If you have overseas assets – such as a foreign holiday home or a pension from a stint working overseas – you might be unaware that UK tax could still catch you out. Peter Webb, our Head of Tax Advisory, takes a look at when UK tax might apply on your overseas assets and income.
About one in ten people in the UK hold assets overseas that might be producing income and gains. These payments, even though they’re based outside the UK, could still face UK tax. Taxing these assets can be complex, and the rules are often misunderstood.
Why is this an issue?
Today it’s easier than ever for your overseas interests to be tracked. Over 100 countries have signed up to the Common Reporting Standard, with information about overseas assets regularly shared between countries; for example in 2018 the details of 5.7 million offshore accounts held by UK residents were sent to the UK tax authorities – HMRC.
What are the common misconceptions?
Let’s look at some of the most common misunderstandings and misconceptions that we come across when it comes to overseas income and gains.
Myth 1 – Offshore income and gains don’t need to be reported
If you are UK tax resident (and UK domiciled) you’re liable to pay UK tax on your worldwide income and gains as they arise – even though your overseas income and gains may have been taxed in another country. The UK tax authorities are very focused on identifying taxpayers who they feel may not have correctly reported their offshore income and gains.
This doesn’t always apply if your ‘permanent home’ or ‘domicile’ is outside of the UK – if this is the case we suggest you seek specialist advice.
Myth 2 – I’ve paid tax overseas and don’t need to pay UK tax too
Even though you may have reported your overseas income and gains elsewhere you’ll still need to include any foreign income and gains on your UK tax return. Most countries have a double tax treaty with the UK to avoid you paying tax twice. Even if there’s no tax treaty between the UK and the country where overseas income and gains arise you can still receive some relief for the overseas tax paid when you calculate your UK tax bill.
Myth 3 – Insignificant amounts of foreign income and gains can be ignored
There’s no minimum limit for the amount of overseas income and gains that may be subject to UK tax. So even a few pounds of interest arising on an overseas bank account or offshore capital gains falling below your annual allowance will still need to be reported through your tax return.
Myth 4 – I was born abroad so don’t need to declare foreign assets
If you’re UK tax resident, but not UK domiciled, you may be able to shelter your overseas income and gains from UK tax. However, this tax advantage is time limited and there are downsides to consider too. You’ll need to speak to a professional to understand the conditions that need to be met and whether or not this will be beneficial for you.
Myth 5 – I can choose the exchange rate that gives me the best outcome
Income and gains must be converted to GBP for UK tax reporting. HMRC publishes yearly average and spot rates for exchange purposes to help, but you’re not obliged to use them. If rates are applied inconsistently, or from a range of sources, HMRC might suspect that you’re ‘picking and choosing’ those which work best for your situation. Note that gains have to be calculated by converting any proceeds and costs using the rates in place at the time you acquired the asset and the time when you dispose of the asset (rather than calculating the gain in the local currency and then converting to GBP).
The reporting of foreign assets is complex, and these are just a few of the hurdles which you might face if you’ve overseas interests. It’s vital that your tax return accurately represents your position. If mistakes are made the Worldwide Disclosure Facility encourages voluntary disclosure, and this approach will generally reduce any penalties. This is an area of increasing scrutiny by HMRC and there are significant penalties that can apply for failing to report your overseas income and gains correctly.