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HMRC internal manual

Tax Credits Technical Manual

Income: Definition of Foreign Income

The Tax Credits (Definition & Calculation of Income) Regulations 2002, Reg.12

Foreign income means income arising, in the year in question, from a source outside the UK or from foreign holdings which is not:

  • employment income (see TCTM04101)
  • trading (self employed) income, (See TCTM04004) or
  • a taxable gain from an overseas insurer chargeable to income tax under Chapter 9 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA)

Broadly, therefore, for tax credit purposes, “foreign income” means pension, social security, investments and property income arising overseas.

The Tax Credits (Definition & Calculation of Income Regulations 2002, Reg. 12(3)

When calculating foreign income, disregard in full:

  • An annuity or pension payable under special provisions to victims of Nationalist Socialist persecution which is made by a law of the Federal Republic of Germany (or any part of it) or Austria
  • Any monies paid by a bank or building society which are exempted from income tax under section 756A of ITTOIA (interest on certain deposits of victims of National Socialist Persecution)
  • any pension, annuity, allowance or other payment provided in accordance with the provisions of the scheme established under the law of the Netherlands and known as Wet uitkeringen vervolgingsslachtoffers 1940-1945 (Netherlands Benefit Act for Victims of Persecution 1940-1945).
  • If the claimant’s foreign income includes or comprises a pension to which section 567(5) and 617 of the Income Tax (Earnings & Pensions) Act 2003 (ITEPA) apply, the amount authorised to be deducted by that section (in practice, this means that the claimant should report 90% of the foreign pension)
  • Any amount authorised to be disregarded for income tax purposes under section 575(2) of ITEPA (taxable pension income: foreign pensions)
  • Any amount authorised to be disregarded for income tax purposes under section 613(3) of ITEPA (taxable pension income: foreign annuities)
  • Any amount authorised to be disregarded for income tax purposes under section 635(3) (taxable pension income: foreign voluntary annual payments);

And any amount which would be disregarded for the purposes of income tax by virtue of

  • Extra Statutory Concession A10 ( lumps sums paid by overseas pension schemes);
  • Section 681 of ITEPA 2003 foreign social security payments - this exempts from UK tax those foreign social security payments which are equivalent to tax-exempt UK social security payments, for example Child Benefit.
  • Section 751(1)(c) ITTOIA (Interest on damages for personal injuries awarded by a foreign court)
  • Extra Statutory Concession A 44 (education allowances payable to public officials of overseas territories)
  • Section 730 of ITTOIA (foreign maintenance payments).

If an overseas property business makes a loss which qualifies for tax relief contained in sections 118 (carry forward against subsequent property business profits) and 119 (how relief works) of ITA apply, then the amount of the relief is deducted from the total amount of foreign income. As with UK property, in practice, the loss is carried forward and set against profits from the same source of the following tax year.