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 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 his UK tax

  3. 3)

    he can also deduct the foreign tax as an expense from his 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 (CGT) and how they should be reported for Self Assessment. It does not cover remittance basis users. For this, see Simon’s Taxes E5.318.

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

Minimisation of foreign tax

Before claiming foreign tax credits, you should note that the individual can only make a claim if he has taken all reasonable steps to have his foreign liability reduced to a minimum.

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

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 treaties in force on the GOV.UK website. You may also wish to read the Structure of a tax treaty guidance note, as this provides some help with interpretation.

Step one – check the treaty

You should first check that the taxpayer falls within the provisions of the treaty – for instance, most treaties require that the individual is resident in the jurisdiction, while some also have references to nationality.

Step two – compare the treaty rate to the actual deduction

If the

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