What is it?

Inheritance Tax is usually paid on your estate when you die. Most estates don’t have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2009-10).

Give It Away And Live For 7 Years

No inheritance tax (IHT) is payable on most gifts in your lifetime so long as you live 7 years after the gift. These gifts are known as a Potentially Exempt Transfers (PET)

If a gift is made but there is some reservation on it, such as gifting your house with the understanding you can still live there until you die, this will not count as a PET and will still form part of your estate that is subject to IHT on at death. However, the gift will be effective for capital gains tax, which can create a double tax charge for the person that inherits the house.

If you give away cash that is used to purchase your house, you can be liable to income tax on the benefit of living in the house. This is called the pre-owned asset charge.

There is a sliding for scale for the amount of IHT payable for death within the 7 years. Of course if your estate is worth less than £325,000, no IHT is ever payable.

Other Gifts That Are Always Free Of Inheritance Tax

The following will always be free on IHT, whenever they are made…

• Small gifts to the same person of not more than £250 in a year.

• Gifts in consideration of marriage of £5,000 from parents, £2,500 from grandparents and £1,000 from anyone else.

• Normal expenditure out of income where the amounts given are part of your normal expenditure taking one year with another.

• Amounts up to £3,000, with any unused amount being allowed to be carried forward to the following tax year.

• Capital transfers for family maintenance – often connected with divorce.

• Any gifts between spouses/civil partners, where the person who receives the gift is domiciled in the UK.

• Any gifts to charities or political parties.

Husband and Wife (or civil partners)

No inheritance tax is payable on gifts between spouses or civil partners as long as both parties are domiciled in the UK. This is often used as a basic method of IHT avoidance. If the gift is a transfer to a foreign domiciled spouse it is only exempt up to £55,000.

With effect from 9th October 2007 spouses and civil partners will now be able to make full use of the nil rate band belonging to each spouse. This is retrospective and applies to anyone with a spouse or civil partner previously deceased. That gives a total inheritance tax exemption for a married couple of £650,000 (for 2009/10). The new rules allow any unused part of the nil rate band on the death of the first spouse or civil partner to be passed to the surviving spouse or civil partner for use on their death.

Say Fred dies on 1 October 2009 with an estate worth £650,000 and his wife did not use her nil rate band when she died previously, he now has the benefit of two nil rate bands totalling £650,000. Now Fred’s executors will pay no IHT at all. The amount of the nil rate band that can be transferred is the proportion of the nil rate band that was unused on the death of the first spouse or civil partner.

For example if on the first death, 50% of a 325K nil rate band was unused, if on the second death the nil rate band is 350K at that time, then 50% x £350K = £175K is available for use in addition to their own nil rate band. There is a maximum of an amount equal to the nil rate band in force at the time of the second death that can be used in addition. Therefore, it doesn’t matter how many ex-spouses or civil partners there are, it is not possible to have a total nil rate band of over 650K in 2009/10.

http://www.southsideaccountants.co.uk/choose-accountant.html

A tax enquiry often starts because HMRC has some information on you. They try to select those cases where they feel there is a good chance of a successful outcome from their point of view.

They keep a file on you so that as much information as possible is kept in one place.

This means that they can review your affairs properly and it is often information from other sources that may lead to an investigation. So ensure you are properly prepared before meeting with the inspector as they have information from many sources…

The Informers

HMRC have a special hotline for informers to call as well as being able to report via the HMRC website and all informers can do so anonymously if they wish. There are many jealous neighbours, disgruntled customers, exlovers and particularly ex spouses out there. Not all accusations are true but it could be the start of your enquiry.

The Curious Inspector

Part of the make up of being a tax inspector is to be naturally curious. How do their neighbours afford that expensive new car? They read local newspapers; scan the Internet, etc looking for anything that they can check against the information they hold on you.

If you’re going to do a job cheaper for cash, you’d better hope, it’s not for a tax inspector. Do you know what all your customers do for a living?

From Other Taxpayer Enquiries

Fred in the course of his investigation mentions that you lent him £15000. The Taxman may want to discuss with you where you got this £15,000 from.

Other Taxpayers Accounts

For, example the inspector can request details of who commissions or rent in another taxpayer’s accounts are paid to, in order to ensure they are declared by the recipient.

Links With Customs & Excise & Government Departments

The Revenue are now combined with Customs & Excise as well as having better links with other government departments. This also means that when your investigation finishes and you have undeclared cash takings, you are also likely to be clobbered by the VAT man for the VAT due on them. Even worse, if you weren’t registered and your higher income now puts you over the VAT registration limit.

The Stamp office will report property transactions.

