What is a bank account? A bank account is an investment in a bank's balance sheet. A depositor sho...
What is a bank account?
A bank account is an investment in a bank's balance sheet. A depositor should be aware of the credit rating of his bank of choice and the depositor protection available, either from the jurisdiction in which his bank is based or the bank's parent.
For instance, the UK and the Isle of Man have depositor protection schemes but Jersey does not. Jersey, however, closely vets banks before they are allowed to set up in the island and closely monitors their activities once established.
Why hold one?
The reasons a bank account is held can affect their tax status. If, for instance a UK resident holds a foreign currency account for foreign expenditure, for example, to maintain a house in Spain, then withdrawals from the account would not be subject to UK CGT. Otherwise foreign currency accounts are chargeable assets and withdrawals are chargeable events for UK tax purposes.
Interest from bank accounts held in UK government sponsored Individual Savings Accounts (Isas) is tax exempt. Transfers can only be made into Isas while the individual (jointly held Isas are not allowed) is UK resident. However the Isa may be retained together with its tax exemptions during a non-resident period and transfers resumed when residence recommences.
Where is a bank account held?
Offshore banks will pay interest gross to non-residents (usually by concession) as a matter of course. However, a UK bank will do so only if a certificate is provided proving the depositor's non-resident status, so called Nora accounts. Some years ago the Inland Revenue, during an audit of these certificates, refused to accept the validity of foreign PO Box addresses, which resulted in significant assessment to tax on the banks involved, many of whom unilaterally moved their non-resident accounts offshore. From 6 April 2001, UK banks automatically report details of all Nora accounts to the Inland Revenue which may distribute these details through exchange of information agreements to the customers' home jurisdictions. The introduction of the European Savings Tax Directive has seen some UK banks not accepting new non-resident accounts from 1 January 2004 and moving existing non-resident accounts to their offshore subsidiaries.
Bank accounts located onshore will be subject to probate and potentially to onshore inheritance taxes and death duties. In offshore finance centres such as Jersey there are no inheritance or estate duties, although there are probate requirements for deposits above a de minimis level, which can be avoided if deposits are held either jointly by spouses or in a simple trust (great care should be taken if contemplating joint ownership other than between spouses). If these steps are not taken, a will should be drawn under the laws of the offshore centre governing the bank accounts located in that centre, although a foreign will should be recognised there for probate purposes. Onshore is not limited to jurisdictions such as the UK and there are now cases of bank accounts held by expatriates in Middle Eastern countries such as Dubai being frozen and subject to local Islamic forced heirship rules when one of the spouses dies.
the account owner
The tax treatment of interest and the bank deposit can vary depending upon who owns the account. A UK resident and domiciled individual who owns an offshore bank account is assessed as and when interest arises, in other words, is credited to the account, regardless of whether it is remitted to the UK. A UK resident but non-domiciled individual, however, is assessed on a remittance basis.
Foreign currency bank accounts held in the UK by non-UK domiciliaries are not within the scope of UK inheritance tax whereas sterling accounts are. The 'two bank account' trick can be used by UK resident non-domiciliaries to mitigate their UK tax liabilities. It is therefore a no-brainer that a UK resident non-domiciliary should always bank offshore but to be sure to establish maximum tax efficiency.
A joint account between spouses is a simple means of avoiding probate and inheritance tax, so long as an inter-spousal exemption applies, as it does automatically in the UK between UK-omiciled spouses but only, for instance, in France if a proper election is made. If the husband is working under a full-time contract of employment in the Middle East, for example, and his wife, although spending substantial amounts of time with him, remains resident in the UK, then a Form 17 (which can only be obtained from the Revenue) can be used (so long as the necessary conditions are satisfied) to elect that 100% of the interest is treated as the non-resident husband's and is therefore tax free while retaining operational flexibility and joint access to the accounts.
chargeable events on bank accounts?
Generally interest is taxable when it is credited to the account. The bank statement is the ultimate authority for this and if a bank makes an error (for instance in relation to the two bank account trick) then the case of Duke of Roxburghe's Executors v CIR  is considered good authority for the bank to issue corrected statements to avoid a tax liability for the customer.
