This has been hugely popular, so much so, that this is now the fifth instalment of the Tax Tony saga, just in time for the January 31st tax return deadline. 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 http://www.tesciuba.com/.
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See Taxing Times 2
See Taxing Times 3
See Taxing Times 4
Tony's introductory remarks
Hi Folks. I've had a lot of positive feedback from previous Taxing Times: thanks, it's much appreciated, and here is the next instalment.
I hope that by now most money savers will have filed their tax returns. If not, filing on-line is the best bet. That way you get an immediate acknowledgement and can be sure you have got the return in on time. The on-line system seems to be working fine this year, with no major glitches reported. If it does get very busy before the deadline, file outside normal office hours and you should avoid the queues. If you have to file a paper return, any tax office can accept it. You do not have to post the return to the office named on the cover.
Gordon is oh so slowly tightening the screws on small limited companies. He never expected so many small businesses to convert to limited companies over the last few years and must have taken quite a hit as a result of the tax savings these businesses achieved. In December's pre-budget report, the government promised to continue to review ‘how the system could be modernised, made simpler, more efficient and more competitive'. In other words how to get the tax take from small companies back to what it was before the starting rate of corporation tax was introduced in 2000. Bet you whatever they do, it won't be ‘simpler'. My guess is that sooner or later they will take away the tax advantages of dividends paid to director/shareholders of small companies, possibly by making them subject to National Insurance or worse, by deeming them to be salary.
In the current environment, I'm not advising clients to incorporate, unless there is a substantial and certain tax saving and then only if the incorporation can easily be undone later.
One abuse they have firmly stamped on is the managed service company. IR35 was supposed to ensure that employees were taxed as such, even if they tried to disguise the employment by sticking a limited company between themselves and their employers. IR35 has proved to be a bureaucratic nightmare. By the time HMRC catches up with IR35 avoiders, too often the company has gone bust and the employee moved on. In future, HMRC will be able to pursue the umbrella organisations that run MSCs for any unpaid tax and the new rules remove the rather trivial advantages that IR35 companies had in terms of deducting expenses.
There's a full round up of the pre-budget report on my website at http://www.tesciuba.com/ard/documents.asp?AID=506&SID=11&FID=8651. One announcement money savers will appreciate is that ISAs are to be made permanent and more generous. Many people are using ISAs as an alternative to pensions for long term saving, particularly because you can get your money back if you want it, rather than being committed eventually to buying an annuity.
The answers to these questions are based on tax law at 15 January 2007. They are general in nature and are no substitute for taking professional advice specific to your own circumstances. While the answers are given in good faith, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author or by MoneySavingExpert.com.
Small Businesses
Newly self employed
MoneySaver's Question:
On December 1st 2006 I started work as a 'consultant' for a small biotech company (3 days per week). I will need to handle my own tax payments and I don't know how to go about this. I have actually tried emailing and calling the tax office but they were not helpful and keep referring me to other people. Could you please tell me how I go about arranging this? I don't want to end up with a huge tax bill and/or a fine!
Tax Tony's Answer:
When you start in business you need to formally notify HMRC within 3 months of starting up. There is information at: http://www.hmrc.gov.uk/startingup/index.htm
which also leads to the form you have to fill in to notify HMRC. It's probably easiest to telephone them. You must do this within 3 months of the end of the month in which you started to trade, so by 31 March 2007 in your case, or there will be an automatic £100 fine.
This should trigger the issue of a tax return just after 6 April 2007 for the 2006/07 tax year. On the self-employed pages of this you will need to include the profits for the period from 1 December 2006 to 5 April 2007 (and it might be easier if you made your accounts up to 5 April each year). The tax for this period will be due on 31 January 2008. You will then have to pay the tax on the profits that you made in tax year 2006/07 plus half as much again on account of 2007/08, so start putting away to meet this payment now.
When to start returns
MoneySaver's Question:
I started a small business in Aug 2006. I logged it all with Inland Revenue but didn't get much back - just a letter a month or two later and a booklet. I have no clue about tax at all - basically I need to know if I need to submit something this year or if I work a year and then do it (if that makes sense). Also if I DO have to do it this year I'm not sure what date I tot up my books until. I tried to investigate via the inland revs online tax returns form but I needed a reference number to enter the site and I've never been given one (the letter I received was blank in that area!). Any advice would be welcomed.
Tax Tony's Answer:
Joining the Taxpayers' Club goes with running a business and it's your responsibility to make sure that you file your returns and pay the tax. There simply ain't any mileage in pleading ignorance, I'm afraid.
First things first: you must now make sure that you are registered as self-employed. See http://www.hmrc.gov.uk/startingup/index.htm and then call the Newly Self-Employed help line on 0845 915 4515.
You commenced to trade in 2006/07, so your first tax return will be sent to you in April 2007. There are various help sheets that you can download: you will certainly need IR222 “how to calculate your taxable profits”. If you get stuck, staff in local Revenue offices and on the telephone help lines do seem to me to be genuinely keen to help and HMRC's website is good and getting better.
Trading on eBay
MoneySaver's Question:
I'm thinking about selling things on eBay. This will be more of a hobby than a source of income and I expect to make less than £50 each month, but I will be buying things to resell. I've got no idea whether I need to pay tax on this profit and if so on what. Could you give me some pointers on what my obligations and where I could find more information?
Tax Tony's Answer:
If you are buying things specifically with an intention to sell on eBay, you will be a trader, just as if you had opened a shop. HMRC has publicly announced that it is keen to bring eBay traders into the Taxpayers' Club.
It doesn't tell you much, but you can look at http://www.hmrc.gov.uk/guidance/selling/index.htm “A guide for people who sell items online, through classified advertisements and at car boot sales”
Company loses
MoneySaver's Question:
Last year I worked and ran a small business as a sole trader. I closed the business in March 06 as it was losing money. Can I set the losses from my business against the tax I have paid on my employment?
Tax Tony's Answer:
You don't say how long you were trading or as what. I assume that there would be no difficulty in establishing that you were indeed trading with a view to making a profit.
There are a couple of ways to use these losses. You can offset losses against total income of the same or previous years. Losses in the final 12 months of trading can also be carried back against any profits from the same trade in the previous 3 years.
There are rules about the form and order of claims, so if a decent amount is involved, it might be worth getting professional help.
Invoicing in the next tax year
MoneySaver's Question:
I am a sole trader, mainly offering computer support services. In the course of this work, I sometimes have to buy items for my customers for a job, which I then resell on to them.
I don't have any "stock" as such, as I only buy on request for a particular job. I put these purchased items in my accounts as "cost of sales", and declare in my income the value I invoice the customer.
However, occasionally near the end of year, some items get bought by me in one financial year, and the customer gets invoiced in the next financial year. How should I handle this on my accounts?
Someone told me I can't claim the "cost of sale" until item is sold, so I tend to ignore the "cost" in my accounts in the year it was bought, and hold it over to enter as a "cost" into the same year as the invoice to the customer, but wanted to check this was the correct way to handle this.
Tax Tony's Answer:
Yeah, that's near enough. This method will work and get the right amount of profit in each period.
Hobby or trade?
