Talking tax

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

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Keith Morell asks: "I would really like to know why the country rakes in £1.1 trillion in taxes and yet only puts about £400bn back into the country. Where does the rest of the money go?"

I think, Keith, you have your figures mixed up a little. £1.1 trillion is something like the UK's GDP - i.e. what the country produces.

The tax bill this year is projected to be £428bn (that includes some sundry government receipts as well).

That was always projected to be somewhat short of the government's spending plans, which this year are scheduled to be £456bn.

Whether the Chancellor is able to stick to these figures is something that is arousing a great deal of speculation at the moment. No doubt we will have a formal report on them in the pre-Budget report later this year.

Vince Clifford, from York has two questions: "If a person became non-resident for tax purposes, would their Isa accounts become taxable until such time as they again become resident in the UK?

"And for how many more years will Isas still be available?"

To open an Isa, one of the conditions is that you are resident in the UK for tax purposes. If at some stage you go non-resident for tax purposes, the Isa remains tax-free in the UK.

However, there are two cautionary notes to sound:

You can't make any additional contributions while you are non-resident.

The tax-free nature of the Isa in all probability won't hold in the country that you are resident in, so you may find yourself having to pay tax on the Isa income there.

The time when an Isa does lose its tax-free status is on the holder's death. Inheriting an Isa from somebody is just the same as inheriting any other investment - you don't inherit the tax-free status of the investment.

When the government introduced Isas in 1999, their guarantee was that Isas would be available for "at least 10 years". I would guess that they will start evaluating the success of the idea in two or three years' time.

It's a long way off but should the scheme come to an end in 2009, I would anticipate that existing Isas would be, like Peps, tax sheltered for at least a good while after that.

Ross Hall from Fife says: "I heard the news that Marks & Spencer had been refunded a large amount of money from the VAT man.

"In 2001 my wife started her own franchise and was told she must be VAT registered. In August 2003 she closed the business. Her turnover never reached the VAT threshold but yet she paid her quarterly VAT returns. Is she entitled to receive the VAT back?"

Marks & Spencer did indeed get some VAT back from Customs & Excise. This was as a result of being told to charge VAT on items such as chocolate teacakes, which the courts later held should have been zero-rated.

After quite a struggle, they were able to reclaim some of the VAT concerned.

On your wife's position, the first thing to check is that the goods or services she supplied were correctly charged to VAT.

The chances are she was charging VAT at the full standard 17.5% rate. It is just possible that this was incorrect. There have been a number of cases in recent years with the position of franchise-type arrangements under discussion.

If she had charged VAT incorrectly, then she could be in a similar position to Marks & Spencer (though possibly on a slightly smaller turnover!).

However, please don't get your hopes up - in most cases VAT was held to be correctly charged, but it might be worth checking with the franchisor.

The fact that she registered but didn't reach the VAT threshold does not of itself mean there was anything wrong. The VAT system does allow a trader to register voluntarily before they reach the turnover threshold.

That often helps new businesses recover VAT that they have paid but does mean they have to keep records and charge VAT.

Assuming that she was validly registered and did run a valid business, albeit for a short time, I fear there is probably nothing much that can be done.

Indeed one cautionary note is to say that she should make sure she has properly "signed off" from VAT by deregistering with Customs & Excise.

There can be VAT implications on deregistering if there are assets of the business on hand at the time.

Colin Cowan, of Loughborough says: "I have not used my £3,000 gift allowance this year or last year.

"If I gift an insurance policy worth £15,000 to my children can I deduct £6,000 (2 x £3,000) from the £15,000 leaving only £9,000 as a PET (potentially exempt transfer)?

Your analysis is correct. For Inheritance Tax purposes everyone has a £3,000 annual allowance. If you don't use your allowance in a year it can be carried forward to the next year.

However, that's as far as it goes - if you don't use it in that next year, it disappears so, as you have set out, you get a maximum of £6,000 to deduct from your gift through the annual exemptions.

The rest of the value, as you say, will be a PET; should you die within seven years of making the gift it becomes chargeable to Inheritance Tax, though if you haven't made any other gifts no tax would be due on that gift.

A viewer called Richard complains that the Revenue have used rounded numbers rather than the ones he sent in which seems to have cost him an extra fiver on his tax bill - not huge money but as he says, is this another stealth tax?

