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The world of UK taxation is intricate and ever-evolving, particularly when it comes to individuals with ties to countries outside the UK. Two prominent concepts that often affect such individuals are ‘Non-UK Domicile’ status and ‘Overseas Workday Relief’ (OWR). David Collins, Private Client Senior Tax Adviser, breaks down these concepts and shares tips for avoiding creating mixed fund accounts for those maintaining overseas bank accounts.
Non-UK Domicile: What Does It Mean?
A ‘domicile’ is a concept that links an individual to a particular country for legal purposes. Being a Non-UK Domicile means that while you may reside in the UK, your permanent home (domicile) is another country. This status can affect your tax obligations, particularly in relation to overseas income.
Overseas Workday Relief (OWR)
OWR is a unique tax relief available to UK residents who are Non-UK Domiciled. In simple terms, if you qualify for OWR, you only pay UK tax on the portion of your overseas employment income that corresponds to the number of days you’ve worked in the UK. For example, if you’ve earned £100,000 overseas but only worked in the UK for 50% of the time, you would only be taxed on £50,000 in the UK.
The Challenge: Avoiding Mixed Fund Accounts
One of the common challenges for Non-UK Domiciles is the ‘mixed fund’ conundrum. An overseas bank account becomes a ‘mixed fund’ when it contains:
- Different types of income (e.g., employment income, savings income, etc.)
- Income from different tax years
- The danger lies in withdrawing funds from these accounts. (If you’re not careful, you could end up paying more tax than necessary, as the UK tax system treats withdrawals from mixed funds in a specific order)
Practical Steps to Avoid Mixed Funds
To benefit fully from your Non-UK Domicile status and OWR, you may want to consider following these steps:
- Separate Accounts for Separate Income Types: Have distinct bank accounts for different types of income. For instance, keep your employment income in one account and savings income in another.
- Yearly Segregation: As the tax year concludes, consider transferring funds to a new account to separate income from different tax years.
- Clear Records: Always keep clear, detailed records of all transactions and sources of income. This will prove invaluable if you ever need to demonstrate the origins of your funds.
- Routine Review: Regularly examine your bank accounts to ensure no inadvertent mixing occurs. This is something that you may want to discuss with your Tax adviser when you have your reviews.
Why This Matters
Maintaining separate overseas accounts might seem like a hassle, but the benefits are tangible:
- Optimise Your Tax Position: Avoid unnecessary UK taxation by clearly demonstrating which funds relate to UK workdays.
- Peace of Mind: Know that you’re compliant with UK tax laws and avoid the headache of untangling mixed funds later.
- Clarity: Separate accounts offer a clearer picture of your financial position and facilitate better financial planning.
Navigating the intricacies of the UK tax system as a Non-UK Domicile can be challenging, but with careful planning and a keen understanding of concepts like OWR, you can optimise your financial position. If you would like to speak to one of our Tax specialists, please reach out to David Collins by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk
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