MoneySaver's Question:
I have been running a small, (50 students) martial arts club for 4 years now. I have been doing a monthly expenses sheet to include mileage, stationery, parking, 50% of my internet and 50% of my mobile phone fees, along with training fees for personal training and development with my instructor. I have not claimed for any heating and electricity or any pc hardware, software.
After paying my hall hire there has never been enough money to pay back all my expenses and now the club technically owes me around £3,000. This is not really an issue as I teach because I enjoy it rather than to make money.
I teach for 10 hours a week in the evenings after my PAYE full time job finishes. The club is not a source of income, although when the expenses are paid back they go into my savings account.
I am not sure if I need to contact HMRC, as I do not actually make any money from my club.
Tax Tony's Answer:
If you are trading then you should notify HMRC. If this is a hobby then it is not a trade! The point at which something becomes a trade is not clear-cut although there has to be a profit seeking motive for anything to be a trade. If you think it will ever make money then you may be trading due to the scale of the activities. It might benefit you to argue that it is a trade since the losses in each year could be set off against your PAYE income. However, you can only claim back a couple of years and the losses can only be incurred for 6 years before they are restricted for sideways set off.
I have my doubts about the deductibility of some of your expenses, so you might need to look more closely at whether you are in fact making a profit.
Claiming for partner's help
MoneySaver's Question:
I work as a self employed plumber and pay tax as a sole trader. My wife has a full time job elsewhere and pays tax in the normal way.
She sometimes helps out with paperwork and answering the phone. If I were to pay her would this benefit me and what would the tax man say?
Tax Tony's Answer:
If you pay her a commercial rate for the work she does, then there is no reason why HMRC would have a problem. It would be a good idea to keep a note of the work that she does, in order to justify the payment, if you are ever asked.
Would this benefit you? You would have to operate PAYE on the payments to her and because she has another job you would have to deduct and pay over 22% tax on everything you paid her. You would also have to comply with the minimum wage and other employment legislation. The only obvious saving would be if her total tax and National Insurance was less than you would be paying on the income if you had it instead. If the numbers work for you, I suggest you pay her once a year (at the end of the tax year) to reduce the PAYE paperwork.
Oh, one last point. If you file your employer's annual return on line, there is a tax-free incentive of £150 this year and £175 over the next two years.
First year accounts
MoneySaver's Question:
My husband and I registered a limited company in 2004, but we have just started trading about 3 months ago (October 2006). As you know it always take longer than you thought. I filled a form last year that saying the company didn't start trading.
There are two questions:
1, When should I tell the tax man that the company has started trading? I have been told differently, so should I tell HMRC now, 3 months after trading or tell HMRC after the company's accounting year finishes?
2, Do I have to ask an accountant to do the accounts for the company? I am studying AAT in the college at the moment. Can I do it myself? If so, could you please tell me the accounting period?
Tax Tony's Answer:
The regime for companies is completely separate from self-assessment for individuals. The company must tell HMRC as soon as it starts to trade, but no harm will be done if you just tell them now. A short letter will suffice.
The first accounting period will be set by default to 12 months from the date of commencement to trade and subsequent periods will be 12 months from then. I suggest that you ask the Revenue to change the first period so that it ends on the company's accounting year end (which will have been set by Companies House, but can be altered if you wish).
There is no legal requirement that accounts or tax returns have to be prepared by a qualified person, so you can have a go if you like. However, there are so many complications with limited companies that I would suggest you got a qualified accountant to help. For example, you have to observe the formalities of PAYE and dividends and not simply draw money from the company.
The complications are so great that unless the company is making decent money (profits of say £20,000 at the very least), I would question if it is really worth the effort. Good luck – I hope you make pots more than this.
Reducing paymetns on account
MoneySaver's Question:
I am a sole trader in my third tax year of trading. The first year I had a tax refund as I'd been employed for most of the year and therefore didn't need to pay anything on account. I know that I owe tax for year 05/06 to be paid at the end of this month with first payment on account for 06/07 (though I haven't yet submitted my tax return!). I fully expect my income for 06/07 to be less than the previous year. My questions are:
1. Is it best to request to reduce the payments on account for 06/07. I understand that if I underestimate my income and then owe extra tax I will have to pay interest on what I owe.
2. If I don't ask to reduce the payments, when I do my 06/07 tax return - if I do if before the date of the 2nd instalment in July can that 2nd instalment in July payment then be reduced or will I need to wait until a later date for a refund? I would rather it were in my bank that theirs!
Tax Tony's Answer:
It does all come out in the wash and things will be a lot clearer once you have filed your 2006 tax return.
If you can make a decent estimate of your 2006/07 liability, then it is worth claiming to reduce the payments on account. You've correctly understood the interest situation. They could also charge a penalty if they think you deliberately underestimated your 2006/07 income, but I've never seen this in practice.
You can make a separate claim to reduce the second 2006/07 POA before it is due on 31 July 2007. This should happen automatically if you get your 2007 return in well before that date.
Paying staff
MoneySaver's Question:
I am a professional DJ/Music Producer and I work weekends at clubs throughout the world and produce music in my studio in my house during the week. My girlfriend/fiancee/16 year partner organises my DJ bookings (ie my agent), she has her own office room in our house and we both live in the same house. We are a great team so to speak.
OK so, the way we have been organising this for accounts over the years is, I bear all the expenses (petrol/proportion of the bills/phone etc etc) and then I pay her 10% of my income. It works out at around £25,000 a year taxable net profit for me, and then she gets £4,000 (10% of around £40,000) a year. Now, this is below the taxable threshold, so we don't do her accounts at all (Hmm, I've always wondered about this - I hope it's right)
Anyway, 3 years ago, I got a mortgage for a house (£100,000). We're completely got into the DIY thing and now obviously want to keep going and building our lives. We're about to apply for an extension (which we'll need to re-mortgage for once we get permission I presume), and I would love to get another house to rent out to someone (which I hope would make for a pension when we get old and grey).
Are we both doing this right? Obviously I'll need to apply for remorgaging and perhaps a buy to let mortgage down the line? Should my fiancée have her own accounts with a much larger net profit? Perhaps I pay her a greater percentage of my income and she bears more expenses)?? Would this get us more money for remorgaging or other benefits down the line?? Hmm very unsure if we're doing the right thing here.
Any advice you have Tony, would be a godsend to us. We absolutely love what we are doing and hope to build steadily and safely on what we have already. Many thanks for your reply in advance
Tax Tony's Answer:
I'm not really sure exactly what the tax status of your girlfriend is. She could be an independent sole trader like you say, but more likely she is your business partner. HMRC would probably like to say she is your employee on the basis that she only works for you and, I guess, you control the work she does. I think you could validly choose either employment or partnership for the future, taking into account the non-tax issues of both.
However you come at it, no great harm has been done by not declaring her income if her total taxable income, not just what she gets from you, is less than the personal allowance (£5,035 in 2006/07).
Yes, it is a good idea to give her some of the family income as either a profit share or salary, provided her rate of tax and National Insurance is lower than yours. If you employ her, make sure you pay her no more than a commercial rate for the work she does.
Accounting period end date
MoneySaver's Question:
I asked for your help back in the original tax questions, and you answered me, so thank you for that!
