Tax FAQ

The main tax that affects wills, triggered by the death of the person, is Inheritance Tax. 

However, when someone dies the deceased's personal representative (PR) or executor will make sure that a personal Tax Return is completed from the start of the tax year to the date of the deceased's death. From the date of the deceased's death to the end of the tax year the PR will have to account for tax and report to the beneficiaries on the tax that he or she has deducted. Each year the PR will have to submit an Income Tax Return to HM Revenue & Customs. However, in the year in which the estate is wound up and all the assets have been distributed, the PR will only have to account for the tax on the income up to the date of distribution. In practice, if probate value is less than £2.5 million and the total tax due by the PR is less than £10,000, HM Revenue & Customs will accept a single computation and one-off payment.

Find out more about making a will, probate and inheritance tax.

A trust is brought into existence when a person (called the 'settlor') transfers some of his assets to trustees (who become the legal owners) for the benefit of third parties, called 'beneficiaries' (the beneficial owners). A trust is a legal entity in itself. Another word for a trust is a settlement.

Sometimes trusts are created under a will and sometimes they are created during the lifetime of the settlor. Sometimes trusts are created to save tax, sometimes to protect assets; there are many and various reasons for setting up a trust.

• Find out more about making a will and DIY wills.
• Find out more about tax and inheritance tax.

When someone dies, they are entitled to their normal full year's worth of allowances. A tax return will need to be completed for the last period of their life from 6 April up to the date of their death and the tax will have to be worked out accordingly.

Income arising after death is treated as the income of the estate and becomes the responsibility of the trustees or executors. When the estate is distributed, both the capital and the income that has arisen since the date of death will be distributed according to the will to the various beneficiaries and tax will be deducted from any income that has been received at the appropriate rate.

If you as a beneficiary receive income that's been credited to a deceased person's estate, then you will receive that income net of the appropriate rate tax and while you may have to pay higher rate tax on the income, there's also a chance that you might be able to claim some back or for there to be no adjustment at all.

Find out more about making a will and DIY wills.

Up to a certain value, the estate is exempt from inheritance tax, but once you reach that threshold, there are quite considerable amounts of tax to be paid. The rates to be paid vary from time to time but you can find the latest figures at the HM Revenue & Custom's website.

You can calculate the tax yourself by working through the HM Revenue & Custom's worksheet IHT/WS and completing forms IHT 200 and D18.

If you are finding the whole thing too much, then hand the tax calculation problem over to your local Capital Taxes Office and they will work it out for you.

Find out more about making a will and DIY wills.

If you rent out a room in your house to a lodger and you are an owner-occupier, or a tenant who is sub-letting, the first £4,250 of any income is tax free, i.e. a rent of £81.73 per week is tax free.

This means that you have in your own house access to over £4,000 income tax-free every year!

If the rent is higher than £4,250, you either elect to pay tax on the surplus above £4,250 (without relief for expenses) or you can treat the arrangement as being a furnished letting and prepare accounts.

This relief is available whether you rent out just one room to a lodger or you run a bed & breakfast business from your house.

• Find out the rules and regulations of renting a room to a lodger with our Lodger Guide.
• Find out how to start up and run a successful B&B.
• Get more landlord tax-saving tips from our guides Tax Answers at a Glance and How to Avoid Landlord Taxes.
• Find out more about the Rent a Room Scheme.
• Find more landlord, tenancy agreement and lodger agreement information.

If you let out holiday accommodation, the definition of furnished holiday lettings is as follows:

• The accommodation must be available for holiday lets for at least 140 days per year.
• The accommodation must be let for at least 70 days in the year.
• No let must exceed 31 days.

The income is treated as earned income (a trade) attracting Capital Gains Tax rollover relief and business asset taper relief.

Tax-saving ideas worth thinking about...

• Rollover of capital gains on the sale of trading assets into the purchase of holiday accommodation.
• Any gain on the sale of the holiday accommodation may eventually attract Capital Gains Tax at only ten per cent.
• You can claim capital allowances on furniture and equipment.
• If you make a trading loss from your holiday lets, you may offset it against your other income or capital gains in the same year or the previous one.

