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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

Remittance Basis: Amounts Remitted: Mixed Funds: Remittances from mixed funds in asset form

Example 1

Example 1a

The rules dealing with ‘mixed funds’ mean that where an individual acquires an asset, whether from taxable or non-taxable income, gains or capital, the proceeds from the sale of that asset is not capital. Instead, the amount is made up of the same amounts of capital and foreign income and gains that were used to purchase the asset in the first place.

Example 1

In 2014-15 Joel, a remittance basis user, purchases shares in a foreign company for £8m out of money that is accepted as being 50% ‘clean’ capital from 2014-15 and the remainder his relevant foreign earnings from 2014-15. In 2016-17 Joel sells the shares for £10m proceeds, resulting in a £1.5million foreign chargeable gain.

These proceeds are regarded as consisting of

Relevant Foreign Earning 2014-15 £4m
Foreign chargeable gain 2016-17 £1.5m
Clean capital 2014-15 £4m
  2016-17 £0.5m

Joel invests all the proceeds in a property in Florida, so the property is now a mixed fund which is regarded as containing the same income, gains and capital for the same years (ITA07/s809R(2)). In 2018-19 Joel sells the Florida property for £10m; he has no foreign chargeable gain on the sale. He brings all of the proceeds to the UK. Joel is regarded as remitting the income, gains and capital listed above.

Refer to the Capital Gains Manual for information on computing capital gains. The computation here has assumed certain allowable expenses which have effectively reduced the chargeable gain, so the capital for 2016-17 includes what is effectively a balancing figure to align the actual proceeds with the sum of the known, quantified component parts.

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Example 1a

As above, but instead Joel sells the Florida property for £11m, making a £0.8m gain. The proceeds are still regarded as containing the income, gains and capital that were contained in the house, plus £0.8m gain and a further £0.2m capital from 2018-19.

If in 2019-20 Joel brings all of the proceeds into the UK he will be chargeable on £4m relevant foreign earnings and £2.3m foreign chargeable gains.

If Joel remits only some of the proceeds, say £2.3m, the ordering rules at ITA07/s809Q will treat the £2.3m as consisting of: £2.1m foreign chargeable gains from para (e), (being £0.8m from 2018-19 and £1.3m from 2016-17, all chargeable in the year they are remitted), and £0.2m capital from para (i), being £0.2m from 2018-19.

Income, gains and capital of a later year are dealt with before those of an earlier year, so if these amounts were placed in ‘mixed fund’ order they are:

From 2018-19 Para (e) £0.8m
    Para (i) £0.2m
From 2016-17 Para (e £1.3m
all chargeable in the year remitted, that is, in 2019-20      

This means that foreign income and gains of an individual cannot be turned into capital by putting them through a capital transaction.