Is there any relief available in the UK for this foreign tax which I have suffered?
Many UK tax resident individuals have sources of income and gains from overseas territories and as a result are subject to tax on this income in those countries. There are various methods of obtaining relief for this for this foreign tax paid on foreign income which is also subject to tax in the UK.
In order to see how much relief is available, we must firstly consider the minimisation rule mentioned within s33 TIOPA 2010. This requires the taxpayer to take all necessary steps to have his foreign liability reduced as far as possible, for example by claiming all the allowances and reliefs available to them in the foreign country or under double taxation arrangements made in relation to that territory.
HMRC will only allow a credit for foreign tax paid, whether under an agreement or unilaterally, for foreign tax that is a properly charged under the foreign country’s laws and where s33 TIOPA has been considered.
Foreign Tax Credit Relief (FTCR)
The same principles apply when claiming FTCR for both income tax and capital gains tax. The credit relief works by offsetting the foreign tax paid against the UK tax liability. The amount of tax credit available in the UK is the lower of the foreign tax paid on the income or capital gain and the UK tax liability on the same income or capital gain.
The FTCR reduces the UK tax liability from the same source of income to nil in order to provide relief but will not generate a repayment of any excess foreign tax you may have suffered. Any surplus foreign tax cannot be used against any other income. For example, on tax chargeable on your UK rental business profits.
Deduction relief
There may be cases where due to other reliefs, UK tax calculation rules or losses available in the UK, you don’t have a UK tax liability on the foreign income or gains you are disclosing on your UK tax return.
In these instances, there is an alternative form of relief called deduction relief. The same principles apply when claiming deduction relief for both income tax and capital gains tax. This works by allowing the foreign tax suffered to be taken as a deduction against the income or gains to reduce the amount which is chargeable to tax in the UK.
This is different to FTCR which gave a tax credit against the tax chargeable on the full foreign income or gains.
Summary
The taxpayer has a choice between FTCR or deduction relief, depending on which is most beneficial for their circumstances. Please also note the double tax treaties between the UK and the foreign territories need to be considered as they may prescribe a treaty rate of relief which could be different. If you have more than one source of foreign income or capital gains eligible for relief, then maximising the relief available can require an involved and complex calculation.
Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.
Subscribers to our VIP Tax Team service have access to our consultancy team who can provide a written report involving a full briefing of the scenario involved.
Remember, members of our VIP Tax Team service can call our priority advice line for instant help with tax, VAT and employment queries such as this.
To unlock your access to the advice line, plus tax & VAT consultancy support, monthly eCPD modules, in-depth webinars and more, call 0800 231 5199 or book your free My VIP Tax Team consultation now.
Please share this article with your clients
