Guidance

HS261 Foreign Tax Credit Relief: Capital Gains (2017)

Updated 10 July 2019

Use this helpsheet to work out the Foreign Tax Credit Relief available against your capital gains. You’ll need the tax calculation summary pages and notes to work out your tax.

Under the terms of a Double Taxation Agreement (DTA), or unilaterally, relief by way of credit for foreign tax paid (foreign tax credit relief) is available against United Kingdom (UK) Capital Gains Tax on the same gains. Alternatively, the foreign tax may be deducted in calculating the gain or loss on a particular disposal. However, this will only usually be to your advantage where no UK tax is chargeable on a disposal, for example, when a loss results in there being no UK tax against which the foreign tax can be set off.

This helpsheet will allow you to work out the amount of Foreign Tax Credit Relief you can claim. You’ll also need to fill in the Foreign pages.

If you’re not a resident of the UK, the Isle of Man or the Channel Islands, you won’t be entitled to Foreign Tax Credit Relief against UK tax and shouldn’t be completing the Foreign pages.

Under most Double Taxation Agreements (DTAs), gains other than those on real property (for instance land and buildings) or those accruing to a permanent establishment in the UK are only taxable in the country where you’re resident and are exempted from tax in the country where the gain arises. If this is the case with your gains then you can’t claim Foreign Tax Credit Relief against UK tax. You should be claiming exemption from the Capital Gains Tax in the country where the gain arises instead.

There are different rules for withholding tax on gains deducted under the UK and Swiss Tax Cooperation Agreement which came into force on 1 January 2013. Please read the Foreign notes for more guidance.

General principles

The amount of credit for foreign tax is not to exceed the lesser of the foreign tax charged on the gain and the UK tax on the doubly taxed part of the gain.

If the foreign tax paid exceeds the UK tax on the gain, the excess can neither be deducted from the amount of the gain chargeable to Capital Gains Tax nor can it be repaid.

The amount of credit must be calculated separately for each gain. An excess of foreign tax over the UK tax on a particular gain can’t be credited against UK tax on any other gain.

Method

1. Make sure that you’ve filled in the Capital Gains Tax summary pages and included your computation for each gain or loss.

2. Complete page F 6 of the Foreign pages to show the amount of each gain for which you’re claiming Foreign Tax Credit Relief.

3. Fill in the working sheet in the Tax calculation summary notes on page TCSN 39, work out your taxable income, the amount of the basic rate band available and the rate of Capital Gains Tax for each gain. Remittance basis taxpayers who aren’t entitled to personal allowances or annual exempt amounts should change box G24 to £0 and in box A84. The amount of gains chargeable at 10%, 18%, 20% and 28% will then be the amounts in boxes G41, G43, G46 and G48.

4. Calculate separately the UK Capital Gains Tax for each gain on which you’ve paid foreign tax and for which you’re claiming credit. Use the working sheet to help you do this.

5. Allocate any losses of the year to these gains.

6. Allocate any losses brought forward from earlier years to these gains. When you deduct losses brought forward from gains of a later year (after deducting losses of the same year, first) you only use enough losses brought forward to reduce the gains to the annual exempt amount.

7. Allocate the annual exempt amount to these gains. Please note that if you’re claiming the remittance basis then you won’t be entitled to an annual exempt amount unless you’re dual resident and would be entitled to personal allowances under the DTA. Also if you claimed the remittance basis in earlier years and are remitting gains from that year then you can’t set off any of the annual exempt amount against those remitted gains.

8. Compare the UK Capital Gains Tax chargeable on each gain with the amount of foreign tax eligible for credit. The relief you can claim is the lower of the 2 amounts. Copy the total relief due to box 39 of the Foreign pages.

From 6 April 2016, the rates of Capital Gains Tax are:

• 18% on gains from residential property (and carried interest) and 10% on other gains which fall within your unused basic rate Income Tax band
• 28% on gains from residential property (and carried interest) and 20% on other gains after your basic rate Income Tax band has been fully used

Before filling in the working sheet, if some gains for which you’re claiming Foreign Tax Credit Relief are chargeable at 28% or 20% and some at 18% or 10% then you need to establish which of your gains are going to be charged at 28%, 20%, 18% and 10%. This can affect how efficiently you can claim relief for any foreign tax paid and so how much UK Capital Gains Tax you have to pay.

The following rules set out what is probably going to be the most efficient way to allocate your gains.

Any residential property (and carried interest) gains where the minimum foreign tax payable is at least 28%, or other gains where the minimum foreign tax payable is at least 20%, of the UK gain before any losses and annual exempt amount are taken into account, should be allocated to the higher rate first.

Any other gains (other than attributed gains where personal losses can’t be set off) where the minimum foreign tax payable is more than 18% (for residential property and carried interest) or 10% (for other gains) of the UK gain before any losses and annual exempt amount are taken into account should generally be allocated to the higher rate band next.

