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New Cleansing Rules

Private Clients - 20 Feb 2018

A number of changes to the taxation of non-domiciliaries (non-doms) came into force in late 2017 and apply retrospectively from 6 April 2017. One change provides a limited window of opportunity for non-doms who have cash which consists of a mixture of income, capital gains and/or capital to separate out these funds, thereby providing a chance for some to bring previously "trapped" clean capital or UK taxed funds into the UK tax free. HM Revenue & Customs (HMRC) has recently issued some guidance regarding mixed fund cleansing and how this should work.

Existing mixed fund rules

Under the mixed fund rules, where a non-UK bank account holds more than one source/type of income and/or gains, the tax treatment of any remittances to the UK is determined according to strict ordering rules. These rules often result in the least favourable (highest tax bracket) items being deemed to be remitted first. It can be very difficult to access any amounts of capital or previously taxed funds, which could in theory be remitted to the UK free of tax.


Mixed fund cleansing

In order to encourage any non-doms (except ‘Formerly Domiciled Residents’) to bring funds to the UK, they now have a limited opportunity to ‘cleanse’ or ‘un-mix’ any mixed funds they may have maintained overseas. Unlike other reliefs in the new legislation, there is no requirement to be a long-term UK resident and to have paid the Remittance Basis Charge. However, the remittance basis must have been claimed at least once between 2008/09 and 2016/17. This limited opportunity will cease to be available on 6 April 2019, from which date it will only be possible to remit funds to the UK under the current mixed fund rules set out above. In the meantime, this provides non-doms with the ability to access capital, previously taxed amounts and/or gains taxable at a lower rate, held in non-UK bank accounts.

The new rules only apply to cash held in a bank account. This means that any other assets would need to be sold and ideally, the proceeds deposited in a new overseas bank account from which the relevant un-mixing can take place. When selling overseas assets, some non-doms may also be able to benefit from rebasing which could increase the amount of clean funds which can be remitted. There is no deadline to remit the funds to the UK (which could then fall within the scope of Inheritance Tax) but the cleansing must have been undertaken by 5 April 2019. The HMRC guidance also confirms that the cleansing opportunity is available on joint accounts, although there is no requirement for both account holders to take advantage of this.

Once the exact split of funds within the account is known, it will then be possible to transfer each of the different sources into new or existing segregated overseas bank accounts. To document the cleansing, it will be necessary to ‘nominate’ the funds being transferred. HMRC has indicated that the normal mixed fund ordering rules will apply to transfers if no nomination is made by 5 April 2019, or where the nomination is incorrect, e.g. where the exact split of funds has not been identified.

Where it is not possible to identify all amounts in an account it will still, in some circumstances, be possible to cleanse the amounts which can be identified.

There are specific rules regarding pre 6 April 2008 mixed funds, which may also be cleansed under this opportunity.



A taxpayer has a mixed fund containing £100 of ‘clean capital’ held before they became UK tax resident, £100 of non-UK interest and £200 of non-UK capital gains (both the interest and gains were earned in the same tax year).

If there was a remittance of £300 to the UK from the above account, the usual ordering rules are such that the £100 of interest would be remitted first and then £200 of capital gain, resulting in a UK tax charge of £85 (£100 x 45% + £200 x 20%).

If the cleansing had been undertaken, the tax on remitting £200 would have been reduced to £40 as the clean capital, the gains and the interest could have been segregated and then remitted in a more favourable order i.e. £100 clean capital first (no UK tax charge) and then £200 of capital gain (charged at 20%).


Some points to consider

  • Do I have an offshore account currently holding funds held prior to arriving in the UK that I would like to access in the UK tax free? Or could I generate such funds, e.g. by selling an asset which qualifies for rebasing or is known to be bought with clean capital?
  • Do I have an account which contains both income and capital gains and would I be prepared to pay some tax if I could remit a certain amount tax efficiently?
  • Do I need additional funds from overseas to use in the UK, or might I in future?
  • Is there a possibility that I will be making a significant purchase or investment in the UK anytime soon which might not otherwise qualify for any reliefs, e.g. a UK property purchase?
  • Where I have a ‘mixed fund’, can I obtain the necessary records to undertake a conservative recognition exercise, breaking down the fund into constituent parts?
  • Have I mixed UK taxed income and/or gains with untaxed overseas funds (e.g. carried interest partly taxable in the UK)?

US individuals

For those individuals who are also subject to US taxation, further consideration is needed when remitting funds to the UK given the complex interaction between the UK and US with regards to claiming foreign tax credits to mitigate double taxation. The US foreign tax credit rules often require that the associated foreign tax be paid by a certain date before a credit is allowed. Being able to now identify recently earned income and gains - and especially clean capital - could enable an individual to access funds in the UK which may have previously seemed off limits.


How we can help

At Frank Hirth, we are well placed to:

  • Carry out a mixed fund analysis, working through the transactions to identify the various components to the fund;
  • Advise on the UK tax impact of remitting those components;
  • Provide guidance as to the practicalities and mechanics of cleansing and segregating; and
  • Consider the US/UK tax interactions where applicable.

Please contact Sarah Farrow or your usual Frank Hirth contact if you would like to explore this further.



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Sarah Farrow

Sarah Farrow


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