Remittance Basis: Remittance Basis up to 6 April 2008: Mixed Funds: Remittances from a mixed fund
For tax years up to 5 April 2008, there are no statutory rules to determine what amounts remitted from ‘mixed funds’ actually consisted of.
On occasion this created difficulty in determining, for UK tax purposes what a remittance to the UK actually consisted of, for example, was it non-taxable income, employment income, interest, chargeable gains or capital.
Scottish Provident v Allan
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, that is, of tracing in the first instance, or, where direct tracing proves to be impossible, of inference from the known facts.
In the absence of any evidence to the contrary, the principal is that 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.
Only when the income content of the fund is exhausted will any balance remitted be regarded as capital.
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).