Different countries have their own tax rules and laws. When you have income and capital gains from one country and are resident in another, you may have to pay tax in both countries under their different tax laws. To help avoid being taxed twice - 'double taxation', the UK has negotiated double taxation agreements with many countries.
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If you are resident in the UK and have income or capital gains in another country you usually have to pay UK tax on them. But you may also have to pay foreign tax on the same income and gains in the other country. Double taxation agreements aim to ensure that you pay tax on your income and gains once only.
If you are not resident in the UK you may have to pay UK tax on any income or capital gains you have in the UK. But you may also be charged tax on your worldwide income or gains, which will include the UK, in the country in which you are resident. Double taxation agreements aim to ensure that you pay tax on your income and gains once only.
Double taxation agreements usually operate in one of three ways:
The agreements work in the same way for residents of both countries involved, but which system is in place depends on the individual agreement between those two countries (and can depend on the type of income involved). For example, where the relevant agreement allows UK residents to claim exemption or relief from Income Tax in Spain, Spanish residents can claim the same for their income in the UK.
Double taxation agreements normally allow some tax relief on the following kinds of income:
The rules for tax relief on dividend income are complicated.
Section 10 of the 'RDR1 - Residence, domicile and the remittance basis' guidance notes provide a guide for tax years 2012-13 onwards for double taxation and dividends. It replaces the booklet HMRC6.
Section 9.1.9 of booklet HMRC6 'Residence, Domicile and the Remittance Basis' covers double taxation and dividends in more detail for tax liabilities in the UK up to the end of tax year 2012-13 only.
If you receive a pension paid by the UK for service to the UK Government or a local authority in the UK, it will usually be taxed only in the UK - but there are some exceptions to this general rule.
For details of how your pension will be taxed under the double taxation agreement between the UK and the country in which you are resident, see HM Revenue & Custom's (HMRC) 'Digest of double taxation treaties'.
If you're not resident in the UK and you're an entertainer, sportsman or sportswoman, you won't be able to claim relief from UK tax on income you receive connected to a performance in the UK. Find out more about UK tax for foreign entertainers and sportspeople by following the link below.
Under many agreements, you will pay Capital Gains Tax in the country where you are resident and you will be exempt from Capital Gains Tax in the country where the gain is made.
The exceptions are where either:
In these circumstances you will pay tax in both countries, but the country in which you are resident will give you relief for the tax paid on the gain in the other country.
You should check the relevant double taxation agreement to see how your gains will be treated.
Under most double taxation agreements, if you are an overseas student or apprentice visiting the UK solely for full-time education or training, you will not pay tax on income payments from sources outside the UK for your maintenance, education or training.
Some double taxation agreements also provide that students or apprentices coming to this country for limited periods will be exempt from UK tax on certain earnings from employment here. You'll need to check the individual agreement for details.
You can find a full list of the UK's double taxation agreements in HMRC publication Double Taxation Digest.
Find out how to claim tax relief or tax exemption or a refund of tax already paid under the terms of a double taxation agreement by following the link below.
If there is no double taxation agreement between the country where you are resident and the country where you have income or capital gains, then your income or capital gains may be taxed fully in both countries.
If you are resident in the UK then you can sometimes get credit for the tax you have paid in the other country (for instance where there is no agreement and the foreign tax is equivalent to Income Tax or Capital Gains Tax.) This is called 'unilateral relief'. You can get more information on unilateral relief by following the link below.
If you're not resident in the UK and you have taxable UK income you may be eligible to receive the first part of this income (known as the 'Personal Allowance') free of tax. You can claim this tax back on form R43 Claim to Personal Allowances and tax repayment by an individual not resident in the UK.
If you are resident in two countries in the same tax year then, if there is a double taxation agreement in place, the agreement will tell you how each country should tax any incomes or gains you may have. This will depend on the exact agreement involved and the nature of your residence in each country. It is a complicated area therefore HMRC recommends that you read the relevant section of the treaty and consider seeking professional tax advice.