Category: HMRC

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.

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. 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 ?

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. WDF : Foreign partnership income

  13. 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.
  14. 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 (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.

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