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Deadline of 5 April 2019
Much has been written about the raft of changes to the taxation of UK resident non-doms which have been implemented recently, some with retrospective effect from 6 April 2017.
A number of earlier proposals in relation to the onward gift rules involving offshore trusts were included in the Finance Bill 2017/2018, with an implementation date of 6 April 2018.
Whilst the changes overall contain little good news, particularly with the retrospective nature of the changes, and the legislation now set out across 2 different Acts with different commencement dates, the new rules are to some extent more complex than ever.
The fact that the uncertainty has now been removed is one small piece of good news and means that taxpayers can now proceed in earnest with reviewing mixed fund accounts and, for those who qualify the rebasing of foreign assets. It is the first of these that I will consider in this article – the cleansing of mixed funds.
The Government is allowing non-doms a one off opportunity to segregate their ‘mixed funds’ to allow more tax-efficient remittances to be made in future. This one-off opportunity has a deadline of 5 April 2019.
In common with other changes to the taxation of returning former UK domiciles this opportunity will not be available to individuals born in the UK with a UK domicile of origin.
As a reminder where an offshore bank account contains a mix of unremitted overseas income, gains and capital, the UK tax legislation sets out the order in which each element is deemed to be remitted. Unsurprisingly this is in the least beneficial manner for the taxpayer, with the latest year’s untaxed income generally remitted first. This can make it difficult for individuals to access their original clean capital (which can be remitted tax free) without first triggering UK tax charges.
As part of the reforms, a window of 2 tax years (from 6 April 2017 to 5 April 2019) was introduced during which individuals can rearrange their mixed funds overseas to segregate them into their constituent parts (e.g. tax-free capital, income, gains) by moving them into nominated offshore accounts. The intention is to provide certainty on how later remittances will be taxed. Once funds have been segregated, the owner will be able to bring ‘clean’ capital into the UK without suffering a tax charge, or to bring lower taxable items to the UK (e.g. capital gains) in priority to higher taxed items (e.g. dividends).
This opportunity only applies to mixed funds consisting of amounts deposited in bank and similar accounts.
It should be noted that a nominated transfer from a mixed fund to a segregated offshore account can only be done once. It could be that several new accounts will be required to segregate the mixed funds (and thereby “cleanse” those funds) effectively.
The initial draft legislation did not specifically allow for the unmixing of any pre 5 April 2008 components of a mixed fund. The legislation does now allow for such funds to be cleansed in the same way as for post 6 April 2008 components. If pre 6 April 2008 funds cannot be accurately categorised, there will be an assumption that the amounts represent untaxed income and gains and so it will certainly be worth taxpayers investing time to properly analyse the make-up of funds and segregating them, particularly where they believe they are likely to contain original sources of clean capital.
Due to the one-off nature of fund transfers to nominated accountants it will be important to fully consider the timing and remittance needs before proceeding with any transfer and nomination thereof.
The legislation is not prescriptive as to how the cleansing will be achieved although HMRC have issued some guidance with a number of examples. Where mixed funds have been invested in other assets there may be further issues to consider.
A further important point to note is that this opportunity applies equally to non doms who are not yet deemed domiciled under the new rules as well as to those who are. Cleansing of mixed funds can be undertaken by any non-domiciled individual who was subject to the remittance basis between 2008/09 and 2016/17. This applies regardless of whether they have paid the Remittance Basis Charge (“RBC”) for any year.
Lets take as an example a non-domiciled individual who became resident in the UK on 6 April 2016. In January 2018 he has filed his first UK tax return and claimed the remittance basis of taxation (with no liability to the RBC). He has a UK source of income in addition to extensive wealth offshore. He has not yet needed to access any offshore funds in the UK and has not made any remittances.
This individual may not yet have considered remittance planning given the short time they have been in the UK. However they have the opportunity before 5 April 2019 to cleanse their mixed funds. If they may be resident in the UK for some time and may need to remit funds to the UK in the future, undertaking some planning now could save tax in the future.
We would recommend that all UK resident non-doms with mixed funds, consider whether it will be beneficial for them to take advantage of this one-off opportunity before 5 April 2019 to segregate them.
For those individuals who will become deemed domiciled as at 6 April 2017 combining fund-cleansing with rebasing for deemed domiciled individuals will not only tidy accounts up but may be used to generate amounts of clean capital for UK expenditure requirements with the potential for a considerable tax saving.
To achieve this, assets held personally outside the UK will be revalued for capital gains tax purposes as if they were acquired on 6 April 2017 (effectively exempting the earlier gain). However, despite lobbying, assets held within overseas structures such as trusts or companies will not benefit from the uplift. It should be noted though that partnership assets and certain offshore investment funds will qualify for rebasing.
Enterprise Tax Consultants are able to offer a full range of advice to UK resident non-doms. In addition to fund cleansing this may include:
Please contact us for a no-obligation initial consultation with one of our chartered tax advisers.