Questions and Answers - September 2006
Is this my Principle Private Residence?
Q: I live with my parents and own a buy- to-let property which has increased in value quite substantially over the last 3 years. I am now looking to sell this, and as I do not own another property am I able to nominate this as my residence to benefit from the Capital Gains tax relief available?
A: The Capital Gains tax relief you refer to is Principle Private Residence (PPR) relief. This is only available to the owner of a house if he occupied it as his only or main residence. Unfortunately, an intention to occupy it is not sufficient to qualify for this relief.
It is not necessary to have lived in it as the only or main residence for all the period of ownership, but it must have been occupied for at least part of the period of ownership as your only or main residence.
HM Revenue and Customs state that to qualify, “residence is one of quality rather than the length of occupation which determines whether a dwelling-house is its owner's residence”. A dwelling house must have become its owners home at some point during ownership even though no minimum qualifying period of occupation is required to qualify for the relief.
There is an exception to this rule if you live in job related accommodation and own an interest in a dwelling house which you intend to occupy in due course as your only or main residence. Provided it was always your intention during to live in the property, PPR relief will be available for the period concerned, even if it is being let out whilst you are living in another property for the purposes of your job.
Increase in State Pension Age.
Q: I have heard the state pension age for women is increasing. Is this correct and how do I qualify for a full basic State Pension at present.
A: In 2006/07, a person needs to have earned at least £4,368 (on which standard rate National Insurance contributions are paid, treated as having been paid or are credited) for that year to be a qualifying year.
The tax years during which you build up entitlement to the basic State Pension are called ‘qualifying years’. The amount of State Pension you ultimately receive will depend on how many qualifying years you have built up before reaching State Pension age.
If you are a man, you normally need to have 44 qualifying years to be entitled to the full (100 per cent) basic State Pension. If you are a woman who will reach 60 before 2010, you normally need 39 qualifying years to receive the full basic State Pension. However, when the State Pension age becomes 65 for women as well as men in 2020, a woman will then also need 44 qualifying years to get the full basic State Pension. Years where a woman chose to pay the married woman’s reduced rate of National Insurance do not count towards her qualifying years for this purpose.
Investments Held Offshore
Q: I own a number of investments in Jersey and a holiday home which I rent out in Spain. As these are located abroad I assume I do not need to disclose the income on my UK tax return?
A: The short answer is no. Assuming that you are resident and domiciled in the UK, all of your worldwide income – including any interest earned through offshore accounts – must be reported on your tax return.
UK resident and domiciled taxpayers are often confused about the advantages of having an offshore account, but to them, the only benefit is usually that these accounts offer a slightly higher rate of return than accounts offered in the UK and the interest is paid gross. It doesn’t remove the fact that you still have to pay UK income tax on the interest you received.
In addition, a recent ruling made in May 2006 by the HMRC resulted in Barclays Bank having to disclose names of any UK residents who hold investment accounts abroad. This means that the HMRC will soon demand similar details from other banks, and anyone who holds an offshore account or property overseas, and who comes to the notice of HMRC is likely, to say the very least, to receive an "enabling" letter from HMRC inviting them to account for any UK tax on the income they receive from it.
Claiming the cost of work clothing!
Q: I am a self-employed Independant Financial Advisor, and while I do work at home, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?
A: This is one of a variety of expenses which the Courts have held to have an “intrinsic duality of purpose” – which means they are not deductible for tax purposes.
The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade”, and are not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required. For example to comply with the rules of a professional body, or simply for the trader to keep up appearances on meeting clients – because these items are regarded as ‘everyday' wardrobe.
Conversely, the cost of clothing that is not part of an ‘everyday' wardrobe, such as protective clothing and uniforms, is deductible against your business income.
Transferring a Property – Stamp Duty
Q: I am thinking of transferring ownership of a rental property into joint names with my wife, to take advantage of her personal income tax allowance as she does not work. The property is currently valued at £400,000 with an outstanding mortgage of £200,000 – and returns £18,000 a year in rental income. Are there any stamp duty issues that I should be aware of?
A: Increases were announced in this year’s budget, so for transactions taking place after 17 March 2006 – stamp duty is payable on mortgage debt over £125,000. In your situation, if ownership of half of the property is being transferred, then only half of the mortgage debt is being taken over by your wife.
As half of the mortgage debt is £100,000, and this figure clearly does not exceed the £125,000 threshold, no stamp duty will be payable. However you should still ensure that you notify the transaction to the HM Customs and Excise.
Part time employment and State pension
Q: One of my full-time employees has recently switched to a lower paid part-time job due to family commitments. She is concerned that this change may affect her entitlement to the basic state pension and other state benefits. Is this the case?
A: For each week that she earns between £84 (the lower earnings limit) and £97 (the primary threshold) in 2006/07, she will be treated as paying National Insurance contributions even though no contributions are deducted from her pay. This means that she will continue to build up entitlement to contributory benefits such as the basic State Pension and Incapacity Benefit, even though she is not paying standard rate National Insurance contributions.
However, if she earns less than the lower earnings limit of £84 per week, she will not pay National Insurance contributions and will not receive credit for state pension and benefit purposes. She may still be able to protect her entitlement to the basic State Pension if she pays NI class 3 voluntary contributions, gets certain benefits or if she is a carer who receives Home Responsibilities Protection.
Customers who do not pay
Q: I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?
A: Legal and professional costs that a business incurs are allowable when they directly relate to trading. Therefore the legal fees incurred in attempting to recover trade debt owed by this customer are therefore allowable as expenditure in establishing your business profit for the year. In addition, as it is a specific customer against which the bad debt has arisen this will be also be allowable as a deduction when establishing your business profits for this period.
Pre Registration Vat expenditure
Q: My business is has been growing very steadily and I am very close to reaching the threshold for becoming VAT registered. A close friend - who also runs a small business – mentioned that once I reach the threshold for becoming VAT registered, I will be eligible to claim back all the VAT from my previous three years of trading. Is this true?
A: Unfortunately not, you can only claim back the vat on goods that you have acquired in the 3 years prior to registration which are still held in stock (or used to make other goods which are still held in stock) and originally acquired for the business purposes. This also applies to any capital assets which you still hold for use in your business. You can also recover the vat incurred on services, which have been supplied within 6 months prior to becoming registered, assuming they were also supplied for the purpose of the business. Therefore, any vat suffered on goods which have been sold on to customers, or capital assets which you have sold or scrapped cannot be re-claimed once you have registered.
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By TaxAssist Direct Ltd. Both answers and advice are offered strictly on the basis that no legal liability is created thereby. Personal circumstances may vary and TaxAssist Direct Ltd advises that individuals seek personal professional advice in all situations.
