so strictly speaking I guess my principal place of residence is at my partner's house.
It is the interest on the mortgage that you deduct, not the repayments. If you are still making a loss, there will be no tax to pay. However, you still have the obligation to do a tax return.
Your remark about principal place of residence hints at the CGT exemption for your home when you sell it. It is not an income tax exemption. If you sold your flat within the next 3 years, there would still be no CGT to pay on any profit you made. There are further generous exemptions that would reduce and possibly cancel any gain you made after that. I have a fact sheet here.
Back to the top
Small businesses rushed to incorporate when the rate of corporation tax on the first £10,000 of profit was cut to 10% in 2000 and then to nil in 2002. Although successive budgets have chipped away at the advantages of incorporation, it remains the most tax efficient vehicle for the majority of small businesses.
Unfortunately, as several questions to me demonstrate, many people incorporated without fully appreciating the much greater regulatory burden and cost that they were letting themselves in for.
I have some fact sheets about corporate and business tax on my website.
Reducing the tax bill
MoneySaver's Question:
As a director of a small limited company (incorporated March 2001) I'd like some advice on reducing our corporation tax bill. Last financial year we paid £27,000; with only a couple of weeks left on this financial year our estimated bill is £60,000.
We have always purchased as much new machinery as we can afford. What other ways do we have to reduce our corporation tax liability?
Your accountant should have done a year end tax plan with you by now. He knows your company better than I do.
The easy things that spring immediately to mind include: (1) pushing off sales into next year or accelerating expenditure into this year, (2) pension contributions, (3) gift aid contributions to charity, (4) making specific provisions against bad stock or for any other specific reason, (5) making use of the generous allowances for qualifying R&D expenditure or for remediating contaminated land and (6) capital allowances, especially the 100% allowances for energy-saving equipment and electric or low carbon emission cars. You'd have to tell me if any of these made any sense for your business.
You might want to put off capital expenditure, because the rate of first year allowance goes back up to 50% from
I have a more detailed article about tax saving opportunities for companies on my website.
Ltd companies with no turnover
MoneySaver's Question:
My wife has a limited company incorporated last March which has earned about £150 since then. She has just received a payment slip from the tax authorities for tax year to April 2006. I don't think that she has filed a tax return for the business as it essentially earned nothing, and she understood the tax year relevant to business ended in December.
I gather though from the existence of this forum and the (payment slip) that she should have filed a return stating her operating loss for the year ending April 2006 already.
What should she be doing at this point to ensure she gets her loss recognised and satisfies the taxation rules?
Humm, Is it worth the trouble and expense of a limited company for so little turnover?
The company has to prepare accounts to
The payment slip has, as usual, been issued early. Corporation tax is due for payment 9 months after the end of the accounting period and the return is only due for filing 3 months after that.
Filing accounts
MoneySaver's Question:
I incorporated a limited company in March last year and soon it will be time to fill out my accounts. I understand that I can receive a cash rebate for filing my accounts online. Do you know where I can find details of this? Also do you know how I can go about submitting my accounts online?
I was told by HMRC that I need to simply produce a balance sheet, profit and loss account and calculations showing how the tax that I have paid relates to the profit and loss account. Is this correct? Are there any examples of the format that these three items should take (again, Inland Revenue couldn't help here).
Finally, I don't have any specialist accounting software, but I do have Excel and software to make a PDF file from an Excel document. Is that sufficient?
Quite apart from the HMRC requirement to do a corporation tax return, the company must prepare accounts in accordance with the Companies Act and file them at Companies House. There are various exemptions for small companies, but it is still an onerous responsibility.
HMRC will insist on seeing full accounts and a corporation tax computation of the tax payable. Your question sounds as if you didn't make clear to them that you have a company, not a sole trader's business.
As things stand, you will file your accounts with Companies House in hard copy form. You can file them with the Revenue by pdf, but there is no cash incentive for doing so – that's just for PAYE annual returns at the moment.
‘Fraid to say that I think you will struggle to do all this without professional help.
There are completely different tax regimes for the employed and self employed. From the tax angle, it has long been the case that both the employer and the employee are better off if the worker was not on the payroll: National Insurance rates are much lower for the self-employed and the employer avoids having to operate PAYE. On the other hand, the self-employed have fewer rights and carry the business risk themselves.
It is very important to understand that you cannot choose whether to be treated as employed or self-employed. You are what you are and if you are truly an employee, the employer has to pay you through PAYE, whether he likes it or not. Sticking a limited company in the middle of an employment relationship helps the employer, because companies do not have to be paid under PAYE. It does not help the poor employee though, because he then has to apply the infamous IR35 regulations that leave him in much the same tax position as if he had been employed directly and with all the headache of running a limited company.
HMRC has been targeting status issues for several years and has dedicated teams working on this. It is very expensive for an employer to get this wrong. HMRC will say that the amounts actually paid were the net amounts under PAYE and that the employer owes the tax and NI that it should have deducted, up to the gross equivalent pay, possibly going back over several years.
“Employed or self-employed” is a crucial question. HMRC have published guidance on their website. You should take professional advice if you are not sure.
Foreign entertainers and sportsmen
MoneySaver's Question:
I am a member of a local cricket club who last year hired a professional cricketer from
If the contract amounts to employment, your cricketer should be paid through the payroll on PAYE, like any other employee.
