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Do I need an accountant?

Why you need to hire a qualified accountant to handle your affairs

Tax rules are complex and handling tax matters can be a stressful experience.

Few reasons for hiring a qualified accountant:

  • A qualified practicing accountant has number of years of experience before starting his own practice.
  • He/she will know about many reliefs and rules available on various income and gains, lowering your tax bills.
  • If a mistake happens after taking advise from a qualified accountant, HMRC considers it an error after taking reasonable care, resulting in lower penalties
  • A qualified accountant will also ensure all tax calculations and procedures are properly followed.
  • A qualified accountant can take an independent view of the matter, as both tax payer and HMRC’s judgement can be skewed by their incentives.
  • A qualified agent is a good emotional barrier between you and HMRC.

Why you should hire us ?

Our commitments to you

  • We will provide information in a clear and understandable way.
  • We abide by the Golden Rule – we will treat you as we wish to be treated.
  • We will provide a high level of service.
  • We will endeavour to make our service flexible to meet your needs.

What we ask of you

  • We request you to be mindful of our time as that is our `Stock in trade`.
  • We request you to be forthright and succinct in your communication with us.

How to change name, address, telephone number or email address with HMRC

HMRC calls these `designatory details`

For Agent see Link Agent Update 105

For Client see the same link, scroll down a bit and read,
Updating your client’s designatory details
re PAYE – guidance says to call HMRC but this seems incorrect, as changing address on Companies House website automatically updates PAYE records on HMRC website.

How to compute and maximize Double Taxation Relief aka Foreign Tax Credit Relief on overseas income and gains

How to calculate Double Taxation Relief (DTR). Excel example where tax payer has more than one source of overseas income.

There is a relief available called Foreign Tax Credit Relief (DTR) basic guidance given in Helpsheet 263

DTR given is lower of:
a – Overseas tax suffered ; or
b – UK tax on overseas income.

a – Overseas tax figure is taken from Tax Deducted certificates client provides, but it is restricted by the ‘treaty rate’ as per DTAA which is 15% (in case of India). This means in case a client earns £5,000 and tax is deducted off him at 20% say £1,000, he can only put the figure as £750 (15%) for overseas tax suffered.

He needs to approach Indian Tax authorities to get a refund of remaining tax.

b – UK tax on overseas income.

I have enumerated the steps to calculate this figure from ICAEW textbook below.

Step 1: Calculate the tax (before DTR) including all sources of income. Say £A

Step 2: Calculate tax but exclude overseas income, Say £B

Step 3: Deduct £A – £B. This is UK tax on overseas income.

Once DTR is determined we need to put it in box 2 of form SA 106 to ensure correct tax liability is calculated.

Example: Tax year 2018-19

Miss Amrita Sher-Gill (in case she is still alive!) lives in the UK and earns employment income of £30,000 and has interest income of £5,000 from India on which £1,000 tax has been taken off @ 20%.

Step 1:  Tax £4,430
Step 2:  Tax £3,630

Step 3: Tax on overseas income £4,430-£3,630 = £800

Compare:
a – Overseas tax taken off £1,000 but maximum allowed 15% : £5,000 x 15% = £750.
b – UK tax on overseas income £800.

DTR lower of a and b that is £750.

Calculation of DTR if overseas income is from more than one source

Please note in case taxpayer has more than one source of income say interest income and rental income, DTR is calculated on a source by source basis, to ensure tax deducted at source of one income is not utilized against another income.

DTR – Excel example more than one source of overseas income

More examples in ICAEW Tax text book Chapter 15 (simple examples) and Tolley Tax Computations Chapter 8 (complex examples).

Points to remember to maximize DTR relief and minimize tax bill

  • Overseas income – In case of more than one source of overseas income , income suffering the highest rate of overseas tax should be excluded first.
  • Overseas gains – Annual exemption allowance and basic rate band should be set off first against UK gains.

Deduction relief

Lastly, there is another method claiming relief by directly deducting the tax suffered from Income earned and pay tax on the remaining in the UK.

Using the above example Amrita can just add £5000 minus £1000 = £4000 as interest income to her tax return and pay tax on it. See example 5 in Help sheet 263.

 Note:

Tax payer is free to choose whichever method is most beneficial to them.

 Which exchange rate should be used to convert the income from foreign currency income to GBP?

If the sums involved are material, take the exchange rate for the day on which the interest is credited in client’s bank account, if sums are not material then go for average rates.

HMRC publishes exchange rates, see link

Bonus:
1. Where a claim for foreign tax credit is made for a state whose fiscal year is different from that of the UK, we should apportion the overseas income and the foreign tax to arrive at the amounts falling into the UK reporting year. INTM161220. This will not be applicable for India as it’s fiscal year closely corresponds to UK. Other countries could follow different fiscal year.  Wikipedia has a very good chart illustrating it.

Taxation of Indian Life Insurance policy in UK

How to compute tax on maturity of foreign insurance policy.

Amounts received under life Insurance policies are usually 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 interest income not as capital gains thus we do not get Annual CGT allowance4.

Top slicing relief 9 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; details below:

Policy matured and paid out Rs 199,200.

Insurance premiums paid Rs 66,540

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, for exceptions where taxable, please see para 170.2-1 of book – Direct taxes by VK Singhania.
  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 but for the purpose of calculating top slicing relief basic rate of tax is treated as paid. This ensures relief is calculated in the same way for UK or foreign policy [IPTM3830]. You can also see IPTM3850 for examples.

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 if 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.