Unfortunately my business, although it made money, didn't last long. I ended my business on 4th September last year. I found it was too stressful.
My first question is this - I completed my first tax return in May 2006 for the period 05/09/2005 - 05/04/2006. Everything went through fine, and the tax people owe me £2!
The only thing is, when I was re-checking it, as I know the Tax deadline is coming up for the end of this month, I realised that I had put the 30th March 2006 down as my account end date. I have telephoned my local Tax Office, and they have told me that it doesn't matter, and to just put on my next tax return the start date 31/03/2006 - 04/09/2006 (the date I ended my business). Sorry to sound like such a worry wart, but will this be ok?
Tax Tony's Answer:
Yes, that will be fine. By the time you have done your 2006/07 return, all your profits will have been taxed once and once only. That's what the rules require and that's what you are going to do.
VAT registration
MoneySaver's Question:
I am about to set up on my own, do I only pass on the VAT on the goods that I have been charged by my supplier to my customer or do I charge it on the goods and service which I will be providing. I am not VAT registered.
Tax Tony's Answer:
You do not have to register for VAT until and unless your turnover exceeds the VAT threshold, currently £61,000 in the previous 12 months.
If you are not VAT registered, you must not add VAT to your invoices. You will pay VAT on some of your costs. That VAT is just part of the cost you pay: the fact that it is VAT is irrelevant if you are not registered. You can include the full VAT-inclusive amount as an expense in your books.
Which tax year?
MoneySaver's Question:
I started up as a self-employed PartyLite consultant in April 2006. (It's a party plan selling candles at people's houses) I did my first party on 5th April (bad timing I know!) but my official start date with PartyLite is 18th April as this was when my consultant agreement was received and accepted at head office. I wasn't paid any money till the beginning of May as the party I did on the 5th April went towards my starter kit.
I was also a PAYE employee with another company until the end of September 2006 I spent all of the tax year 05/06 (except about 2 weeks) on maternity leave. So I didn't earn a great deal.
So my question is do I really need to fill in a tax return for Tax year 2005/06?
Tax Tony's Answer:
You didn't make any money in 2005/06, so I can't see HMRC getting very excited about the party on 5 April. 2006/07 will be your first return.
There's something else here though. You should have registered as self-employed by the end of July 2006. (If you didn't, do it right now!) At that point, you would have told them your commencement date. If you said 5 April, you will be stuck with doing a 2005/06 return.Work Related
Working abroad
MoneySaver's Question:
I could be working in tax free Qatar in February 2007. Prior to this, I have only worked in the UK on a self employed basis.
Does this mean that for my 2007 tax return I will only have to declare my UK income earned, from April 2006 to January 2007?
The job is a two year renewable contract, and the information I have been given states that I have to be a non resident for the salary to be tax free ie. I must have worked there for a complete tax year.
Any additional information that you think I should be aware of would be gratefully received.
Tax Tony's Answer:
Although tax residence is normally looked at for the whole tax year (ie you are either resident or non-resident for the whole tax year), if you are leaving to take up work overseas which will last at least a whole tax year, then you are treated as non-resident from the day after you leave the UK. This means that when you do your 2006/07 return you will only have to include UK income up to January 2007. You will need to complete a P85 notifying HMRC that you have left the UK and that you will be non-resident. If you do not, in fact, stay out of the UK for a full tax year (if you come back before 6 April 2008) then the residency status would be reviewed and the income earned when away might come into charge to UK tax.
Working for a UK company from abroad
MoneySaver's Question:
I've been working in UK as a programmer for the last 2 years for the same employer. Now I'm back home in Bulgaria and I am working remotely for the same UK employer. When leaving the UK I filled in the P85 to let the Inland Revenue know that I'm leaving the country. Taking into consideration the fact that I am not a UK resident anymore, but I still get paid in my UK PayPal and from there to my Barclays UK bank account, do I need to pay any tax on this money in the UK or do I need to pay income tax here in Bulgaria?
Tax Tony's Answer:
If you are not resident in the UK and have left the UK permanently then you no longer have to pay tax in the UK if you do not perform any duties in the UK. If you have left permanently any earnings after you leave are not taxed in the UK even in relation to the tax year in which you left. I have no idea what is the tax position in Bulgaria!
Class 4 National Insurance contributions for non residents
MoneySaver's Question:
I left the UK on 8/9/2005 to live in France. Until then I was self-employed. I tried to continue the business after moving, but the travelling was too much and so finished the business in March 2006. According to the notes with the 05/06 Tax Return, non-residents do not have to pay Class 4 NIC. I calculated that including trips back, I was in the UK for less than 183 days in 2005/6. I therefore ticked the exemption box and gave an explanation. Was I right to do this, or will I be asked to pay the NICs?
Tax Tony's Answer:
Non-residents who carry on a business in the UK are subject to UK income tax and Class 4 National Insurance on the UK business profits in the same way as residents. It sounds as if the business continued to be conducted in the UK, so, yes, Class 4 NI is payable.
Temporary employee
MoneySaver's Question:
I left my job in May 2006. After a few months my employer asked me to do some temporary work for him for a few months. I did this but was not on payroll therefore my earnings were not taxed at source. I have now rejoined the company and am now on the payroll. Can you please advise how I go about declaring the income for the 4 months I was not on payroll?
Tax Tony's Answer:
It sounds like the employer should have been deducting tax as you were a temporary employee. You could notify HMRC that you have untaxed income for 2006/07 so they can issue you with a tax return and you can pay the tax on it. However, the obligation to operate PAYE and pay the tax lies with your employer, not you. So it might be better for all concerned if the employer worked out what PAYE they should have paid for those few months and added it to their next PAYE payment.
Previous year's tax code
MoneySaver's Question:
Last year whilst working as a sales executive, I used my own car for a lot of business mileage. I was advised I could claim the difference between what I was paid per mile (13p) and 40p, which was great! I earned myself a £1,000 rebate by filling in a 2005/06 self assessment tax form.
However, at the same time, they asked me if I could also complete an 04-05 self assessment document? (Why, I don't know, as I did not use my own car for that year, just a company car, to which there was nothing to reclaim). However after being threatened with penalties for not completing the form I did so, only to find out my previous employer had under declared my tax code and they wrote back saying I owe them £915 immediately otherwise interest would start to accumulate!
I simply can't afford this outright as have just about managed to get a place on my own.
Is this fair? How can I find out if my previous employer did under declare my tax code and if they did, have I a leg to stand on?
I feel like they simply bamboozled me with figures leaving me with no logical defence.
Tax Tony's Answer:
Unfortunately it is still you that has not paid enough tax so HMRC can chase you for the money. It is not unusual for there to be small ups and downs in the PAYE system. Ask the tax office if they can code out the income in next tax year so that you are paying the money out of next year's salary. Speak nicely to them, because you are a bit late for this now.
Losses from self employment
MoneySaver's Question:
I work in a PAYE job part-time and am also self employed part time. My part-time self employment is currently showing a small loss for this and next year. I can claim my current losses against my PAYE income - but is there a way to claim losses brought forward against my PAYE income.
Tax Tony's Answer:
Losses from self employment can be offset against total income for the same or previous tax year. Losses brought forward can only be offset against profits from the same trade.
