Month: January 2023

Taxation of Indian Life Insurance policy in UK

How to compute tax on maturity of Indian insurance policy

Amounts received under life Insurance policies are exempt1 from tax in India thus are received without any tax deduction but in case it is received by an UK tax resident they will need to pay tax on any gain to HMRC2 and 3.

Please note similar rules are for all foreign life insurance policies thus this blog is not limited to Indian life insurance policies.

First thing to note is that gains is treated as income not as capital gains thus we do not get Annual CGT allowance4.

Top slicing relief (but no notional credit9) will benefit where gain straddles basic to higher or higher to additional rate5 but will be reduced by the period of non-residence6.

A simple example given below without top slicing relief7 and without taking in account policies partial payouts8.

Recently, my LIC life insurance policy matured. It was a Jeevan Surbhi policy with following payouts.

Income : Receipts


Details of life insurance premium paid is given below:

Time apportioned reductions [see IPTM3730 and 3731]

As I was non-resident for 8 years out of 20 years of insurance term. I could reduce the gain proportionately i.e. 66,540 divided by 20 (policy term) x 12 (years tax resident in UK) = INR 39,924

FX rate to convert foreign gain – method IPTM3700

Now we can convert this foreign life insurance gain to GBP using FX rate on date of maturity say 16 September 2020 which is 98.65.

Foreign life insurance gain in £405.

As this gain is lower than Personal savings allowance, thus no tax is payable.

Please note we will still need to disclose the gain even if not tax is payable.

Source:

  1. Institute of Chartered Accountants of India has produced a helpful guide for NRI taxation.
  2. HMRC Help sheet HS321
  3. Please note foreign life insurance policies issued before 18 November 1983 and capital redemption policies issued before 23 February 1984 are treated same as UK policies. [ICTA 1988, Sch 15 Pt11]
  4. [ITTOIA 2005, s 465(5)]
  5. [ITTOIA 2005, s 535-537 ]
  6. [ITTOIA 2005, s 536(7)(8)]
  7. [ITTOIA 2005 s537]
  8. [ITTOIA 2005, s507].
  9. [ITTOIA 2005, s531] – Foreign policies do not get notional credit.

Bonus

  1. LIC also operates in the UK market. Policies issued by the UK establishment can be qualifying policies and exempt for UK income tax. If you have such a policy please contact them they should be able to provide more guidance.
  2. For tax relief for foreign life insurance policies of EU insurers see [ITTOIA 2005, s 532]
  3. Loan taken on insurance policy is considered partial surrender. see IPTM3545
  4. Deficiency relief: In case taxpayer makes a loss on the policy. He can claim this relief. Please note, a loss on one policy cannot be set against a gain on another. Deficiency relief available only is tax payer has income chargeable at higher rate. see IPTM3860, IPTM3880 and IPTM3870
  5. Gains under a policy of life assurance are always taxable on the full amount on the arising basis, irrespective of your domicile or residency status.[RDRM31110]
  6. For further reading, visit our Worldwide Disclosure blog.

HMRC Worldwide Disclosure Facility (WDF)- India

What to do when you get a nudge letter from HMRC regarding your overseas assets, income or gains.

Do I need to make a worldwide disclosure?

If you receive a nudge letter (which starts as `Your overseas assets, income or gains`) from HMRC and after having checked your tax affairs you find that you need to make a WDF disclosure, you can follow this step by step guide.

`Prevention is better than cure` – It is wise not to wait for HMRC to find out about your worldwide income and send you a `nudge` letter. If you realise that you have undeclared foreign income or gains, immediately contact your tax adviser and get it sorted. Voluntary disclosures attract lower penalty rates.

Step 1 – Where possible, contact HMRC on the telephone number given on the nudge letter. They will give you more information about the foreign income in question, which will help focus the review of tax affairs and help in filing an accurate disclosure.

Step 2 – Send the certificate back to HMRC after ticking box 1.

Please note this is an important step because if the statement turns out to be false this could expose the tax payer to criminal investigation and prosecution.

What actions do I need to take after sending the worldwide disclosure certificate back to HMRC ?

Step 3 – Register for the Digital Disclosure Service (DDS) on Worldwide disclosure webpage of gov.uk.

Please note 90 day time period starts from the date you notify HMRC using DDS not from the date you sent the certificate back mentioned in Step 2.

Step 4 – You have now 90 days to:

  • Gather all information to complete the disclosure.
  • Calculate the total tax bill including tax, duty, interest and penalties on a year by year basis.
  • Fill in the disclosure, using the unique disclosure reference number (DRN) given on WDF notification.
  • Gather information on maximum value of overseas assets you had in the last 5 years.

IMPORTANT: Worldwide disclosure should be full and frank .

What help is available to calculate income and gains ?

I have written a number of blogs on this topic, which you may find useful.

  1. WDF – Taxation of Interest Income from NRE / FCNR Deposits.
  2. WDF : Taxation of LIC Policy in UK.
  3. WDF : Foreign gains via non-resident company
  4. WDF : Foreign capital losses
  5. WDF : TDS on NRO Deposits in India
  6. WDF : Indian provident fund and UK taxation
  7. WDF : Indian Mutual funds and UK taxation
  8. WDF : Computation of Double taxation relief
  9. WDF: Compulsory land purchase in India
  10. WDF: Foreign income less than £2k
  11. WDF : Foreign agriculture income

  12. HMRC has launched a toolkit for foreign income on 6th December 2022. I have read through it, it’s fairly comprehensive. A simple video on Youtube also jogs client’s memories.
  13. Be aware of the effect of Double Taxation Agreements for this DTAA Digest and HS 263 will come handy.

How many years are covered by worldwide disclosure ?

