Readers' lives

Letting houses ... endowment policies ... the safety of pension funds. Your everyday financial queries answered
Click to follow
The Independent Online
My husband and I have finished paying the mortgage on our house and would like to buy a second house near where my parents live. To make the mortgage more affordable, we might need to rent out a room in the second home. What are the tax implications? My husband is a higher-rate taxpayer and I am a basic-rate taxpayer.

AE, Essex

There are income tax and capital gains tax considerations when it comes to letting property. It is possible to reduce the tax you pay depending on the arrangements you choose, especially as you and your husband pay tax at different rates. There are various scenarios, including the possibility that you and your husband "separate" - despite being happily married. You would be well advised to get advice from a reputable accountant who is familiar with the rules on letting property.

If you were to let out the second property there are a number of expenses you can deduct from the rental income before being taxed on any profit. The cost of insurance, water rates, repairs, decoration, management expenses (such as your own stationery, phone costs, advertising and estate agency fees) and wear and tear on furniture could be deducted. The list includes most expenses you incur as a result of owning and letting the property, including - most importantly - all the mortgage interest you pay. If you were to let only part of the property, you would be able to claim an appropriate proportion of all those costs and expenses. This may have to be negotiated with your tax inspector.

There may be a capital gains tax bill when you come to sell the second home. It is normally possible to choose which of your two homes is the "main" one and so exempt from capital gains tax. But you and your husband won't be able to have different "main" homes unless you separate. Leaflet CGT4, available from tax offices, gives more details on this aspect of capital gains tax. Leaflet IR87 gives general tax information on letting property.

MY WIFE and I have an endowment mortgage policy from Guardian Financial Services. Guardian has contacted us to say that the tax consequences of the plan were not fully explained to us. I'm a higher-rate taxpayer and there could be a higher-rate tax charge (the 16 per cent difference between basic and higher rates) when the policy matures. Guardian proposes to reimburse us for this charge, but wants my signature to agree to this. Should I sign? Is the offer generous enough?

GW, West Sussex

Endowment policies to pay off a mortgage are usually "qualifying" - meaning that there will be no tax payable on the proceeds. Your policy appears to be "non-qualifying".

The policy is a "whole-of-life" contract which offers flexibility on the maturity date and on stopping, starting and changing premiums. The fact that it is non-qualifying wouldn't be a problem if you and your wife were basic-rate taxpayers when the policy matures. But given that you are a higher-rate taxpayer, you'll have to share the payout with the Inland Revenue.

"We felt that a number of clients who had non-qualifying Freedom for Homebuyers contracts may not have had the full tax implications discussed with them and perhaps did not understand the implications of the contract they were buying," says a spokesperson for Guardian. The company thinks some people may be due compensation when these policies mature. Sounds like a cock-up.

Guardian has written to 33,000 people trying to establish whether they understood the nature of the contract. The policies were sold through Nationwide Building Society between 1990 and 1995.

Guardian is asking you to sign a form saying you accept their offer to reimburse you for any higher-rate tax liability when you cash in the policy. Don't sign just yet. Instead, ask for confirmation that Guardian will ensure you are in the same financial position that you would be if there were no higher-rate tax charge.

Simply reimbursing you with higher-rate tax may not do the trick if that payment is itself liable to tax. Guardian says the payment will be ex gratia and not taxable. Ideally, the company should have something in writing from the Inland Revenue to confirm this. The Revenue says the extra payment may not be taxable "if it is not a benefit secured by the policy", but it will need to decide on the full facts of the case.

I WILL be retiring in two years' time at the age of 65. I am due to receive a pension from Wickes, for whom I worked until 1992. Will the uncertainties surrounding Wickes following recent revelations of false accounting at the company affect my pension?

AW, Liverpool

One lesson learned from Robert Maxwell's plundering of pension fund money is that no pension fund investment can ever be entirely safe from crooks. That said, recent legislation should make company pensions a lot safer than they were.

The professionals who run the Wickes scheme are confident that the company's problems will have no effect on the pension scheme. The company pension scheme is run on behalf of trustees by outside actuaries, pensions administrators and investment managers and audited by accountants. It is entirely separate from the company.

The trustees will shortly be sending out their annual statement. They will comment on the difficulties at Wickes and offer reassurance that the scheme is in a sound financial position. Perhaps crucially, the pension scheme has no direct investments in Wickes itself and, it seems, no indirect investments in the form of unit trusts and other investment funds that themselves hold Wickes shares.

q Write to Steve Lodge, personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a telephone number.

Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies and cannot guarantee to answer every letter we receive. We accept no legal responsibility for advice.

Comments