Tax issues: Your questions answered
It was once said that nothing is certain but death and taxes.
But the rules and regulations on tax issues can be complicated and may change radically from year to year.
In the latest instalment of our Ask the Expert series, John Whiting, of the Chartered Institute of Taxation, answers your questions.
Here, he deals with queries about income tax and inheritance tax, among others. Next week, he will look at your questions on other issues including capital gains tax.
Q1. Which law gives the right for the government to collect taxes? If I remember correctly income tax was raised to fight the French and that has long since ended. Adam Scott, Norwich.
What a great question to start with! We have a great body of laws - the Taxes Acts - that lay down our tax system and make sure it continues. In principle it is all voluntary - look at the preamble to any Finance Bill which starts off with a message to the Queen about her "dutiful and loyal subjects... have freely and voluntarily resolved to give and to grant unto Her Majesty the several duties hereinafter mention...".
What it boils down to is that most taxes are permanent but get tinkered with. Income tax is strictly temporary. It was, as you recall, introduced to fund the wars against France in 1799 as a temporary levy. Abolished in 1816, it came back, again temporarily in 1842 and has been with us every year but is still officially temporary. Accordingly, Parliament has to resolve in the Budget debates to keep it going but if that resolution is not confirmed by a Finance Act by 5 August, income tax lapses. This is why there was a flurry to pass legislation to continue income tax before Parliament dissolved in April, just in case the new government forgot!
Q2. I have received some money as an inheritance following the death of a relative who lived in Austria. Estate duty has been levied by the Austrian authorities on this inheritance. What taxes on this money would I be liable for in the UK? Orlando, Evesham
There are no taxes on bringing money into the UK - no accession taxes or inheritance tax. If you invest it and it generates income, that is of course liable to tax. And if you give the money away, that would be within the inheritance tax net.
If the inheritance was in other assets which you liquidated to provide cash to bring back to the UK there may well be a capital gains tax (CGT) issue.
Q3. My father passed away last year and held properties - valued at over £1m - in a limited company in which he and my mum were equal, joint shareholders (one share each). Firstly, can you please confirm what the tax treatment is for inheritance tax purposes? Secondly, can you offer any advice as to how best mitigate tax into the future assuming my mother wants to pass this on to her three children in the most tax efficient manner? V Aggarwal, Newcastle.
Much depends on the nature of the company - what does it do? There is a very useful and generous relief against inheritance tax called Business Property Relief (BPR). That can give relief of 100% (i.e. the value of the business is effectively ignored for inheritance tax purposes).
However, the business must not be one whose business is "wholly or mainly dealing in... land or buildings or making or holding investments". The way you describe the company I wonder if it would fail this test - in which case the shares are simply normal property for inheritance tax purposes, liable for inheritance tax at 40% along with the rest of his estate over the nil rate band (currently £325,000).
What did your father's Will say? There would be no inheritance tax if he simply left his share to his wife, assuming both are UK domiciled.
In terms of your mother's plans, inheritance tax may be relevant if she were to give her share(s) away (which brings us back to the BPR question), and if it does qualify for BPR, there is a need for the donee to keep the company trading. If inheritance tax is potentially chargeable, there is the seven-year rule for inheritance tax purposes, i.e. gifts more than seven years before death are normally exempt. There would also be CGT to consider as a gift by her would be a disposal for CGT purposes (CGT does not apply on death of course).
This is quite a complex question and I think you may need to sit down with a properly qualified tax adviser to discuss all the issues.
Q4. I want to give some tax-free money to my children and grandchildren. I know I can gift £3,000 to them tax-free but what about great grandchildren? Monica Lyons, Camberley, Surrey
The £3,000 is an annual exemption from inheritance tax and you can make one or more gifts totalling up to that amount, or it can cover part of a larger gift.
It does not matter to whom the gifts are made. But it is one overall amount - it is not £3,000 per donee. Where your gifts in one year fall short of the £3,000 the unused amount can be carried forward to the next year only.
There are also exemptions for marriage gifts and a small gifts exemption - the latter covers gifts of up to £250, but only one gift to each person each year - and also "normal expenditure out of income" which allows you to give away residual income each year and avoid building up more capital.
Q5. My mother recently died leaving her property and cash savings to me and my siblings, bringing her estate over the inheritance tax threshold. The property was professionally valued at £300,000 at date of death, but it needs approximately £100,000 of restoration and will be difficult to sell as a residential property.
We therefore obtained outline planning permission for redevelopment raising it in value by between £25,000 and £50,000. We have been advised that HM Revenue and Customs (HMRC) will probably use the sale value, including the gain from outline planning permission, in calculating inheritance tax, and that it might be worth waiting for the anniversary of her death to sell the property, when HMRC are more likely to apply the lower rate of CGT.
