Double tax agreements (DTA’s)

Overview

Understanding tax obligations is crucial, particularly if you are both domiciled and resident in the UK. In such cases, you’re liable for taxes on worldwide income earned in the relevant tax year. For instance, if you reside in the UK and have rental property in Spain, you must declare the foreign rental income on your UK tax return and pay tax on the profits. However, if you’re not domiciled in the UK, you may be eligible to claim the Remittance Basis if you don’t bring the overseas income into the UK.

But why do I have to pay tax twice if I’m already taxed in Spain?

An essential consideration. Unless income is exempted by a Double Tax Agreement (DTA), the country where income arises has the right to tax it. If income isn’t exempted by a DTA, it’s assessed in the UK, and relief from double taxation can be claimed. This relief, known as Foreign Tax Credit relief, requires UK residency to claim. Alternatively, foreign tax paid can be claimed as an expense. Typically, income from property is taxable both in the country where it arises and where the taxpayer resides.

Example

To illustrate, Foreign Tax Credit can often be claimed as the lower of:

• The foreign tax paid on the income
• The UK tax due on the foreign income

Suppose Joe lets out a property in Spain, with gross income of £15,000 and expenses of £3,000, resulting in net income of £12,000. Joe pays Spanish tax of £2,280 on the profits. As a UK resident and 40% taxpayer, Joe must declare this income on his UK tax return. However, he can claim Foreign Tax Credit Relief to avoid double taxation.

Joe’s UK tax on rental profits is £4,800 (40% of £12,000). Since the tax already paid in Spain is lower (£2,280), he can claim this as a tax credit. Thus, the tax due on his Spanish rental income in the UK is £4,800 minus £2,280, equalling £2,520.

Further Applications of DTA

As mentioned, UK residents are liable for tax on worldwide income. Non-UK residents with UK income are subject to UK tax unless exempted under relevant DTA terms. While most tax treaties share similarities, differences exist depending on the country. Some treaties exempt pensions, but certain government pensions may still be taxable in the UK under specific treaties.

DTAs can be complex. We recommend consulting our accounts team and seeking advice from an advisor in your country of residence or income receipt.

Territories With DTAs

Below is a list of territories with DTAs with the UK. Note that each agreement’s contents and terms may vary: