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RDRM35310 | Remittance Basis: Amounts Remitted: Mixed Funds: Example 3 - (continuation) remittance of funds covering two years

From HM Revenue & Customs · Remittance Basis and Domicile Manual

Refer to RDRM35300 for earlier part of example 3

Immediately after the £10m transfer in Year 2 (refer to example 3) Jeff’s mixed fund contains £84,000 of capital from Year 0 (from the sale of shares).

For the rest of Year 2, Jeff continues to have his UK salary of £10,000 a month and his ‘relevant foreign earnings’ of £5,000 a month paid into that same account. Both salaries are paid on the last day of each month. There are no further credits or debits from the account in Year 2.

In Year 3 Jeff purchases shares in a UK company by direct debit from this account (£150,000). He also transfers £5,000 to meet daily living expenses. These amounts are remittances from a mixed fund to which the rules in s809Q apply.

His UK salary is credited net of PAYE and NIC. His overseas salary is subject to a foreign tax deducted at source, and is credited net. His overseas dividends are also credited to the account net of overseas withholding taxes.

Jeff’s overseas bank account continuation

DateDecriptorCreditDebitBalanceCategory s809Q(4)
Year 2Balance b/f--£84,000-
31 AugUK salary£10,000-£94,000Para (a)
31 AugOverseas salary£5,000-£99,000Para (f)
30 SeptUK salary (net of tax)£10,000-£109,000Para (a)
30 SeptOverseas salary (net of tax)£5,000-£114,000Para (f)
31 OctUK salary£10,000-£124,000Para (a)
31 OctOverseas salary£5,000-£129,000Para (f)
30 NovUK salary£10,000-£139,000Para (a)
30 NovOverseas salary£5,000-£144,000Para (f)
31 DecUK salary£10,000-£154,000Para (a)
31 DecOverseas salary£5,000-£159,000Para (f)
31 JanUK salary£10,000-£169,000Para (a)
31 JanOverseas salary£5,000-£174,000Para (f)
28 FebUK salary£10,000-£184,000Para (a)
28 FebOverseas salary£5,000-£189,000Para (f)
31 MarUK salary£10,000-£199,000Para (a)
31 MarOverseas salary£5,000-£204,000Para (f)
30 April (Year 3)UK salary£10,000-£214,000Para (a)
30 AprilOverseas salary£5,000-£219,000Para (f)
15 MayDividend£2,000-£221,000Para (g)
31 MayUK salary£10,000-£231,000Para (a)
31 MayOverseas salary£5,000-£236,000Para (f)
30 JuneUK salary£10,000-£246,000Para (a)
30 JuneOverseas salary£5,000£251,000Para (f)
30 JuneDirect Debit to purchase UK shares-£150,000£101,000-
3 JulyTransfer to UK-£5,000£96,000-

The direct debit on 30 June (£150,000) is a remittance from a mixed fund.

Applying the ordering rules in S809Q to the account

Apply immediately before the transfer

Step 1

Identify the ‘amount of transfer’ in the relevant tax year (year 3)

Analyse the mixed fund to identify the separate amounts of income, capital gains and capital present for the relevant tax year (year 3) immediately before the date of transfer:

  • Para (a) employment income (including UK employment income) not subject to a foreign tax

  • Para (f) employment income subject to a foreign tax

  • Para (g) relevant foreign income subject to a foreign tax

Step 2

Identify the earliest paragraph above for the relevant year (year 3), which has an amount of income or gain in the mixed fund – para (a).

Step 3

Where the amount of the remittance is greater than the amount identified at step 2, the amount remitted is treated as reduced by the amount identified in step 2.

Step 4

Find the next paragraph/amount for that tax year (year 3). In the order of preference listed above repeat steps 2 and 3.

Step 2 – identify the earliest paragraph – para (f)

Step 3 – where the amount of the remittance is greater

Step 4 – repeat steps 2 and 3

Step 2 – identify the earliest paragraph – para (g)

Step 3 – where the amount of the remittance is greater.

At this stage all the amounts credited to the account in year 3 have been matched against remitted amounts. Income and capital of the next previous year, (year 2), must now be considered – so return to Step 1 for year 2.

Step 1

Identify the separate amounts of income, capital gains and capital present for year 2 before the transfer:

  • Para (a) employment income (including UK employment income) not subject to a foreign tax

  • Para (f) employment income subject to a foreign tax

Step 2

Identify the earliest paragraph above for the relevant year (year 2), which has an amount of income or gain in the mixed fund – para (a).

Step 3

Where the amount of remittance is greater than the amount identified at step 2, the amount remitted is treated as reduced by the amount identified at step 2.

Step 4

Find the next paragraph/amount for that tax year (year 2). In the order of preference listed above repeat steps 2 and 3.

Step 2 – identify the earliest paragraph – para (f)

Step 3

If the amount is more than the [residual] ‘transfer amount’, the whole of the remittance comes from that paragraph.

The £150,000 transfer is therefore regarded as a remittance of:

AmountSourceFrom
£110,000UK employment income (Para a)(£30,000 Year 3 + £80,000 Year 2)
£38,000relevant foreign earnings (Para f)(£15,000 Year 3 + £23,000 Year 2)
£2,000relevant foreign income (Para g)(Year 3)

Note - The transfer on 3 July of £5,000 to meet daily living expenses will similarly be regarded as coming from the ‘earliest paragraph’ in the mixed fund, which is paragraph (f) containing £17,000 of relevant foreign earnings from Year 2.

Reconciliation

The mixed fund still contains:

  • £84,000 - capital from Year 0 (from the sale of shares in Year 2)

  • £12,000 - relevant foreign earnings from Year 2

  • £96,000 total

The result of this exercise is that:

  • All of Jeff’s UK salary in Year 3 (£30,000) is deemed to have been brought to the UK first and is not a taxable remittance. In addition, Jeff has remitted £80,000 of UK employment income from Year 2 that is also not taxable again upon remittance.

  • Similarly all of his relevant foreign income (£2,000) and overseas employment income of Year 3 (£15,000) together with £28,000 of relevant foreign earnings from Year 2 are treated as remitted to the UK and chargeable to tax at the appropriate rates of tax -