With the self-assessment deadline fast approaching, we present three tax driven examples based on real-life scenarios.
1. Treatment of child benefit in a household earning above £50k in self-assessment
Scenario: An individual earning less than £50,000 has been receiving child tax credit. The individual is registered for self-assessment. Her partner’s earnings exceeded £50k in 2014-15. He is on payroll and is not registered for self-assessment. He is not the father of the child. The individuals are not married but live together.
Answer: Families where one parent is earning more than £50,000 a year are no longer be able to claim the total amount of child benefit. The limit applies to total household earnings of two partners, irrespectively of whether they are married or not.
‘Partner’ means someone you’re not permanently separated from who you’re married to, in a civil partnership with or living with as if you were. It does not matter if the child living in the household is the biological child of either of the individuals caring for it.
To work out if your income is over the threshold, you’ll need to work out your ‘adjusted net income’.
Your adjusted net income is your total taxable income before any personal allowances and less deductions such as Gift Aid.
The higher earner in the household will need to register for self-assessment and fill in a tax return, declaring the amount of child benefit received in the tax year. A tax charge will arise on the child benefit received if the income in the tax year exceeded 50,099. HMRC’s child benefit calculator can be used to calculate the charge, which needs to be paid to HMRC.
Once income per household reaches 60,000 the total amount of child benefit will have to be repaid.
It is possible to stop receiving child benefit to avoid returning money to HMRC later. However, filling in a child benefit form even in case where no child benefit is actually received due to exceeded income thresholds, will allow the individual to receive National Insurance credits which count towards the state pension.
2. EIS scheme – treatment of losses in self-assessment
Scenario: An individual invested £500k in an EIS scheme in tax year 2013-14 and claimed a tax reduction in his income tax liability for that year of £150k (30% of invested amount). In 2014-15 the individual incurred a loss when the company went bust. How is the resulting capital loss treated for tax purposes?
Answer: The amount of the loss allowable but restricted in this case, due to the sale within 3 years of the purchase is as follows:
Capital loss 500,000 Less income tax relief given 150,000 Allowable loss 350,000
The loss can be relieved in the same way as any capital loss:
Against capital gain in the same year; or
Carried forward to be offset against future capital gains;
An additional way to relieve the allowable loss is granted by s131 ITA 2007 as follows:
Against total income in the current year (s131 ITA 2007); or
Carried back against total income in the preceding year (s131 ITA 2007)
S.131 ITA 2007 is also available on SEIS and SITR capital losses, with a cap applying only to SEIS losses, whereby restricting the amount of the capital loss that can be offset against income is restricted to the higher of £50k and 25% of adjusted total income.
S.131 ITA 2007 capital loss relief is the only time a capital loss can be relieved against total income. 3. Foreign dividend income – double taxation relief used in self assessment
Scenario: An individual receives £40,000 of employment income and 60,000 of foreign dividend income, net of foreign tax of 6,000 deducted at source. How are those dividends treated in the tax return and what is the total tax after DTR?
Answer: Foreign dividends received by UK resident individuals are treated as normal dividend income.
If no tax has been deducted at source, foreign dividends are brought into the tax computation in the normal way and taxed subject to the same tax rules as UK dividends.
If foreign tax has been withheld, double taxation relief is available. DTR is usually available either via exemption defined in a treaty, or in the form of a credit against the UK income tax.
In the second instance, overseas dividends are included in the UK tax computation gross of overseas tax suffered. DTR on a source by source basis is available, being the lower of overseas tax suffered and UK tax on overseas income.
In order to establish UK tax on overseas income the following method is used:
Calculate the UK income tax liability on all sources of income
Calculate the UK income tax liability on only UK income (exclude dividends)
Calculate the difference between point 1 and 2, to identify the amount of UK tax on foreign income
Compare the UK tax on foreign income and the foreign tax actually suffered. The lower of the two is the DTR which will reduce the total UK tax liability.
A calculation of the DTR credit is shown below
Total income tax on all sources of income:
2014/15 Tax calculation:
Income tax on UK sources of income:
Difference : UK tax on total income 27,030
UK tax on UK income 6,000 Balance 21,030
The lower of the above difference of 21,030 and the overseas tax suffered of 6,000 is 6,000. This amount is the DTR which will reduce the UK tax liability
Total tax liability above 27,030 Less DTR (6,000) Income tax payable 21,030
The above assumes no other taxes have been deducted at source.
If the above income was expressed and received in a foreign currency, it would be necessary to convert it to sterling at the date when the income is received.