Otherwise, payments to a foreign entertainer or sportsman fall under the Income Tax (Entertainers and Sportsmen) Regulations 1987. The payer, the cricket club in this case, must deduct tax at basic rate unless the payment is below £1,000 or the cricketer has persuaded HMRC to apply a lower or nil rate. There are detailed rules about administration etc.
HMRC will look to you for the tax and possibly NI. In law they do not have to give you any credit for the tax that the cricketer has paid (if he has), but in practice usually will. You really need to get this right now, because it can get expensive if HMRC takes the view that you have made a net payment and are holding a deemed deduction already.
MoneySaver's Question:
I have a limited company and also have a job under PAYE. I want to pay myself for work that I do through the company. Can I submit invoices from myself to the company to avoid PAYE and deal with the personal income gained for myself via my tax return?
Either you are doing the work, or the company is. If the company is entering into contracts and issuing invoices, the income belongs to the company, not you. If you are the only shareholder, you can take what you want out as a dividend. There are minimal formalities: the directors need to pass a simple resolution before paying each dividend and you must have sufficient after-tax profits to do it. Otherwise, what you take out is a salary, taxable under PAYE.
Freelancing and PAYE
MoneySaver's Question:
I freelance at various company premises through a composite company with limited status, receiving weekly final pay via a dividend payment structure. The company handles all my IR35 compliance and tax and NI payments and sends me a net pay weekly. I also do 'odd job' design work direct for other clients from home. I will be filling a tax return for all this.
Am I right in assuming that my composite company handled freelance work is categorised as employment earnings (they will supply me with the breakdown at the end of the financial year) and that I fill employment pages in for that and the extra work I fill in as standard self employment? Where do I stand in relation to National Insurance payments because I am classed as self employed? Although my 'freelance' contract work is self employed I am classed as employed by my composite company.
Your income from the composite company is probably a mixture of PAYE income and dividends. These will go on an employment page and in
If the freelance work amounts to a trade, you must register as self-employed with HMRC within 3 months of starting, or face a £100 fine. The profit is then reported using the self-employment pages. If it's merely one-off freelance income, put it in
Agency work, PAYE or self-employed?
MoneySaver's Question:
In addition to a full-time job, I have been partly self-employed for many years. However, at the end of April, I will be leaving my salaried job to go fully self-employed. My employer, however, wants me to help out after I've left, as a replacement might take some months to arrive. They will probably want me to be employed through an agency, who will take off tax and NI. Would it be better for me to offer my services on a freelance basis so that I can make a clean break to become fully self-employed or should I accept the agency work or perhaps decline to work for them once I've left?
Don't let paying tax get in the way of earning money!
It is not clear to me how your relationship with your employer is to change. If you are still an employee, you are still an employee and must go through PAYE. You only have the option of being a self-employed freelancer if the nature of your relationship with them changes completely. I imagine that they want you employed through an agency because you will in truth still be an employee and the agency will have the headache of running the PAYE payroll. I'm not clear why they would want to pay the agency a margin on your fee though.
Payroll agencies
MoneySaver's Question:
Having worked for the same plastering contractor for nearly 3 years continuously, the Inland Revenue is now saying that I should be employed by this contractor as opposed to being Self Employed (CIS) as I am now. My yearly gross wage is approximately £46,000.
The contractor doesn't want to do this as he says it will cost him money and has instead suggested that I get paid through a payroll agency (for this service I have to pay them £28.00 per week). They would set up Single Person Company for me, by where I get paid a minimum wage and dividends. I am totally confused and wondered if you could shed any light on what would be best for me to do, would I be better off, worse off, or could you suggest any alternatives to me.
The Construction Industry Scheme is about to change radically. The upshot is that HMRC is determined to get everyone that is a true employee onto someone's payroll. I'm sorry that your employer is unwilling to do what the law requires of him and put you on PAYE.
A single person company would shift the burden and cost of running the payroll to you. The minimum wage idea won't work, because it will be caught by IR35.
It sounds to me like you've just got a pay cut.
Saving tax through incorporation
MoneySaver's Question:
I have been contracting for about 6 months and many people have encouraged me to do so by opening a limited company where I would be the director, as they say it would be more tax effective seeing that I fall into a higher tax bracket. I have got a couple of properties rented out and I am a bit concerned that a limited company under my name would increase future CGT. What would be your opinion on this? I am very confused.
Provided you are not caught by IR35 and depending on how your income falls, the chances are that incorporation would be a big tax saving for you. How much is just a matter of arithmetic, but it could be several thousand pounds a year.
You've no obligation to put the properties into the limited company, so forget about the double CGT charge.
Please take professional advice first. It's obvious that other questioners have jumped into incorporation with both eyes closed and are not prepared for the much greater formality involved.
Back to the top
There is a full range of tax tables and calculators on my website.
Selling properties
MoneySaver's Question:
I bought a property in 1976 for £15,000 and it has always been let. I wish now to sell it. I believe that one of the considerations in calculating capital gains is that the annual RPI is applied to this sum (until taper relief was introduced). I find the RPI rather complicated over this period. Could you tell me how to apply the RPI to the £15,000 or roughly the calculated amount?
