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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 4

Ken is resident but not domiciled in the UK and meets the requirement of ITEPA03/S26A (ERSM162615) when an option is granted, on 6 April 2013, and is on the remittance basis in year 1, 2013/14 and year 2, 2014/15. The option vests at the end of Year 2 on 5 April 2015 and is exercised at the end of Year 3 on 5 April 2016. For the purposes of the Chapter 5B rules the relevant period is two years (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 (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/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

If none of the chargeable 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.