Double Tax Relief (DTR) — An Introduction
Double Tax Relief is an important mechanism that applies when tax is charged on the same income or capital gains in more than one country (or tax jurisdiction).
Many countries, including the UK, have laws requiring that income and capital gains arising in their territory are subject to tax within that jurisdiction. This means that income and capital gains arising in the UK are taxable on an individual in the UK regardless of their residency status.
DTR for Income Tax
In the UK there are three main forms of DTR for income tax:
1. Unilateral Relief
The UK government offers a tax credit within the UK income tax calculation for any foreign tax paid. This tax credit is available at the lesser of the foreign tax suffered or the UK tax liability on the foreign income.
The UK tax charge on foreign income is determined by calculating the difference between the total tax liability for the year and what it would have been if the foreign income were excluded.
2. Deduction Relief
In some cases, treating foreign tax paid as a deduction from income may be advantageous, rather than as a credit against tax. This option is beneficial when the taxpayer has losses for the year, resulting in no tax liability, and therefore no potential tax credit.
3. Double Tax Treaties (DTTs)
The UK has signed DTTs with various countries to outline which country has primary taxing authority in certain situations. Many DTTs follow the model treaty established by the Organisation of Economic Cooperation and Development (OECD), which helps streamline DTR processes between signatory nations.
DTR for Capital Gains Tax (CGT)
If a UK resident individual is taxed on capital gains in both the UK and a foreign country, DTR may be available under a double tax treaty or through unilateral relief.
Unilateral Relief
When a UK resident individual incurs a capital gain on the sale of a foreign asset and pays overseas tax, they may claim unilateral relief. This relief reduces the UK CGT payable and is limited to the lesser of the UK or overseas tax on the gain.
Deduction Relief
Similar to income tax, deduction relief is also available for capital gains. Here the foreign tax is deducted when calculating the gain. Deduction relief can be advantageous where gains are deferred or where there are losses.
Interaction with the Remittance Basis
For non-domiciled individuals in the UK who sell a foreign asset and pay foreign tax, DTR is handled differently if they’ve claimed the remittance basis. Under the remittance basis UK tax is only charged when proceeds from the gain is brought into the UK. In these cases any foreign tax credit is proportionate to the portion of the gain remitted providing partial relief for foreign taxes paid.
Tax-Efficient DTR Strategies for Foreign Assets
Taxpayers can maximize DTR by increasing the UK CGT on foreign assets where possible. A useful strategy is to use the annual exemption allowance and basic rate band on UK assets first. Prioritising UK assets this way leaves higher UK CGT applicable to foreign assets thereby enhancing DTR relief.
Speak to an Expert
DTR is a complex area, and taxpayers are often unaware of the reliefs available when selling an overseas asset. If you’re uncertain about your eligibility for relief on the sale of a foreign asset, or have overseas income of any kind, reach out to our tax team for expert assistance.
Authored by: London Team