Extra income but not registered self employed
MoneySaver's Question:
My husband is in fulltime employment as a carpenter but has just been offered a private roof contract between him and his friend for a payment of £10,000. How do they split this payment and declare the tax as they are not registered for self employment anymore?
Tax Tony's Answer:
Even if this is a one-off job and he is not going to have an ongoing self employment, your husband will still have to declare this income, less of course any costs. He will need to get an self assessment return issued to him by notifying HMRC that he has additional income. If this is truly a one-off, he could just enter his share of the profit as ‘other income' in box 13.1 of the main body of the tax return and then put a note in the ‘white space' on the back of the return.
HMRC would like this to be a trade, so that they can get National Insurance, but if they do not pick up the point, your husband should be fine, so long as he describes the situation accurately in the white space. It might be worth saying there that there is no partnership, because otherwise HMRC would require a partnership return.
How the two of them split the income is up to them.
I hope that this work is on domestic premises. Otherwise the payer has to operate the Construction Industry Scheme to deduct tax at source.
Personal
Gift Aid
MoneySaver's Question:
I understand that it is possible to reclaim from HMRC in your tax return 18% of the donations made to charities under the Gift Aid scheme.
But what are considered as "gifts"? Obviously donations to the Disasters Emergency Committee, but what about:
Subscriptions to 'Friends' schemes for musical charities?
'Friends' annual charges for admission to Westonbirt Arboretum?
Raffle tickets for Age Concern?
Does it relate to whether you obtain a 'benefit' from the donation, and are there limits to this?
Tax Tony's Answer:
Gift aid rules are quite complex. In general terms, you cannot get Gift Aid for any money paid in return for goods or services, as it is not a gift. This would also cover raffle tickets. Where the payment is for admission to property, Gift Aid does apply either if you pay 10% more than the normal daily admission rate or make a payment which entitles you to annual admission to the property. So the annual admission charge to Westonbirt would be eligible for Gift Aid but the others probably would not (depends what you get for the first one).
If the benefit received is small, then it can be a Gift Aid payment. The limits on the benefit received is 25% if the donation is up to £100, £25 for donations from £101 to £1,000 and 2.5% if the donation is over £1,001. This covers situations where a charity gives a small gift as a token of thanks for the gift.
The charity should be able to tell you exactly what qualifies for Gift Aid.
The extra 18% relief would only apply if you are a higher rate taxpayer.
Transfer of property after divorce
MoneySaver's Question:
I have been sent a tax return as I used to have a buy-to-let property. From April 05-April 06 I only received £360 in rent as I 'sold' the property to my ex-husband as part of a divorce court order. He paid me a lump sum which was far less than the value of the property. Do I need to pay CGT on this transfer?
The property was originally my ex-husband's and he had transferred it to me for no cost.
Tax Tony's Answer:
If the transfer under the court order took place in the tax year in which you separated from your husband then no CGT is payable. If it was after this, then you may have to pay CGT on the transfer. The sale price will be deemed to be the market value at the date of transfer with your deductible cost being the price your ex-husband originally paid for the property (assuming he transferred it to you whilst you were married and living together).
The possibility of you being landed with a CGT bill should really have been looked into as part of the divorce settlement. This is a complex area and I suggest you take professional advice.
Ceasing trading on retirement
MoneySaver's Question:
I will be retiring this year after being a sole trader for 10 years.
My question is I will have stock left when I stop so how is my unsold stock value treated by the IRS if I cannot sell it all off before I retire. What other questions/pitfalls should I be aware of as far as IRS is concerned on ceasing to trade?
Tax Tony's Answer:
I guess you mean Her Majesty's Revenue & Customs, rather than Uncle Sam's Internal Revenue Service.
Stock is treated as being sold at market value when your business ceases – of course if you have tried to sell it unsuccessfully prior to retirement there is an argument that it has no value and there is some flexibility in this respect. Any capital assets also leave the business at market value although the same argument may apply.
There are some planning opportunities on retirement and if decent sums are involved, it might be worthy taking professional advice.
Bank interet paid gross
MoneySaver's Question:
What is the criterion for having your interest and small pension paid gross? My wife and I have state pensions totalling £740 a month between us and we get a private pension of about £180 net a month. Our interest on investments is about £10,000 a year taxed at standard rate. We are both 68 years of age. Does the interest count as income when deciding whether we are non taxpayers or not?
Tax Tony's Answer:
You are both tax payers and so you are not entitled to have your bank interest paid gross.
Private pensions are paid under PAYE and are usually used to mop up any additional tax not already paid at source. It sounds to me as if you should not be paying any tax on the private pensions and should be getting a small refund of the tax paid at source on your investments. You should each complete a form R40 to reclaim any overpaid tax and to get the right PAYE codes.
"Am I better off?" calculations
MoneySaver's Question:
My husband's income as an employee and my small income from self-employment entitle us to Child Tax Credit as we have two children at home. Based on our income, our son at university gets a very good grant and bursary that does not need to be repaid, as well as his Student Loan. My self-employed business is doing well but I am struggling to calculate if we would gain financially or loose out by my business growing. There doesn't seem to be any point in working harder if our son looses out and we then need to support him. Where can I find help to sort through the financial jungle?
Tax Tony's Answer:
There is an appalling poverty trap for people in situations similar to your own. It can easily work out that earning an additional £1,000 can cost you far more than this in additional tax and National Insurance, lost tax credits, benefits, other allowances and “cliff-hangers” like the Educational Maintenance Allowance intended to encourage children to stay in education. EMA is £30 a week for households with income up to £20,817 and then drops to £20 a week (a reduction of £520 a year) if household income is even 1p over this threshold.
The highest effective marginal rates of tax (in the widest sense of the word) are paid, not by the super rich, but by working families with modest incomes.
This scandalous disincentive to enterprise is made worse by the near impossibility of the mathematics required to work out the answer to the simple question, “How much better or worse off would I be if I earned a bit more?” People in this situation are almost by definition those least likely to be able to afford the professional advice needed to work this all out. You can try Citizens Advice or www.taxaid.org.uk.
This may be unscientific, but my own view is that in the long run you are probably best off by making your business as successful as you possibly can.
Ill heath payment
MoneySaver's Question:
I received a permanent health insurance benefit from an insurance company under a group scheme provided by my employer. As I was unlikely to return to work I accepted a lump sum from the insurance company in lieu of any further payments. As this payment was made via my employer they treated it as a redundancy to minimise tax payment as some of it was at higher rate. I've since heard I shouldn't have paid tax at all anyway as payment connected with ill health. Is this correct and should I contact tax office with this or leave things as they are?
Tax Tony's Answer:
The answer to this depends on whether the money was payable directly to you or was payable to your employer. If it is the latter then it is up to the employer to decide how they pay the money to you. If it is the former, then it might be worth looking at the payment to see if it could be exempt from tax. The PHI company may be able to help.
