If you are considered a tax resident in two or more countries, it is important to understand possible tax relief through double tax treaties. This article looks at double taxation agreements the UK has with other countries
Double tax agreements, also known as Double Tax Treaties, are created between two countries which define the tax rules when it comes to the taxation of income or gains earned in either jurisdiction.
Each double tax agreement is different, although many follow very similar guidelines - even if the details differ.
For individuals, a double tax agreement will usually be relevant if you are either (i) resident in one of the two countries covered by the agreement and have income in the other country, or (ii) resident in both countries and claiming that you are treaty non-resident in one of them.
For the purpose of this article, we are considering an individual as being tax resident in the UK and an additional country, although double tax treaties can exist between any two countries. Our specialists can assist people in a number of countries, if you need help please request an introduction and free discovery call.
This article has been written in cooperation with Laura Sant, a UK and International tax specialist and Partner at LSR Partners.
Where an individual is tax resident in the UK and also tax resident in another jurisdiction, i.e. a "dual resident", and the other jurisdiction has a tax agreement with the UK, the agreement defines the taxing rights over an individual’s income and gains between the two countries.
Essential to determining whether it is possible and then how to apply a double tax agreement is establishing the individual’s "treaty residence" position, as it is the country of treaty residence which generally assumes the taxing rights.
Where you are treaty resident will generally be determined by applying a series of "tie breaker" tests as outlined in the relevant Double Tax Agreement in place with the UK.
Typically, you will be treaty resident in the country in which you have your permanent home, but if you have a home in both countries it may be necessary to determine which country would be considered to be your ‘centre of vital interests’ i.e. which of the two countries it can be argued you have stronger family, social and economic ties to. If your centre of vital interests is indeterminable further tests are considered which look at your habitual abode and nationality.
Two typical examples where treaty non-residence are important are as follows:
In this example, an individual works for a UK employer but is a dual resident and spends their time working in the UK and overseas. Given that the individual is working in two or more tax jurisdictions (including the UK) it is very important to determine where they are treaty resident.
In this scenario, the individual may be considered "treaty non-resident" from a UK perspective and therefore the Employment Income Article of the Double Tax Agreement will usually restrict the UK tax liability to UK workdays only. This means that tax on income would only be due to the UK tax authorities (HMRC) for the days that the individual actually worked in the UK, and not days worked in other jurisdictions.
This arrangement is typical in scenarios where an expat is employed on a local UK contract, but their family have remained at home somewhere in Europe and they spend three to four days in the UK and the remaining time at the family home outside of the UK.
The individual would still need to consider their local tax position outside of the UK, declaring their income in full and claiming a tax credit for the UK taxes paid as appropriate to avoid double taxation.
If an individual is considered a treaty non-resident in the UK, under most double tax treaties in place, the individual would only be liable for tax in the UK with reference to the relevant treaty paragraph.
For example, a non-resident will often pay no or limited UK tax on UK sourced interest, UK dividend income or UK capital gains. However, bear in mind that the UK does retain a right to tax UK rental income and UK capital gains which relate to the sale of UK real estate, whether the direct sale of a property or the sale of shares which derive their value from real estate.
If treaty non-resident this also means that all non-UK investment income and gains are sheltered from UK tax.
Despite being relatively common, the application of double tax treaties, and therefore the claim for tax relief can be a complicated affair.
To begin the process, an individual who believes they may be tax resident in two jurisdictions, including the UK, must make a claim for treaty residence via a self-assessment tax return and/or a through a specific tax agreement relief claim.
It is possible for people to do this themselves, however, there are many rules, requirements and tests which need to be applied correctly to ensure that the correct tax residence statuses can be applied.
The best approach is to seek the services of a UK and international tax specialist who is qualified and experienced in claiming tax relief using double tax treaties. Fees will vary depending on the level of complexity of an individual's personal circumstances, in nearly all cases the tax savings far exceed any costs incurred by using an accountant - and they can be sure that they are paying the right amount of tax with total confidence.
The UK Government website provides a list of the countries that have a double tax agreement with the UK, including links to the treaties themselves: UK double tax treaties.
What is a double tax agreement?
A double tax agreement is a tax treaty between two countries that ensures individuals and companies aren’t doubly taxed on the same income, even though in principle the same item of income and/or capital gains could be subject to tax in both countries. These agreements set out where income is taxed and how relief is applied, using exemptions or tax credits.
The UK has double tax agreements with over 130 countries. You can check HMRC’s official double tax agreement list to confirm if your country is included.
If you're a UK national living abroad (or a foreign national with UK income), you may be eligible to claim foreign tax credits, use tax exemptions defined in the double tax agreement, or apply for split-year treatment or non-resident status. Each situation depends on your country of residence and the nature of your income.
Double tax agreements usually cover employment income, pensions, rental income, dividends and interest, business profits, and capital gains. The agreement defines which country has taxing rights over each type. The double tax agreements also provide guidance as to when they cannot be used, for example, if you are not taxed on your full worldwide income in the country you live in.
Yes. Common HMRC forms include Form DT-Individual (for non-residents claiming UK tax relief) and the Self Assessment tax return to report income and apply reliefs. Each country may have its own equivalent process for claiming relief abroad.
If no treaty exists, you could still apply for unilateral relief from HMRC, or you may need to rely on local tax relief provisions in your country of residence. In this case, specialist advice is essential to avoid double taxation.
The Statutory Residence Test (SRT) determines if you're a UK tax resident. Your residency status, combined with any relevant double tax agreement, dictates whether the UK has taxing rights over your income.
Double tax agreements can be complex and vary by income type and individual circumstances. A tax professional can review the tax agreements, apply them to your situation, assess your residency status, identify eligible reliefs, and help you claim refunds or prevent overpayments. Using a tax professional will also protect you from making mistakes.
As there are many rules and complications which can arise when attempting to apply double tax treaties it is important to seek professional assistance from a qualified and experienced UK and international tax specialist.
Therefore we offer a free introductions to tax specialists who will offer an initial free consultation who will be able to answer your general questions and help you understand how a tax agreement could apply to you and help ensure you get your tax obligations right - and avoid unnecessarily being taxed twice.
Once you have completed the initial consultation, you will also have the opportunity to get formal advice and tax help using specialist tax services. If you wish to do so, our partner will create a proposal which will detail all services, fees and timescales - after which you can decide whether you wish to go ahead or not. There are no obligations to proceed with any paid services at any time.
Use the link below to request your free introduction to a tax specialist and once your details are received, we will evaluate your situation and hand-pick the best partner from our network to contact you directly.