It's even more complicated than you think. Instead of the original cost, you can substitute the value of the property as at
Either way, the indexation allowance that takes you from
Tax on additional earnings
MoneySaver's Question:
I've recently set up a new business (Pilates instructor). I also work part time and earn a salary through PAYE. I've notified the tax offices who tell me that I will have to enter my additional earnings from the new business into my self assessment tax return. I'm wondering how much tax I will have to pay on the money that I make from the Pilates business and specifically how much I should aim to put aside during the year. Do I just pay tax on any profit that I make?
You'll have to pay income tax on the Pilates profit at your highest rate of tax. Your PAYE income will use up your personal allowances and some of your lower rate bands at least. You'll also have to pay class 2 and class 4 NI.
Assuming you are still in the basic rate band (total PAYE and Pilates income less than £38,000), I suggest you put away 30% of your profit as you go along. Please do that from day 1 because the way the system works, you first pay tax on your self employed income a year or more after you start trading. It comes as a nasty shock if you haven't been saving up.
Yes, you only pay tax on your profit, not on turnover.
Self-employment and PAYE
MoneySaver's Question:
I've just gone self-employed full time and also have a casual PAYE job for a couple of Saturdays a month. I have a lodger and the income is under the allowance for the rent a room scheme.
I have just found out about class 4 NI contributions - what is classified as profit for that purpose? I will be earning less than £15,000 - can I just count all that as wages rather than profit?
I am a writer so don't manufacture anything. Should I just pay myself everything I make to avoid paying this (I have two bank accounts, one personal, one for work)? Will the fact I am also PAYE make any difference? Is my lodger's money profit or included in the calculation in any way?
Class 4 NI is just additional income tax by another name. It is based on the same profits as income tax and collected at the same time, through your self-assessment return.
If you are self-employed, there is no such thing as your wages. You are taxed on the profit you make, whether or not you take it out of the business.
The income tax that you pay depends on your total income, PAYE and self-employed combined. The Class 4 NI is only on the self-employed income and there are rules to limit the grand total of NI that you pay to an overall maximum.
The rent-a-room income will remain tax free, regardless of your other income.
NI and self employment
MoneySaver's Question:
My wife has given up her employed job to become self employed earning roughly the same per year. She has set up class 2 NI contributions by direct debit. Will she be sent a bill for class 4 NI along with her tax bill at the end of the year?
She will pay class 4 NI at the same time as her income tax, based on her profits reported on her self-assessment return. Class 2 NI is just the membership subs for the self-employed club and is collected separately, by directly debit mostly, as you say.
Working overseas
MoneySaver's Question:
I'm from
You will be subject to normal
Maternity leave and tax
MoneySaver's Question:
Would I be correct that the mother of my 8 month old baby should be entitled to a tax rebate as she paid tax between April and June 2005 and also continued to be paid by her company for a fixed period of time whilst on maternity leave? What other benefits, bearing in mind she is to return to work in June 2006 should we be entitled to? We live together but are not married and I earn £40,000 before tax.
Mum should check her tax at the end of the year and apply for a rebate if she is entitled to one. No doubt you have applied for child benefit. Don't forget to use your child trust fund voucher and to apply for tax credits.
Mysterious £500!
MoneySaver's Question:
I work 30 hours a week and pay tax and National Insurance. I receive around £500 a month from money invested in a company which started last August and tax has not been paid on this. Am I right in saying that I won't pay the tax until next year? How do I pay this, how and who calculates this and if it is via the self assessment form which bit do I fill in?
It would have been helpful to tell me what the £500 is: loan repayment, interest, dividend, salary or what? My mind reading is a bit rusty.
Life insurance polices
MoneySaver's Question:
I have just received a payout from a matured life insurance policy that I've had for 30 years. I'm also a high rate taxpayer. On the payment letter it says HMRC may treat it as income. Is this correct if so, how much am I likely to owe?
A gain on a non-qualifying life policy can in certain circumstances be taxable, as if it were income. Most commonly this arises on single premium policies held by higher rate taxpayers. Your insurance company ought to help you with this. You can read more about this in HMRC help sheet IR320.
Beneficial loans
MoneySaver's Question:
I received a £7,000 interest free loan from my employer when I started on their graduate scheme in September 2005. Should I be filing a tax return for this or will any tax due on this simply be deducted through the PAYE scheme?
Almost certainly this is a beneficial loan and you will be taxed on the deemed benefit of the interest that you have not paid. The official rate of interest is 5%, so (ignoring the effect of repayments in the year), you will be deemed to have additional income of £350 a year. Your employer will report the actual benefit to HMRC on a P11D and you should also put it on your tax return, if you get one. The tax will probably be collected through your PAYE code.
I have an introductory article about benefits in kind on my website.
Endowment compensation
MoneySaver's Question:
I have just received an offer of compensation for endowment mis-selling, but they say it may be subject to tax. If this is so, how much tax can I expect to pay on £1,500?
Any interest element of the settlement is taxable. The payer should have identified any interest and deducted tax from it. Whether tax is deducted or not, the interest is taxable and should go on your return. Apart from the interest element, the compensation is tax-free.
If you want to read up on the technicalities, see Tax Journal 72 on the HMRC website.
Travelling and residency
MoneySaver's Question:
My partner and I left the
You will remain
Provided you are straight with HMRC, you have the right to expect a courteous and reliable service, aimed at helping you to pay the right amount of tax. Don't expect them to help you with your tax planning though!
