Non-resident tax attribution

How to split tax liability between UK income sources

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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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By Wanderer
20th Jun 2019 11:42

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.

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Replying to Wanderer:
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By Tax Dragon
20th Jun 2019 11:53

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).

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Replying to Tax Dragon:
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By Wanderer
20th Jun 2019 12:03

Tax Dragon wrote:

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).

Well, yes, that's obvious!
Tax Dragon wrote:

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).

Think in many / most cases that would give the same result as my suggestion.
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Replying to Wanderer:
By Duggimon
20th Jun 2019 12:32

Wanderer wrote:
Think in many / most cases that would give the same result as my suggestion.

Certainly in this situation, it has the effect of the tax attributable being 40%, less finance cost relief, which is as much as it could possibly be.

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By Tim Vane
20th Jun 2019 12:16

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.

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Replying to Tim Vane:
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By Tax Dragon
20th Jun 2019 15:39

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?

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Replying to Tax Dragon:
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By Wanderer
20th Jun 2019 16:02

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.

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Replying to Wanderer:
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By Tax Dragon
20th Jun 2019 16:12

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.)

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Replying to Tax Dragon:
By Tim Vane
20th Jun 2019 16:12

Tax Dragon wrote:

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”

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Replying to Tim Vane:
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By Tax Dragon
20th Jun 2019 17:02

Well, who could have guessed that a method HMRC invented could give daft outcomes? I'm in shock.

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By Montrose
22nd Jun 2019 17:48

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

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Replying to Montrose:
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By Wanderer
23rd Jun 2019 05:41

Montrose wrote:

Am I missing something? If employment ceased in 2017/8, ......

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.
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Replying to Wanderer:
By Duggimon
24th Jun 2019 08:39

Exactly, employment ceased early in June 2018.

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By libraBE
24th Jun 2019 11:52

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

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Replying to libraBE:
By Duggimon
25th Jun 2019 12:03

Thanks for the response. The individual is not in France.

I'm not getting involved in calculating the tax in their resident state, they have a local tax adviser for that. It is that tax adviser who asked for the split. I'm only interested in giving the correct figures to them per UK rules and am happy that my initial thoughts and the responses earlier in the thread were on the right track.

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By David Gordon FCCA
24th Jun 2019 13:22

According to a paper published on accounting web earlier this year
taxpayer is entitled to allocate allowances as he or she wishes.

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By David Gordon FCCA
24th Jun 2019 13:22

According to a paper published on accounting web earlier this year
taxpayer is entitled to allocate allowances as he or she wishes.

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