January 10, 2019HMRC Guidance – Deemed domicile rules and cleansing mixed funds – An update from the Chartered Institute of Taxation (CIOT)

From 6 April 2017 those who are resident in the UK for 15 of the prior 20 years are deemed UK domiciled for the purposes of income tax, capital gains tax and inheritance tax. The effect of these deemed domicile rules is to tax long term non-UK domiciled individuals on their worldwide income and gains as they arise, so there is no ability for them to claim the remittance basis of taxation.

Two provisions were introduced to help long term residents move from the remittance basis to worldwide taxation, namely the ability:

  • to rebase certain foreign assets to 5 April 2017; and an interim measure
  • for all remittance basis users to cleanse mixed funds in the two-year period to 5 April 2019.

Note that whilst there is a two-year window – 6 April 2017 to 5 April 2019 – during which cleansing transfers and the associated nomination can take place, the actual remittance of cleansed funds can happen at any time (therefore it could be well outside of the two-year window).

HMRC guidance in relation to the rules on ‘cleansing’ mixed funds can be found here.

The Chartered Institute of Taxation (CIOT) has published professional body Questions and Answers, which are intended to assist professional advisers with a number of areas of uncertainty in the tax legislation.

Given how complex this area of taxation is, individuals are advised to seek professional advice from a specialist prior to taking any action. However, we thought these published Qs and As may be useful as an initial reference point.

HMRC’s comments on the questions and suggested answers are reflected in the document. Where it’s indicated in the document that further discussion is required it means that HMRC do not necessarily agree with the suggested answer and so it should be treated with caution until further clarification has been published. A further update will be issued when these discussions have taken place.

Mixed funds

Broadly, a mixed fund is a fund of money which contains more than one type of income or capital (including ‘foreign chargeable gains’) and/or income or capital from more than one tax year.

However, it is important to note that this opportunity only extends to cash. This means that if an individual has purchased assets with mixed funds, the asset would need to be sold and the proceeds credited to an appropriate account(s).

The ‘cleansing’ of mixed funds enables a bank account containing untaxed unremitted income, capital gains and clean non-taxable capital to be segregated through moving the constituent parts to separate accounts. It will then be possible to remit funds from the new accounts to the UK in the most favourable manner.

In practice these rules are extremely complicated and come with a number of conditions. Broadly, the individual has to be non-UK domiciled, be able to identify the make-up of their mixed funds and have been a remittance basis user under the terms of the legislation prior to April 2017.

Note it is not possible to ‘cleanse’ mixed funds if the client was born in the UK and has a UK domicile of origin.

The draft suggested answers reflect the views of the committee members of the professional bodies involved in their preparation on the generic issues addressed in the questions and draft suggested answers. The questions and draft suggested answers are intended to assist professional advisers in considering the issues, do not constitute advice and are not a substitute for professional consideration of the issues by such a professional adviser in each client’s specific context.

HMRC guidance on the deemed domicile rules applicable from 6 April 2107 can be found here.

Important information:

With investment, your capital is at risk. Tax benefits and allowances described in this document are based on current legislation and HM Revenue & Customs practice and depend on personal circumstances. You should not take, or refrain from taking, action based on the content and no part of this document should be relied upon or construed as any form of advice or personal recommendation.


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