The HMRC website is excellent and getting better. You shouldn't be afraid of talking to them directly, on a no names basis if necessary. Their contact details are here. You should take professional advice before approaching HMRC if you have to disclose an irregularity.
Incorrect coding notices
MoneySaver's Question:
I am a high rate tax payer, exclusively PAYE and have not been required to complete a self-assessment. I changed employer mid-way through the tax year in September 2005. My old employer paid an extremely expensive medical insurance benefit which was taxed through my PAYE code. The code still reflects a full year's premium, although my new employer does not give this benefit. Shouldn't the benefit be applied on a pro-rata basis?
My coding notices for 2006/07 and 20007/08 have rolled over this benefit, assuming it is still being paid.
I contacted the tax office but HMRC believe everything to be correct at present and thus will not make any adjustment in my favour pending receipt of subsequent P11Ds. As a high rate tax payer, I really don't want to lose any of my allowance unnecessarily. Is there any way of forcing the issue or do I have to just wait it out on the off-chance that it'll all sort itself out eventually?
I am surprised that your tax office wasn't more helpful. I would have expected them to take your word for it and to increase your 2005/06 code immediately. You do not have to pay tax on benefits that you have not received, so persevere. Put your claim in writing and make sure it is accepted. I imagine that this will trigger a tax return, which should be simple in your case.
Claiming back tax
MoneySaver's Question:
My son is a full time university student. Until September last year he was working part time in a club for which he was taxed. Then in September he started full time work in practice. In September this year he will return to University. How will we be able to check that the tax he has paid this tax year is correct and how does he claim back on the tax paid in the first 6 months of 2006/07? Can we trust his current employer to have the matter in hand?
The current employer has no more responsibility than to operate PAYE according to the rules. Your son will have to check his tax position when he has his P45 or P60s for the year. If he has overpaid, he should make a repayment claim on form R40 available from HMRC.
Underpaid tax
MoneySaver's Question:
My husband has been advised by HMRC that he has underpaid tax for the past three years. They did not take into account his company health plan, they admit it is their error as all the relevant forms were submitted by his company.
They want to collect the underpayment of £2,000 through his 2006/07 coding and £1,500 the following tax year. What is his legal position, does he have to pay or can he ask for a reduction?
By concession, not right, HMRC will not collect tax that was omitted by their own error, if more than 12 months have gone by since they got full information from the taxpayer or his employer and if the taxpayer had reasonably believed his affairs were in order. Can you look them in the eye and say that? Anyway, they are probably still within time for most of this tax under the normal rules. It sounds to me as if your complaint is no more than that your husband wasn't asked to pay the tax sooner. HMRC has to collect the tax and your husband has to pay it.
Wrong P45
MoneySaver's Question:
I did some temping through an agency in the current tax year. The P45 that the agency issued me with says that I have not paid any tax during employment with them when my wage slips say I have paid tax. As far as I am aware in order to get a tax refund from the Revenue I will need to send them the P45 that the agency gave me last week as the Revenue will not accept wage slips as proof of tax paid. How do I therefore claim back the tax deducted from my wages in this situation?
You must go back to the agency. Get them to explain the P45 and correct it if necessary.
Holiday lettings
MoneySaver's Question:
I have bought a series of apartments in
Basically, I have declared the income since the start, to clarify, these are let as furnished holiday lets in line with ALL the guidelines, I have also checked with the IR that this was in order, and all the returns I have submitted have been in the red, i.e. when I accumulate the interest on the loans, all the other costs, rates etc, its MORE than the income, so I declare a loss. This year after 7 years they send me a bill for the full amount owed on this years account, plus on account for next year!! Can you explain or help?
Despite your protestations that income tax should not apply to you, there must be something that you are holding back from me, or worse, from HMRC. The furnished holiday lettings regime only applies to
Did you forget to offset the brought forward losses against a profit? Has HMRC taken the view that your business is not being carried on commercially? Are you aware that losses on foreign lettings cannot be offset against
If you let me have more details, I'll try to unravel this for you.
Excluded from a work pension scheme
MoneySaver's Question:
My wife was employed by the local authority (part time) and was excluded for a time from their pension scheme. She retired early two years ago. Since then the Industrial Tribunal & employers have agreed that she should not have been excluded. She has now paid the required money to cover her contributions for the excluded period.
Had she still been employed this money could have been deducted from her salary and she would not paid tax on that part of her earnings. Can she now claim a refund from the tax office on this pension payment? The only income she has at present is under the tax threshold.
Your wife needs to check with the pension provider and confirm how the money she has paid over is treated. I expect that the provider has agreed with HMRC that the payments are pension contributions, but this is not automatic. If they are pension contributions, she should have paid them over net of basic rate tax; so that for each £78 she paid, HMRC would pay directly an additional £22. Provided that the gross equivalent amount is less than £3,600 in the year of payment, it does not matter what your wife's income is, or indeed if she has no income. Your wife has therefore already had the tax relief.
Working outside the EU
MoneySaver's Question:
I did some work for the UN outside the EU recently. They paid my fees into my UK account, and while I was there also gave me two cheques for per diems which I cashed locally; I brought some cash back with me and spent that in the UK. I did not keep receipts for my expenditure while abroad because I (mistakenly, I now realise) thought that I would not be taxed on any of these earnings, but I did keep a very detailed tally of my expenditure for future expense budgeting reasons. Do I have to pay tax on the per diem payments? And if so, would detailed expense tallies be good enough for expenses against these payments?
