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Lost losses
Allowable losses on non-approved share options.
My client exercised non-approved share options in 1999-2000 and 2001-02 and incurred losses of £950,000 calculated in accordance with Mansworth v Jelley and the 2003 Revenue guidance.
These losses were included in amended tax returns and have been shown as carried forward. HMRC has not raised enquiries into these losses.
A capital gain was realised in 2018-19 sufficient to absorb the losses brought forward and, in view of the amount, I need to be sure about whether those losses will be allowed.
My thoughts are that HMRC will issue an enquiry when the tax return is submitted claiming the losses brought forward. I expect that HMRC will rely on the decision in Hutchinson [2017] STC 2048 on the basis that in 2018-19 my client should have known the Revenue’s view that the losses
would not be allowable.
I should be grateful for readers’ views and any arguments that might be made in support of the loss claim.
Query 19,391– Manjay.
Transatlantic relations
Tax treatment of UK dividends for US citizen.
Our client is a US citizen, who was UK resident under the statutory residence test (SRT) for the three years to 5 April 2017, but treaty resident in the US under Article 4 throughout on the basis of his US home, family, economic ties, etc.
In 2016-17, he received a dividend from his UK registered company, and we claimed full relief under Article 10(1) of the UK/US treaty. HMRC has accepted that our client is treaty resident in the US, but is attempting to levy a 15% withholding tax on the dividend under Article 10(2).
We do not believe that Article 10(2) applies because our understanding is that it would only apply to US dividends beneficially owned by and paid to UK residents, which follows HMRC guidance that: ‘The treaty allows both the US and the UK to tax dividends paid to a resident of the other country but [...] limits the tax the source country may impose to 5% or 15% of the gross amount of the dividend. In other circumstances, it removes entirely the right of the source country to tax dividends. As the UK does not have a withholding tax on dividends, the limitations are only applicable to US dividends beneficially owned by and paid to UK residents.’
HMRC states: ‘Whilst the client is considered dual resident for tax purposes in the UK and the USA but treaty resident in the USA, he is still considered to be a resident of the UK under the UK’s domestic tax legislation and he is only considered treaty resident in the USA for the sole purpose of interpreting the UK/USA double taxation agreement. ln this respect [...], per Article 10(2) of the UK/USA double taxation agreement, the UK has the right to tax the UK dividends of your client but the UK’s right is restricted to a rate of 15% tax even though your client was treaty resident in the US.’
It seems to us that HMRC is ignoring the fact that our client is treaty resident in the US, and instead is concentrating on the fact that he is UK resident under the SRT/UK registered company. Bearing in mind HMRC’s own literature references that the UK does not have a withholding tax on dividends, and the tax is only applicable to US dividends, we are really not sure that HMRC is correct.
Have any readers come across a similar situation, were they able to argue that the 15% withholding tax is not applicable, and if so how?
Advice would be gratefully received.
Query 19,392– Perplexed.
Property letting
Property letting while working abroad.
My single unmarried client owns a two-bedroom home – subject to a mortgage – and she lets a room to a lodger. The client is going to work abroad for a year or perhaps longer. She is thinking of letting the other room to another lodger or as a holiday let through Airbnb. The lodger – who the client trusts – has suggested that she could look after the property and the lettings and my client will pay her a percentage of the rent received.
If my client becomes non-UK resident, I am wondering what the tax implications will be. Should tax be deducted from the rent before it is paid to her? Also, how should the mortgage interest be split between lettings and are there capital gains tax or other tax and financial implications?
Query 19,393– Landlord.
Election day
Surprise option to tax letter received from HMRC.
I have taken on a new client and one of his businesses deregistered from VAT three months ago. The registration related to a commercial property he owns and rents out to a tyre business. He deregistered because the rental income he earns is below the VAT threshold.
However, HMRC has now written to him saying that the registration has an option to tax election in place (no details given) and the letter asks for an explanation of what he has done with the properties he owns.
My client is sure that he never made an option to tax election with HMRC when he bought the property ten years ago although he does think he paid VAT on the purchase price and claimed this back as input tax.
He definitely charged VAT on the rent to the tenant. He cannot produce a copy of his first VAT return and the solicitor who acted for him is not co-operating because there was a falling out and it is also a long time to go.
Can Taxation readers suggest the best way to proceed here?
Query 19,394– Michel Dunlap.
