SolvedLAM09240 | Double Tax Relief: Credit relief restriction where profits calculated on trading basis: example
From HM Revenue & Customs · Life Assurance Manual
This example is based on the double tax relief computation in the example tax computation in LAM Chapter 8 diagram and focuses on credit relief for non-BLAGAB foreign income.
TIOPA10/S42 general limitation
Under the restriction in TIOPA10/S42 the credit relief claimed in respect of foreign income must not exceed the corporation tax attributable to that income. Table B3 from the example tax computation (below) splits relevant non-BLAGAB income into that from overseas shares and from overseas debentures, then shows the foreign tax paid (row C) on that income and the rate of foreign tax (row D). Focusing on the income from overseas shares (i.e. relevant income of £100), as the foreign tax of £15 does not exceed the corporation tax attributable to that income (row E), there is no restriction under TIOPA10/S42 (no excess tax in row F).
B3 – Foreign income - Non-BLAGAB
| A | Source | Overseas shares | Overseas preference shares | Overseas debentures | Total |
|---|---|---|---|---|---|
| B | Relevant income | 100 | 18,997 | 283,800 | 302,897 |
| C | Foreign tax | 15 | 4,749 | 2,838 | |
| D | Rate | 15% | 25% | 1% | |
| E | Foreign tax to 20.25% | 15 | 3,847 | 2,838 | |
| F | Excess foreign tax | 0 | 902 | 0 | |
| G | Appropriate fraction of relevant expenses (TRE x RI/TI) | 67.37 | 12,798 | 191,196 | |
| H | Income above expenses TIOPA10/S100 | 32.63 | 6,199 | 92,604 | |
| I | Relevant fraction of profits | -276 | -524 | -7,740 | |
| J | Income restricted to profits TIOPA10/S101 | 0 | 0 | 0 | |
| K | Maximum creditable tax | 0 | 0 | 0 | |
| L | Actual creditable tax | 0 | 0 | 0 | 0 |
TIPOA10/S100: First (expenses) limitation
The items relevant to the calculation of total income for the purposes of the first (expenses) limitation (LAM09230), allocated on a commercial basis (and are not identifiable elsewhere in the computation), are:
| Non-BLAGAB | |
|---|---|
| Premiums | 1,500,000 |
| Investment income | 500,000 |
| Change in DAC | - 100,000 |
| Expenses non-acquisition | - 45,000 |
| Claims | - 1,235,000 |
Investment income includes the foreign income in respect of overseas shares of £100 in Table B3 above, on which foreign tax is £15.
Total relevant expenses (TRE) = £45,000 (expenses) + £1,235,000 (claims) = £1,280,000
The appropriate fraction per TIOPA10/S100 is:
Relevant income (£100)
TI = £1,500k (premium) + £500k (inv inc) - £100k (change in DAC)
= 100/1900k
= 0.005
The expenses attributable to relevant income is therefore TRE x the appropriate fraction, £12,798 x 0.005= £67.37 (shown in row G of table B3 above)
The amount of relevant income as reduced by the first (expenses) limitation is £32.63 (i.e. £100-£67.37), which is shown in row H.
TIOPA2010/S101: second limitation
The second limitation applies where:
the amount of the relevant income after any reduction under the first limitation exceeds
the relevant fraction of the profits of the category of business, after the set off of any brought forward losses
Where this applies, the relevant income is further reduced (but not below nil) to an amount equal to that fraction of those profits (LAM09220).
The relevant fraction applied to the profit is:
RI = the relevant income
The referable share of total relievable income and gains in respect of which credit for foreign is to be allowed
From table B3 above, RI is £100 in respect of non-BLAGAB income from overseas shares.
Also from table B3 above, “The referable share of total receivable income and gains in respect of which credit for foreign is to be allowed” (before any reduction in accordance with the first limitation) is £302,897. Therefore the relevant fraction is:
£100/£302,897 = 0.033%
From A5 in the example computation in Chapter 8, there is a non-BLAGAB trade loss of £5,605.
The relevant fraction of the profit is 0.033% x (£5,605) = £(1)
As the relevant income after the first limitation, £32.63, exceeds the relevant fraction of profits, £(1), RI is reduced to nil. Therefore, the amount of creditable tax in Rows K and L is also nil.