Category: HMRC

Death and taxes

What to do when a tax payer dies ?

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes — Benjamin Franklin, in a letter to Jean-Baptiste Le Roy, 1789

10th August 2020

Step 1: Use Government’s Tell Us Once (TUO) Service:
Via this service you inform a number of government organisations including HMRC about the death. Please note you will need a lot of information before you use this service. So check there website before calling – click here.


Step 2: Ascertain whether there was a Will?
Tax affairs of the deceased are handled by the Personal Representatives (PR).In case a Will is present, PRs are called Executors. In its absence they are called Administrators.

Step 3: Use HMRC Bereavement guide.

Step 4: Do PRs need to apply for Probate?
See basic guide here. Probate is not required all cases

Step 5: HMRC will send a tax return within 3 months with instructions. Submission back by post. No action needs to be taken unless the tax return arrives with instructions.

Sources:
1 – ICAEW Website
2 – Citizen Advice
3 – Gov.uk – After a death

18th September 2020

Two Tax returns received from HMRC:

Tax year 2019-20File in 90 days
Period 6th April 2020 till the date of death.File by 31st Oct 2021

Please note these tax returns do not have tax computation sections, HMRC will compute the tax payable and send the bill.

Bonus:

Agent authorisation for deceased taxpayers made easier : see ICAEW article.

Please note allowances like Married Couple’s allowance, Marriage Allowance and Blind Person’s Allowance can be transferred from the person who died to the surviving partner in the year of death. Source : Tax Adviser Magazine

HMRC Contacts:

  1. Self assessment forms ordering (paper returns) – 0300 200 3610. Incase there is delay in getting the forms, please call this line. Agents can call without Agent authorisation in place but this team can only re-issue the forms if death is noted in HMRC systems.
  2. Bereavement and deceased estate Helpline on 0300 322 9620. Agents should also use this helpline for deceased estates in preference to the Agent Dedicated Line (ADL) to speak to the right advisers first time. [Agent update 122]

Taxation of Indian Partnership profits in UK

If a UK tax resident is a partner in an overseas firm, they will be liable to UK income tax on their share of profits.1

Difference between UK and Indian partnership

UKIndia
In UK, partnership pays no tax, partners pay tax on their share of profit.2  In India, partnership pays tax and partners share is exempt income u/s 10(2A) of Indian Income Tax Act.4
Partners salary and/or interest not allowed as deduction for partnership profits.3Any salary and/or interest paid to partners is allowed as a deduction but then taxable in the hands of the partners. 4

Similarities between UK and Indian partnership

UKIndia
Qualifying interest. Monies borrowed to buy interest in a partnership is allowable deduction in partners tax return.5Same in India.  

Computation of taxable profits

  • Taxable profits of the partnership are computed in a manner as if the partnership itself was UK resident3. This means taxable profit and loss of the Indian partnership will need to be re-computed9 as per UK rules.
  • See Book – Alan Melville Taxation for computation examples.
  • FTCR available to UK resident partner on tax paid by the foreign partnership overseas6 . Be aware you will need to add it manually, software does not pick this up automatically.

  • NIC Both Class 2 and Class 4 not payable as trade carried wholly outside the UK.8 Be aware you will need to manually remove it, software does not pick this up automatically.
  • Basis period should not be an issue as most of the firms in India keep their accounting period aligned to the fiscal year.
  • Tax return: for both UK and foreign partnership we need to use form SA104. Plus, use SA106 box 2 to fill in FTCR manually computed.

Notes:
1. RDR1 point 6.8 and 6.63
2. Tolley Income tax 51.1
3. Tolley Income tax 51.4
4. Direct taxes by VK Singhania para 314
5. Tolley Income tax 41.10
6. INTM335500 , DTAA Article 4 1 b and 24 1 a and Tolley Ray – Partnership Chapter 16 & 17.
7. Loss relief for partners – ICAEW Textbook Pg 206
8. Re Class 4 see SSCBA 1992, Section 15 (1) c ; re Class 2 see SSCBA 1992 , Section 11 (3)
9. Besides adding back salary and interest, adjustments as per ICAEW Textbook Pg 124 and 125. See also Tolley Tax Computations.
10. BIM82000

To know more about taxation of foreign income in the UK read our Worldwide Disclosure blog.

Tronc Guidance

A summary of new rules for Tronc.

Summary

  • Coming in force from 1st October 2024
  • All tips (without any kind of deduction) to be passed to workers (agency workers included) by end of following month.
  • Businesses required to have a written tipping policy to ensure fairness and transparency.
  • Code or Act does not affect taxation of tips.
  • Cash tips (if no control exercised by employer) are out of scope of Tipping Act and Code.
  • Tips will be distributed in the restaurant where collected. One restaurant’s tips cannot be paid to staff of other restaurant.

