Double tax agreements (DTA’s)

Overview

It is important to know that if you are domiciled and resident in the UK, you will be assessed for tax purposes on worldwide income arising in the relevant tax year. For example, if you are resident in the UK and have a rental property in Spain, you will be required to declare the foreign rental income on your UK tax return and pay tax on the profits. If you are not domiciled in the UK (which is not the same as residence), you may be able to claim the Remittance Basis if you do not remit the overseas income to the UK.  

But I already pay tax on that income in Spain. Why do I have to pay tax twice?

Excellent point. Unless the income is exempted by a Double Tax Agreement (DTA), the country where the income arises is entitled to tax that income. If the income is not exempted by a DTA, the income is assessed in the UK and relief from double taxation is claimed. This relief is known as Foreign Tax Credit relief and you must be resident in the UK in order to make a claim. Alternatively, you may be able to claim the foreign tax paid as an expense. Normally, income from property is taxable in the country where it arises as well as the country where the taxpayer is resident.

Example

In simple terms, Foreign Tax Credit can often be claimed as the lower of:

• The amount of foreign tax paid on the income
• The amount of UK tax due on the foreign income

Let’s say Joe lets out a property in Spain. After converting Euros to Pound Sterling, he has gross income of £15000 and expenses of £3000. Joe pays Spanish tax of £2280 on the profits. He is resident and employed in the UK and is a 40% taxpayer.

Joe must declare this income on his UK tax return but he can claim Foreign Tax Credit Relief so that he is not paying tax twice on the same income.

Joe’s rental profits are £12000 and will be taxed in the UK at 40% – a total of £4800. The tax already paid in Spain is lower than this amount and can therefore be claimed as a tax credit. This means that the tax due on his Spanish rental income in the UK will be £4800 minus £2280, equalling £2520.

Further Applications of DTA

As previously mentioned, UK residents are liable for tax on their worldwide income – such as employment income, dividends, or capital gains. However, non-UK residents with UK income will be liable for UK tax on that income unless it is exempted under the terms of the relevant DTA. Whilst there are similarities in most tax treaties, there are differences depending on the country. A lot of treaties, for example, do exempt pensions but some treaties allow the UK to tax certain government pensions in the UK.

Double Tax Agreements can be very complicated to understand. We would suggest speaking to our accounts team and at the same time seeking advice from an advisor in the country where you are resident or where you receive income.

Territories With DTAs

See below a list of territories with DTAs with the UK. Please note that the contents and terms of each agreement may vary:

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