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Mixed Fund Cleansing Webinar

 

Transcript

Hello, my name is Sarah Farrow and I head up the UK tax team here at Frank Hirth.

Welcome to this short presentation on mixed fund cleansing.

For a non-domiciled individual who is taxable on their remittance basis, it’s always desirable to operate multiple bank accounts which hold different types of income capital or gains.

However, sometimes for whatever reason, individuals end up with multiple sources mixed in one account.

This account is called a mixed fund.

As I have already explained, a mixed fund is an account which contains:

  • more than one kind of income or capital, or
  • income or capital for more than one year.

A mixed fund could also be an asset, such as an investment or even a painting, which is funded by various sources of funds. The different types of income or capital could include employment income, foreign employment income, foreign chargeable gains and even UK source income such as UK investment income.

Where money is transferred from a mixed fun bank account, there are separate rules that apply depending upon whether the transfer is to an offshore account or to a UK account. Where a transfer is made to an offshore account, the transfer takes with it a proportion of each type of income gains or clean capital.

On the other hand, if the same transfer was made to a UK account, different rules apply. In this scenario its necessary to look at what the account contains on a tax year by tax year basis starting with the most recent tax year. The various sources of funds need to be put into a specific order in order to analyse what has been remitted.

So why are the mixed fund ordering rules an issue? You can see from the slide that depending on what the non-UK source is would determine the rate at which its taxed in the UK. This can be up to 45% for income whereas for clean capital this is not taxed at all.

Mixed fund cleansing is an interim measure which was introduced in 2017 and allows an individual to cleanse a mixed fund bank account. This means that if an individual has an account which contains clean capital, but this cant be accessed in the UK because there is also income or gains in the account which would be deemed to be remitted before the clean capital. These rules allow you to identify the clean capital and transfer this to an offshore account from which they can be moved to the UK.

In order to cleanse an account, detailed calculations must be undertaken to analyse exactly what the account contains. This can be complex and time consuming for accounts which have been open for a long time or have made lots of offshore transfers. It is not possible to use estimates and HMRC have confirmed that if the amounts cleansed are inaccurate, for example, if the clean capital figure identified is out by even £1, then the nomination is invalid, and the normal offshore rules will apply.

This slide shows you how to clean a mixed fund so that various sources of funds could be held in various separate offshore bank accounts. This would maximise flexibility of what is remitted to the UK.

The mixed fund cleansing is a great opportunity for individuals who have clean capital trapped in mixed accounts to segregate this in order that the clean money can be accessed in the UK. The rules for cleansing are complex and for some accounts the volume of transactions may mean that the costs of cleansing the accounts makes it prohibitive.  For others, this provides an excellent opportunity to free up funds which can be brought to the UK tax free.

At Frank Hirth we are able to review bank accounts and advise whether these are suitable for cleansing. We can carry out the mixed fund cleansing calculations and we can provide the cleansing nomination forms.

If you would like to discuss this further, please contact me or your usual Frank Hirth advisor. Thanks for listening.