RDRM73340 - Temporary repatriation facility: Designating qualifying overseas capital: Designation process: Foreign tax credits
Paragraph 8(3) and (4) Schedule 10 Finance Act 2025
Where an individual has paid foreign tax on income or capital gains that are also taxable in the UK, they may be able to claim relief for the foreign tax paid (see INTM150000 onwards for further guidance on foreign tax credit relief).
Under the temporary repatriation facility (TRF), the TRF charge is payable on designations of amounts of qualifying overseas capital. These amounts of designated qualifying overseas capital must be net of any foreign tax that has been paid or is payable. As such, foreign tax credit relief is not available against any qualifying overseas capital designated under the TRF.
Where an individual chooses to designate an amount on which foreign tax has already been paid, the TRF rate will only apply to the net amount after foreign tax has been deducted. No further credit can be claimed against the TRF rate of 12% for 2025-26 and 2026-27 or 15% in the 2027-28 tax year.
It will only be possible for an individual to claim a full credit for foreign tax paid overseas if they do not elect to designate the net amount under the TRF and instead remit the funds as an ordinary remittance.
An individual may have paid the foreign tax due on an amount of income or gains out of funds other than the original income or gains, for example, if they settled their overseas tax liability using funds from a different bank account. If this is the case, the individual can designate the amount of the original income or gains that would have been used to settle the liability if other funds hadn’t been used instead (see example 2 below).
Example 1
Lorenzo is UK resident and a former remittance basis user. He arrived in the UK for the first time on 6 April 2019. On 6 April 2020 he sold his house in Rome. The house had originally cost £50,000 in 2011 but was sold for £350,000, making a gain of £300,000.
Lorenzo was charged a withholding tax at 30% on this gain in Italy and paid £90,000 to the Italian tax authorities, leaving £260,000 (£50,000 clean capital and £210,000 net gain) which was paid into a newly opened Italian bank account.
Under the Italy-UK Double Tax Agreement (DTA), as the Italian tax authorities have taxed this gain, a credit can be given in the UK on the Italian tax paid.
Assuming a tax rate of 28% and no other allowances, Lorenzo would have paid tax of £84,000 in the UK on the £300,000 gain if he was taxed on the arising basis. Since he had already paid £90,000 tax in Italy, the tax credit would be restricted to the lower of the UK or Italian tax paid. This means Lorenzo would have been able to claim a foreign tax credit of £84,000 and no additional UK tax would be due.
However, Lorenzo is instead subject to the remittance basis in the 2020-21 tax year, and so does not pay tax on this gain as it arises. He does not make any remittances from this account and by 6 April 2025, the account still contains a balance of £260,000.
Lorenzo decides to remit the £260,000 to the UK in 2025-26. He has three options.
Option 1: He can make no designation and claim a tax credit against the capital gains tax arising on the gross remittance. Assuming a rate of 28% and no other allowances, he would declare a £300,000 gain in his tax return for 2025-26 along with a UK tax liability of £84,000, which is reduced to nil by payment of the Italian tax.
Option 2: He can make a designation under the TRF in the amount of £210,000, because this is the amount of qualifying overseas capital net of foreign tax paid. This would need to be designated in his 2025-26 tax return and he would pay the TRF charge at 12% on this amount, totalling £25,200. He would not be able to claim a further tax credit against this liability because the tax is on a capital amount and not the full gain on remittance (he has effectively claimed the tax credit relief by way of deduction since the TRF charge is calculated on the net amount).
Option 3: He can make a partial designation of some of the gain. The amount designated would be taxed at 12% against which he will not be able to claim an additional tax credit, as per option 2 above. The remaining element of the gain would be grossed up with a proportional tax credit claimed as per option 1. As a result of the mixed fund ordering rules (see RDRM75000 onwards), Lorenzo will be deemed to have remitted the designated qualifying overseas capital before the undesignated net gain.
Example 2
Nadiya is UK resident and a former remittance basis user. She arrived in the UK for the first time on 6 April 2020. On 6 April 2021 she sold her house in China, which was purchased with clean capital. The house had originally cost £50,000 but was sold for £450,000, making a gain of £400,000. The full disposal proceeds of £450,000 were paid into a newly opened overseas bank account A.
Nadiya has a tax liability to pay in China of 20% on this gain. When the tax of £80,000 (20% of £400,000) becomes due, she makes the payment to the Chinese tax authorities, but from another overseas bank account B, containing her foreign income.
Under the China-UK Double Tax Agreement (DTA), as the Chinese tax authorities have taxed the gain, a credit can be given in the UK on the Chinese tax paid. However, on 6 April 2025 Nadiya decides she wants to designate the gain under the TRF instead.
Because Nadiya paid the foreign tax due on the gain from other funds in account B, the £400,000 in account A exceeds the net amount of £320,000. However, because the foreign tax has been paid from account B, the additional £80,000 which formed part of the original gain is qualifying overseas capital, and so she can designate the full £400,000. Nadiya designates the £400,000 in her 2025-26 tax return and pays the TRF charge of £48,000 on this amount (12% of £400,000). Nadiya cannot claim foreign tax credit relief to reduce the TRF charge paid. However, Nadiya can now remit the £400,000 of TRF capital, along with the £50,000 of clean capital in account A, to the UK without any further tax charge.