Tag: Indian Income and UK taxation

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.

What happens when £2k threshold remittance basis user remits funds to the UK

An example of how remittance from `mixed funds` are dealt.

Charge is on full amount remitted in the tax year even though client may not be claiming remittance basis in that in the year of remittance1.

Foreign investment income (interest and dividends) is taxed as non-saving income, when remittance basis applies2.

Taxed as non-saving income means no personal saving allowance or dividend allowance is available. Plus, no starting rate for interest3, dividends taxed at normal rates (currently 20%, 40% and 45%) and not at the special rates applicable to dividends (currently 8.75%, 33.75% and 39.35%)4.

Below is a simple example demonstrating the concept of `Mixed funds`, in practice bank accounts will need to be analyzed line by line to be classified as per ITA 2007 section 809 Q (3).

Example: A client who first came to the UK, say on 6th April 2019 has been not being declaring foreign income in their tax returns as it was £2k threshold.

Client had only foreign interest income which was saved in two Bank accounts say Account A and Account B5.

Detail of foreign interest income:

Tax YearAccount AAccount BTotal
2020£1,500£400£1,900
2021£2,000£400£2,400
2022£1,500£400£1,900

 
2021’s income declared to HMRC as it was over £2k. In tax year 2022-23 client remitted c£20k to UK from Account A.

As interest income is saved in same account as the capital, both Account A and B now have `mixed funds`.

Client’s total income since he has been UK tax resident in Account A = £1,500 + £2,000 + £1,500 = £5,000.

Less income on which tax already paid £2,000.

Taxable income on remittance £5,000 – £2,0006 = £3,000.

Bonus

1. The rate of exchange that should be used when declaring the remittance is the actual rate of exchange on the date of remittance into the UK7.

2. Remember to claim FTCR or DTAA relief like NRE relief as well.

3. Please remember if there are different sources of income eg. Foreign interest, dividends or capital gains, ITA 2007 sec 809Q (3) prescribes the order in which they are treated as remitted to the UK.8

Notes:
1. Tolley Income tax 60.5
2. ICAEW Text book Pg 331
3. RDRM31140
4. HS 264 Point 3.1
5. Remittances distinguished account-wise – LITRG website.
6. Tolley Tax computations 23.1 Notes (e).
7. RDRM31190
8. For mixed funds see RDRM35210 et seq

Foreign capital losses – remittance basis

When to make the foreign capital losses election and is it beneficial to make this election.

Foreign capital losses – remittance basis

Remittance basis is basically a deferral of UK tax. If foreign income and gains remain offshore and are never regarded as remitted to the UK, the tax charge is effectively deferred indefinitely.[RDRM31030]

Foreign income or gains not covered by remittance basis

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]

Foreign capital losses election

Non-domiciled remittance basis users are required to make an election under TCGA1992/s16ZA if they want their overseas losses to be offset against foreign chargeable gains.

The election should be made for the first year for which the remittance basis is claimed, irrespective of whether the individual has any foreign chargeable gains or overseas losses in that year. The election will usually be expected to be made within the white space in the Capital Gains supplementary pages of the same SA Return as the first remittance basis claim is made. The election is irrevocable.

The usual time limits for claims/elections at TMA70/s42 and 43 apply.

If the individual does not make an election, relief cannot be allowed in respect of any foreign losses accruing to them in that year, or any future tax year in which they remain not domiciled in the United Kingdom (whether or not they claim or use the remittance basis in those later years).[RDRM31170]

Capital Gains Manual
Rules for foreign capital losses for remittance basis users are given in 5 pages from CG25330 to CG25330D.

CG25330D contains an example, I made an Excel sheet to demonstrate it better.

Foreign-Losses-Excel Example CG25330DDownload

Main point to remember is:

Effect of the election is that losses (UK and foreign) are first adjusted against foreign gains not remitted (thus not taxable) before UK taxable gains. This will make tax payer pay higher taxes if their UK losses are adjusted against their foreign gains which they do not plan to remit to the UK.

Thus, it is important to make the capital Gains election in the first year of making remittance basis claim and secondly it may not be always beneficial to make this claim.

Foreign agriculture income

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

  1. Indian Income Tax Text – read section 2 (1A) and section 10 (1)
  2. BIM55095
  3. 31.1 Tolley Tax guide.
  4. 31.13 Tolley Tax guide.
  5. Re Class 4 see SSCBA 1992, Section 15 (1) c ; re Class 2 see SSCBA 1992 , Section 11 (3)
  6. There are detailed rule defining agriculture land and rural area, see para 167 of book – Direct taxes by VK Singhania.

Source

Further reading

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

Foreign income £2k threshold

How can you save UK income tax if your foreign income is less than £2k per annum

Basics

Non-domiciled UK tax residents do not pay UK income tax on their foreign income and capital gains if both the following apply:

  • These are less than £2,000 in the tax year; and
  • not brought into the UK, for example by transferring them to a UK bank account

ITA 2007 sec 809D

Detailed guidance

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. see RDRM32210.

4. 60.2 Tolley Income tax Annual.

5. What happens when £2k threshold remittance basis user remits funds to the UK

Source:

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