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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: Example 4 - remittances before 6 April 2008


The ‘mixed fund’ rules in s809Q do not apply to amounts that are in an account before 6 April 2008 (FA2008/para 89).

Martyn has lived in the UK for many years. He has paid UK tax on the remittance basis for all relevant tax years and has decided that he will do so again for 2008-2009.

Martyn has his UK salary paid into his British Virgin Islands overseas bank account. He also has a salary for overseas employment and his net salary for that work of £5,000 a month is paid into the BVI account. Dividends from a shareholding in a foreign company are also paid into the account.

On 18 March Martyn sold some of his foreign shares, as he was thinking of purchasing a new property in the Cotswolds. He deposited the proceeds of £5,000,000 from the sale into his BVI account. This amount is made up of £4m capital and £1m gain (no deduction of foreign tax).

BVI Account

  Credit Debit Balance Note  
Tax Year 2007-2008          
  Balance b/f     £47,000 1
31 Dec UK salary (net of tax) £10,000   £57,000  
31 Dec Overseas salary (net of tax) £5,000   £62,000  
3 Jan Transfer to UK account   £5,000 £57,000 2
31 Jan UK salary £10,000   £67,000  
31 Jan Overseas salary £5,000   £72,000  
3 Feb Transfer to UK account   £12,000 £60,000 2
15 Feb Dividend £2,000   £62,000  
29 Feb UK salary £10,000   £72,000  
29 Feb Overseas salary £5,000   £77,000  
3 March Transfer to UK account   £8,000 £69,000 2
18 March Sale of shares        
(£4m capital and £1m gain) £5,000,000        
    £5,069,000 3    
31 March UK salary £10,000   £5,079,000  
31 March Overseas salary £5,000   £5,084,000  
3 Apr Transfer to UK account   £10,000 £5,074,000 2

Note 1 - The balance brought forward of £47,000 is made up of £15,000 UK salary, £25,000 overseas salary and £7,000 overseas dividends all arising in, and credit during that tax year. Martyn has paid the relevant amount of UK tax based upon his UK sources of income and the amounts of foreign income and gains that he has remitted to the UK.

Note 2 - For tax years up to 5 April 2008, there are no statutory rules to determine what amounts remitted from ‘mixed funds’ actually consisted of. Broadly HMRC practice was based on House of Lords decisions, in particular that of Scottish Provident v Allan (4 TC 409/591). In the Court of Exchequer, Lord McLaren said (page 419 ‘un-appropriated remittances must be dealt with according to the ordinary course of business, and these remittances must be presumed to be paid in the first place out of interest so far as they are income, and in the second place of principal or capital. I think that rule results from the fact that no prudent man of business will encroach upon his capital for investment when he has income un-invested lying at his disposal’.

The House of Lords considered that the question of whether any amount of income had actually been received in the UK is essentially one of fact - of tracing in the first instance, or, where direct tracing proves to be impossible, of inference from the known facts.

The principle followed is, therefore, that in the absence of any evidence to the contrary, where capital and income have been paid into a single fund overseas so that they are no longer distinguishable, remittances to the UK out of the fund will be presumed to be income to the extent that there is income existing in the fund at the time that the remittance was made.

Where an overseas ‘mixed fund’ contained an amount that has already suffered UK tax, for example UK salary dealt with under PAYE, the practice (Sterling Trust v CIR 12 TC 868) was that a taxpayer was entitled to say that he or she has remitted income which has already suffered UK tax (to the extent that such income exists in the fund) in priority to income which is assessable on the arising basis.

So to establish the taxable amount of remittances made in the example above in 2007-2008 the account must be analysed. In this case the analysis is straightforward. Martyn has brought £35,000 to the UK between December 2007 and March 2008 to meet his day to day UK spending needs. Applying the Sterling Trust v CIR practice outlined above, the £35,000 can be regarded as remittances consisting solely of his UK salary that has already been taxed under PAYE. Because he has claimed the remittance basis of taxation in respect of his relevant foreign income or foreign earnings for 2007-2008 he has no further amount of UK tax to pay on these amounts that stay in the BVI account.

Note 3 - Although not relevant in this example, for years up to 5 April 2008, where a remittance is made to the UK from a mixed fund into which the proceeds from the sale of an asset (such as a shareholding) has been paid the remittance contains a due proportion of any capital and of any capital gain arising from the disposal.

That is because, unlike income that can be identified separately, a capital gain is merely part of the money received from the sale and has no separate existence within that amount. Refer to the Capital Gains manual CG25380 onwards (and CG25440 in particular).

Example 4 continuation below at RDRM35330