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Foreign Tax Credit Relief and Dividend Allowance

Foreign Tax Credit Relief and Dividend Allowance

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What is the correct order for allocating the annual dividend allowance against a mix of UK and foreign dividends in calculating foreign tax credit relief  ? 

For example, if a higher rate tax payer has  3,000 UK dividend income  and 1,000 gross foreign dividends which have suffered a 15% foreign tax deduction , do you have to allocate the 2,000 annual dividend allowance against the foreign dividends first such that no UK tax is payable on the foreign dividends and therefore no foreign tax credit can be reclaimed, 

or

Can you allocate the annual dividend allowance against the UK dividends first such that the whole of the foreign dividends are liable to UK tax  and the whole of the 15% foreign tax suffered can then be reclaimed by the higher rate tax payer ? 

 

 

 

 

  

Replies (7)

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By Wanderer
10th Jan 2020 17:35

Option B.
But you can't reclaim, only claim.

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Replying to Wanderer:
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By L Haldane
10th Jan 2020 17:44

Yes, I understand that the foreign tax can only be claimed up to the value of the UK tax liability.

In advising that UK dividends can be allocated against the dividend allowance first, how do reach this opinion ?

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Replying to L Haldane:
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By Wanderer
10th Jan 2020 18:05

L Haldane wrote:

Yes, I understand that the foreign tax can only be claimed up to the value of the UK tax liability.

Correct, but you said re-claim which is a different matter altogether.
L Haldane wrote:

In advising that UK dividends can be allocated against the dividend allowance first, how do reach this opinion ?

It's not a dividend allowance despite what HMRC paste all over the internet. It's a zero rate band.
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Replying to L Haldane:
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By Tax Dragon
11th Jan 2020 11:49

L Haldane wrote:

In advising that UK dividends can be allocated against the dividend allowance first, how do reach this opinion ?

Best question I've seen on aweb in a long time.

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By SXGuy
10th Jan 2020 19:57

Dividend tax free amount is a zero band tax bracket up to £2000 it's not an allowance.

I'd go with its allocated to UK divs. What does your software say when you stick the figures in?

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Replying to SXGuy:
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By L Haldane
10th Jan 2020 20:31

My sofware (Ftax) doesn't calculate the foreign tax credit so I have to do a manual calculation [Note to self : change software provider for 2019/20 !]

The simplest way to do the manual calculation is to run the software tax calculation (a) including the foreign dividend income and (b) excluding the foreign dividend income, and the difference between the two calculations is then the value of the UK tax payable on the foreign income (foreign tax credit claim is then the lower of this UK tax difference and the amount of foreign tax suffered) , but this approach to the calculation presumes that the dividend allowance is allocated to the UK dividends first.

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By Tax Dragon
11th Jan 2020 11:47

You're looking for a rule that permits the favourable answer.

That's the wrong search. You can essentially choose which approach you prefer unless there's a rule that stops you (which indeed may be because there is a prescribed method).

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