I'd like to think that the Treasury isn't so short of tax that they have to squeeze out a few extra pounds by the sort of calculations you suggest!

In principle, the Revenue should of course use the figures for income that you put on your return. Extrapolating from tax paid can, as you suggest, introduce a few small errors, especially if they are working back from PAYE, where inevitably a few pounds of roundings creep in over a year.

The Revenue's normal stance is that roundings (we are after all allowed to round down our incomes to the nearest pound) produce an element of swings and roundabouts and at the end of the day deliver a few pounds to the taxpayer rather than to the Revenue.

Having checked recently a repayment in similar circumstances, I notice that a friend's wife had a pound or two extra repayment thanks to roundings.

I would have thought that although the sum is still a small one, it has gone beyond what you might term routine roundings so if you have the time it might be worth a letter to your tax office asking for comments.

Colin Davies of Co Antrim writes: "I have a holiday home as well as my own house.

"If the property market falls and I sell my holiday home can I use the fall in the price of my own house to offset as a capital loss against the capital gains I will have to pay on the sale of my holiday home.

"If not, what classes as a capital loss for a private investor?"

Sadly, your idea doesn't work. You only get a capital loss for tax purposes when you sell something, not just because it has dropped in value.

In addition, your private house (your "only or main residence") is outside the tax net. Usually this is helpful as gains are outside the taxman's reach, but the corollary is that any losses that you incur are likewise outside the tax net.

Where most people get a tax allowable capital loss is on share disposals. With the way the stock market has been going over the past couple of years, it's quite possible that many people have capital losses and they need to keep a record of them.

The loss is, in simple terms, the difference between what you paid for the investment and what you got back; indexation may play a part if you held the investment prior to 1998 and there may be other things like rights issues coming into play.

In all of this planning, spouses have their uses - they may have losses and a couple has two CGT annual exemptions to play with (if the house's ownership is split) which can draw the sting of the tax bill on your holiday home.

Geoff Fowler says: "I have for the last 10 years been paying the endowment mortgages on two flats which I bought to give to each of my children when they were of age.

"The endowments served me poorly, and I have to settle an enormous Capital Gains Tax bill for each gift. Surely this cannot be morally correct?"

I have a great deal of sympathy with the position you find yourself in but I am afraid you are coming up against a facet of the tax system that many indeed do not see as fair.

The first point is that by giving an asset away (and therefore receiving no proceeds from it) you can actually create a tax bill for yourself.

This is because the asset - in your case each flat - is treated for tax purposes as being given at market value.

That, as you are finding, can create a significant capital gain and thus a tax bill for you when potentially you have no funds to meet the bill with.

In terms of mitigating the gain, try to make sure you make maximum use of your annual exemptions.

Many people split the ownership of the property with their spouse so that a gift occupies two annual exemptions.

There is then an argument that you can give your child a share in the property one year and a greater share next year and again mop up some more annual exemptions.

You'd have to be careful with how you did this and not make it obvious that it was a plan from the start.

But if you manage to mop up a few annual exemptions, indexation up to 1998 and a small amount of tapering relief subsequent to that can at least draw some of the sting.

Alan Lord, of Camberley writes: "I noticed on my tax return that my pension is being taxed twice.

"To my occupational pension is added the government pension to show my total income. This is taxed at 22%. However, against the personal and marriage allowances are the items that reduce my allowance and one of these is "state pension".

"This reduces my allowance by £5,012 and means, as I see it, 22% of £5,012 which equals another £1,102. Am I correct in this assumption?"

I can't be absolutely certain that things are right on what you have said but I suspect that the Revenue have managed the position properly.

However, in doing so they use their own methodology, which only serves to confuse.

I notice you have an occupational pension as well as a state pension. That occupational pension is subject to PAYE; just as when you were in work, you get a tax code to tell the pension provider how much tax to deduct.

That code starts off with your allowances but is then reduced by the amount of state pension, as that comes tax-free.

Thus you only get a small "tax-free" allowance against your employer's pension. At the end of the year when you get your tax return, the taxman will add your various income sources together and show tax due on them - hopefully covered to all intents and purposes by what has been deducted at source.

There will be an extra complication coming in with your married allowance, which only gets tax relief at 10% and is thus clawed back to a degree; then, if your income is above £18,300, you suffer a restriction on the higher age allowances.

