When we have additional income in a foreign currency, the tax we need to pay is affected not only buy the amount and type of income, but also by the currency rate at that particular moment.
In this article, we will present a very simplified example to clarify the relation between EUR/GBP and how it has affected the tax-free allowance for tax payers over a three-year period.
When we submit our Self assessment tax return, we must declare all incomes, even those that received from abroad and even if we have already paid tax on that incomes. What happens next is that if there is a Double Taxation Agreement (DTA) between the two countries, it is taken into consideration and should a relevant provision allow it, a tax relief is granted for any tax already paid.
However, sometimes the tax has not been paid at all or it may have been paid partially and there may be a difference that needs to be covered. This means tax will have to be paid in a different currency, if of course the income is not in GBP.
During the Self Assessment tax return, the foreign currency is converted into GBP according to the official currency rate accepted by HMRC. If it is in the Eurozone, usually the currency exchange should be EUR/GBP.
It is obvious that with significant currency fluctuations, the tax payer may be asked to pay relevantly more or less for exactly the same amount of income.
To understand this better, let us see the following example with virtual numbers and indicative rates.
In our example, it is obvious that the tax free allowance limit played a crucial role in saving tax payers from over-paying tax due to the falling of the Pound. To be precise, the tax free limit was so high that they paid less tax even for higher income, because of the exchange rate.
The total amount that was saved in 3 years is £ 620. If we compare and calculate only the years of non-changed level and on the basis of the tax year 2014/15, the taxpayer should pay more just £ 25.09 totally.
And one may say that the difference is not significantly large. This however is not the case for two main reasons: A. for low-salary employees, each pound counts and B. high rentiers would obviously have to pay ever higher tax. In addition, the amount is such low due to the 15% paid in the country of income origin, which in the case of zero (0), the amount (tax payable) would be £ 100.37.
Of course, the above example is subjective when we talk about countries with higher tax rate, on income derived from rentals. In this example, we used 15% foreign tax rate as it is similar to the Greek tax rate.
The unknown outcome of political negotiations over BREXIT can only result in the Pound deteriorating and we will need to wait to see how much the pound and consequently the Euro rentiers will suffer in the future, if will.
In any case, since this acute crisis is political rather than financial, it is believed that it will soon be overcome without major consequences for foreign currency rentiers.
For personalised details on calculating tax on rentals income earned abroad, please visit GOV.UK or seek professional advice. You should always be very careful as the process is not always the same for everybody as it was in the above example.
Translated / Edited by, Apostolia Nestoratou.
© 2018 UPECO LTD
This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.