Voucher payment for voluntary work
MoneySaver's Question:
My wife is a part time employee and a basic tax payer. She volunteers to meet weekly with two elderly women with learning disabilities to give them opportunity for social experiences or outings under the Adult Placement Scheme from the Social Services Directorate. She receives payment of £36 per week to cover her expenses. The payment is made under a voucher payment scheme. The Guide, which she received from Social Services states: “The payment made to you is counted as unearned income and it is up to you to declare this to Inland Revenue”. As a voluntary “carer of adult” does she needs to include the voucher payments into her SA as income? Does she need to keep the receipts of all her travel and other expenses?
Tax Tony's Answer:
Although some expenses payments are not taxable, if the voucher states that it is taxable, then it probably is. She would then put it on the SA return – yes, she could claim a deduction for any receipted expenditure. I would put this income in box 13.1 of the tax return (other taxable income), rather than as self-employment income to avoid National Insurance.
Higher rate relief on pension contributions
MoneySaver's Question:
My husband died 16 months ago and I now receive a small pension from his employer which tips me into 40% tax. This is collected via PAYE through my salary. I am paying into a stakeholder pension to boost my pension, however I only get the basic rate of tax relief added to it. Do I have to fill in a tax return to trigger a higher 'donation' from tax office?
Tax Tony's Answer:
You do not have to fill in a tax return unless one is sent to you but you can claim repayment of overpaid tax (including higher rate relief on pension contributions) by filling in a form R40. You can ask your tax office for one or download one from the HMRC site at http://www.hmrc.gov.uk/students/fagr40.shtml
Rental property
MoneySaver's Question:
In December 2004 I converted my residential mortgage to a BTL mortgage and then took out a new residential mortgage on my new home, the idea was that the old house be let, subsequently the house was sold in mid April 2005, never having had a tenant.
On my 03-04 tax return I made a claim for a loss pertaining to finance fees and mortgage interest.
Can I claim a loss for the 04-05 tax year for interest, estate agents fees, conveyencing and mortgage redemption penalties, which I can then carry forward?
I no longer have any rental properties, so I suppose I would have to tick the "no longer a rental business" box, does this mean I can still carry forward the losses, or do I then lose that ability?
Tax Tony's Answer:
If you never let out the old house, it's hard to see that you ever had a rental business, so these various costs are not business expenses. Anyway, it's irrelevant what you claim by way of loss on your 2004/05 return since property losses cannot be carried forward once the rental business ceases.
Second property
MoneySaver's Question:
I have just bought a second property which I intend to redevelop and rent out. There is also an opportunity to build an additional property in the garden of the existing property. What are my tax obligations if I:
Receive rental income from the second property?
Sell the land with planning permission?
Build on the land and sell both houses?
I have heard that if I can prove the second house is my primary private residence I don't have to declare it on a tax return is this correct?
Tax Tony's Answer:
If you receive rent you will be taxable on the profit element (ie after any allowable expenses) as income.
If you sell the land with planning permission, you will be taxable on the profit element probably as a capital gain. If you build on the land and sell both houses again any profit probably would be taxed as a capital gain. HMRC could tax it as income if they could show that you had only bought it to develop it and sell it on for a profit but this can be quite difficult to prove. If you can prove the house is your main residence you can claim private residence relief so the gain is exempt from tax and does not have to go on the tax return. However this is not straightforward if you have a residence already unless you simply move out of one into the other or if you live in both. But you must actually use the house as a residence. A new ruling in court last year means developing a back garden even of a principal residence is fraught with difficulties in terms of getting a tax break.
Rental income
MoneySaver's Question:
We purchased a house in Jan 06, found tenants in Mar 06 and the tenants are still there. The rent the tenant pays does not cover the mortgage (we're hopefully in for the long haul!). The property is owned jointly by my wife and I and is unfurnished. And so a couple of questions:
1. Do we need to fill in self assessment forms? (both, just me, or neither?)
2. When do we need to fill one in?
3. What can we claim for to reduce the tax bill?
4. Is it worth employing someone to complete them for you?
Tax Tony's Answer:
If you get a new source of income (or potential source) then you have to notify HMRC so they can issue you with a tax return. It would be useful for you to do this so that you can claim the loss which is then carried forward so that you can offset any loss against profits made in the future from the rental of this property. If you both own the property then you both need to fill in a return. You should have notified HRMC within 6 months of the end of the tax year in which you acquired the source although this is unlikely to be a problem as there is no taxable income at this stage.
Returns will be issued once you notify HMRC and the normal return cycle will commence. You can deduct anything which is incurred for the purposes of the rental business including mortgage interest, insurance, repairs etc. This should be quite straightforward unless major renovations are undertaken when the tax position is less clear.
Is it worth taking your car in for servicing? Depends on if you can do a competent job yourself, I suppose!
Rental income for students
MoneySaver's Question:
I left full-time employment in May '06 to become a student for a year. I got a redundancy payment and as far as I can work out have paid tax on this payment. I've rented out my flat every month since June '06 and intend continuing until my course finishes in October '07. Should I be filling in a tax return by 31 January '07? Is there anything I can claim for my flat to offset the rental income I receive? Rental income is £695/month.
Tax Tony's Answer:
Since the rental income commenced in 2006/07 you will have to send in a tax return for that year but this only has to be done by 31 January 2008 ie next year not this year! You do need to tell HMRC so that they issue you with a tax return for that year. It is unclear from the query but assuming you are letting out the whole house you can claim all expenses you still meet which relate to the house and, most importantly, any mortgage interest being paid. The notes to the Land and Property pages of the tax return at http://www.hmrc.gov.uk/worksheets/sa105notes.pdf are very helpful (ignore everything to do with furnished holiday lettings).
Rent a room scheme
MoneySaver's Question:
I am in the process of completing my Tax Return, and have one query if you can help. I owned a flat in 2005 which was my main home, and had one lodger staying with me for a few months, who paid me rent. In May 2005, I also bought another house, and moved into that house after a few months. From November 2005, I fully let my flat to the same lodger. I also re-mortgaged the flat under a BTL mortgage in January 2006. Do I still qualify for rent-a-room scheme (considering for later part of the year I was not staying in the flat)? If yes, can I declare the full rental income in my self-assessment form (although the flat was in joint name with my wife) or does my wife also have to fill in a tax return?
Tax Tony's Answer:
You will qualify for rent a room up to the point you moved out (the limit will be time-apportioned), then it becomes a property business. If the property is jointly owned, then your wife should fill in a tax return too and return half of the income.
There's more about the rent-a-room scheme at http://www.hmrc.gov.uk/individuals/tmarent-a-room-scheme.shtml
Letting to family
MoneySaver's Question:
Firstly can I thank you for your advice last time. My father has had his tax bill reduced by about £600.
My question this time relates to the contribution my father is paying to my son who has unofficially let his house to his grandfather.
My son has recently redeveloped an old house, advised the Inland Revenue that it is now his primary residence and moved in.
Instead of selling his old house, his grandfather has moved in so that he can be near the family now he is on his own (age 93). Dad is paying all the usual utilities and council tax bills and is also making a regular monthly payment to my son by direct debit. The amount is less than the interest element on my son's mortgage on the property but does pay most of it.
Should this be mentioned on my son's tax return? He does not make a profit. If he does declare a loss can this be carried forward and set against any future rental income?
Tax Tony's Answer:
Glad to have been of help!
