REMITTANCES AND BANK ACCOUNT STRUCTURES FOR NON-UK DOMICILED INDIVIDUALSNick Knight – Spring 2016

"The trick is to stop thinking of it as 'your' money" - IRS auditor

Agenda

Overseas Work Day ReliefMixed Funds – why these should be avoided (where possible)‘Clean capital’Types of AccountsBeware of Capital GainsRemember to calculate remittances using UK rulesRemittances with FTC attachedRemittances and the arising basisExempt PropertyPlanning ideasAccounts to use in the UK and those not to touch

Overseas Work Day Relief (OWDR)

• Available for first three years of UK-tax residence for non-UK domiciles• Can be claimed anew, but only if returning to the UK after three years of non-UK

tax residence• Earnings must be paid into a qualifying non-UK account and amount of OWDR

claimed must never be brought into the UK as cash• OWDR claim will almost certainly lead to loss of PA (if otherwise due) and CGT

annual exemption under £2K rule, so these need to be considered• For US nationals, anything that escapes UK taxation will then still be taxed in the

US, but now with no FTC, meaning that even more saving is needed to make this worthwhile

• Many may feel sacrifices needed to claim OWDR are not worthwhile, especially if they are tax equalised and not paying the UK tax in any case.

Overseas Work Day Relief – Qualifying Account• Old SP1/09 accounts now replaced by Special Mixed-Fund Accounts• Where accounts qualify then there are deemed to be two transactions, firstly ‘UK remittances’ and

then ‘offshore transfers’ (everything else, including non-UK spending from the account) at the end of the UK tax year

• This makes things simpler, but there are specific conditions for the qualifying accounts:• Only one is permitted at any one time• It must be nominated and reported as such on the relevant UK tax return, with the date it

became so (which must be before the date of the first payment into it)• Account must only receive income from a single employment and interest from the account

(anything else is a ‘tainting event’ which would disqualify the account after three times in any twelve-month period, if ‘tainting’ not reversed within 30 days)

• Ideally there is a new account each year (but not always practical), otherwise must be reduced to under £10 before first earnings payment in new UK tax year

• Split-year arrival cases problem (see below) – better to be NR for arrival year.

OWDR – Split-year problem for qualifying account

• Account needs to be nominated before the first payment of general earnings into the account in the UK tax year

• The definition of ‘general earnings’ will include pre-arrival earnings• At beginning of UK tax year any UK assignment may not be envisaged and so

election unlikely to be made in time• Account would therefore not qualify and usual strict tracking rules would need to

apply• NR in first year alleviates this issue, as does opening a new account to be the

qualifying account as soon as (or just before) the UK assignment commences

OWDR – Avoiding ‘Trapped’ relief

• As current-year income is deemed to be remitted before that of previous years, clearing the account at the year end to stop ‘trapped’ relief is important

• Once tax return is prepared, actual level of OWDR can be determined (i.e. amount that must remain outside the UK), with anything above this remitted to the UK without further charge (being already taxed UK earnings). NB: it is necessary to remit the non-OWDR income, due to ‘offshore transfer’ identification rules (see below)

• The OWDR funds should all be put into an account that is NEVER remitted to the UK (either directly or indirectly)

• All OWDR funds for various years can go into the same account, with any interest credited into a specific interest account

• OWDR funds will be taxable even if remitted in years of non-UK tax residence (the only such example of this?).

OWDR Funds – Practical example• Mary earns £200K a year, which is paid into a nominated qualifying account for OWDR (she keeps the same account

for her salary while in the UK). She arrived in 2014/15 and was resident for that year.• She anticipates 10% non-UK work days for 2015/16, but keeps 20% in the account to be on the safe side, remitting the

balance to her London account to cover her UK living expenses.• On 4 April 2016 she transfers £40K (the 20%) to a new non-UK holding account (her first pay day for the new UK tax

year is 16 April, being paid semi-monthly). • The interest from this new account is paid into an interest-only account outside the UK until closed• Mary’s UK tax return is filed on 15 September, showing 15% non-UK workdays• Available OWDR is therefore £30K (15% x £200K) being lower than the £40K kept outside the UK.• Mary closes the holding account and transfers £30K to her OWDR account (that she uses to fund costs when she

travels home) after remitting the remaining £10K to her UK account (which is income that has already been taxed in the UK and is deemed to be remitted first).

• NB: If no transfer out of the account had taken place in April then the £10K would have become ‘trapped’ behind 2016/17 earnings and so could not be brought into the UK without foregoing any 2016/17 OWDR (unless a new nominated account was opened).

• Another option would be to operate a split salary – 20% paid into non-UK account and 80% into the UK account with the same year-end operation, as above.

Mixed Funds – ‘Do I not like that!’

