Foreign service exemption for termination payments

Produced by Tolley in association with

Employment Tax

Guidance

STOP PRESS: The remittance basis is abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in FA 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.

What is ‘foreign service’?

A full or partial exemption from UK tax is available on a termination payment where the employment included a period of ‘foreign service’. The definition of ‘foreign service’ is complex as it reflects the different rules that have applied to the taxation of foreign earnings over the years. The Office of Tax Simplification review of employee benefits and expenses final report published on 31 July 2014 sets out that HMRC noted that some employers played safe and did not apply the relief because it is too complicated.

In respect of service from the 2003/04 tax year onwards,

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Sue El Hachmi

Senior Associate at Osborne Clarke

Sue advises on the design and implementation of employee incentive arrangements for private and public companies, including all types of tax-advantaged plans and bespoke arrangements for senior executives and management.Sue also advises on the incentive-related aspects of corporate transactions and has experience of private equity transactions and public company takeovers, flotations and demergers.Sue is a member of the Share Plan Lawyers Group and a member of the UK BioIndustry Association Finance and Tax Advisory Committee.

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