On another note, I bought a second hand computer for my (sole trader) work, for £150, and also a mobile for £90. Do these fall under capital expenses?
Unless you were away for a full tax year, you remained
You haven't told me what expenses you incurred, so I cannot say if they would be validly deductible against employment income.
The general rule is that HMRC expects you to have invoices or other third party receipts as evidence of expenses claimed. They can accept a detailed record like yours, but I wouldn't count on it.
You will get capital allowances on the computer and mobile phone.
Receiving interest net
MoneySaver's Question:
At the beginning of this tax year I wasn't working having previously been a student and so I was having my interest paid gross. I forgot to inform my bank in time for my September interest and so that was paid gross. I sent them a letter asking them to pay interest net from now on.
However, I have received no response since. If they pay my March interest gross as well how difficult is it going to be to get it sorted? It is only going to be about £15 tax which is what is really annoying. Could I just go to the tax office and write them a cheque or something?
You are entitled to receive interest gross so long as you do not expect to pay any tax at all. Once your circumstances change, you have an obligation to tell your bank in writing, so if they have ignored your letter, you should write again. The rule book says that you should also inform HMRC. Keep a copy of your letter to them in case they ignore that as well.
Pension Contributions
MoneySaver's Question:
Since I retired in 2001 I have received a pension. I then became employed again for which I received a salary and paid into a second pension. My pension and salary each attract tax at 22% although when added together attract tax at 40% which I pay through self assessment. My pension contributions are paid in respect of the salary which only attracts 22% tax; can these pension contributions be used to reduce my overall 40% tax liability? The Inland Revenue seem confused but say no.
Your tax liability is calculated by adding up all your income and deducting your pension from the total. So you will certainly get 40% relief for your pension contributions. It does not have to be allocated against any particular source of income. I think your confusion is about how the PAYE coding works. Take your P60s and pension statement to your tax office and have them check that you are paying the right amount of tax. You might need to complete a tax return to get things sorted out properly.
Net or gross interest
MoneySaver's Question:
I'm over retirement age but still working for few hours a month as an independent consultant. I pay tax on my earnings by way of completing my self assessment each year. Recently I opened a Cahoot savings account with a deposit of several thousands and the interest is paid net of tax each month. I would rather have all the interest earning further interest and pay tax on it through my self assessment at the end of the tax year. I would be grateful if you could advise me what I can do to prevent Cahoot paying my interest net of tax, and start paying it gross?
Only if your total income, including your state retirement pension and your freelance earnings, is less than your (age related) personal allowances, can you apply for your interest to be paid gross.
As you say you are a taxpayer, you cannot apply for gross payment, but certainly can apply for a refund if it works out that you pay too much tax.
You can read more at http://www.hmrc.gov.uk/taxback/ or call the Taxback help line on 0845 077 6543
Tax returns online
MoneySaver's Question:
I've been self employed for over 3 years; 9 months in 2005/06 have been self employed. Only tax paid has been through several large CIS vouchers at 18%.
For last 3 months of the year I have been paid under PAYE and because of my salary have been paying 40% tax. I have already done some figures and believe what I will have paid in CIS vouchers and PAYE tax will be too much by about £5,000 when taking into account running business costs etc. How soon can I fill in my self assessment and get the money back?
The 2006 tax returns and the on-line filing service will be available on
Tax rebate?
MoneySaver's Question:
Until
The tax you have paid under PAYE will be credited against your total liability for the year. It might very well result in a small refund payable to you.
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Tax returns and charity donations
MoneySaver's Question:
I am a higher rate tax payer. Can I put on my tax return any charity donation I have been giving during this financial year? If so, do I need any receipt from the charity?
You can put on your tax return any donations made under Gift Aid. This will reduce your higher rate tax bill and help the charity. If you did not make a Gift Aid declaration at the time, you can do so retrospectively. The charity will be very happy to help and they should give you a receipt to keep as evidence.
I have a fact sheet about charitable giving here.
Clothing and dry cleaning allowances
MoneySaver's Question:
As Paediatricians we are not permitted to wear hospital-laundered white coats, and our clothes are subject to 'accidents' from various bodily fluids/colouring implements/food etc from our young patients. Colleagues have mentioned claiming clothing and dry cleaning allowances, but I have been unable to verify this and the amount per annum either via the Inland Revenue or the
As a general rule, employees cannot claim for the costs of buying and maintaining ordinary clothing. However, HMRC does recognise that certain professions and trades do incur additional costs in keeping their clothes clean (wonderfully termed “dirty money”).
Strictly speaking, they will only allow these costs for a uniform or for protective clothing. So a doctor in civvies would not qualify. Practice does vary around the country. If you think it is worth it, I suggest that you telephone your own tax office and ask if they will allow a deduction for the cost of dry cleaning in your case.
Flat rate deductions have been agreed for specific trades and these are listed at http://www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm.
The specific scheme for nurses is described at http://www.hmrc.gov.uk/manuals/eimanual/EIM67240.htm.
Wear and tear allowance
MoneySaver's Question:
Can wear and tear allowance be applied during a properties void period or is it based on 10% of the annual rental income as opposed to what would be 10% of potential monthly income during that void period?
The deduction is 10% of rent from furnished lettings, so by definition is not given during a void period.
