Residevncy, foreign income and self-assessment

Hi, I am a French citizen who had lived and worked in the UK for two years before going back to France. I have been earning French foreign rental income above the £2000 threshold which have been taxed in France and was never transfered to the UK. As such, I would like to clarify my past residency and whether I needed to complete UK self-assessments. Could anyone please confirm the following? 1) The France-UK DTA overrides the SRT. Therefore, I am only refering to the France-UK DTA. 2) In determining one's residency, article 4 from the France-UK DTA states: "For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature". ->As I am liable to pay taxes in France based on the fact that I manage property from this country, from a French address where I kept going back regularly, I understand I was still a French resident ->As I paid taxes in the UK based on the fact that I lived and worked there, I understand I could also have been a UK resident. Therefore, I need to refer to the next article from the DTA. 3) "a) he shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him" -> I do in both countries 4) "if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests)" -> France is where 95% of my assets are located. It is also where my parents, friends and professional network are. Therefore, I should only be considered a French resident. Based on this conclusion, I did not need to fill the Self Assessment and was not liable to pay taxes in the UK apart from the income that originated from there (my former salary). Could anyone please confirm whether this is correct? Source: https://assets.publishing.service.gov.uk/media/5a80112ced915d74e33f840a/france_dtc_-_in_force.pdf

Not HMRC...tax acct. Unfortunately, you are confusing the relevance of SRT and DTA in your circumstances. The starting point is your SRT. If UK tax resident under SRT then the priniciple that immediately comes with this is "you are liable to UK tax on worldwide income and gains". That is a fundamental principle of taxation (pretty much worldwide). Then, you look at the DTA re relevant sources. The French DTA says property income may be taxed in France. The word "may" here does not mean if they do thats it. It means, France may tax it and you then have to include the information in the UK also, and because the DTA says may, you can claim tax credit in the UK for French tax paid on that source. I appreciate its confusing, but you should have submitted UK returns as a UK tax resident, included the French source and claimed tax credit relief. This is one of the biggest areas of misunderstandings around tax...SRT is looked at first, and if UK tax resident under SRT rules you are liable on worldwide income and gains in the UK, then treaty residence becomes relevant if resident in another country also, when the source is "only" taxed in one country, thats when treaty residence is important, where statutory residence includes the UK then all sources worldwide must be included on UK returns unless the DTA says "only" one state and thats when treaty residence becomes relevant if statutorily resident in more than one country as to which country that source is taxed.

Hi I read your response with interest because I would tend to agree with Frenchie that the DTA overrides the SRT in his case. But I am not a tax accountant or in any way an 'expert' in this area so I am keen to understand where I am going wrong. I agree that SRT is first used to determine tax residency according to UK law. This is because the DTA is only relevant if you are considered resident in both countries. If Frenchie is regarded as tax resident in UK under the UK SRT and also tax resident in France using their SRT rules, then he is Tax Resident in both countries. Then you go to the DTA to work out how you will be taxed. The DTA has a bunch of rules that (to my mind) are designed to allocate you to be a tax resident of a single country. The rule that Frenchie uses states "if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests)" After this, you get the allocation rules, all of which seem to talk about a 'resident of one state' and whether they can be taxed in 'the other state'. Which therefore wouldn't make sense if Frenchie was actually resident in both states. So by my reading the DTA deems him to be resident of just France - and therefore non-resident in UK. Which overrides the SRT. I'd really like to understand what I am missing. Thanks.

Name removed admin .

Me again...In the area you are considering the DTA rules on treaty residence where there is something to be decided that is not clear under SRT rules...this is mainly when a DTA states a source is "only" taxable in one state where SRT resident in both. It does not alter the principle that a person who is SRT resident in the UK (whether resident in one, two or more countries) is liable to UK tax on a source that "may" be taxed by a state. The principle is that if you are SRT resident in the UK your worldwide income and gains are taxable. It is only if the DTA then says a source is taxable "only" in one state that treaty residence is considered. I agree, if Frenchie is SRT resident in both countries he should consult treaty residence but the DTA doesnt say that the property income is taxable "only" in one state, so its irrelevent...it says France may tax it, but he is also already caught under worldwide income principle in the UK, so must include it in his UK return and claim the appropriate tax credit. For "may" read "can" or "is allowed to" not "has exclusive rights to"

...i.e. you can be SRT in the UK and SRT and Treaty resident in France (i.e. not the UK) or SRT and Treaty resident in the UK whilst being SRT in another country or countries...on that basis the guidance per the Treaty is relevant as to where sources can be taxed...being treaty resident outside of the UK would mean that sources that are "only" taxable in one state are not taxable in the country where there is no treaty residence, if a person is still SRT there and the source "may" be taxed outside of the other country of SRT then it is still liable in the other country of SRT, with a tax credit.

