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HMRC internal manual

Savings and Investment Manual

HM Revenue & Customs
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Collective investment schemes: unauthorised unit trusts: foreign income

Foreign income

Where income from foreign sources is received, the trustees may be entitled to Double Taxation relief, in accordance with the relevant Double Taxation guidance. It is important to note that

  • withholding tax may not be passed through to the unit holders, and
  • ITA07/S29 (2), limits relief to the amount of Income Tax payable by the trustees less any tax which they are entitled to deduct from annual payments including deemed annual payments to the unit holders.
  • where DTR has been claimed by the trustees, there may be a restriction in the sum treated as income tax deducted from deemed payments (ITTOIA05/S550) treated as received by the unit holders (ITTOIA05/S548) - seeSAIM6105 and SAIM6145 

Example: restriction of relief for overseas tax

A unit trust has income of £1000 for 2006-2007, which carries withholding tax £100. There are no expenses. If the trustees overlooked ITA07/S29 (2)), they would calculate the amount available for payment as

Income 1000
Less withholding tax 100
Net 900
Provision for UK tax: 220 less tax credit 100 120
Available for payment 780

The amount of deemed payments would be £1000 (£780 grossed up) and the Income Tax to be accounted for £220.

ITA07/S29 (2) would restrict tax credit to nil (the liability on the trustees’ income amounting to £220 less the amount of £220 deductible from the distribution to unit holders), so that the assessment on the trustees’ income would give rise to liability of £220 and the trustees would have to find £100 out of capital or future income to balance the income account.

The trustees would arrive at the correct figure and make adequate provision for liability if they begin with the premise that there is £900 available to meet the distribution and UK tax.

The net distribution would be £702 plus tax deducted £198 = gross annual payment £900.

ITA07/S29 (2) restricts the tax credit to

Basic rate tax on income 220
Less tax deductible 198
Tax credit 22

The trustees liability becomes £220 less tax credit £22 = UK tax payable £198. The trustees make provision for

Income 1000 less withholding tax 900
Less UK tax 198
Available for payment 702