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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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HM Revenue & Customs
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Remittance Basis: Amounts Remitted: Offshore Transfers: Composition of a mixed fund - offshore transfers - Example 1 - purchase of asset

Example 1 - purchase of asset

Ahmid, a remittance basis user has a bank account in the Isle of Man into which is paid both UK source (taxed) income and his foreign income and gains. Ahmid makes regular transfers from this account to his UK account to meet his UK living expenses.

Details of Ahmid’s bank account in the Isle of Man

    Credit Debit Balance Category S809Q(4) Note
             
10 April XYZ (CI) Ltd - proceeds from sale of shares £1,000,000     e 1
15 April Relevant foreign income - offshore dividend £10,000   £1,010,000 g  
30 April UK salary £10,000   £1,020,000 a 2
30 April Bank interest £5,000   £1,025,000 d  
30 April Overseas salary £5,000   £1,030,000 f  
3 May Transfer to UK account   £5,000 £1,025,000   2
15 May Offshore dividend £2,000   £1,027,000 g  
31 May UK salary £10,000   £1,037,000 a  
31 May Overseas salary £5,000   £1,042,000 f  
31 May ABC (IoM) Ltd - purchase of shares in foreign company   £1,000,000 £42,000   3
3 June Transfer to UK account   £5,000 £37,000   4
30 June UK salary £10,000   £47,000 a  
30 June Overseas salary £5,000   £52,000 f  
3 July Transfer to UK account   £5,000 £47,000   5
31 July UK salary £10,000   £57,000 a  
31 July Overseas salary £5,000   £62,000 f  
3 Aug Transfer to UK account   £5,000 £57,000   6
15 Aug Cheque - ZZZ Cars Ltd London   £25,000 £32,000   7

Note 1 - The sale price of the shares includes a gain over the original purchase price of £150,000 that has not been taxed. The purchase was made long before 6 April 2008 and was made using accumulated foreign income and gains which were treated as clean capital.

The mixed fund provisions do not apply to foreign income or gains that arose or accrued before 6 April 2008 (Sch 7 FA2008/para 89). This means that it is not possible to apply the ‘mixed fund’ rules to the £850,000 used to buy the shares.

Note 2 - Using the ordering rules at ITA07/s809Q(1), the remittance to the UK on 3 May is matched against the UK salary from that tax year credited to the account on 30 April, as this is the ‘earliest paragraph’ of income or gains within the mixed fund.

Working this through this example

The £5,000 transfer to the UK on 3 May is a ‘transfer’ from a mixed fund within section 809Q. Applying the ordering rules in that section, and analysing the mixed fund to identify the separate amounts of income, capital gains and capital in the account for each tax year immediately before the date of the transfer:

Para (a) Employment Income £10,000
     
Para (d) RFI £5,000
Para (e) Chargeable gains £150,000
Para (f) Earnings subject to a foreign tax £5,000
Para (g) RFI subject to tax £10,000
Para (i) Income or capital not within another paragraph £850,000

The remittance is regarded as coming from the ‘earliest paragraph’, that is Para (a), so the £5,000 is UK employment income. Although money has been brought into the UK, there is no taxable remittance as the money has already been taxed.

Note 3 - The purchase of shares on 31 May is an ‘offshore transfer’; by the end of the tax year the shares purchase have not, nor on best estimate are they likely to be, a remittance transfer so that s809Q applies.

The account is treated as including the amounts of foreign income and gain that were present immediately before the transfer (ITA07/s809R(4)). The transfer has no effect on the amount remitted in the current tax year but may need to be taken into account in a later tax year.

Immediately before the offshore transfer the mixed fund consists of the following

Para (a) Employment Income £15,000
     
Para (d) RFI £5,000
Para (e) Chargeable gains £150,000
Para (f) Earnings subject to a foreign tax £10,000
Para (g) RFI subject to tax £12,000
Para (i) Income or capital not within another paragraph £850,000
    £1,042,000

The offshore transfer consists of an appropriate proportion of each kind of income, gain or capital, within the mixed fund.

Para (a) Employment Income £14,396
     
Para (d) RFI £4,798
Para (e) Chargeable gains £143,953
Para (f) Earnings subject to a foreign tax £9,597
Para (g) RFI subject to tax £11,517
Para (i) Income or capital not within another paragraph £815,739
    £1,000,000

Note 4 - The £5,000 transfer on 3 June to the UK is a ‘transfer’ to the UK from a mixed fund, and is within s809Q(1). Applying the ordering rules in that section, and analysing the mixed fund to identify the separate amounts of income, capital gains and capital present for each tax year immediately before the date of the transfer:

Para (a) Employment Income £604
     
Para (d) RFI £202
Para (e) Chargeable gains £6,047
Para (f) Earnings subject to a foreign tax £403
Para (g) RFI subject to tax £483
Para (i) Income or capital not within another paragraph £34,261

The transfer is regarded as coming from each of the paragraphs in order; that is £604 from Para (a), and a taxable remittance of £4,396, being £202 from Para (d) and £4,194 from Para (e).

Note 5 and 6 - Both of these £5,000 transfers are to the UK. There have been credits to the fund between the last transfer (Note 4) and this transfer and the fund now contains some employment income (Para a) and additional amounts of foreign earning subject to foreign tax (Para f) in addition to the residue following the last transfer.

The £5,000 transfers made on 3 July and 3 August are regarded as coming from the ‘earliest paragraph’ of income, that is Para (a) - £10,000 of UK employment income credited to the account on 30 June.

Note 7 - The cheque remittance on 15 August is £25,000. This amount was used to buy a car from a UK company. This is also a remittance within s809Q.

Immediately before the transfer the mixed fund consists of

Para (a) Employment Income £10,000
     
Para (d) RFI £nil
Para (e) Chargeable gains £1,853
Para (f) Earnings subject to a foreign tax £10,403
Para (g) RFI subject to tax £483
Para (i) Income or capital not within another paragraph £34,261

The cheque remittance is regarded as coming from each of the paragraphs in order; that is £10,000 from Para (a), £1,853 from Para (e) and £10,403 from Para (f), £483 from Para (g) and £2,261 from Para (i).

The remaining £32,000 at 15 August is also within Para (i)

Refer to example 1 continuation