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You ask the tax expert

John Whiting
John Whiting answers your tax questions before being returned to the Working Lunch vault

For the last time on Working Lunch, John Whiting answers all your tax questions.

Click on one of the questions in blue below to skip straight to that answer, or scroll down the page to read them all.



VIEWER QUESTIONS

ANSWERS


1. I'm a non-taxpayer and each year HMRC repays the tax deducted from my savings accounts interest, but not the tax paid deducted on income from my funds and shares, even though I am sent tax credits - is this right?

There is a big difference in tax terms between income that comes to you as interest and income that comes as dividends. (Income from 'funds' will be one or the other, depending on the sort of funds.) Both come with some sort of tax deducted but it's a different mechanism:

• Interest gets 20% tax deducted at source - and that income tax covers your basic rate liability if you are a taxpayer, or can be reclaimed if you are a non-taxpayer (or partially reclaimed if you fall into the 10% rate for savings income);

• Dividends come with a tax credit of 1/9th of the amount of cash received (or 1/10th of the gross dividends, i.e. dividend plus tax credit); that tax credit is enough to pay for the basis rate tax liability that you have as the rate of tax on dividends for basic rate taxpayers is only 10%. But if you are not a taxpayer, the tax credit isn't repayable - and hasn't been repayable for some years now.

This differing tax result is something to take into account when you plan your investments.


2. I'm selling a holiday home in Spain and will be taxed by the Spanish government on any capital gain. When the proceeds come to the UK, will I be taxed again?

Assuming you are resident in the UK (and even if you are not but return here in a few years), the basic answer is 'yes'. You are in fact taxed when you realise the gain, i.e. not when you bring the proceeds back; but there will be relief for the Spanish tax that you've paid against the UK tax bill. Whether you actually have a tax bill in the UK after the relief does of course depend on the amounts involved.

Spanish CGT, incidentally, is now at 19% from 1 January 2010, up from 18%. At one stage Spain operated two rates of CGT - 35% for non-residents and 15% for residents I think - but they had to change under pressure from the EU. There is also a relief for reinvesting proceeds of property disposals but that is I think only applicable to main residences which I guess your property wasn't. If you need to check out the Spanish tax calculation, do get some local advice, or talk to a UK tax adviser who has Spanish experience. There are some websites that offer help - for example: http://belegal.com/


3. I'm intending selling a holiday apartment in Spain which was bought in 1986, so there may be quite a capital gain. I'm an OAP UK resident with some retirement income, paying basic rate tax. Will any taper relief apply and could I end up paying 28% tax on the gain?

See the comments on last question for some Spanish tax points and the interaction basics.

The way that UK CGT now operates is that the calculation is simply proceeds less costs - cost of purchase, costs of buying/selling and costs of any capital improvements whilst you owned the property. I would guess that a lot of the costs would be in pesetas/Euros and you will need to translate those into sterling using the exchange rate at the time. Similarly proceeds need to be expressed into sterling.

There is no taper relief, nor is there any indexation (inflation) relief. Whatever gain results can then be reduced by your annual CGT exemption - currently £10,100 - assuming you haven't used it elsewhere. You are then taxed at 18% on the gain - but the gain is in effect added to your income to see if it takes you into higher rate tax. If it does, then the excess is taxed at the new higher 28% CGT rate.


4. I hold shares in Spanish company Iberdrola. The dividends i receive have 15% Spanish withholding tax deducted. As a basic rate taxpayer do I have any further tax liability and would this situation change if the shares were in an Isa?

The short answer is 'no'. As well as the withholding tax you are also entitled to a tax credit in the same way as for a UK dividend and so there is more than enough there to satisfy your basic rate liability. Sadly you can't get any excess credits repaid. Holding the shares in an ISA would help in that although it would be tax-free, it wouldn't mean Spain wouldn't deduct withholding tax.

However as with UK shares, you cannot just transfer them into an ISA, you effectively have to dispose of them and then repurchase shares through the ISA. You will therefore need to consider the CGT implications of this and also if once sold you do want to buy shares in the particular company. You may wish to take independent financial advice on this.


5. How do share tax credits work and when are you eligible to receive them?

I assume you are referring to the tax credits that 'attach' to dividends paid on shares. To reiterate part of my answer to Qs. 1, dividends come with a tax credit of 1/9th of the amount of cash received (or 1/10th of the gross dividends, i.e. dividend plus tax credit); that tax credit is enough to pay for the basis rate tax liability that you have as the rate of tax on dividends for basic rate taxpayers is only 10%. If you are a higher rate (40%) taxpayer, there will be more tax to pay - equivalent to 25% of the cash dividend received - and of course even more for someone who falls into the new 50% tax rate.