Tipping policy – Factors to Consider

Businesses need to prepare and distribute the tipping policy to all staff members including agency workers. Tipping policy needs to inform staff the basis of tips allocation. Basis can be on several factors, see example list below:

a. Type of role/work e.g. distribution between front of house and backroom workers

b. Basic pay (and how workers are engaged)

c. Hours worked during period when tips are received

d. Individual and/or team performance

e. Seniority/level of responsibility

f. Length of time served with the employer

g. Customer intention

Employers should consult with workers to seek broad agreement in the workplace that the system of allocation of tips is fair, reasonable and clear.

Records

Workers can ask for past 3 years records. Employer will need to provide total tips collected during their employment and amount allocated to the worker making the request but not the specific amounts paid to other workers.

If a worker does not wish to participate in Tronc, Tronc master should get this in writing.

Action:

Restaurants should start preparing a written Tronc policy.

Employee on the road to Samarkand

Employee moving abroad.

March 2021

A client’s employee wished to leave her job as she was moving back to India. Client requested her to keep on working for few months from India until they found a replacement.

As per HMRC guidance I advised them to submit P85 to HMRC.

Client called HMRC and was advised by the specialist team to complete DT individual form, print it off and get it stamped by the Indian Tax Authority.  Once it is stamped it will need to be passed on to HMRC who will issue employer with an NT code (no tax deduction ) but until then employer will keep deducting tax in the UK and run payroll in usual manner. 

The moment employee is issued with an NT code employee does not pay tax in the UK.  Only when P45 is issued employee will be reimbursed any tax overpaid.

July 2021

As expected when employee approached Indian Tax authorities, they made excuses to certify the DT Individual tax form.

April 2023

Employee moved to invoices basis.

Conclusion

In such cases, where employer is small organization, employee should move to invoices basis asap and submit P85 to HMRC. After employee moves to India, employment earnings become taxable in India not in UK, so employee should declare it on their Indian tax return.

Title of this article inspired by a play – Hassan: The Story of Hassan of
Baghdad and How He Came to Make the Golden Journey to Samarkand
by James Elroy Flecker

How Capital Allowance interact with Capital Gains Tax

This article explains how capital allowance effects capital gains calculations.

A common occurrence in trading businesses is sale of plant & machinery or vehicles used in the business. Rules shown below are applicable both in moveable and fixed plant & machinery for a business following accrual based accounting , for business following cash basis see Bonus point 4 below.

Two scenarios could happen:

  1. Disposal proceeds are less than purchase cost – a loss (usual case)
  2. Disposal proceeds are less than purchase cost – gain

We will try to explain these scenarios, by way of an example.

We need to prepare two calculations – one for capital allowance (CA) and other for capital gains.

X is an individual trader for many years. He brings forward main pool expenditure of £40k. In year 1, he buys a van for £20k and a computer for £5k. He claims AIA on all expenditure. In year 2, he sells the van for £12k and the computer for £8k.

We have illustrated below, how these transactions will affect the Capital Allowance and Capital Gains calculations.

Capital Allowance calculation

Year 1                                                                          Main pool                                        
WDV b/fwd                                                                  40,000
Additions                                                                     25,000
AIA                                        25,000                                                              
                                                                                         40,000
WDV 18%                                                                       7,200                                                              
WDV c/fwd                                                                   32,800

Year 2
WDV b/fwd                                                                   32,800
Disposal value                                                             17,000 a
                                                                                          15,800
WDV 18%                                                                      2,844                                                              
WDV c/fwd                                                                   12,956

a. Disposal value = £12k (van) plus £5k (computer), as disposal value is restricted to original purchase cost.

Capital Gains Calculation

Capital gains is only applied on assets if sold above its original purchase price. Thus, van is ignored for Capital Gains.

                                                                                   Computer b         
Disposal proceeds                                                 8,000
Purchase cost c                                                        5,000
Unindexed Gain                                                      3,000
Indexation allowance (estimated)                 (500)
Indexed Gain                                                             2,500

Note:

b. Gain or loss is computed on each asset individually.
c. Capital allowance taken on assets are completely ignored. TCGA 1992 sec 41

Practice notes:

  1. We should keep note of each item added to the pool – date added/purchased and amount added. Date is important as companies get indexation allowance for items purchased before 31st December 2017. Usually, commercial tax filing software will have the facility to record assets individually and calculate indexation allowance.

Source:

  1. Book – Taxation by Alan Melville
  2. Book – Tolley’s Tax Guide para 22.19, 22.46 and 38.4

Bonus:
1. In case X sells a table to his friend for £1k (market value £2k). Disposal value will be £1k if his friend runs a trading business where he can claim Capital Allowances . In case his friend does not run a trading business and cannot claim Capital allowances disposal value will be £2k.

2. In case X gifts the table to his employee, disposal value will be nil. But tax maybe payable by employee under ITEPA 2003.

3. In case X gifts the table to his brother, disposal value will be £2k (market value).

See HMRC Manual CA23250 on disposal values.

4. For business following cash basis accounting – When a asset is disposed off for more than its purchase price, business owner will be taxable on the full disposal value even if it is higher than purchase price. Source ICAEW Tax guide 04/24.