ASK THE EXPERTS

Q. Re ‘source ceasing’. I am resident in the UK; my domicile is Jersey.In the last tax year 4th April 2008, all the steps were taken to source cease, i.e. a tainted and interest account was closed and the next day 5th April a new account opened, and the money put in this account.I would expect that when the tax year ended, i.e. on the first day of the new tax year (April 2008), this would be treated as capital if brought back to UK.Is this now correct or incorrect?
A.W. via email

A. You must remember that the old rules changed on 5th April 2008. Source ceasing worked in the past, but no longer. It is therefore no longer possible to turn interest into capital by closing one account and opening another. Furthermore, in future, resident non-doms will be taxed on worldwide income and remittances are irrelevant, unless you elect to be taxed on this basis by paying £30,000 for the privilege. 

Q. My father died in June 1998. I inherited a 50% share in my father’s residence in January 1989 through a deed of variation.I have never lived in the house, only my mum has. Is there any capital gains tax (CGT), and if so how is this computed? Also, what is the date for indexation purposes?
K.H. via email

A. When the property is sold, the capital gain will be equal to the sale proceeds minus the probate value in June 1998. The gain will then be apportioned 50:50 between you and your mum.Your mum’s share of the gain will be exempt from CGT under the ‘principal private residence’ exemption. But you will be liable to CGT at 18% on your half of the gain. 

Q. Property purchased by a sole-trader builder and two adult children as a joint venture. Renovation carried out by father. Varying amounts of capital introduced plus a joint mortgage used to finance purchase and renovation. Upon completion in July 2005 the property was let, qualifying as furnished holiday accommodation and the net rents before deducting mortgage interest were shared equally. The mortgage interest deduction was shared unequally to reflect greater capital contributions by the children. Due to a change in one of the children’s circumstances, the property was sold in September 2007 to the other child on the basis of an independent valuation. As the father cannot claim the value of his labour on the renovation in his capital gain computation he has only charged his children at approximately two-thirds of his normal rate. As compensation, the children have agreed that their father will receive more than one-third of the profit from the sale of the property.Queries relating to the father’s CGT position:

1. Please confirm that the father cannot claim for the value of his labour as a cost in his capital gain computation.

1. Will HMRC accept the father’s computation on the basis of more than a one-third share of the gain?

R.F., via email

A. If there is an agreement between the three that the capital gain should be allocated in a different ratio to the rental income and other than equally this is acceptable to HMRC.Given that the father is a builder and he does not own 100% of the rental property, it would be perfectly acceptable for him to charge the partnership (which is in effect what the father and two sons are in relation to the house) for his labour. However, he will have to have brought the value of his labour into his sole trader accounts as income. As he has apparently not done this and as the work was carried out more than four years ago, it is unlikely to be a good idea to do this retrospectively as this would necessitate opening up several years’ worth of accounts and would no doubt result in interest and penalties on unpaid income tax.

Q. I read somewhere that if partners meet to discuss the future business – say once a month or once a quarter –­ then the costs associated with this can be, effectively, offset against tax. Is this correct? What sort of charges? For example, if we chose to meet in the local hotel and had a meal whilst we were planning, is that an allowable expense?H.L., via website 

A. The Revenue’s view is that the cost of any meals taken at times when you would ordinarily have eaten anyway is not a valid business expense. The costs have to be justified as being wholly and exclusively for business purposes and the Revenue’s view is that there is ‘duality of purpose’ in the cost of providing food since people would have had to eat anyway.If you met in a hotel and the cost of refreshments is part of the package involving room hire, then the total cost plus travel costs would be allowable.Our view is that, providing you definitely had a meeting and could produce minutes to prove this, it is not for HMRC to challenge the scale of the expenditure. You may choose to eat in a restaurant to avoid the cost of hiring a room, or to enable you to meet in the evening and so not waste the working day. A similar argument could be advanced in respect of a weekend away in a hotel if you had a really major issue to discuss that would take more than one day or that had to be kept confidential from other staff.Our advice would therefore be to claim all the costs but to be aware that it may be challenged and where possible to incur food costs as part of an overall package for meeting services.  

Q. I am a computer contractor currently using an umbrella company rather than having my own limited company or rather than operating as a sole trader. The umbrella company pays contractors using it via PAYE and takes care of managing allowed expenses. Not requiring immediate income, I have asked the umbrella company to pay me minimum wage only and to pay all other money that would normally have been paid as salary directly into my pension (a SIPP) as an employer’s contribution. This results in an employer’s contribution to my pension that is far higher than my take-home pay. Can you confirm please that this is a legitimate thing to do and that this should not cause HMRC any issues (with me anyway)?J.H., via website 

A. As long as the amount paid to the SIPP does not exceed the current annual permitted maximum of £235,000 and as long as HMRC considers your overall package, i.e. salary plus pension contribution, not to be an excessive reward for your services, then there will be no problems with what you are doing. Given that you are working for an umbrella company and your total reward is directly related to the hours you work and the work that you do, we do not consider that the reward would be considered excessive.