Bank accounts and mixed funds - tax planning for interest
The mixed fund rules are notoriously complex and therefore any non doms with overseas income or gains should carefully consider whether they'll be affected by these rules. It's worthwhile noting that although the provisions refer to 'mixed funds' they don't just apply to bank accounts but could also apply to any other asset that derives from foreign income or gains.
The mixed fund rules can also be important to some non doms as they can open the door for increased Revenue disclosure given they may want to ascertain the sources of the various elements of the mixed fund.
What is a mixed fund?
A mixed fund is any overseas fund which contains more than one type of income or gains, and/or income or gains from more than one tax years.
So you're usually looking at a bank account (or other asset) which contains
What is the effect of the mixed fund rules?
There is a taxable remittance from a mixed fund generally where property (including money) is brought to the UK (or a service is provided in the UK) and the property identified is from the mixed fund.
Where there is a remittance from a mixed fund you need to ascertain the various elements of the mixed fund and then tax any remittance in a certain order. The order is essentially income first, then capital gains, then capital. However it's more subtle than this. The order of remittances can be broken down into employment income, investment income, capital gains, and capital. This is just a recap as we've looked at the mixed fund rules in other articles.
Mixed funds & overseas bank accounts
Many non doms hold overseas bank accounts that are mixed funds.
You should note though that a mixed fund doesn't arise just because a non dom has a number of accounts with the same bank. Provided each bank account is separate and contains only one of the relevant types of income there will be no mixed fund.
Example
Bob is a non dom who claims the remittance basis. He has three separate accounts with the same offshore bank:
Each of these accounts is separate and would not be classed as mixed funds. Therefore provided they don't subsequently become mixed funds, (eg by account B generating interest which is retained in account B) Bob can bring money into the UK from Account B and that will be accepted as a being a transfer of 'clean' capital, and so will not be a taxable remittance.
Interest generated on offshore bank accounts
If a non dom claims the remittance basis of tax any overseas interest they earn will be taxed only to the extent that they actually bring the interest into the UK.
Care needs to be taken if there is 'clean capital' in an offshore account which generates interest. If the interest is credited to the offshore account this would then make it a mixed fund (as it contains capital and interest income). This means that if any cash was extracted from the account it would be classed as a remittance of the interest income first, before the tax free capital could be brought back.
If the interest had been held in a separate account this would then allow the tax free capital to be brought back to the UK, with the interest income retained overseas, avoiding a UK tax charge.
Can I transfer interest to a separate account and avoid it being a mixed fund?
If you have a capital account overseas which generates interest you may have this credited to the capital account before being immediately transferred to a separate interest account.
HMRC accept that in these cases there should be no mixed fund. They have specifically stated:
'…Where a mixed fund such as this is created fleetingly by an operation of the banking system, HMRC will accept that the interest credit will not taint the principal and so that the mixed fund rules…do not apply…'
Bank accounts and the arising basis
If you're subject to the arising basis and retain your overseas income offshore this will effectively make it 'clean capital'. As you're taxed under the arising basis the overseas income would be taxed in the UK. The offshore account would therefore be funded from earnings after UK tax. It would not constitute relevant foreign income or gains for the purposes of the legislation and as such could be brought back into the UK free of further income tax.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
=============================================================
Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.