Managing foreign taxes when you are not covered by a Double Taxation Agreement

At the time of writing, the UK has 136 Double Taxation Agreements in force that cover Income Tax and Capital Gains Tax, and a mere 11 that cover Inheritance Tax. With the abolition of the remittance basis and the changes to the rules concerning exposure to Inheritance Tax which took effect from 6 April 2025, Double Tax Agreements will become increasingly important for UK resident clients with overseas assets and tax liabilities. 

In the absence of Double Taxation Agreements, taxpayers must resort to the “unilateral relief” rules provided under UK domestic law. This article looks at how those rules work, and highlights areas where double taxation may arise despite these reliefs. 

Income Tax and Capital Gains Tax 

Notable amongst the list of countries that do not have an Income Tax and Capital Gains Tax treaty with the UK in force are Brazil, Costa Rica and Peru. In the case of Brazil, a treaty was agreed in November 2022 but is awaiting final approval by the Brazilian National Congress before it comes in to force, a process which typically takes three to five years.   

In the absence of a treaty, provisions in the Taxation (International and Other Provisions) Act 2010 apply in the UK to limit double taxation. Under the Act, a credit is available against UK tax for foreign tax paid on income or gains arising in that foreign territory. At first glance, this relief is easy to understand. However, there are two potential areas of difficulty. 

No relief for tax on UK income and gains 

First, the relief only applies to foreign tax paid on foreign income or gains. Unlike under a Double Taxation Agreement, there is no guarantee that a corresponding relief will be available overseas to provide a credit for any UK tax paid on UK income or gains.   

This is particularly problematic where an individual is treated as being resident in two countries at the same time (or at least within the scope of worldwide tax in two countries). This is more common than one might expect. Under the UK statutory residence test, subject to certain exceptions, an individual is treated as either resident or non-resident for an entire tax year. In extreme cases, it is also possible to be UK tax resident with as few as 16 days spent in the UK in a tax year. This presents the possibility of being simultaneously tax resident in two countries. 

This is further compounded by the fact that most other countries’ tax years sensibly operate on a calendar year basis. Due to historical quirks from when the UK moved from the Julian to the Gregorian calendar in 1752, the UK tax year instead arbitrarily starts on 6 April. 

Somebody who relocates away from the UK on 31 December could therefore be tax resident in both the UK and their new country of residence for the period between 1 January and 5 March, with their UK income and gains falling within the scope of tax in both countries. In the absence of a Double Tax Treaty and any unilateral relief overseas, double taxation would occur. 

Identifying the location of income and gains 

Linked to this issue is the sometimes-difficult question of where income and gains are located.  Where should income derived from royalties or other forms of intellectual property be treated as having arisen? What about gains made on the sale of crypto assets? There is no guarantee that the approach taken under UK law will mirror that taken overseas.   

If, for example, income is treated as arising in the UK under our domestic law, but in Brazil under Brazilian law, UK unilateral relief will not be available and double taxation could ensue.  The position becomes exponentially more complex if there are more than two countries who are seeking to tax the same income and gains. 

Inheritance Tax 

Due to the low number of relevant treaties, the question of double taxation is more common when considering Inheritance Tax. In addition, in some cases even when an Inheritance Tax double tax treaty exists there can be circumstances where it does not apply. One example of this is the UK/US Estate Tax treaty which, depending on their circumstances, can be of limited use to dual US/UK nationals.   

Where treaty relief is unavailable, a similar unilateral relief is available under UK law where Inheritance Tax is charged in the UK and a similar tax is charged overseas on the same event. 

Under the Inheritance Tax unilateral relief, a credit is provided against UK tax for any overseas inheritance or estate tax that is charged by reference to the same event (i.e. a death or gift).  However, the relief is only available in relation to tax paid on non-UK assets. No UK relief is available if the asset in question is located in the UK. 

Where the overseas tax is imposed by the jurisdiction in which the asset is located, a credit is available for the entirety of the overseas tax paid. However, if tax is charged in a third jurisdiction, then the relief is pro-rated according to what percentage of the overall tax is represented by UK IHT. In this case, relief will also need to be claimed in whichever other jurisdiction is also charging tax. This can often result in less than 100% relief being available. 

The Inheritance Tax unilateral relief also suffers from the same problems as the Income Tax and Capital Gains Tax relief. In particular, there is no guarantee that overseas relief will be available to prevent the double taxation of UK assets. Furthermore, the situs of an asset for Inheritance Tax purposes is a difficult topic with each jurisdiction applying its own rules.  Intangible assets, such as cryptocurrency, cause particular difficulties as there is no internationally accepted approach to determining where such assets are located for tax purposes. 

Changes to the taxation of non-domiciliaries 

Reliance on Double Taxation Agreements and unilateral reliefs will become wider spread after the changes to the taxation of non-domiciliaries that were introduced on 6 April 2025. The abolition of the remittance basis will expose many more taxpayers to UK taxation on their overseas income and gains. If any of that income or gains arises in a country which does not have a double taxation treaty with the UK, advice should be taken as to the extent to which unilateral relief can assist. 

A similar comment can be made in relation to Inheritance Tax. It is possible that somebody emigrating from the UK could remain within the scope of Inheritance Tax for up to 10 years after their departure. During this time, they could also fall within the scope of an overseas estate tax, with the consequence that two jurisdictions may seek to impose tax charges on their death, and potentially on lifetime gifts. If no Inheritance Tax treaty exists to cover this potential double tax charge, unilateral relief would again need to be relied upon. 

Our International Private Client Team have considerable experience in assisting clients with double taxation issues and would be delighted to discuss anything raised in this article with you.