In a world where cultures and economies are closer and more interconnected than ever, increasing numbers of people are likely to find themselves generating income from overseas. Regardless of where you reside and where you generate income, you’ll have to account for your earnings and pay any tax due, but there can often be some confusion about what you need to declare and how to go about it.
When it comes to declaring foreign income, it’s vital to follow the correct rules. We all leave a digital trail wherever we go, and with international tax authorities now routinely sharing information with each other, if you’re not declaring your overseas income correctly, it will only be a matter of time before HMRC catches up with you.
In the first of two blogs about paying tax on overseas income, we look at things from the perspective of a UK resident with financial interests overseas. In a further blog to be published soon, we’ll look at things from the other way around and consider the position of a non-UK resident based temporarily in the UK and earning in their country of residence.
Are you a UK resident earning overseas income?
If you’re a UK resident, your permanent home is in this country, and you’re generating income in a foreign country, you may need to pay UK income tax on your earnings. It doesn’t matter if the activity is being taxed overseas already; there is a UK tax implication that you must deal with.
The fact that your income may have been generated hundreds or thousands of miles away from UK shores doesn’t mean UK tax authorities won’t get to find out about it. HMRC works with international financial authorities to recover unpaid tax owed to the UK exchequer. Automatic Exchange of Information agreements made between the UK and other countries allow information about financial accounts and investments to be freely exchanged. Financial institutions in other countries, including banks, building societies, insurance and investment companies, share information about UK residents who have financial accounts and investments.
In light of the impact of the global pandemic on the UK economy, we can expect HMRC to be especially vigorous in pursuing unpaid tax relating to overseas income.
What do you need to declare?
As already stated, any income earned overseas must be declared, including foreign investment income – for example, dividends and savings interest, income from pensions held overseas and rental income from overseas property.
The areas most likely to catch people out are overseas dividends (where tax is paid in the foreign country) and people coming to the UK on a secondment and renting out their property in their home country.
Many UK residents work for international companies with operations in this country and – especially in the case of US-based organisations, may qualify for share options as part of their benefits package.
It’s easy to see how an employee might overlook income earned on dividends in a foreign country. If the shares are not disposed of, the shareholder may even forget they own them, but all earnings on dividends or profits made on the sale of overseas shares must be declared to HMRC.
Reporting your foreign income
If you’re a UK resident, you’ll usually need to report any overseas income by completing a Self Assessment tax return. However, you don’t need to fill in a tax return if your only foreign income is from dividends, your total earnings from them (including any UK dividends) is less than £2k – and you have no other income to report.
Paying tax on your foreign income
If you do have foreign income to declare, it may be taxed by the tax authority in the country where your income originates – as well as by HMRC in the UK. But usually, you’ll be able to get some or all of this tax back by claiming tax relief.
You can apply for tax relief before you’re taxed on foreign income as long as the income is exempt from foreign tax but is taxed in the UK (for example, most pensions), or if you’re required to do so by that country’s double-taxation agreement. To claim tax relief, you’ll need to apply to the tax authority in the country where your income originates and confirm you’re eligibility by providing proof that you’re a UK resident.
If you’ve already paid tax on your foreign income, you can usually claim Foreign Tax Credit Relief when you complete your tax return
How much tax relief will you get?
The level of tax relief you’ll get will depend on the terms of the double-taxation agreement the UK has with the country in question. You can find details of HMRC’s tax treaties with other countries here. You will usually still be able to get relief even if there is not an agreement unless the foreign tax doesn’t correspond to UK Income Tax or Capital Gains Tax.
If you’re receiving overseas income and not declaring it, the long arm of HMRC will inevitably become aware of it eventually. As always in these matters, honesty is by far the best policy. Whatever the circumstances, approaching HMRC before they come to you and ask questions will help to demonstrate your good faith.
If you’d like help in preparing and presenting your case to HMRC