However, don't buy the accommodation with a substantial mortgage because HM Revenue & Customs may regard your motives as not being commercial and don't forget about the VAT consequences if you are VAT-registered.

• Get more landlord tax-saving tips from our guides Tax Answers at a Glance and How to Avoid Landlord Taxes.
• Download our legal form for making a Holiday Letting Agreement today.
• Find more landlord, tenancy agreement and buy-to-let information.

If you receive income from furnished property letting, it's taxed under the property income rules.

If you provide laundry, meals, domestic help, etc. for your tenants, then you may be able to claim that you are running a self-employed business - as you usually can if you are providing holiday lettings (see below).

The advantage of running your property enterprise as a trading business means that there are usually more expenses you can claim against Income Tax and, in addition, you may be able to claim entrepreneurs' relief for Capital Gains Tax and business property relief for Inheritance Tax purposes. Although this does depend to a large extent on the amount of services you are providing.

• Get more landlord tax-saving tips from our guides Tax Answers at a Glance and How to Avoid Landlord Taxes.
• Find more landlord, tenancy agreement and buy-to-let information.

   

Stamp Duty Land Tax was introduced on 1 December 2003 and replaces the 'old' Stamp Duty on land. In the case of freehold property, the Stamp Duty Land Tax payable by the purchaser is as follows:

• up to £125,000 - Nil
• over £125,000 and up to £250,000 - 1 per cent
• over £250,000 and up to £500,000 - 3 per cent
• over £500,000 - 4 per cent

Normally, the house or flat in which you live is exempt from Capital Gains Tax when you sell it. The property must have been your only or main residence during the period of ownership. During the last 36 months of ownership, the property is always regarded as your main residence even if you don't live there. You can also be absent for periods totalling three years and for any period throughout which you worked abroad. In addition, if you had any work which required you to live in job-related accommodation, that also does not stand against you for Capital Gains Tax purposes. Any periods of absence in excess of the periods allowed result in the relevant proportion of your sale profit being charged to Capital Gains Tax.

If a specific part of your house is set aside for business purposes, then that proportion of your profits on the sale of the house will be taxable. However, if you don't have any rooms used exclusively for business purposes, you will not normally be liable to any Capital Gains Tax if you sell your house.

Special consideration needs to be given to houses with a lot of land alongside them. If land is sold in excess of what HM Revenue & Customs regards to be a normal area of garden in character for the house that is being sold, then part of any gain on the sale of such extra land will be subject to Capital Gains Tax.

If you owned two properties, within two years of buying the second one you should have sent in a letter (called an 'election') in which you disclosed to the taxman which you were treating as your private residence for Capital Gains Tax purposes. Otherwise, the taxman will decide for you.

Apart from the annual exemption, you are entitled to set the costs of acquisition of the asset, including purchase price, and the sale costs against the gain.

In addition, if you bought an asset on which you have incurred enhancement or improvement expenditure, then that too will be allowed as a cost. Certain costs such as accountant's fees are not allowed, but if you are looking for allowable costs, and because this subject can be so wide-ranging, we suggest that you talk either to a professional accountant or to HM Revenue & Customs.

Every year there is an annual exemption from Capital Gains Tax and in the year 2008/09 your first £9,600 of gains is exempt. In the case of trusts, it's £4,800.

The rate of Capital Gains Tax is 18 per cent for individuals, partnerships and trusts.

The simplest answer is that savings accounts with building societies or banks that are in the children's names should pay the children interest gross (i.e. without tax deducted).

It's still quite permissible for children to hold shares in companies, even though the tax credits on the dividends are not refundable.

If the children don't have any investments and if you have surplus after-tax income of your own which you can give to your children, this is usually tax free in the children's hands and, if you are particularly wealthy, is a very useful way of transferring income to them, so that the children can accumulate a sum that can then be invested. However, once the income from the source exceeds £100 per annum it will be taxed in your hands. Where you transfer your own shares to your children, if the children are under 18, the income arising on these shares will be regarded as belonging to you, so this does not save tax.

