SolvedRDRM35450 | Remittance Basis: Amounts Remitted: Offshore Transfers: Composition of a mixed fund - offshore transfers - Example 2 offshore transfer covering two years
From HM Revenue & Customs · Remittance Basis and Domicile Manual
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
| Year | Descriptor | Credit £ | Debit £ | Balance £ | s809(4) category | Note |
|---|---|---|---|---|---|---|
| 15 Jan Year 1 | Capital | 1,000,000 | - | 1,000,000 | i | 1 |
| 30 Jan Year 1 | UK salary | 10,000 | - | 1,010,000 | a | - |
| 30 Jan Year 1 | Bank interest | 5,000 | - | 1,015,000 | d | - |
| 30 Jan Year 1 | Overseas salary (net of tax) | 5,000 | - | 1,020,000 | f | - |
| 3 Feb Year 1 | Transfer to UK account | - | 5,000 | 1,015,000 | - | 2 |
| 28 Feb Year 1 | Dividend | 2,000 | - | 1,017,000 | g | - |
| 28 Feb Year 1 | UK salary | 10,000 | - | 1,027,000 | a | - |
| 28 Feb Year 1 | Overseas salary (net of tax) | 5,000 | - | 1,032,000 | f | - |
| 3 Mar Year 1 | Foreign company share purchase | - | 800,000 | 232,000 | - | 3 |
| 10 Mar Year 1 | Transfer to UK account | - | 5,000 | 227,000 | - | 4 |
| 31 Mar Year 1 | UK salary | 10,000 | - | 237,000 | a | - |
| 31 Mar Year 1 | Overseas salary (net of tax) | 5,000 | - | 242,000 | f | - |
| 2 Apr Year 1 | Transfer to UK account | - | 5,000 | 237,000 | - | 5 |
| 30 Apr Year 2 | UK salary | 10,000 | - | 247,000 | a | - |
| 30 Apr Year 2 | Overseas salary (net of tax) | 5,000 | - | 252,000 | f | - |
| 3 May Year 2 | Transfer to UK account | - | 5,000 | 247,000 | - | 6 |
| 15 May Year 2 | Transfer to UK account | - | 100,000 | 147,000 | - | 7 |
| 31 May Year 2 | UK salary | 10,000 | - | 157,000 | a | - |
| 31 May Year 2 | Overseas salary (net of tax) | 5,000 | - | 162,000 | f | - |
| 8 June Year 2 | Transfer - A2Z teavel 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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
| s809Q para | Type of income | Amount |
|---|---|---|
| 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
| s809Q para | Type of income | Amount |
|---|---|---|
| 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:
| s809Q para | Type of income | Amount |
|---|---|---|
| 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
| s809Q para | Type of income | Amount |
|---|---|---|
| Para (a) | Employment income | £8,765 |
| Para (f) | Earnings subject to a foreign tax | £4,383 |
From Year 1
| s809Q para | Type of income | Amount |
|---|---|---|
| Para (i) | Income or capital not within another paragraph | £128,852 |
| - | - | £142,000 |