Taxpayer will also need to self-assess their own behaviour. Based on this assessment, tax payer will be presented with the number of years for which disclosure needs to be made.

12 yearsNon-deliberate (see below)
up to 20 Dishonest behaviour

Time period for offshore assessments was changed in 2019. This overrides RTC Regulations. Earliest year, if reasonable care taken, is 2015/16. If behaviour was careless earliest year is 2013/14. Incase of failure to notify last 20 years need to be included. These time periods changed on 6th April 2021.

This will also have an effect on the quantum of penalty.

What penalties are charged under worldwide disclosure regime?

Details of penalty calculation is given in HMRC guidance CC/FS17

India is not on the list thus falls in the residual category 2.

See Example of Offshore Penalty Calculation

Is there scope of Penalty suspension?

Penalty suspension – Penalty for the year 2016-17 and later years can be requested to be suspended refer to David Testa v Revenue & Customs [2013]
on the BAILII Website. BAILII is a small charity making case law freely available.

HMRC’s WDF team can consider penalty suspension in case of full co-operation is provided to HMRC.

When does the tax bill needs to be paid?

You must make full payment in accordance with the disclosure on the same date that the disclosure is submitted, unless a payment plan is needed.

Current rate of interest for late payment of tax is 6.75% since 13th April 2023 [this set at Bank of England base rate plus 2.5%] – source

Please note in case of Time to pay arrangements. Interest on penalties usually start 30 days after the issue of Notice of determination by officer of HMRC. For example a penalty is decided for the year ended April 2015 on 31st March 2023. Interest on penalty will start from 30th April 2023 see TMA 1970 Sec 103A

You will get an acknowledgement from HMRC within 15 days of them getting the completed disclosure. They will aim to tell us of the intended course of action within 90 days of the acknowledgement.

Which exchange rate to be used ?

HMRC has provided helpful guidance on RDRM31190.

As per HMRC guidance, if threshold is breached and you need to include the income in the tax return, exchange rate that needs to be used is of the day that the income arose overseas. In practice it may not be reasonable to calculate in this way, in those cases average rates can be used. See foreign notes SA106.

Do I need an accountant?

Worldwide disclosure involves looking at different income/gains over a number of years. Tax rules are complex and handling HMRC enquiry can be a stressful experience. It is advisable to engage a qualified accountant. I have listed a few reasons for hiring a qualified accountant in our blog – Do i need an accountant ?

Further resources to help you on your worldwide journey:

HMRC Guidance on worldwide disclosure facility

ICAEW page for current and historic exchange rates


Pension contributions for general practitioner – NHS doctors

How to enter pension contributions in the self-assessment tax return for doctors.

Question 1: What’s the pension contributions amount ?

Where a practitioner is self-employed, they are responsible for making both the “employee contribution” and the “employer’s contribution”; for tax purposes, both elements are relievable as member contributions. see BIM 54020.

Question 2: Where in the tax return the figure will be entered?

Go to Form SA100 Page TR 4.

Tax Reliefs: Paying into registered pension schemes and overseas pension schemes

Box 3.

This will result in full deduction of pension contribution from income.

See EIM61025

Bonus

For detailed guidance re Doctors and Dentists see BIM 54000

Limit on non-resident’s UK income tax liability

Special rule limiting non UK resident’s tax liability.

A non-resident income tax liability is limited to sum of A and B below:

A means tax deducted at source

B means amount of tax which would otherwise be chargeable on non-disregarded income

[section 811 ITA 2007]

Disregarded income includes interest, dividends from UK companies, state pensions etc.

[section 813 ITA 2007]

Example – Rash Bose is a non-resident. He has net UK rental income of £2,150 and un-taxed interest income of £20,000.

Computation of income for the tax year ended April 2022.

Rental Income£2,150
Interest Income£20,000
Total£22,150
Less Personal Allowance (no personal allowance for non-resident)Nil
Taxable Income£22,150
Tax Calculation 
Starting Savings Rate£2,8500%£0
Personal savings allowance£1,0000%£0
Basic rate£18,30020%£3,230
Tax as per usual rates  (1)£3,230
Limit to liability calculation
Tax on non-disregarded income (Rental Income)£2,15020%£430 (2)
Income tax liability limited to lower of (1) or (2) £430

Conclusion – in the above example, tax payer pays tax only on their UK rental income.

Updated 13th February 2023

Further, above treatment is not available in case individual is treated as non-resident for only part of the year i.e. in case of split year treatment.

Consultant receiving shares instead of monies

Our client (a limited company) provides consultancy services. Recently they provided services to a company based in Portugal. Portuguese company paid them in shares instead of monies.

Question 1: Whether shares received will be considered trading income?

Answer: 

  1. Corporation tax

Yes, the value of trading income received in non-monetary form is taxable in full as trading income. See section 49A CTA 2009; as inserted by FA 2016. HMRC simply enacts in legislation, 1948 House of Lords decision in Gold Coast Selection Trust Ltd v Humphrey (30TC209). See Explanatory Notes to FA 2016; Volume 1 Page 177.

  • VAT

As services are provided out of UK, VAT is not chargeable. See VAT Notice 741A Section 12.

  • Accounting

As per FRS 105 (micro entities) Section 18 Revenue Clause 18.7:

(b) …at the fair value of the goods or services given up

Conclusion:

Thus, if the client receives shares or any other goods or services, client should value the items received and enter it as trading income in its books.

Question 2: What is the value of shares received?

We asked the client to estimate the number of hours they will spend on this assignment and multiplied it by their usual hourly rate to get the trading income.

Bonus

You may have noticed that client would need to pay corporation tax now on an estimated income, when they have not received any cash funds. These shares are long term investment.