UK Withholding Tax on Overseas Interest: HMRC Treaty Relief Consultation to 7 September 2026

On 13 July 2026, HMRC published a consultation on simplifying the administration of treaty relief from UK withholding tax on interest paid to overseas lenders. The consultation runs for eight weeks and closes at 11:59pm on 7 September 2026. Responses can be sent to [email protected].

UK companies that borrow from overseas lenders — including many growth SMEs with private equity, group, or overseas shareholder loans — currently face a clearance-heavy process before they can apply a reduced or zero treaty rate at source. The government has not chosen a final model; it is inviting views on options that reduce delay while protecting against profit-stripping.

As a starting point, UK-source yearly interest paid overseas is often subject to withholding at the basic rate of income tax unless an exemption or treaty relief applies. Double taxation agreements frequently reduce or eliminate that withholding, but relief is not automatic.

In practice, the overseas payee and UK payer typically need HMRC to issue a direction before interest can be paid at the treaty rate. Without a direction, the UK payer remains obligated to deduct and account for tax; the payee may later reclaim overpaid tax — creating cash-flow friction and admin cost. The Double Taxation Treaty Passport scheme can accelerate some lender clearances, but loan-by-loan directions still create friction for many borrowers.

HMRC notes that withholding on interest is also a base-protection tool against routing UK profits offshore as deductible interest. Any simplification must keep those safeguards intact.

One option discussed is allowing UK payers to apply treaty relief at source on a self-assessment basis where they believe treaty conditions are met — closer to how royalty treaty relief can operate — with HMRC retaining post-payment compliance powers.

Commentators including Pinsent Masons, Simmons & Simmons, and Ross Martin highlight that the consultation is early-stage: self-assessment is on the table, but the government has not committed to a single design. Stakeholders are also asked how reform should interact with corporate interest restriction and transfer pricing.

Separately, HMRC has paused a previous concessionary approach to certain failed withholdings while it reviews policy; that pause is outside the consultation’s scope but matters operationally for groups mid-clearance.

Inventory cross-border interest flows: lender residence, treaty article relied on, passport status, and whether directions are current. Note where cash is trapped awaiting reclaim.

If you regularly pay overseas interest, consider submitting a consultation response with anonymised data on clearance times and costs — HMRC expressly invites supporting evidence.

Keep loan agreements, beneficial ownership evidence, and interest calculations in one auditable pack. FinnAccountings helps UK and Ireland businesses organise banking, invoices, and tax prep drafts so advisers can evidence interest and treaty positions before year-end — start a free trial to centralise the working papers.

Cross-border groups may also track Pillar Two filing windows and corporation tax calendars in our recent Pillar Two penalty waiver briefing. For day-to-day UK tax planning estimates, use the free tax calculator — planning only, not a substitute for CT600 or SA filings.