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Residence, Domicile and Remittance Basis Manual

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Remittance Basis: Amounts Remitted: Offshore Transfers: Composition of a mixed fund - offshore transfers - Example 2 offshore transfer covering two years

Lorraine, a remittance basis user, opens a bank account in Bermuda into which is paid both UK source (taxed) income and her foreign income and gains. Lorraine makes a few transfers from this account to her UK account to meet UK living expenses. She also transfers money from this account to her other offshore account in Jersey, as well as using it for several offshore purchases.

Account 1 Lorraine’s Bermuda account

  Credit Debit Balance Category
s809Q(4) Note            
               
  Year 1            
  15 Jan Capital £1,000,000   £1,000,000 i 1
  30 Jan UK salary £10,000   £1,010,000 a  
  30 Jan Bank interest £5,000   £1,015,000 d  
  30 Jan Overseas salary (net of tax) £5,000   £1,020,000 f  
  3 Feb Transfer to UK account   £5,000 £1,015,000   2
  28 Feb Dividend £2,000   £1,017,000 g  
  28 Feb UK salary £10,000   £1,027,000 a  
  28 Feb Overseas salary £5,000   £1,032,000 f  
  3 March Purchase of shares in foreign company   £800,000 £232,000   3
  10 March Transfer to UK account   £5,000 £227,000   4
  31 March UK salary £10,000   £237,000 a  
  31 March Overseas salary (net of tax) £5,000   £242,000 f  
  2 Apr Transfer to UK account   £5,000 £237,000   5
  Year 2            
  30 April UK salary £10,000   £247,000 a  
  30 April Overseas salary (net of tax) £5,000   £252,000 f  
  3 May Transfer to UK account   £5,000 £247,000   6
  15 May Transfer to UK account   £100,000 £147,000   7
  31 May UK salary £10,000   £157,000 a  
  31 May Overseas salary (net of tax) £5,000   £162,000 f  
  8 June Transfer – A2Z travel services   £20,000 £142,000   8

Year 1

Note 1 - The £1,000,000 credited to the account on 15 January was inherited under Lorraine’s great aunt’s will, and is ‘clean’ capital.

Note 2 - The £5,000 transfer to the UK on 3 May is a ‘remittance’ from a mixed fund within section 809Q(1). 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 (f) Earnings subject to a foreign tax £5,000
Para (i) Inherited capital £1,000,000

The remittance is regarded as coming from the ‘earliest paragraph’, that is Para (a), so the £5,000 is UK employment income, so there is no taxable remittance of foreign income nor further tax to pay upon remittance.

Note 3 - The purchase of shares on 3 March (£800,000) is an ‘offshore transfer’. By the end of the tax year the shares purchased have not been sold, brought to the UK or otherwise used 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) Relevant foreign income £5,000
Para (f) Earnings subject to a foreign tax £10,000
Para (g) Relevant foreign income subject to tax £2,000
Para (i) Inherited capital £1,000,000
    £1,032,000

The ‘offshore transfer’ (the shares purchase) consists of an appropriate proportion (100/129) of each kind of income, gain or capital, within the mixed fund, that is:

Para (a) Employment Income £11,628
     
Para (d) RFI £3,876
Para (f) Earnings subject to a foreign tax £7,752
Para (g) RFI subject to tax £1,550
Para (i) Income or capital not within another paragraph £775,194
    £800,000

Note 4 - The £5,000 transfer to the UK on 10 March is a ‘remittance’ from a mixed fund within section 809Q(1). 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 the mixed fund consists of:

Para (a) Employment Income £3,372
     
Para (d) RFI £1,124
Para (f) Earnings subject to a foreign tax £2,248
Para (g) RFI subject to tax £450
Para (i) Income or capital not within another paragraph £224,80
    £232,000

The remittance is regarded as coming from the ‘earliest paragraph’, that is Para (a), £3,372, Para (d) £1,124 and Para (f) £504. Of this amount, £1,124 and £504 are taxable remittances.

