If you reside in one country but have income or capital gains in another, you may end up paying tax in both nations, under the relevant laws for each state. To avoid double taxation, Britain has negotiated agreements with a number of countries.
How could you be affected?
Double taxation could affect you if you have income or gains in the UK but live in another country, or you live in the UK but have income from overseas. Although you will be taxed in the UK for any income earned, your country of residence may also tax you on the whole of your income.
How do the agreements operate?
There are three ways for the agreements for double taxation to work. You may pay any tax due in the country where you reside and obtain relief or an exemption from the country where you have income or gains. You could also pay tax in the nation where you have income and seek relief or an exemption from the country where you reside. If you complete a tax return in your own country, you could pay tax in the state where you have income and then declare this tax paid on your returns. The tax you have paid is called ‘withholding tax’.
The double taxation agreements will vary according to the countries that have made them. To find out which countries have a double taxation agreement with the UK, either seek advice from your accountant or consult the Double Taxation Digest published by HMRC.
What if an agreement doesn’t exist?
If there isn’t an agreement between the country where you reside and the one where you have income and gains, you could end up paying tax in both states. If you are a UK resident, you may be able to ask for credit for the tax you have paid overseas. This type of credit is called unilateral relief.
If you are not a resident of the UK, you may be able to claim personal allowances, the tax free amount which is due to all residents here. You can complete a form called ‘R43 Claim to Personal Allowances’ and you will receive income equivalent to your full personal allowances, free of tax.
The double taxation system is complex and it is highly advisable to seek professional advice, which will allow you to avoid paying more tax than necessary.
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