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HMRC internal manual

Employment Related Securities Manual

Interaction of UK law and treaties - from 6 April 2015: chapter 5B and time apportionment - example 2

Lyra is UK-resident but not ordinarily resident in the UK in 2012/13 (ERSM162645) when an option is granted by GlobalCorp Inc, on 6 April 2012, and is on the remittance basis in that year, and in 2013/14, when she is resident but not domiciled in the UK and meets the requirement of ITEPA03/S26A (ERSM162615). She leaves the UK on 5 October 2014 but remains employed by the same group. The option vests at the end of Year 2 on 5 April 2014 and is exercised at the end of Year 3 on 5 April 2015, giving rise to specific employment income of £10,000. For the purposes of the Chapter 5B rules the relevant period is two years to 5 April 2014 (which is 480 workdays). For the purposes of time apportionment, in accordance with the UK/US DTA, the gain of £10,000 relates to a 3-year period to 5 April 2015 (a total of 720 workdays).

Lyra has 24 US workdays in each of years 1 and 2 and 120 US workdays in Year 3. She is treaty-resident in the US when she exercises the option.

In accordance with ITEPA03/S41G the relevant period begins with the grant (which the legislation refers to as the “acquisition”) of the option and ends with the vesting of the option (as there has been no chargeable event which precedes the vesting). ITEPA03/S41H(6) applies and apportions the securities income of 10,000 between duties performed in the UK and duties performed outside the UK. In the absence of unusual circumstances, workdays in each of the territories concerned will be an acceptable method of determining the balance of duties between them. (See ERSM162615 and the examples at ERSM162670).

So, in the absence of a Double Taxation Treaty, ITEPA03/S41F(3) will produce the following result:

Total securities income 10,000
Overseas workdays 48/480 x 10,000 gives chargeable foreign securities income of 1,000
Taxable specific income under S41F(3) 9,000

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

Gain on UK workdays between grant and exercise 552/720 x 10,000 7,666

So the UK’s charge will then be restricted to £7,666 and Lyra should claim credit in the US for UK tax suffered on the amount assessed here. The remittance basis would not apply to any of the employment income.