What is double taxation relief?
Under UK tax law an individual who is resident in the UK must pay UK income tax on his worldwide income.
In the case of income arising in another country, that income may also be taxed in the foreign country, and will be taxed in the UK, if the individual is UK resident.
The rules that apply to the taxing of overseas income are set out in the Organisation for Economic Co-operation and Development Model (OECD).
This model states that if there is no double taxation treaty between 2 countries, then double taxation relief is available. (There will never be a treaty in your exam, you will always have to calculate DTR)
Therefore, in order to avoid being taxed on the same income two times, double taxation relief (DTR) is available, usually as a tax credit against the UK income tax liability.
The DTR tax credit is the lower of:
(i) UK tax on overseas source
(ii) Overseas tax suffered.
Where there is more than one source of overseas income, DTR on each source must be considered separately.
John owns a home in Barbados and rents it out for £30,000 p.a.
He is UK resident and has employment income of £60,000.
The income tax rate in Barbados is 45%.
How much double tax relief will be available to John?
He is a higher rate tax payer.
Therefore, he will pay 40% UK IT, however, in Barbados, the tax rate is 45% - which is higher than the UK.
Therefore, DTR: £30,000 * 40% = £12,000.
Jeremy is resident and domiciled in the UK and has the following income.
Salary from UK employment (gross) £98,000
Bank interest received £3,000
Dividend income received £7,000
Barbados bank interest £1,100 (gross) (42% I.T. in Barbados)
India rent £600 (gross) (15% I.T. in India)
You should assume that no double tax treaty exists between the UK, Barbados and India.
What is the income tax liability after considering all available reliefs?
Income tax computation
Employment income £98,000
Dividend income £7,000
Indian rent £600
Barbados bank interest £1,100
Bank interest £3,000
Net income £109,700
Less: Personal allowance £11,850- £4,850 [½ (£109,700 – £100,000)] (£7,000)
Taxable income £102,700
Analysis of income:
Non-savings income £91,600 (£98,000 + £600 - £7,000)
Savings income £4,100
Taxable income £102,700
£34,500 × 20% = £6,900
£57,100 × 40% = £22,840
£500 × 0% =£Nil
£3,600 x 40% =£1,440
£2,000 x 0% =£Nil
£5,000 x 32.5% =£1,625
I.T. Liability £32,805
DTR Relief for Barbados tax (W1) (£440)
Relief for India tax (W2) (£90)
Income tax payable: £32,275
UK tax on £1,100 (£1,100 × 40%) 440
Foreign tax on £1,100 (1,100 × 42%) 462
DTR = lower £440
UK tax attributable = £600 × 40% =£240
Foreign tax on £600 (600 × 15%) =£90
DTR = lower £90