Explanations On Your Tax Return  Or rather, a lack of them. For owners of small businesses, enquiries often stem from their business accounts. The simplest way to avoid an investigation is to avoid an enquiry being made into your Return in the first place. The best way to do this is to explain anything unusual when your Tax Return is submitted rather than just sending it in without any explanations.

Your Tax Return is originally processed by a computer that carries out analytical checks on the figures to look for unusual items. If you know there is something unusual, explain it in the white space on your return, and then HMRC are far less likely to start an enquiry. It is crucial your accountant does this although often it doesn’t seem to happen.

Examples of things you might explain:
♦ If profits or drawings are low, how have you lived?
♦ If you introduced some money into the business, where did it come from?
♦ If the gross profit margin has changed significantly, why is this?
♦ If any expenses are unusually high, why is this?
♦ If sales have fallen, why is this?

You are looking for anything that is unusual, looking particularly at what HMRC already knows about you from previous years.

Most of these will have simple explanations, so give them now and stop an enquiry being made.

Another reason for an enquiry could be that you haven’t declared any interest being received in the year but HMRC knows you have an interest earning account. Is this where you have filtered away undeclared profits they wonder?

Get It In On Time

Sending Returns in late is also more likely to lead to an enquiry, so be organised. After all, if your Return goes in late it’s an indication you are disorganised and so maybe your accounting records are a bit disorganised and may not be correct.

Random enquiries – a percentage of returns are also randomly selected for enquiry and there’s nothing you can do to prevent this

Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”

http://www.southsideaccountants.co.uk/taxation-services.html

Payments made on personal injury claims are not taxable, regardless of how this payment is received – lump sum or through periodic payments. Further, any interest paid as part of the damages is tax free but interest paid as result of late payment of the award is taxable.

HMRC Employment Manual paragrah 31835 says“The tests that apply to travel expense relate to the nature of the expense and not to the amount.” It goes on to say: “You should not refuse a deduction for first class rail travel, if that has been incurred, on the basis that the same journey could have been made more cheaply in standard class”. As long as the travel and hotel costs were incurred wholly and exclusive for your business the full cost is tax deductible.

If you decide to rent a room in your house or flat to earn some dosh, the taxman cannot touch the rent you receive up to £4,250 per year ie this is tax free income. He has called this “Rent a Room Scheme”. This scheme would apply if you rent a room in your furnished family home where you live. Your lodger can take up either a single room or an entire floor of your home. If you charge extra for meals and laundry, you would need to add this to the rent you receive. If the total amount of money you receive from your lodger exceeds £4,250 then you have two options:

• You pay tax on any income over £4,250 without deducting any expenses or

• Take the rent you receive and deduct your expenses to work out your profit. You then pay tax on this profit.

This scheme will not apply if you split your home into separate flats and you let out the separate flat(s). If you do this than you declare the rent you receive from this in the normal way.

Income Tax

For the tax year 2009-2010 you can earn up to £6, 475 per year before you start paying income tax. If you are over 65  you can earn a bit more before you start paying tax.

National Insurance

For the tax year 2009-2010, you can earn up to £110 a week before you pay any National Insurance contributions.

Gifts to Your Customers

These are not an allowable business expenses unless you are giving free sample of products or your gifts have conspicuous advertising and the cost of the gift does not exceed £50+VAT per person per year. Further, food, tobacco, drink or gift vouchers are not tax deductible.

You can reclaim the VAT as long as the cost is no more than £50+vat per gift to each customer.

Gifts to Staff

Taxman says trivial benefits to staff as staff welfare are tax deductible and VAT can be claimed by the employer. Further, employees are not taxed on these trivial benefits. Examples of trivial benefits include turkey, box of chocolates or bottle of wine. Taxman has not set financial limits on these trivial benefits but he has said that value of these gifts should be reasonable.

Third Party Gifts

Employees can receive gifts from third parties (eg suppliers and customers) without being taxed as long as the gifts are up to the value of £250 (including VAT).

The tax treatment of a van is far more favorable compared to a car. A question we are often asked what are tax advantages of a van and what can be classed as a van by the taxman.

In response to a Free Index question on the subject, I provided a full response. Rather than repeating this information, here is the link to this information:

http://www.freeindex.co.uk/business-advice/claiming-tax-costs-of-cars-versus-vans_1175.htm

As a Free Index Finance and Accounting Expert I respond to tax questions on FreeIndex.

One of these question was about records that a cash based busines needs to keep for tax purposes. Here is the link that provides this information http://www.freeindex.co.uk/business-advice/what-documentation-to-keep-for-your-tax-return_1144.htm