The Child Trust Fund is a tax-free savings scheme designed for children. The Government contributes £250 when the child is born and a further £250 (£500 for lower-income families) at the age of seven. Parents, family and friends can contribute a further £1,200 annually. The child is entitled to the fund at the age of 18 and there will be no restriction on how he uses the money.

Find out how you can pay less tax.

Permanent health insurance policies are intended to provide you with an income should illness prevent you from working. If your employer pays the premium on your policy, they will obtain a tax allowance on the payment they make and you will have to pay tax on any benefit that you receive.

If you make the payments, whether as an employee or as a self-employed person, you will not obtain any tax relief, but any benefits paid to you under these circumstances would be tax free.

Find out how you can pay less tax.

Unfortunately, since 5 April 2000, tax relief on mortgage interest payments has been withdrawn; this applies to both interest paid under MIRAS (mortgage interest relief at source) and otherwise.

Find out how you can pay less tax.

If you're self-employed or a sole trader, legally you must keep records of your income (and any capital gains) for at least five years and ten months after the end of the tax year.

Learn how to understand your accounts here.

If you have to complete a Tax Return, included in the package will be a tax calculation guide for you to follow. The main thing to bear in mind is that if you get your Tax Return submitted by 30 September each year, HM Revenue & Customs will work out for you how much tax you have to pay and when you have to pay it.

In principle, you make two payments a year. On 31 January each year you will pay the balance of the previous year's tax still owing plus one half of the previous year's tax liability as a payment on account for the following year. On 31 July each year you will pay the second half of last year's tax liability. On 31 January following, you will find yourself paying any balance of tax that is due plus one half of next year's tax liability based on this year's total tax bill and so on.

Learn all you need to know about tax and your accounts.

Self Invested Personal Pensions (SIPPs) allow you direct control over the investments in your pension scheme. They provide maximum flexibility in the timing of contributions into, and benefit payments from, the scheme.

An example of such flexibility is that a SIPP allows you to withdraw up to 25 per cent of the fund tax free between the ages of 55 and 75. You can then use the balance to provide income for the rest of your life.

Self Invested Personal Pensions also provide an attraction for Inheritance Tax purposes because if you die before retirement, the whole of the value of the SIPP is excluded from your estate.

There are many assets that can be included in a SIPP, but some are specifically excluded (e.g. residential property, works of art, fine wines and vintage cars).

One advantage of a Self Invested Personal Pension is the opportunity it provides for investing in smaller companies. Another is that a SIPP can borrow up to 50 per cent of its value.

Find out more about pensions in our book Tax Answers at a Glance.

No, and you are particularly at a disadvantage when it comes to Inheritance Tax. If you are married and your spouse dies, you do not have to pay tax on his estate whereas a partner who is unmarried but cohabiting does.

If HM Revenue & Customs says that you owe them money for a particular tax year, you may be able to get these arrears waived or appeal if this request is refused. This will be possible if (a) they had all the information they needed to make a decision; (b) by the time they let you know more than 12 months had gone by since the end of that tax year (in exceptional circumstances they may waive if it is less than 12 months); and (c) you reasonably believed your tax affairs were in order. You can also get arrears waived if the tax office paid you too much tax rebate, then tried to reclaim it after the end of the tax year. When you claim, say you are doing it under Extra Statutory Concession A19.

Find out how you can pay less tax this year.

To complain, apply in writing to the listing officer at the Valuation Office Agency (VOA). This is called 'making a proposal'. Examples of valid reasons are where the property has been reduced in size or physically deteriorated so its value should be lower, or the area has gone downhill; perhaps a factory has been built next door. Alternatively, perhaps the property has been adapted to make it suitable for a person with disabilities - if so, take advice. If the VOA doesn't agree with your proposal, your application automatically becomes an appeal to the Valuation Tribunal after six months.

