Foreign Tax Credit Relief

Foreign Tax Credit Relief

How is Foreign Tax Credit Relief given?

If the DTA gives exclusive taxing rights to the UK (taxed in UK only), no foreign tax is payable and there is therefore no relief.

If the DTA gives exclusive taxing rights to another country (taxed only overseas), no UK tax is payable, and so no relief will be available.

However, the DTA may restrict the amount of foreign tax payable, which will affect the amount of relief that you may claim.  If the DTA restricts the relief available then it is the restricted amount that is claimed against UK tax.

If there is no DTA or the DTA does not prevent the income or gains being taxed in both countries then relief may be available using either of the 2 following methods:

1. Relief by way of credit for foreign tax paid; OR
2. Deduction relief.

For both income and gains the same principles apply, the tax credit in the UK is the LOWER of the:

• Foreign tax paid (or allowed by the DTA) on the income/gain; OR
• UK tax liability on the income or gain.

The credit then reduces the UK tax liability to provide relief.

1. Relief by way of credit for foreign tax paid
2. Deduction relief

Getting it right

We are aware that HMRC have started to write to those taxpayers who may have made errors or mistakes in their 2019/20 tax returns in respect of their claims for relief.  If you have received a letter from HMRC on this subject or you require support in ensuring that any claims you make are correct, please do not hesitate to contact us.

If you have any queries about how it might affect you, please get in touch with our Edinburgh-based team.