Tax incorrectly withheld as dividend instead of sale proceeds

I have recently had tax withheld in the US by a broker, which is related to a take over of one US company by another and purchase of their listed stock. The sale was well documented, with 48% of the stock holding paid for in cash, with the remaining 52% made up of stock in the new company. Upon payment of the cash element, a 15% withholding tax was taken by the broker, with the proceeds seen as a dividend instead of a stock sale. My questions relates to how this amount needs to be declared on my SA return. Can I declare this as sale proceeds with the relevant capital gain declared, or will HMRC see this also as dividend income if the issue is not resolved with the broker / IRS? A full set of documentation is available documenting the sale, the agreement, and the issue with the broker treating it as a dividend, which clearly shows the payment as proceeds of the sale / takeover. Thanks

Hi,

You would declare the dividend on SA106 (foreign) and include the tax withheld in the USA, in the section for dividends. You can claim a tax credit for the foreign tax withheld

Please see below or on the foreign section of the online return.

Foreign (2023)

Guidance notes can be found at:

Foreign notes (2022-23) - Use these notes to help you fill in the Foreign pages of your tax return

Thank you.

Hi, and thank you for your response. Does this mean that HMRC will treat the revenue from the sale of shares as dividend irrespective of any supporting documentation provided, because this is how it has been incorrectly reported to the IRS? I appreciate this is a US tax error which I am trying to correct, but the revenue is fully from the sales of shares and not from a dividend. Thanks in advance

Hi
HMRC will tax the sale in the correct way, regardless of the error reported to the IRS.  In your tax return, you would declare the income under its correct type and claim a foreign tax credit for overseas tax correctly payable on disposal.  In this way, the correct figures are declared to HMRC, leaving the matter of correcting the IRS matter to the individual.

Hi, For this specific transaction (with the proceeds erroneously seen as a dividend rather than stock sale by IRS), would the claimed foreign tax credit able to offset the actual capital gain occurred as part of the transaction itself, or would I only be able to offset it against my taxable income?

Hi
Foreign tax credit relief can only apply against the source of income that it relates to so in the case as it has been seen as a dividend it would go against your taxable income.

Thank you. And apologies in advance for this last question, I just want to be sure I got this correctly. I can claim foreign tax credit to offset my taxable income even if in my declaration of the proceeds of the sale to HMRC will declare the proceeds as stock sale rather than dividend (as erroneously done by IRS, and reason why the tax was withheld).

Hi ostefano,
You would need to make that clarification on the tax return to ensure the relief was given.
Thank you. 

Absolutely, but can you confirm that my understanding is correct, and what I just said is a fair conclusion and approved course of action?

Hi,

If your tax return shows disposal of dividends as dividends, then the foreign tax credit in the tax return can only be set against dividends.  

If it should be capital gains, you would need to amend the tax return to remove the diviends and add the capital gain.  

The FTCR would then need to be amended so that it is set against the UK capital gains liability.

Thank you.

If I'm submitting the amount as capital gains AND my total capital gains is below the UK Annual exempt amount limits i.e. I would be liable for £0 UK tax on the amount. Then I can submit the foreign tax credit, but effectively this would only reduce the tax due on the capital gains and they are already £0. Is that correct?

Hi Boman,
Foreign tax credit relief can only be given if UK tax is due on the same source of income. as you state no UK capital gains tax is due, you therefore cannot claim foreign tax credit relief for this and would need to seek a refund from the foreign tax authority.
Thank you,