Keeping Capital Clean Print

A remittance basis user should take care to ensure that income is segregated from clean capital so that HM Revenue & Customs are unable to argue that income has been remitted here. So far as possible original capital should not be mixed with income, or capital gains, but should be kept in a separate account.

Example:

Capital of £500,000 deposited by a non-domiciled UK resident in Jersey Bank (Capital Account).

Interest arising is credited to a second account at the bank (Income Account).

Any withdrawals from the Capital Account may be remitted to the UK without a charge to income tax arising, as the funds in this account are capital only.

Interest in the income account may be withdrawn and spent overseas (i.e. hotel bills whilst on a foreign holiday) without incurring a liability to UK income tax.

Where the capital is used to invest in equities, or other assets on which capital gains may arise, it may be advisable to have the subsequent disposal proceeds paid into a new “gains” account. It is not normally possible to segregate the gain from the initial investment, and the gain arising is treated as being remitted to the UK in priority to the original capital used to purchase the asset. Depending on the proportion of original capital to gain, any tax charge arising on remitting these funds to the UK may be relatively low, and more preferable to remitting income if all clean capital has already been remitted here. If there are several disposals in a year, and the proceeds are of sufficient amount, it may be worthwhile to have a series of accounts into which the proceeds are paid so that one account does not stockpile gains which would prevent remittances of the remaining capital to the UK without remitting all the gains first.

Example:

Stefan, who is not domiciled in the UK has made (out of clean capital)10 investments of £40,000 each in offshore companies and in 2019/20 he sells them all, making gains of £10,000 on each investment. If all the proceeds are paid into one bank account, and he remits £100,000 to the UK he would be remitting the £100,000 gain here and would have to pay CGT of up to £20,000 (i.e. £100,000 @ 20%). The remainder of the account would now be clean capital and that could be remitted to the UK without a further tax charge arising. If instead, the proceeds are paid into a series of say 5 bank accounts, so that they each have £100,000, then on the remittance of £100,000 to the UK from one of the accounts this would be made up of the gain of £20,000, and the remainder would be the original capital of £80,000. Accordingly, the CGT payable for the year of remittance would be reduced to a maximum of £4,000 (i.e. £20,000 @ 20%).

In conjunction with the rules for long term residents introduced from 6 April 2017, a temporary measure was introduced to allow funds in a bank account in which income or gains have been mixed with clean capital to be segregated back into their component parts of capital, income, or gains. The ability to cleanse accounts in this way is available to all non-domiciles who have claimed the remittance basis at some time. There is no requirement for the individual to have paid the Remittance Basis Charge.

The segregation must take place within the 2 years ending 5 April 2019. There is no short-cut approach offered to simplify the calculation of the component parts, and so this will only be available to those individuals who have retained all relevant bank statements so that the amounts of capital, income and gains can be calculated accurately under both the rules applying pre-April 2008 where relevant, and post-April 2008. Cleansing of accounts will not be possible after 5 April 2019.

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