Mortgage arrangement fees and BTL property
MoneySaver's Question:
Can mortgage arrangement fees be included as expenses on my tax return?
If you mean arrangement fees for loans to buy let property, yes they can. Include it within “finance charges, including interest” in
Purchasing a van for work
MoneySaver's Question:
How can I deal with the cost of purchase and use of a van in relation to managing my property?
You can claim capital allowances which go in
Tax relief on a new van
MoneySaver's Question:
I have been self employed as a carpenter for 18 years and I am not VAT registered. I have an old van that has just been written off by the local bus and the insurance has just offered me £1,200 settlement. What do you think about buying a new van? Can I get tax relief on a brand new van or would it be better to go for a second hand van? Either way I need some form of business or personal loan to buy one.
Glad the bus didn't write you off! If you claimed capital allowances on the old van, the £1,200 will be taxable. You'll get capital allowances on the VAT inclusive cost of the replacement van, whether it is new or second hand. The interest on the loan will be a business expense.
Claiming car expenses
MoneySaver's Question:
My daughter has run her own business for 18 months as a fashion designer. She is also employed two days for someone else. She has recently acquired a car which she paid for out of her business. What is the position re claiming for the car against tax?
She can only claim for business mileage, such as going to see clients. If her self-employed turnover is less than £61,000, the simplest thing would be for her to claim mileage against her profit at the rate of 40p a mile for the first 10,000 business miles and 25p a mile after that. She can also claim on top for parking and tolls on purely business trips.
Her employer can also pay up to 40p/25p a mile tax free, when your daughter uses her car on the employer's business. If the employer pays a lower rate, your daughter can claim the difference as a deduction from her PAYE income on her tax return.
Tax relief on a rebuild
MoneySaver's Question:
My husband is a self employed builder. We are rebuilding our garage which houses quite a lot of his building equipment etc. Are we able to claim any tax relief on the cost of the rebuilding? We estimate the materials will cost about £6,000 and then there is the time involved to rebuild. Is there a way of being able to claim any tax relief at all on this?
No. You're better off having a garage at the end of your drive, rather than an industrial building.
Tax relief on travel
MoneySaver's Question:
Can I claim back tax/get relief on travel to and from work. I am employed and use my own car. I have an 80 mile round trip per day.
For most employees, ordinary commuting is the journey they make most days between home and their permanent workplace. In general there is no relief for the cost of travel between an employee's permanent workplace. The distance you have to travel is irrelevant.
Business travel can be deductible, but the detailed rules are complicated and I would need to know more before I could say if they applied to your situation.
There is an introductory article about travel expenses here.
MoneySaver's Question:
I work in the engineering construction Industry. I used to be based on site, with no permanent place of work. Now I am based permanently in the office. I used to claim tax relief on my mileage as expenses at the recommended rates, and the remainder I used to claim as expenses deductions. Since I was permanently based in the office, and I lost any allowance I was claiming, can I claim for tax relief and/or expenses deductions for expenses I incur now, as I don't live near work?
If your situation was a “temporary posting away from a permanent workplace”, it would be worth looking if your travel was allowable. However, you describe the situation as permanent, so your journeys are now just ordinary commuting. As for the last questioner, the distance is irrelevant.
MoneySaver's Question:
I use my own car for business purposes. My employer pays me 30 pence per mile for this. But I note that the Inland Revenue recommend 40 pence per mile for the first 10,000 miles. Can I claim the difference?
Yes. You claim the difference in
Working at home and tax relief
MoneySaver's Question:
I work full time but my employer allows me to work one day a week at home to look after my baby son. Can I claim a tax discount for having a home office for this? I have done some checking and the info I have says you can only claim if you have no choice but to work at home. My question is, does childcare count as being different or as being "no choice" but to work at home?
You are working at home by personal choice, not necessity. HMRC has recently issued guidance on this particular point and so, sorry, no relief.
Carrying forward losses
MoneySaver's Question:
Unfortunately I have a accumulated a lot of losses this year and wonder if it's possible to carry forward those losses to next year in the hope that gains next year can be set off against them.
Yes, that is exactly what the rules say. You should complete the capital gains section of your tax return this year to establish the losses.
Commuting expenses
MoneySaver's Question:
Last year I was working at a hospital 160 miles away from my home and commuting daily. Am I eligible to claim tax relief on my travel expenses to and from work at the max rate of 40p for the first 10,000 miles?
Only if the hospital was a “temporary workplace” as defined in the legislation. I would need a lot more details, so I suggest you take advice.
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There are some personal tax planning ideas here.
Rent a room
MoneySaver's Question:
I'm thinking of hosting some French students in my spare room during the Easter and summer holidays. I have been told that any income I get will be mine to keep, tax free, as the government is trying to encourage more families to open their homes to tourists as there is insufficient housing.
Is this true? Will the same apply to those who are currently receiving some kind of state benefit, e.g. working families' tax credit?
If you already have a lodger or are thinking about letting furnished rooms in your home, you can receive up to £4,250 a year tax-free (£2,150 if letting jointly). This is known as the Rent a Room scheme. See http://www.hmrc.gov.uk/individuals/tmarent-a-room-scheme.shtml. Income within the Rent-a-Room scheme does not count as income for Tax Credits purposes, but I don't know about other means tested benefits.
Tax breaks for disabled people
MoneySaver's Question:
My brother-in-law (aged 46) is semi-paralysed and now resides in a nursing home where he is likely to remain for the rest of his life.
