Based on the above rules, it is possible for a non-UK domiciled
individual to keep the bulk of his investments outside the UK, and to
minimise his exposure to UK tax on the income. If spending money is
required in the UK, capital can be safely remitted. This, however, poses a
number of problems.
First, there is the age-old economists’ taboo against living off
one’s capital. Second, there is the question whether the capital can be
easily separated from the income for the purposes of remittance planning.
Where the investment takes the form of shares and securities, this is
easily done – the income (unless reinvested) is always clearly separated
from the capital. The capital itself, however, is not liquid, and
converting it to ready cash may involve capital gains tax problems.
For money held on deposit, the problem is one of fungibility – any
dollar is as good as any other dollar, so how can one point to a sum drawn
from a bank account and prove that it is capital rather than interest?
If the account is managed so that all income arising is credited to a
separate account, without ever forming part of the original account, it is
straightforwardly possible to segregate income from capital. If, however,
the interest is credited to the account from which it arises, there will
be a “mixed source”. The Inland Revenue’s rule for mixed sources is
that, whenever a sum leaves the account, the first thing removed is
interest.
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Example
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Ahmed’s initial deposit into his Jersey account, in 2000,
was £1,000,000 of capital. In the 2000/2001 tax year he earned
£40,000 interest, which was added to the account balance.
At the end of that year, he remitted £51,000 out of the
account into the UK. The first £40,000 was treated as income,
and so became taxable. The remaining £11,000 was capital, and
so not taxable.
In 2001/2002, Ahmed instructed his bankers to credit all
interest as it arose into a separate bank account. He ensured
that all his remittances for that year were from the capital
account, and so paid no UK tax.
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Careful planning can therefore ensure that income is
segregated and not remitted, but that still does not help avoid
the evils of living off capital.
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