Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

International Manual

From
HM Revenue & Customs
Updated
, see all updates

UK residents with foreign income or gains: income tax: Losses - examples

Example 1

A UK resident carries on a trade in the UK and in a foreign country through a branch. The trading results are as follows

  £  
     
Year to 31 March 2010    
UK profits 20,000  
Foreign branch profits 8,000 (before foreign tax 2,200)
     
Total profits taxable    
Case 1 28,000  
     
Year to 31 March 2011    
UK profits 6,000  
Foreign branch loss (10,000)  
Net loss (4,000)  

The loss is claimed under ITA2007/S64 to be set against the profits of the year ended 31 March 2010. The final liability for that year is:

  £
   
Case I profits 28,000
Less Section 64 loss (4,000)
- 24,000
Less personal allowance (6,475)
- 17,525
Tax on 17,525 at 20% 3,505.00
Less foreign tax credit relief (see below) (1,600.00)
Tax payable 1,905.00

The tax credit relief on the foreign branch profits (such profits being treated as from a separate source for this purpose) are computed as follows:

  £ £
     
Case I profits 28,000  
Less Section 64 loss (4,000)  
Total income 24,000  
     
Tax on 24,000 as above   3,505.00(a)
Total income as above 24,000  
Less foreign branch profits (8,000)  
  16,000  
Less Personal allowance (6,475)  
  9,525  
Tax on 9,525 at 20%   1,905(b)
Tax at marginal rate on foreign branch profits (a)-(b)   1,600.00

As tax at the marginal rate (1,600) is less than the foreign tax (2,200) credit is restricted to 1,600.

Example 2

A UK resident has income from property in three different countries:

  Country A Country B Country C Total
         
Income 6,000 4,000 6,000  
Expenses 1,000 6,000 4,000  
Profit (loss) 5,000 (2,000) 2,000 5,000

The following amounts of foreign tax have been paid:

    Rate of Foreign Tax Tax Paid
       
Country A 5,000 10% 500
Country B Nil    
Country C 2,000 30% 600
Total Foreign Tax     1,100

Assuming that all of the income is wholly chargeable at 20%, the Income Tax due will be as follows:

Country A 

£5,000 at 20% = £1,000

All the losses that arose in Country B are allocated to Country A as that has suffered the lowest rate of foreign tax:

Profit £5,000 less Losses £2,000 = Net £3,000 at 20% = £600

All of the foreign tax paid of £500 is available for foreign tax credit relief.

Country C 

£2,000 at 20% = £400

Although foreign tax of £600 has been paid, the amount available for foreign tax credit relief is limited to the amount of UK tax charged on the same income, that is £400.

Summary 

Income Tax due £600 + £400 = £1,000

Foreign tax credit relief £500 + £400 = £900

Net UK tax payable = £100