Vital steps for private investors venturing into new territories
In the ever-evolving realm of international investments, the foresight to strategically structure your financial affairs before venturing into new territories is a game-changer for private clients. The decisions made at this point can significantly impact your wealth management journey.
Pre-arrival planning for private individuals moving to the UK
We explore how this proactive approach will ensure efficient access to investment opportunities, both inside and outside of the UK, whilst navigating the complexities of the UK legislation. We will unravel the intricacies of pre-arrival structuring, empowering you to make informed decisions that safeguard and enhance your private capital.
Different funds and their tax treatments
In reality the picture is pretty intricate. Different funds may fall under various tax treatments, depending on how and when they arose, and maintaining their segregation is crucial to maximise the advantages of the remittance basis.
In broad categories, at any time you might have funds which fall into the following categories:
- Clean capital – comprising funds (cash, investments, and other assets) held before UK residency, and which are generally not taxable when remitted to the UK.
- UK source income – taxed irrespective of domicile, up to a rate of 45%.
- UK source capital gains – taxed at rates up to 20% (or up to 28% for residential property and specific private equity returns).
- Non-UK income – potentially sheltered from UK tax under the remittance basis but taxed at up to 45% if remitted.
- Non-UK capital gains – potentially sheltered from UK tax under the remittance basis but taxed at up to 20% if remitted.
A personal tax standpoint
The ideal scenario would be to use funds with the lowest tax liability in the UK, following this general order:
- UK income and capital gains – as this should already have been taxed in the UK and should not face further taxation upon remittance.
- Clean capital – generally not subject to UK tax when remitted.
- Non-UK capital gains
- Non-UK income
Mixed funds and segregating non-UK accounts
When an account encompasses multiple fund types in a single account, statutory rules govern their deemed remittance order.
In simplified terms, these remittance ordering rules tend to be less favourable for the taxpayer, and broadly dictate that a remittance to the UK is deemed to be made up of income first (taxable at up to 45%), then capital gains (taxable at up to 20%), and finally clean capital (non-taxable).
Conversely, where there is a transfer between non-UK accounts, such transfers are deemed to be made up proportionally of each constituent part of a mixed fund, such that there are currently no methods by which to ‘cleanse’ a mixed fund.
To mitigate these statutory remittance ordering rules, one can adopt a proactive approach by 'segregating' non-UK bank accounts before becoming a UK resident.
Opting for segregated accounts, with accompanying strict account procedures ensures that individuals do not create unnecessary taxable remittances to the UK.
It is usually possible for institutions familiar with the remittance basis to ensure that any interest arising on any of the segregated accounts is paid into a separate non-UK income account. This ‘sweeping’ ensures that the clean capital account is not tainted.
Ideally, non-UK income (including the interest arising on the segregated accounts) would never be remitted to the UK, instead being used to fund any non-UK expenses.
When investments are sold
The entire proceeds should be paid to a non-UK gains account, as it is not currently possible to separate the element of gain from the initial clean capital investment. Any remittances from this account would be taxable at a maximum of 20%.
Depending on their circumstances, certain individuals opt for a further account to segregate dividend income from any non-dividend earnings, such as interest. This is particularly relevant for US taxpayers who are claiming foreign tax credits on their US tax returns.
Offshore transfers and their tax implications
Once funds are transferred, any associated tax liabilities are triggered. Only limited and specific circumstances exist wherein a transfer can be 'reversed' for tax purposes.
This principle extends beyond remittances to the UK and encompasses transfers between non-UK accounts, referred to as "offshore transfers" in relevant legislation. For instance, transferring foreign income to a clean capital account renders the latter 'tainted,' requiring any subsequent remittances to the UK to be taxed as if they constituted foreign income.
It's noteworthy that offshore transfer rules, distinct from remittance ordering rules, increase the complexity of the affairs of an individual coming to the UK. Notably, it's impossible to ‘cleanse’ a mixed fund by making transfers between offshore accounts. While the intricacies of these rules aren't detailed here, their complexity underscores the importance of avoiding such transfers to ensure they don't apply.
Therefore, meticulous attention to depositing each type of income or gain into the appropriate account is paramount. For instance, if a clean capital account starts earning bank interest after becoming a UK resident, the interest should not be directed to the clean capital account. Instead, the bank should deposit it directly into the non-UK income account to maintain financial integrity and compliance with tax regulations.
At Sanctoras, we are experienced in advising both professional advisors and their clients in pre-arrival structuring and clean capital. If you need our help, please do not hesitate to contact us firstname.lastname@example.org