• This is an account comprising more than one type of income or gains, or the same income and gains relating to different tax years (so special accounts for OWDR are a simple version of a mixed-fund account)

• A mixed fund will have deemed ordering rules where remitted to the UK, with non-taxable ‘clean capital’ after everything else (broadly employment then other income, then gains, then income with FTC, gains with an FTC, finally other ‘clean capital’)

• Current year funds are deemed to be remitted first, then PY1, PY2, etc.• Where transferred to another non-UK account or spent outside the UK, the ordering rules

do not apply. Rather the relevant percentage of each source is deemed to be transferred or spent each transaction (with the former this may in itself create a new mixed fund account). These are both known as ‘offshore transfers’

• Tracking will only be required for accounts where funds are to be remitted to the UK, but the best thing to do is to keep the different types of funds entirely separate, which keeps things simple and leaves more options for remittances.

Offshore Transfer example (to show how onerous it can be)

• £10,000 in account - £6,000 clean capital, £1,000 foreign interest and £3,000 foreign capital gains

• Three spending transactions totalling £100 on consecutive days, with each transaction needing to be split between the different funds as follows:

Clean Interest Capital Gains Balance

6,000 1000 3,000 10,000

Cigarettes -6 -1 -3 -10

5,994 999 2,997 9,990

Petrol -24 -4 -12 -40

5,970 995 2,985 9,950

Football ticket -30 -5 -15 -50

5,940 990 2,970 9,900

‘Clean Capital’

What is ‘Clean Capital’?• Pre-UK tax residence income and gains/losses• Taxed UK income• Inheritance• Gambling winnings• Outright gifts (so beware artificial gifts for the benefit of the donor)• Anything else that isn’t taxable in the UK (such as – usually - proceeds from the

sale of a private car, home sold where full PPR available, etc.)NB: These can all be put together in the same ‘clean capital’ account, as it can all be remitted tax-free to the UK, but the interest should be credited to a specific account for interest

Possible different non-UK account types

Will depend on sources held and level of funds, but in theory all of these may be appropriate (for very HNWI):• Clean Capital Account• OWDR (‘Special Mixed-Fund’) account (and possibly ‘holding account’, as above)• Rental income account• Interest account* (possibly split between taxed and untaxed)• Dividend account• Capital Gains account (split where mixture of gains subject/not subject to a foreign

tax, as the latter is always deemed to be remitted first)• Capital losses account(*The interest earned on all other non-UK accounts should be paid into this)

Suggested account structure (OWDR year example)Holding account (for year end) – remit to UK account then OWDR account once levels known

Non-UK account for salary (leave OWDR element here during year)

Clean Capital Account (remit freely to UK account from here

UK Mainland account (for UK living expenses)

Interest account (all interest from non-UK accounts paid into this account)

OWDR (never remit to UK) Capital Gains

Suggested account structure (non-OWDR year example)

Clean Capital Account (remit freely to UK account from here

UK Mainland account (salary paid into this)

Interest account (all interest from non-UK accounts paid into this account)

OWDR (never remit to UK) Capital Gains

Beware of Capital Gains

When is a ‘gain’ not a ‘gain’ (or a ‘loss’ not a ‘loss’?)• Remember that exchange rates may change a foreign gain to a loss or vice versa due to exchange rate

differentials as at the purchase and sale dates• For example, if Hank both buys and sells his investment property for $1.2 million then he (quite rightly for home-

country purposes) thinks he has no gain or loss.• However, from a UK perspective the situation may be very different.• If the exchange rate was $1.8 to £1 at purchase (£666,667) and $1.2 at sale (£1,000,000) then for UK tax

purposes there is a £333,333 gain (or loss if the rates are reversed)• Until the sale takes place we wouldn’t know whether the proceeds should go into the capital gains or the capital

losses account (assuming Hank had both), so should initially be put into a separate holding account (where there are other gains/losses that have already been banked).

• Always watch out for foreign exchange rate issues like this, as they can give an extremely distorted picture (the sterling to US$ exchange rate has fluctuated broadly in line with the above in recent years, for example, so this is not far fetched).

• Sterling has weakened against most currencies in recent years, meaning that exchange rate gains are more likely than losses (lower base cost, as with example above).

Remember to calculate using UK rules• When calculating remitted income remember to calculate this using UK rules, as methods

will vary from country to country and may give vastly different results• For example, some countries (USA and Australia) will give relief for depreciation against

rental income, whereas the UK does not. As such, for UK purposes any profit is likely to be higher than in the home country, meaning if remitting rental income from these countries there may be no FTC to use, or else a lower amount than expected.

• Similarly, there may be different rules for calculating capital gains in other countries (such as the above, where the depreciation relief is then ‘clawed back’ at sale), or there may not even be a capital gains tax at all (Hong Kong, Malaysia, New Zealand, etc.).

• Clients need to be aware that the UK tax treatment may be very different to that in the country of origin of a gain or income.

