RDRM35710 - Remittance basis: Mixed funds: Cleansing of mixed funds: Failure or inability to identify the sources of the mixed fund
If an individual could not identify all the sources of the amounts contained in each of their mixed fund accounts, they would only be able to apply the cleansing provisions to those amounts they could identify.
It was not necessary to cleanse all overseas mixed fund accounts at the same time, so long as each account (if it were to be cleansed) was cleansed within the 2-year window, ending 5 April 2019.
Nor was it necessary to completely empty the original mixed fund account, though once a nominated transfer from an account had happened it could not be nominated again into that same account.
Example
Torsen is a qualifying individual and has 2 foreign bank accounts, one in Iceland and the other in Liechtenstein. Both contain funds from a number of sources deposited over several years and so are mixed fund accounts.
He wishes to cleanse both accounts, but due to difficulties with the account held in Iceland, he cannot identify any of the funds held in this account. Until he is able to do so, Torsen will not be able to cleanse this account.
Torsen has no such problems with his other account in Liechtenstein. He identifies the various component sources of the funds. He opens up a new bank account for each source and on 18 September 2017 makes a nominated transfer to each of these new separate accounts.
On 13 November 2018 the Icelandic bank is able to provide a breakdown of the funds credited to the account for the 3 tax years prior to and ending on 5 April 2017, but not for the earlier years. The account has been open since 1 July 2010. These amounts are:
2014-2015 Foreign gain £100,000
2014-2015 Foreign income £375,000
2014-2015 Clean Capital £1,500,000
2015-2016 UK gain £1,500,000
2015-2016 Foreign income £400,000
2016-2017 Foreign income £450,000
2016-2017 UK gain £800,000
2016-2017 UK income £650,000
Total £5,775,000
Torsen creates 3 new offshore bank accounts (accounts 1, 2 and 3). He leaves his UK gains of £2.3 million and the UK income of £650,000 in the original account, together with the unidentified £12 million, nominating the following transfers on 18 December 2018:
Account 1 - £100,000 foreign gain
Account 2 - £1,225,000 foreign income
Account 3 - £1,500,000 clean capital
After further research Torsen and his Icelandic bank are able to identify the source of the £12 million. This is made up as follows:
2010-2011 £4 million clean capital
2011-2012 £2.5 million foreign gain
2012-2013 £500,000 foreign income
2012-2013 £2 million UK gain
2013-2014 £1.75 million foreign gain
2013-2014 £1.25 million foreign income
If Torsen wishes to cleanse these amounts he will need to create further new accounts to cleanse the foreign income, gains and capital. He cannot nominate again from the original Icelandic account into the new Icelandic accounts 1, 2 or 3. This would breach the cleansing conditions, as one transfer each from the original Icelandic account to these new accounts has already been nominated.
He could, however, nominate from this account into the new Liechtenstein accounts which contain the same type of funds. Torsen could leave the newly identified UK gain of £2 million in the original Icelandic account. This now only contains UK source income and gains.
Torsen knows that there is no formal nomination process, but he is aware that he has to keep full records of the nominations as part of his existing obligations under S12B of the Taxes Management Act (TMA 1970).
Example
Nadia is a qualifying individual who became resident in the UK from 1 October 2010. She has 1 offshore account in the Isle of Man (IOM) which is a mixed fund account.
She decides to nominate a transfer from this account under the cleansing provisions. Immediately before she cleanses the IOM account it contains:
- £3.5 million of overseas employment income which she earned before coming to the UK.
- 2011-2012 £600,000 foreign gain
- 2011-2012 £250,000 foreign income
- 2013-2014 £180,000 foreign gain
- 2014-2015 £510,000 foreign income
- 2014-2015 £1 million inheritance
- 2015-2016 £500,000 foreign gain
Totals £6,540,000
Nadia sets up 2 new overseas accounts and nominates a transfer from the original account of £1,280,000 foreign gains into the first of the new receiving accounts. In the second receiving account she places the £1 million inheritance. (Again, making the necessary nomination for the purposes of the cleansing provisions). These transfers both happen on 1 April 2019
Nadia subsequently realises on 19 April 2019 that the £3.5 million of overseas employment income which was earned before she came to the UK, but after 6 April 2008, would generally, be treated as clean capital for remittance basis purposes.
Nadia has missed the 2-year window. She is therefore unable to make any further transfers from this account under the cleansing provisions.
The consequence of this is that while the 2 new receiving accounts now only contain one source of income, the original account still contains funds from more than one source that is £3.5 million overseas employment income and £760,000 foreign income The mixed funds rules at section 809(Q) will therefore apply if she remits any of these funds to the UK at a future date. Likewise, the offshore transfer rules (section 809R) will apply to this account.