He is single and owns his own home outright. He is now receiving a medical pension and we have recently let out his house on an assured short hold tenancy. He is currently being assessed for disability living allowance. Because he is a house-owner, he is responsible for paying a large amount of his care (approx £550 every week).
As his next-of-kin, we are trying to sort out his affairs but are finding it difficult to get info about what benefits etc he is entitled to (social worker is a waste of time). Are there any extra tax benefits he can claim as a disabled person?
I suggest you speak to the Citizen's Advice Bureau about benefits generally. Most social security benefits, such as attendance allowance and disability living allowance, are tax free. Others, such as incapacity benefit, are taxable. I am not sure what the “medical pension” you refer to is. There is a disability element in working tax credit, but it sounds as if that is not relevant here unfortunately. Otherwise, there are no particular tax breaks for disabled people.
You might want to take professional advice from someone experienced in this area about the management of your brother-in-law's money, possibly using a Power of Attorney or a trust.
A property trader?
MoneySaver's Question:
My husband and I bought a property in 2000 and lived in it as our main residence for two years until 2002 when it was let out. Then we bought a second property which became our main residence for two years until it was also let out in 2004. We then bought our third property and are living in it as our main residence. We wish to sell our first property to pay off the mortgage of our now main residence and intend to keep our second property as an investment for our future pension.
The gain on the sale of our first property will amount to approximately £120,000. Do the same CGT exemptions apply to this sale taking our second property into consideration and will we then be liable for any CGT if we decide to sell our current main residence in the future to move to another property?
I am a touch worried that HMRC might see you as a property trader, subject to income tax in full on the gains you make. A lot depends on your original intention when you bought the properties. If you bought them with making a trading profit on sale in mind, you're a trader, just as if you run a sweet shop. If you are subject to income tax, there's no private residence relief to consider. Ouch.
Private residence relief is targeted at people's homes. There are anti-avoidance provisions that deny the relief if you buy or improve a property with an intention of making a profit on it, rather than to provide a roof over your head. So even if HMRC doesn't label you a trader, you could still be subject to CGT at rates that are almost as bad as income tax.
Let's assume that you bought in 2000 to provide a home for yourselves and that the fortuitous rise in the property market allowed you to build up this small portfolio, now held as income generating assets.
You will have held the first house for 6 years. The pro-rata gains relating to the first two years and the last three years are exempt under PRR. The remaining part will attract lettings relief. All in all, the gain should be wholly exempt.
There will be some exemption on the second property when sold as it was your principal private residence for a while. The third property while be wholly exempt if it was only ever your home.
As I write this, I'm getting increasingly nervous that you are walking into property trading and income tax. Beware.
Avoiding Inheritance tax
MoneySaver's Question:
Would putting my assets into a limited company avoid Inheritance Tax, or do I simply change the problem to Corporation Tax if I do?
The short answer is a polite suggestion that you forget it!
Inheritance tax planning
MoneySaver's Question:
I wonder if you could tell me how I can reduce inheritance tax liability. Mum has a flat, assets and personal savings way above the IHT threshold. We are four siblings, three in the
I've heard about trusts but am also aware the government has closed many "loopholes" recently. How can we reduce our liability without removing the financial security mum needs whilst she's alive?
Last week's budget specifically targeted IHT planning using trusts. HMRC has made it very plain that they are at war with the tax avoidance industry and will legislate retrospectively if necessary to defeat planning that, in their view, results in people not paying what they decide is “the right amount of tax”. So I would stick with the basic IHT planning that falls fair and square within the exemptions.
You are right to concentrate on your Mum's financial security and I expect that her welfare will come a long way in front of any tax planning considerations. After all, she won't be paying the IHT, so why should she care how much it is?
You have two years from your father's death to re-write his will, if you have the unanimous consent of all the beneficiaries. If you are still in time, this can put in place the IHT planning that you wish your Dad had done. Be aware that this has income tax and CGT implications. You will certainly need professional legal and tax advice.
Beyond that, you Mum can make gifts within the various annual and other exemptions. Larger gifts remain free of IHT, if your Mum survives 7 years.
Transferring property ownership
MoneySaver's Question:
Is it possible to transfer my share of property income into my wife's name as I am already within the higher tax band and she has enough room within hers to absorb my part of the property income without going into the 40% band?
Yes, but you would have to transfer legal ownership of the property to her first. Your solicitor should be able to arrange a simple gift and there should be no tax on the transfer, but there might be stamp duty.
Property income and tax relief
MoneySaver's Question:
My husband and I bought a house with a cottage at the end of the garden two years ago. We live in the house and the cottage is rented out on an assured short hold tenancy. Our mortgage lenders currently have a hold over both properties as they were bought under one title. We would like the mortgage to be on the cottage only as we believe we could then claim relief on all the interest (the cottage has been valued at more than the mortgage we want) but we've been told that unless we sell the property, we can't split the title.
We don't want to sell the cottage. Would it be possible or worthwhile making ourselves into a company and selling the cottage to the company? What are the advantages/pitfalls in doing such a thing?
You should be claiming a reasonable proportion of the interest as a deduction from your property income anyway.
To get beyond that, you will have to split the title. Then you can remortgage the cottage up to its original value when you bought it and use the funds raised to repay the new mortgage on the house. You will have to do this in steps and the mortgage lender will have to cooperate. There will be substantial cost involved, I expect.
