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14.09.2017 01:49 Age: 2 days

UK Finance Bill provisions intended to encourage remittance are flawed, say experts


Provisions in the newly-published Finance Bill could deter resident non-domiciles from 'cleansing' or 'segregating' offshore capital held in a mixed fund and remitting it to the UK, say experts.

The measures appear in a highly technical section of the Bill governing the conditions under which money held in an overseas fund can be 'cleansed' by identifying income, gains or pure capital and transferring these elements to new accounts. The rules are part of the extensive changes to the non-dom tax rules introduced in the Bill.

The policy was first announced last December and the legislation was intended to be enacted earlier this year, but was shelved because of the general election in June. It has now been brought forward again.

The government's declared intention is to encourage cleansing of mixed funds held offshore by non-doms, so that they can later bring it into the UK, to the benefit of the UK economy, without triggering serious tax consequences. Non-doms are thus being given until 5 April 2019 to separate income, capital gains and capital that have been mixed in a single account. This will allow individuals to separate original clean capital invested from capital gains on the sale of an asset, or to separate capital gains from income. It is anticipated that this should encourage the remittance of significant funds for expenditure or investment.

However, some practitioners believe the legislation as it stands defeats this purpose, and will discourage non-doms from cleansing their 'tainted' capital, leaving it trapped offshore.

The problem is that the relevant offshore transfer provisions do not apply if the money which is paid out of the mixed fund is expected to be remitted to the UK. This, of course, is likely to be the reason for the cleansing, but the rules do not disapply provisions which could treat the segregation as ineffective if that was the intention. Thus the 'cleansing' would not work as intended.

In order to avoid this result, the relevant passage - paragraph 44 of Schedule 8 in the new version - needs to make it clear that the nomination treatment will apply whether or not the cleansing transfer is an 'offshore transfer', says STEP's Technical Committee.

HMRC in private correspondence has offered assurance that relevant persons will be able to cleanse a mixed fund provided the income or gains belong to them. It promises that further clarification will be provided in guidance, but some experts believe that the legislation as worded cannot produce that result.

The STEP Technical Committee's consultation response reads: 'We think that (the relevant paragraph) in any event needs to take account of the fact that the 'offshore transfer' provisions do not apply if it is anticipated that the money which is paid out of the mixed fund will be remitted to the UK (section 809R(6) ITA 2007). Where an account is being cleansed by a transfer of what is thought to be clean capital to a new offshore account, it may of course very well be the case that the taxpayer intends to remit the clean capital to the UK in the foreseeable future so that section 809R(6)(b) will apply with the result that a subsequent remittance would still fall within section 809Q and the cleansing would not have worked as intended. As the purpose of the provisions is precisely to encourage remittances to the UK, taxpayers must be given certainty that the law will work as intended.

In order to avoid any uncertainty, the legislation needs to make it clear that the nomination treatment will apply whether or not the cleansing transfer is an 'offshore transfer'.'

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UK Finance Bill provisions intended to encourage remittance are flawed, say experts