Posted by Nick Day on 16 Apr 2018
Offshore earnings accounts
Non-domiciled individuals that have come to work in the UK need to open offshore bank accounts outside the UK to take advantage of rules which exclude earnings from non-UK duties from being taxable in the UK. This relief is known as Overseas Workday Relief – or OWR – and in broad terms applies for up to three years providing employment earnings are paid outside the UK – offshore – and not remitted/brought to the UK.
This is a complex area requiring specialist advice, but where such accounts are in place it would be good tax planning to open a new offshore account for each separate UK tax year.
Consideration should be given to opening a new offshore account to receive employment earnings paid from 6 April 2018 onwards, but keeping the previous offshore account open that had earnings paid in to it up to 5 April 2018. The reason for doing this is so that it is simpler to analyse the earnings for each UK tax year separately and decide which account to remit from to minimise UK tax liabilities. The way the UK rules relating to offshore accounts work is to deem the current year’s earnings remitted to the UK first where earnings for more than one year are contained in an account, so by opening the fresh offshore account each year, the earnings for the previous year do not become “trapped” behind current year earnings.
Special Mixed Fund Rules
The UK has laws that determine which funds are remitted to the UK where different sources of income, gains etc. are mixed in the same offshore bank account. This can make it extremely difficult to compute the amount of employment earnings remitted to the UK from mixed overseas funds. To assist in overcoming these complexities, HM Revenue & Customs (HMRC) has introduced the “Special Mixed Fund Rules”, which greatly simplify the calculation of an employee’s taxable remittances and therefore their UK tax affairs. To qualify employment income will need to be paid into an offshore bank account meeting the following conditions:-
- The bank account is in the employee’s name. (Joint accounts are acceptable, provided only the employee makes deposits into the account.)
- The bank account is an overseas (i.e. non-UK) bank account.
- The bank account has a balance of no more than £10 on the day the first qualifying earnings are paid into it.
Only the following funds should be deposited into the qualifying account:-
- Earnings from the employment where the earnings are paid into the bank account in a tax year when the individual is eligible for OWR and performs duties of that employment both in the UK and overseas.
- The proceeds from share sales from certain employment-related share schemes (options, RSUs, etc.).
- Interest arising on the bank account.
An individual can only have one qualifying bank account at any one time, and the nominated bank account must be notified to HMRC by no later than 31 January following the end of the tax year – for 2017/18 this will therefore mean that the nomination should be made by 31 January 2019.
Existing overseas bank accounts can be nominated bank accounts provided they meet the above criteria, taking care the balance is no more than £10 on the day the first qualifying earnings are paid into it. However, a qualifying bank account that has been the nominated bank account in the past (but subsequently ceases to be the nominated bank account) cannot be nominated a second time.
It should not be forgotten that it is possible for UK tax resident non-domiciled individuals to remit certain funds to the UK on a tax-free basis; for example earnings/investment income/capital gains that relate to a period before they became UK tax resident. The key is not to mix such funds with income/gains arising after becoming UK tax resident, and prior to remitting them to the UK. Furthermore, if gifts or inheritances are received outside the UK whilst an individual is tax resident here, it should be possible to bring these to the UK on a tax-free basis, although care needs to be taken not to “mix” the funds.
The above comments are subject to review whether it is beneficial to file UK Tax Returns on the “Remittance Basis”, as this may not always be the case.
Rearrangement of offshore mixed funds
Under new law applying from 6 April 2017, non-domiciled individuals who have previously claimed the Remittance Basis will be allowed a temporary two year grace period from 6 April 2017 to 5 April 2019 in which to rearrange their offshore mixed funds, to effectively separate those funds out into their various constituent parts of “clean (non-taxable) capital”, offshore income and offshore capital gains, etc.
The different constituent parts can then be kept in separate offshore accounts and the individual will have discretion over what to remit and therefore whether to make taxable remittances to the UK. However, this opportunity will not be open to those who become deemed domiciled by virtue of being born in the UK with a domicile of origin in the UK.
For advice regarding expatriate tax/non-residence issues, please contact Nick Day and read our blog “Top 10 Expat Tax Tips for Individuals Moving to the UK“.
If you would like any advice regarding the new offshore bank accounts for expat employees or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org
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