Declaring interest earned by savings accounts outside of Japan

[Flintomatic]

I’ve lived in Japan for more than five years and recently received an inheritance in the UK that I’m minded to stick into a 3-year fixed interest account there. I realise the interest has to be declared as worldwide income and will therefore have to be added to my freelance income in Japan when it comes to submitting tax forms. I fill out the 青色申告, Ao Iro Shinkoku form each year and am wondering if there’s anything in particular I should know when declaring the interest in Japan; eg. is it simply added to my work income and I'm taxed on that grand total?

On the same matter, would I have to pay tax on interest earned to the UK authorities before claiming it back as part of the Double Taxation Agreement that exists between the two countries, or is there a legal way to avoid paying it to the UK authorities in the first place?

[Beaglehound]

Yes, there is a section in the blue form for overseas interest, it is aggregated with your other income so you will be taxed on it at your marginal rate and it will also be assessed for health insurance premiums unless you are on shakai hoken. You need to convert it notionally to yen on the day the interest is received, using the mid-market rate.

As far as I am aware, if you are a British citizen you are entitled to a personal allowance, so as long as you earn less than that from interest you should be fine regarding UK tax. It won't be taxed at source. If you are worried there is an online tool from HMRC that lets you see if they want you to do a tax return.

Also, as an overseas resident it isn't so easy to open a new UK savings account as they generally ask you to confirm you are a UK resident.

[Flintomatic]

Thanks so much, that's really useful. I was looking at was the new British Savings Bonds product, which I believe does not require you to be UK resident (unlike, say, an ISA), though I am in the process of confirming this. Also, something else came to mind - as NS&I premium bonds offer tax free prizes, I'm assuming I would have to nevertheless declare any prizes to Japan as worldwide income, but I wonder if those prizes would also have to be declared to HMRC.

[Beaglehound]

That makes sense, yes NS&I products are fine for overseas residents, though the proof of ID and address requirements for opening an account involve certifying documents, so not without hassle and cost (you may already have an account with them, which would likely make it easier).

Premium bond prizes are totally free from UK tax, though you rightly say that any winnings would be subject to Japanese tax.

[IloveJapan]

I think in Japan they would probably be taxed as “occasional income” but please check! The other thing is I’m not sure if people are allowed to hold premium bonds if they live in Japan.