I am dealing with an estate where there are numerous pecuniary legacies but due to delays in the house sale, these are being paid after the ‘Executors Year’, and so statutory interest is payable on them. Some of the beneficiaries live abroad. I read somewhere that the statutory interest on legacies for beneficiaries in other countries should be paid net of tax, but I cannot find any authority for this point, or anything to say how to deal with the tax deducted.
If anyone is able to shed any light on this I’d be grateful.
ITA 2007 s874(1)(d). The phrase is “usual place of abode” and not tax non-resident. In theory it is possible to be UK resident but live usually abroad. See SAIM9080. A UK resident is going to be taxable on the interest received so will be able to reclaim the tax or offset it. When in any doubt deduct or HMRC can get the tax from you.
A non-resident is likely to be irritated by the deduction. He has to suffer the tax charge unless a Treaty assists (it often prevents the UK taxing local source interest). A non-resident is not entitled to a PA unless a Treaty confers it and many don’t e.g. the Australian Treaty, probably because they have no equivalent. Treaty claims for small amounts are likely to not be worthwhile. You are under no obligation to assist the payer with such a claim and so incur the cost of getting a direction to pay gross in view of the one-off nature of the payment and its likely small amount. With a big number the payee might pay the cost. The payee may well be resident in a country that taxes the interest and gives unilateral relief for foreign tax, as the UK does, by way of credit; but no tax authority is going to repay tax deducted abroad. The only way to get that back is from the UK under a post-event Treaty claim.
A Treaty isn’t the only way for non-residents to get a personal allowance. The tax return notes lists these:
• you’re a British citizen or a national of another
member state of the European Economic
Area (EEA). The EEA member states are:
Austria, Belgium, Bulgaria, Croatia, Cyprus,
Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Latvia, Liechtenstein, Lithuania,
Luxembourg, Malta, Netherlands, Norway,
Poland, Portugal, Romania, Slovak Republic
(Slovakia), Slovenia, Spain and Sweden
• you’re resident in the Isle of Man or the
Channel Islands
• you’ve previously resided in the UK and are
resident abroad for the sake of your health, or
the health of a member of your family living
with you
• you’re, or have been, employed in the service of
the British Crown
• you’re employed in the service of any State
under the protection of His Majesty
• you’re employed in the service of any
missionary society
• you’re a widow, widower or surviving civil
partner whose late husband, wife or civil partner
was in the service of the British Crown
I would not wish to be considered a flaming galah by my Aussie mates (G’day) but Duncan prompted me to dig further and I have changed my mind: an Australian resident is entitled to a personal allowance but must also be a national of the country. This is not made clear in the Tax Return Notes but it is in RDRM1030. It is confirmed in that invaluable resource The Digest Of Double Tax Treatieshttps://assets.publishing.service.gov.uk/media/5b05425fed915d1317445ed2/DT_Digest_April_2018.pdf
I had been led astray by the Non-Discrimination Article of the Australia Treaty “25.5 Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident”.
The general rule is that a DTT prevails over domestic legislation, in this case s56 ITA 2007: ss2 and 6(2) TIOPA 2010. But the Treaty does not appear to actually override in this respect. Those who were Commonwealth citizens lost their right to a PA when FA 2009 repealed s278 ICT 1988 and s.56 ITA applied, both from 6 April 2010. RDRM10330 confirms this but gives no indication of the authority for preserving the right of an Australian resident and national. If it’s in the Treaty I can’t find it. At this juncture I would invariably have consulted my illustrious former colleague and all round technical wizard, but sadly he is the late great Ralph B Newns.
Here is a context in which this matters. Flushing out DT income to beneficiaries, often minors, who are non-resident. This is taxable because it is tax deducted at 45% from disregarded annual payments income (and so is taxable under ss811,813 and 826 ITA). Australia does not give residents a personal allowance but " a tax-free threshold", or a nil rate band, from $0-18200 or c.£9000. Other countries may be more generous. The Digest warns that the income may be required to be remitted to Australia but presumably trustees could pay out the gross equivalent of just the optimum amount needed. Where a Treaty requires income to be subject to tax that will normally include where is given a relief rather than a nil rate.
Has anyone experience of this strategy in relation to any country and can anyone provide the authority for Australian entitlement to a PA apart from HMRC guidance with its dubious legitimate expectation?