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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

Remittance Basis: Amounts Remitted: Offshore Transfers: Offshore transfers - composition of transfer

ITA07/s809R(4) provides the rules that are required to determine what is regarded as ‘leaving’ the mixed fund where an offshore transfer occurs. This is necessary to determine the amounts of each type of income/gain/capital amount contained in a mixed fund in order that the ordering rules for remittances from mixed funds at ITA07/s809Q, and particularly Step 1 of s809Q(3) can be applied.

Under the rules for offshore transfers the transfer from the mixed fund is regarded as consisting of the appropriate proportion of each and every amount of each kind of income and capital as contained in the mixed fund itself, immediately before the offshore transfer. Thus all the elements of the mixed fund reduce in proportion too.

The term ‘appropriate proportion’ means the actual amount transferred (or the market value of an asset) divided by the value of the fund at the time of the transfer.

This means that, for example, where an individual sets up an additional offshore account and transfers funds between those accounts, remittances to the UK from any of these accounts are subject to the normal ordering rules for mixed funds (refer to example 1).

The practical effect is that if a new Fund B is created and funds are transferred to that account from existing Fund A it cannot be argued (for example) that Fund A contains only income and Fund B only capital. Instead both Fund A and Fund B are treated as containing the same proportion of capital and income as did the original fund and remittances are dealt with accordingly.

Example 1

Marianne, a remittance basis user, has a bank account in Jersey which contains £10,000 of her relevant foreign earnings, £5,000 of relevant foreign income and £2,000 ‘clean capital’ for 2009-10 and £40,000 of her relevant foreign earnings and £8,000 of relevant foreign income for 2010-11.

She transfers half of the money in this Jersey account to another account in the Isle of Man. Both the Jersey and Isle of Man accounts are now regarded as containing;

  2009-10 2010-11
Relevant foreign earnings £5,000 £20,000
Relevant foreign income £2,500 £4,000
Clean Capital £1,000  

Similarly, property which was acquired through foreign income or gains is treated in exactly the same way as the foreign income or gains from which it was acquired (refer to example 2).

So if an individual purchases an asset (such as a holding of shares in an overseas company) and then sells that property, the amount of money that is credited to the mixed fund 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 shares. This means that it is not possible for foreign income and gains of an individual to be turned into capital and so become not taxable when remitted (refer to example 3).

Example 2

Matilda, a remittance basis user, has, in Year 1, an offshore bank account consisting of £30,000 of relevant foreign earnings, £20,000 of relevant foreign income and £10,000 foreign chargeable gains only. These fall within Para (b), Para (d) and Para (e) of ITA07/s809Q(4) respectively.

She uses £15,000 of this money to purchase a crystal chandelier for her property in Switzerland. The £15,000 offshore transfer is regarded as consisting of the ‘appropriate proportion’ (£15,000/£60,000 which equates to one quarter) of the items in the mixed fund, that is £7,500 of relevant foreign earnings, £5,000 of relevant foreign income and £2,500 foreign chargeable gains.

Example 3

Matthie has £100 of interest and £50 of capital which he uses to buy an asset in Year 1. That asset is sold in Year 3 for £180; the disposal proceeds are a mixed fund. The property (asset and then its disposal proceeds) derive from the interest and the capital and do not lose their character as interest and capital for Year 1. The mixed fund is treated as containing the £100 of interest and £50 of capital for Year 1 and £30 of gain for Year 3.