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Can anyone advise on this Tax question?

Can anyone help my friend with his Tax question?

Last year, Paul became a 40% tax payer (wage of £43k + company car BIK of £5k).

Paul has no other regular income. His only savings are in tax free ISAs. Paul has never completed a tax return as he believes it is all done through PAYE as there are no other earnings. (Is this correct?)

Scenario 1: Imagine Pauls Mum wanted to give the couple £500 as a random gift. If Paul received this into his account, would he have to pay tax on it? If so, how would this tax be paid?

Scenario 2: Paul’s last remaining grandparent died. The grandparent left half of the small estate to Paul’s Mother (about £30k). Paul’s mother would like to gift half of her share to Paul. Would Paul have to pay tax on this? Again, how would this Tax be paid?


Thank you in advance!
November 2016: Mortgage = £185,000
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Comments

  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    even in the UK, gifts are tax free;

    however if the donor dies within 7 years then there may be an inheritance tax issue depending upon the size of the donor's estate
  • FlashBarry
    FlashBarry Posts: 115 Forumite
    Ninth Anniversary 10 Posts Combo Breaker Mortgage-free Glee!
    CLAPTON wrote: »
    even in the UK, gifts are tax free;

    however if the donor dies within 7 years then there may be an inheritance tax issue depending upon the size of the donor's estate

    Thanks CLAPTON

    So, if he was to receive about £15k at a gift from his Mother, he wouldn't need to declare this in some way and pay tax on it?

    The lady in his local bank told him that HMRC advise the bank on customer's earnings and so would flag up if lump sums arrive in the account. Is there any truth in this?

    Should he be doing a Tax return if he has no other income other than a regular job (PAYE)?

    Thanks
    November 2016: Mortgage = £185,000
  • Nicola_Ed
    Nicola_Ed Posts: 117 Forumite
    Hi Barry

    If you receive cash as a gift then there is no income tax to pay when you receive it. If the cash then earns interest then income tax will be payable on the interest. The bank will deduct 20% tax and a higher rate taxpayer would have to file a tax return to pay the extra 20% tax ( to add up to 40%)

    I am not clear on from your question who is advising who between the bank and HMRC but you could be referring to the bank's responsibility under Money Laundering regulations.
  • FlashBarry
    FlashBarry Posts: 115 Forumite
    Ninth Anniversary 10 Posts Combo Breaker Mortgage-free Glee!
    Nicola,

    So if the bank sees £15k being deposited into his account, would they tell HMRC and it would be up to Paul to prove that this money was a gift rather than a works bonus/earning?

    Neither of us understand how this works!
    November 2016: Mortgage = £185,000
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    FlashBarry wrote: »
    Nicola,

    So if the bank sees £15k being deposited into his account, would they tell HMRC and it would be up to Paul to prove that this money was a gift rather than a works bonus/earning?

    Neither of us understand how this works!



    Well, there are some money laundering rules which are very unclear so it's just possible that the source of the money may be queried.

    However gifts are free of tax and frankly 15k isn't a lot of money really.

    Far more likely the bank will phone and want to invest your money for you.
  • Savvy_Sue
    Savvy_Sue Posts: 47,470 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    As well as possibly needing to pay more tax on any interest earned (which will only be taxed at 20%), I think I'm right in saying that it's worth Paul doing a tax return if he makes any charitable gifts under Gift Aid. The charity will be reclaiming 20% tax on these, but he can claim the difference between that 20% and the 40% tax he's actually paid.

    I'm probably not explaining that very well ...
    Signature removed for peace of mind
  • BobQ
    BobQ Posts: 11,181 Forumite
    Ninth Anniversary 10,000 Posts Name Dropper Combo Breaker
    edited 23 June 2013 at 12:56AM
    If Paul earns £43K as an employee on PAYE his tax deducted with pay will include whatever he owes to HMRC and they will not require him to complete a tax return every year. They may occasionally ask him to complete a return to ensure he is reporting all he should report.

    If Paul knows that he is receiving income from savings, investments or other sources on which he is either not paying any tax or is only paying tax at 20% when he should be paying 40% on it (the case when its additional to £43K), he is obliged to tell HMRC since it is Paul's obligation to pay any tax he is due to pay. If he tells them that he got £500 of interest last year they will adjust his PAYE to collect the tax on it. This will also mean he is "invited" to do a tax return each year.
    Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.
  • CLAPTON
    CLAPTON Posts: 41,865 Forumite
    10,000 Posts Combo Breaker
    Of course, Paul may be making pension contributions (and if not the he should consider doing so.)

    Pension contributions are tax deductable so can easily bring his maximum tax level under the 40% tax band.
  • jem16
    jem16 Posts: 19,724 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    BobQ wrote: »
    If Paul knows that he is receiving income from savings, investments or other sources on which he is either not paying any tax or is only paying tax at 20% when he should be paying 40% on it (the case when its additional to £43K), he is obliged to tell HMRC since it is Paul's obligation to pay any tax he is due to pay. If he tells them that he got £500 of interest last year they will adjust his PAYE to collect the tax on it. This will also mean he is "invited" to do a tax return each year.

    Paul would not be invited to complete a tax return each year as he wouldn't fit the category of needing to do one.

    http://www.hmrc.gov.uk/sa/need-tax-return.htm
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
    proving the £15k is a gift shouldn't be a problem. if the payment came to HMRC's attention (which i suspect isn't very likely anyway), paul would state that it's a gift from his mother, presumably HMRC could check that the payment came from her, and (if necessary) she could confirm that it's a gift. in the absence of any further evidence, that would be sufficient. since there's nothing unusual about parents giving money to their children. not all payments from parents to children are gifts - it could be payment for work done (taxable), or a loan or repayment of a loan (not taxable, but any interest would be taxable) - but if both parties state it's a gift, and there's no evidence to the contrary, then their words won't be challenged.
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