The Cleansing Opportunity for non-doms’ mixed accounts

Thu 14 Feb 2019

The Cleansing Opportunity is a one-off chance for qualifying individuals to identify the make-up of their mixed funds held in offshore accounts and segregate the funds to allow the bringing of funds into the UK in a tax efficient manner.  Cleansing a mixed fund can make the difference between someone paying tax at 0% and 45% on the money they bring into the UK but the process must be completed by 5 April 2019. The analysis work can be time consuming so anybody that wants to take advantage of this opportunity needs to take action now.

Who is affected?

To qualify for cleansing relief taxpayers must:

• have an offshore mixed fund with accurate records on the source of the funds;
• be non-UK domiciled;
• have been taxed on the remittance basis in any tax year from 6 April 2008 to 5 April 2017.

Benefits of Cleansing

When a non-domiciled individual remits funds to the UK from a mixed offshore fund, the funds with the highest tax liability are deemed to be remitted first – i.e. the funds will be subject to income tax to the extent there was income in the account; then capital gains tax where there are sale proceeds; and finally clean capital.  Cleansing allows the clean capital to be separated from the income and capital gains and the individual can then choose the funds they wish to remit.

Cleansing Process

In order to cleanse their overseas mixed funds, the taxpayer must make a transfer of funds from one overseas account A to another overseas account B.  Ordinarily, when a transfer is made from one overseas account A to another overseas account B, the funds transferred are deemed to be split in the same proportion as the split of funds in account A immediately before the transfer.   The cleansing opportunity works by effectively disapplying these usual rules and instead allowing the taxpayer to nominate which funds from account A they are transferring to account B, allowing the tax paper to separate the various different sources of mixed funds.  Any clean capital that was previously held within the mixed fund can then be remitted to the UK tax free.

It is imperative that taxpayer has certainty as to what funds were contained in account A immediately before the cleansing transfer, as the legislation provides for a ‘cliff edge’ effect whereby the relief fails entirely if the analysis is inaccurate.

It’s probably best to illustrate this by example:

Say we have a fund of 1,800 made up of initial capital of 1,000 and accrued subsequent gains of 800 in Account A.  We transfer 800 to a new account B and ‘nominate’ it, that is identify it, as the gains and claim the relief. That means the content of Account A is the capital which we can remit tax free and let’s say we remit 400.

We then subsequently find out that due to an innocent error the gains were actually 799 and the capital 1,001.  What happens is the nomination fails and (without going into the detail) the result of the normal rules instead applying is that Account A is actually made up of capital of 556 and gains of 444.  As a result the 400 remitted is all gains and taxable in the UK giving rise to a liability of 80.  So we move from an expected tax free remittance to a tax liability of 80 as a result of a completely innocent error of 1.

Mazars has developed strategies to reduce the cliff edge effect, however it is still important to be as accurate as possible in the analysis and the process can take some time to complete depending on the time period involved and the number of transactions within the mixed fund.

Next steps

Clients should seek help to review their overseas accounts as soon as possible to identify:

• If they can benefit from cleansing;
• The likely value of any benefit; and
• What action is required before 5 April 2019.

Contacts

For any further information, please contact sean.cockburn@mazars.co.uk or marjory.hounsome@mazars.co.uk.