- If you are employed or running a business here in the UK
and you also have any type of foreign income that is income
from overseas, then you'll probably want
to know how your foreign income is treated for tax purposes.
In this video, I will cover a refresher on Tax Residency.
How are you taxed if you have foreign income?
What exactly are Double Tax Treaties?
When can Double Tax Treaties or Relief be claimed?
And a finally section.
Before I get into today's video, be sure
to visit our Accounting and Tax Academy membership area
where you can get access to exclusive in-depth courses,
templates, calculators and a members Q&A section
where you can get your specific accounting
and tax questions answered by a qualified accountant
or chartered tax advisor.
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There's a common misconception
that your residency of a country that is your citizenship
determines your tax residency.
Just because you hold a British passport for example
or are eligible for one does not necessarily mean
you are UK tax resident too, although the probability
of this being the case is probably quite high.
Your tax residency, this is where you are a resident
in the UK for tax purposes and pay UK taxes,
is mutually exclusive from your citizenship.
By being a UK tax resident,
you are liable to pay UK income tax
and dividend tax on your worldwide earnings,
whether through employment, self-employment
or dividends received from a company.
But the question is how is your tax residency determined
and how do you know if you are UK tax resident
in any particular tax for the year?
To find out more, we've done a video which you can access
in the description box below that provides a process
in helping you work out your tax residency.
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If you have foreign income, for example dividends
from overseas companies, interest receipts,
employment income or self-employment income,
then how is this foreign income assessed
for tax here in the UK?
So the first rule is does the UK actually have the right
to tax your foreign income?
You see, a country cannot tax income
unless it has some jurisdiction
over either the income itself or the recipient, that is you.
And if you are a tax resident in the UK,
then the UK has the right to tax your foreign income.
And as we know from the previous section of this video,
UK tax residents are assessable to UK tax
on their worldwide income.
But there is an exception to this rule.
And that is if you are UK resident but not UK domiciled
and the remittance spaces of taxation applies
for an income and gains are only assessed
if they are remitted to the UK.
Remitted simply means if you bring the funds back to the UK
probably by way of a bank or digital money transfer.
And I really think the days
of suitcases full of cash are all but gone.
UK's right to tax income is also affected by what is known
as Double Tax Treaties that may exist between the UK
and the country in which either the income arises
or the recipient, that is you, is tax resident.
You see, tax is often sought by the country
in which the income arose.
So let's suppose you were earning a PAYE income here
in the UK and in addition to this had 20,000 pounds
of GBP equivalent of dividends from Spain.
If you are a UK tax resident and domiciled,
then this dividend is assessable to UK tax
and according to their domestic laws,
the Spanish tax authorities will most likely seek
to tax you too on this, known as double taxation.
And that's where Double Tax Treaties kick in.
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Double Tax Treaties also known as Double Tax Arrangements
are agreements that are drawn up between two states.
One of their functions is to clarify each state's right
to tax in cases where two states are claiming the right
to tax a source of income
under their respective domestic laws.
This clarification can completely
or partially eliminate the double taxation
that you, a taxpayer, might otherwise suffer.
Double Tax Treaties override a country's domestic tax law,
but they cannot create a tax liability
that does not exist in domestic law.
So for example here in the UK,
the rate of basic income tax is 20%
and this is part of the Finance Act or Domestic Tax Law.
A Double Tax Treaty cannot go
and create a 25% income tax rule or rate.
All current and live Double Tax Treaties between the UK
and other tax jurisdictions can be freely and openly viewed
by following the link in the description box below.
However, a word of caution,
being able to read a Double Tax Treaty is one thing,
but sound interpretation and application is another.
So be careful here and I always recommend you consult
with a professional tax advisor
for this complex area of taxation.
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Now, if after applying any available exemptions
and restrictions, your foreign income whether in full
or part is suffering double taxation,
HMRC here in the UK will usually allow double tax relief
for the foreign tax paid against a UK tax liability
by granting what's known as a credit.
However, there are five principles that must be met.
Number one is the income must arise in the country
that has levied tax.
Number two, the foreign tax must have arisen
in respect of the same amount of income
that is being assessed in the UK.
Number three is the foreign tax must have been levied
on the same income.
Number four, the foreign tax must have been minimized.
And number five, the credit you will get is the lower
of the foreign tax or UK assessed tax in question,
converted to GBP, that's Great British Pounds.
Where there is no Double Tax Treaty between the UK
and any particular country,
the UK still allows double tax relief
known as unilateral relief.
This is quite common between the UK and USA for example
where many tax laws in the US are determined
by individual states and not the federal government
in the USA.
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And finally, international tax is a vast
and often complex area.
And there's only so much I can cover in this short video.
However, if you want to learn more,
including specific examples, case studies
and how you can swipe and apply it
to your particular circumstances,
head on to our in-depth course on international tax
in our Accounting and Tax Academy membership area.
That covers what are the basic methods of getting DTR,
such as credit relief and deduction relief.
Foreign dividends and how to declare them.
Foreign employment income and how to declare it.
Foreign employment expenses, the rules around it.
If you are non-domiciled,
how does a remittance basis actually work?
And how-to calculations showing you how
to work out double tax relief correctly.
These are just amongst a few of the topics covered
in this 60-minute course.
This is Tony Dhanial for the Accounting and Tax Academy.
Thanks for tuning in.
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