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Where Taxpayers and Advisers Meet

foreign tax credit relief on dividends 17/18

anders35
Posts: 1
Joined: Tue Sep 25, 2018 7:24 pm

foreign tax credit relief on dividends 17/18

Postby anders35 » Tue Sep 25, 2018 7:44 pm

Hi,

I've seen this being explained in two different ways with some people suggesting 1) and some people suggesting 2) as the correct way of doing it. Can someone please confirm which one is correct.

Higher rate tax payer
No UK dividend income
Foreign dividend income, £8000 (with £2000 in countries with withholding tax of 15% and £6000 in countries with withholding tax of 5%).

Option 1)
Foreign tax credit relief can only be given on the part exceeding the dividend allowance, i.e. starting with the slice taxed at 15% the maximum relief would be
2000*0.15 + 1000*0.05 = £350

Option 2)
Foreign tax credit relief can be given on all the foreign tax paid, i.e.
2000*0.15 + 6000*0.05 = £600

With the UK tax being 3000*0.325 = £975 you would then be allowed to either claim £350 or £600 back as they are both lower than the UK tax.

The way I interpret the HMRC instructions I am only allowed to claim the £350 back on the part of the dividend income exceeding the allowance (as there is de facto no UK tax on the other part) but I have seen many people suggesting otherwise so I thought it would be worth asking here.

Many thanks!

robbob
Posts: 2662
Joined: Wed Aug 06, 2008 4:01 pm

Re: foreign tax credit relief on dividends 17/18

Postby robbob » Tue Sep 25, 2018 9:38 pm

As far as I remember you must do your entire tax calculation excluding the foreign dividend income.
Then for each source of foreign dividend income you must add this in one at a time and recalculate the amount of tax due after each source has been added in ignoring the foreign tax credit for that income . Once added in the increase in tax due is the maximum amount of foreign tax credit you can claim against that income source. You then enter your claimed foreign tax credit and Start again with the next income source - the order you enter the foreign dividends in can be chosen by you.

If we presume you only have two foreign dividend income sources (sounds like this may not be the case) and no funnies elsewhere in the calculation (dividends can in rare circumstances be better used against personal allowances than other income)

Ok try one 2k first no tax no tax credit
6k = 3k at 32.5% tax due 975 foreign tax credit 6000*5% =300

Total foreign tax credit 300

Try 2 6k =1k at 32.5% = 325 foreign tax credit 6000*5% = 300
2k at 32.5% = 650 tax due foreign tax credit = 2000*15% = 300

Total foreign tax credit 600

Total foreign tax credit claimed 600 although this matches your answer in your option 2 it wasn’t clear that answer was correct until the source by source uk extra tax due is calculated for each income source to ensure the foreign tax for each line is less than the uk tax on that line income I am guessing your logic for 2 may not always give the correct answer if the numbers are quirky and a particular income source has more overseas tax charged than uk tax when that line is added in.


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