22 Nov Foreign income – wikis
Foreign Income – Tax Credit Relief
When a person is resident for tax purposes in the UK, that person is subject to tax in the UK for his or her worldwide income.
This means that you may need to pay UK income tax on your foreign income, such as:
- Employment income
- Foreign investments and savings interest
- Rental income on overseas property
- Income from pensions held overseas
In summary, any income from overseas is subject to tax in the UK.
However, if you have paid tax on the overseas country for that income, you might be able to claim tax relief in the UK.
Most people fall into the “resident” category when they have spent 183 days or more in the UK during a tax year (6 April to 5 April of next year).
Now, if you are resident but non-domiciled in the UK, you don’t have to pay UK tax on income or gains if they are less than £2,000 in a tax year and you don’t bring them into the UK. You don’t have to do anything if this is your case.
Generally speaking, you are non-domiciled if your father’s permanent home when you were born was outside the UK.
If you have received very large amounts of income abroad, there is an alternative method to tax your foreign income called “remittance basis”. This is available for residents but not domiciled individuals. Remittance basis is a payment for all your income abroad, rather than having to calculate tax on all your foreign income. It is very expensive, and it is commonly used by very wealthy individuals.
Most people would fall into normal rules, as follows.
Your foreign income has to be included in your UK Self-Assessment tax return.
The steps for getting ready to do this are:
- Register for Self-Asssessment,
- Obtaining a UTR,
- Include all your UK income, as well as your foreign income,
- Prepare 2 sets of tax calculations – one considering your worldwide income, and a second one with your UK income only.
- If you are eligible to get Foreign Tax Credit Relief (“FTCR”), you can use this to offset any UK tax liability caused by your foreign income. Your FTCR is the lower of UK tax on foreign income, and the tax actually paid abroad. Please note that the tax paid abroad needs to be of similar nature as the UK Income tax or Capital Gains Tax.
Foreign Tax Credit Relief
Many of you have mentioned the Tax Treaty between Colombia and UK. Please note, this Treaty is signed since November 2016, but according to the HMRC’s website, it is still not in force.
Therefore, all foreign income received from Colombia, is subject to tax in Colombia and in the UK.
All income is taxed according to UK laws, giving deductions or allowances as you would if the income was earned in the UK.
For example, property income is taxed just as if the property was in the UK. You can either choose to apply the property income allowance, or deduct allowable expenses, whichever brings you a higher benefit.
If you have paid tax in another country on your overseas income, you can claim FTCR if:
- You are tax resident in the UK,
- The foreign income was properly charged under the foreign country’s laws,
- The amount of FTCR doesn’t exceed the UK tax on the same income or gains
- There is a Double Tax Treaty in force.
As it is the case with Colombia, if there is no Tax Treaty, HMRC allows you to apply unilateral FTCR. This means that the foreign tax is normally available as a credit but only up to the extent of the UK tax charged on that foreign income or gain.
Things to consider
If you have income from Colombia, you should always start on the understanding that you need to pay tax in Colombia. If you are resident for tax purposes in the UK, you will also need to at least include the foreign income in your UK Self-Assessment tax return.
You must have filed your Colombian tax return and pay tax therein.
Remember, it doesn’t matter whether you bring it or not – if you earn it, declare it!
KRA Consulting Services
I will be doing Self-Assessment tax returns from now to January 2019. The deadline for income received during the tax year 2017/18 is fast approaching (31st January 2019) and it should include your foreign income on the same year. You can either include your foreign income of the calendar year 2017 – as it matches your Colombian tax return; or prorate your foreign income to match the UK tax year (April to March).
KRA Consulting charge for a “normal” tax return is £120 per return, provided you are already registered for Self-Assessment. Hourly rates might apply if the return is more complex.
For more information send an email to firstname.lastname@example.org