For most UK residents, income from abroad is taxable in the UK
- Most income arising overseas is taxed in the country where it arises.
- Credit may be given for some of the tax paid overseas against UK tax.
- You may have an obligation to submit overseas Tax Returns.
- Formal agreements called Tax Treaties exist between most countries. These regulate what is taxed in which country and go some way to eradicate double taxation.
- Special rules for unremittable income.
- This is a VERY complicated topic.
Where do I pay tax on overseas income?
All UK residents are subject to tax on income from abroad except where the individual is not domiciled in the UK and the income is not remitted to the UK and an election has been made to use the remittance basis. HMRC provided the following:
Even if you are eligible to use the remittance basis, it does not mean that you have to use it. You might decide instead to pay UK tax on your worldwide income (and gains if you are not domiciled in the UK) on the arising basis and claim relief from UK tax for foreign tax that you have also had to pay. You may choose to do this rather than lose your Personal Allowances, as your tax bill could be higher on the remittance basis.
If you decide to use the remittance basis, the impact of these special rules will depend on your personal circumstances – how much of your foreign income and/or gains that arise in a tax year you decide to leave outside the UK, whether or not you are aged 18 or over and how long you have been resident in the UK. These factors will determine whether you can use the remittance basis without having to make a formal claim or if you need to make a claim to use it. If you have been resident in the UK for more than seven out of the last nine years and wish to use the remittance basis then you must pay the remittance basis charge to do so.
The remittance basis charge starts at £30,000. The remittance basis charge increases as your period of residency in the UK increases.
If you have less than £2,000 unremitted foreign income and/or gains which arise or accrue in the relevant tax year you can use the Remittance Basis without making a claim.
If you have £2,000 or more unremitted foreign income and/or gains arising/accruing in the relevant tax year and you want to use the remittance basis you must make a claim for that year. Your claim must be made by completing the relevant boxes of a Self Assessment Return. When you make the claim you will lose your entitlement to UK personal tax allowances and the Annual Exempt Amount for Capital Gains Tax . Depending on how long you have been resident in the UK you might also be required to pay the Remittance Basis Charge.
If you have used the remittance basis in previous years and have remitted any income and gains in the current year and/or if you are planning to use the remittance basis this year, you are strongly advised to look at the additional guidance provided in the Residence, Domicile and Remittance Basis Manual on HMRC website.
So if you are a non-UK domiciled and rent out a property abroad (whether a recent investment or the family home) or have any other investment income arising abroad, you may elect to be taxed only on the income you bring into the UK. The same applies to all other investment income arising abroad. If you think this applies to you, you must complete the relevant section of the “Foreign” pages of the tax return (SA105) and the Remittance basis page of the Residency section of the tax return otherwise all your income arising overseas will be chargeable to UK taxation.
Unless the special rules (above) for non-UK domiciled persons apply to you then your income arising overseas is taxable on the “arising” basis. That means that it is taxable in the tax year it arose whether you brought it to the UK or not unless it is in a country listed as one where currency transfers are blocked. You must notify HMRC of unremittable income in the Foreign Pages of the tax return and it becomes taxable in the year it becomes remittable whether remitted or not (except for non-domiciled persons).
The two most common situations are the UK citizen who has bought holiday accommodation abroad and rents it out, and a member of a family that came to the UK for a number of years and retained and rented out the former family home in the country of origin. But this article is not restricted to such situations, it deals with income arising from overseas and belonging to a UK resident no matter what type of income and no matter how it arose.
Do I have to pay tax in more than one country?
The obligation to pay tax in the country where the income arose and again in the UK gives rise to Double Taxation. This would clearly be unfair, so the Double Taxation Agreements (see also HMRC Tax Treaties) were made to give the taxpayer some relief and to set down rules for which country would receive tax on each different category of income. The Double Taxation Agreements provide that the country in which the income arose generally gets first right to assess and collect tax (and the country of residency will generally give relief for that foreign tax). This is done using a local tax return and the taxable amount is calculated in accordance with local rules. You may need a local accountant or tax practitioner to help you with this. Don’t forget that other countries take a dim view of foreigners arriving, earning income and then not paying the tax due.
You must then make a UK Tax Return including the same income again – but this time calculated in accordance with the UK rules. You should also show the tax suffered overseas and claim Foreign Tax Credit Relief. Page F2 & F3 of the return are for foreign savings, pensions and dividends. Pages F4 and F5 are for income from foreign land and property. The calculation of foreign Tax Credit Relief is quite complicated and working sheets are available to help you in the help notes. (The Help Notes are part of the Foreign Notes).
Foreign Tax Credit Relief is normally the most beneficial way to obtain relief from double taxation, but if you do not wish to claim it you may deduct the foreign tax from your income as if it were an expense. This will limit the maximum you benefit to the foreign tax times your rate of tax.
To claim Foreign Tax Credit Relief you must be a UK resident and the income must be properly chargeable to tax under the law of the country in which it arose. You may be asked to provide evidence that the income has been assessed to tax overseas.
Where a Double Taxation Agreement (see also HMRC Tax Treaties) exists, the amount of foreign tax eligible for relief is the minimum foreign tax payable under the terms of the Agreement. The guidance notes to the Foreign pages of the tax return (FN24 to FN28) list the countries with which a double taxation agreement exists It also shows the rates of tax deduction at source on certain types of income – but while this includes interest, etc it does not include rental income. The calculation of Foreign Tax Credit Relief is therefore normally made with reference to the income calculated in accordance with UK rules, the amount of income assessed overseas calculated with reference to local rules and the rate of tax paid overseas.
Very roughly the relief is limited to the overseas tax as long as:
- the rate does not exceed the UK rate (if it does the relief is restricted) and
- the profit assessed overseas under local rules does not exceed the profit assessable in the UK under UK rules (if it does the relief is restricted).
Special rules apply to tax deducted from dividends paid in some countries. In practice you just enter the foreign tax suffered on your property income in column C of the summary on page F4 on the Foreign pages and if you submit your return early enough – or use an accountant either HMRC or the accountant, will do the rest for you.