Tax Q&A: How exactly are gifts from income excluded from inheritance tax calculations?
From self-assessment tax returns to HMRC struggles, the Telegraph’s tax expert, Mike Warburton, answered all the tax questions that have been bothering you.
Last week, Mike shed a light into which figure is used by HMRC to calculate whether someone is entitled to child benefit.
Find below a highlight of the Q&A. The rest of the questions answered can be found in the comments section below. Thanks to all who participated by sending in questions.
07:14 PM GMT
Thank you for all of your questions
That’s all for today’s Q&A. Thanks to those of you who sent in a question, and apologies if you did not get an answer to your question this time.
You can follow the week’s most important tax, property, investing and pensions news, analysis and tips by signing up to The Telegraph Money Newsletter.
07:11 PM GMT
Do I need to complete a self-assessment if I have £3,000 in dividends?
The final question comes from JD regarding tax returns and dividends.
JD wants to know: “Do I have to make a tax return with less than the personal allowance but £3,000 in dividends?”
Mike replies: “The dividend allowance has been falling and is £2,000 for tax tear 2022/23 and £1,000 for 2023/24. Even though your dividend income is above this, it does not necessarily mean that you need to complete a self-assessment return, unless HMRC sent you one for completion. The HMRC threshold for self-assessment is dividends of over £10,000.
“I suggest that you write to HMRC with the amount of your dividends, and they will decide whether in your overall circumstance a return is required. If you are on PAYE I would expect this to then be reflected on your tax code, depending on when you report it.
“Sadly, this is all becoming more of an issue just when HMRC are trying to cut down on the number of returns issued.”
07:08 PM GMT
How is tax treated from a UK perspective if I withdraw from my US pension?
Reader Clive asks Mike a question on his US company pension.
Clive would like to know: “I have recently cashed in a US company pension− 401(k) account − that I contributed to when I used to work for a US company in the far east. I have paid 30 per cent tax in the US to withdraw the funds, but wonder how the reminder is treated from a UK tax perspective?
“I am 66 and a full-time UK resident and taxpayer with no other overseas income or interests.”
Mike replies: “Your question came in last week Clive and I have been trying to clarify the answer. I know what the general UK tax rules are but this can be overridden by the double tax treaty concerned.
“This is an interesting question and one that I have researched but I need a bit longer to bottom out how 401(k) funds are treated. It may be that another reader has practical experience of this?”
06:56 PM GMT
Does my wife have to pay tax on the income from the savings held in her name or can she use any allowances?
Up next a question on tax allowances from Stuart.
Stuart is wondering: “My wife only has non-savings income (a partial state pension) of approximately £4,800. The majority of our cash savings are therefore held in her name, as my income means that I only have the standard savings tax allowance of £1,000 per year.
“To check when/if my wife has to pay tax on the income from the savings held in her name, could you please clarify whether my wife can use all of the following allowances together? They are as follows: The balance of her personal allowance up to £1,2570, together with her savings tax allowance of £1,000 per year, together with the additional savings allowance of £5,000 per year.”
Here’s what Mike says: “The £1,000 savings allowance should apply to her along with her personal allowance. The £5,000 nil rate savings band could then apply. Once her non savings income goes above her personal allowance it will eat into the £5,000 savings band but she should still have the £1,000 savings allowance available.”
06:53 PM GMT
Will my SIPP no longer be exempt from IHT when I die after 75?
A reader wants to know if inheritance tax will affect his self-invested personal pension.
John asks Mike: “I’m approaching 75 and am concerned about what happens to my SIPP when I die after 75. Am I right in assuming it will no longer be exempt from IHT?”
Mike responds: “If you have a SIPP and die before or after the age 75 it should be free of IHT under the current rules. If you die after age 75 and the benefit of the funds passes to your adult children, for example, they would be subject to income tax on any pension taken, depending on their circumstances.”
06:51 PM GMT
How do I calculate P11D or medical insurance benefits?
Now, for a question from Chris on medical insurance benefits.
Chris queries: “How do I calculate P11D or medical insurance benefits on my self-assessment return?”
Mike answers: “You should have been sent the amount of the medical insurance on the P11D given to you by your employer. If you are in self-assessment, you enter the benefit in kind amount on the return in the employment section. You should not need to do any calculations yourself.”