The only reason for including the property business on your son's tax return would be to establish the losses. In theory at least, these can be carried forward and set against future rental income profits, for example if your son were ever to let the property commercially. There would have to be a continuous rental business: losses cannot jump over breaks.
I say “in theory” because I'm not persuaded that your son is letting the property with an intention of making a profit. As a general rule of any business, losses are only ever deductible if there is a genuine profit motive.
Small time landlords
MoneySaver's Question:
My wife and I are both PAYE employees. Two years ago we bought what used to be her parents' home from the rest of the family for £85,000. The mortgage, interest only, is £50,000. We hope to sell our current home in a couple of years' time when we retire and move to my wife's parents' home. We have spent a great deal of money on doing up that property and it is now valued at around £150,000. As from Dec 1 2006 we are renting it out unfurnished for £500 pcm less 12% estate agent's management fees. Until that time we were paying all utilities including council tax. The mortgage interest is approx £200 pcm. The property is 100 miles from our home. It is in Scotland, we are in England. There was some furniture in there which we now have in store up there at £10 pw. Can we claim this? Can you tell us what our tax liabilities are likely to be? When do we need to inform the IR? What about self assessment? We don't do that at the moment. Is there any source of information on what small time landlords like us can claim against income from a single let? I've looked on the web but haven't found anything useful yet.
Tax Tony's Answer:
You need to inform HMRC now (well, by the end of October 2007 anyway) so they can issue you with a 2006/07 self assessment return. This must be filed by 31 January 2008 using the figures for rental income and expenses for the period from 1 December 2006 to 5 April 2007. You will then be in a cycle of filling in returns. You can claim anything directly linked to the rental business: mortgage interest, management fees etc. Sounds to me like you will make about £1,200 in the five months of 2006/07. If you are basic rate tax payers, the tax on this will be £264.
I don't think you can claim for storage as this is not closely enough connected with the rental. The utilities and council tax during the letting will be the responsibility of the tenant. You can claim for these if you pay them, but only during voids once the property has been first let, not before that.
The notes to the Land and Property pages of the tax return at http://www.hmrc.gov.uk/worksheets/sa105notes.pdf are very helpful (ignore everything to do with furnished holiday lettings).
Rental property abroad
MoneySaver's Question:
My wife and I had a villa built, all payments being made in tax year 2005/06. We then incurred various expenses adding to the building and fitting it out. Do we need to complete a tax return for 2005/06 to show these costs of acquisition or just retain all documentation and receipts for calculating capital gain when we come to sell it at some future date.
We have received rental income in 2006/07 and have already declared this to the local tax authorities through a local accountant. When we complete a UK return for 2006/07, will we have to produce the Turkish title deed to prove ownership (it is currently registered in my name only and will be re-registered in joint names on our next visit in April). All finances are shared and villa income is handled through a joint account, and we would like the income tax liability to be shared too.
Tax Tony's Answer:
Nothing needs to be done in relation to the costs of building and fitting out until the property is sold, as you say.
You will not have to prove ownership to HMRC in the UK. If the fact is that the property is jointly owned, you should each put 50% of the income and costs on the foreign income pages of your tax returns. You will get credit for the Turkish tax paid on the income. If that is more than the UK tax, no additional tax would be payable.
Transferred ownership
MoneySaver's Question:
About 10 years ago my in-laws transferred ownership of their house to my wife and her sister (they were worried about care fees). The parents continued to live in the house (father in law died a few years back) paying no rent, but maintaining the place.
There will be no inheritance tax to pay on the mother in law's estate. Will the wife and or mother in law be liable to tax now or when mother in law dies?
Tax Tony's Answer:
I think what you are referring to is the pre-owned assets charge which catches these types of situations. However I do not think it will apply in this case since I suspect that this was a gift with reservation because the in laws continued to live effectively rent free in the property.
The value of the property will then remain in the estate of mother in law and will count towards the amount subject to inheritance tax when she dies.General
Therapist's potpourri
MoneySaver's Question:
1. I am employed fulltime earning £31,000 and paying PAYE. I have about £20 monthly in direct debits to various charities - can I claim back tax on these? What if I ticked the box on the direct debit forms allowing the charity to claim it? If I can claim, how far back can I go...the full 8 years?
2. For three years I have studied part-time to be a therapist. For the past year (as a final-year student) I have been treating clients part-time (in addition to my full-time job) and being paid in cash/by cheque. I am now about to complete my training and plan to start self-assessment. I expect to continue earning an extra £50-£100 a week. What I'm hoping is that all this has not been illegal, either because my fees could be considered 'donations' until I was fully qualified, or because I was paying tuition fees exceeding my earnings in my last year, or both? If I'm wrong and I should have started self-assessment a year ago, and owe tax, how is HMRC to know whether I lie about how many treatments I did?
3. Both my husband and I are employed full time earning £32,000 and £39,000 and paying PAYE. Now that we will both start working part-time in addition as therapists, would it be better for us to form a company or just each self-assess?
Tax Tony's Answer:
1. When you make payments to charity that qualify for Gift Aid, the payment is treated as if the payment is net of basic rate tax and the charity can claim back that tax if you tick the box. If you are a higher rate taxpayer you can claim additional tax relief. If you are earning £31,000, you are probably not quite a higher rate taxpayer so there is nothing further to claim back. If you could, you can go back up to 6 tax years.
2. Well that's a funny thing: I do my clients' tax return just for the thrill of it and they love me so much that they keep giving me presents! Er, no, that won't wash in a month of Sundays.
The £50 to £100 a week that you have been earning is taxable and you should have registered as self employed some time ago. You can deduct the costs you incurred in doing this work, but the tuition fees are not an allowable deduction.
Sounds like you started trading in 2005/06, so you are still in time to get your 2006 return in before 31 January 2007. So apart from an automatic £100 fine for late registration, there should be no other interest or penalties.
So far, you've done nothing “illegal”. Suppressing your income would be illegal and a very poor start to a professional career. Ultimately, it's up to you to make an honest return including all the treatments that you do. HMRC do have many sources of information and without sounding paranoid, they do have a habit of finding things out! If you do lie and they find out, you will be liable for the tax plus interest and penalties of up to 100% of the tax unpaid.
3. The decision to incorporate is a complex one and will depend on a variety of factors. As a generality, the incorporation trick does not work if you also have substantial PAYE income from another source.
Personal allowance when living abroad
MoneySaver's Question:
I live in France but have money/investments in the UK. What would the tax liability in the UK be, do I still get a personal allowance?
Tax Tony's Answer:
The income tax charge for a non-resident is the lower of (1) the tax that would be chargeable on total income with a UK source if personal allowances are given and (2) the tax due on total income excluding excluded income plus any tax deducted at source, without any personal allowance. Excluded income is basically interest and dividend income.
The short version is that if all of your income is dividends or interest your liability will be capped at the amount deducted at source from the income. It would automatically be nil if your income is less than the personal allowance. The complication might come if there is any rental income. However, again, if your total UK income is less than the personal allowance, you will have no UK tax to pay.
Previous years tax thresholds
MoneySaver's Question:
How can I find out what the previous 6 years' tax band thresholds were before 40% tax is incurred?
