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The income tax legislation draws distinctions between individuals domiciled
in the UK and those domiciled elsewhere. The most important of these governs the
taxation of investment income.
A UK domiciliary is taxed on investment income as it arises, regardless of where
in the world the income is derived.
This comes as a shock to many “bar-room experts”,
who are naively certain that placing money in an offshore account will generate
tax-free interest – many only find out their error when the tax bill, together with
interest and penalties, arrives on their doormat.
By contrast, a non-UK domiciliary’s exposure to tax on investment income depends
on the source of the income. If the income has a UK source, it will be taxed as it
arises; if, however, it is non-UK sourced, it is only taxable when, and to the
extent that, it is received in the UK – the so-called “remittance basis”.
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Example
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Ahmed is domiciled in Egypt, but has been resident in the UK for many
years. He has two bank accounts, one in London and one in Jersey. He
uses the London account to pay for expenditure in the UK, and the Jersey account to finance personal expenditure when overseas.
In the 2003/2004 tax year, each account earns him interest of £20,000.
The £20,000 from the London account is taxable in the year it arises,
and tax is due on 31 January 2005 in the normal manner. There is no UK
tax on the £20,000 interest arising in the Jersey account.
On 1 July 2004, Ahmed needs additional money in the UK, and brings onshore
£6,000 from the Jersey account. He is taxed on this in the 2004/2005 tax
year, and will pay tax on 31 January 2006.
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