The UK tax system is rather simple for those who only have income and gains from UK sources during their stay in the country. But, for UK residents who have foreign income and gains, things can be quite difficult. Here we discuss the taxability of foreign income and gains in the UK.
Do I have to pay tax on money transferred from overseas?
Your status of residency is a crucial factor in deciding whether you have to pay tax or not in the UK. If you are a non-resident, you will not need to pay UK tax on your foreign income. In case of a UK resident, however, foreign income will usually be taxable. Moreover, if your permanent residence is in another country, you may not have to pay tax.
Following are some instances when one may have to pay UK Income Tax on foreign income:
- If you work abroad, your salary is taxable
- Your investments and savings interest abroad
- Earnings through rented property in another country
- Income through pensions held in a foreign land
Declaring foreign income: A Self Assessment tax return is generally used to declare foreign income in case you need to pay tax, but not all foreign earnings are taxed in the same way.
Income that is taxable in more than one country: If you are paying tax in more than one country, it may be possible to claim tax exemption. To prove your eligibility for relief, you will need to apply for a certificate of residence.
Tax implications of transferring money to UK
UK residence and tax: Your residence status in the UK is the deciding factor in whether your foreign income is taxable or not. Non-residents’ overseas income is not taxable; they only pay tax on their income in the UK. Those who reside in the UK usually pay tax on all their earnings, whether it’s from the UK or overseas. But for UK residents whose permanent home is abroad, there are special rules.
Know your UK residence status: Your UK residency status is normally determined on the basis of the number of days you stay in the UK in the tax year (6 April to 5 April the next year).
Resident status: Staying for183 days or more in the UK in the tax year would automatically make you a resident of the country. Another condition is – if your only residence was in the UK and you owned, rented or lived in it for no less than 91 days and you spent no less than 30 days there in the tax year, you are a resident of that country.
Non-resident status: Staying for less than 16 days in the UK (or 46 days if you have not been categorised as UK resident for the three preceding tax years), you are naturally a non-resident. Moreover, working full-time (no less than 35 hours a week) in a foreign country and staying for less than 91 days in the UK, of which only 30 are spent working, would make you a non-resident.
Your residence status when you move: For those who move in or out of the UK, there’s something called ‘split-year treatment’ which means the tax year is normally divided into two parts – a non-resident part and a resident part. Hence, one only pays UK tax on foreign earnings during the time she or he was living in the country.
One does not have to claim split-year treatment - it’s applied automatically. Moreover, one cannot get split-year treatment if she or he lives overseas for less than a complete tax year before coming back to the UK. There are other conditions as well that one needs to fulfil to be eligible for this provision. For details, you can contact HMRC (Her Majesty’s Revenue and Customs).
If there’s a change in your state of affairs: According to the situation you are in, your status can be different from one tax year to the next. Your must check your status in keeping with your situation, for instance:
- the length of your stay in the UK increases or decreases
- you purchase or sell a house in the UK
- there's a change in your job
- you get married, separated or have children, or your family comes to live in the UK or moves out of the UK
Residence and capital gains: Knowing your residence status is crucial if you sell shares or a second home, similar to what you do for income.
UK residents’ UK and foreign gains are taxable. Non-residents have to pay income tax, but only pay Capital Gains Tax either on UK residential property, or if they come back to the UK.
'Non-domiciled' residents: Those who reside in the UK but have their permanent home (‘domicile’) outside the country may not have to pay tax on overseas income. The same rules come into effect if you make any foreign capital gains (for example, you sell shares or a second home).
Know your domicile: Your domicile is normally the country your father regarded as his permanent home at the time of your birth. It may have changed if you moved into a foreign country and you do not plan to go back.
More rules are there for domicile and Inheritance Tax.
