She is the sole shareholder of a UK company, from which she only takes dividends, and has some UK property income. I understand that as a non-UK resident she is only taxable on UK sourced income, but that dividends are disregarded income. Therefore, is she only taxed on the property income?
A.) Legislative references are to ITA 2007 unless otherwise stated.
Limitation of a non-UK resident’s income tax liability
It seems there might be a common misconception that ‘disregarded income’ is not assessable. Disregarded income is still assessable income, but for non-UK residents, there is a limitation to their UK income tax liability by virtue of s811. This limits the UK liability to essentially any income tax deducted at source, or treated as deducted, on disregarded income plus any income tax on other income.
Generally, on commercial software you may see two calculations in this case – one is the ‘normal’ calculation with personal allowances applying, if entitled, and the second is the limit to the non-resident’s UK liability. It is a comparative calculation and the non-resident’s income tax liability will be the lower of the two results.
S813 sets out the definition of disregarded income and includes dividend income. In theory, if a non-resident only has UK sourced dividends, then there should be no further UK tax liability on those dividends due to the application of the limitation.
Your client will be taxed on both the dividend and rental income. If the s811 calculation produces a lower result, then that is her UK tax liability.
For 2024-25, the client will be deemed to have paid the dividend ordinary rate of income tax on her dividend income (s399 ITTOIA 2005), such that you may see a tax credit in the tax calculation.
Temporary non-resident
I note the client’s intention is to return to the UK in three years’ time. We should consider the application of the temporary non-resident rules in s812A which supplements the general rule of s401C ITTOIA 2005. If the client is temporarily non-resident (per Part 4 Schedule 45 FA 2013), has had dividend income during a year of non residency and that year’s UK tax liability was subject to the limitation under s811, then the dividend income will form part of her taxable income when she becomes UK resident again.
There is an exception to this. If the dividend is paid out of ‘post-departure trade profits’, then it would not be taxable income when the client becomes UK resident again (s812A(5)). Post-departure trade profits are essentially any trade profits arising from when the client becomes non-resident (s812A(6)).
HMRC appear to accept a reasonable apportionment, based on the facts, as to what part of the dividend is to be attributed to post-departure profits. However, if there are substantial reserves built up prior to the individual becoming non-resident, HMRC may consider that the dividend received is either wholly or partly made up of pre-departure profits (see RDRM12700). It is unclear what HMRC mean by ‘substantial’ in this instance.
Conclusion
In summary, your client’s UK dividend and property income is assessable to UK income tax in 2024-25. However, the client’s UK tax liability will be capped at the amount calculated per s811. For disregarded income, the income tax is limited to the amount deducted at source (or deemed to be).
It is advisable to make the client aware of the impact of the temporary non-resident rules on her return to the UK.
The Croner-i Direct Tax Reporter guidance on the limited liability of non-residents is at 148-650 and on the temporary non-residence rules for dividends at 328-750. HMRC have some general guidance on s811 at SAIM1170 and for some practical application of the calculation at HS300.
