Category: HMRC Overseas matters

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 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£2,8500%£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.

Bonus

  1. 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.
  2. 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:

  1. ITA 2007 Sec 811
  2. Disregarded income includes interest, dividends from UK companies, state pensions etc. [section 813 ITA 2007]
  3. Non-disregarded income includes rental income.
  4. ITTOIA 2005 Sec 399

Foreign gains via non-resident company

Foreign Gains accruing to non-resident companies whose shares are owned by UK tax residents may be taxable in the UK.

Background

Usually, a company not resident in the UK is not normally liable to UK tax nor its shareholders.

Thus, UK residents could avoid tax by holding assets overseas via a foreign company.

Rule

Since 27 November 1995, foreign gains accruing to non-resident companies whose shares are owned by UK tax residents are attributed to the UK tax resident and taxable in the percentage of shares held by them in that foreign company.

Note, NO gain is taxed in case percentage of shares held is less than 25% on and after 06/04/2012.

Example

Mr A opens a company in India and buys a house. After few years company sells the house. Indian company will pay taxes on the gain in India and Mr A will also be liable to pay taxes on the gain in UK.

Foreign tax relief is available. DTAA may also be applicable.

Losses

Foreign losses accruing to non-resident companies are NOT attributable to UK tax resident. However, current year losses are allowable to get a net gain figure.

Reliefs

Two main reliefs:

  • Assets used for a trade; or
  • Where tax avoidance was not the main purpose

Source:

HMRC CGT Manual CGT57200P onwards

TCGA Section 3 onwards

Acknowledgement:

  1. Para 49.7 in Tolley’s Capital Gains Tax Main Annual
  2. Bloomsbury Capital Gains Tax
  3. For further reading, visit our Worldwide Disclosure blog.

Foreign capital losses

What are the rules for setting off foreign capital losses.

Foreign capital losses

A loss accruing to a person in a tax year in which they were non-resident it is not an allowable loss. TCGA 1992 sec 1E subsection (1)

In a split year this rule applies to the overseas part. TCGA 1992 sec 1G subsection (2)

Exception to the above rule is disposal of UK Land (direct or indirect) or UK assets held for the purpose of a UK trade. TCGA 1992 sec 1A subsection (3)


Example

Say, Pavel is a long-term resident of India and moved to the UK in 2022. He is an active investor in Indian stock market. He made capital losses in year 2021 but when he became UK tax resident in tax year 2022, he made capital gains in India. His position is summarized below:

Tax yearResident status in UKResident status in IndiaCapital Gain/Loss
2021Non-residentResidentLoss
2022ResidentNon-residentGain


From UK tax perspective, as Pavel made capital loss in India in 2021 when he was a non-resident in the UK, he cannot set them off against capital gains made in India in tax year 2022.

Note: Rules may differ for remittance basis users and temporary non-residents.

Bonus
Usually, capital gains can be transferred among spouses e.g. before disposing off an equity shares husband can transfer part of them to wife to take advantage of two capital annual allowances. Unfortunately, Capital losses cannot be transferred i.e. capital gains of one spouse cannot be offset against the capital losses of the other.

For further reading, visit our Worldwide Disclosure blog.

TDS on NRO deposits in India

UK residents can restrict Indian bank to deduct TDS at 15%

Usually Indian bank deduct c31% as tax on the interest they pay on NRO deposits – savings bank or fixed deposits.

A UK resident can use double taxation avoidance agreement between India and UK to restrict Indian banks to deduct TDS at 15% (treaty rate).

Usually, Bank ask for Form 10F and a self-declaration (sample forms).

Please be aware, India UK DTAA restricts FTCR at 15% for interest income even if tax suffered is higher i.e. c31% in this case.

Incase UK resident has deposits in other countries, similar forms will be required. Please check with you bank. Treaty rates for different countries can be access via DTAA digest.

This exercise is only worth if taxpayer has material deposits.

Bonus material

You may find another blog post on similar topic useful – UK resident earning overseas interest income from India

For further reading, visit our Worldwide Disclosure blog.

Taxation of investments in Indian Mutual Funds in the UK

Gains made on disposal of Indian mutual funds are taxed at highest marginal rate of taxation

HMRC has classified overseas mutual funds as `reporting` and `non-reporting`.

Reporting means mutual funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.

Non-reporting means any mutual funds which do not comply with these requirements.

Recently funds in India have started registering with HMRC and have become reporting funds so we recommend you check HMRC list before tax calculation. For a list of reporting offshore funds click here.

When you dispose offshore non-reporting mutual funds

Any gain on disposal of investments in Offshore non-reporting mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of income tax and not as capital gains.

Double whammy – in case of loss, the loss is only allowed to be set-off against capital gains and not against income .

Lastly, annual capital exemption is also not available to such gains.

Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.

Bonus:

  1. An article with an example.
  2. This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.
  3. Offshore gain is treated for tax purposes as miscellaneous income – [see Tolley Income tax annual 50.3] to be mentioned in SA106 2023 in Box 41.

Further reading:
1. HS265 Offshore Funds
2. Visit our Worldwide Disclosure blog.
3. To know about taxation of UK mutual funds.