Tax-related matters, for many people, are dreadful topics. While some people manage to qualify for tax relief with their in-depth knowledge of tax credits, others find dealing with them stressful. Foreign tax on income, for instance, is something that financially drains many people who have overseas earnings. These people usually have to pay tax to HMRC for both their local and foreign income.
This is when the foreign tax credit relief comes into play. FTCR (foreign tax credit relief) can help taxpayers reduce their tax liabilities for their overseas withholdings. It is typically a non-refundable amount for income taxes that people pay to foreign governments for their overseas tax gains.
Anyone who either works abroad or has savings or investment gains coming from a foreign country is subject to the foreign tax credit. However, if a person has already paid his or her tax on foreign gains (taxed in the UK), he/she can claim relief from the tax credit. Taxpayers may experience this situation in two cases;¹
- If you live (resident) of the UK, Isle of Man or Channel Islands if you want to claim FTCR.
In either situation, taxpayers can claim FTCR to lower their UK tax dues by the amount of overseas tax they have paid-or may be less. The double taxation contract between the United Kingdom and other countries (where a taxpayer earns and pays tax on the gains) is a significant factor in deciding the amount of relief a taxpayer will get.
Put simply, HMRC doesn't refund foreign tax. However, when you have foreign tax on the income taxable in the UK, you can file a claim for tax credit relief. You can file this claim for all or just a part of the overseas tax you have paid.
Whether you're paying foreign tax credit for the first time or have experienced the situation before, the article may help you understand the foreign tax credit relief concept and how you can file a claim on capital gains.
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As mentioned above, FTCR is a solution for people who have to pay tax for their UK and foreign income. Note that to file a credit relief claim, you should be a UK resident. Or, you should be residing in the Channel Islands.¹
Moreover, making a claim depends on the double-taxation contract.² The contract must allow the UK and other countries to charge tax on similar income items. In case this treaty is not there between both the countries, HMRC offers a unilateral relief. That means when a double-taxation contract doesn't apply, you have another option to avail. Although the overseas tax is there, the HMRC will charge tax up to a certain extent on the foreign gain.
It is worth mentioning that some double-taxation treaties can limit the foreign tax amount a person can claim. These limits may vary from state to state. The source of earning of a person is also an important factor that governs these limits. Also, there are conditions on when you can't file a claim for foreign tax credit relief on capital gains.
For example, a double-taxation treaty between the countries lets you off from tax liability on UK-based earnings, tax payer is not eligible to claim FTRC e.g., government pension in the foreign country. Similarly, in cases like foreign taxes on a pension someone receives from another country, filing FTCR is not possible.
There are some general principles you need to consider when evaluating the tax credit you can claim. For instance, you should not exceed the credit amount for overseas tax from the lesser of tax (to-be-paid) on the gain.
It also should not cross the limit of the UK tax on parts taxed twice of the gain. If the amount of your foreign paid tax exceeds the limit of the UK tax on the income, neither can you deduct an additional amount from the gains chargeable to your capital gain tax, nor can you repay it.
You must calculate the credit amount separately for each income. You can't credit an excess amount of your foreign tax over the local taxes on a specific gain against any other gain. Precisely, a taxpayer can claim the small amount of:¹
Due UK tax
Foreign tax (paid or allowed by agreement)
Although HMRC can determine it, you can calculate it yourself using the working sheet (FTCRWS). There are separate working sheets to fill for each item of gain. If you have multiple income items, it is always beneficial to calculate the foreign tax credit relief for the taxable income item at the maximum or highest tax rate.²
Furthermore, it is essential to fill in all the tax calculation notes until box A264 before using the FTCR working sheet.
The amount of tax due is usually the difference between
The UK tax due on total income, and the item with overseas tax lifted off
The UK tax due on the total gain, without the item with overseas tax lifted off
In a nutshell, you can claim foreign tax credit relief, or FTCR for short, if you have paid overseas taxes on gains or income source, which is chargeable to the UK tax. To qualify for tax credit relief, you need to be a resident of the UK. Remember that you can file a claim for the lesser amount of paid tax or permitted by the double taxation treaty.
This article provides general information about foreign tax credit relief but does not give any advice about the matter. You can always consult with a professional tax attorney to understand the conditions and limitations.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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