Find out how you can pay less tax this year.

All chartered accountants are members of the Institute of Chartered Accountants, who will assess your complaint to decide whether conciliation is appropriate or alternatively, carry out an investigation.

Other accountants may be members of the Association of Chartered Certified Accountants, the Chartered Institute of Management Accountants, or the Chartered Institute of Public Finance Accountants. Book-keepers may belong to the Institute of Chartered Secretaries. All of these bodies will investigate and may take disciplinary action against the accountant if your complaint is upheld.

Need to find an accountant? Get a free initial meeting with TaxAssist Accountants.

Corporation Tax is accounted for in 12-month periods, unless the accounting period from its commencement to the first accounting date, or the last period of operation, is less than 12 months. (You may already be thinking that it's time to consult a professional accountant and, in our view, if you have a limited company and you are dealing with Corporation Tax you should certainly seek professional advice.)

Every company has to fill in an annual Corporation Tax Return (Form CT600) and this Return has to be submitted by the company secretary or the directors within 12 months of the end of the accounting period. However, tax has to be paid, assuming we are dealing with a small company, nine months after the end of the accounting period. Big companies have to pay Corporation Tax at more frequent intervals.

Find out more about tax and your business.

Corporation Tax is the tax that limited companies and unincorporated associations (such as clubs) pay on their profits. It's a tax on the profits of the company; profits include interest and capital gains.

Find out more about tax and your business.

In principle, you are liable to Capital Gains Tax in respect of any assets used in your business. However, if further business assets are purchased within one year before or three years after the sale, you can claim 'rollover relief' as a result of which the gain on the disposal is deducted from the cost of the new business assets acquired. Therefore, no tax is paid until the new business assets are sold, unless they too are replaced. For these assets to qualify they must either be land and buildings, fixed plant and machinery, milk and potato quota or other agricultural quotas. Please note that motor vehicles or any vehicle on wheels don't qualify.

Find out more about tax and your business.

To work out what percentage you can offset against tax you need to work out the area of your home that is taken up by your business. Apply this as a percentage. And there is your tax offset!

Find out more about working from home.

If you are an employee, so long as your employer agrees that you can work from home (and whether or not your employer provides you with equipment to carry out such work), you may be entitled to seek a reduction in council tax on the ground that the room you use as an office can no longer be used, for example as a bedroom.

It would be advisable for you not to hold business meetings at your home, because too many of those might constitute a change of use and cause other problems with your local council.

Find out more about working from home.

Your business rates depend on the space occupied by your business - contact your local authority for advice.

Find out more about self-employment.

In principle, you can either pay yourself from your own company by a salary (which could be in the form of a bonus or other remuneration) or, so long as you hold shares in the company, you could pay yourself from your own company by a dividend.

If you are paid a salary from your own company, normal PAYE rules apply.

If you are paid a dividend, your company doesn't have to pay any tax over at the time of making the distribution. This is because dividends can only be paid out of profits which have already been taxed. In principle, dividends are now a more tax-efficient way of withdrawing profits from a company than salary.

If you have lent money to your company and that company wishes you to be able to withdraw some of that loan (to have it paid back), there would be no tax involved with any such repayment.

Find out more about the law and your business.

If you are self-employed you can claim tax-deductible expenses by completing the relevant parts of a tax return.

Find legal forms, advice and information on self-employment.

Yes, National Insurance is still payable if you are self-employed unless your profits are below a certain level. You need to register either way.

Find legal forms, advice and information on self-employment.

To register for self-employed National Insurance contributions you should contact your local National Insurance office, listed in your phone book.

Find legal forms, advice and information on self-employment.

You can tell HM Revenue & Customs that you are self-employed by completing and sending HM Revenue & Customs forms CWF1 and CA5601.

Find legal forms, advice and information on self-employment.

For most new businesses, you must start adding VAT onto your business invoices when your turnover exceeds £67,000 a year (2008/09 figure).

Find legal forms, advice and information on Starting a Business.