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HM Revenue and Customs Brief 17/10

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HM Revenue and Customs -Tax Authorities

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Issued 19 March 2010

Restriction of Foreign Tax Credit Relief on chargeable gains

Introduction

The purpose of this brief is to publicise a change to the established practice of restricting the amount of Foreign Tax Credit Relief (FTCR) that can be deducted when calculating the amount of UK tax due on a chargeable gain.

Background

Where a gain is chargeable to UK Capital Gains Tax or UK Corporation Tax and the same gain has also been taxed in another country then FTCR can be claimed in respect of the foreign tax paid.

Our practice has been to restrict the amount of FTCR if different periods of ownership of the asset are considered when arriving at the gain assessable in the UK and the foreign gain, or if the amount of the UK gain is less than the foreign gain.

We have reconsidered our view and are revising our practice so that the whole of the foreign tax is allowable as FTCR up to the amount of the UK tax on the gain.

The current practice

The established practice has been to restrict the amount of FTCR in the following two situations:

Situation one

The amount of gain charged to foreign tax may be calculated by reference to a longer period of ownership than the period on which the gain charged to UK tax is based. The most common instance is where assets were acquired before the 31 March 1982 and the gain chargeable in the UK is based only on the period from 31 March 1982 onwards. In such cases the established practice has been to restrict the FTCR due by the following calculation:

period of time assessed by UK divided by period of time assessed by foreign authority multiplied by foreign tax equals allowable FTCR

For example, where the asset was acquired on 31 March 1971 and disposed of on 31 March 1993, with foreign tax of 10,000 charged then the maximum amount of FTCR would be restricted as follows:

31 March 1993 minus 31 March 1982 equals 11 years divided by 31 March 1993 minus 31 March 1971 equals 22 years multiplied by 10,000 equals 5,000

Situation two

Where the gain charged in the UK is less than the gain charged to foreign tax, the established practice has been to restrict the maximum amount of FTCR due by the following calculation:

amount of UK assessment divided by amount of foreign assessment multiplied by foreign tax equals allowable FTCR

For example, where the UK assessed a gain of 55,000, the gain charged to foreign tax was 75,000 and the foreign tax was 15,000 then the FTCR would be restricted as follows:

55,000 divided by 75,000 multiplied by 15,000 equals 11,000

How we intend to implement the revised practice

From 19 March 2010 the practices described above that restrict the allowable FTCR will end. In all cases where FTCR is claimed against UK tax on chargeable gains, the whole of the foreign tax will be allowable up to the amount of the UK tax on the gain, provided that the gain charged in both countries relates to the same disposal.

In the examples above, the maximum allowable FTCR would now be the full 10,000 of foreign tax in the first case and the full 15,000 of foreign tax in the second, provided, in each case, that this amount was less than or equal to the UK tax.

This change will bring the chargeable gains practice in line with the Income Tax practice, which does not restrict the amount of FTCR allowed where the amount assessed in the UK is less than the amount of income assessed to foreign tax.

Implications

If tax returns were submitted with a claim to FTCR on the basis that the FTCR should be restricted, and those returns are still open or within the self-assessment window for amendment, they may be amended to reflect the change in practice. In other cases where FTCR has been restricted a claim can be made for additional relief within the normal time limits.

The current time limit for claims and assessments for Income Tax and Capital Gains Tax is five years from the 31 January immediately following the tax year and for assessments to Corporation Tax six years from the end of the accounting period to which the claim relates.

However, following changes announced in the 2008 Budget, from 1 April 2010 there will be a standard limit of four years from the end of the tax year for making claims of repayments to Income Tax and Capital Gains Tax and four years from the end of the accounting period for Corporation Tax.

Under these rules claims resulting from this change of practice that relate to Income Tax and Capital Gains Tax for the tax year 2004-05 would have to be made before 1 April 2010 and claims for the tax year 2005-06 must be made before 6 April 2010. Similarly, companies would have until 31 March 2010 to make claims for accounting periods ending before 1 April 2006, provided such claims are within the current six year time limit.

Because publication of this brief leaves so little time for such claims to be made within the statutory time limits, we will, exceptionally, accept late claims for the tax years 2004-05 and 2005-06 or accounting periods ending on dates between 19 March 2004 and 29 June 2006, provided that those claims are for additional tax credit relief resulting from this change of practice and are made no later than 30 June 2010.

Further Information

Guidance on the current practice can be found at CG14380 onwards http://www.hmrc.gov.uk/manuals/CG1manual/cg14380+.htm . The Capital Gains Manual will shortly be updated to reflect the change in practice.

For further information please contact:

Cristy Semini
Charities, Assets & Residence - CGT
Royal House
Homer Road
Solihull
B91 3WG
Tel: 0121 712 8654


About the Author

Crown Copyright 2010.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2010-06-14 12:01:34 in Tax Articles

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