Tax free or tax spree?

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Money Talk By Leonie Kerswill Tax partner at PricewaterhouseCoopers LLP

Leonie Kerswill warns that some trading leads to tax demands

When money starts to get a bit tight, people naturally start to take note of the price of essentials, how much tax they pay and look to ways of making a bit of extra money through selling off unwanted goods.

There are, however, tax consequences to selling some items and people should be aware of when a hobby, such as car boot sales and selling the odd item on an internet auction site, becomes a trade in the eyes of the taxman.

On the bright side, there are many items that people sell or make money from that are tax-free.

While most people are aware that they can sell their main home or a property qualifying as their principal private residence (PPR) without paying capital gains tax (CGT), there are other less well known items that can be sold tax-free.

Antiques

The main one is chattels - which basically means a person's moveable possessions.

Chattels include items such as antiques, jewellery, stamps and works of art. These are CGT exempt provided that the sales proceeds are less than £6,000.

Someone who regularly sells on internet auction sites, or even at car boot sales, could be regarded as trading and liable to income tax on any profits

This limit is a total amount in the case of chattels forming part of a set, for example, eight dining room chairs, which are sold to the same person.

If someone owns a chattel with somebody else, provided that the sales proceeds do not exceed £12,000, no tax liability should arise on the sale.

"Wasting assets" can be sold free from CGT whatever price they are sold for provided the asset has not been used in a business.

A wasting asset must have a useful life of less than 50 years and includes racehorses, some fine wines and champagne, certain clocks and watches and boats.

Caution should be taken to ensure that a person is not trading in these tax-free items.

If they make frequent sales of wine, for example, in order to realise a profit, then HM Revenue and Customs (HMRC) may believe that they are trading in wine and as such any profits made will be subject to income tax.

Similarly someone who regularly sells on internet auction sites, or even at car boot sales, could be regarded as trading and liable to income tax on any profits, particularly if they buy items for resale.

Lottery

No CGT is charged if someone is lucky enough to win the lottery or other gambling prizes.

Winnings on the National Lottery are tax-free

If played as a group, people should ensure that the group draws up an agreement setting out how it will operate and how the winnings will be shared.

Without this agreement, a group winner who gives a share of the prize money to another winner could be regarded as making a potentially exempt transfer (PET) for inheritance tax purposes with inheritance tax falling due if the donor dies within seven years of gifting the money.

Should a person sell their car at a gain then the gain will be CGT exempt.

In most cases, cars are sold at a loss, which can't be offset against other gains.

However, the exemption can be a useful relief where individuals own vintage cars which they eventually sell or pass on to future generations.

Timber

Holding woodlands as an investment may not be the first asset that springs to mind when making an investment decision, but the tax treatment of woodlands can be generous and, of course, if you like the outdoors you can get some enjoyment from the investment.

Profits arising from a woodlands business are not subject to income tax and there is no CGT charge on sales of timber, although CGT will still apply on any sale of the underlying land.

Many employers now allow people to exchange salary for benefits and save tax and/or National Insurance Contributions (NIC).

This is particularly beneficial for tax-free benefits such as childcare vouchers.

As well as Lotto winnings, cars and woodlands, it is also worth noting that investments in PEPs and ISAs, enterprise investment schemes and venture capital trust shares, national savings certificates and premium bonds as well as statutory redundancy pay, are also tax-free.

Every person also gets an annual capital gains tax exemption - currently £9,600, so it is important to make sure that wherever possible this doesn't get wasted.

Misconceptions

Now for some of those tax misconceptions, including offshore accounts, redundancy pay and gifts.

Gifts of money are only tax-free provided the person making the gift survives at least seven years after the gift

Putting money offshore is perfectly legal but does not put it beyond the grasp of the UK taxman.

A UK domiciled and resident individual is taxed on their worldwide income and gains, so income from offshore accounts is subject to UK income tax and gains from the sale of overseas assets are subject to UK CGT.

With more people potentially facing redundancy, given the uncertain market conditions, it is worth remembering that not all redundancy pay is tax free.

While the first £30,000 of redundancy can be received tax-free, this tax-free limit only applies to ex-gratia payments, which means those made to compensate for the end of employment.

Therefore, unpaid wages, notice period payments and bonuses are taxed as normal employment income.

If someone receives anything else that is not money to compensate for their redundancy, for example, a company car, it is converted to a cash value and counts towards the £30,000 tax-free limit.

Gifts of money are only tax-free provided the person making the gift survives at least seven years after the gift, otherwise it is subject to inheritance tax.

Landlord

For those receiving rental income from a let property, only the interest element of their mortgage is deductible for tax purposes.

A fairly common misconception is that the whole mortgage payments can be deducted.

Also, as a landlord, any expenditure that is of a capital nature is not deductible against rental income for income tax purposes. Instead it is deductible for capital gains tax purposes on the sale of the property.

Finally, many people do not realise that if they let furnished rooms in their home, they can receive up to £4,250 a year tax-free (£2,150 if letting jointly) under the rent-a-room relief.

<i>The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.</i>