Proceeds from house sale in California

Confused here...

In 2005 I sold my house in California before moving to the UK. I wanted to transfer the proceeds to the UK so I could buy a house here eventually.

BUT I couldn't open a dollar account in the UK with my building society. They do have a subsidiary company on the Isle of Man that offered a dollar account, so I ended up opening an account and transferring most of the house sale proceeds into. It has just been sitting there except for about $4,000 in withdrawals. (They convert the dollars to pounds when they transfer money from the Isle of Man account to the mainland UK account.)

Do I report only the amount I've had transferred to my UK Building Society account?

Do I have to file some kind of tax return for the Isle of Man?

Will I have to pay taxes on the whole kit and kaboodle when I buy a house here in the UK and need to transfer the money into my UK account?

With thanks,

Clarelynn

1)  No tax on sale of residence in UK.  Therefore, no tax on the bulk of the money.

2)  Tax on remittances of *taxable* income to UK.  So the bank interest the US account (and later the Isle of Man account) has earned (only since the date you moved to the UK) is taxable since you remitted $4,000 to the UK.

3)  No tax in Isle of Man.

4)  When you bring the "whole kit and kaboodle" over, you'll pay UK tax on the interest earned between the time you took the $4,000 over and the time you took the rest.

5)  The tax on that interest is 40%.  There is a way around it, but not worth the bother if it's only a small amount of interest.

Thanks, Lizzit -- you really know your stuff. Let's see if I've got this right.

None of the house sale money was taxable in the US (under the 250K threshold) and I understand your response to mean that home sale gain isn't taxable in the UK. So none of my US home sale gain is taxable in the UK.

The house money is not taxable regardless of what I spend it on (another house, dog food, or lotto tickets.)

BUT all bank interest is taxable. When you say it is taxable at 40%, are you assuming I'm in a 40% marginal tax bracket here in the UK? I.e., if my income is £25,000, then would I be paying 22% rather than 40% tax on the bank interest?

I moved most but not all of the house money into the Isle of Man account. Would it be wise to move the rest into it now? Will it matter that there was a delay of 1 year between deposits?

With thanks,

Clarelynn

1. If you move the whole lot to the UK you'll have pay UK income tax on the interest.  Until 5 April 2005 the rate charged was indeed 22%.  However following an unintended change in UK law the rate of tax s currently 20%.

2. Just for completeness it is worth saying that if it was American interest the answer would be different because you'd have to gross the interest up to account for US tax.  Because of the delay this will need to be examined with UK tax in mind.

3. However because the dollar has fallen so far you will also have a capital loss in currency terms.  You can't deduct this in the UK (although gains would be taxable) but you might be able to deduct it in the US.

4. Interest in the Isle of Man might have been subject to withholding under the EU Savings Tax Directive, but this can all be reclaimed on your UK return.

5. It is vital that you spend a little time talking about the structure of remittances so you can ensure you have money that is 'clean' of mixtures from a UK tax perspective  now and in the future.   There are many simple ways to pay zero UK tax when you bring money to the UK.

6. Don't forget the bank account goes on the TDF 90-22.1 each year...

5. It is vital that you spend a little time talking about the structure of remittances so you can ensure you have money that is 'clean' of mixtures from a UK tax perspective  now and in the future.   There are many simple ways to pay zero UK tax when you bring money to the UK.

What does this mean?    If the principal is not taxable and the interest is, would it make any difference how the money is brought in to the UK? And how could one bring it in other than by simply transferring it to a UK bank account?

Thanks,

Clarelynn

There are many simple ways to achieve this. 
1. Do not bring it in all at once, or bring it in during different UK tax years.
2. Have more than one account at the same bank and choose to bring the money from the account that has the best tax result (2,3,4 or greater numbers of accounts are a  common standard tax planning technique, depending on circumstances)
3. Close the accounts currently in place and open new accounts with the same bank.
4. Close the accounts currently in place and open new accounts a new bank offshore.

I have been advising on remittances for around 20 years, all of these work but you'd really need a discussion because the golden rule for me -and you I am sure too - is to do the simplest thing providing it is not going to cost too much money. 
(I am assuming that there is no living trust or other trust in place, because for larger amounts setting up a US trust can also eliminate the UK issues).

Guya's saying the same thing as I am. 

If it's a lot of interest, you'll want to do one of the things he suggested - but not without going to someone (like Guya) to help you structure the remittance.

If it's a tiny amount of interest, it's probably not worth the bother of paying an expert to negotiate the remittance.  You'll pay 40% tax on the interest earned in the account since you moved to the UK. 

You can look up how much interest the account has earned and decide whether you want to save 40% of this by paying an expert's salary to help you restructure the remittance into one of the several tax-free methods he's described.