All of this makes the average pensioner's tax position ridiculously overcomplicated and it is an area that cries out for simplification.

Jim Proffitt asks: "If interest from banks and building societies is the only source of income, after deducting personal allowances is the rest subject to the initial 10% ax band similar to other forms of income?"

The short answer to you question is "Yes".

What this can mean is that many people (typically somebody with a small pension and a bit of interest) finds that they get enough income to tip them into the income tax bracket.

For somebody over 65, that might mean total income of (say) £7,000, of which (say) £1,000 is interest.

With the personal tax allowance for those aged 65+ being £6,610, that means £390 of their income is taxable with a total tax bill (at 10%) of £39.

That £1,000 of interest will, though, have had £200 deducted by the bank or building society. That means that the taxpayer is due a repayment of £161 because of the impact of the 10% band.

Margaret Pannell, of Northampton also asks a related question: "Could you please inform me as to the amount of savings I am allowed before income tax, I am on state pension.

Assuming you are aged over 65, your personal allowance for income tax purposes is £6,610 this year.

That means you can have income - state pension and income from your savings - of £6,610 before you pay any tax.

This allowance goes up a little if you are aged 75 and over (to £6,720) and tends to be increased each year.

So the absolute amount of savings doesn't matter - it's the income that the savings produces which is relevant.

P Bryan from Cheshire asks: "If shares that are inherited on the death of a spouse are subsequently sold, is the Capital Gains Tax calculated from the date they were inherited or from the date they were originally bought?"

Anyone inheriting assets - be they shares, property or anything else - on the death of somebody else takes those assets at the market value at the time of death.

That's the value that will have been used to calculate any Inheritance Tax due. There is no Capital Gains Tax due, for any gains made up to the person's death.

When you sell the shares, you will calculate Capital Gains Tax based on that market value at death.

Just as a small point that some people miss when sorting out the estate of a deceased person, it can often be the case that shares in the estate are sold by the executors at a loss compared with market value at the date of death.

It's possible to go back to that market value and rework Inheritance Tax based on proceeds for all shares sold within 12 months of death.

That can result in a repayment of IHT and some compensation for a loss of value.

Kris Jones asks: "Is there a tax advantage to be had from an offset mortgage? Is it only the excess of savings over the amount of the mortgage on which interest is received, and which is therefore taxable?"

Offset mortgages can indeed produce a tax advantage, although in some ways it depends how you look at the situation as to how real the advantage is.

If for the sake of argument you receive interest of £100 and pay mortgage interest of £1,000 you will be taxed on that interest of £100 (and net only £80 if you are a basic rate taxpayer); thus you'll have a net overall cost of £920.

If your bank or building society operates in a way that it only charges you interest of £900 and doesn't give you any interest then you do have a saving (of £20).

The point being that you were never entitled to that interest of £100. But it does come down to how your interest is calculated - if you are credited with interest, that is taxable.

What you need is a situation where the charge is the £900 in my example and you are simply not entitled to any interest on the deposit that you have.

Chester Parker of Portsmouth has a question about Inheritance Tax.

"My parents owned their house as tenants in common," he says. "When my mother died her half of the house was left to my sister. My father still lives there.

"As far as my father's IHT position is concerned, does it make any difference if my sister does not live there or contribute to the upkeep of the house?"

It sounds as if your parents have done what is an increasingly common Inheritance Tax planning device - splitting the ownership of their house so that they can each leave their half of the house as they wish.

That typically allows the deceased's Inheritance Tax nil rate band to be used up.

Assuming your mother's will was as simple as you say - she simply left her half of the house direct to your sister - then there is no particular tax reason why your sister should live there or contribute to the upkeep of the house.

There might be an issue if a trust were created on your mother's death where your father was a beneficiary under the trust - if, say, he was given a specific right to live in the whole house.

That's something that would be worth checking out if you are not sure.

In terms of the upkeep of the house, technically if your father pays all the outgoings he is making a gift to your sister but probably that would count as "normal expenditure out of income" for Inheritance Tax purposes and not raise an issue.

Where there will be a tax point is that when eventually the house is sold, half of the house will rank as your father's main residence and be outside CGT but the half owned by your sister would be in the CGT net, assuming she has her own house somewhere else.

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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.