INTM165240 - 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