Remittances with an FTC attached• The remittance is net of the foreign tax rate (so we need to know this)• This then has to be grossed-up at the foreign tax rate to give the deemed remittance• The FTC is then based on the gross amount• Residual liability where UK marginal rate is higher than FTC rate• See the following for examples: https://

www.gov.uk/government/uploads/system/uploads/attachment_data/file/323623/hs264.pdf• Simple example from this is shown on next slide

Remittances with FTC attached (HMRC example)• Jenny is taxable on the remittance basis and is liable to UK tax at the rate of 40%.• Interest of £9,000 is paid into her foreign bank account after deduction of tax in the‘other’ country at the rate of 10% which is

available as a credit against UK tax on that income. • Jenny decides to remit £4,500 of this interest to the UK.• As Jenny has remitted half of the net amount of the interest she was paid, she is able to claim half of the admissible foreign

tax as a credit against UK tax on the income.• Jenny must pay UK tax as follows:• Gross income £10,000• Foreign tax £1,000• Net amount £9,000• Remitted amount £4,500• Available Foreign Tax Credit Relief (FTCR) £500• (half the income has been remitted and so half the foreign tax is available as a credit against UK tax)• Taxable amount £5,000• UK tax (40%) £2,000• minus FTCR £500• Amount to pay £1,500

Remittances and the arising basis• If an individual is filing on the arising basis, you may well think that remittances do not have

to be considered• However, if the individual was previously filing on the remittance basis (and changed to the

arising basis to avoid the RBC, for example) any funds relating to the remittance basis years will still be subject to the same rules, including mixed funds (where held)

• We should not see this very often, but it is something to bear in mind• See Taxation article on this:

http://www.taxation.co.uk/taxation/Articles/2016/01/19/334219/readers-forum-arising-remittance

Exempt PropertyIn certain circumstances it is possible to remit goods (not cash) without there being a tax charge on this, where the remittance falls under one of the following headings:

• Property that meets the public access rule (for paintings, etc.) • Clothing, footwear, jewellery and watches which meet the personal use rule • Property of any description which meets the repair rule (furniture only in UK for repair, for

example)• Property of any description which meets the temporary importation rule (in UK for fewer that

275 ‘countable days’)• Property where the notional remitted amount is less than £1000 (per item)

We are most likely to see the ‘personal use’ rule, but more details on all these are here:https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm34000

Making offshore transfers minimise tax liabilities• At first glance doing this wouldn’t seem to make any difference, but it can do if the whole

amount is not being remitted.• Example: need to remit £10,000 from a £100,000 account that is 90% clean and 10%

interest. Liability can be reduced as follows:

Straight transfer

Clean Interest Balance

90,000 10000 100,000Direct remittance 0 -10000 -10,000

90,000 0 90,000

Gives £10,000 taxable remittance

Transfer then remit funds

Making offshore transfers minimise tax liabilities

Clean Interest Balance

90,000 10000 100,000Xfer to new account -9000 -1000 -10000

81,000 9000 90,000

New account make up 9,000 1000 10,000Direct remittance -9000 -1000 -10000

0 0 0

Gives £1,000 taxable remittance

Other planning ideas• Remit taxed income or gains where overseas rate paid is higher than rate payable in the UK (as no

additional tax then payable). • It may even be worth having separate accounts for the same type of income, but with differing FTC rates

from different countries (if income held in multiple countries)• If making a foreign rental loss (for UK purposes), then pay the related expenses outside the UK from a

different account to the rental income account (ideally one where you can never bring the funds into the UK). Rental income funds can then effectively be brought into the UK tax free (although reported as foreign rental), as there is nothing to say the expenses have to be operated out of the same account, in the same way that capital gains do not have to be paid into the same account from which the original purchase is made. (How new mortgage interest rules would work in this scenario is a different matter)

• Same principle for Self-Employed earnings (if we see these)?• Remit ‘exempt property’ purchased abroad from OWDR account with no charge?• Set up a trust (but highly specialised and complex)• However, the golden rule is that advice should always be sought in advance of making any remittances

to the UK and we need to highlight this fact at arrival briefings

Accounts to use (or possibly use) for remittances• Clean capital (always tax free)• Capital loss account (you cannot remit a loss, so these are tax free)• Accounts with an FTC higher than rate due in the UK (but check how gain/income calculated)• Rental income account (where net loss or nil gain for UK purposes)• Accounts with an FTC slightly under rate due in the UK (after the above exhausted, as residual

liability will be lower)• Capital Gains account (where an annual exemption is available – manipulate remittance to give a

gain close to this, but ensure gain correctly calculated)• If all else fails then other Capital Gains could be remitted - lower tax rates vs income tax• OWDR income and interest should not be remitted to the UK wherever possible (or have a UK

loan secured on these funds, per recent HMRC guidance), as these will attract tax rates up to 45%. These should be used to fund expenses for home trips or non-UK holidays (but then remember not to bring anything significant back to the UK as this would constitute a remittance to the UK if not ‘exempt property’ such as clothes and jewellery)

QUESTIONS

AND ANSWERS?

THANK YOU FOR YOUR TIME AND ATTENTION