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Dealing with foreign dividends

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5th Oct 2009
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The treatment of foreign dividends has changed and will change again next year. This summary includes a worked example to explain the treatment.

Since April 2008, many holders of shares in foreign companies have been entitled to a non payable UK tax credit on their foreign dividends, bringing the tax treatment of foreign dividends in the UK into line with the treatment of UK dividends. However, the treatment for the tax return can be a little confusing, and the rules are changing again from April 2009.

Tax year 2008-09

UK resident taxpayers, and certain eligible non residents are entitled to a non payable 10% tax credit in respect of dividends paid by non resident companies in which they are minority shareholders (as defined). The tax credit does not apply to distributions by offshore funds. The tax credit of one ninth operates in exactly the same way as a tax credit attaching to a UK dividend, which is not repayable, but set against the tax liability on the income concerned.

Finance Act 2008 Sch 12 inserted new sections into ITTOIA 2005 to accomplish the change. New s 397A(7) defines an eligible non-UK resident as an individual who at any time in the tax year in which any part of the distribution is brought into charge to tax is not UK resident but is entitled to claim UK personal allowances under ITA 2007 s 56(3).

The tax credit also applies to manufactured overseas dividends which are representative of an overseas dividend.

A minority shareholder for these purposes is defined by new s397C. A minority shareholder for these purposes is someone whose shareholding in the company is less than 10% of the company’s issued share capital, taking into account shares to which the individual is beneficially entitled, or to which he is beneficially entitled to the distribution arising on the shares.

Normally only the shares owned by each individual will be taken into account for the minority shareholding test, but where an individual has transferred shares to a connected person wholly or mainly in order to avoid tax then the shares transferred to the connected person are aggregated with the shares held by the transferor. Shares transferred to any other person as part of a repo or stock lending arrangement are treated as owned by the transferor.

Treatment on the 2009 tax return

Foreign dividends of up to £300 can be included on the main savings area of the tax return in box 5, without the need to complete the foreign pages of the return. Although the foreign tax is also entered in box 6, only basic rate (10%) relief is given for foreign dividends entered on page 3.

For those who want the benefit of relief for foreign tax against their higher rate liability, the dividend must be shown on page F2 of the foreign pages (SA106), along with the relevant foreign tax. The calculation of the gross dividend and the tax due is a bit more complex, and is best illustrated by example.

Assume that a foreign dividend of £2,500 has been received, net of foreign tax of £470. The gross foreign dividend is subject to the UK tax credit, so the calculation would be as follows :

Gross dividend before UK tax credit addition = £2,970

UK tax credit of 1/9 = £330

Gross dividend income = £3,300

UK higher rate tax liability at 32.5% = £1,072.50

Less UK tax credit of £330 leaves tax due of £742.50

Credit for foreign tax – assume full credit available under DTT £470

Remaining tax due £272.50

Tax year 2009-10

The tax credit is extended to include dividends on shareholdings in excess of 10% provided the profits arise in a qualifying territory – that is a territory with which the UK has a double taxation agreement which includes a non discrimination clause. This will mean that only relatively few foreign dividends do not attract the deemed UK tax credit from April 2009, narrowing the difference in treatment between UK and foreign dividends still further. However, these are likely to continue to be entered on to the foreign pages in order for credit to be given for the foreign tax when the recipient is a higher or additional rate taxpayer.
 

Replies (5)

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By strongbow
05th Oct 2009 13:15

Notional Tax on Foreign Dividends not applicable to foreign gund

Does anyone know if it is intended to sort out the anomaly re UK tracker funds based in Dublin?

The notional tax credit was withdrawn for 'Foreign Funds' because of attempts to misuse the new provisions. This leads to the anomaly that Barclays Ishares UK trackers do not get the tax credit, because they are based in Dublin and classified as 'foreign funds', even though they are invested in UK shares.

 

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
05th Oct 2009 19:47

FA 2009 I think

There are provisions in FA 2009 which change the tax structure in relation to offshore funds. I'm not sure about the funds you are referring to as I don't have any practical experience of them, but I am pretty sure that the distributions are covered by new Section 397AA inserted by Sch 19 FA 2009 para 3. This provides for a tax credit for a distribution from an offshore fund (condition B). This applies for distributions received on or after 22 April 2009.

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By pawncob
06th Oct 2009 10:28

Please
Email this article to HMRC.

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By Robin S
06th Nov 2009 10:40

But what is entered on R185?

So what do I declare on form R185 for a life tenant? and how does that life tenant then declare the dividend on his return?

I'm happy with the grossing up on the SA900 but guidance and my tax return system seem to wants to gross up the already grossed up dividend when I come to prepare the life tenant's SA100. 

 

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By [email protected]
26th Oct 2011 17:00

Iberdrola dividends 2010/11 tax year

Does anyone know where to find out what foreign divs Iberdrola paid in tax year 2011. Client has mislaid vouchers but we know the holding.

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