Tag: Worldwide Disclosure

Taxation of Crypto assets

This article deals with `exchange tokens` like Bitcoins, not with assets like NFTs or stablecoins. It is written for Individual tax payers.

HMRC does not treat Crypto as currency or money1.

Most common scenario is of an individual investing in Crypto optimistic for an increase in its value. Any gains or loss in such a case is treated similar to investment in shares. Rules such as pooling, same day and 30-day2 apply even if crypto held in different exchanges9.

Please note sale of crypto takes place even if it is exchanged for another crypto asset, it is used to buy goods/services or given away to a person (not their spouse)8.

International matters

Gains need to calculated in pound sterling3.

Location of asset – In HMRC’s view, exchange tokens are located where the owner is tax-resident. This rule will be of importance to remittance basis users, as their crypto gains will be taxable even if they do not remit funds to the UK4.

Other taxes

Stamp duty – not applicable5.

VAT – not applicable. But if a trader sells goods or services in exchange of crypto assets, the trader will need to charge VAT6.

Loss

In case of fraud – HMRC does not consider theft as a sale, a negligible value claim can be made7.

In case of loss – similar treatment as in case of shares. Three things to be aware of:

  1. Capital losses will be adjusted against gains in same year.
  2. Carry forward indefinitely and adjust against first available gains.
  3. Cannot be carried back except in case of death.

Disclosure service

HMRC has launched a cryto disclosure service for individuals who may have not paid the correct amount of tax in past tax years.8.

Notes:

  1. CRYPTO10100 means loan relationship rules do not apply.
  2. TCGA 92 sections Pooling (104) Same-day (105) 30-day (106A)
  3. CRYPTO40100
  4. CRYPTO22600
  5. CRYPTO44100
  6. CRYPTO45000
  7. CRYPTO22450
  8. Check cryptoasset disclosures, HMRC tells taxpayers | ICAEW
  9. Share and securities matching rules apply to assets which are fungible assets i.e. assets which are not individually identifiable. Tolley annual CGT book 64.2

Further readings:

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.