Tag: Worldwide Disclosure

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.

Compulsory purchase of land in India and second Private Residence Relief

This article focuses on compulsory purchase of land in India, basic concept is same in case land is situated in any country including UK.

Background

Our client’s ancestral home was partly acquired by the government in India to widen the road. Client lives in UK, but the Indian house is occupied by his widowed mother.

What is compulsory purchase of land?

Compulsory purchase is where land is acquired by an authority possessing compulsory purchase powers. Example a highway is being broadened and government acquires part of your front garden.  Compensation received from authority is `sale proceeds` in this case. [see CG72100]

What is the date of disposal?

Date of disposal is date when compensation is agreed. [see CG72101]

Does land in India treated as same as land situated in UK?

UK Capital Gains Tax is not normally dependent on where in the world an asset is situated but there are some exceptions to this rule. [see CG12400P] These exceptions are not applicable in our case, as client is tax resident in the UK.

Since 6 April 2020 , individuals (not companies) selling UK land need to report and pay capital gains tax to HMRC within 60 days. Overseas land disposals are reported in Self-assessment tax return only. Source Litrg.org.uk.

Are there any reliefs available?

Yes, besides the usual CGT reliefs (like EIS investment etc.) there are three reliefs available:

  1. Small disposal relief

Where disposal proceeds are less than £3,000 or 5% of the Market Value of the land. No gain arises and compensation is deducted from the purchase cost. [see CG72200]

2. Roll over relief

Simple guidance on this relief is given in HS290 ; for detailed guidance see CG61900P.

Basically, if sale proceeds are used to acquire another land, capital gain tax can be deferred.

Conditions:

  1. New land must not be used as tax payers main residence within 6 years from date of acquisition. [section 13 HS290].

[Practice notes – Where new land is acquired which seems suitable for use as a private residence by the new owner but which at the time of the roll-over relief claim is not used as a private residence by the owner, a forward note should be made to review the position at, say, the three or six year points after the date of acquisition in order to ensure that the property has not become the only or main residence of the landowner.] [see CG61906]

  • Period of reinvestment 12 months before, or 36 months after the disposal of the old asset.

This relief – you can be claimed provisionally as well.

How to claim this relief? See section 18 and 19 of Helpsheet HS290 also see Example 17 and 18 for computation of relief.

3. Principal private residence relief (PPR).

Simple guidance on this relief is given in HS283 ; for detailed guidance see CG64200c.

If you dispose of a house which was any time your main residence you get this relief. If the dwelling house has not always been your only or main residence, you will need to split the gain as [Period of occupation1 + final 9 months2] / [Period of ownership1].

  1. Both period of occupation and ownership starts from 31st March 1982 if property owned before this date.
  2. The final 9 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling house has been your only or main residence at some point.

Residence provided for a dependent relative – Second PPR Relief

A second PPR relief may be available on disposal of a residence which was provided to a dependent relative if certain conditions are fulfilled see [CG65550+.] . Main condition is that the residence was acquired for the dependent relative before 6th April 1988.

Conclusion:

In our case, as interest in the property was acquired by tax payer and his widowed mother before 1988 and they also full filled other conditions. So no Capital Gains Tax was payable.

For further reading on UK India taxation see our Worldwide blog

Indian Provident fund and UK taxation

Method to calculated tax on foreign pension lump sum with example. This blog post focuses on lumpsum received from India.

Summary

Withdrawal from Indian Provident fund by a UK tax resident will be taxable in the UK.

In India, payment from provident fund is usually (see note below in case of tax deduction in India)1 exempt income under section 10(11/12) of Indian Income Tax Act2.

But in case an individual who is a UK resident who takes a lumpsum from it, he will need to pay UK income tax on it3.

Main point to remember is value of Provident fund till 6 April 2017 may not be taxable. EIM 75550

Basic Method of calculating foreign pension income (ITEPA 2003 section 574A(3) as inserted by FA 2017 Sch 3 para 8-10) :

Foreign Lumpsum receivedsay £100
Less: Accumulated value before 6 April 2017say £40
Balance£60
Less: 25% of lumpsum£15
Taxable foreign pension£45

Source
Explanatory notes FA 2017; read Pages 46 to 49.

EIM 75550 has two good examples. Please use Internet Archive to see previous version of EIM75550.

Example 1 deals with personal pension plan tax computation, something similar to SIPPs in the UK.

In case of Public Provident Fund (PPF), as it does not satisfy the criteria of being a pension PTM021000 , it can be treated as a fixed deposit. As PPF can be foreclosed and money can be accessed after paying penalty, interest on PPF will be taxable in UK on yearly accrual basis – see Example 2 SAIM2440.

Example 2 deals with Employer Provident fund, calculation method is similar but eligibility for 100% deduction for accumulated value before 6th April 2017, depends on length of foreign service.

Conclusion

For many of us who may be forced to withdraw funds from their Indian provident fund, it is better to know that it is taxed at the highest marginal rate in the UK. Unless they withdraw it before coming to the UK.

Notes

  1. There are four types of provident funds in India – Statutory provident fund, Recognised provident fund, Unrecognised provident fund and Public provident fund each with their own detailed rules of taxation.

Source: Taxmann’s direct taxes law & practice by Dr Vinod K. Singhania para 56.

2. Source: ICAI Taxation of Non- Residents – Revised (2021)

3. Source: FA 2017 Sch 3 Part 3.

Bonus

  1. As per India UK DTAA Article 19 (2)- Any pension paid by Government of India to any individual shall be taxable only in India. Government of India means Union, State or Municipal – see Article 3 (1) (k). This is mainly useful for ex Indian defence force personnel now living in UK. Source: UK India DTAA Agreement – Synthesized text
  2. Pension annual allowance is restricted when taxpayer accesses their pension flexibly. Sec 227G FA 2004 defines when the restriction is triggered, it does not include lumpsum from foreign pension.

For further reading, visit our Worldwide Disclosure blog.

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.