If you are non-domiciled: No UK tax is charged on your foreign income or gains when:
- they are below £2,000 in the tax year
- you do not bring your income into the UK, that is to say you do not keep the money in a UK bank account
When income is £2,000 or more: Foreign income or gains of £2,000 or above, or any money being brought to the UK must be declared in a Self Assessment tax return. The options are:
- pay UK tax on them - which can be claimed back later
- claim the ‘remittance basis’
Claiming the remittance basis means only the income or gains brought into the UK are taxable, but:
- no tax-free allowances are there for Income Tax and Capital Gains Tax (some ‘dual residents’ may keep them)
- if you have been a UK resident for a certain amount of time, you have to pay an annual charge
You pay an annual charge of either:
- £30,000 if you have been in the UK for no less than seven of the preceding nine tax years
- £60,000 for no less than 12 of the preceding 14 tax years
- £90,000 for no less than 17 of the preceding 20 tax years
If you work in the UK and abroad
In case someone works both in the UK and abroad, there are special rules. Foreign income or gains (even those you bring into the UK) are not taxable if you get the ‘foreign workers’ exemption’. You are eligible if:
- your income from your job abroad is below £10,000
- your other income from overseas (such as bank interest) is below £100
- your overseas income has been entirely subject to foreign tax (even if you did not have to pay, for example on account of a tax-free allowance)
- put together, your UK and overseas income is within the limit for basic rate Income Tax
- there is no other reason for you to file a tax return
If you qualify, you do not have to do anything to claim.
If on a temporary assignment in the UK: If your employer sends you to the UK for a temporary assignment, you may be able to claim Overseas Workday Relief. Your employer can tell you whether you can claim.
If you qualify:
- UK tax payable on UK employment income is based on the number of days you work in the country
- no tax is payable on income from days you work abroad (so long as it is not brought into the UK)
There are special rules if you visit the UK for studies’ purpose.
Tax on foreign income
If you are a UK resident with overseas income or capital gains, you have to fill in a Self Assessment tax return. However, some foreign income is taxed in a different manner. There is no need to fill in a tax return if your only foreign income is dividends below £300 in total and you do not have anything else to declare. Rules may be different if your permanent home (‘domicile’) is abroad.
Register for Self Assessment
If you do not send a tax return, you must register by 5 October next to the tax year in which you had the income. After registering, you will get a letter telling you what to do next.
How to file your tax return: The tax return has a section called ‘foreign’ for the purpose of stating your earnings or profits in a foreign country. Income that has already been taxed abroad must be incorporated here in order to get Foreign Tax Credit Relief as per your eligibility.
There are HMRC guidelines on how to declare foreign earnings or profits in your tax return in ‘Foreign notes’.
When foreign income is taxed differently: Usually taxation onforeign income follows the same rules as UK income, but when it comes to pensions, rent from property and income from some types of employment, there are special rules.
Pensions: If you are resident, or were resident in any of the five preceding tax years, paying tax on pensions is mandatory.
Any foreign pension payments, including unauthorised payments like early payments and some lump sums.
Check with your pension provider to find out how you’ll be taxed.
Rent from property: Overseas property is taxable in the ordinary way. However, if more than one property is rented out, losses can be compensated against other foreign properties.
Special rules for certain types of employment income: If you work both in the UK and overseas, you usually pay tax in the ordinary way. However, there are special rules if you work:
- in the offshore gas or oil industry, or on a ship
- as a volunteer development worker, or for the EU or government
If you are taxed twice: Your foreign income is taxable by the UK and by the country where your income is from. Tax relief can be claimed to get some or all of this tax back, depending on whether your foreign income has already been taxed. If you are a non-resident with UK income, the way to claim relief is different.
If tax previously paid on foreign income: Normally, Foreign Tax Credit Relief can be claimed if you declare your foreign income in your tax return.
The amount of relief you get depends on the kind of ‘double-taxation agreement’ the UK has with the country your income is from.
Even if there is no agreement, it is possible to get relief unless the foreign tax does not correspond to UK Income Tax or Capital Gains Tax.
