.png)
.png)
Effective use of the IHT relief for gifts out of income.
The recent publicity about inheritance tax seems to have energised some of my clients. I was talking to one recently about the various reliefs that were available to reduce the potential future liability of himself and his wife. As he has a high level of income from his business and property portfolio, he was very interested in gifts out of income. I stressed that to benefit from this relief such transfers to his children should be made on a regular basis, but I do not have practical experience in claiming this relief – which I understand is probably underused.
Can Taxation readers provide some information on the regularity of such gifts – should these be made monthly or is an annual transfer sufficient? Also, how should such gifts be evidenced? Should he send the recipient a covering letter and keep a copy for himself and what records should be retained to confirm that the gift is out of income rather than capital? Should the gift be made from a specific account or source? For example, should it come from the current account into which, say, property income is received, rather than, say, from a deposit account into which accumulated income has subsequently been paid to benefit from interest on the capital?
Query 20,447 – Baron.
How to claim the exchange rate loss in the UK tax return?
A UK resident client had acquired a residential property in the US with a US mortgage. The acquisition price was $1.5m and with a mortgage of $1m. At the time of the acquisition in 2019 the exchange rate was £1 = $1.5. The property was sold for $1.5m in 2024 when the exchange rate was £1=$1.2 when the mortgage was also redeemed.
Overall, the client provided £333,000 funds for the acquisition and received back £417,000 on disposal after redeeming the mortgage thus having a net gain of £84,000.
The acquisition cost for the CGT pages of the UK tax return is £1m ($1.5m divided by 1.5) and the disposal proceeds in sterling is £1.25m ($1.5m divided by 1.2) showing gains of £250,000.
How is one supposed to claim the exchange loss suffered on settlement of the forex mortgage?
Query 20,448 – Fogg.
Tax effects of moving in with the in-laws.
An elderly client is in a situation where her late husband set up matters with regards to their joint estate so that she is able to do pretty much what she wishes during her lifetime but, on death, is tied into a will that is not exactly where her current wishes would have her find herself.
Three years ago she decided that she would like to favour her daughter and provide her with a potential future income. She paid £80,000 to convert the daughter’s garage into an annex suitable for letting via Airbnb. All planning consents were obtained. However, the garage was actually solely owned by her son-in-law as the marital home had only been acquired in his name. The annex has been kitted out for letting purposes but never actually let. The daughter occasionally uses it as a space for crafts.
My client is now becoming frail and is wondering if she could move into the annex. She has no right to do so as the gift was with ‘no strings attached’. The planning consent was primarily for use as a short-term letting but it includes permission to use for long-term purposes for family members. If she were to move in, would the gift with reservation rules apply? And if so, would the situation be improved by charging her a market rent? This is not a problem for the family but the preferred approach would be for cash not to change hands (but it could without difficulty) – instead a liability would accrue to be eventually settled as a charge on her estate.
The rent would be declared on the son-in-law’s tax return and tax would be paid each year. Do readers believe that rent-a-room relief would be available? The annex is detached, accessed by its own front door albeit from the same drive as the house, has everything needed for lettings purposes including kitchen and bathroom, and has its own access to a small area of garden that is separated from the main by moveable planters.
Are there any other concerns to flag?
Query 20,449 – Kevin.
Is there VAT on lessons invoiced to school?
One of my sole trader clients provides lessons in science and maths and is registered for VAT. If he gives private and group tuition to students and invoices either the students or their parents, he does not charge VAT.
However, if he invoices a school on an hourly or daily rate basis for his time, he charges VAT. Can readers confirm this is the correct VAT accounting in each case? The reason for my doubt is a sentence in HMRC’s policy manual VATEDU40200, which states: ‘For the purposes of this exemption it is irrelevant whether the individual teacher:
- delivers the instruction to one person or to a group;
- contracts with an individual, or with an organisation that makes an onward supply of the educational services.’
If the services to the school are also exempt, my client can deregister from VAT, which would be welcome.
Query 20,450– Professor.
Queries and replies
Full T&Cs: tinyurl.com/RFguidelines.
