Time to prepare for cleansing relief

Certain UK resident, nonUK domiciled individuals whose tax status changed from 6 April 2017 have until April 2019 to improve their situation and take advantage of HMRC’s cleansing relief.

The relief will enable eligible nondoms (e.g. those who have been taxed on the remittance basis in any year from 6 April 2008 but excluding those born in the UK with a UK domicile of origin) to remit some funds to the UK in a more favourable manner for tax purposes. For example, if they can identify ‘clean capital’ they will be able to transfer it into the UK at any time with no tax charge.

Attaining this favourable treatment requires eligible nondoms to cleanse their mixed funds. Mixed funds are not only overseas funds that represent a mixture of income, capital gains and clean capital, but also overseas funds where those elements arise from more than one tax year. 

Obtaining the cleansing relief involves identifying the constituent parts of any mixed fund i.e. income, capital gains and clean capital. The cleansing then takes place by transferring each segregated element to a new offshore bank account, electing for a disregard of the offshore transfer rules, and nominating the transferred amount as being income, capital or clean capital. Multiple bank accounts will be necessary to receive the transfers, which must be made before 5 April 2019.

Although there is no formal nomination process, records must be kept of all nominations and the supporting calculations to show how the amounts of income, capital gains and clean capital were determined. Note too that the relief only applies to cash transfers, so other assets representing mixed funds would need to be sold and then held in cash.

Meeting the rules around the cleansing relief is likely to be challenging. For example, it could be difficult to identify the constituent elements of a mixed fund where there are incomplete records or many transactions took place over time. However, it should be possible to cleanse mixed funds relatively easily where only one element can be identified e.g. a large capital gain made in one year.

Another complication is that over-nominating an element of a mixed fund (e.g. overstating the clean capital) will invalidate the whole transfer. Computations therefore need to be accurate and it may be necessary to take a conservative approach.

We are still awaiting the publication of detailed FAQs about the operation of the rules. Nevertheless, preparing for cleansing should start now – by reducing assets to cash, preparing mixed fund computations and opening new bank accounts.

Download our factsheet for more details or please get in touch with your adviser for help and advice.

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