Tax Clinic March 2009: Domicile, Barristers, VAT Tax Points, HMRC Access to Private Bank Statements, CGT and Main Residence Reliefs, IHT and Gifts

In his second monthly instalment, Malcolm Finney points out some further important tax issues for taxpayers and practitioners: Domicile, Barristers' Expenses, VAT Tax Points, Inspector Wants to see Private Bank Statements, CGT and Main Residence Reliefs, IHT and Gift Exemptions

This month’s clinic looks at a number of issues:

1. Practitioners' Queries: Domicile, Barristers and VAT Tax Points

2. Inspector Wants to See Private Bank Statements

3. Capital Gains Tax and Main Residence Reliefs

4. Inheritance Tax and Gift Exemptions

1. Pracitioners' Queries: Domicile, Barristers and VAT Tax Points

Whilst the Forum primarily appears (as best one can guess) to involve queries raised by non-tax practitioners it also provides the opportunity for a tax practitioner (or someone involved in advising clients) to raise a query which has arisen in their own practice and in respect of which the practitioner is seeking some comfort or outright help from fellow practitioners. The Forum is thus an extremely useful vehicle for the practitioner and perhaps could be exploited more fully. The Forum permits anonymity and thus no “loss of face” need arise and, in any event, none of us can know everything even about our own areas of specialisation.

Three recent examples of this were the queries raised by three knowledgeable and regular contributors to the Forum, namely, pawncob on 26th February 2009; tom 7000 on 4th February 2009; and Lee Young 14th December 2008.  In each case help was at hand.

Domicile – Reviving the Domicile of Origin

Introduction

Pawncob and Maths discussed the perennially thorny topic of domicile, and how difficult it can be to lose one and gain another. In particular, one’s domicile of origin may be revived when a domicile of dependency, or choice, is actively given up. [For further information on this interesting topic, see also Malcolm’s excellent tax article on Domicile here Domicile of Origin - Ed. ]

Reviving Domicile

Barristers – Special Treatments

Introduction

Tom7000 had started to act for a barrister and wanted to know if a barrister could incorporate, and if there were any further issues to beware. Some basic points were covered - perhaps the most unusual aspect of the taxation of barristers is that they are unique in being legally entitled to adopt the ‘cash basis’ of accounting (as averse to the otherwise-universal accruals basis) for tax purposes for the first seven years after commencement – see http://www.hmrc.gov.uk/manuals/bimmanual/BIM74020.htm.

Barristers

VAT Tax Points

Introduction

Another issue which is frequently overlooked or misunderstood by businesses is the VAT ‘Tax Point’ – i.e., the date at which the VAT on a supply must be accounted for, e.g., when preparing one’s VAT Return. Unhappily, it isn’t always the date of the invoice! Lee Young asked what was the tax point on payment by credit card, and received guidance from his fellow forum contributors. There are basic tax points, and there are actual tax points, and then there are tax points for continuous supplies of services, and staged payments in the construction industry...  fortunately, sections 14 and 15 of The VAT Guide  should help to point in the right direction -

Tax Point Query

2. Inspector Wants to See Private Bank Statements

Introduction

The tricky topic of tax investigations crops up from time to time. One of the problems with queries in this area is that “facts” rather than “principles” tend to dominate, making constructive help from contributors somewhat difficult. Nevertheless, a recent query illustrates the lengths to which contributors will go to provide help and guidance. Lambo’s query on 5th January 2009 has resulted in five contributors offering help resulting in a discussion which has extended over the period 5th January 2009 to  21st February 2009 (and still going on !!) -

Private Bank Statements

For details of ongoing changes to the enquiry regime, including HM Inspector's Rights and Powers, see Mark McLaughlin's articles Cause for Concern? and An Inspector Calls - Ed.

3. Capital Gains Tax and Main Residence Reliefs

Introduction

This is a topic which appears regularly albeit in different variants. The perhaps classic variant is where the property has been occupied for a period of time as the owner’s residence followed by a period of letting followed by sale. The issue is whether a capital gains tax liability arises on the sale.

Believe it or not this topic is actually fraught with potential tax issues and is not always as straight forward as is often assumed. For example, it is often thought that “lettings relief” is equal to £40,000. However, this is in many cases not so. Lettings relief is the smallest of three amounts, namely, £40,000; the exempt gain on sale due to principle private residence relief; and the gain attributable to the lettings period itself. In many situations it is the last figure which applies and which is often less than £40,000. It also needs to be appreciated that a “residence” does not need to be owned to classify as such.

For example, a house may be owned which is occupied, say, four nights a week with the other three nights being regularly spent at the parent’s house. In this case the individual may be regarded as having two residences. In order not to precipitate a capital gains tax charge on sale of the house an election may need to be lodged within a two year period.

A favourable part of the legislation prescribes that once a property qualifies as a sole or main residence, the capital gain attributable to the last three years of ownership always qualifies for exemption irrespective of all other issues (thus this applies, for example, even if during this three year period the individual in fact has another residence).

The combination of occupation as the sole or main residence, the last three year automatic exemption and lettings relief will often mean that no capital gains tax arises on sale unless the gain attributable to the lettings period exceeds £40,000 (which would require letting the property for quite a length of time; mathematically). In many cases therefore there is no need to get bogged down in too much legislation as it may be clear from the facts that no capital gains tax arises.

An example of this can be seen in a query raised by firekill on Mon Feb 09 2009 -

Capital Gain on Rented Property

4. Inheritance Tax and Gift Exemptions

Introduction

Inheritance tax is levied on lifetime and death transfers. However, a number of such transfers may qualify as “exempt” transfers thus precipitating no inheritance tax liabilities. However, exempt transfers each have their own attaching conditions which need to be satisfied. Thus, for example, some exempt transfers apply to both lifetime and death transfers (eg inter-spouse transfers) whereas some only apply to lifetime or death transfers (but not both); some exempt transfers are per donor whereas some are per donee; some exempt transfers are absolute amounts whereas others are variable amounts; some exempt transfers if not used in one tax year may be carried forward for future use; etc.

As exempt transfers the transfers are neither “chargeable” nor “potentially exempt”; the need for a donor to survive 7 years to avoid any tax liabilities is thus not relevant. The annual exemption applies to lifetime transfers only; is a fixed amount (currently £3,000 per tax year); can be carried forward if unused for one tax year only; and is per donor not per donee. The gifts in contemplation of marriage exemption is wide in scope but with respect to parental gifts (to children) amounts to £5,000 per parent per marriage.

The queries raised by This e-mail address is being protected from spambots. You need JavaScript enabled to view it on 18th June 2002 and under the same posting by TommyP on 5th April 2004 highlight the potential, and understandable, misunderstandings which can occur in this area of gifting -

Gift Tax

Article Added Sunday, 08 March 2009

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