RDRM73340 - Temporary repatriation facility: Designating qualifying overseas capital: Designation process: Foreign tax credits
Source: gov.uk (2025-04-07)


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 (https://www.gov.uk/hmrc-internal-manuals/international-manual/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.

Example

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 (https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm75000) onwards), Lorenzo will be deemed to have remitted the designated qualifying overseas capital before the undesignated net gain.