how does double taxation agreements work?

gravlax

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?

baser999

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.

[Deleted User]

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.

[Deleted User]

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.

Credit only up to the U.K. tax due on that income.

gravlax

[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.

Thanks, but I don't follow the figures. If the overseas income was £15,000, and it is taxable at UK 20%, why would you owe £1,200? 20% of £15,000 = £3,000.

Dazed_and_C0nfused

Less FTCR £1,800 = £1,200 maybe?

[Deleted User]

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.

Thanks, but I don't follow the figures. If the overseas income was £15,000, and it is taxable at UK 20%, why would you owe £1,200? 20% of £15,000 = £3,000.

The tax would be £3000 in the U.K. 
£1800 already paid in foreign tax. 

Balance owed £1200

Jeremy535897

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

To put this in context, your £15,000 rental income might actually be only £14,000 because of exchange rate differences, but if there was a 10% depreciation allowance claimed overseas, the UK assessable rental income might be £14,000 + 10% = £15,400. However, if your full personal allowance is available to deduct from the UK liability, then for these amounts your UK tax bill would be nil as purdyoaten explains.

gravlax

[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?

[Deleted User]

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?

Sorry - typo - £1314. ‘Lost’ is probably not appropriate - ‘unrelieved’ would be better. 

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.

Jeremy535897

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.