You ask the tax expert

Tax expert John Whiting.

It seems recent events have sparked a flurry of questions about Capital Gains Tax... PWC's expert John Whiting answered your tax related queries on Friday's programme (June 19).

As ever, click on one of the questions in blue below to go straight to the answer, or scroll down the page to read them all.

Our next 'ask the expert' will be on Friday July 10 after our break for Wimbledon.

1. Please explain the 10% starting rate for savings.

2. Do I have to pay tax on compensation from the FSCS?

3. Am I liable for tax on inheritance from my brother who died abroad?

4. If savings are changed into bonds does this delay the tax rebate?

5. If we buy a house for retirement now, and sell our current house once we've retired, are we liable for Capital Gains Tax?

6. I'm 65 in January - when does my code change?

7. If I come home after working for a year in Dubai how will this affect my tax situation?

Please explain the 10% starting rate for savings.
Harry Easun

The operation of the 10% savings rate of income tax continues to cause confusion and a lot of people need to gear up to put in a claim for a tax repayment now we are into the new tax year.

The point is that if you are a taxpayer, then you cannot have your savings interest paid under the 10% tax rate.

The bank/building society can only deduct tax at 20% or pay it gross (if you are a non-taxpayer). If, then, your income is modest then it may be that you are entitled to a tax rebate.

However, this calculation needs care. You need to add together all your sources of income, treating your savings interest as the 'top slice'.

Any interest that falls into the band of taxable income between £0 and £2,320 (for the tax year 2008/09, which people should be submitting reclaims for now if they are eligible) will be taxed at 10%.

But if your income means that your savings income does not start until considerably above the £2,320 figure then it will be taxed in full at 20% (or perhaps 40% will apply to some or all).

It's best to illustrate with an example. Let's take the year 2008-09. You are over 65 and have a pension of £1030. You also earn £1000 interest on your savings, bringing your total income to £1130.

The personal tax allowance for over 65s is £9030, so £1000 of your pension will be taxed at a rate of 20%.

As a result, your £1000 savings will also be taxed - at the 10% rate, leaving you with a total tax bill of £300.

However as your savings are automatically taxed at 20% you will get a rebate of 10% - in this case £100.

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I have been awarded compensation by the Financial Services Compensation Scheme in connection with being wrongly advised to take out a personal pension plan.

I have been told that tax may be payable on some or all of the compensation. What are the rules on this?
Peter Price

The normal rule is that compensation for loss, or likely loss, caused by what might be termed 'bad investment advice' around pensions, is exempt from both income tax and capital gains tax.

Where income tax might arise is where there has been some sort of enhancement to the payment, often because of delays in actually formally making the payment.

If interest has been added to the payment because of a delay, then that interest is going to be taxable under normal principles.

The same principles to cover compensation for mis-selling of other financial products such as mortgage endowment policies.

The issue of interest has come more into focus recently with people getting compensation for the loss of money from a default by a financial institution.

If the compensation received includes the equivalent of interest that would have been received as well as compensation for the actual deposit, then the interest-equivalent will be taxed as interest.

This is logical and fair enough and would probably be the case on general principles - but was put beyond doubt with an announcement in the April Budget.

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I inherited almost £50,000 from my brother who died in Australia a year ago. I live in Scotland. Am I liable for any tax on this?
Willie McIntyre

There is no tax in the UK on receiving an inheritance. I assume any duty due in Australia on your brother's estate will have been paid there - so it is tax-free as far as you are concerned.

Of course if you invest it and it generates interest, there will be tax due on the interest, but that's a separate matter.

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I am 62 and at the end of the tax year I claim back most of the tax paid on my savings. This year I went to do this, but as I had changed my savings into a Bond product in April 2008 I have been told by Nationwide it will need to go into next year's tax return. I think this is totally unfair.
Gordon Brown (honest!)

This is unfortunate. In essence, interest is taxed when it is received - so you received your interest on 27 April, in tax year 2009/10.

You will presumably be able to get some or all of your tax back after the end of the current tax year, but that is a long time to wait, I appreciate.

Are you able to register to get your interest gross, I wonder - it sounds as if you are a non-taxpayer? If so, ask your building society for the form R85 so they can pay you gross.

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My husband and I are two and a half years away from retiring. We are looking to buy a house in Plymouth to be near to our daughter when we retire.

If we purchased a house now, and then sold our current bungalow to move down south when we retire, would we be liable for capital gains tax?
Sue Hobson

As you're probably aware, you and your husband are in principle entitled to one 'CGT free' house at a time. So selling your bungalow now would mean no CGT. But if you buy a second property, then one of them would be 'exposed' to some CGT.

However, there are some exemptions that could help you - some of which have received a certain amount of publicity of late!

The key point is that the CGT exemption is geared to when you use the house as your main residence. But there are periods which are treated as a period of residence, even if you are not there.

The main one is the 'last three years of ownership' - which helps a lot if, as you will potentially have, there is an overlap period when you have two properties.

So what you could do is, when you buy your second property, tell HMRC that it is your main residence (anyone getting a second property should nominate one as their main residence within two years, to make sure the tax position is clear).

That starts its 'CGT free clock' running. The bungalow would then potentially be exposed to CGT - but provided you sold within three years, that period would be treated as occupation and no CGT would arise.

If you went over that period - say to four years, it would mean that a little CGT would arise - one 20th of the gain if (say) you had owned it for 20 years in all - but once costs and annual exemptions were taken into account, the chances are there would be little on no tax to pay.

There are other exemptions and reliefs as well but that would mean rather a long answer and probably won't apply or be necessary for you.

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Could you please tell me when my code changes? I am 65 in Jan 2010.
Stan Johnson

You are going to get your higher personal allowance for the whole of 2009/10, the current tax year.

So you will be due the full £9,490 for the year; you can notify HMRC now that you will be turning 65 during the year and ask them to give you the higher allowance - indeed you should tell them as they do not automatically give you the higher allowance.

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I've been working in Dubai since July 2008. I'm thinking of returning to work in UK in July 2009, but am worried about how this will affect my tax situation. Please advise.
Alice Waters

I assume that apart from your time in Dubai you have been resident in the UK, and that the UK is your normal home. What this means is that if you earn some money from short periods abroad, you are still taxed in the UK as being 'resident, ordinarily resident and domiciled' here.

Going abroad for a spell can get you out of the UK tax net. If you leave the UK to work abroad full-time, you can be non-resident (and in essence not liable to UK tax on your employment income for your non-UK duties) from the day after your day of departure (and only become resident again on the day you get back) provided you will be working abroad for at least a whole tax year, will be absent for a whole tax year, and your visits to the UK in that period averaged under 91 days in a tax year.

It looks as if you won't pass the 'whole tax year absence' test and so you will be treated as remaining resident for the tax years in question. That means your income whilst abroad will be subject to UK tax - less any overseas tax you have paid (presumably nil).

HMRC publish a useful guide to the issues - HMRC6 (it replaces the longstanding IR 20 on the same subject).

The views expressed are those of John Whiting, not the BBC.