Sometimes individuals will be resident in one country but receiving income or gains from another country. It may be that the same income or gains are subject to tax under the laws of both countries. Tax Treaties are helpful in these situations, since they specify taxation rights that each country has on the income and gains. In doing so, they minimise the risk of double taxation.
A list of countries that have Tax Treaties with the UK can be found here. The wording of a double taxation treaty can sometimes be difficult to interpret, and it may be worthwhile to seek a specialist advisor.
Tax Treaties for Individuals Who Are UK Resident
Individuals resident in the UK will normally be subject to tax on their worldwide income and gains, unless the remittance basis applies. If the individual is also subject to tax on the income or gains in the country where the income or gains originates, it will be necessary to check the taxation rights under the tax treaty (if there is one) between the UK and that other country. The below looks at some common examples:
Andrew is a UK resident individual. He has a property in the Netherlands, which he rents out. The UK-Netherlands tax treaty, under Article 6, states that such income ‘may be taxed’ in the state in which the property is situated. Essentially this gives taxing rights to both states: the Netherlands may tax the rental income. Which they do (under Netherlands domestic law). Since the treaty does not say that only the Netherlands can tax the income, it means that the UK can also tax it. Which they do (under UK domestic law). Though since the treaty states that the Netherlands may tax it, the UK is obliged to give treaty relief for the tax paid in the Netherlands. Therefore tax paid in the Netherlands can be deducted from the tax due in the UK.
Martin is a UK resident individual. He has some money in a French bank account, which generates interest income. The UK-France tax treaty, under Article 12, states that interest ‘shall be taxable only’ in the state in which the individual is resident. Since it is only taxable in the UK, where Andrew is resident, then even if it were taxable in the France under domestic law, the tax treaty would override this, giving full taxation rights to the UK.
Unilateral Relief is available in the UK in those situations where it is not possible to claim tax relief under a Tax Treaty. This might occur where:
- There is no tax treaty between the UK and the other country
- There is a tax treaty, but it does not cover the type of income that the individual receives.
In these situations, a foreign tax credit under Unilateral Relief can be claimed instead. This allows the tax paid in the other country to be used so as to reduce the UK tax that is due on the same income or capital gains.
Paolo is a UK resident who receives investment income from Brazil, on which 10% tax is withheld. There is no UK-Brazil tax treaty. He pays tax on the arising basis in the UK. Using Unilateral Relief, a foreign tax credit of 10% is taken against the UK tax due.
Mark is UK resident, and employed in the UK by a UK company. He spent 30 days in the tax year working in New York. Under Article 14 of the US-UK tax treaty, the employment income will be exempt from US taxation, as he meets the criteria of spending fewer than 183 days in the US, and has a non-US employer. Therefore full taxation rights lie with the UK. However, the US-UK tax treaty does not cover state taxes. New York state imposes income tax on non-residents who perform work in New York, in accordance with days worked in the state. Therefore while no federal taxes are due from Mark, New York state taxes are due. As the US-UK tax treaty does not cover state taxes, it will be necessary for Martin to claim Unilateral Relief on his UK tax return, so as to claim a foreign tax credit for taxes paid to New York.
Double Tax Treaties for Individuals Not Resident in the UK
Individuals who are not resident in the UK may still be subject to UK tax on income and gains arising in the UK (see ‘Taxation of non-residents’ for more detail).
Many countries will subject resident individuals to tax on their worldwide income and gains. Therefore, where the UK and the other country are both subjecting the same income or gain to tax, it will be necessary to check the Tax Treaty between the two countries (if there is one) to determine the taxation rights of each country.
One common example is pension income, for individuals who live and work in the UK and then retire abroad. The UK state pension will not be taxable in the UK for non-residents, as it is disregarded income. However, workplace and private pensions from the UK may still be taxable in the UK after the individual becomes non-resident. It is likely that the country of residence will also tax the income. This is where reference to the tax treaty between the UK and the country of residence becomes relevant. Normally tax treaties between the UK and other countries will give primary taxation rights to the country of residence (though there are exceptions, notably for UK government and local authority pensions).
Claiming Back UK Tax Withholding
The UK will typically withhold tax at source on items such as private pension income. If tax has been withheld at source on the UK income, then the individual can claim tax treaty relief on their UK tax return, and thereby claim back the tax withholding.
Non-resident Individuals who do not complete tax returns, or who would like to stop tax withholding (such as PAYE on pension payments) can certify that they are resident outside the UK by using the following forms
By default individuals should use the standard Double Taxation Treaty Relief form, available here in order to apply for relief at source from UK tax and/or repayment of UK tax. However, HMRC has created dedicated Treaty Relief forms for many countries. Below we list only the most popular:
The forms are sent to the tax authorities of the country that the individual is resident in for them to stamp. The form is then sent to HMRC. Once HMRC have processed the form, they will inform the entity that is making payments (e.g. the company making UK pension payments) that no tax, or a reduced rate of tax, should be deducted from future payments.
Albert worked in the UK and on retirement moved to Canada. Through his former UK employer he has a pension plan, and takes a drawdown from it of £15,000 per year, paid monthly. As this amount is in excess of the tax-free personal allowance, the UK withholds tax (through PAYE) on the monthly payments. Albert is also subject to Canada taxation on the pension income, as he is resident there. After examining the UK-Canada tax treaty, Albert identifies that it is Canada that has primary taxation rights under Article 17(1). In order to notify HMRC and stop the tax withholding he completes the relevant HMRC form. This form is sent to Canada Tax Revenue who stamp it and return it to the taxpayer, who then forward it to HMRC.