I have a client who lived and worked in the UK until early in the 2018/19 tax year.
I've been through the residence questionaire and am satisfied they are classed as non-resident for 2018/19.
In the year, they have employment income from their former UK job, which ceased when they left the UK but which included a redundancy payment over and above the tax free amount and so were taxed on this. They then let out their UK property and moved abroad (EU).
I've completed their 2018/19 return including the employment income earned while in the UK and the property income earned after leaving. The return shows a refund due as the client was taxed under PAYE on their redundancy pay and had no further UK employment in the year. My client's local adviser is now asking what proportion of the tax bill relates to the property income, as a resident in their new country, they will pay tax on this income but get relief for tax suffered in the UK.
The tax owing for the year includes employment income up to and over the higher rate threshold, and around £10K in property income. Do I treat the property income as all being taxed at 40%, as the total tax multiplied by the ratio of property to total income, or some other figure? As far as I'm aware, when working out the order of taxation, property and employment income are always lumped together but I've never come across or even considered this question.
Replies (17)
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Often wondered about this. Maybe it's:-
a) Tax with the property income
b) Tax without the property income.
Tax on property income = a) - b).
Interested in a definitive answer.
But that wouldn't work – at least, if you applied the same formula to allocating the tax to each source, you'd end up massively over-allocated (try it).
Best guess (but it is a guess): subject to overrides, you can allocate your allowances and rate bands as best suits you – so do it to maximise the tax on your rents. (And don't forget the non-resident landlords scheme).
Well, yes, that's obvious!But that wouldn't work – at least, if you applied the same formula to allocating the tax to each source, you'd end up massively over-allocated (try it).
Think in many / most cases that would give the same result as my suggestion.Best guess (but it is a guess): subject to overrides, you can allocate your allowances and rate bands as best suits you – so do it to maximise the tax on your rents. (And don't forget the non-resident landlords scheme).
Wanderer's answer is correct. The tax on the property income slice is the difference between the optimised calculation with and then without the property income. Reminds me of the old days of doing marginal rate calculations.
Got any backing for that, Tim?
In this case it doesn't matter, but let's say there was a capital gain partly within the BRB and partly not. On what basis are you allocating CGT to rents?
Is there going to be any formal backing though? We are looking at how a foreign tax authority might be making this calculation. Our own HMRC can't get tax calculations right in many cases. We were up to number 106 in April and I think there's been another update since then.
Had Tim said "I agree with Wanderer", that would have been one thing; he should not have made the claim "Wanderer's answer is correct" if he wasn't willing to back it up.
In this case, no-one cares. In another case, in which two UK sources were liable overseas, someone will, because doing it your ("correct") way could easily end up with more tax allocated to sources than has been paid. (That's easy to show… I used CGT as a provocative example; substitute a chargeable event gain with top-slicing and you quickly get ludicrous outcomes.)
Got any backing for that, Tim?
In this case it doesn't matter, but let's say there was a capital gain partly within the BRB and partly not. On what basis are you allocating CGT to rents?
Eh? You can ignore CGT as we are only interested in income tax. It is the accepted method used by HMRC for years. It is the same method used for limiting amounts claimed for foreign tax credit relief as laid out in HS263
“The UK tax liability on a specific amount of income or a capital gain is the difference between The UK tax due on your income or capital gains:
plus the item on which foreign tax was incurred
without the item on which foreign tax was incurred”
Well, who could have guessed that a method HMRC invented could give daft outcomes? I'm in shock.
Am I missing something? If employment ceased in 2017/8, then redundancy payment received in 2018/9 is deemed to have arisen on the day employment ceased at which date the right to redundancy pay arose which falls in 2017/8.
See ITEPA s403
(3)For the purposes of this Chapter—
(a)a cash benefit is treated as received—
(i)when it is paid or a payment is made on account of it, or
(ii)when the recipient becomes entitled to require payment of or on account of it, and
Yes, I think you are putting a different interpretation on the OP's third paragraph and in particular the word 'former'. My reading is that employment ceased in 2018/2019.Am I missing something? If employment ceased in 2017/8, ......
Not sure which EU country you talk about but in France, where your 4th para includes " ...they will pay tax on this income but get relief for tax suffered in the UK.", that tax relief is not deducted at the same amount as the actual, calculated, UK tax bill. The UK earnings are added into the French income calculation, just to establish your top French rate of tax, then the income is deducted again, before the French tax bill is calculated, at the French rate established. So the UK split of tax would not be necessary
According to a paper published on accounting web earlier this year
taxpayer is entitled to allocate allowances as he or she wishes.
According to a paper published on accounting web earlier this year
taxpayer is entitled to allocate allowances as he or she wishes.