UK tax resident individual having agriculture income in India.
Agriculture income is exempt in India1 but taxable in the UK. Thus, an individual tax resident in the UK having agriculture income from India will need to pay tax on it in the UK.
Agriculture income can be of two types – trading income or rental income.
Trading income Whether it is a trade or not will be decided using the usual principles of `badges of trade`.2 Agriculture income is generally calculated in the same way as other businesses3. Deduction of expense is allowable. BIM55095 is misleading, please read BIM37625 for more details on the case – Sargent v Eayrs [1972] 48TC573.
Taxes payable – Income tax only. NICs not payable as trade wholly outside the UK.5
Rental Income Farm lands rented out – rent could be an agreed minimum rent or rent based on the value of produce. In both cases taxed as rental income.4
Taxes payable – Income tax only.
Taxable income The amount of income taxable on the landowner will often be much the same whether he or she is treated as a farmer taxable as a trader or as a landlord in respect of property income. The main advantage of farming treatment for the landowner lies in the reliefs from Capital Gains Tax and Inheritance Tax which are available to farmers but not to landlords. See BIM55085
Bonus
Capital gains on sale of Agriculture land in rural area is not taxed in India6. But again taxable in the UK.
Trading allowance avaliable for foreign agriculture income see section S783A –S783AR Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
Notes
Indian Income Tax Text – read section 2 (1A) and section 10 (1)
UK Tax residents1 can use remittance basis2without being liable to the remittance basis charge3 nor losing their personal allowance or annual exemption limit for capital gains, if they are below the £2k threshold. See RDRM32260
Exchange rates
To check whether foreign income is below £2k threshold, un-remitted foreign income is converted to pounds sterling at the rate of exchange on the last day of the tax year.
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.
Note in case remittance basis is claimed and income is remitted in a later year, exchange rate of the date of remittance should be used.
This will mean that the same foreign income may be converted at different exchange rates, depending on the reason for the conversion. See RDRM31190
Self-Assessment Tax return
Individuals using the remittance basis by virtue of s809D do not have to file a self-assessment return in order to access the remittance basis. However, if an SA return has been issued or requested then they should include details of their use of the remittance basis by including Residence and domicile pages with the return, even if the remittance basis is accessed by using s809D [Box 29]. see RDRM32105
Split tax years Income of whole tax year is taken in account to determine the £2k threshold.4
Small remittances Where £2k threshold met and remittances are less than £500 and are in cash, no need to complete a tax return to pay UK tax on amount remitted. 4
Notes:
1. Including long term UK tax residents i.e. individuals who have been tax resident in at least seven out of the nine tax years preceding the current or ‘relevant’ tax year see RDRM32210.
2. Individuals tax resident in the UK are liable to pay tax on their worldwide income. Individuals whose domicile (in simple terms – permanent home) is overseas can choose to pay tax on their foreign income on remittance basis i.e. pay tax only on income brought to the UK. See RDRM31030
3. Remittance basis charge is payable by long term residents who choose to pay tax on remittance basis. seeRDRM32210.
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:
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
Please note we will still need to disclose the gain even if not tax is payable.
Source:
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.
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]
[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
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.
For tax relief for foreign life insurance policies of EU insurers see [ITTOIA 2005, s 532]
Loan taken on insurance policy is considered partial surrender. see IPTM3545
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
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]
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. 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; example by increasing disclosure years from 12 years to 20 years.
What actions do I need to take after sending the worldwide disclosure certificate back to HMRC ?
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.
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.
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.
Penalty suspension – Penalty for the year 2016-17 and later years can be requested to be suspended (in case of inaccurate tax returns ) 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.
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:
Special rule limiting non UK resident’s tax liability.
A non-resident income tax liability is limited1 :
1. To sum of A and B below:
A means tax deducted at source in respect of Disregarded Income.2
B means amount of tax which would otherwise be chargeable on non-disregarded income.
or
2. Tax liability computed under normal rules.
Final tax liability is lower of 1 or 2.
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 [non-disregarded income]
£2,150
Interest Income [disregarded 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
£2,850
0%
£0
Personal savings allowance
£1,000
0%
£0
Basic rate
£18,300
20%
£3,230
Tax as per usual rates
(1)
£3,230
Limit to liability calculation
Tax on non-disregarded income (Rental Income)
£2,150
20%
£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.
Bonus
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.
Where a non-resident receives dividend from a UK company he is treated as that he has already paid tax @ dividend ordinary rate.4 But this credit is not repayable.
Notes:
ITA 2007 Sec 811
Disregarded income includes interest, dividends from UK companies, state pensions etc. [section 813 ITA 2007]
Roy Accountants 