Foreign tax relief

Produced by Tolley
  • (Updated for Tax Returns)

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...

Foreign tax relief

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

  1. 1)

    treaty tax relief may reduce or eliminate the double tax

  2. 2)

    if there is no treaty, the individual can claim ‘unilateral’ relief by deducting the foreign tax from their UK tax

  3. 3)

    the individual can also deduct the foreign 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 the reliefs 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 the individual 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 the deduction of, all allowances, reductions, reliefs and deductions which the individual 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 the overseas country, deductions for expenses, etc.

Treaty relief

Next, you should consider the provisions of the relevant tax treaty. There is a list of current UK

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