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David Collins, Senior Tax Adviser, breaks down some of the specifics which can save you from costly mistakes.
Helping clients navigate the complexities of tax residency matters is the part of my role that I enjoy the most. Don’t get me wrong, it can be fiendishly complicated at times, but I find it satisfying. The UK’s Statutory Residence Test (SRT) is used to establish if an individual is tax-resident in the UK and, if they are, they will be subject to tax in the UK on their worldwide arising income and gains. However, this isn’t always the case as I shall explain below.
It’s a commonly held misconception that taxes can’t be applied to the same source of income in both the UK and elsewhere. Whilst this is technically true, the reality is that if you are a UK resident and have profits arising from a holiday villa situated in France, then you will be taxable on the profits in both the UK as well as in France. To remedy this, you need the skill of a tax adviser who can ensure the reality of a client’s circumstances follows the theory of tax law and the first and most important thing to consider in this example is what the Double Taxation Agreement (DTA) between the UK and France states about this type of income. The answer is that letting profits are “taxable in the country where the property is situated, but they may also be taxed in the country of residence”. This might sound like taxes will be paid twice, but the treaty goes on to explain that “credit for tax paid overseas is available in the country of residence”, and this is known as Foreign Tax Credit Relief (FTCR), and the individual is left only essentially paying tax in one jurisdiction, eventually. This requires the self-assessment Tax Return to be completed in the correct way.
However, things can get even trickier when a DTA says a particular source of income “is only taxable in the country of residence” because this means that the income is only taxable in the country of residence and if income tax has already been deducted at source in the other country then credit is not available in the UK. To get around the fact that tax has been incurred twice on the same piece of income, a refund of tax must instead be obtained directly from the tax authorities in the country where the income originates. This is something that can easily catch people out. In fact, I have recently been assisting a client whose previous adviser had not appreciated that the DTA between the UK and Luxembourg states that Non-Government service pensions are “only taxable in the country of residence”. HMRC has made an enquiry into the Tax Return in question because FTCR was claimed on the client’s Tax Return in error, and HMRC have charged penalties for the error. The client will now have to pay the UK tax arising on the Luxembourg pension, plus interest, and they need to take steps to obtain a refund of the tax arising at source on the Luxembourg pension from the Luxembourg tax authorities.
If the above is not complicated enough (I did warn you!) the DTA between the UK and Luxembourg contains provisions that treat Government Service pensions (i.e. those paid to civil servants) in completely the opposite way to normal pensions and, not only that, the UK and Luxemburg signed a treaty back in 2022 which takes effect from 6 April 2024 and states that all pensions arising in Luxembourg are now only taxed in Luxembourg.
This case underscores the importance of obtaining specialised advice when dealing with foreign income sources. The rules surrounding DTAs can be complex, each country’s treaty with the UK will be different, there are different rules for each source of income and the agreements may change from one year to another. Therefore, having an adviser who understands the specifics can save you from costly mistakes!
If you found this article helpful or if you have any questions about your own situation, feel free to reach out. Contact David by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk. We can also provide you with points of contact in other countries so you can ensure your worldwide tax obligations are being met correctly.
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