Questions of Cash

Should we keep our nerve with Personal Equity Plans?

Q My wife and I have about £25,000, most of our savings, in Personal Equity Plans with Scottish Widows, Virgin and Alliance & Leicester. These are three of the worst performers, according to tables I've seen in the newspapers. All three advise me to "hang in there and keep our nerve"! We rely on the income for our holidays, which we couldn't afford for the last two years because of weak performance – we lost £4,000 last year. Should we stick with them, or look for other investments? JR, Stockport

A Donna Bradshaw of IFA Fiona Price & Partners says: "The weak performance reflects two factors: one, the performance of stock markets generally and two, the performance of the funds relative to other funds in their sectors. There is insufficient information here to comment on the Scottish Widows and Alliance & Leicester funds. Virgin's is a tracker and its under-performance against other trackers is mostly because of annual management charges: Virgin charges 1 per cent, compared with 0.3 per cent with M&G or 0.5 per cent with Legal & General. You should also ask if the funds fit with your attitude to risk and is there the right balance between income and growth? There is very little diversity within the portfolio and I would recommend a wider spread of investment funds. The portfolio needs to be restructured to fit your needs better. This will involve charges and you need advice to ensure the correct balance of investments. Shop around for the right independent financial adviser, remembering that IFAs' fees vary."

Q I must take issue with your response to 'RJ' in last Saturday's Questions of Cash regarding IR35. As a director of a small company with some contracts potentially subject to these rules, I have studied them carefully since their announcement, and can assure you that they do NOT apply to the conventionally self-employed. The crux of the legislation is the existence of an intermediary between the worker and the client. By definition, a self-employed person does not have such an intermediary since they contract personally with the client. DP, Harrogate

A Throughout this exchange we have relied on advice from the Inland Revenue, which hopefully knows what its own rules mean. A spokesman for the Revenue says: "IR35 covers status, whether you are considered an employee or self-employed, so it can apply to the self-employed as well as to companies. 'Status' is the consideration of all the factors affecting your income in order to determine whether you should be treated as an employee, self-employed or a company." John Whiting, president of the Chartered Institute of Taxation and a tax partner with accountants PricewaterhouseCoopers, adds: "Both parties are almost entirely right," in the sense that if someone is genuinely self-employed they will not be subject to IR35 rules. But he adds: "Strictly, the Revenue are correct in saying that a self-employed individual can be subject to IR35."

Q I own a flat in Richmond, Surrey, jointly with my wife, bought in 1971. It was let from then until 1999. Since then my daughter and her family have lived there rent-free. We wish to give it to her now, as a gift. I have been advised there is no Capital Gains Tax to pay. Can you confirm this. If there is, how can the value be established? If it is payable can the payment be rolled over until my daughter sells the flat (if ever)? RA, Richmond

A Stephen Pallister, tax partner at lawyers Pinsent Curtis Biddle, says: "Your flat must be standing at a huge gain. The problem is when you give it to your daughter the gain will be 'triggered' and you and your wife will pay CGT, as the flat has never been your main residence. You must report the gift in your tax returns. The gain is the difference between the flat's value now and in March 1982. Ask an estate agent for values. The Revenue may accept these or instruct the District Valuer to negotiate higher values. You will be able to reduce the gain that is taxed. You get indexation on the 1982 value for overall inflation up to April 1998. You then get 'taper relief' on your ownership since 1998 – this should reduce the taxable gain by 15 per cent (if you make the gift in this tax year). The remaining gain is taxed on each of you at between 10 per cent and 40 per cent, depending on your incomes. "You may be able to defer the tax. You could transfer the flat to a discretionary trust (of which your daughter would be a beneficiary). If the flat is worth less than £500,000, you could make the transfer without an inheritance tax charge if your 'nil rate bands' (£250,000 each) are available. You could hold over the CGT until the flat is sold by the trust. You need to take advice on this, and on setting up the trust."

* If you have any questions about personal finance topics or problems, please write to Questions of Cash, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk. We regret that we can reply only to letters published here. Please send copies, not originals, as we cannot undertake to return material.