Questions of Cash: Your investment loss was a salesman's gain

The value in my Allied Dunbar pension is £5,842, against my contributions of £12,278. I want to know what has happened to the rest. I increased my contributions in 1997 after the company's representative told me I was saving too little for my retirement and the stock market has been in boom for most of that time.

Q: The value in my Allied Dunbar pension is £5,842, against my contributions of £12,278. I want to know what has happened to the rest. I increased my contributions in 1997 after the company's representative told me I was saving too little for my retirement and the stock market has been in boom for most of that time.

I did not then realise just how much commission the adviser was earning. Surely the agreement is invalid without the commission costs being explained? WG, Bury.

A: Since 1995, providers of pensions and some other financial products have been required to advise the commission paid to the sales person. While failure to do so is illegal it does not constitute mis-selling, but it would be taken into consideration by the financial ombudsman. Allied Dunbar says the individual you name as having sold the product did not actually sell you one. and he was not licensed to sell that particular one.

It says it is "satisfied that [the amount of commission] was covered in [the representative's] discussions with you and the documentation provided for you by the Company [Allied Dunbar]".

The poor performance of your fund is partly explained by the severe fall in the stock market, but also because the charges were front-loaded. Some 65 per cent of your contributions in the first 30 months went as charges, which coincided with boom years for shares. Allied Dunbar no longer sells front-loaded products.

If you believe Allied Dunbar failed to notify you of the commission and charges you should lodge a complaint with the Financial Ombudsman's Service, on 0207 964 1000.

Q: The version of the tax relief you get on gifts ("Where there's a will, there's a way to save on the taxes", Your Money, 15 March) looked suspiciously simple. My solicitor tells me it is more complex than that. So who is right? JR, Bath.

A: I am afraid it is your solicitor, and our apologies. The rules go as follows: Everyone has a nil rate band of inheritance tax, on which nothing is levied when they die. This year, it stands at £250,000. If you make gifts in the seven years before you die, they are set against this nil rate band first of all. The tapering tax relief applies only when you have used up the nil rate band. Assume you gave away £500,000 between six and seven years ago. The 20 per cent tax relief would only apply to the £250,000 above the original allowance, ignoring any other allowances you may have made.

The nil rate tends to go up each year, which is good news in a sense. But tax offices use the allowance in force at the time you die, to find how much relief applies to your estate. The higher the allowance, the more of your tapering relief will be used up, and the less value it will have.

Q: Some years ago I bought a flat for my daughter, which she now wants to buy from me. I am happy to charge her less than the market value. I was under the impression the difference between the sale price and the open market value would be deemed a "gift", liable for inheritance tax if I do not survive seven years. I now understand I will be liable for capital gains tax. If I do not survive for seven years will my estate be liable for inheritance tax on the "gift" as well? AC, Hadleigh.

A: Jonathan Riley, tax partner at accountant Grant Thornton, says: "You are correct that this disposal could lead to two bites of the cherry for Gordon Brown. To the extent that the market value at disposal exceeds the price you paid for the flat, you will be liable to capital gains tax on the discount you 'give' your daughter.

"You cannot claim private residence relief because the flat was not your residence. If you are married, you could gift half the flat to your wife tax-free and your wife could gift that on to your daughter. This would utilise two annual exemptions, yours and your wife's. You might also gift the flat to your daughter over two or more tax years to utilise more than one annual exemption.

"The second bite potentially is from inheritance tax. IHT could arise on the difference between the market value of the flat and the amount your daughter pays if you die within seven years of the flat passing to her. There is an annual gift exemption for inheritance tax purposes of £3,000 which can be carried forward one year if unused.

If your daughter plans to marry, you could utilise the £5,000 exemption for a marriage gift by a parent. There is no relief for offsetting the capital gains tax paid by you against any potential inheritance tax payable by your daughter, because the taxes fall on different persons. The transfer of the flat could also be liable to stamp duty, depending on the amount paid. The tax charges could be avoided or reduced with careful planning and the possible use of a trust."

Q: Further to recent letters on the Financial Services Compensation Scheme (Questions of Cash, 8 and 22 March), what is the position if you have a flexible mortgages, with linked mortgage and savings? Would the savings element be treated independently, meaning the saver does not get full compensation? TM, by e-mail.

A: It depends on the type of flexible mortgage you have, whether there is a single balance, or separate "pots" for mortgage and savings. With The One Account (formerly Virgin One), you have an overall balance and no separate figure for savings. This means that should the bank cease trading and be unable to meet its liabilities, you would be a debtor to the company for the net amount and the question of compensation for your savings would not arise.

If you had an offset account of the type offered by Intelligent Finance, the mortgage debt and savings assets are treated as separate accounts. This means the deposit is liable for compensation at the rate of 100 per cent on the first £2,000 and 90 per cent of the rest, up to a maximum of £33,000.

Paradoxically, you are actually better off where the compensation scheme does not come into play because the value of the mortgage debt is reduced in full. This is probably a matter of theoretical relevance only. The One Account is a wholly owned subsidiary of the Royal Bank of Scotland, and Intelligent Finance is part of the Halifax Bank of Scotland group.

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