An article by Nicholas Williamson

It seems to be the trend amongst recent Chancellors of the Exchequer to make Budget announcements far in advance of their introduction into the tax legislation. One of the more significant announcements made in recent times, which took effect from 6 April 1999, was made as long ago as July 1997 in Gordon Brown's post-election Budget speech and will undoubtedly affect some Isle of Man residents.

For tax years after 1998/99, individuals will no longer be able to reclaim the tax credit which is attached to UK dividends. Prior to 6 April 1999, UK residents and Commonwealth citizens residing abroad had an automatic right to claim a refund of the tax credits attaching to UK dividend income, to the extent that their UK tax circumstances dictated. This was because they could claim personal allowances to offset their UK source income even though not residing in the UK for income tax purposes. The personal allowances could be worth up to £1,124 by way of tax refund in the tax year 1998/99 for a individual, residing in the Isle of Man, who had taxed UK source income which included dividends from UK companies.

The reason that the reclaim can no longer be made for periods after 5 April 1999 is that the rate of tax credit is being downgraded from the present rate of 20% to a new 10% rate. This is only significant if a taxpayer is in a repayment position. Taxpaying individuals in the UK will not be affected by the changes, irrespective of the rate of tax which applies to such income.

The detail in the new provisions will mean that from 6 April 1999:

  • individuals with liabilities which fall into the new 10% income tax band will be treated as having extinguished the liability relating to UK dividend income;
  • individuals with liabilities in the 23% tax band will likewise be treated as having extinguished the liability relating to UK dividend income. The shortfall of 13% between the new 10% rate and the individual's marginal rate of tax is ignored;
  • individuals with a higher rate liability to tax in the UK will pay tax on dividend income at a special higher rate of 32.5%. This will place them in the same cash position as in the tax year 1998/99. Therefore, although an individual may have no liability whatsoever or a liability at the new lower rate of 10% for tax years after 1998/99, none of the tax credit may be reclaimed.

A reclaim of the tax can still be made by local residents for the years 1992/93 to 1998/99 if one has not already been made, providing it can be supported by the original dividend vouchers. Inland Revenue practice is that repayments will only be made on the strength of supporting documentary evidence.

The writer is senior manager in the taxation department of Deloitte & Touche's Douglas office and can be contacted on 672332.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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