If you’re a UK resident, you need to pay UK income tax on your dividends from foreign shares and UK capital gains tax on any sale proceeds. There’s no getting away from being taxed just because you’ve bought foreign assets.

You will generally escape being stung with UK transaction taxes such as stamp duty, although some markets will also charge their own local levies. But that’s the only break. You usually need to declare your savings and investment income from abroad.

These principles are very simple. Where it gets complicated is that many countries will levy their own taxes on this foreign income. So when you receive a foreign dividend it will often have had some tax deducted at source.

You are then due to pay a further round of tax on the same income to the UK tax authorities. So if you’re unlucky, you could end up being taxed twice on the same income.

You can stop this happening. But you need to be alert and know how the system works.

Dont get taxed twice on your dividends

In theory, this double taxation shouldn’t happen. In most cases, there will be a limit to how much the foreign tax authorities deduct from dividends being paid to a UK resident. And any foreign tax paid can usually be offset against any UK tax (under a system called Foreign Tax Credit Relief ) that would be due on that income.

In order to prevent investors from being taxed twice on the same income, countries usually sign double taxation agreements with each other that aim to simplify the handling of income being paid from a source in one country to a resident of another.  (If there’s no double taxation treaty, HMRC say you may still be able to claim unilateral tax relief. but you will need to discuss it with them.)

The UK’s double taxation agreements usually set out the maximum rate of tax that a country can charge a UK resident receiving dividend or interest income from that country. This is known as withholding tax, because it’s withheld when the payment is made.

The typical rate under most of the UK’s treaties is 15% a detailed list is here on the HMRC website [PDF]. So in theory, a UK investor will generally receive his dividend net of 15% tax.

He then declares his dividend and calculates his tax. The actual way in which this is done is typically complex, but the outcome is relatively simple.

UK dividends come with a notional dividend tax credit of 10%, for reasons that are rather complicated. A basic rate taxpayer has UK dividends taxed at 10% and so has no further liability, because this is offset by the tax credit.

A higher rate one will pay 32.5% and those in the top tier will pay 42.5%. These rates include the 10% tax credit, so in fact higher rate taxpayers need to pay a further 25% on the dividend they’ve received and top rate taxpayers owe a further 36.1%. (An explanation of how it all works from HMRC is here .)

Following a change in the rules in 2008 – a change that for once worked in the taxpayer’s favour foreign dividends are now granted a theoretical credit of the same amount for UK tax purposes.

So if you receive a dividend equal to £900 from a foreign source (inclusive of £135 foreign withholding tax thats already been deducted), this is then grossed up to £1000 [=900+(900*1/9)] for tax purposes.

You then calculate the theoretical tax due at your highest dividend tax rate. For basic rate taxpayers, that’s 10%. For the next two tiers, the tax due is £325 [=1000*32.5%] and £425 [=1000*42.5%] respectively.

From that, you deduct away the withholding tax already paid and the amount of the theoretical tax credit. What remains is your net UK tax liability.