Tax Clinic November 2009 – Salary to Spouse, Receipt of Gift from Overseas, Claiming Tax Paid Overseas, Fuel Payments for Employees, Tax of Gifts Prior to Death

Malcolm Finney considers whether a claim for spouse’s salary will be acceptable for tax purposes, if gifts from overseas are taxable in the UK, when tax paid overseas can be claimed in the UK, problems with mileage allowance and fuel payments, and the taxation of gifts made before death.

Salay Paid to Spouse

In Can HMRC Prove Wife's Pay was Tax Evasion? Vplain asked:

“I'm looking for guidance here. A friend of mine has been paid a salary for about four years by her husband's company, even though she was not working there. Recently he has fired some employees who are aware of this payment situation and she is worried they may blow the whistle. If they do, can the HMRC prove that she wasn't working for him..?”

For some reason neither of the first two responses appear to have provided the simple answer “yes, of course”.

If the wife does not, and has not, worked for her husband’s company then she is quite clearly entitled to no salary whatsoever. If having paid the monies to the wife the company has claimed a corporation tax deduction in respect thereof then this amounts to tax evasion/fraud. It would not be very difficult for HMRC to investigate and ascertain that the wife has never worked for the company.

What the query does highlight is that attempting to avoid tax illegally inevitably involves more than one person possessing this knowledge (in the present case the employees) and thus the risk of discovery remains high should someone choose to inform HMRC.

Receipt of Cash Gift From India

The query rasied by Max 41 in Tax Implications of Cash Gift from India represents a common area of concern for many relates to the UK tax consequences of receiving monies in the UK gifted by relatives resident abroad (see also Transferring Money from Cyprus, Non EU Citizen Binring Money to UK and Cash Gift From Switzerland).

Typically, the recipient individual is non-UK domiciled (rather than UK domiciled) but UK resident as in the current query.

Suitably structured, no UK tax consequences should arise for either the recipient or the donor. For the recipient the gift constitutes what might be termed “pure capital” and this is not subject to either Income or Capital Gains Taxes. For the donor, no UK Inheritance Tax consequences arise assuming the gift is of non-UK-situs property (i.e., non-UK domiciliaries are not exposed to Inheritance Tax except on UK-situs property). It is thus important that the monies to be transferred are from the donor’s account outside the UK and not from an account in the UK. If the latter, the gift would be a potentially exempt transfer for Inheritance Tax purposes.

For the recipient a point to note relates to Capital Gains Tax. If the donor, for example, gifts say US$Dollars from his Cayman Islands account to his son’s $Dollar account also in Cayman and the son decides to remit the monies at a later date a possible Capital Gains Tax liability may arise. The foreign currency (i.e., US$Dollars) is a chargeable asset and if Sterling depreciates against the Dollar then on remittance to the UK, a Sterling capital gain will have been made and a Capital Gains Tax liability would thus arise.

The Timing of Relief for Tax Paid Overseas

In Aligning German and UK Tax Years, 'Kaiser Friedrich II' wanted to know about the method for claiming relief from UK tax where foreign tax has also been paid.

Under UK tax law a UK resident with overseas income or gains is in principle able to offset any foreign taxes paid on such income or gains, against any UK tax charge.

However, the UK’s tax year (i.e., 6th April to following 5th April) is not in line with the calendar year typically utilised by many other countries. As a consequence, possible problems can arise as there is a “mismatch” between the two tax years.

This was the problem raised by Kaiser Friedrich II (see also Friday12's Overseas Tax Year Jan to Jan - Reconciling to UK?).

In Friedrich’s case it is not acceptable simply to utilise the income/expenses for, say, the German year 1st January 2009 to 31st December 2009 for the UK tax year 2008/09 or 2009/10. It is necessary to include only the income and expenses for the relevant UK tax year; in effect, some re-computation is necessary.

With respect to any double tax relief (i.e., identifying the quantum of German taxes paid to offset against the corresponding UK tax charge on the same income less expenses) the position is as follows:

If an overseas tax return covers the period say 1 January 2009 to 31 December 2009 and foreign tax paid is (equivalent to) £1,200 then for the UK tax year 6 April 2009 to 5 April 2010, the foreign tax credit will be 75% of that £1,200 plus 25% of the foreign tax paid for the next period 1 January 2010 to 31 December 2010.

Problems with Mileage Allowance

This query Benefits in Kind on P11Ds concerned an employee using his own car and whose employer paid for fuel used on business and appears to have generated great interest. More specifically, the issue raised concerned the P11D implications. “GBfrom Devizes” was concerned that a payment of £2,697 for business fuel should have been entered on his P11D and as a consequence he felt he would be subject to tax thereon.

The starting point for any payment from an employer to an employee is that it is prima facie taxable. This applies whether the payment is monetary (e.g., salary) or some form of “benefit in kind” (i.e., non-monetary). Form P11D is used by an employer to notify HMRC of details of expense payments, benefits and facilities provided to certain employees. (i.e., employees earning at a rate of £8,500 per annum, and certain directors).

In the current case a payment of £2,697 was made by the employer to a card-issuing company due to the purchase of fuel by the employee using the card.

Whether this payment was in respect of business mileage or not, the employer was correct to enter the amount on the employee’s P11D, possibly under “B” in Box 15 of the P11D as “Payments made on behalf of the employee”. It is then for the employee to claim an appropriate deduction in respect thereof if it is demonstrable that the £2,697 was all incurred in respect of business miles only. This is done by the employee claiming 40p per mile for the first 10,000 business miles and then 25p per mile thereafter (i.e., using the approved mileage figures provided by HMRC).

Had the employer simply made payments directly to the employee following a claim utilising the above rates then no entries would have been entered by the employer on the employee’s P11D (however, any payments in excess of the above rates would require appropriate entries on the P11D).

GBfromDevizes appears to be of the view that the entry on his P11D followed by a claim on his behalf means that he receives no benefit from using his car. In short this is correct. It is not the intention of the legislation to enable him to receive any such benefit; what is intended is that should his employer pay for his business mileage fuel costs then he should not be taxed thereon, which is correct once a claim for a deduction is lodged.

Contributor “MrPAYE” provided a succinct and, in my view, correct response.

Interaction between Lifetime Gifts and the IHT Nil Rate Band

Confusion often arises over ascertaining the amount of Nil Rate Band (NRB) available on an individual’s death for Inheritance Tax purposes where lifetime gifts have been made. This was the issue at hand in Emdlaw's question Failed PETs and NRB.

On death in the tax year 2009/10 the NRB is £325,000. However, if in the previous 7 years the deceased made any lifetime gifts (e.g., to his son, daughter, brother, etc.) then each of these lifetime gifts reduces the amount of NRB to offset against the deceased’s death estate.

For example, assume lifetime gifts of £50,000, £150,000 and £25,000 were all made within the 7 years prior to death. If, on death, the deceased had a death estate of £600,000 the available NRB would be [£325,000 less [£50,000 + £150,000 + £25,000]] i.e., £100,000. Inheritance tax at 40% would then be payable on £500,000 i.e., £600,000 less £100,000.

At the date of death, no Inheritance Tax would arise on those lifetime gifts as they fall within the NRB of £325,000.

Article Added Tuesday, 17 November 2009

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