Most taxpayers are aware that if they receive income in the UK, subject to reliefs and allowances, it will be taxed. What is less well known is that UK residents are taxable on their worldwide or offshore income, whether it’s received in the UK or not.
A former client with rental property in Dubai openly commented “but it’s tax free in Dubai”, which it was.
However, he was a UK resident taxpayer and it wasn’t tax free in the UK.
Simple tax problems
The problem may arise from simple origins. Decades ago, UK taxpayers with savings deposits were, on occasion, promoted overseas accounts by financial institutions as the interest earned did not incur tax at source.
Factually that was often correct, but it didn’t stop the interest being subject to tax in the hands of the UK taxpayer.
Slightly more complicated problems can arise if, say, a family legacy is held overseas but remits income and or gains to legatees. It is not the original source of the legacy that can be the problem, it’s the character of the subsequent payments.
Growing tax problems
One tax problem, that can grow in size, can originate from the ownership of overseas property, e.g. a holiday villa.
What starts out as a family escape can grow into a tax problem. As time passes and perhaps the owners and/or family use the property less and less it can become a financial burden. The owners then look to secure some return from the property to cover costs, it starts being rented out and that’s when problems arise.
Firstly, it’s likely the commencement of rents will create a tax obligation in the country where the property is located. Secondly, the receipt of rents is likely to trigger a tax return requirement in the UK for a UK resident taxpayer.
Double reporting of the same matter and taxed twice on the same, although the UK does allow Foreign Tax Credit Relief for foreign taxes paid.
A simple act of covering costs on the property opens up numerous reporting obligations that didn’t exist beforehand.
Technical tax problems
A tax problem can arise from changes in legislation.
HMRC will not have much sympathy with any taxpayer who advances comments like “We followed what great uncle Bob did back in the 1950’s”.
What may have been fine in the 1950’s should not be assumed to be fine in 2020, legislation changes and can have a bearing on the taxation position.
Residence and domicile
The above does not comment on the residence and/or domicile of the taxpayer, both of which can complicate matters even further. Potentially positively but also negatively as well.
HMRC regularly receives information under the Common Reporting Standard (CRS) from overseas. The type and quality of information is growing year by year.
The absence of a HMRC challenge is often due to lack of resource rather than intent.
However, the absence of a current challenge presents an opportunity to correct matters before HMRC finds the problem itself and commences intrusive scrutiny.
Avoid being a sitting duck, take appropriate advice.