6. I was advised 20 years ago to set up a trust with a life insurance on my brother with me as the beneficiary. The insurance has now been cancelled and all the premiums will be refunded to me, amounting to over £6000. How do I declare this to the revenue and what level of charge is likely?

I think I need to understand a bit more about what exactly was set up here to be sure as to whether there really are any tax consequences. The starting point is that life insurance doesn't get tax relief for premiums these days - so a cancelled policy and returned premiums would be outside the tax net. But was this any sort of savings products that allowed income withdrawals - or was it purely a life insurance? And the trust will complicate matters - what has been happening with the trust in the interim?


7. What is the income tax position when you decide to take a lump sum state pension, after having deferred it over one or more years? In particular, how it will affect the "upper earnings limit"?

Deferral of your state pension has been available since 2005 and leads, when you do start to draw it, either to a higher pension (taxed in the normal way) or a lump sum representing the unclaimed pension. (You have to put off claiming your State Pension for at least 12 consecutive months.) The lump sum payment, when you claim it, will be based on the amount of normal weekly State Pension you would have received, plus interest added each week.

The lump sum is taxable but in quite a generous way, all things considered. It will not affect the rate at which you are already paying Income Tax - it will be taxed at the same rate, i.e. it can't push you into higher rate tax if you are a basic rate taxpayer. As for the higher age-related allowance, if a lump sum would seemingly take your income above the limit beyond which the age-related allowance starts to be clawed back, you will keep the higher allowance.


8. My husband had a tax bill saying he owed tax from a previous year, even though he was on pay as you earn. We made a part payment by cheque. Then his coding for the following year was adjusted to deduct the balance. We were told at the time that this would sort the problem but now we've received a letter from HMRC telling him that yet again they have found underpayments, and would be deducting £158 per month from his pension. Are we obliged to pay this back - because we had been told that it had been sorted out and that would be the end of it.

It isn't impossible that HMRC are right - but this does need to be checked! However, anyone helping you would need more information about the years involved and the cause of the underpayments. An underpayment can arise for a number of reasons - maybe your husband received a benefit from his employer which wasn't taxed initially; he could have two sources of income taxed under PAYE; or perhaps he's a higher rate tax payer and there is extra tax to collect on savings income. If the amounts are modest, HMRC will 'code out' at least some of the underpayment - i.e. collect the tax via the tax code rather than asking for an immediate cheque. That's helpful to the taxpayer of course.

It could be that there was an underpayment for two successive years and although HMRC said that they had sorted things with the March 2008 letter and bill, they found another error in a later year. If there really is another underpayment then they are certainly within their rights to collect the tax but I do suggest you ask for clear explanations as to what is going on - why this wasn't picked up first time round and why is the new tax bill so high. If your husband's tax affairs mean he is likely to underpay tax each year he could ask for a restriction to go in his coding notice for each year to minimise this.

If you aren't getting anywhere with HMRC and your husband is a pensioner on a low income, you may want to contact TaxHelp for Older People on 0845 601 3321 or 01308 488066 or email them on taxvol@taxvol.org.uk.

Finally, if the demands are in respect of the same year and if HMRC had all the information when they made the first demand, you should consider whether you are eligible to make a claim under Extra Statutory Concession (ESC) A19. Under ESCA19 HMRC will sometimes give up collecting arrears of income tax if they result from their failure to make proper and timely use of information supplied to them. Details of the ESC are available at: http://www.hmrc.gov.uk/specialist/esc.pdf


9. I have some income from letting salmon fishing pitches. Can I offset the cost of my lease against the income from the fishing on my tax return?

Not something I have come across before but I see no real difference from letting income generally. The general rules are that the income is taxable but you can offset related expenses. And that must surely mean a reasonable proportion of the cost of the lease. Not being a fisherman I don't know how these things work but I would suggest that if you paid £X for the annual lease and let out the rights for 10 weeks out of 52, that would imply you could deduct 10/52nd of the lease cost against the income; if alternatively the pitches that you let out are full-time but are in effect half the basic rights, that would suggest you could deduct half the lease costs from the income.

