Why HMRC is suddenly interested in your “global life”

When Alex opened an email from his accountant with “HMRC – Foreign Tax Credit Relief” in the subject line, he assumed it was just another routine reminder about the Self Assessment deadline.

Instead, there was a copy of a new-style HMRC letter.

It didn’t say “enquiry”. It didn’t mention a formal “compliance check”.

But the message was unmistakable:

“Please check that you meet the conditions for claiming Foreign Tax Credit Relief (FTCR) and that your claim reflects the terms of the relevant double tax agreement. If we later find errors, any disclosures from that point on will be treated as prompted.” 

Alex is UK-resident. He:

• does part of his work from another country; 
• has a rental flat abroad;
• holds investments through a non-UK broker; and
• still gets a small pension from a previous employer overseas.

His Self Assessment has included foreign pages and FTCR claims for years, without drama.

Now HMRC is explicitly telling people like Alex:
“If you have foreign income, we expect you (and your adviser) to understand exactly why you’re claiming credit, and how it fits the treaty.”

If that sounds like your life, the rest of this article is for you.

1. Foreign income: what HMRC is really looking at

HMRC’s recent letters are targeted at taxpayers whose Self Assessment returns show Foreign Tax Credit Relief in respect of:

• employment income taxed overseas; and
• non-employment income (pensions, royalties, dividends, interest, rental income, etc.).

The letters do three things:

1. Remind you of the criteria for claiming FTCR at all.
2. Push you towards the double tax agreement (DTA) between the UK and the country where tax was paid.
3. Warn you about timing: if HMRC finds errors and then you correct them, your disclosure is classed as prompted, which usually means higher penalties.

Although the initial wave of letters has a specific focus, the underlying message is broader:

If you are UK-resident with foreign income, HMRC expects your return to show a clear, technically coherent story: what the income is, which country had taxing rights, what tax was paid overseas, and why the FTCR claim is justified.

2. So what counts as “foreign income” for a UK resident?

If you are UK-resident, you are generally within the scope of UK tax on your worldwide income and gains (subject to special regimes and the new FIG rules from 2025/26).

Typical examples of foreign income include:

• Overseas employment income
  Salary, bonus, stock awards and allowances for work actually carried out outside the UK.
• Foreign self-employment / professional income
  Fees from non-UK clients, especially where services are performed abroad.
• Rental income from overseas property
  Long-term lets, holiday rentals, or mixed personal/letting use.
• Foreign pensions and annuities
  Company pensions, state pensions or other retirement income from another country.
• Dividends from non-UK companies
  Often with foreign withholding tax applied at source.
• Interest on non-UK bank accounts, bonds, notes or deposits.
• Distributions from foreign funds, partnerships or trusts
  Depending on the structure and local law.

On a UK Self Assessment return, these usually feed into:

• the main SA100; and
• SA106 “Foreign”, where you list foreign income and any foreign tax paid and calculate FTCR.

3. Double taxation and FTCR – the core mechanics

The reason FTCR exists is straightforward: the same income can be taxed in two places:

• Source country – where the income arises (e.g. where the property is, where the employer is, where the company paying the dividend is resident); and
• Residence country – where you are tax resident (UK, in our context).

FTCR is designed so that you don’t suffer tax twice on the same income – but it’s far from a blank cheque.

For a valid FTCR claim, all of the following need to be true:

1. UK residence
   You are UK-resident in that tax year.
2. Same income taxed twice
   The income is:
   • taxed under the other country’s law; and
   • also within the charge to UK tax (no UK exemption, no treaty rule that takes it completely out of UK scope).

1. The “lower of” cap
   The foreign tax credit cannot exceed the UK tax on that same slice of income. In practice the allowable FTCR is the lower of:
   • foreign tax actually charged on that income; and
   • the UK tax that would be due on that income in your Self Assessment.

If the foreign tax is higher than the UK tax, the surplus is simply a cost – it does not generate a UK refund.

In some limited situations, you may be better off with relief by deduction (treating foreign tax as an expense against income) instead of FTCR – but that is a technical decision and needs proper modelling.

4. Where double tax agreements (DTAs) come in

FTCR on its own is not enough. You also have to apply the double tax agreement (if there is one) between the UK and the country where tax was paid.

DTAs:

• decide which country has primary taxing rights over each type of income;
• often cap the rate of withholding tax that the source country can apply to dividends, interest and royalties;
• sometimes give one country exclusive rights to tax a particular income (for example, certain pensions or government salaries).

In practical terms:

• If a DTA says only the UK can tax a particular pension, but another country has taxed it anyway, the UK may well say:
  “FTCR isn’t available. The correct route is a refund claim abroad.”
• If a DTA says dividends can be taxed at source up to 10%, but in practice 25% was withheld, the UK may limit FTCR to 10% – even if you haven’t yet reclaimed the excess 15% in the other country.
• For employment income, many DTAs cap the rights of the work country when:
  • you’re present for less than a defined number of days; and
  • certain employer/establishment conditions are met.
    If those conditions are satisfied, the other country shouldn’t tax the income – and again, FTCR may not be available for any tax they nonetheless take.

HMRC’s letters are pushing taxpayers to go back to first principles:

Does the treaty actually allow the other country to tax this income?
If yes, at what rate?
If no, why are you claiming UK credit for it?

5. Common foreign income patterns – and common mistakes

Here are recurring scenarios where foreign income and FTCR go wrong.