Tax Tony's Answer:
OK, here goes:
2001/02: personal allowance aged under 65: £4,535. Then 10% on £0 to £1,880, 22% on £1,881 to £29,400 and 40% over £29,400: So for most people, 40% tax kicked in at £33,935.
The corresponding allowances and limits in later years were:
2002/03: £4,615/£1,920/£29,900, giving £34,515
2003/04: £4,615/£1,960/£30,500, giving £35,115
2004/05: £4,745/£2,020/£31,400, giving £36,145
2005/06: £4,895/£2,090/£32,400, giving £37,295
2006/07: £5,035/£2,150/£33,300, giving £38,335
2007/08: £5,225/£2,230/£34,600, giving £39,825
Staff entertainment
MoneySaver's Question:
Can I claim the entertainment cost against tax of a New Years Eve party (meal, drinks) for my staff as this was our Staff Xmas party.
Tax Tony's Answer:
A deduction is allowed for any expense incurred wholly and exclusively for the purposes of the trade and this would include the cost of such a party.
So far as the staff are concenred, there is no benefit in kind on them if the total cost per head in the year of annual parties is no more than £150 per head.
More detailed rules are at http://www.hmrc.gov.uk/manuals/eimanual/EIM21690.htm
Cash ISAs
MoneySaver's Question:
I'm actually embarrassed to ask this, but doing my tax return always makes me feel like a criminal, even though I want to do it properly.
I know a mini cash ISA is tax free - do I have to mention it at all on the return?
Tax Tony's Answer:
What a lovely question! No, you do not have to mention your ISA on your tax return. If you are still worried, see the second bullet point under “Q10 Did you receive any income from savings and investments?” on page 8 of your tax return guide, where HM Revenue & Customs commands you with the full force of the law to “exclude interest, dividends and bonuses from an ISA”. Sleep tight!
Inland Revenue office closures on 31 Jan
MoneySaver's Question:
Some unions in the Civil Service are going to be balloted on strike action to take place on the 31st January. If this goes ahead then there's a possibility some Inland Revenue offices may be shut on that day. I know when I had an accountant he would have to rush to the IR office on the last day to get my returns in!
Don't get caught out.
Tax Tony's Answer:
Thanks for the tip. Almost all of my returns are filed online and I hope will be done well before 31 January. (Ha ha)
Lost post resulted in unpaid tax
MoneySaver's Question:
We moved abroad to Spain two years ago due to my husband's ill health. Prior to our departure I ensured that all tax returns were completed for our small building business that we had to close due to the aforementioned reasons. The business stayed open for 4 months.
All our post was sent to a friend's and reviewed ASAP. On 3 occasions I have had to contact our local Tax office in the UK and explain that we have done all the returns they requested in triplicate but they still say they never received them. They are now saying we owe them thousands in their estimation and have issued CCJs etc. I am furious because this is just not so.
I am returning to the UK at some point later this year as my husband now needs constant medical assistance but I need to sort this out first. Can you point me in the direction of the first few steps I should take?
Tax Tony's Answer:
This is not a situation that you should ignore. Contrary to popular myth, HMRC does not make a habit of losing post and I doubt that this latest correspondence has come out of the blue. In fairness to other taxpayers, HMRC will pursue unpaid tax right through to bankruptcy. I suggest that you take professional advice from a qualified accountant in the UK as soon as possible.
If you cannot afford to pay for professional advice, you would do well to look at www.taxaid.org.uk.
How to make payments
MoneySaver's Question:
This is the first time I will need to pay tax as last year I had a refund. I would like to pay via the Post Office but as the Inland Revenue. has not yet advised me of the amount outstanding, I have no payslip. Naturally I wish to avoid surcharges and fines. I will need to pay tax and NI on account. Please advise me of the best way of doing this.
Tax Tony's Answer:
Have a look at http://www.hmrc.gov.uk/howtopay/self_assessment.htm which explains what to do, including if you do not have a payslip. Remember the tax is due on 31 January and interest will run from then whether or not you have a statement by then.
Change of tax code
MoneySaver's Question:
I received a letter from the Inland Revenue telling me that they were changing my tax code from 494 to 471. I happened to look at my pay slip which said my tax code was 460. I rang my employer to query this (not knowing anything about tax things) and they said I should contact the tax office and query it with them. I rang them and they said my employer had been taxing me wrongly and that I should probably receive a back payment from my employer for the difference. I then rang my employer who tried to pass me back to the Inland Revenue people, saying that my new tax code would resolve any discrepancies so far. I really don't understand and feel that no-one is really listening to me, or wants to admit there's a problem.
Tax Tony's Answer:
Your employer gets a notification of your tax code from HMRC and is obliged to operate that code. The tax code operates on a cumulative basis; the new code will make amends for the previous incorrect tax deductions.
Non-domiciled UK resident
MoneySaver's Question:
I am non-domiciled but resident in UK for the time being. I do have overseas income but do not have any funds remitted to me from abroad. Do I need to fill in a tax return or other form to claim this non-domicile status? I did not work last year when I first became resident so did not get sent a tax return. I started work this year and get my salary paid after tax. I'm not sure if I'll get sent a tax return but presume that if I do, I will be able to claim non-domicile status then.
Tax Tony's Answer:
You can claim non-domicile status if you do receive a tax return. If you do not receive a tax return you can ‘file' your status by completing a DOM1 form but HMRC will not confirm or question the domicile status if it is not relevant to your tax liability. In your case, it is relevant because of the overseas income. You probably ought to be receiving a tax return anyway and the domicile status can be recorded on that.
Company in administration
MoneySaver's Question:
My partner and I are directors and shareholders of 5 companies, one of which is now in administration. Over the last three years the companies have accrued losses of about £3.7million.
Is there any way we can derive any benefit from the losses. We no longer need any of the companies.
Tax Tony's Answer:
Yikes. Be prepared for a bumpy ride from the liquidator.
No, these are the companies' losses and will die with them. You may be able to claim relief for any monies loaned to the companies or the amount you paid for the shares.
Tax credit on dividends
MoneySaver's Question:
My wife is a non tax payer. I have transferred a number of company "sharesave" shares into her name. I realised recently that she is paying tax on her dividends. I approached the Registrar and they said that they have to deduct the tax even for non tax payers. She has been paying this tax for many years now. How can I stop it in the future and can I claim any back?
Tax Tony's Answer:
She's not actually paying tax. This tax credit on dividends is non-refundable regardless of whether the recipient has any other income. So you cannot stop it or reclaim it.
Interest from an overseas company
MoneySaver's Question:
This query really only strikes from April, but forewarned is forearmed.
In 2005 the venerable Peninsular & Orient Company was taken over by "Dubai Ports"; I think this is really Sheikh Mohammed bin Rashid Al Maktoum thinly disguised.
In a former life I had been an employee of P&O and had subscribed lots of salary into a SAYE scheme to buy P&O "shares". So I had a wad of "shares" bought under different options and at different times with weird & wonderful documentation from building societies and Royal Bank of Scotland - a potential nightmare for Capital Gains calculations.
So I opted for the variable rate loan notes, with the intention of dribbling out the sales over 2 or 3 years, thus avoiding tax and hassle.
Last June I got the first interest payment from "Thunder FZE" via Computershare, complete with the expected tax deduction certificate.