If you paid a lump sum or premium for the lease, rather than annual rent, a proportion of that premium can be treated as annual rent under a lease - see http://www.hmrc.gov.uk/manuals/pimmanual/pim2310.htm

Depending on the revenue and whether part of a larger business you may need to consider the VAT implications, as shooting and fishing rights are not exempt from VAT, although depending on the terms of the letting they might be deemed to be the sale of fish and hence zero rated. In Scotland different rules apply - see http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile?contentID=HMCE_PROD1_023492


10. I've offered to lend my son the £120,000 he needs to buy his house. This is on the basis that he repays the loan at the rate of the building society's standard variable rate. I'll need the income that this provides but want to interpret the payments not as interest but as repayment of capital. I am in my 70s. What will be my tax position?

If you are lending him money and charging interest, then the interest will be income for you and will be taxable. Theoretically you could 'roll up' the loan interest so his payments are purely capital repayments but there is then a question of what happens when the interest is eventually paid - it would be taxable then. Doing this could be seen as having an element of tax avoidance. I would therefore suggest that you seek advice on this from a qualified Tax Adviser before you enter into any arrangements.


11. What are the tax benefits of investing in the AIM stock market?

Capital gains tax now applies in the same way as for other shares - in the old tapering system, AIM shares did get a better treatment than those quoted on the full stock market, but this no longer applies.

As for inheritance tax, AIM shares do get better business property relief and will normally qualify for 100% relief once they have been owned for at least two years by the donor/deceased as they are regarded for these purposes as 'unquoted' (though there is a tripwire with some companies that are listed on AIM in the UK but on the full market in another country). Gifts of AIM shares to a charity qualify for Gift Aid relief. Of course AIM shares often carry more risk than fully quoted shares and this should be weighed against the tax advantage.


12. I had some Cadbury shares on which I now have to pay capital gains tax. I want to know how I can get hold of the appropriate percentages to apply to base cost in February last when Kraft Foods acquired the company, where the consideration comprised shares and cash?

As I guess you are aware, if you exchange your shares for shares in another company, any capital gain is deferred until you sell the new shares. If you sell your chares for cash, that means an immediate capital gain. So, if you sell your old shares for a mix of new shares and cash, that means apart gain deferred and part immediate gain - which is the situation you have.

The starting point is the cost of your old shares. You then need the value of the shares you have acquired - which should be noted within your documentation, or look up the quoted price on the day of the deal. To work out your gain, the proceeds are the cash that you have received; the cost is:

Original cost X (Cash received/Total proceeds)


13. The government announced in their last budget that the basic tax allowance will increase by £1000 from next year. Will the higher tax allowance for senior citizens increase by the same amount i.e £10,000 basic allowance?

It seems not; there is a commitment to get the higher age allowances up to the £10,000 level but no indication they will be going up in the same way as the proposed lifting of the main personal allowance. For the moment it seems that the higher allowances will just be going up in line with inflation but whether this means that all allowances will end up at the same level we will have to wait and see.


14. I have one main pension and three smaller ones started during a period of self-employment. Each pension seems to come under a separate Tax Office so that each year I get four different letters advising Notice of Coding and all are different codes. Is it not possible for all of these to be lumped together so that I get just one Notice of Coding?

This is, in a sense, one of the problems with the PAYE system. The coding notice is an instruction from HMRC to an employer or pension provider how much tax-free pay someone is allowed or, sometimes, that there is no tax-free pay and that all the income is to be taxed at 20% or even 40%. If you have multiple sources, that means an instruction to each of the payers; and in doing this the standard personal allowance (£6,475 for those under 65, £9,490 for 65+) is allocated around the payers. One issue is to make sure that you are being given the full amount of the allowance; one source of problems with the PAYE system for older people is that they don't get their full allowance, or sometimes that they get too much which leads to a bill from HMRC after a few years to claw the excess back.


15. I made a loss on shares and showed this on my tax return. One share holding went back many years, with additions of profit sharing, SAYE shares, etc. It was not possible to give HMRC the full history of that one holding. How do I know if they accept my loss shown, as the tax office say they do not write to say if they accept it but only contact me if there is a problem?

The basic rule for capital losses nowadays is that you do need to formally claim them. The usual way to do this is to complete the Capital Gains summary pages of the Tax Return and make it clear that you are making a claim.

If HMRC don't contact you about this within the normal timescale for making an enquiry (typically a year after the date for filing the return) then you can take it that they have accepted your claim.

It is possible for HMRC to go back to your claim after a longer interval if they make what is known as a 'discovery' - essentially that they find extra information that they didn't know about and which you should have drawn to their attention. The law in this area is far from clear at the moment but I suspect that if you have done your best in showing what you are claiming and why and that HMRC have the information they need to see what is going on, you shouldn't have a problem.


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




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