Is this wise advice, and should HMRC be charging inheritance tax on value added to the property after our mother's death? We would like to sell as soon as possible as we are paying for maintenance, but otherwise are in no hurry to sell. Helen Caston, London
There is an element of six of one and half-a-dozen of the other here. Leaving the property to sell later may well mean a lower value is used for inheritance tax, but there will then be a potential CGT bill, though CGT annual exemptions and (current) lower rate may help.
You have presumably used the £300,000 valuation for probate value and paid inheritance tax accordingly to secure probate; when you complete the inheritance tax account for the estate HMRC may well seek to use sale value if indeed you have sold the property by then.
They may well in any event use their own valuer who will take into account development value and the like, not simply the fact that you have now secured planning permission but a realistic assessment of value, taking into account local circumstances (which may well include that properties are often redeveloped). Bear in mind it is supposed to be the open market value of the property at the date of your mother's death.
If in due course you sell the property for more than its £300,000 value, then you and your siblings (I assume you were left it jointly) are liable to CGT on the gain, shared across you all. You may well have the CGT annual exemption available and a CGT rate of 18% sounds good. But as you will be aware, the rate and the annual exemption may well change under the new government's plans.
Also note that the timing of the sale affects the CGT exemption(s) available. The estate has one annual exemption, which is equivalent to half an individual's annual exemption - if the property is sold by the estate. However, if the property is distributed first to the beneficiaries then each beneficiary potentially has an annual exemption to apply against the gain, if they have not used this elsewhere. It would be advisable to take advice on the timing of the sale.
Q6. I am UK domicile, if I were to marry a foreign citizen (but EU national), what is the inheritance allowance on my death? John Petersen, Colchester
I assume you will be keeping your UK domicile and your future wife would keep her non-UK domicile. There is a bit of a tripwire here in the inheritance tax rules. The normal position is that you can give (during life or on death) any amount to your spouse/civil partner and it is exempt from inheritance tax.
However, if your spouse is non-UK domiciled, there is a limit to the amount that is inheritance tax-exempt of a very modest £55,000. This is a limit that has been in place for many years and is very much in need of revision.
It is interesting that you say that your potential spouse is an EU national as there is a real argument that the UK non-domicile rule for inheritance tax is invalid under EU non-discrimination law. This may force a change before too long.
Q7. I am about to start a second job which, like my current job, will be PAYE. The combined income will take me into the 40% tax bracket. How will I be taxed on each income and how do I let the Revenue know? Tom Grange, London
PAYE works well for a single, permanent job. It begins to creak for non-standard situations such as yours (which are increasingly frequently met). What should happen is that when you start your new job, you will not have the usual P45 (given when you leave a job) which tells your new employer the tax code to use against your salary.
Your new employer would then ask you to complete form P46 with them: this is the notification to HMRC that you have started and you are continuing with another job. They will normally be told by HMRC to use tax code 'BR' against your pay - which means deduct tax at basic rate i.e. 20%.
This would leave you with a tax underpayment at the end of the year in respect of that part which should have been taxed at the higher rate. However, they may be told to apply code 'DO' which means deduct at 40% if HMRC think all or almost all of your pay needs to pay tax at the higher rate. That would lead to an overpayment in respect of that part which should have been taxed at the basic rate.
Either way you will probably end up completing a tax return and will probably need to so as to make sure you end up paying the right amount of tax for the year. If they do not automatically send you a return you ought to ask to complete one.
Q8. I am a non-British citizen currently working in the UK. I have been working for two years. I am wondering if I can get part of my income tax/National Insurance back if I am planning to leave the country for good in the near future? Dennis Lu, Cardiff
Assuming you are working on UK duties and are tax resident in the UK, you are liable to pay UK tax on your UK income. If and when you leave, the main reason you may be able to get some tax back is because you may not have been given your full personal allowance for the year - so it is worth your while completing form P85 as you go, see the HMRC website.
There may also be issues concerned with your homeland - whether they would want you to pay tax on your UK income when you return. If so, there would normally be relief against that tax for UK tax paid. There may also be issues about where you were in fact residence at the beginning and end of your stay.
Q9. I work in the IT industry where there are a lot of contract staff who are able to claim back expenses for hardware, travel, lunches etc. I have never really understood why staff on PAYE cannot claim for such expenses where as contract staff can. Is there anything an individual on PAYE can claim for? Andrew, London
As an employee you can claim expenses against your salary only if the expenses are "wholly, exclusively and necessarily" incurred in the performance of your duties. That means your costs of travel to work do not count - your do not start work until you get to the office - and lunches are not wholly and exclusively - you would eat anyway. Contract staff may get more expenses but it does depend on the nature of their contract, where they are based and other factors.
