Cash Clinic: Giving without a tax loss requires a little paperwork

Q I intend giving financial gifts to family, friends and to charities over the coming year but I don't really know what the tax implications could be. Could you please shed some light on this?

PF, Broxburn

A Given the current state of the economy it is perhaps wise to think of giving money rather than presents, as it may be more appreciated.

For inheritance tax (IHT) purposes you can give small gifts of cash or assets of up to 250 to separate individuals; on top of that there is an annual gift allowance of 3,000 a year per donor. There is also the ability to make gifts out of normal expenditure. This exemption is in addition to the annual gift allowance and is limited to the surplus income you can give away each year without affecting your lifestyle or reducing the capital value of your estate.

When giving to charities, remember to claim gift aid tax relief. This can be claimed even on relatively small single cash gifts just by filling in a little bit of paperwork and keeping a record of it. At the end of the year, higher-rate taxpayers can claim an extra 20 per cent tax relief on all their gift aid payments through their tax return, passing it on to the charity or keeping it for themselves as they see fit. If you make a gift before you have filed your tax return for 2009-10, you can even elect to carry it back to last tax year to get tax relief sooner, but this must be done by 31 January, 2011 at the latest.

For regular donations, employed individuals can claim tax relief sooner by asking HM Revenue & Customs to adjust their tax code number so their monthly or weekly tax deductions are reduced. Similarly, making regular donations direct from your salary through a give-as-you-earn scheme gives you immediate tax relief.

You can also claim income tax relief on the value of shares, securities and property given to charities and you will not be liable for any capital gains tax you would have paid on selling the asset. But it is important to check the gain or loss position for assets before you give them away. For example, if you have shares that are standing at a loss on paper, sell them first and then give the cash to the charity and claim gift aid. This will benefit the charity just as much and you will also have both income tax relief on the gift and a capital loss that can be carried forward to set against gains you make on other asset sales - reducing your future tax bill.

Q I have a number of seasonal jobs throughout the year, but also find that I don't have any work for several months of the year. I usually get short-term work during these periods. I have read in the papers that people like me with several employers are the ones who are being targeted by the tax office over coding issues. How can I make sure that I am not affected by this and what can I do if I do get a letter from the taxman?

JB Edinburgh

A The key here is to take responsibility for it - don't just assume that HMRC and your employers will get it right. So, check any correspondence you have had from HMRC to see if it matches the code numbers on your pay slips. There are issues with people who have multiple employers and inaccurate coding has always been an issue for such employees. HMRC has said it will not bother to collect underpayments of less than 300. If you do receive a letter saying you owe more tax, the first thing to do is to write back to ask HMRC to clarify how the underpayment occurred. If you receive a reply explaining the reasons, the only next step is to enter into negotiation with HMRC on the payment terms. It is important not to ignore this or assume it is a debt that will be written off.

• Neil Whyte is a tax partner with accountants and business advisers PKF

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd accepts no liability on the basis of this article.