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Friday, 30 November, 2001, 13:57 GMT
Taxing questions
Adam and Adrian talk tax
Who'd have thought tax could be so much fun

John Whiting, tax partner at accountancy firm PricewaterhouseCoopers answers your tax questions.

Colin Pye and Brian Barr are both concerned about state retirement. They both thought it was tax-free.

But both of them have since found that tax is being deducted from their work pensions. Is this right?

I'm afraid it is. There is a great deal of confusion about tax and benefits.

The automatic assumption might be that they aren't taxable but that's the wrong way to think about it.

You should assume that all income is taxable but that some, perhaps most famously child benefits, are exempt.

If you have concerns about a specific payment, ask the benefits office or the Inland Revenue.

Marc Edney says: "I was made redundant recently, and got five months redundancy pay which was tax-free.

On top of this I got my three months notice, which I didn't work - this was taxed. Is there any way I can get the tax back and claim it as part of my redundancy package?"

The general belief is that you can get a payoff of 30,000 tax-free when you lose your job.

But if some of the money is a payment for your notice period, as Marc's seems to be, then it's taxable just like any pay for that job.

The only way you may get some back is if you don't work for the rest of the tax year and you are due a little back thanks to the way PAYE works - but let's hope that Marc doesn't need to worry about that.

John Goddard is having problems working out the Capital Gains Tax on his shares.

He thought he could do this by deducting the purchase price from the selling price but things aren't that easy for him.

He used to own British Gas shares but then that company demerged into BG and Centrica, which then split again to form Lattice.

He also used to own National Power shares, which not only issued more shares but also split into International Power and Innogy.

And another one of his holdings, British Telecom, went on to issue several lots of bonus shares and has just split into BT and mmO2.

How do you arrive at a purchase price of the shares now held in each of the seven individual companies so as not to fall foul of the Inland Revenue?

The easiest thing to do would be to hire a good tax adviser - who will probably use a computer programme.

The example shows why CGT is generally thought of as the most complex of taxes.

The basic calculation is proceeds less cost, which will at least give you a feel for the figures.

But that cost has to be adjusted for:

  • Indexation allowance (i.e. inflation adjustment) which runs up to April 1998.

  • Don't forget the costs of buying and selling such as dealers' charges.

  • Bonus and rights issues, which adjust the number of shares and costs.

  • Demergers, which means you have to apportion the costs between the two new shareholdings based on the values at the time of demerger.

  • All of this also has to have regard to each block of shares you bought but (pre-1998) the shares you buy in one company are pooled, i.e. lumped together as one asset.

    The first issue is to work out which shares you have sold and then what their cost is. Finally when you have worked out your gain you need to taper the gain depending on how long you have held the shares.

    There really is no easy way of describing the process. The practical answer is probably to put the details on your tax return and let the Revenue work it out - it's their tax after all.

    For an in-depth guide into the intricacies of CGT take a look at Working Lunch's CGT guide. A link to the guide is included on the right hand side of this page.

    More capital gains woes for Darren McMurray from Cheshire who wants to know if it is possible to own property as an asset of a limited company and gain taper relief on the sale of the company.

    The short answer is yes - but it may not be the answer that Darren wants.

    Any CGT sale qualifies for tapering.

    The point is that there are two rates of taper depending on whether you have a business or non-business asset.

    You get better tapering for business assets, which means you could pay a CGT rate of just 10% after four years (if you are a higher rate taxpayer). Business assets include the assets you use for your business and shares in your employing company.

    They don't include investment properties, and from the way Darren describes his idea I suspect his planned company would only get the non-business taper.

    It sounds like Darren would probably be better holding the property himself.

    Mrs Bulbeck in Hereford says she's not a taxpayer but does receive regular dividends which include a tax credit she can no longer reclaim.

    Can she make payments under the Gift Aid scheme up to the aggregate amount of these tax credits?

    The point here is that when you make a gift to a charity they can reclaim basic rate tax on it.

    But you can only use the Gift Aid scheme - and thus allow the charity to reclaim tax - if you have paid enough tax yourself to cover the tax that the charity will reclaim.

    For most of us there will be plenty of PAYE or self assessed income tax to cover the notional bill.

    Someone who only has dividend income can use the tax credit of one-ninth on the dividends to cover the tax related to the Gift Aid payment.

    John in Durham wants help settling an argument at work. Is it true his employer can claim a tax allowance for employee Christmas bonuses up to 75?

    In essence anything an employer gives employees earns that employer a tax allowance.

    The rabbit punch is that it will usually constitute a benefit to the employee and so can earn them an extra tax bill.

    Often the employer will pick up the tax bill so the whole deal looks as if it's tax-free.

    There are limited get-outs and one famous one is the Christmas party exemption which I suspect has given rise to John's argument.

    The Revenue will not tax a staff function (normally at Xmas, though it doesn't have to be) up to a total cost of 75 a head of those attending.

    Nikki Bishop asks: "Is there any chance you could do a quick and simple intro to tax for a new sole trader?"

    A new sole trader has a lot of taxes to look out for.

    To start with, you should inform the Revenue that you have started in business - traditionally within six months of the end of the tax year in which you commenced trading.

    That is rather overtaken by National Insurance requirements that demand you inform the Inland Revenue within three months of trading.

    You see you have to start paying Class 2 NICs (2 per week) and Class 4 (a levy on your profits).

    Then you may well have to register with Customs and Excise for VAT purposes - you have to if your taxable turnover is above 54,000 a year.

    There may be other taxes to consider, such as business rates, CGT on any assets and various others (we have over 20 taxes in the UK).

    Rob Dealey is about to get married and his father wants to use the "wedding gift allowance" of 2,500 to buy gifts of this value over a period of a year or so.

    Can he do this, or is he about to make a costly mistake?

    We're on to inheritance tax here.

    This tax is worked out on the value of the assets you leave to others on your death or that you have given away within the seven years prior to his death.

    There are various exemptions and one category of these is lifetime marriage gifts.

    You can give up to 5,000 to your child on the occasion of their marriage (2,500 for grandchildren) without having to worry about IHT.

    Andrew Bissell is due to retire in 2012 and has been contributing to his employer's pension scheme.

    But he's heard that as of 2010, all pension commutation payments will be taxable, which will affect the amount he has on retirement. Surely this cannot be true?

    I don't think it is - so please don't worry.

    The idea of taxing the tax-free lump sum that many people take when they retire has been mooted many times but so far there is no sign of it according to my pensions colleagues.

    It could happen, but traditionally changes to pension funds are prospective rather than retrospective - so any change, if it happened, should be to pensions started after a certain date.

    The opinions expressed are John's, not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.
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