What is clean capital?

‘Clean capital’ is typically cash or assets held by an individual at the time that individual came to the UK although, in limited circumstances, it can be as a result of a gift or inheritance.

Caution should be exercised when claiming that cash or assets are clean capital as any additional income or gains arising as a result of the holding of clean capital (e.g. interest earned or dividends received) will ‘taint’ the clean capital; if ‘tainted’ the relevant cash or assets will become a ‘mixed fund’, to which various rules apply, and the clean capital treatment outlined below can no longer be claimed in full.

Identifying Clean Capital

Under further responses to consultation, it is proposed that taxpayers be given 24 months (i.e. to 5/4/2019) to identify and separate out clean capital from income and/or gains. If separation can be achieved, the ‘mixed fund’ rules will no longer apply. Undertaking this process for many individually held accounts or trusts might be a significant and expensive exercise; however, there are potentially considerable benefits of holding clean capital and these are set out below.:

Why is clean capital valuable?

Clean capital is valuable as in each of the products below, no tax will be payable on ‘clean capital’ received by the UK resident?

• if held in a trust, the trustee may make capital distribution;
• if held in an offshore life bond, a 5% return of capital p.a. can be realised by way of partial surrender; or
• if held in an offshore deferred variable annuity, payments to the annuitant may be capable of benefiting from return of capital treatment.

Expert advice should be taken if clean capital treatment of cash or assets is to be claimed.