Posted by Nick Day on 11 Mar 2014
Reviewing Offshore Expat Bank Accounts
Many non-domiciled individuals that have come to work in the UK open offshore expat bank accounts outside the UK to take advantage of rules which exclude earnings from non-UK duties from being taxable in the UK (known as Overseas Workday Relief – OWR) for up to three years providing they are 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 2014 onwards, but keeping the previous offshore account open that had earnings paid in to it up to 5 April 2014. 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.
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.
Qualifying for Employment Income for Expats Offshore Bank Accounts
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.
Funds to be Deposited
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 2013/14 this will therefore mean that the nomination should be made by 31 January 2015.
Existing offshore 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 reviewing whether it is beneficial to file UK Tax Returns on the “Remittance Basis”, as this may not always be the case.
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