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ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: the scope of income tax, residence and overseas aspects

Priya, a UK resident higher rate taxpayer, receives overseas rental income of £20,000 (gross) from which foreign tax of £5,000 has been deducted at source. UK tax on this income before double tax relief is £8,000 (40%). The UK has a double tax treaty with the foreign country. What is the UK tax payable on this income after double tax relief?

The UK tax payable is £3,000. Double tax relief is the lower of foreign tax paid, £5,000, and the UK tax on the income, £8,000. Deducting the £5,000 credit from the £8,000 UK liability leaves £3,000 payable to HMRC.

  1. A£3,000Correct
  2. B£8,000
  3. C£0
  4. D£5,000

Explanation

Unilateral or treaty credit relief is the lower of foreign tax suffered (£5,000) and UK tax on the income (£8,000). The credit is £5,000, so UK tax payable is £8,000 − £5,000 = £3,000. £5,000 is the credit itself, not the remaining liability.

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