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Foreign Tax Credit Relief

Foreign Tax Credit Relief

Can someone please confirm my understanding of this please?

Tax payer has Australian employment income of £25k which has been taxed significantly in Australia.

UK Income is rental income £4k and dividends £19k.  Without foreign employment income no UK tax due as not hitting higher rates.  If add in employment income will be tax on dividends in higher rate so can I claim FTCR on the additional tax due?

Guidance says FTCR is lower of foreign tax paid and additional tax due on this source of income but as dividends always top slice is this correct?

Thanks 

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08th Jan 2013 18:10

You have lost me

I assume that despite earning £25k in Australia during the tax year, he is UK resident for the entire tax year and that the split year treatment does not apply to exclude the Australian income from the UK tax return.

The Australian tax deducted from his Australian salary can be set against the UK tax due on his Australian salary.  As dividends are the top slice, all the UK tax on his Australian salary will be at the basic rate.  The relief is restricted to the lesser of the Australian and UK tax payable on the same income.

If inclusion of his Australian salary pushes his total income for the year into the higher rate tax band, so that some of the UK dividends are taxable at the higher dividend rate, so be it.  He will have to pay the additional tax of 25% of the net dividend on the gross dividends falling into the higher rate band.

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16th Jan 2013 14:50

Thanks for reply BUT...

The rules say:

The amount of the UK tax chargeable on that item of income is the

difference between:

• the tax due on your income including the item subject to the FTCR claim

• the tax due on your remaining income after the item, subject to the FTCR

claim, is removed. 

 

So without the Australian income, nothing taxable at higher rate but with the income there is some higher rate tax. So the difference (as above rule) includes tax on the dividends as follows:

Without Aus income, no tax to pay as no higher rate.

With Aus income, tax includes higher rate tax on dividends.

But this is still less than that suffered in Australia. So is relief a) aus income @ 20% or b) total tax due if include Aus income???

Would really appreciate your reply!

Many thanks

 

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16th Jan 2013 15:41

Ah, Foreign income is treated as top slice...

 

INTM165040 - UK residents with foreign income or gains: income tax: Limit of credit        Foreign tax is the minimum tax chargeable on the income (see INTM161250 and INTM164140 for claims to credit made after 21 March 2000). See INTM168000 onwards for rules to calculate the tax credit due where foreign tax is paid on income taken into account as a receipt of a trade.        1. General rule               Credit for foreign tax on foreign income must not exceed the lesser of            the foreign tax attributable to the income and      UK Income Tax charged on that income.              If the foreign tax exceeds the UK tax the excess cannot either be deducted from the amount of income chargeable to UK tax nor can it be repaid (see INTM165050, example 1). Provisions introduced by FA2000 for using excess foreign tax apply only to income from foreign branches and dividends received by UK companies (dealt with at INTM164240)        1. More than one source of income              Where a taxpayer has more than one source of income, his foreign source income is to be treated as forming the top slice of his total income so that the maximum amount of UK tax can be attributed to it. In this guidance the maximum amount of UK tax attributable to an item of foreign income is referred to as tax at the taxpayer's marginal rate.        1. Calculation of tax at marginal rate - one source of foreign income            a) Work out the Income Tax on the taxpayer's total income (excluding tax on charges and before any reduction for credit for foreign tax) for the year of claim.        b) Deduct from (a) the amount of Income Tax which would be chargeable (excluding tax on charges) on his total income if it were reduced by the amount of foreign income for which credit for foreign tax is claimed. If the foreign income has been taken into account in the computation of any relief (for example, retirement annuity relief) then the amount of that relief, for the purpose of calculating tax credit relief only, should be recomputed to reflect the exclusion of the foreign income.        (a) - (b) = Tax at the taxpayer's marginal rate. (See INTM165050, examples 2 and 3).   

 

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