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RDRM35470 | Remittance Basis: Amounts Remitted: Offshore Transfers: Composition of a mixed fund - debts - example

From HM Revenue & Customs · Remittance Basis and Domicile Manual

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

On 28 May, Frankie acquires a loan from his Jersey bank that he uses to purchase an asset in Jersey for £200,000 - Note 3. He repays the loan from this account.

Frankie’s bank account in Jersey

DateType of incomeCreditDebitBalanceCategory (S809Q(4))Refer to Note
Opening balance at 6 AprilClean capital from inheritance£80,000-£80,000i-
15 AprilRelevant foreign income offshore dividend (untaxed)£10,000-£90,000d-
30 AprilUK salary£10,000-£100,000a-
30 AprilRelevant foreign income (Jersey bank interest)£5,000-£105,000d-
30 AprilOverseas salary (not subject to foreign tax)£5,000-£110,000b-
3 MayTransfer to UK account-£5,000£105,000-1
15 MayRelevant foreign income£2,000-£107,000d-
31 MayUK salary£10,000-£117,000a-
31 MayOverseas salary£5,000-£122,000b-
3 JuneTransfer to UK account-£5,000£117,000-2
28 JuneMonthly payment - bank loan-£15,000£102,000-3 and 4
30 JuneUK salary£10,000-£112,000a-
30 JuneOverseas salary£5,000-£117,000b-
3 JulyTransfer to UK account-£5,000£112,000-5
28 JulyMonthly payment - bank loan-£15,000£97,000-6
31 JulyUK salary£10,000-£107,000a-
31 JulyOverseas salary£5,000-£109,000b-
3 AugustTransfer to UK account-£5,000£102,000-7
15 AugustCheque - ZZZ Cars Ltd-£25,000£77,000-8
28 AugustMonthly payment - bank loan-£15,000£62,000-9
31 AugustOverseas salary£5,000-£67,000b-
31 AugustUK salary£10,000-£72,000a-
3 SeptTransfer to UK account-£5,000£67,000-10

Note 1 - Using the ordering rules at ITA07/s809Q, 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.

Note 2 - The remittance on 3 June is also matched against the UK salary from that tax year credited to the account before that date.

Note 3 - The £200,000 used to pay for the assets is borrowed capital and is not in itself a remittance or an offshore transfer. However, subsequent payments of interest and capital used to repay the loan are offshore transfers.

Note 4 - At the time immediately before the first repayment of the debt occurs on 28 June, the ‘mixed fund’ is composed as follows:

Type of incomeAmount
‘Clean capital’£80,000
UK salary£10,000 (refer to Note 4a)
Relevant foreign earnings£10,000
Relevant foreign income£17,000
-£117,000

Each kind of income within the mixed fund

The repayment of the monthly bank loan of £15,000 is an offshore transfer, consisting of an appropriate proportion of each kind of income within the mixed fund, that is:

Type of incomeAmount
Clean capital£10,256
UK salary£1,282
Relevant foreign earnings£1,282
Relevant foreign income£2,180
-£15,000

The property acquired by Frankie using the loan is now regarded as containing this income.

Note 4(a) - Although £20,000 of Frankie’s UK salary has been credited to the account, £10,000 has already been remitted prior to 28 June (refer to Notes 1 and 2).

Note 5 - The next remittance on 3 July is again £5,000 that is matched against the UK salary credited to the account before that date.

Note 6 - At the time immediately before the repayment on 28 July, the ‘mixed fund’ is composed as follows:

Type of incomeAmount
Clean capital£69,744
UK salary£13,718
Relevant foreign earnings£13,718
Relevant foreign income£14,820
-£112,000

The repayment of the monthly bank loan of £15,000 is an offshore transfer, consisting of an appropriate proportion of each kind of income within the mixed fund, that is:

Type of incomeAmount
Clean capital£9,339
UK salary£1,838
Relevant foreign earnings£1,838
Relevant foreign income£1,985
-£15,000

The property acquired by Frankie is now regarded as containing this income.

Note 7 - A further £5,000 remittance on 3 August is again matched against UK salary.

Note 8 - The payment of £25,000 to ZZZ Cars is to buy a car and is a taxable remittance. Immediately before the transfer the mixed fund is composed as follows:

Type of incomeAmount
Clean capital£60,405
UK salary£16,880
Relevant foreign earnings£16,880
Relevant foreign income£12,835
-£107,000

This £25,000 remittance is matched firstly against UK salary (£16,880), then against relevant foreign earnings (£8,120).

Note 9 - At the time immediately before the repayment on 28 August, the ‘mixed fund’ is composed as follows:

Type of incomeAmount
Clean capital£60,405
UK salary£nil
Relevant foreign earnings£8,760
Relevant foreign income£12,835
-£82,000

The repayment of the monthly bank loan of £15,000 is an offshore transfer, consisting of an appropriate proportion of each kind of income within the mixed fund, that is:

Type of incomeAmount
Clean capital£11,049
Relevant foreign earnings£1,603
Relevant foreign income£2,348
-£15,000

Note 10 - The fifth remittance on 3 September is again £5,000 that is matched against the UK salary from that tax year credited to the account before that date.

The account now contains £77,000

Type of incomeAmount
Clean capital£49,356
UK salary£5,000
Relevant foreign earnings£12,157
Relevant Foreign Income£10,487

For the purposes of this example, assume that on 8 September Frankie wins the Jersey local lottery (‘clean capital’) and uses his winnings to pay off the outstanding loan.

Three years later, Frankie brings the property acquired with the loan to the UK. The property is a mixed fund, and it is regarded as containing the income and capital used to pay off the loan, that is:

Type of incomeAmount
UK salary£3,120
Relevant foreign earnings£4,723
Relevant foreign income£6,513
Clean capital£185,644
Frankie has remitted foreign income of£11,236