Tax Treaties Have A Direct Impact On You As A UK Expatriate
Many people have heard of double tax treaties, and some may know that the UK has an extremely sophisticated and large network of double tax treaties. But how much do you really know about what a double tax treaty is there for? And do you understand how they affect you as a British expatriate?
One myth we often hear is that you can use any relevant treaty to choose where to pay tax. This is not correct, as tax treaties are designed to decide where taxes on different income, gains and inheritances are taxable, when assets are located in one country and the individual is resident in another country. They generally also contain “tie-breaker” clauses for residence purposes, just in case an individual satisfies domestic resident laws of both countries. All treaties are different, although most generally follow the Organisation for Economic Cooperation and Development (OECD) model.
Tax treaties are very detailed, and all of them are different, so to make sure you apply them correctly to your situation you should seek professional advice. Blevins Franks study all the fine print and are experienced at guiding expatriates through the detail and effective tax planning.
Another myth we often come across is that income taxable in one country cannot be taxable in the other. This is incorrect and, in many cases, income remains taxable in the source country but can also be taxed in the country in which the individual is resident. To avoid double taxation, i.e. being taxed in both countries, tax paid in the source country is offset against the liability in the country of residence.
Where income can be taxed in both countries under the terms of the treaty, each country will always be able to apply its own rules in calculating the taxable income, and also the actual tax payable. While tax paid in the source country can be offset against the tax payable in the country of residence, if the tax paid in the source country exceeds the tax payable in the country of residence, no further tax will be due in the country of residence. If the tax payable in the country of residence is higher than that payable in the source country, you pay tax in the source country and then pay the difference between the two amounts in your country of residence. Therefore, you always end up paying the higher of the two amounts.
The trick here, of course, is to minimise the tax in both countries legally so that the minimum amount of tax is paid. A good adviser can help you ensure that you minimise taxes in both countries, so that your overall tax liability is minimised.
No two tax treaties are ever completely the same, although generally, certain types of income and gains are only taxable in the country of residence and others are taxable in both countries. For example, capital gains on real estate, dividends and bank interest, are often taxable in both the country in which the income arises and the country of residence (although not always). On the other hand, state, occupational and private pensions and annuities are usually only taxable in the country of residence. Government service pensions, such as Armed Forces, civil service, police, fire brigade and teachers’ pensions, usually are taxable only in the source country (but again, not always), and not in the country of residence.
The UK only has 10 treaties regarding taxes on death. These are with France, Italy, India, Pakistan, USA, Sweden, Ireland, South Africa, Netherlands and Switzerland. These treaties are, again, all different, particularly those with France, Italy, India and Pakistan, which were put in place back when UK inheritance tax was called “estate duty”, and have different rules to eliminate double taxation.
There are also exchange of information agreements, generally between countries formerly blacklisted by the OECD (i.e, formerly seen as tax havens) and various other countries.
Where there is no double tax treaty governing where income is taxed and how relief is given in the case of double taxation, the UK will give “unilateral relief” where another country charges tax on assets that are also taxable in the UK. The UK will apply UK law in determining where an asset is actually located for this purpose, and if the tax charged abroad exceeds the UK liability in the UK on that asset, the credit given for the foreign tax is limited to the amount of tax payable in the UK. Unilateral relief is also given where both the UK and another country tax income or assets in a third country.
Double tax treaties supersede national law and therefore take precedence over either country’s domestic rules. If you have assets outside the UK, or if you are moving or have moved abroad and retain UK assets, it is essential that you have an adviser who understands how any relevant double tax treaty will apply to you, and how this works in relation to the domestic laws. We would always recommend that you take advice from an expert knowledgeable regarding the double tax treaty and both countries’ laws, such as Blevins Franks. They will be able to assist you in understanding exactly what will be taxed where, when and how, as well as assisting you in minimising taxation.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
23rd August 2012