UK resident UK national client has a US income source to be reported on UK tax return.
Included in the this source is an amount of "tax exempt interest", shown on schedule K-1 to form 1041.
The tax exempt status is of course by reference to US law. It typically arises from municipal bonds that are afforded attractive tax status in USA in order to attract investment.
Would I be correct in disregarding the exemption when including it in the UK tax return?
Thanks
With kind regards
Clint Westwood
Replies (2)
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Yes
As you say, it's exempt with reference to US law, not ours. I made the mistake of ignoring such income for UK purposes until a client moved to a big 4 firm and my error in earlier years was pointed out. Not an experience I look back on fondly.
A Form 1041 is a return for an estate or trust. US tax exempt interest is entirely taxable by the UK as foreign source interest. If the client is not a US person, such interest is entirely free of all US taxes, unless effectively connected to a US trade or business.