ERSM161350 - Interaction of UK law and treaties: remittance basis and time apportionment – example 2

Lyra is UK-resident but not ordinarily resident in the UK when an option is granted, on 6 April 2009, and is on the remittance basis in year 1, 2009/10 and in year 2, 2010/11, when she is still R/NOR. The option vests at the end of Year 2 on 5 April 2011 and is exercised at the end of Year 3 on 5 April 2012, giving rise to specific employment income of £10,000. For the purposes of the UK remittance basis rules the relevant period is two years to 5 April 2011. For the purposes of time apportionment, in accordance with the UK/US DTA, the gain of £10,000 relates to a 3-year period to 5 April 2012 (a total of 720 workdays).

Lyra has 24 US workdays in each of years 1 and 2 and 120 US workdays in Year 3. She is treaty-resident in the US when she exercises the option.

In accordance with ITEPA03/S41B the relevant period begins with the grant (which the legislation refers to as the “acquisition”) of the option and ends with the vesting of the option (as there has been no chargeable event which precedes the vesting). ITEPA03/S41C(5) applies and apportions the securities income of 10,000 between duties performed in the UK and duties performed outside the UK. In the absence of unusual circumstances, workdays in each of the territories concerned will be an acceptable method of determining the balance of duties between them. (See ERSM160815 and the examples at ERSM160865).

So, in the absence of a Double Taxation Treaty, ITEPA03/S41A(4) will produce the following result:

However, under the UK/USA Double Taxation Treaty, US will tax the whole of the gain and the UK is entitled to tax the UK workday proportion of the gain – based on the workdays between grant and exercise in accordance with the Treaty.

So the UK’s charge will then be restricted to £7,666 and Lyra should claim credit in the US for UK tax suffered on the amount assessed here. The remittance basis would not apply to any of the employment income.