Expatriates residing in the UK may have funds in international banks and often desire to shift some of these funds to the UK. Some money can be transferred without tax, while some will be taxable upon arrival in the UK. Our Tax Advisors analyse the possibility of accessing any “remittable income” and develop strategies to organise your accounts for optimal future transfers, ensuring tax efficiency.

For non-UK domiciled taxpayers, the “Remittance Basis” offers advantages, allowing them to avoid reporting and paying taxes on their foreign income and gains accumulated while living in the UK under specific conditions. More details about UK taxation principles can be found here. They can also avail of benefits from Overseas Workday Relief (OWR). A prerequisite for claiming the remittance basis and OWR is that foreign income must be paid and held outside the UK. This implies that an offshore account can house money that can be tax-free transferred to the UK and money that cannot. We designate this kind of account as a “Mixed Fund“. HMRC has particular laws that dictate the income types in these accounts and their order of transfer to the UK.

UNDERSTANDING INCOME CATEGORIES 

It is first vital to comprehend the various income types in an offshore account. UK legislation enumerates nine income types, but we’ll limit our discussion to the four primary ones you’ll most likely encounter.

UK employment income: Income earned in the UK where UK tax has been deducted or is due. This income can be transferred to the UK tax-free—foreign earnings – Income earned outside the UK and not subject to UK tax. Generally happens when a taxpayer claims OWR, and transferring this money to the UK would trigger an income tax charge. Foreign investment income – Can be subdivided based on whether it is income or chargeable gains and if foreign tax has been paid. If the taxpayer claimed the remittance basis and hasn’t paid UK tax on this income, transferring to the UK will incur a charge at the highest income tax rate. 

Capital – Broadly defined as anything that doesn’t fall into the above categories. Typically, this is money earned before relocating to the UK. This money can be transferred to the UK free of charge. These categories are ordered by tax year. For instance, income and capital for the current tax year (2022/23) will differ from the 2021-22 tax year, 2020-21 tax year, and so on. We cannot immediately transfer the UK employment income and capital to the UK once we have identified the mixed fund’s components. There are rules governing the transfer order.

HOW ARE THESE AMOUNTS REMITTED TO THE UK? 

HMRC’s legislation also clarifies the transfer order out of the account. This article discusses two types of transfers; an offshore transfer (to an account outside the UK) and a UK transfer (to an onshore account).

For a UK transfer, the remittance follows the above order, starting from the current or most recent tax year. For example, UK employment income earned in the current tax year (2022/23) will be transferred first, followed by the current tax year’s foreign earnings, and so on. One may notice from this example that it is only possible to access capital in the UK by first transferring taxable foreign income to the UK. However, with some early planning, this situation can be circumvented.

An offshore transfer comprises a proportional share of each income type in the account immediately before the transfer. For instance, if the account contained £1,000 divided equally among the above categories, and you transferred £100 offshore, then each category would be £25. A common misconception for individuals with a qualifying account for overseas workday relief is that they can isolate foreign earnings by transferring money to a separate offshore account, but in reality, they are transferring a mix of UK and foreign income to the other account. If they later decide to transfer some amount to the UK, they might inadvertently be transferring foreign earnings and may incur a tax charge.

HOW TO MAKE MY OFFSHORE FUNDS ACCESSIBLE IN THE UK? 

If you’ve maintained an offshore mixed fund for several years, your best option is to examine the account to identify foreign income sources, then decide whether to pay the tax to use the money in the UK or leave it. The cost of analysis also factors in. This can be a complex, time-consuming process, especially if there have been multiple transactions with other offshore accounts.

TIP: If there’s a tax year with particularly low income, the tax implications of a transfer will be diminished. Lower-income earners have more significant allowances and lower tax rates.

For recent arrivals in the UK, more options are available:

Use the Special Mixed Fund rules: These allow individuals claiming OWR to maximise their relief and evade the complex analysis needed to determine if they have kept enough foreign earnings outside the UK. 

Open a new offshore account each tax year – This mostly applies to individuals claiming OWR. A new qualifying account each year lets you isolate UK employment income, facilitating its transfer to the UK. Don’t claim the remittance basis – Despite short-term tax savings, if you intend to stay in the UK long-term and need to bring money into the UK (e.g., to buy a house), these tax savings will be negated. 

Immediate transfer to the UK – If you always intend to transfer money to the UK, consider doing this early before the account gets mixed with different foreign “unremittable income” sources. 

Isolate foreign interest income – Some accounts allow interest and coupons to be paid into a separate account, thereby keeping your capital free from untaxed foreign interest. This article interprets HMRC’s legislation on mixed funds and should not be construed as tax advice. Every case is unique, and the details above may not apply to you. The rules are complex, and we strongly advise seeking tax advice before making a UK transfer if you’re unsure about the potential consequences.

If you need help regarding tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.