Note 5 - The next remittance on 2 April is again £5,000. Two further amounts have been credited to the account which now consists of:

Para (a) Employment Income £10,000
     
Para (f) Earnings subject to a foreign tax £6,744
Para (g) RFI subject to tax £450
Para (i) Income or capital not within another paragraph £224,806

The remittance is regarded as coming from the ‘earliest paragraph’, that is Para (a), so the £5,000 is UK employment income, so there is no taxable remittance of foreign income nor further tax to pay upon remittance.

The account now consists of the following

Para (a) Employment Income £5,000
     
Para (f) Earnings subject to a foreign tax £6,744
Para (g) RFI subject to tax £450
Para (i) Income or capital not within another paragraph £224,806
    £237,000

At the end of the tax year, Lorraine has made taxable remittances of: £1,628 (Para (d) £1,124 and Para (f) £504). She has also made two offshore transfers:

Year 2

At the start of the next tax year, Lorraine continues to make remittances to the UK from the overseas account. The ‘mixed fund’ rules mean that income, gains and capital of a tax year are treated in priority to income, gains and capital of a previous year.

Note 6 - The £5,000 transfer to the UK on 3 May is a ‘remittance’ from a mixed fund 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 in the account for tax Year 2 immediately before the date of the transfer:

Para (a) Employment Income £10,000
     
Para (f) Earnings subject to a foreign tax £5,000

The remittance is regarded as coming from the ‘earliest paragraph’, that is Para (a), so the £5,000 is UK employment income, so there is no taxable remittance of foreign income nor further tax to pay upon remittance.

Note 7 - On 15 May, Lorraine transfers £100,000 to her UK bank account. This is a ‘remittance’ from a mixed fund within section 809Q(1).

Applying the ordering rules section 809Q, and analysing the mixed fund to identify the separate amounts of income, capital gains and capital in the account for tax Year 2 immediately before the date of the transfer:

Para (a) Employment Income £5,000
     
Para (f) Earnings subject to a foreign tax £5,000

So £10,000 of the transfer comes from these two paragraphs of Year 2 income. The outstanding balance of £90,000 must be identified by applying the ordering rules section 809Q, and analysing the mixed fund to identify the separate amounts of income, capital gains and capital in the account for tax Year 1 immediately before the date of the transfer:

Para (a) Employment Income £5,000
     
Para (f) Earnings subject to a foreign tax £6,744
Para (g) RFI subject to tax £450
Para (i) Income or capital not within another paragraph £224,806

So the remaining £90,000 of the transfer will regarded as consisting of monies from Para (a) £5,000, Para (f) £6,744, Para (g) £450 and Para (i) £77,806 from Year 1.

The mixed fund now consists of the following

Para (i) Income or capital not within another paragraph £147,000
     

Note 8 - The payment on 8 June to A2Z Travel Services is to a Jamaican based travel company for a cruise trip around the Caribbean islands for Lorraine and her sister, starting and finishing from Venezuela. This payment is not a taxable remittance as no property is used or service provided in the UK.

Immediately before the transfer the mixed fund consisted of the following

Para (a) Employment Income £10,000
     
Para (f) Earnings subject to a foreign tax £5,000
Para (i) Income or capital not within another paragraph £147,000
    £162,000

The payment is an offshore transfer, so is regarded as consisting of an appropriate proportion (10/81) of each kind of income, gain or capital, within the mixed fund, that is:

Para (a) Employment Income £1,235
     
Para (f) Earnings subject to a foreign tax £617
Para (i) Income or capital not within another paragraph £18,148
    £20,000

Immediately after the transfer the mixed fund is regarded as consisting of the following

From Year 2    
     
Para (a) Employment Income £8,765
Para (f) Earnings subject to a foreign tax £4,383
From Year 1    
Para (i) Income or capital not within another paragraph £128,852
    £142,000