Expatriates should always consider bed and breakfasting their bank deposits before returning to the UK so that interest is credited during a non-resident period. A bank may be willing to either accelerate or defer interest so as to create a tax holiday. For instance, an expatriate returning to his country of origin could ask his bank to credit five years' interest in a pre-residence period. By so doing the next five years' interest escapes tax. An arrangement to defer interest could work for someone moving from a high tax jurisdiction to a low or no tax jurisdiction. An interest deferral scheme was attacked unsuccessfully by the Revenue in the case of Girvan v Orange Personal Communications Services  which stated:
"While the interest was accruing, and was being compounded on a quarterly basis, it was being retained by the bank and as a matter of ordinary language the compounded interest was not 'income' which 'arose' until it was actually paid over to Orange. Orange had no right to receive any interest unless it gave notice to the bank that it wished to be paid the interest or if it closed the relevant account. Therefore, while it was a debt which was accruing, and could be called in by Orange at any time on notice, it was not, as a matter of ordinary language, income, until it was paid."
Banks are attaching many ancillary services to their bank accounts over and above those such as standing orders and worldwide ATM access. Gold debit cards have become commonplace along with telephone and internet banking, often on a 24 by 365 basis. It is standard planning for non-domiciliaries resident in the UK to use one card for UK expenditure and another for foreign expenditure. However, if the foreign expenditure card is settled in the UK by the bank then this would constitute a constructive remittance and so care must be taken to choose a card that settles offshore.
Offshore bond vs pension for retirement funding
Brendan Harper is technical services consultant at Friends Provident International
In the article on page nine, I outlined how anyone can now contribute to a UK pension fund regardless of whether they are UK resident or not, whether or not they have earnings in the UK, and regardless of how long they have been non-UK resident.
The changes mean that, if you have a client who has moved abroad, they can continue to save in their home pension scheme. There are several advantages with this, including the convenience of only having one savings plan, and the ability to get tax relief on their contributions when they resume UK residence.
But is a UK pension the best place to direct disposable income when non-UK resident? In return for tax relief on contributions, individuals have to pay the price of certain restrictions, including the inability to access the fund until (after the changes) age 55, and, after age 75, they will not be able to leave the remaining fund to their family.
Also, when you put money into a pension, your original capital can be turned into taxable income on retirement.
If someone is receiving tax relief at, say 40%, then these restrictions are possibly worth it. However, is it worth it in the case of an expatriate who has no UK earnings?
Offshore life policies are one possibility. When investments are held within a life policy, the tax treatment is exactly the same as a UK pension fund, in other words, UK dividends are collected net of a non-reclaimable 10% tax credit, and capital gains are tax free. Contributions to a life policy do not receive tax relief, but in the case of a non-resident with no UK earnings, this means that the position between a policy and a pension is neutral.
However, on encashment, or vesting in the case of the pension, the position is very different. For a start, there are no restrictions on when you can take the benefits, so the client could start taking benefits before they retire . The client can also leave the remaining fund to their heirs.
Secondly, the benefits can be taken in a tax efficient way. For example, by using the 5% withdrawal allowance, or by owning the contract with your spouse, and splitting the tax bill between you. Pensions are non-assignable, so the tax bill cannot be split in this way.
Also, on full encashment, the capital is 100% deductible from the proceeds, which means part of the income will always be tax free.
Another major advantage is that the gains on an offshore life policy can be reduced directly in proportion to the time the policyholder spent as a non-UK resident. If an expatriate contributes to a UK pension fund, they do not receive any relief later for the period of non-residence - the income is still taxable in full.
Finally, when one takes an income from a pension fund, after deduction of the personal allowance, the income is put through the tax bands. This means that the client begins to pay tax at the higher rate after they have used up their basic rate band (currently £31,400)
Life policies, however, have the added advantage of allowing a policyholder to claim top-slicing relief. This reduces the tax bill for those who are in the basic or starting rate of tax where a policy gain takes them into the higher rate of tax. It works by averaging the gains out over the years that the policy has been in force, or by the years in the policy term when the policyholder was UK resident. This effectively increases the basic rate band for clients in this situation.
I am not advocating that saving through life assurance is better than saving in pensions. However, each has its own merits, and the best results can be gained from combining the two.
Non-UK residents putting cash into UK pension are giving up some flexibility, eg can't draw benefits until age 55, but they do get tax relief on contributions
Expat with no UK earnings may want to consider offshore life policy as alternative funding vehicle.
5% withdrawal via offshore life policy is tax efficient.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
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