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how does double taxation agreements work?
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gravlax
Posts: 135 Forumite

in Cutting tax
If you live in the UK and have £15,000 rental income from overseas and there is a double taxation agreement between the countries how is the UK tax calculated if you paid £1,800 12% tax overseas? If you are a basic (20%) tax payer do you pay another 8% in the UK (20%-12%)? Does the £15,000 count towards your £12,570 UK Personal Allowance so if you had no other income, then would you just pay another 8% on £2,430?
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As far as I’m aware, the whole of the £15k would be taxable here but credit would be given for the overseas tax suffered. Happy to be corrected though.0
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In simple terms you work out the tax payable in the U.K. on THAT source of income. If, for example, it is all taxable at 20%, you would owe £1200.However, in the event that there is no other income, the tax due would be (15000 - 12570) at 20% which is £486. You would receive credit of £486, reducing the tax due to NIL. The remaining £1354 is lost.1
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baser999 said:As far as I’m aware, the whole of the £15k would be taxable here but credit would be given for the overseas tax suffered. Happy to be corrected though.0
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[Deleted User] said:In simple terms you work out the tax payable in the U.K. on THAT source of income. If, for example, it is all taxable at 20%, you would owe £1200.However, in the event that there is no other income, the tax due would be (15000 - 12570) at 20% which is £486. You would receive credit of £486, reducing the tax due to NIL. The remaining £1354 is lost.
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Less FTCR £1,800 = £1,200 maybe?2
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gravlax said:[Deleted User] said:In simple terms you work out the tax payable in the U.K. on THAT source of income. If, for example, it is all taxable at 20%, you would owe £1200.However, in the event that there is no other income, the tax due would be (15000 - 12570) at 20% which is £486. You would receive credit of £486, reducing the tax due to NIL. The remaining £1354 is lost.
£1800 already paid in foreign tax.Balance owed £12001 -
It may be a little more complex than that, for two reasons:
- if the overseas rent is receivable in a currency other than sterling, the impact of exchange rate changes may mean that the rent fluctuates monthly in sterling terms
- if the overseas rent is calculated using different rules to the method of calculation in the UK, the UK tax could be higher. Some countries allow a depreciation deduction, for example
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[Deleted User] said:In simple terms you work out the tax payable in the U.K. on THAT source of income. If, for example, it is all taxable at 20%, you would owe £1200.However, in the event that there is no other income, the tax due would be (15000 - 12570) at 20% which is £486. You would receive credit of £486, reducing the tax due to NIL. The remaining £1354 is lost.
The remaining £1,354 is lost? I don't see what is lost - no UK tax is paid on £12,570 (but you are worse off because you did pay tax on it overseas). Where does £1,354 come from? Is there an optimum amount of overseas income that would mean maximising the UK personal allowance and not losing anything?
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gravlax said:[Deleted User] said:In simple terms you work out the tax payable in the U.K. on THAT source of income. If, for example, it is all taxable at 20%, you would owe £1200.However, in the event that there is no other income, the tax due would be (15000 - 12570) at 20% which is £486. You would receive credit of £486, reducing the tax due to NIL. The remaining £1354 is lost.
The remaining £1,354 is lost? I don't see what is lost - no UK tax is paid on £12,570 (but you are worse off because you did pay tax on it overseas). Where does £1,354 come from? Is there an optimum amount of overseas income that would mean maximising the UK personal allowance and not losing anything?You paid £1800 in foreign tax - you can only claim up to the U.K. liability on that income. In the example, that liability was £486. Only £486 of foreign tax paid can be relieved - £1314 remains unrelievable.As you say, you are worse off because you have paid £1800 tax in total. Had it been U.K. income your tax liability would only have been £486.1 -
The £1,354 was the overseas tax paid of £1,800 less the UK tax that would otherwise have been paid of £486. If you have UK income say of £13,000 and overseas income of £15,000 on which you have paid £1,800 overseas tax, you are allowed to set your personal allowance against the UK income on which you would otherwise have paid 20% income tax, leaving the overseas income within the charge to income tax, but at 20% less the overseas tax paid.1
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