I have just received repayment of last June's tax deduction, together with December's interest payment paid gross. It seems Computershare has cocked up, the explanation being "The payment should have been made gross as it represents income from an overseas company".
Today I completed my online tax return and noticed there was a special concession for Abbey shareholders - now that Abbey is Spanish.
Next year there won't be a similar concession for ex owners of P&O and I would not qualify anyway.
So:
What rate of tax will HMRC want (assuming I am a standard rate tax payer)?
Does this mean I will have to go back to doing a paper tax return with some strange complicated extra page for overseas income or could I get away with dumping the amount into the box marked "untaxed interest"?
Tax Tony's Answer:
You actually make this sound exciting.
Interest from an overseas company will have to put on the foreign income page and will be taxed at the basic rate of 22% or 40% if you are a higher rate taxpayer.
I haven't tried it (we have our own software), but I think the on-line self assessment software does include a page for foreign income.
Inheritace and Capital Gains Tax
Capital gains tax on inherited property
MoneySaver's Question:
I'm 25 and the legal owner of a flat my family inherited from my grandmother when she died. No inheritance tax was paid as her estate was worth less than the threshold. My parents put it in my name for tax reasons because at the time I was still at school and so not earning. It has been let for the whole time we've owned it (since 1992) and I have never lived there.
I'm now getting ready to enter the property market myself and my Mum has said I can sell the flat and use the proceeds towards my own place. However, I'm pretty sure I'm liable for capital gains tax. I've done my sums and reckon I'm liable for CGT on all but the final 36 months, which I think are always exempt.
In the time I've owned the flat its value has increased by about £100,000, so I reckon I stand to pay 40% of that, minus whatever the last 36 month exemption saves me, so around £40,000. Ouch.
I've looked at the various exemptions and none seem to fit. Although I haven't owned another property at any point, I don't think I can claim it as my 'main and only residence' and get full relief through that. Are there any magic tax-saving exemptions or tricks I've missed?
Tax Tony's Answer:
Unfortunately, the last 36 months of ownership is only exempt from CGT if the property has been your main residence at some point during the period of ownership.
However, there are other reliefs available. Indexation will increase the original cost by the increase of the RPI of about 17.5% up to 6 April 1998 (when the rules changed). Taper relief will reduce the gain by a percentage depending on how many complete years you have held the property after 6 April 1998: the reduction will be the maximum 40% come April 2007. Finally, the first £8,800 of capital gains in the tax year are exempt (2006/07 rate). The balance is taxed as if it were the highest slice of your income at the savings rates of 10% / 20% and 40%.
So things probably are not quite as bad as you think.
Inheritance tax on tenanted property
MoneySaver's Question:
My aged mother has named me as the executor of her will. She owns the house in which she and my stepfather reside. She has left the property to her children with the proviso that my stepfather can reside there rent-free for life. When I need to value the property for probate/IHT purposes, is a discount to the unencumbered open market value available because of the life tenant? Is there a rule of thumb on this and would it be best to get a professional valuer to act? The value of my mother's assets is well over the current IHT limit.
Tax Tony's Answer:
The valuation of property is a significant area of contention between HMRC and the public. Some discount will be available for the fact that your stepfather has a right of occupation. I suggest you get help from a professional valuer who has experience of dealing with negotiations with HMRC. The discount is unlikely to be significant unless there is a formal tenancy in place.
Capital gains tax on investments
MoneySaver's Question:
I decided to buy a property off plan which should be ready by November 2007. I have paid a 3% deposit but have since changed my mind about buying it. As I already own a main residence will I be liable for CGT when I sell the off plan property? I am presuming there will be a small profit. If the answer is yes, is there any way, legally of course, to get around paying it?
Tax Tony's Answer:
Yes you will be liable to CGT on any profit. If it is small, it may well be covered by the annual exemption (£8,800 this year). There are various ways of getting relief from CGT (or at least postponing it) for example by investing in EIS or VCT products, but you would need to get investment advice on such products.
Inherited property
MoneySaver's Question:
My father, back in approx 1993 transferred ownership of his great aunt's house into his name as a move to avoid inheritance tax (which I believe at the time was calculated differently, and the house price was different). He was sole benefactor and at the time thought this was an astute move.
Great Auntie continued to live in the house until her death last year and the house is now empty for him to sell. He has plans to share the proceeds of the house between himself, his spouse and children. As the house effectively cost him nothing (he just transferred ownership), is he liable to pay tax on the total proceeds of the sale? Or because he wants to split the proceeds is there a more tax efficient way of doing this?
Tax Tony's Answer:
Your father will have acquired the property at its market value at the time of the transfer in 1993. The gain which arises now will therefore be on the difference between the price he sells it for and the value at that time, less indexation and non-business taper relief. He can gift you part of the proceeds but this will not reduce the gain. He could gift you an interest in the property before sale but this would be treated as a sale at market value (ie a gain would arise anyway) so there is no tax saving by doing this.
The really nasty sting in the tail of this story is that in addition to the CGT payable by your father, the house would have remained in your great aunt's estate for inheritance tax purposes under the gift with reservation rules, potentially giving rise to double taxation (CGT and IHT on the same asset).
Private residence
MoneySaver's Question:
I have sold my shop which was part living accommodation. I have owned it for more than 10 years and wondered can the profits from the sale be portioned part business and part residential as I have lived in the flat. Also can the profits be subject to taper relief due to the time that I have owned it.
Tax Tony's Answer:
The calculation of the capital gain in this type of situation is complicated. You will get some private residence relief, some business taper relief and some non-business taper relief and some indexation. You should get professional help with the calculation.
Expenses / Allowances
Self employment expenses
MoneySaver's Question:
Could you tell me what amount of my expenses I can claim? I am self employed and I have bought a vehicle and various other tools/equipment. A friend tells me to only claim 40% of these, is this correct? Surely, I claim the entire amount and if I sell the vehicle then the money is shown as income to the business?
Tax Tony's Answer:
You can claim deductions for any expenses incurred in earning the profits for your business. Anything which is capital (broadly costs on assets which will last more than 2 years) may be eligible for capital allowances which are 40% in the first year (for most but not all assets) and 25% of the remaining balance thereafter. So on capital equipment costing £1,000, the capital allowance in each year would be £400, £150, £112.50 etc. With a car, if your turnover is less than the VAT threshold you can simply claim 40 p per mile (up to 10,000 miles and 25p thereafter) rather than bringing the car into the business and claiming the running expenses and capital allowances.
There are enhanced capital allowances for very low emission cars and certain energy saving equipment. HMRC help sheet IR222 tells you a bit more about capital allowances on page 5 etc.
Company car implications
MoneySaver's Question:
My girlfriend graduated as Vet in 2006 and, like most vets, has a work car. The vet car is stacked full of equipment so is not easily useable for personal use. She needs the car at home to drive directly to calls (especially if they're in the middle of the night). Could you tell me the tax implications of this and whether she needs to complete a tax return? Is this seen as a perk and is there anyway around her being taxed for it?
Tax Tony's Answer:
I'm guessing that your girlfriend is an employee. (You would not be asking if she needed to do a return if she was self-employed).