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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

HM Revenue & Customs
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Remittance Basis: Amounts Remitted: Mixed Funds: Remittances from mixed funds - Identifying nature of remittance

The legislation provides rules (five steps) to identify the order of priority in which income, gains and amounts of capital are deemed to have been remitted to the UK (ITA07/s809Q(3) and (4)).

Once income, capital or gains enters a mixed fund it is usually considered to lose its ‘identity’ within the fund. So rules are needed to determine what any subsequent remittance from that fund represents. The practical effect of these rules is that a taxpayer cannot limit the amount of UK tax that may be due by saying, for example, that a remittance from a mixed fund was made out of a particular amount of capital within the fund (and so not taxable) in preference to income in the same fund.

These rules do not apply to foreign income or gains that arose or accrued before 6 April 2008. Refer to RDRM31400 transitional provisions.

Under the rules, untaxed foreign income is treated as being remitted in priority to untaxed foreign gains, which are both treated as remitted in priority to foreign income and gains on which foreign tax has been paid. Amounts of capital of a tax year are taken into account last. These ordering rules are applied to income and gains etc of a later tax year before being applied to those of an earlier tax year. This is known as the ‘Last In First Out’ (LIFO) principle.

Each transfer must be identified separately and ‘matched’ against the amounts of income and capital that were in the fund immediately before the transfer. This is particularly important where more than one transfer is made in a tax year.

Step 1

Assuming Condition A is met, identify the amount taken out of the fund - this is the ‘transfer’ from a mixed fund. The year in which the transfer occurs is the ‘relevant tax year’.

Then, for each tax year in which a transfer is made, the mixed fund must be analysed to identify the amounts present in the order listed below (s809Q(4)) fund immediately before the transfer, for each of the categories of income, gain and capital in paragraphs (a) to (i) listed below.

Start with the ‘relevant tax year’ (if necessary you may need to repeat the exercise for income, gains or capital for each earlier tax years (refer to step 5))

  1. Employment income (which can include UK employment income) not subject to a foreign tax (that is, amounts not appropriate to any of ‘b’, ‘c’ or ‘f’ in the list below). Also refer to Note 6.
  2. Relevant foreign earnings (not if subject to a foreign tax - refer to ‘f’). Refer to Note 7.
  3. Foreign specific employment income (not if subject to a foreign tax - refer to ‘f’)
  4. Relevant foreign income (not if subject to a foreign tax - refer to ‘g’).
  5. Foreign chargeable gains (not if subject to a foreign tax - refer to ‘h’). Also refer to Note 3.
  6. Employment income subject to a foreign tax. Also refer to Note 6.
  7. Relevant foreign income subject to a foreign tax.
  8. Foreign chargeable gains subject to a foreign tax refer to Note 3.
  9. Any income or capital not included in one of the previous eight categories. Refer to Note 1.

Note 1 - category (i) in this list includes UK income and gains and both UK and non-UK capital amounts but not income from UK employment, which is likely to fall within Para (a).

Note 2 - The ordering and identification rules (see below) mean that all the income and capital of a later tax year will be treated as remitted before any of the income and capital of an earlier year.

Note 3 - Only non-domiciled remittance basis users can pay tax on the remittance basis in respect of foreign gains (ITA07/s809Z7(2)(d)).

Note 4 - Also refer tos809R for additional rules relating to Step 1. These additional rules may apply where there is an offshore transfer of funds. Offshore transfers include: transfers from one overseas bank account to another and foreign expenditure, including the purchase and sale of non-UK property, using money from a mixed fund.

Step 2

In the mixed fund identify the earliest of paragraphs (a) to (i) above for which the amount determined in Step 1 is not nil, starting with paragraphs for the ‘relevant’ tax year.

If the amount in the fund for that ‘paragraph’ is more than the amount of the transfer, treat the transfer as containing income or capital in the amount and of the description within that paragraph. It is not then necessary to consider Step 3.

If the amount in the fund for that ‘paragraph’ is less that the amount of the transfer, treat the transfer as containing income or capital in the amount and of the description within that paragraph. Then go to Step 3 to determine what the rest of the transfer consists of

Note 5 - All the income or capital considered will be of one tax year, initially the most recent tax year, and then working back through each earlier tax year in turn.

Step 3

Reduce the amount of the transfer (Step 1) by the amount taken into account in Step 2.

If the transfer amount is not nil go to Step 4.

Step 4

If the reduced amount of the transfer is not nil, go back to the mixed fund and find the next ‘paragraph’ for the relevant tax year.

Repeat Step 2 (and 3) taking the reference to the first of paragraphs (a) to (i) as a reference to the earliest paragraph not previously taken into account.

Step 5

If the reduced amount of the transfer is not nil after all of paragraphs (a) to (i) have been taken into account for the relevant tax year, start again at Step 1.

This time allocate income and capital of the previous tax year to the categories in paragraphs (a) to (i).

Refer to the examples.

Also refer to RDRM35200 Mixed funds - Anti-avoidance provisions

Note 6 - UK employment income ‘subject to a foreign tax’

Occasionally UK resident remittance basis users’ UK employment income may be ‘subject to foreign tax’, that is to say another country or government authority (usually their country of nationality or citizenship) will also tax them on this income. In these cases HMRC will accept that the individual’s UK source employment income may still be regarded as within Para (a) in the mixed fund, unless the individual requests otherwise, in which case it will remain to fall within Para (f) as employment income subject to a foreign tax.

This is only relevant where the other country has in fact subjected the UK employment income under consideration to their tax. In some cases no tax will, in fact, have been due in or paid to the other country due to various exemptions and provisions (for example the US has a ‘foreign earned income exclusion’ provision to employment income below a certain level), so the UK employment income will be within Para (a) anyway.

Note 7 - Employees who are resident but not ordinarily resident in the UK

Employees who are resident but not ordinarily resident in the UK and who perform duties of an office or employment both inside and outside the UK (refer to RDRM31140: Relevant foreign earnings) can choose not to apply these mixed fund rules in respect of transfers from an account if, broadly, that account only contains employment income from that employment, gains from employees share scheme related transactions and interest arising on that account in respect of these.

For full details of the practice that applies from 6 April 2009 Statement of Practice SP1/09.

For tax year 2008-09 only HMRC will continue to operate Statement of Practice 5/84 on the same basis as in 2007-08. The statement of practice will operate on a concessionary basis until the end of the tax year 2008-09 and where appropriate apply instead of provisions in Schedule 7 Finance Act 2008 (for example instead of the mixed fund rule). This temporary measure is intended help ensure a smooth transition to the new legislation in 2008-09 for employers and employees who use the statement of practice.