06:48 PM GMT
In what order are savings interest and dividends income taxed?
A question from an anonymous reader on additional savings allowance.
The question is as follows: “Mike, of the income I earn that could possibly be taxed under the current rules £8,000 is savings interest and £9,000 is dividend income. In what order are these taxed as I’m conscious of the additional savings allowance?
Mike says: “Under the rules, the first slice of your income comprises earnings, pensions, taxable social security payments, trading profits and income from property. The next slice is savings income. Dividend income is the top slice.”
06:48 PM GMT
Should I take the 25 per cent tax free part of my personal pension in case of rule changes?
Up next, a common question regarding pensions from S Hall to Mike.
S Hall shares: “Fortunately I have an adequate pension and ISA savings for the next 5+ years. I have 500k in personal pensions between my wife and myself. Should I consider taking the 25 per cent tax free part in case of rule changes?”
Mike explains: “This is a question raised almost every year. So far, no government has taken the step of abolishing the 25 per cent tax free pension lump sum, but I guess the risk remains. Nigel Lawson referred to it as the “anomalous but much loved tax free lump sum”.
“If in doubt you may wish to take it before the next election but it is not a change I am expecting.”
06:46 PM GMT
Will there be any IHT due on my wife’s £650,000 gift to our children?
Reader Mr Jones has a query to do with inheritance tax.
Mr Jones asks: “My wife gifted our children £650,000 from her own account – this was money from proceeds of a property we owned together. If she dies within seven years and I live, is there any inheritance tax due?”
Mike replies: “Even though you were equal owners of the property, once the money reached her personal bank account it became her property unless there is clear evidence to the contrary, such as a formal declaration of trust.
“If having made the gift your wife were to die within seven years, the gift would fall back into her estate, subject to the tapering rules. You take the IHT nil rate band from the gift and tax that at 40 per cent less a tapering allowance based successively on 20pc, 40pc, 60pc and 80pc, depending on how she lived after making the gift. For example, the taper would be 80pc if she died six years after making the gift.”
06:44 PM GMT
Is it correct that the interest paid to by banks is declared directly to the tax man?
A question from Jan on how interest paid by banks is declared.
Jan writes: “Is it correct that the interest paid to me by banks and building societies is declared directly to the tax man?”
Mike says: “That is what should happen but comments from readers in the past leads me to question whether this always happens in practice. There is a reconciliation after each tax year end which is supposed to pick all the information up.
“However, my view is that it is better to play safe and, if you are not in self-assessment, tell HMRC in a letter.”
06:40 PM GMT
Do I potentially need to pay capital gains tax on an insurance payout?
Now, we have a question from Matthew regarding CGT tax on insurance money.
Matthew wants to know: “I lost a watch last year which was insured for £21,000 and received the full payment. I bought it in 2015 for £7,000. Could I potentially need to pay capital gains tax on this insurance payout?”
Mike answers: “The insurance proceeds would be treated as if you had sold the watch for this amount. Sadly, at £21,000 you are above the ceiling of the chattel exemption of £15,000.”
06:39 PM GMT
To avoid potential IHT, can I gift my spouse money five minutes before they make the same fit to a beneficiary?
Reader Nick would like to know more about inheritance tax.
Nick asks: “Re potential IHT, do payments from our joint bank account (my wife and I) count as 50/50 irrespective of whose investments were sold to credit this account. And can a spouse gift money to the other five minutes before they make the same gift to a beneficiary, as if it came from them?”
Mike answers: “In the absence of clear evidence to the contrary, HMRC will regard a joint account as being held equally between spouses. It does not matter who introduced the funds. In theory, you could do as you suggest, provided there was no agreement or understanding that the subsequent gifts would be made. When Nigel Lawson as chancellor introduced independent taxation to parliament he did so with the words ‘it is inevitable, and acceptable, that married couples will transfer assets to each other to save tax’.
“Nevertheless, I would be inclined to make the transfers on different days.”
06:37 PM GMT
Does interest on money in stocks and shares ISA have to be declared as income?
Anne wonders: “Does interest on money in stocks and shares ISA have to be declared as income?”