What is refundable: The full amount of foreign tax paid may not be refundable. You get back less if either:
- the country’s double-taxation agreement sets a smaller amount
- the income is taxed at a lower rate in the UK
HMRC can guide you on how Foreign Tax Credit Relief is determined. This relief cannot be claimed if the UK’s double-taxation agreement asks for claiming tax back from the country your income was from.
If no tax has been paid on foreign income: You must ask for tax exemption in the country your income is from if:
- the income is free from foreign tax but is taxable in the UK (like most pensions)
- that country’s double-taxation agreement requires you to do so
You can get a form from the foreign tax authority, or apply by letter if a form is not available. Before applying, you must show your eligibility for tax relief by either:
- filling the form and sending it to HMRC – they will confirm your resident status and return the form to you
- attaching a UK certificate of residence in case of an application by letter
Once there is evidence, send the form or letter to the foreign tax authority.
Tax on Capital Gains: Normally, you are taxed in the country where you are resident and tax-free in the country where you make the capital gain. There is normally no need to make a claim. One has to pay Capital Gains Tax on UK residential property even if she or he is not a resident of the UK.
Claiming relief: Rules are different if your earnings come from an asset that either:
- cannot be shifted out of the UK, such as house or land
- asset that you are applying for business purpose in the UK
While tax must be paid in both countries, you can get relief from the UK.
Dual residents: It is possible to be resident in both the UK and another country. You must know the other country’s residence rules and also the beginning and the end of the tax year. HMRC can guide you on claiming double-taxation relief if you are dual resident.
If you are a student in the UK: Students from overseas normally do not pay UK tax on foreign income or gains, provided that they are spent on course fees or living costs like study materials, food, rent and bills. It’s important to know whether the country your income is from has a ‘double-taxation agreement’ that covers students. HMRC may ask you to give reason for your living costs if they are over £15,000 in a tax year (apart from course fees). The tax year is from 6 April to 5 April the next year.
When you need to pay tax: Usually, your foreign income will be taxable in the UK if:
- you country of origin does not have a double-taxation agreement for students
- have other income other than that you bring to the UK
- bring your income to the UK and use it differently instead of spending on living costs and tuition fees
- intend to live in the UK as your permanent home (‘domicile’)
For those who work in the UK: Some double-taxation agreements allow your income to be tax-free if you work while being a student in the UK. If your country has no such agreement, your earnings will be taxable in the same way as others who come to live in the UK.
Sending money to family overseas
From students receiving education in a foreign country to family members who have moved abroad for work, there could be many reasons for sending money overseas. If you work abroad, you may want to send some of your hard-earned money to your family staying in your home country. And, while an individual’s tax affairs become more difficult as a result of international transactions, it is extremely important to correctly file his or her tax returns.
Tax considerations: To steer clear of any difference with HMRC in the UK, it’s prudent to think about the possible tax implications of sending money overseas.
The gift tax: The major concern when sending money abroad is often the gift tax. When individuals send more than a fixed amount to the same person within a year, they need to file a return with their relevant governing body.
Tax implications for different types of recipients: The tax requirements for senders differ on the basis of the recipients of the foreign exchange funds. For different categories – as mentioned below, the tax implication is different.
To family: On money being transferred to family, a gift or inheritance tax is applicable in the UK, although there’s a provision to avoid taxation by dividing the total annual funds by the number of people being supported. However, this could possibly bring about a warning for regulators — particularly if it is done to evade submitting personal identification when sending cash. So this must be done carefully.
To a child who is dependent: No gift or inheritance tax is charged if the recipient is a dependent child, because the purpose of sending money is to support a minor. But if the child is not a dependent, the tax is imposed.
To the sender’s own accounts: Once the money being sent exceeds a certain limit — even if it is only for a day, individuals who have a bank account in a foreign country must declare that to their respective governing body.
Amount of money is crucial: Individuals who are planning on sending large amounts of money should consult a financial advisor who is well-informed about government regulations regarding money transfers. An international tax advisor can educate individuals about their tax liabilities when making money transfers, while curbing the costs linked with sending money overseas.