Foreign nationals living in the UK will likely have money in foreign bank accounts and often they would like to transfer some of this to the UK. Some money can be transferred without a tax charge and some will be taxable upon remittance. This article discusses whether it is possible to access any remittable income but also how best to organize your accounts to make transfers as tax efficient as possible in the future.
Taxpayers domiciled outside of the UK can benefit from the “Remittance Basis” whereby they do not have to report and pay tax on their foreign income and gains arising while living in the UK (under certain circumstances). More information on the basis of taxation in the UK can be found here . Non-UK domiciled taxpayers can also benefit from Overseas Workday Relief (OWR). One of the requirements for claiming the remittance basis and OWR is that the foreign income must be paid and retained outside of the UK. This means that an offshore account can contain money which cannot be transferred to the UK free of charge and money that can. We refer to this type of account as a “Mixed Fund”. HMRC have specific legislation which governs the type of income in these accounts and the order in which these are deemed to be transferred to the UK.
What are the different types of income?
Firstly, it is important to understand the different types of income that you can have in an offshore account. The UK legislation actually lists nine types of income but for the sake of simplicity we’ll just be looking at the four main types you are likely to have.
- UK employment income – this is employment income that has been earned in the UK where UK tax has been withheld or is due to be paid. This income can be transferred to the UK without incurring a charge.
- Foreign earnings – this is income earned outside of the UK that has not been subject to UK tax. This usually arises where a taxpayer claims Overseas Workday Relief and transferring this money to the UK would incur an income tax charge.
- Foreign investment income – this is self-explanatory but can be broken down by whether it is income or chargeable gains and whether foreign tax has been paid. If the taxpayer claimed the remittance basis and has not paid UK tax on this income, transferring to the UK will incur a charge at the top rate of income tax despite the favourable allowances and rates for certain types of investment income currently available in the UK.
- Capital – this is rather loosely defined as anything that cannot be categorised in the above. In real terms this is usually money that was earned prior to moving to the UK (and does not relate to a previous period of UK residence). This money can be transferred to the UK free of charge (albeit impossible in some circumstances – see notes below).
All these categories are organised by tax year. Meaning that income and capital for the current tax year will be separate to the 2019-20 tax year, 2018-19 tax year and so on.
Unfortunately, now that we have identified the contents of the mixed fund, we cannot simply transfer the UK employment income and capital to the UK straightaway. There are rules for the order in which these amounts are transferred.
In what order are these amounts remitted to the UK?
HMRC’s legislation also tells us the order in which these amounts are deemed to be remitted when making transfers out of the account. For the purposes of this article we will look at two types of transfer; an offshore transfer (to another account based outside of the UK) and a UK transfer (inbound to an onshore account).
- A UK transfer will be remitted in the order listed above from the current or most recent tax year first. For example, UK employment income earned in the current tax year will be the first thing to be transferred, followed by foreign earnings from the current tax year and so on. Once all income sources from the current year have been depleted the list would start again for the most recent tax year that has ended, so in our example the next income to be transferred would be UK employment income earned in 2019-20 and then foreign earnings from the same year etc.
You may have noticed from this example that it is impossible to access capital in the UK without first transferring taxable foreign income to the UK. There are ways to avoid this tricky situation with some early planning.
- An offshore transfer will consist of a rateable portion of each type of income in the account immediately prior to the transfer. For example, if the account contained £1,000 and is made up of equal 25% shares of the above categories and you transferred £100 offshore, then £25 would be UK employment income, £25 would be foreign earnings, £25 would be foreign investment income and £25 would be capital.
A common misconception for individuals who have set up a qualifying account for overseas workday relief is that they can transfer money to a separate offshore account to isolate foreign earnings but in fact by doing this they are transferring a combination of UK and foreign income into the other account. If they later decided to transfer an amount to the UK then they would inadvertently be transferring foreign earnings and would incur a tax charge.
What can I do now to ensure that my offshore funds are accessible in the UK?
If you have had an offshore mixed fund for multiple years then your only real option is to analyse the account to see the sources of foreign income in the account and then making a judgement call as to whether you would prefer to pay the tax to enjoy the money in the UK or just leave it be. A factor in all this is also the cost of the analysis itself. This is a complex and time-consuming process especially if there have been many transactions with other offshore accounts.
TIP: If there is a tax year where your income is particularly low then the tax consequences of a transfer will be reduced. Lower income earners have greater allowances and lower tax rates available to them.
If you have recently arrived in the UK, then there are a few more options available to you
- Utilise the Special Mixed Fund rules – this allows individuals claiming Overseas Workday Relief to optimise their relief and avoid the complex analysis required to determine whether they have retained enough foreign earnings outside of the UK. More details regarding the account criteria can be found here.
- Open a new offshore account at the start of each tax year – this is mostly relevant to individuals claiming Overseas Workday Relief. Setting up a new qualifying account each year will allow you to isolate UK employment income which can be easily transferred to the UK without having to worry about transferring foreign earnings from a later tax year first.
- Don’t claim the remittance basis – there are significant tax savings to be made in the short term by claiming the remittance basis but if you intend to stay in the UK for a longer term and need to bring money into the UK to buy a house, for example, then the tax savings will be reversed. This article discusses the allowances available for certain types of investment income for arising basis taxpayers.
- Transfer to the UK straightaway – if it is always your intention to transfer money to the UK then you should consider doing this early on before the account becomes contaminated with different sources of foreign unremittable income.
- Syphon off foreign interest income – this is not always possible, but some accounts allow you to have interest and coupons to be paid into a separate account thereby leaving your capital uncontaminated with untaxed foreign interest.
This article should not be taken as tax advice and should be viewed as an interpretation of HMRC’s legislation on the composition of mixed funds. Every case is different, and the above details may not be relevant to you. The rules around this area are complex and we strongly recommend that you seek tax advice before making a transfer to the UK if you are at all unsure as to the consequences of doing so.
More detailed guidance on this area can be found on HMRC’s website.