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HMRC internal manual

Capital Gains Manual

Remittance basis: mixed funds: ordering rules: summary

When a sum is transferred out of a mixed fund, it is necessary to identify which component parts of the fund are involved before we can decide whether there has been a taxable remittance. In the example in CG25380 above, the account contains both capital and foreign chargeable gains: to the extent that gains are brought to the UK, chargeable gains will accrue. To the extent that capital is imported, there will be no resulting chargeable gain.

There are rules in the Income Tax Act 2007 at sections 809Q - 809S which govern how transfers from mixed funds are to be identified for tax purposes. These rules apply for the purposes of all forms of income as well as for chargeable gains and detailed guidance is in the Residence, Domicile & Remittances Manual. What follows is a brief outline of the rules principally in terms of chargeable gains.

In very general terms, the mixed fund is analysed immediately before the transfer and its contents classified into various categories of income, gains and capital. The amount transferred from the mixed fund (and which may give rise to a remittance) is then matched with each category in turn in a rigorous order. The transfer is treated as containing the income, gain or capital with which it is matched. The rules ensure that transfers are treated as being made out of categories which give rise to taxable remittances (and which have not been subject to foreign tax) before they are treated as being made out of income etc which is subject to foreign tax, and only when those categories are fully-matched are the transfers treated as being made out of capital and hence not giving rise to a chargeable gain in the UK. So in the example in CG25380 above, the sum of €135,000 is treated as being all of the £12,000 chargeable gain before any of it is treated as pure capital. (Remember that Seamus may be entitled to relief in respect of his loss in 2008-09: see CG25330+ for information on losses under the remittance basis.)

Correct operation of the mixed fund rules is likely to require detailed and careful record keeping by taxpayers.

Taxpayers may prefer to create and operate a number of bank accounts so that income and capital from various sources or of various years is always clearly identifiable as such and the mixed fund rules do not apply when transfers are made from those accounts. This is not in principle objectionable, but you should note that there are specific anti-avoidance rules to prevent abuse of the mixed fund rules (ITA07/S809S). See the Residence, Domicile & Remittances Manual for details.