Double Taxation: How to Claim Relief for Foreign Income
If you earn income from a foreign source, you may find yourself in a situation where you’re taxed twice — both by the country where your income originates and by the UK. However, the good news is that you can often claim tax relief to recover some or all of the additional tax you’ve paid. In this blog post, we’ll explore the process of claiming relief for foreign income in an easy-to-understand manner.
This post explores double taxation for UK residents. There is a separate process for UK non-residents who are being taxed on their UK income by the foreign country in which they reside.
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Claiming Relief Before Being Taxed on Foreign Income
In some cases, you may need to apply for tax relief in the country where your income is generated before it is taxed. This is typically applicable when:
- Your income is exempt from foreign tax but is taxed in the UK (e.g., most pensions).
- It is required by the double-taxation agreement between the two countries.
To initiate the process, you should contact the foreign tax authority and request the appropriate form. If there is no form available, you can apply by letter. Before applying, you must prove your eligibility for tax relief. You can do this by either completing the form and sending it to HM Revenue and Customs (HMRC), who will verify your residency status and return the form to you, or by including a UK certificate of residence if you are applying by letter. Once you have obtained proof of eligibility, you should send the form or letter to the foreign tax authority.
Claiming Relief After Paying Tax on Foreign Income
If you have already paid tax on your foreign income, you can generally claim Foreign Tax Credit Relief when reporting your overseas income in your tax return. The amount of relief you receive depends on the UK’s double-taxation agreement with the country where your income originates.
Even if there is no specific agreement in place, you will usually still be eligible for relief unless the foreign tax does not correspond to UK Income Tax or Capital Gains Tax. If you’re unsure about whether you qualify for relief or need assistance with double-taxation relief, don’t hesitate to reach out to us at CIGMA Accounting for assistance.
Determining the Amount of double taxation Relief
It’s important to note that the full amount of foreign tax paid may not be refunded to you. The relief you receive will be reduced if:
- The double-taxation agreement specifies a lower relief amount.
- The income would have been taxed at a lower rate in the UK.
HMRC provides guidance on how Foreign Tax Credit Relief is calculated, including special rules for interest and dividends, which can be found in their ‘Foreign notes’ section. However, it’s essential to remember that you cannot claim this relief if the UK’s double-taxation agreement requires you to claim tax back from the country where your income originates.
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Capital Gains Tax
When it comes to Capital Gains Tax, typically, you’ll pay tax in the country where you are a resident and be exempt from tax in the country where the capital gain occurs. Usually, you won’t need to make a claim for relief.
However, there is an exception for UK residential property. Regardless of your residency status, you are required to pay Capital Gains Tax on any gains made from UK residential property.
When to Claim Capital Gains Relief
The rules for claiming relief vary depending on the nature of the asset generating the gain. If the asset cannot be taken out of the country, such as land or a house, or if it is used for business purposes in that country, you’ll need to pay tax in both countries and seek relief from the UK.
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