Mike replies: “Assuming you have a qualifying ISA, the income should be tax free and would not need to be declared”
06:35 PM GMT
Can HMRC examine records older than seven years?
An interesting question to Mike from Colin.
Colin would like to know: “Are there any circumstances under which HMRC can examine records older than seven years when assessing a PET.”
Mike answers: “There is a rather strange set of circumstances where events up to 14 years before death can be relevant. This can happen if gifts were made within the seven years before death but there were earlier transfers in the seven years before the gift concerned, typically into a discretionary trust.
“The detail is too complicated to go into in this answer but I could write an article about the 14 year rule if readers are interested.”
06:34 PM GMT
Do I have to declare side earnings of less than £1,000?
Next up, a question from Paul.
Paul asks: “Do I have to declare ‘side’ earnings of less than £1,000 (around £400) if I have used up my personal allowance with pensions?”
Mike explains: “If this is just income from a small self-employment, then the £1,000 would be covered by the small trader allowance.”
06:28 PM GMT
Does every trust have the capital gains allowance of £3,000?
A question now from Egan on capital gains tax allowance.
Egan wants to know: “With bare trusts, the capital gains allowance for 2023-24 is £3,000. Does every trust have this allowance or is it the trustee’s total allowance, if say the trustee has set up a trust for two children? Does any capital gain in a trust additionally count towards the beneficiaries personal £6,000 allowance?”
Mike says: “With a bare trust you are simply a nominee for the person involved, the beneficiary. This applies even if it is for a child. The income and gains are taxed as if for the beneficiary, but watch out for children’s income arising from a gift from the parents.
“Trusts other than bare trusts have different rules where the CGT exemption you mention is divided by the number of trusts involved.”
06:26 PM GMT
If Labour win and decide to increase CGT from 20 to 40 per cent, will this change take effect overnight?
An interesting question about the possibility of a CHT hike under Labour.
Anonymous asks: “If Labour wins the next general election and decide to hike the CGT from 20 per cent to 40 per cent, will this change take effect overnight or will the need to wait until April 2025?”
Mike explains: “Gains on shares are taxed at a lower rate because the company involved has already been taxed on the profits generated that supported the increase on the share price. In addition, shares, and property come to that, tend to be long term investments with the result that much of the gain can be inflationary rather than real.
“Nevertheless an increase is possible under a Labour government and if it is introduced I would not expect it to have effect until there is s budget and probably not before April 2025.”
06:22 PM GMT
Can I claim tax relief on the amounts HMRC withdraws after a charity donation?
Now, Caroline shares her query.
Caroline says: “If I choose to make a very large contribution to a charity that is very close to my heart for a year (maybe more) – I know the charity get the 20 per cent gift aid – but do I also get in addition to my higher rate tax refunded, the amounts HMRC withdraws on personal allowance and child allowance also refunded?
“Roughly, on a salary of £150k, and I am thinking about donating c £100k.”
Mike replies: “The basic position is that the charity recovers 20 per cent of the grossed up amount (25pc of the gift), and you can then claim relief at your higher rates through your self-assessment. With such a large and generous donation, I think you should take some advice because you may benefit from spreading the gift into different tax years.”
06:13 PM GMT
I have misplaced my P11D, can I add up the values from my monthly payslips instead?
Sean says: “If I have misplaced my P11D, would it be accurate to take the value from each monthly payslip and add them up for the tax year in question?”
Mike answers: “That is fine as long as it gives the same result. Alternatively, you could ask the HR department or your employer for another copy. If you put in an estimate, you need to say so on the return.”
06:09 PM GMT
How exactly are gifts from income excluded from inheritance tax calculations?
Reader Duncan has a question on gifts and inheritance tax.
Duncan would like to know: “Re gifts from income being excluded from inheritance tax calculations, what exactly counts as income? I’ve been advised that income drawdown and tax free payments from pensions count as capital, rather than income.”
Mike replies: “It is a matter of the general distinction between income and capital. A withdrawal of the 25 per cent tax free lump sum from a self-invested personal pension (SIPP) would typically be capital. Income from and ISA is still income even though it is not taxable. However, a regular 5pc withdrawal from a single premium insurance bond is treated as capital.”