You can’t set off losses against some attributed gains so you need to decide whether attributed gains on which foreign tax has been paid at a rate between 10% and 28% of the UK gain before any annual exempt amount is taken into account should be allocated to the higher rate band. If you’ve enough losses and annual exempt amount to fully cover all your gains other than attributed gains where personal losses can’t be set off, then it’s probably better to allocate these attributed gains to the basic rate band if possible.

It’s likely that one gain will fall partly within the higher rate band and partly within the basic rate band. If that’s the case, for the working sheet split this gain into 2 parts, one charged at 10% or 18%, and one charged at 18% or 28%. Allocate the foreign tax paid on this gain against the part charged at the lower rate up to the amount of UK tax payable on this part of the gain. Any excess foreign tax on this gain should then be allocated to the part charged at the higher rate.

Completing the Foreign Tax Credit Relief working sheet for capital gains

Column A (rows 1 to 12)

You should enter in column A details of your chargeable gains.

Your gains are those before allowable losses have been set off. You can find details of all of the gains to enter on your completed computation working sheets from page CGN 6 of the Capital Gains Tax summary notes.

Columns B and C (rows 1 to 12)

Use these columns to allocate out the overall figures shown in column A.

Enter in column B the amounts corresponding to gains chargeable to UK Capital Gains Tax for which you’re not claiming Foreign Tax Credit Relief. That is, any UK gains and any foreign gains that have either not been subject to any foreign tax or where the foreign tax paid has been deducted in computing the amount of the gain that is chargeable to UK tax.

Any amount remaining after losses and the annual exempt amount have been taken into account will need to be allocated to the 10%, 18%, 20% and 28% rates in rows 7, 8, 9 and 10 as appropriate.

Enter in Columns C(i) to C(x) individual gains that have been subject to foreign tax for which you’re claiming Foreign Tax Credit Relief. If you have more gains than will fit in the working sheet, photocopy it before making any entries.

When entering details of losses of the year (row 2) and the annual exempt amount (where due) (row 3), and losses from previous years (rows 4 and 5), you can allocate the annual exempt amount and losses in the way that is most beneficial to you. This will normally be by allocating them against gains chargeable to UK tax at a higher rate first. Allocating them to gains where the foreign tax exceeds the UK tax or allocating more losses or annual exempt amount than needed to reduce the UK tax payable on the gain to the foreign tax available to set off against the UK tax, makes no difference to the UK tax payable as the UK liability will be extinguished by the foreign tax.

You must where possible, and if you’ve sufficient losses, deduct all your losses of the year from gains until all gains have been extinguished. Any unused losses can then be carried forward and set off against gains accruing in a following year. If you’ve enough gains left, any losses brought forward from a previous year must then be used to reduce your total gains but only down to an amount equal to the annual exempt amount (even if this means that the tax payable in row 11 is reduced to an amount less than the foreign tax paid on the gain in row 12). Any unused losses brought forward can then be carried forward.

Column C (row 12)

Enter the respective amounts of foreign tax eligible for Foreign Tax Credit Relief.

Column C (row 13)

For each separate column, enter the lower of the figures at rows 11 and 12.

Column A (row 13)

Add up all the figures in column C, row 13, and enter the total in column A row 13. This is the total Foreign Tax Credit Relief allowable for the year. Copy this figure to box 39 in your Foreign pages.

Example 1

You have total gains of £35,000 of which £7,000 are chargeable at 18% and £14,900 at 28%, £8,000 against which no Foreign Tax Credit Relief is being claimed, an attributed gain where personal losses can’t be set off against them from Country X totalling £15,000 (foreign tax paid £2,250) and a gain from Country Y of £12,000 (foreign tax paid £2,400). You also have £2,000 losses brought forward from a previous year and are entitled to the annual exempt amount for 2016 to 2017 of £11,100.

Columns C(i) and C(ii)

The attributed gains with no personal losses and country X foreign tax of £2,250 at 15% will apply.

Column C(iii)

Country Y foreign tax of £2,400 at 20% will apply.

To maximise your foreign tax credits you would allocate your annual exempt amount to the tax rate bands as show in the table.

		Column A	Column B	Column C(i)	Column C(ii)	Column C(iii)
		Summary	Gain 1	Gain 2	Gain 2	Gain 3
1	Gains before any losses	£35,000	£8,000	£7,000	£8,000	£12,000
2	Minus losses of the year
3	Minus annual exempt amount	£11,100	£6,000	£1,672	£0	£3,428
4	Minus clogged losses of previous years
5	Minus unclogged losses of previous years	£2,000	£2,000	£0	£0	£0
6	Equals net taxable gains	£21,900		£5,328	£8,000	£8,572
7	Gains chargeable at 10%
8	Gains chargeable at 18%	£7,000		£5,328	£1,672
9	Gains chargeable at 20%
10	Gains chargeable at 28%	£14,900			£6,328	£8,572
11	UK Capital Gains Tax chargeable on gains	£5,432		£959.04	£2,072.80	£2,400.16**
12	Foreign tax eligible for credit relief	£4,650		£177.20	£2,072.80	£2,400
13	Foreign Tax Credit Relief allowable	£4,650		£177.20	£2,072.80	£2,400

