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HMRC internal manual

Employment Related Securities Manual

Interaction of UK law and treaties - up to 5 April 2015: remittance basis and time apportionment - example 4

Ken is UK-resident but not ordinarily resident in the UK when an option is granted, on 6 April 2009, and is on the remittance basis in year 1, 2009/10 and year 2, 2010/11. The option vests at the end of Year 2 on 5 April 2011 and is exercised at the end of Year 3 on 5 April 2012. For the purposes of the UK remittance basis rules the relevant period is two years. For the purposes of time apportionment, in accordance with the UK/US DTA, the gain of 10,000 relates to a 3 year period (a total of 720 workdays).

Ken has 24 US workdays in each of years 1 and 2 and 120 US workdays in Year 3. He is still resident, and is treaty resident, in the UK when he exercises his option.

So, ITEPA03/S41A(4) will produce the following result:

Total securities income 10,000
Overseas workdays 48/480 x 10,000 gives foreign securities income of 1,000
Taxable specific income under S41A(4) 9,000

If none of the foreign securities income of £1,000 is remitted to the UK, then it will not be subject to UK income tax.

Under the UK/USA Double Taxation Treaty, US is entitled to tax the US workday proportion of the gain - this will be based on the workdays between grant and exercise in accordance with the Treaty.

US tax gain 168/720 x 10,000 2,333

Foreign Tax Credit Relief is available for the US tax on doubly taxed income. UK has not subjected to tax £1,000 in respect of US duties. So, Ken is entitled to FTCR in respect of the US tax on the gain of £1,333 (i.e. £2,333 less £1,000). If subsequently, the £1,000 is remitted, it will be subject to UK tax as taxable specific income of the year of remittance and Ken will be entitled to FTCR in respect of the US tax on the £1,000.

For the application of this and the other examples to periods from 6 April 2013, see ERSM161335.