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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
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Non-resident companies: double taxation agreements: foreign tax paid by a non-resident company

This example illustrates the differences between allowing any foreign tax paid by the non-resident company as tax credit relief or as a deduction in computing the gain.

Facts

  • The non-resident company realises a gain of £20,000 computed under the normal Capital Gains Tax rules.
  • It has to pay £5,000 tax on this gain in its country of residence.
  • 75 per cent of the gain is attributable to a UK resident.

Capital Gains Tax treatment

A TCGA92/S13 charge of £20,000 @ 75 per cent = £15,000 is apportioned to the UK resident. Relief for the tax paid can be claimed in two ways.

  • TAX CREDIT RELIEF, SEE CG57382.

Suppose the UK resident is liable to Capital Gains Tax at 40 per cent. The tax payable would be £6,000. The UK resident can claim tax credit relief on the foreign tax of £5,000 paid by the company in the same proportion as the gain is apportioned. £5,000 @ 75 per cent = £3,750. The total tax payable by the UK resident becomes £2,250.

  • DEDUCTION IN COMPUTING THE GAIN, SEE CG57383.

The foreign tax paid of £5,000 can be deducted in computing the gain. No indexation allowance is due on this deduction. The gain to be apportioned becomes £20,000 - £5,000 = £15,000. The taxpayer’s share is £15,000 @ 75 per cent = £11,250. At a rate of 40 per cent the tax payable would be £11,250 @ 40 per cent = £4,500.

In this example you would expect the taxpayer to claim tax credit relief.