Taxing issues

John Whiting of PricewaterhouseCoopers has a taxing time tackling your questions.

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Michael Dawson has to pay capital gains tax and has been advised to subscribe to a venture capital trust. How do they work in relation to CGT?

Venture capital trusts (VCTs) are a sort of collective investment funds that will take your money and invest it in smaller, riskier and newer companies.

There are some tax advantages - 20% income tax relief - and also the chance that you can roll your capital gains. So if you've made a big gain you can invest in a VCT and off goes your gain. You've got a year to invest but there's one caveat; they are inherently more risky so don't go into it for the sake of it.

Debbie Lewis is trying to work out how much Children's Tax Credit she should get. She knows it is reduced by £1 for every £15 of her husband's earnings (he's on £41,500), but isn't sure if the gross starting figure should be taken net of pension contributions. And does she have to apply for this part of it?

They'll get something but they do need to register for it - you can apply with a form you get from the Inland Revenue website.

She's right that the phase-out is on your net taxable income when you get to the higher rates, so that's after pension contributions. I reckon she should get about £180 (the calculation is taxable income of £39,010, assuming he puts in 5% to his pension; the excess over £33,935 is £5,075, which means a taper of £338 and a net credit of £520. Deduct the taper from the credit and you get £182.)

Is it right that there's now a tax on the purchase of spectacles and contact lenses?, says John Dean of Skipton. II don't remember hearing anything in the Budget.

Of course the Chancellor doesn't mention everything in his speech - there is a great deal of fine print!

This is arguably nothing to do with him - or so he would say. It's Customs applying what they see as the law (and making more money for themselves in the process).

In the early days of VAT, Customs said that specs were standard rated, i.e. had VAT on them. Then an enterprising opticians, Leightons, took a case and proved in the courts that when you went for an eye test and had specs dispensed there were two supplies - the medical work (no VAT) and the spec frames (VAT).

Customs hate losing - they had to pay back a lot of VAT to opticians whom they'd effectively overcharged - and saw a chance to reverse this thanks to another case (nothing to do with spectacles).

This one said that in many instances you should look at the overall thing; what do people really think they are getting. Customs interpret this to mean that when you pop into your opticians you are going in for spectacles so should pay VAT. You and I might say that we are getting medical help and shouldn't pay VAT, but Customs have the whip hand and changed the law from 1 June.

They piously say that they hope opticians will absorb the extra VAT - but why should they?

Nick Hatton: What way to pay?

After 20 years as a sole trader, Nick Hatton from Birmingham is going limited. He wants to know the most tax-efficient way of paying himself - taking a salary from the company or paying himself in dividends.

Whatever you take out is going to be subject to income tax. If you take a salary there's PAYE as you go along; if you take dividends there's a bit of a cash-flow advantage but you still get taxed (and the company would be paying corporation tax).

The big difference is with national insurance contributions - there's no national insurance on dividends. But this is where the infamous IR35 comes in.

That's basically trying to stop avoidance of contributions and it would depend on whether Nick was selling his services through his company and how he was working. It is possible to save a bit of tax by taking dividends but it needs looking at carefully. Presumably Nick also needs to bear in mind payments to his wife if appropriate.

Ron Anthony from Cardiff is unclear about the allowance restriction set against your personal allowance. He knows everyone gets only 10% tax relief, but says it's like another form of tax for thousands of pensioners.

What happens is that the elderly get higher personal allowances - currently £5,990 at 65+ compared to the normal £4,535.

But in a sense this is means tested, so the extra £1,455 is clawed back as the income goes over £17,600 at the rate of £1 for every £2 of extra income. That means that income of £18,000 would reduce the higher allowance by £200, and the elderly who are above this limit have a marginal tax rate not of 22% but 33% until they get back to the basic personal allowance.

The elderly can often find their coding notices confusing. For a start they may well find their personal allowance is set against the state pension, leaving any employer's pension to be taxed in full. Then there is the married couples allowance, which is still there for those who were over 65 on 6 April 2000.

Mr Belsten from Bristol says two members of his family have inherited a house from their parents. It's valued at £60,000 - what's the tax position?

Any inheritance tax would have been paid on the estate so the house will presumably have come without IHT.

But if they're going to sell it now then the cost for capital gains is the probate value, i.e. the value at death - presumably the £60,000 quoted. So if they sell it for £70,000 there might be a £10,000 capital gain, which would be shared between the owners.

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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.