A client, who continues to hold an Irish passport, emigrated from the UK to the USA several years ago. He has not returned to the UK for many years and is therefore clearly non-resident for UK tax purposes.
He works in the USA and files Tax Returns there.
He retains a property in the UK and receives rental income. His only other income arising in the UK is bank interest of about £2,600, paid gross.
I am getting very confused over his 2014/2015 UK tax position and would be extremely grateful for help and guidance.
My confusion arises from the following:
- The rental income, net of related expenses, to be declared on his UK Tax Return, is about £12,000.
- If he was not in receipt of bank interest in the UK, he would, as an Irish national, qualify for a UK personal allowance of £10,000 and would have a tax liability of about £400.
- If the gross bank interest of £2,600 is shown on his UK Tax Return, the first £880 would be taxed at 10% (£88) and the balance of £1,720 at 20% (£344), resulting in a total liability of £832.
- If the gross bank interest were instead regarded as “excluded income”, it would not be shown on the UK Tax Return, but my client would not then be entitled to a personal allowance, resulting in a total tax liability of £2,400 (£12,000 at 20%).
- Article 11 of the UK/USA Double Taxation Convention suggests that interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. In light of this Article, am I correct to prepare the UK Tax Return without declaring the UK interest (not on the grounds that it is “excluded income”, but simply because it is only taxable in the USA and therefore can be overlooked altogether), so preserving the UK personal allowance
……..which therefore takes us back to a UK tax liability of about £400?
I would really appreciate help on this issue. Thank you.
Replies (5)
Please login or register to join the discussion.
Does it matter at all? The bank interest and rental profits are all taxable in the United States. Reducing the UK tax - even by a penny - may have no effect if the US tax would increase by the same amount.
RTFM
You can claim a personal allowance, and not put the interest on the tax return. All this is explained in the notes to the residence pages and helpsheet 304.
Technically the US should only give credit for UK tax that is correctly paid, so if you paid more UK tax than was required they should not give credit for it. In practice, how would they know.
Oh and it is disregarded income, rather than excluded income, except it is neither of those things in this instance.
I agree incidentally; the treaty overrides domestic law. The client still needs to file his FBAR and 8938 and his US accountant needs to understand the UK return and UK position. Don't forget that your client must pay the £400 of UK tax by 31 December 2015 to optimise his foreign tax credits in the States. The timing is critical but often overlooked.