Selling the cottage to a company causes more problems than it solves.
Property income and domestic mortgages
MoneySaver's Question:
I have a commercial property which has 3 years mortgage left on it. I pay approximately £2,000 in tax on its rental income. Is there any tax complication if I raise money on the equity and pay my residential mortgage with it?
Remortgage the property and use the money raised to repay your domestic mortgage. You can then claim interest relief against the property rental income, but only on a loan up to the original value of the property when you bought it. This restricted gain would have to be weighed against the probably higher costs of a commercial loan.
This is a neat trick, which the Revenue appears to be quite happy with. See example 2 in this link to their own manuals.
Capital Gains Tax and transferring properties
MoneySaver's Question:
I live in a flat which was bought for me in my parents' name 5 years ago for £42,000. My parents now wish to transfer it over to me, but as property generally has increased in value since and none of us can afford to pay CGT on that increase, I wondered if there was a way that its value could be "declared" between us to HMRC at a level which limits the CGT bill.
The flat has been underpinned, is uninsurable as it is sliding down the hill, and thus is unmortgageable. The flat upstairs completely failed to sell when they tried a year or so ago. Similar properties (without these faults) sell for almost £100,000 here now. I am afraid to do any improvements to the flat which would increase any capital gains tax bill! Surely its value would not be "market value"? Would the revenue accept a professional valuation taking the faults into account, or is there another way to accurately declare its value?
Your parents will have to pay CGT on the gift of the flat to you, based on its market value. It does not matter what price, if any, you pay. Market value means what the flat would fetch on the open market and should certainly reflect its true condition. A local estate agent should be able to value the property for you “as is”.
I agree with your excellent suggestion that any repairs should be put off until the flat is yours.
Postponing Capital Gains Tax
MoneySaver's Question:
My husband sold his business in July 2005, from which the proceeds are being paid over five years. The tax has been worked out with taper relief etc and this sizeable amount has to be paid in January 2007. Is there any step we could take to reduce this amount?
His income this year tax year will be around £12,000 wages from the company from April to July and a retirement pension from August to March 2007. He has no savings in his name as we were advised any extra income would be taxed at 40% as the total proceeds of the sale will be counted as income for tax year ending 2006 for this reason he has deferred taking any private pension. So we were wondering if there are any investments which would allow tax relief against tax which is not on earnings.
The disposal took place in 2005/06 and the amount of CGT payable will be determined by your husband's total income and gains in that one tax year alone. The fact that the proceeds are payable by instalments does not change that.
Although the CGT is payable in full on
Your husband could reinvest some or all of the proceeds in a company that qualifies under the Enterprise Investment Scheme. The pro rata CGT is then postponed (not cancelled) until he sells the EIS shares. This is only suitable if he is prepared to take a business risk.
Ownership and CGT exemption
MoneySaver's Question:
My wife and I remortgaged our old flat to purchase another one. When purchasing the second flat the mortgage was arranged in my name only. We are considering selling the flat and were wondering will we be able to include her CGT allowance when dealing with the tax as her name is not on the mortgage or should we add her name to the mortgage before selling?
It is the ownership of the property that matters, not the name on the mortgage, although I expect they are the same.
You do need to convey an interest to her before sale to get the benefits of her CGT annual exemption. Depending on the figures, you might be best off giving her the entire ownership. You will have some legal fees and the mortgage company would have to play ball. There should not be any CGT on the gift to your wife, but there might well be Stamp Duty on the value of the mortgage. Your solicitor can explain.
CGT and gifts
MoneySaver's Question:
My boyfriend and I live in a flat which was bought in his parents' name six years ago, secured on their own home as at the time my boyfriend was starting a PhD and I didn't yet have a job.
The understanding has always been that the flat is ours, and we have paid our share of the mortgage from the start. When it sells, the intention is for us to keep any profit towards our own mortgage deposit when we move.
With plans to move, the ugly spectre of CGT raises its head. We've had a lot of conflicting advice about how to avoid it. No-one seems to agree if the current owners can legally sell us the property at cost price or whether it has to be current market value. Can you advise? Are there any other loopholes that may help us?
If we have to pay CGT, what's the worst case scenario bill we could be looking at? The flat was bought for £51,000 and we believe it will fetch £115,000, perhaps as much as £125,000. We've lived there since November 1999 so could there be a taper relief factor? As first time buyers we're looking for the biggest shunt up the ladder we can get!
This is a classic example of where a little bit of professional help at the right time would have gone a long way. At your lower valuation, the gain after taper relief is over £50,000. Depending on your parents' other gains and income in the year, the potential CGT will be between £7,000 and £20,000. There would be no CGT if you had established in the first place that the flat belonged to you, as it would be exempt as your principal private residence.
You now have to establish who the flat belongs to and I sense some ambiguity on the point. Strictly speaking, it does not matter whose name the legal title is in. It is the beneficial ownership that matters. So if you can establish that your ownership from day 1 was real, not merely intended, the flat is yours. But you have an evidential issue, to put it mildly. I think you need a solicitor to sort this out, rather than an accountant.
If the flat belongs to your boyfriend's parents, the CGT on its gift by them to either or both of you would be the same as if they were to sell it on the open market.
Back to the top See Taxing Times 1 See Taxing Times 2
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