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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Interaction of UK law and treaties - from 6 April 2015: chapter 5B and time apportionment - example 5

Jasjeet 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. On 6 April 2015 she leaves the UK and begins to reside in the US. 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).

Jasjeet’s UK/US workdays are 120/120 days in each of Years 1 and 2 and 60/180 days in Year 3. She is not resident in the UK and is treaty resident in the US when she exercises her option

ITEPA03/S41F(3) produces a UK tax charge as follows:

Securities income 10,000
   
Overseas workdays 240/480 x 10,000 gives chargeable foreign securities income of 5,000
Taxable specific income under S41F(3) 5,000

If Jasjeet makes a claim for time apportionment under the UK/US Double Taxation Treaty, the gain that will be taxed as specific employment income will be apportioned on the basis of the UK workdays as a proportion of total workdays in the period from the grant of the option to its exercise, in contrast to the rules of Chapter 5B which use the relevant period from grant to vest. US will tax 100% of the gain and will give a foreign tax credit in respect of the proportion of the gain that is from a foreign source, using the same basis of apportionment - workdays from grant to exercise.

So the UK will tax, and US will give credit for tax paid on, the UK part of the gain which is:

UK gain of 300/720 4,167
   

In this example, while the remittance basis rules make £5,000 of the gain taxable on the arising basis and the remaining £5,000 taxable if remitted to the UK, the time apportionment offered by the double taxation agreement means that only £4,167 is taxable in the UK and remittance basis will not apply to any of the remaining amount.