5.1. Multi-country employment

• UK-resident executive spending part of the year working in another country for a group company.
• Foreign payroll tax or withholding applied to some portion of salary and bonus.

Mistakes we see:

• Treating the contract employer as the treaty “employer”, ignoring which entity actually bears the cost and risk of the work (the key treaty concept).
• Claiming FTCR on all foreign payroll tax, without checking:
  • whether the DTA allows that country to tax the employment income at all;
  • whether any day-count threshold has been exceeded.

5.2. Overseas rental income

• One or more properties abroad, often with:
  • local tax on net rental profit; or
  • flat withholding on gross rents.

Common issues:

• FTCR claimed on local charges that aren’t “tax on income”, such as certain municipal or wealth-type levies.
• No reconciliation between local tax calculations and what appears on SA106 – making it hard to show that the “same income” has been taxed twice.

5.3. Foreign dividends and interest

• Dividends and interest from non-UK companies and institutions, often via a foreign broker.

Frequent errors:

• Claiming FTCR for full foreign withholding where the DTA entitlement is lower.
• Claiming FTCR on interest that, under the DTA, should only be taxed in the UK (so the other country’s tax is technically not creditable).

5.4. Pensions and annuities from abroad

• Company pensions, state pensions or annuities from a previous country of residence.

Problems that arise:

• Assuming “it’s already taxed abroad so the UK will just give a credit”.
• Overlooking treaty clauses that give only one country the right to tax certain pensions, so either:
  • no FTCR in the UK; or
  • scope for a treaty claim to stop or reduce foreign tax.

5.5. Trust, fund and partnership structures

• Income flows through multiple layers (fund → foreign company → trust → individual).

Risk points:

• FTCR claimed twice (for example at structure level and again by the individual).
• FTCR claimed by the wrong taxpayer, because the actual charge to foreign tax falls on a different entity.

6. What HMRC now expects you (and your adviser) to do

HMRC’s new-style letters are not just information pieces. They set expectations:

1. Know and apply the FTCR criteria
   • Confirm UK residence in each year.
   • Make sure the foreign tax is eligible (a tax on income or gains, not something else).
   • Check the “same income, taxed twice” test and the lower-of cap.

1. Read the relevant DTA, not just the bank statement
   • Identify which article applies (employment, property, dividends, interest, pensions, royalties, etc.).
   • Check who has taxing rights and what withholding rates are permitted.

1. Review and fix past returns where necessary
   • Start with recent years (where you can still amend online).
   • For older years, consider whether a more formal disclosure is needed, particularly if foreign income or assets have been under-reported or misreported.

1. Get 2024/25 and future years right, consistently
   • Use SA106 and the foreign tax credit working sheets carefully.
   • Keep working papers that show the logic: how each foreign income line, each foreign tax figure, and each FTCR amount has been derived.

And importantly, HMRC is explicit that once it has spotted an error and contacted you, later corrections are “prompted” – which narrows the scope for penalty mitigation.

7. A practical framework for reviewing your foreign income

If you have a mix of foreign income, here is a simple but robust review framework:

Step 1 – Build a clear inventory

For each tax year, list:

• every foreign income source (by type and by country);
• gross income in local currency and sterling;
• foreign tax paid, with evidence (statements, tax returns, certificates) 

Step 2 – Confirm your UK residence and any dual residence

• Apply the Statutory Residence Test.
• Where there is potential dual residence, identify the treaty tie-breaker outcome and document it.

Step 3 – Overlay the relevant DTAs

For each country and income type:

• identify the treaty article;
• note:
  • who has taxing rights;
  • whether they are exclusive or shared;
  • any limits on foreign withholding rates;
  • any conditions (days tests, beneficial ownership, etc.).

Step 4 – Recompute FTCR

For each foreign income stream:

• compute the UK tax with that income included;
• compute the UK tax without that income;
• the FTCR is broadly the difference, but then capped at:
  • the foreign tax actually paid;
  • any treaty limit.

Step 5 – Decide on amendments, disclosures, or confirmation

• If there are over-claims or non-creditable foreign taxes currently in your return, consider amending recent returns before HMRC escalates to a full enquiry.
• For more complex or borderline issues, document the technical analysis so you can explain your position if HMRC asks.
   

8. How Vectigalis Tax can help

At Vectigalis Tax, we work with clients whose financial lives are naturally international:

• executives and professionals with multi-country careers;
• founders and investors with cross-border structures and overseas portfolios;
• families with property, pensions and businesses in more than one jurisdiction.

For this profile, “foreign income” is not a footnote – it is a key part of the story HMRC sees.

Our role is to:

• turn a pile of foreign statements, payslips and tax returns into a coherent UK narrative;
• test FTCR claims against both UK rules and the relevant double tax agreements;
• bring UK and overseas advisers into alignment so each jurisdiction is telling the same story;
• help you decide:
  • what to correct,
  • what to disclose, and
  • what can be defended as filed.

If you’d like to review your foreign income position or sense-check your FTCR claims, you can:

• visit www.vectigalistax.co.uk, or
• email angelo@vectigalistax.co.uk with a short summary of:
  • your main foreign income sources; and
  • any letters or nudges you’ve received from HMRC.
     

Disclaimer

This article is for general information only and does not constitute tax, legal or financial advice. The UK tax treatment of foreign income, the availability of Foreign Tax Credit Relief and the application of double tax agreements depend on your specific facts and may change over time. You should obtain professional advice before taking, or refraining from taking, any action based on this article.