TQOTW: Non-resident Disregarded income
My client, Ron, has built up a motor repair business over many years in a limited company. His two sons now run the business as co-directors with him. Lately, Ron has not been doing much work in the business and so has not been getting any remuneration from the company. However, he has typically received dividends from the company of £50,000 each year. He began to rent a place for himself in France from the end of March 2019 and was not UK resident for 2019/20. His income for 19/20 was just the £50k dividend and a UK state pension of £7k. He has emailed to say that in 20/21 he expects his income to have increased by about £30,000 because he has been renting out his former home in St. Alban’s. He understands from our previous conversations that he didn’t have any tax to pay for 19/20 because his income was just state pension and dividends. As far as he is concerned, the rent is just more investment income like the dividends so he’s not expecting to have any tax to pay in the UK for 20/21 either. How can I explain the difference in his income tax bill? 

There was nothing to pay in 2019/20 because all of Ron’s income was ‘disregarded income’ (S.813 Income Tax Act 2007). This is important because our tax rules say that a non-resident individual’s income tax bill can never exceed the total of tax deducted at source or treated as paid on his or her disregarded income plus the income tax on any other income UK sources of income. So, as long as no tax has been deducted at source on his state pension, Ron’s bill is limited to the tax treated as paid on the dividends at 7.5% under S.399 Income Tax (Trading and Other Income) Act 2005. Since, he’s treated as having paid that tax already, he has nil to pay for that year.

In 2020/21, the introduction of rental income complicates the income tax position because rent is not ‘disregarded income’. We still need to calculate the limit on Ron’s bill imposed by S.811 ITA but it has been raised by £6,000 because of the rental income. This is because we have to increase the limit by the tax referable to the income that is not disregarded (i.e. the rent) without setting against it any of Ron’s personal allowance even though he is entitled to one as a British national. This maximum amount is applicable to any non-resident regardless of where in the world they are living. However, Ron has moved to France – a country with which the UK has a full double taxation agreement – and so the provisions of that agreement are more likely to limit Ron’s exposure to UK income rather than the calculation of S.811.

Article 23 (Other income) of the agreement with France entirely excludes the UK’s right to tax the UK state pension and Article 11 (Dividends) limits the tax charged on the dividends to 15% of the gross dividend. This means that the claim form associated with HS304 is needed for the pension and the dividends. Because the UK’s right to tax the pension is excluded by the treaty, the pension is reported in the table on page 1 of the claim form and is omitted from the tax return. The dividend income goes on page 2 of the claim form as well as the return; the amount by which the tax payable on the dividend exceeds 15% of the gross dividend then feeds into Box 22 and is credited in the income tax calculation.

Most countries will have a treaty with the UK that says something about the UK’s right to tax its state pension and a dividend from a UK company when they are paid to someone resident in that other country. However, the relevant treaty must be looked at in each case. For instance, if Ron had instead moved to Spain, that agreement would also stop the UK taxing the state pension but the tax charged by the UK would be limited to 10% instead of 15%. On the other hand, if he’d settled in Germany, that treaty provides the same 15% limit on the dividends but gives the UK exclusive rights to tax the state pension.

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Julian began his tax career in a small firm dealing with the tax affairs of individuals and small business concerns. He has also worked for 5 years in corporate compliance at PwC. Julian is a member of the Association of Taxation Technicians

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