A particular element of the UK tax system which can help solve this
problem is the so-called “source doctrine”. Income tax is an annual
tax, renewed each year by the Finance Act. Underlying the law is the
doctrine that, to be taxable, income must have a source; furthermore, the
income must have a source that exists in the current tax year, if that
income is to be taxable.
This does not matter for UK domiciled individuals, since they are
always taxed on income as it arises – there will always be a current
year source for the income.
The doctrine is important for non-UK domiciliaries, however, since
there is frequently a mismatch between the year in which income arises and
the year in which it is remitted into the UK and so becomes taxable. If
the source from which the income arose no longer exists, and has not
existed at any time during the tax year of remittance, it cannot be taxed
since there is no valid source for the income in that tax year.
What this means in practice is that a bank account (account “A”)
can generate interest which is credited into a separate account (account
“B”) as it arises. If the original account is closed on 5 April, and
the funds deposited into a new, different account (account “C”) on 6
April, the interest held in account “B” has in effect become capital
from 6 April, and can be safely remitted.
Great care must be taken when planning using this technique. Account
“A” and account “C” must never co-exist, even for a single day, in
the same tax year. Account “B” may itself earn interest, which will
need to be managed (using additional accounts) if it is not to cause
remittance problems of its own. Most banks in offshore tax havens are,
however, familiar with the concept and have procedures to ensure the
planning can be carried out without risk.
If done properly, the multiple account system can enable a non-UK
domiciled individual to make regular remittances into the UK without
income tax liabilities, and without eroding his capital.
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