Mixed Foreign Account ‘Cleansing’
Although we advise on segregation of accounts for non domiciliaries this is not always easy or possible to implement in practice. Non domiciliaries may find that – over time – although they have clean capital, they cannot readily access it to remit to the UK because the tax rules treat monies coming from a mixed account as income first and then capital gains and only then as clean capital.
The Government has decided to introduce a temporary two year window from 6 April 2017 to 5 April 2019 in which individuals can rearrange their mixed cash funds banked overseas to enable them to separate those funds into their constituent parts (i.e. income, capital gains, income gains and clean capital). This may enable individuals to access ‘buried’ clean capital for use in the UK and segregate capital gains which was not previously possible.
For example, Oliver inherited an apartment in Rome which he later sold at a capital gain of £500,000. He deposited the sale proceeds of £1,500,000 into an Italian bank account. Under the cleansing provisions Oliver will be able to segregate the capital gain and the purchase funds into separate offshore accounts in the two year period to 5 April 2019. He will then be free to remit the clean capital of £1 million to the UK at any time without a tax charge.
The opportunity only applies to cash deposits and not assets. In the above example, if Oliver retained the apartment throughout the two years ended 5 April 2019 he would not be eligible for cleansing. It might therefore be advantageous for Oliver to accelerate a disposal for cash in order to take advantage of this temporary window of opportunity.
For individuals who have not previously segregated income, the cleansing opportunity will enable them to move this income to a separate account and access capital gains in the UK, generally taxed at a lower rate than income, or even to access the underlying clean capital.
In order to benefit from the cleansing provisions a transfer of money will need to be made from an offshore mixed fund (account A) to a different offshore account (account B) during the two years ended 5 April 2019. This transfer will need to be nominated and no further transfers can then be nominated from account A to account B. Care should therefore be taken in relation to the mechanics and timing of these transfers. It is not yet clear in what form and timeframe a nomination will need to be made.
There will be no requirement for the non domiciliary to make a remittance from their newly segregated accounts in any particular order or within any particular time limit. This will mean that an individual who separates their mixed funds may, if they wish, remit funds from each separated fund, even if that remittance takes place in a later tax year after the transitional period has ended.
Unlike rebasing, this opportunity will not be restricted only to individuals who have been resident for 15 out of the previous 20 tax years. In order to benefit, you will simply need to have been UK resident at some point in time and have used the remittance basis of taxation. This includes individuals who are non-UK resident in April 2017. Even if such an individual has no current intention to return to the UK, the opportunity should be considered in case circumstances change. Unfortunately cleansing will not be available to individuals who become deemed domiciled in April 2017 because they were born in the UK with a UK domicile of origin.
This is likely to be a useful tool for many clients in that it will provide certainty on how amounts remitted to the UK in the future will be taxed. Clients should consider their funding requirements in the UK and review their assets including cash deposits. We can advise on the ability to use these provisions, the extent to which identification is needed and help you balance practicality and ease of administration going forward. Please contact Alice Pearson or your usual contact at Mercer & Hole.
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