What expenses can you claim? The honest answer is very few. Professional or Trade Unions subscriptions are one item. There is some scope with tools if you have to provide them. But one problem is that HMRC will usually resist deductions from employees as if the expense was really necessary, then your employer would provide the item or pay direct.
Training costs are a troubling example - train yourself and the costs will probably not be deductible, however much you need to keep up to date, whereas a self-employed contractor would be able to claim many training costs.
Q10. I work from home and am having trouble finding out what tax allowances I am entitled to. Nick Jenkins, Penistone, Sheffield
If you are based at home as an employee and that really is your place of work you can probably claim costs such as:
- Travel to clients, customers or meetings
- Some costs of running the space you use as your home office - such as a sensible proportion of heating and lighting (HMRC will allow a flat rate of £3 per week instead of detailed bills)
- Costs of business telephone calls
- Costs of equipment, such as a computer, and consumables, such as paper, that you use for your business.
There may be other things but it rather depends on the nature of your employer's business. Think about what costs you really incur to enable you to work and do your job, and keep evidence to satisfy HMRC if and when they ask you to justify your claim. Have a look at the HMRC website.
Alternatively, if you are self-employed and run your own business from home then the rules are slightly different. Some detailed information is available in HMRC's Business Income manual.
Q11. I am in my 60s now, and have been building my philatelic stamp collection for over 40 years. Whilst I have not kept records of my expenditure over the period, it has sometimes been substantial. I have now commenced selling my collection gradually on eBay and through some UK auction houses. The proceeds average about £1,500 a month, and could continue to do so for quite a number of years. How do I establish if I have any tax liability in this situation? At present I am also in full time employment and pay tax through the PAYE system. Do I have to report my stamp sales on my self-assessment returns? Noel Lyons, Enfield, Middlesex
Stamps would normally count as assets for CGT purposes and so would be liable to tax on disposal. However, they would rank as "chattels" (tangible moveable property) and would be outside CGT if the proceeds do not exceed £6,000 per item.
What "an item" is might be an issue: HMRC do have some anti-avoidance rules to stop someone breaking up a set and selling in stages to keep under that limit. They say that a collection of stamps is not normally regarded as a set even if all the stamps are from one country or are all about a particular theme such as birds. However, if it contains examples of all the values of a commemorative issue or a definitive issue of one country, these will, themselves, form a set.
There may be a question of HMRC asking whether you are trading by disposing of your collection in stages. That would lead to income tax. You may be able to escape that by showing that it is the only practical way of disposing; that you did not aim to make a profit when you bought, just enjoyment. But the fact that you are selling over an extended period in regular amounts may cause some problems.
Q12. I lent money, in the form of an unsecured loan, to a company run by a friend of mine. The company filed for bankruptcy in late 2007 as the credit crunch began. Is there any way I can write off this loss against my PAYE tax bill? I am a salaried full-time employee, with no directorships or other external income. Noel, Richmond, Surrey
I fear not. I assume this is just a one-off loan to a friend rather than part of a banking and money-lending business. You would need to establish a trade of lending money to get towards a deduction. However, if you qualify under the "relief for loans to traders" rules under the capital gains tax (CGT) legislation, you might be able to get the loan treated as a loss for CGT purposes.
Q13. My P60 lists "total NIable income" from my employers but not my gross income which is what the tax credit people want. Can you tell me the difference please? My employer cannot tell me. Colin Porter, Hawarden, Wales
It is a real criticism of the tax system that "income" means different things for income tax, NICs and tax credit purposes. For example, any pension contributions you make are deductible from income for income tax purposes but not for NICs.
Income for tax credits also excludes your pension contributions and is similar to the income tax definition but bear in mind it will also include any benefits from your employer, investment income (including rental income but not rent-a-room) and, importantly, it is the combined income of the couple concerned. See the notes on filling in a tax credit claim on the HMRC website which does explain - admittedly at some length - the things that go into income for tax credits purposes.
Q14. I have some shares (worth about £3,000) from when I worked for an American company which are listed on the NASDAQ. Recently they have started to pay a dividend (something which they did not do previously). Am I liable for tax on this income and if so who do I pay it to the UK or US taxman? Glyn Quesnell, Edinburgh, Scotland
The US taxman may require the paying company to withhold tax - apply a deduction typically of 15% - when they pay it to you. Any such deduction should show on the voucher you get from the company. After that, the US taxman loses interest - assuming that you are not a US citizen!
In the UK, dividends from an overseas company are taxable in the same way as dividends from a UK company. The good thing is that they are treated as carrying the same tax credit as UK dividends do which means no basic rate tax to pay. If you are a higher rate taxpayer, any US withholding tax can be set against your additional liability.
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