Nationwide Isle of Man US $ account and tax on interest...

deanogiraffe

Hello,

A few years back I lived and worked in the USA and saved up a decent chunk of money, about $130k.

After I came back to the UK to live, I transferred that money into a Nationwide International US dollar account, which is based in the Isle of Man, with an interest rate of 1.4%. At the end of March this year I got paid a years worth of interest, which was about $1800. No tax has been paid on this interest.

My question is, am I meant to be paying tax on this interest? I assumed I did have to, so began to register for an online tax return. But then I read an article saying you don't have to pay tax on these offshore accounts until you bring the money into the UK, so as long as it stays in the Isle of Man I don't have to do anything.

Is this correct?

Also, if I do have to pay tax on the interest, how much would I have to pay? My annual salary is over the threshold for the higher rate of tax, so does this mean I would have to pay 40% tax on all the interest from my Isle of Man account? Also, how does this work if the money is in US $? Do I just work out the 40% in US $ and convert it to GBP at the current rate and pay that to HMRC?

Thank you.

bowlhead99

deanogiraffe wrote: »

My question is, am I meant to be paying tax on this interest?

Yes - as a UK resident, you have to pay tax on your worldwide income.

I assumed I did have to, so began to register for an online tax return.

That's one way to do it; but if you don't have lots of other things to tell HMRC about (like gains from selling shares, or income from renting out a house, or personal pension contributions that you want to use to lower your tax bill if you're in the high rate bracket), you can probably just tell HMRC how much interest you received in a letter rather than fill out the full tax return, and if the tax is not much they'll adjust your PAYE tax code. But to be honest the full tax return is pretty easy if you have the information about your earnings to hand and don't have much to put into it.

But then I read an article saying you don't have to pay tax on these offshore accounts until you bring the money into the UK, so as long as it stays in the Isle of Man I don't have to do anything.

Is this correct?

Not for the vast majority of people.

If you are 'resident but not domiciled' in the UK, you can sometimes avoid tax on money you make overseas by claiming the 'remittance basis'. So for example an American living in London temporarily might have some income outside this country. As a UK resident he would pay UK tax on his UK income just like you and I, but wouldn't necessarily pay UK tax on his whole worldwide income.

If that non-UK-domiciled person earned under £2k a year from his 'offshore' dollar accounts and didn't bring them into the UK, HMRC will ignore them. If they were over that amount (and there are some people like Roman Abramovich who probably have millions or billions of non-UK income while living here), they'd have the choice of paying UK tax on all of them, or claiming the remittance basis, where they only pay UK tax on what they actually transfer into the UK, as long as they pay a flat £30k fee.

If you are a UK person who just happened to be non resident for a while, and now you are back, you are UK domiciled, so this 'remittance basis' is not relevant or available to you.

https://www.gov.uk/tax-foreign-income/non-domiciled-residents

Also, if I do have to pay tax on the interest, how much would I have to pay? My annual salary is over the threshold for the higher rate of tax, so does this mean I would have to pay 40% tax on all the interest from my Isle of Man account?

Yes, a 40% taxpayer needs to pay 40% tax on all the interest they earn (unless it's in an ISA or a pension). So you have to pay 40% on that $1800 you made. Actually your total tax bill might be worse than that - if you have interest earned on other normal UK bank accounts, you are supposed to be paying 40% tax on those too. The banks will only take off a maximum of 20% at source. So if you have a normal UK high interest current account or savings account that earned £100 of interest over the year, the bank probably took off £20 and you still owe £20.

So, add up all your gross interest (including all your UK and non-UK interest)and see what 40% of it is, and then whatever has not already been taken off by the UK banks, is outstanding for you to pay.

Also, how does this work if the money is in US $? Do I just work out the 40% in US $ and convert it to GBP at the current rate and pay that to HMRC?

You owe the tax on what you earned when you were paid it rather than specifically at today's rate. So if you earned $100 today it is worth £67. But if you earned $100 last July, it was worth £59, so you shouldn't now need to pay tax on it as if you earned £67.

HMRC publish from time to time a list of 'official' exchange rates which will be helpful if you didn't convert the money to GBP at the time. See https://www.gov.uk/government/publications/exchange-rates-for-customs-and-vat-monthly for the rates each month or an average for the year to end of March 2015. You can probably use other reasonable rates or even daily rates, but if you use the ones from HMRC website they won't complain if they look into it and ask to see your workings, (although you don't have to give them any workings or statements unless they ask, which is rare - it is after all supposed to be a 'self assessment'). All they need to know is the GBP amount you were paid in the tax year.

Not that you are thinking of not telling HMRC, but just in case, be aware that if you had $130k in your Nationwide IOM bank account at 31 Dec, Nationwide will be telling the IOM tax authority about it when their annual returns are due, who will pass that info on to HMRC. Then, HMRC might be curious about that, if they know you have 'offshore' assets of $130k and never tried to pay any extra tax on income.

deanogiraffe

Thanks for that comprehensive reply. I appreciate all your advice.

I am definitely intending to pay the tax on the interest, I boycotted Starbucks for their non-payment of UK tax, so I'd be a bit of a hypocrite if I didn't!

I'm a bit surprised by the fact that banks only take off 20% from UK based bank accounts that pay interest. I would have thought a mechanism would exist in the banking world to automatically look at income and adjust the tax garnered on the balance at the correct rate automatically. Or when applying for a bank account, look at the applicants annual salary on the application and apply the correct tax rate accordingly. I imagine a lot of tax goes missing with the current way?!

bowlhead99

Yes, tax probably does go missing the current way. And from next year, potentially some more will go missing as HMRC will allow everyone some nominal allowance of savings interest income without needing to pay tax , resulting in UK banks stopping deducting interest at source altogether, and leaving those basic or higher rate taxpayers who get more than the allowance to make an HMRC return (but with the advantage that a great many people get taken out of tax altogether).

However, whether you want to tell your bank your salary every single year or not, they can't possibly know whether you will get a pay rise, bonus, change jobs, make a large pension contribution or charitable donation, receive dividends, get paid lots of interest from other banks, or rental income on a property, etc etc, and therefore whether the next incremental pound they pay you ought to attract an incremental 20p or 40p or 45p or 60p etc etc.

So, at the moment all the banks will do is take 20% which covers most people, or take nothing if you fill out a special declaration that you're going to earn too little this year to pay any interest tax, and leave those others who are above basic rate tax to sort themselves out direct with HMRC at some point within 9-10 months after the end of a tax year.

You are the only one in a position to know what you owe overall for the year, and so having banks administer your tax in a more complicated way would just make banking services more expensive or interest rates lower...

deanogiraffe

I guess when you put it that way it makes sense. Thank you.