I wanted to illustrate by reference to this situation...Frenchie determines he is SRT in both countries and decides he is Treaty resident in France. His treaty residence in France does not mean he is not still also SRT in the UK, he is still SRT in the UK if he meets SRT rules, indeed if he didnt Treaty residence would not even need to be considered. Per the DTA, Employment is "only" taxed in the state of Treaty residence. Income from property "may" be taxed in the state its in, its still liable also in UK under "worldwide income and gains" principle. There is an issue, he is SRT in both countries, so he needs to revert to Treaty residence clarification for any source that is "only" assessable in one state, the employment source, and unless the employment is carried out in the UK then as Treaty resident in France then thats where it is taxed and it does not go on the UK return or in the UK calculation. The income from property is not "only" taxable in one state, the DTA simply says France can tax it, so, if they do, (as the UK would in reverse situation) as he is SRT in both countries he claims tax credit under the DTA in the other country. n.b. this is often the case with employment income, pension income etc, unfortunately, many people think that because the PAYE equivalent is paid in the country that the situation is dealt with. I have numerous cases every year where the person has actually become treaty resident in the UK and the source should not be taxed in the paying country at all and is liable in the UK with no tax credit, which means they then need to obtain refunds from the paying country to then pay over to HMRC.

Hi Frenchie75,
HMRC cannot advise you on your residence as this is for you to determine based on the guidance available. If you are resident but non domiciled, you can opt to pay tax on the remittance basis - Remittance basis 2024 (HS264).
Thank you.

Re HMRC comment on remittance basis...you would need to check whether you would lose personal allowances in the UK (you mention working in the UK for 2 years) https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm32050 https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm32040

Hi Clive, Thank you so much for your detailed explanation, it has really helped my understanding. I still have a problem with the following sentence because I think it's very misleading: he shall be deemed to be a resident only of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests); This is what made me believe that for the purposes of Income Tax, Corporation Tax and Capital Gains Tax (the types of tax that the treaty covers), he would be deemed to be non-resident in the UK and therefore would not be taxable on his worldwide gains. I realise now that this is my misinterpretation, but I do feel that it must be a fairly common mistake (not many of us are fluent in 'legalese'). It would be helpful if the DTA spelled it out more clearly, as you have done. So, thank you for that.

NP...the main issue is, most people dont understand there are two types of tax residence, statutory residence and treaty residence and they are independant of each other when it comes to if/what/where. Yes, it is a very common misunderstanding, and HMRC have been very good over the last few years at looking at returns where FTC has been claimed in the UK on sources "only" assessable in the treaty resident country, because, if actually UK treaty resident FTC is not allowable.

Hi all, Thank you for taking the time to answer. I will be honnest, this is still pretty unclear to me and the lack of proper clarification from HMRC Admin 21 leads me to believe there is room for interpretation, which is quite concerning. Would someone from HMRC have the kindness to clarify whether DTAs override the SRT ? Or whether SRT remains the main reference when assessing residence as suggested by Clive? This, coupled with the outstanding difficulty to register for Self Assessments or even get paper forms, makes the whole experience extremely complicated. This makes it even stressful as penalties for late returns are very high regarding foreign income (see below). In fact, I understand penalties are a % of the tax liability (100% to 200%). But HMRC never specifies whether it applies to UK taxes before or after tax credit (as in, what is factored in to avoid double taxation). For instance; - Assuming I owe £1000 before tax credit - Assuming the tax credit enabled by the DTA is £1000, hence leading to a £0 liability -> Would I be paying a £0 or a £1000-2000 penalty? The latter would seem quite unfair and crippling for one's finances.

Best way I can explain it is...I think "override" is the confusing bit here. The DTA makes the decision as to treaty residence where something is assessable when it is "only" assessable in one state, when the DTA says it may be taxed in both then treaty residence hasnt overridden anything, it doesnt turn someone in to a non resident for UK tax purposes under SRT...but will leave it for HMRC to clarify re that and penalties etc...

Hi,
 

The statutory residence test determines whether someone is tax resident in the UK.  Where they are tax resident and have an income from overseas, then the tax treaty, if there is one, can be reviewed to ascertain how tax is applied between the UK and the other country. We do not comment on scenarios in this forum.  If there is a foreign income and foreign tax is payable, then per the tax treaty, a foreign tax credit can be claimed.  This credit is applied where UK tax is payable on the foreign income.  If tax is payable after foreign tax credits are applied and it is not paid by the due date, interest and penalties may be applied.  You can find guidance on that at : Self Assessment tax returns  . Thank you .