Notes

1. The gain from country X has been split into 2 parts, £7,000 charged at 18% and £8,000 charged at 28%. The foreign tax has been allocated against the part charged at 18% first up to 18% of this part of the gain with the balance allocated to the part of the gain charged at 28%.
2. Since the attributed gains cannot have personal losses set against them it’s best in this case to set off the annual exempt amount against the gains from country X to the extent needed to reduce the UK tax charged to the foreign tax paid on this gain even though this gain is only charged at 18%. This is because there will still be enough annual exempt amount and losses to cover the gains in column B and reduce the UK tax payable at 28% on the gain in column C(ii) to the amount of foreign tax paid on this gain.

Example 2

You have gains of £33,000 in the tax year, consisting of gains against which no Foreign Tax Credit Relief is being claimed of £18,000, attributed gains where personal losses can’t be set off against them from country X totalling £7,000 (foreign tax paid at £560) and other gains from country Y totalling £8,000 (foreign tax paid at £1,600). You also have £21,000 losses on chargeable disposals made during the year. All your basic rate band has been used up by other income.

To maximise your foreign tax credits you would allocate your annual exempt amount to the tax rate bands as follows.

		Column A	Column B	Column C(i)	Column C(ii)
		Summary	Gain 1	Gain 2	Gain 3
1	Gains before any losses	£33,000	£18,000	£7,000	£8,000
2	Minus losses of the year	£21,000	£18,000		£3,000
3	Minus annual exempt amount	£11,100		£7,000	£4,100
4	Minus clogged losses of previous years
5	Minus unclogged losses of previous years
6	Equals net taxable gains	£900	£0	£0	£900
7	Gains chargeable at 10%
8	Gains chargeable at 18%
9	Gains chargeable at 20%	£900			£900
10	UK Capital Gains Tax chargeable on gains	£180	£0	£0	£180
11	Foreign tax eligible for credit relief	£2,160		£560	£1,600
12	Foreign Tax Credit Relief allowable	£180		£0	£180

Notes

1. Only £900 of the gain is chargeable so the foreign tax credit relief is limited to the UK tax due on the same gains.

2. Alternatively the foreign tax may be deducted in calculating the gain (or loss) that is Gain £33,000 minus foreign tax £2,160 = £30,840 minus losses £21,000 = £9,840 which will be covered by the annual exempt amount of £11,100. £0 tax due.

Example 3

You have no basic rate band remaining. You’re not claiming remittance basis for this tax year. You have gains of £170,000, consisting of UK gains of £18,000 of which £4,700 qualifies for Entrepreneurs’ Relief, country X gains of £90,000 (foreign tax paid £11,400) and country Y gains of £62,000 (foreign tax paid £18,600) that is a gain remitted from a year in which you’d claimed the remittance basis. You also have £13,000 losses brought forward from a previous year.

Columns B

Entrepreneurs’ Relief of £4,700 will apply.

Column C(i)

Country X foreign tax of £11,400 at 12.67% will apply.

Column C(ii)

Country Y foreign tax of £18,600 at 30% will apply.

To maximise your foreign tax credits you would allocate your annual exempt amount to the tax rate bands as follows.

		Column A	Column B	Column C(i)	Column C(ii)
		Summary	Gain 1	Gain 2	Gain 3
1	Gains before any losses	£170,000	£18,000	£90,000	£62,000
2	Minus losses of the year
3	Minus annual exempt amount	£11,100	£11,100
4	Minus clogged losses of previous years
5	Minus unclogged losses of previous years	£13,000	£2,200	£10,800
6	**Equals net taxable gains	£145,900	£4,700**	£79,200	£62,000
7	Gains chargeable at 10%	£4,700	£4,700
8	Gains chargeable at 18%
9	Gains chargeable at 28%	£141,200		£79,200	£62,000
10	UK Capital Gains Tax chargeable on gains	£40,006	£470	£22,176	£17,360
11	Foreign tax eligible for credit relief	£30,000		£11,400	£18,600
12	Foreign Tax Credit Relief allowable	£28,760		£11,400	£17,360

Notes

1. The annual exempt amount can’t be set off against the gains from country Y as this is a gain remitted from a year during which the remittance basis was claimed. However, the foreign tax paid on this gain exceeds the UK tax payable so there’s no benefit to setting off any losses against this gain as an alternative.
2. It’s better in this example to use losses and annual exempt amount against the gains charged at the higher UK rates than against the amounts charged at 10% Entrepreneurs’ Relief.
3. Country Y gain is liable to tax at 28% so although 30% foreign tax has been paid on the same gain, the Foreign Tax Credit Relief will be limited to the amount of UK tax due on the same gain.

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