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UK tax rules on foreign income for UK tax residents

When you have sources of foreign income, it is important you understand your legal obligation to pay income tax on it within the UK.

Written on 22 February 2022

When you have sources of foreign income, it is important you understand your legal obligation to pay income tax on it within the UK.

The two most important factors in determining your UK tax liabilities on this foreign income will be your tax residency status and your domicile status.

Everyone’s individual circumstances are unique and vary in complexity, which is why you should always seek professional tailored advice when unsure of your own liability.

Below is a clearer breakdown of what types of foreign income are taxable in the UK, how you can determine what your UK tax liabilities are, and how you can benefit from seeking advice from a UK tax expert.

What types of foreign income can be subject to UK tax?

There are multiple sources of foreign income, and although acquired outside of the UK, many will be automatically subject to UK tax. Some of these can include:

  • Overseas pension income
  • Interest on any international bank accounts held
  • Income from renting out a property overseas
  • Profits made from running a registered business in another country
  • Earings from employment outside of the UK
  • Gains that are made from selling assets overseas (such as shares or property)

How do my Residency and Domicile status effect my UK tax liability on foreign income?

Being established as UK tax resident ultimately means that you will be required to pay tax on all income and gains that has been made both in the UK and overseas.

It is important to remember that your residency status is not fixed and permanent and can easily change depending on how much time has been spent in different locations.

Meaning that just because you may not be liable to pay UK tax on your foreign income right now, does not necessarily mean that this will remain the case.

As well as this, your domicile status can also impact your overall tax liability within the UK.

You will need to pay UK tax on all income and gains worldwide on an ‘arising basis’, if you are found to be both UK resident and UK domicile.

Paying on an arising basis will mean paying tax on your worldwide income and gains, regardless of whether that income is brought into the UK.

If you are not deemed to be of UK-domicile, but are still deemed UK-resident, you will then have a choice between being taxed on the arising basis or the remittance basis.

The remittance basis means that despite the positive of only being subject to UK tax on foreign income that you actually bring into the UK, other obstacles and charges will apply such as:

  • A Remittance Basis Charge (RBC)
  • The loss of use of the personal allowance and capital gains exemption

How do I report my Foreign Income in the UK?

All foreign income must be reported to HMRC, regardless of your residency and domicile status.

Reporting this income to HMRC is done through completing a self-assessment tax return. This has a filing deadline of January 31st the following tax year, as well as paying any other tax due.

Will I be taxed twice on my foreign income?

The risk of double taxation is certainly a possibility when it comes to foreign income and gains.

When this happens, it means that you have been taxed within the country that the income or gain was originally earned, as well as being taxed in the UK (as UK tax resident).

Maintaining a dual residency status may also trigger double taxation.

Fortunately, the UK holds double taxation agreements with over 130 countries worldwide.

The tax relief that you receive will ultimately depend on that country’s specific rules and restrictions, which will all have an impact on how much relief will be claimable.

If there is no agreement in place with that country, tax relief may still be obtainable as long as the foreign tax in question was taxed on either foreign income or Capital Gains.

Check out our guide to Double Tax Treaties here for further information on this.

When you know in advance that this may happen, or if you have sought advice from a professional, you should, or will more than likely have been advised to apply for tax relief as soon as possible (before actually being taxed).

This is usually done by either obtaining a specific form from the foreign tax authority in question (where the foreign income was earned) and send it completed to HMRC, or alternatively, depending on the country (if no such form exists), sending a letter requesting tax relief in writing.

How can seeking help from a UK tax specialist help me?

Whether you are unsure of your tax liability, or need some clarity on double tax treaties, it is important to seek specialist advice to ensure you are not taxed unfavourably.

We offer free introductions to tax specialists, who after a short initial consultation, can provide you with answers to your questions, and most importantly tailor those answers to what best suits your needs and situation.

These introductions can lead you to professional, financially smart advice, and essentially help you to avoid and save significant amounts of unnecessary tax.

After having our initial introduction and you decide that you wish to proceed with further tax advice or services on offer, you will then be provided with a quote after which you can decide whether you would like to go ahead or not.

There are many complex rules and complications that come with foreign income tax, residency and double tax treaties, and our qualified, experienced accountants can help you navigate your concerns.

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