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Old Feb 24th 2010, 10:10 pm   #1
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Question UK Tax-free allowances

Had a search about in these forums, but can't find anything specific about Tax-free allowances for non-residents.

To summarise, we're moving to Canada in Aug this year, but will likely rent for 6-12 months before buying a property. As UK saving rates are higher than Canada, we were planning on leaving our house sale proceeds in the UK until such time that we find a house to buy.

Looking at the DirectGov & HMRC website it's not 100% clear how the tax on the savings interest will be applied. My understanding is that you can either;

1) As well as the P85, complete a R105 so that tax is not deducted at source, but then the interest will need declaring on the Canada tax return or;

2) Just complete the P85, and still be eligible for a UK tax allowance (around £6500), in which case the interest is taxed in the UK, but you can claim it back, therefore there is no requirement for declaring this on the Canada tax return?

Anyone able to confirm if my understanding is correct?

Thanks.

Quote:
Tax-free allowances for non-residents
If you're a Commonwealth citizen (including British), European Economic Area citizen, or a current or former Crown employee, you'll still get your tax-free allowances to reduce the amount of UK Income Tax due. Members of certain other special groups also qualify.

DirectGov website
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Tax on UK bank and building society interest
If you're non-resident, the only UK tax you'll usually pay is the tax deducted before you get the interest.

If you're also 'not ordinarily resident' (you normally live outside the UK), you can get your interest without tax deducted by giving form R105 to your bank or building society.

In either case, if tax has been deducted from interest, you might be able to claim a refund against UK tax allowances using form R43.

HMRC website
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Old Feb 24th 2010, 11:09 pm   #2
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Default Re: UK Tax-free allowances

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Originally Posted by SimonAndJuliet View Post
Had a search about in these forums, but can't find anything specific about Tax-free allowances for non-residents.

To summarise, we're moving to Canada in Aug this year, but will likely rent for 6-12 months before buying a property. As UK saving rates are higher than Canada, we were planning on leaving our house sale proceeds in the UK until such time that we find a house to buy.

Looking at the DirectGov & HMRC website it's not 100% clear how the tax on the savings interest will be applied. My understanding is that you can either;

1) As well as the P85, complete a R105 so that tax is not deducted at source, but then the interest will need declaring on the Canada tax return or;

2) Just complete the P85, and still be eligible for a UK tax allowance (around £6500), in which case the interest is taxed in the UK, but you can claim it back, therefore there is no requirement for declaring this on the Canada tax return?

Anyone able to confirm if my understanding is correct?

Thanks.
Not quite correct. Yes, you need to complete the P85 and yes, you should give your bank the R105 form so they do not deduct interest.

You are still entitled to your personal allowance in the UK so any interest up to that amount is tax free in the UK (and you should invest the money in joint names so you get both allowances).

Above this amount the UK is entitled to tax the interest at 10%.

Regardless of what the UK government do the interest is taxable in Canada and you must declare it. If you pay any UK tax you can deduct this from the Canadian tax you have to pay on the interest.
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Old Feb 25th 2010, 12:05 pm   #3
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Default Re: UK Tax-free allowances

Thanks for the comments.

Am I correct in assuming that even though we can use the tax free allowance in the UK, any income within this is still treated on the Canadian side as 'untaxed income'? I thought this would be covered under the joint tax agreement with Canada, in that allowances are allowed for and treated as 'taxed income'.

Would then any amount over the allowance which is 'taxed' in the UK, be then treated on the Canadian side as 'taxed income'?
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Old Feb 25th 2010, 5:19 pm   #4
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Default Re: UK Tax-free allowances

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Originally Posted by SimonAndJuliet View Post
Am I correct in assuming that even though we can use the tax free allowance in the UK, any income within this is still treated on the Canadian side as 'untaxed income'? I thought this would be covered under the joint tax agreement with Canada, in that allowances are allowed for and treated as 'taxed income'.
Canada has its own equivalent to the personal allowance as you get a tax credit on the first $10,382 you earn. If the interest from the UK is your only income for the year then you will benefit from this. However, if you use up your personal amount with other income - usually employment income - then you will have to pay tax on the rest of.

The point of the tax treaty is to avoid double taxation. It is not enable people to have tax-free income.

Quote:
Would then any amount over the allowance which is 'taxed' in the UK, be then treated on the Canadian side as 'taxed income'?
No. You still add it to your income but deduct the UK tax paid from the Canadian tax owing. For example, if you have no other income (numbers are approximate for simplicity):

Say you earn £20,000 in interest in the UK. That is £10,000 each. £6,000 falls in your personal allowance and so you are each taxed £400 being 10% on the balance of £4,000.

In Canada you each declare $17,000 of interest income (£10,000 x 1.7).

Tax due is $3,400 ($17,000 x 20%). However, you get a personal tax credit on the first $10,000 i.e. $10,000 x 20% = $2,000. You also get a credit for UK tax paid of $680 (£400 x 1.7).

So, you will owe the Canadian Government $720 each. ($3,400 - 2,000 - 680).
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Old Feb 25th 2010, 6:02 pm   #5
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Default Re: UK Tax-free allowances

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Originally Posted by JonboyE View Post
Canada has its own equivalent to the personal allowance as you get a tax credit on the first $10,382 you earn. If the interest from the UK is your only income for the year then you will benefit from this. However, if you use up your personal amount with other income - usually employment income - then you will have to pay tax on the rest of.

The point of the tax treaty is to avoid double taxation. It is not enable people to have tax-free income.



No. You still add it to your income but deduct the UK tax paid from the Canadian tax owing. For example, if you have no other income (numbers are approximate for simplicity):

Say you earn £20,000 in interest in the UK. That is £10,000 each. £6,000 falls in your personal allowance and so you are each taxed £400 being 10% on the balance of £4,000.

In Canada you each declare $17,000 of interest income (£10,000 x 1.7).

Tax due is $3,400 ($17,000 x 20%). However, you get a personal tax credit on the first $10,000 i.e. $10,000 x 20% = $2,000. You also get a credit for UK tax paid of $680 (£400 x 1.7).

So, you will owe the Canadian Government $720 each. ($3,400 - 2,000 - 680).
To get the full tax allowance in Canada do you need to have been resident for the full tax year (ie do they pro rata it) or is it just your status on 31 December that matters?
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Old Feb 25th 2010, 6:16 pm   #6
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Default Re: UK Tax-free allowances

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Originally Posted by JonboyE View Post
Canada has its own equivalent to the personal allowance as you get a tax credit on the first $10,382 you earn. If the interest from the UK is your only income for the year then you will benefit from this. However, if you use up your personal amount with other income - usually employment income - then you will have to pay tax on the rest of.

The point of the tax treaty is to avoid double taxation. It is not enable people to have tax-free income.....
Thanks JonboyE, that makes a bit more sense now

Makes me wonder why non uk residents can still get an allowance, guess it must be for other situations.
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Old Feb 25th 2010, 6:21 pm   #7
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Default Re: UK Tax-free allowances

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Originally Posted by jimf View Post
To get the full tax allowance in Canada do you need to have been resident for the full tax year (ie do they pro rata it) or is it just your status on 31 December that matters?
It is pro-rated in the year you become resident (or cease to be resident).
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