06:06 PM GMT
How do I let HMRC know I no longer have to do a tax return?
Now, a question on HMRC’s self-assessment register from Fulford.
Fulford shares: “I used to earn extra income outside my normal job, so I had an accountant do my tax return. When I stopped having an extra income I didn’t need my accountant back in 2019, I have only realised now that I am registered for self-assessment even though I have had no income outside my job. What shall I do?”
Mike replies: “It sounds as if you were left on the self-assessment register with HMRC. If you were sent a tax return you should have submitted it even if you had no additional tax to pay. My suggestion is that you write to HMRC and explain what has happened. They may just ask you to complete one further return and then close the file. I am surprised that you haven’t been chased over this by HMRC.”
05:59 PM GMT
Should I crystallise my pension pot if Labour reintroduce the Lifetime Allowance?
Rory questions: “Regarding the Labour Party’s intention to reintroduce the Lifetime Allowance if elected, I have two pension pots – one crystallised, the other uncrystallised.
“Should I crystallise the uncrystallised pot, to uplift the base value, when I next have to pay the 55 per cent charge?”
Mike responds: “Depending on your circumstances, it could be worthwhile crystallising your uncrystallised pension fund before the next election. I wrote an article about this earlier this month — linked here — which you may have seen. Anybody with a large pension fund should consider taking professional advice on the alternatives.”
05:54 PM GMT
Do I have to pay capital gains tax on my late brother’s house?
Now, a question on capital gains tax (CGT) from Michael.
Michael asks: “My late brother died on April 27 2022 and after the Letter of Administration was granted, I sold his buy-to-let house. My two sisters and I were each given £47,000. His estate was below the inheritance tax (IHT) threshold. However, I had a joint mortgage with him to help my brother get the mortgage in the first place, and registered as a joint owner with the Land Registry. The house used to belong to our late father, and my brother bought it from us (his siblings) in 2004. Do I have to pay capital gains CGT?”
Mike explains: “CGT is based on beneficial ownership. You say that you were registered as a part owner with the land registry, but that does not mean that you obtained any beneficial ownership. It looks to me as though the beneficial ownership was all retained by your brother. If so, you would only be caught on the gain, if any, between your share of the selling price and the probate value at death.
“You need to go back to what happened when you were registered as a joint owner. Did your brother intend to transfer a part ownership to you?”
05:52 PM GMT
What can I do to minimise the effects of moving into the upper tax bracket?
Up next, a question from Matthew.
Matthew says: “My end of year bonus, paid in March, will take me into the upper tax bracket, and I’ll lose my personal allowance and tax-free childcare. What can I do to minimise the effect of this?”
Mike responds: “Sorry, but pension contributions are all I can think of to help here.”
05:50 PM GMT
How much of my savings interest is tax-free if I’m living outside the UK?
Now, a question on savings when living abroad from Jane.
Jane shares: “I live outside the UK and receive state pension. My only other income is the interest on my savings. How much of this interest is tax free?”
Mike replies: “The normal rule is that income arising to a non-resident individual is taxable on that income in the UK. However, under a number of double tax agreements this will not be the case. You can refer to the HMRC guidance on this.
“In any event, if tax is paid in the UK, it will usually be available for credit against the tax on the same income taxed where you live.”
05:45 PM GMT
Can my daughter gift me money, so long as I live more than seven years?
The first question comes from Ronnie, who has a query on inheritance tax.
Ronnie asks: “Can my daughter gift me money without either of us incurring tax, so long as I live more than seven years?”
Mike asnwers: “The answer is yes, although it normally works the other way round, with parents giving money to their children.
“However, if you are likely to fall within the IHT nil-rate band on your death I wonder if this might be better structured as a formal loan to your daughter which could be deducted from your estate at death, it would be worth asking a solicitor if this is the case.”
05:31 PM GMT
Q&A is starting in 15 minutes
Hello all. This Q&A will be getting underway in just 15 minutes. Our tax expert, Mike Warburton, is on hand to answer your tax-related questions ahead of the self-assessment tax return deadline.
Please leave your questions in the comments section below for him to answer – just look for the speech bubble underneath this post.
