To offer some respite following the substantial changes to the UK taxation of certain non-UK domiciled individuals from 6 April 2017, a temporary ‘cleansing’ relief is being offered to permit the rearranging of overseas funds and thereby enable tax efficient remittances. The window of opportunity for ‘cleansing’ or ‘un-mixing’ the funds is open from 6 April 2017 to 5 April 2019.
Back in December 2016, our previous article ‘The good news part 2: Identifying clean capital in a mixed account‘ gave an introduction to the relief but prior to November 2017 we did not have the final legislation to enable clients to take action. HMRC guidance was issued on 31 January but is basic in content.
Qualifying for the cleansing relief
The relief is widely available to non-UK domiciled individuals and in order to qualify for the ‘cleansing’ relief an individual:
- Must have utilised the remittance basis for at least one of the tax years between 2008/09 and 2016/17; and
- Cannot be a ‘Formerly Domiciled Resident’ (born in the UK with a domicile of origin in the UK).
Unlike rebasing relief, there is no requirement for the individual to have paid the remittance basis charge in any year. Cleansing is available to non-UK residents provided they meet the conditions and this could be useful to individuals who have previously lived in the UK and claimed the remittance basis and have subsequently left but are likely to return in the future and will require funding here.
The usual rules for transfers from ‘mixed’ accounts
Whilst it is good practice to segregate offshore accounts; overseas bank accounts or assets can often contain a mix of funds consisting of clean capital and untaxed capital gains plus sometimes untaxed income. These are known as ‘mixed funds’. The usual tax rules determine that a transfer from a ‘mixed fund’ to another overseas account carries a proportion of the constituent parts (income, capital gains, clean capital) over to the new account.
Conversely, there is a deemed order when remitting to the UK from a ‘mixed fund’ and this is broadly unfavourable to the taxpayer with tax free clean capital treated as remitted last, after taxable income and gains.
Effect of the cleansing relief
If a taxpayer qualifies for the cleansing relief, it is possible to ‘nominate’ transfers of cash between overseas bank accounts to consist of a specific type of fund, such as clean capital. This nomination will mean that, for example, only clean capital is treated as being carried over to the second overseas bank account, rather than the usual apportioned mix, which may have also contained any income and capital gains.
A remittance of the clean capital could subsequently be made to the UK from this second overseas bank, to provide additional tax free funds for the taxpayer.
If the funds remaining in the original account comprise a mixture of income and gains which is separately identifiable, this may also be cleansed to segregate the income from gains and facilitate further remittance planning to make use of preferential tax rates and allowances or losses.
Important practical points to consider
The mechanics of the nomination and transfer are complex and it is important to consider the following:
- Only cash can be nominated to be cleansed and as such assets purchased using clean capital would need to be sold, prior to cleansing the disposal proceeds, in order to access the clean capital.
- Joint accounts can be cleansed subject to each holder meeting the qualifying conditions.
- The nomination must take place on a transfer between two overseas bank accounts.
- Only one nomination can be made between two specific bank accounts and new overseas bank accounts may need to be opened to facilitate the cleansing nominated transfers.
- Records of all cleansing nominations need to be retained, to provide clarity as to the transfers that have been made.
- HMRC’s view is that an over nomination can void the cleansing relief. As such a nomination should always be taken on a prudent basis and only where the amount to be nominated of can be clearly identified.
- Where clean capital has been transferred to a trust or spouse, it may be possible for the individual who made the transfer to carry out nominations to access that clean capital, even though the trust or spouse is the bank account holder.
- The new capital gains tax rebasing (see our article ‘2017 Rebasing – a welcome relief’) can be used in conjunction with the cleansing relief but care needs to be taken to identify the funds used to initially purchase those rebased assets.
The cleansing relief provides a unique and time limited window of opportunity in which to rearrange offshore funds and to access clean capital.
Please contact Henry Lowe or your usual contact at Mercer & Hole if you would like to explore the options available to you.