Foreign Tax Credit Relief in the UK

If you live in the UK and earn income from overseas, you’re going to need to understand your tax obligations. This not only means getting to grips with the rules and rates, but also with what tax relief may be available to you.

In this guide, we’ll give you the lowdown on foreign tax credit relief in the UK. This includes info on double taxation agreements, and how to calculate and claim foreign tax credit relief.

We’ll also show you an easy, low cost way to manage your money between countries, with Wise.

Open a Wise account and you can hold, convert, send and receive 40+ currencies all in one place. It’s ideal for Brits with foreign income of all kinds, from rental income to investment dividends.

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What is double tax?

Double tax or double taxation is when tax is paid twice on the same income, in two different countries. It can happen when a person is legally resident in one country for tax purposes but earns income in another.

For example, an expat from the UK could have a rental property in another country. It’s possible that they could end up paying tax twice on the rental income.

Double tax can also happen in the following situations:¹

• When income is taxed twice on both a corporate/business and personal level
• When a person is resident in two countries at the same time
• When a person is living in a country that taxes worldwide income.

What are double taxation agreements?

The good news is that there are some measures in place to prevent double taxation for UK citizens.

These are called double taxation agreements or treaties, and the UK has them in place with over 100 countries.² These agreements provide relief for double taxation, in one of two ways. Either only one country is allowed to tax the income, or a credit is allowed for the foreign tax paid when calculating UK tax liability for foreign income.

There’s also something called unilateral relief. This is something you may be able to claim if you’ve paid tax twice and the UK doesn’t have a double taxation agreement in place with the country in question.¹

What is foreign tax credit relief?

Foreign tax credit relief (FTCR) can be claimed when you’ve paid tax twice on the same income. It’s designed to offset some or all of this tax. So effectively, you’ll only have paid tax once on the income.

Here’s a quick example. Imagine you have a holiday home in Spain that you rent out while living back home in the UK.

The UK has a double taxation agreement in place with Spain. This means you’ll be entitled to double tax relief if you are taxed on the income by the Spanish tax authorities. You’ll claim it when completing your UK tax return, as tax would otherwise be due for the foreign income.

How to calculate foreign tax credit relief in the UK?

How much foreign tax relief you can claim depends on the double taxation agreement the UK has with the country you earned the income in.

If you’ve already paid tax in another country, you may not get all of it back if either of the following apply:³

• The income would have been taxed at a lower rate in the UK
• If the country’s double-taxation agreement stipulates a smaller amount.

HMRC has guidance available here to help you calculate how much foreign tax credit you’re likely to get. However, it can be very complicated to work it out - so it’s recommended to seek professional tax advice.

How to claim foreign tax credit?

If you’ve already paid the tax in the country the income derives from, you can claim foreign tax credit relief (FTCR) in your Self Assessment tax return for the year. You can do this in the ‘Foreign’ section relating to foreign income.

It’s important to note that you can’t claim FTCR in the UK if the relevant double taxation agreement stipulates that the tax must be claimed back in the country it was earned in.³

If you’ve not already been taxed, you can apply for tax relief in the country in which you earned the income. You can only do this if the income is exempt from foreign tax, but is taxed in the UK, or if it's a mandatory requirement of the double taxation agreement.³

You’ll firstly need to prove you're eligible, by sending a completed form to HMRC and waiting for it to be returned. You can use this, or a UK certificate of residence, to apply via form or letter to the relevant foreign tax authority.³

Receive foreign income easily with Wise

If you receive foreign income from rent, investment dividends, pensions, work, businesses or any other source, you might want to get yourself a Wise account.

With Wise, you can manage your money in 40+ currencies all in one place. You can get local account details to receive income from overseas, and convert it to GBP or another currency for low fees and the mid-market exchange rate.

This means you’re not at the mercy of banks, which can pass on high fees and poor exchange rates for currency conversion.

You can also send money worldwide with Wise for low fees and great rates, which could be helpful if you want to make other investments elsewhere. All global transfers are fast, secure and trackable, so you can send with confidence.

It’s the ideal solution for Brits with investments, business interests or income-generating activities in other countries.

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In a nutshell, you can claim foreign tax credit relief (FTCR) if you have paid overseas taxes on income that is also liable for UK tax. To qualify for tax credit relief, you need to be a resident of the UK and complete the relevant section of your annual tax return.

Remember though - while this article provides general information about foreign tax credit relief, it’s no substitute for expert advice from a professional tax specialist.

Tax can be very complicated and each person’s circumstances will be different, so you’ll need tailored advice to help you understand your obligations.

This guide does not constitute tax advice. Get professional tax advice and guidance from your lawyer or tax advisor when filling your self-assessment.

Sources used:

Sources last checked on date: 16-Oct-2024