Policy paper

Statement of Practice 6 (1988)

Published 4 November 1988

General

1. TCGA 1992 s 277 applies to Capital Gains Tax the double taxation provisions set out in Income and Corporation Taxes Act 1988 ss 788 to 806, with the necessary modifications. ICTA 1988 s 797 applies the provisions to Corporation Tax on chargeable gains.

2. The standard credit Article in our double taxation agreements (which are made under Income and Corporation Taxes Act 1988 s 788) says, in effect, that subject to the provisions of the law of the UK, tax payable under the law of the treaty partner on capital gains from sources within that territory shall be allowed as credit against any UK tax computed by reference to the same gains by reference to which the overseas tax is computed. Income and Corporation Taxes Act 1988 s 790 allows unilateral relief for overseas tax and s 790(4) is in similar terms to the standard credit Article.

3. The principal requirement for the granting of credit for overseas tax against liability to Capital Gains Tax (or Corporation Tax on chargeable gains) is therefore that the overseas tax should be computed by reference to the same gain as the UK tax. There is no requirement that the respective tax liabilities should arise at the same time nor that they should be charged on the same person.

Specific examples

4. HM Revenue and Customs’s view is that the following sets of circumstances fall within the terms of the standard credit Article and Income and Corporation Taxes Act 1988 s 790 and may therefore give rise to a credit for overseas tax against UK Capital Gains Tax or Corporation Tax on chargeable gains:

• the overseas tax charges capital gains as income
• overseas tax is payable on a disposal falling within TCGA 1992 s 171 (transfers within a group of companies treated as taking place on a no gain/no loss basis) and a liability to UK tax arises on a subsequent disposal
• an overseas trade carried on through a branch or agency is domesticated (ie, transferred to a local subsidiary) and relief is given under TCGA 1992 s 140, there is a subsequent disposal of the securities (or the subsidiary disposes of the assets within 6 years) giving rise to a liability to UK tax and overseas tax is charged in whole or in part by reference to the gain accruing at the date of domestication
• overseas tax is payable by reference to increases in the value of assets although there has been no disposal, there is a subsequent disposal of the assets on which a liability to UK tax arises

5. It will be seen that relief is conditional upon the subject of the overseas tax being identified with the gains on which the UK tax liability arises. In contrast, where ‘roll-over’ relief is claimed, for example under TCGA 1992 s 152, the gain on disposal of the old asset is not subjected to UK tax. The gain on realisation of the new asset remains a gain separate from that realised on sale of the old asset and overseas tax payable as a result of the sale of the old asset is not creditable against UK tax payable on the gain realised on sale of the new asset. However, in such circumstances TCGA 1992 s 278 allows the overseas tax to be claimed as a deduction in computing the gain for ‘roll-over’ relief purposes.