October questions and answers

Newsletter issue - October 2020

Q. My mother gave my daughter £5,000 on 1 May 2016. She had not made any other gifts in previous years. Unfortunately my mother passed away on 1 September 2020. How much of the gift she gave to her granddaughter is chargeable to inheritance tax?

A: Since your mother did not make any other gifts, the gift she made to your daughter will be covered by inheritance tax annual exemptions - £3,000 for 2016/17 plus her unused exemption brought forward from 2015/16 (£3,000 available).

Q. I am a self-employed builder. I carried out a job for a customer and invoiced him for £750. The customer did not pay the invoice and I have since discovered that he has been declared bankrupt. I included the £750 in my turnover figures. Can I claim tax relief for the unpaid bill?

A: A deduction can generally be made for a bad or doubtful debt in the year in which the debt becomes bad or doubtful. The HMRC Business Income Manual (at BIM42701) states:

'A deduction is not allowed for a debt owed to a trader except:

• a bad debt;
• a doubtful debt to the extent estimated to be bad. In the case of the bankruptcy or insolvency of the debtor this means the debt except to the extent that any amount may reasonably be expected to be received on the debt;
• a debt or part of a debt released by the creditor wholly and exclusively for the purposes of the trade as part of a statutory insolvency arrangement.'

You should be able to write off the debt and claim a deduction of £750 in your accounts.

Q. I have recently become unemployed due to the coronavirus pandemic so I am going to rent a room out in my home to get some extra income. What are the tax implications if this is my only source of income?

A: HMRC's rent-a-room scheme is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else. Broadly, as long as income is below the annual threshold, it does not need to be reported to HMRC. If income exceeds the threshold, it needs to be reported to HMRC via the self-assessment system.

To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:

• Method A: paying tax on the profit from letting worked out in the normal way for a rental business (ie rents received less expenses).
• Method B: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.

If you make an election (within the time limit) for Method B to apply, the first £7,500 will be tax-free, and the remainder will be covered by your income tax personal allowance, so will be tax-free. The remainder is calculated as your gross rental receipts over and above the £7,500 figure, without any deduction for expenses.

HMRC's Helpsheet HS223 contains further information.