Foreign tax relief

Produced by Tolley
Foreign tax relief

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Foreign tax relief
  • Minimisation of foreign tax
  • Treaty relief
  • Step one ― check the treaty
  • Step two ― compare the treaty rate to the actual deduction
  • Step three ― compare the treaty rate with the UK tax charged
  • Unilateral relief
  • Foreign tax as a deduction from income or gains
  • Exemption from foreign tax
  • Making a claim for foreign tax relief
  • More...

Income and gains may be taxable in more than one country. The UK has three ways of ensuring that theindividual does not bear a double burden:

  1. 1)

    treaty tax relief may reduce or eliminate thedouble tax

  2. 2)

    if there is no treaty, theindividual can claim ‘unilateral’ relief by deducting theforeign tax from their UK tax

  3. 3)

    the individual can also deduct theforeign tax as an expense from their income (known as relief by deduction), although this is generally less efficient

This guidance note looks at these three options in turn, and then considers how thereliefs should be used efficiently for income tax and capital gains tax and how they should be reported for self assessment. It does not cover remittance basis users. For this, see Simon’s Taxes E4.1323.

HMRC guidance on a country by country basis is given in DT2140PP.

Minimisation of foreign tax

Before claiming relief for foreign taxes suffered, you should note that theindividual can only make a claim if they have taken all reasonable steps to have their foreign liability reduced to a minimum.

This includes claiming, or securing thededuction of, all allowances, reductions, reliefs and deductions which theindividual might have reasonably expected to have claimed or secured if no foreign tax relief claim was open to them.

Examples of such reliefs might be personal allowances in theoverseas country, deductions for expenses, etc.

Treaty relief

Next, you should consider theprovisions of therelevant tax treaty. There is a list of current UK treaties in force on theGOV.UK website. You may also wish to read theStructure of a tax treaty guidance note, as this provides some help with interpretation.

Step one ― check thetreaty

You should first check that thetaxpayer falls within theprovisions of thetreaty. For instance, most treaties require that theindividual is resident in thejurisdiction, while some also have references to nationality.

Step two ― compare thetreaty rate to theactual deduction

If the

Popular documents