Remittances from Mixed Funds

[Barry Hallam]

Imagine this scenario. A Non-Dom client ,who has previously claimed the remittance basis, decides to go on the arising basis for 2008/2009 onwards.

He has a bank account abroad which contains some Pre 2008 income and some income that has arisen after 5 April 2008. He sells an asset, which had previously been purchased with Pre 2008 income and makes a gain and pays the proceeds into the same account. He then withdraws an amount equivalent to the proceeds of the sale from the account and brings it to the UK.

Although on the arising basis for 2008/09 he remains on the remittance basis for Pre 2008 income and gains.

How do you identify what has come out of the account.?

The new rules for remittances give a detailed set of ordering rules for remittances from a “mixed fund” (given s809Q ITA 2007) but these do not apply :

- to the post April 2008 income because it is taxable on the arising basis anyway, or
- to the post April 2008 gain because it is taxable on the arising basis anyway, or
- to the Pre 2008 income included in the proceeds of sale because s809Q does not apply to 2007/08 and earlier years income.

Clearly he is taxable on the income arising in the year and also on the capital gain arising on the sale of the asset – but has he remitted the Pre 2008 income included in the sales proceeds?

HMRC guidance does not seem to cover this, not uncommon, situation.

Any thoughts?

[maths]

Initial thought as follows.

Where an account contains income/gains some of which taxed on arising basis and some on remittance basis case law supports the view that remittances come out of taxed income/gains (ie arising) before remittance basis income (applies bot pre and post FA 2008).

In your example therefore a remittance of the sale proceeds arising on post 6.4.08 asset sale consists of capital gain element together with income which arose post 6.4.08 (ie arising basis income) so that aggregate equals sale proceeds of asset sale ie in principle no remittance of pre 6.4.08 income.

However, if aggregate sale proceeds exceed post 6.4.08 capital gain plus post 6.4.08 arising income then the excess will have come out of pre 6.4.08 income and the "old" remittance rules will apply to determine which pre 6.4.08 income/gains have thus been remitted.

[Barry Hallam]

Thanks for your response Maths.

So are you saying that you simply look at what has arisen (and therefore taxable) during the year by the time of the withdrawal and it is only anything in excess of this amount that could be considered a remittance of pre 2008 income / gains.

If that is the the case does it mean you can segregate pre and post 2008 income by simply withdrawing an amount equal to the income or gains arising giving you you two separate pots.

You mentioned case law - do you happen to know which cases support the view that rermittances come out of arising basis income / gains in priority to those that arose when the remittance basis was claimed.

Thanks again for your time.

[maths]

Barry

Set out below some thoughts.Thought a simple example would help (me if not you !!).

Assume, say, 200 RFI arose in 07/08.

Assume 70 is used in 08/09 to purchase asset which is then sold in 08/09 producing sale proceeds of 250 ie capital gain 180.

Assume interest in 08/09 generated of 13 (effectively say 10% on the unused 130 in the bank account).

Assume all monies in same bank account.

Assume non-dom taxpayer subject to arising basis re 08/09.

Assume 250 brought to the UK on 5.4.09; what is deemed remitted?

1. Even though taxpayer taxed on arising basis the account is still a mixed acccount (under old and new rules).

2. However, the new rules ascertaining what is actually remitted are inapplicable as there is no income/gains arising on or after 6.4.08 which are subject to remittance treatment.

3. As a consequence, under general law (see below) income taxed on arising basis remitted in priority to income taxed on remittance basis and in priority to gains taxed on arising basis.

4. Thus, remittance comprises 13 (of interest); 180 (capital gain); balance of 57 comprising the 07/08 RFI.

5. The 70 of 07/08 RFI used to purchase asset on the sale of the asset still remains as 07/08 RFI; in other words it does not become part of 08/09 "capital".

The relevant cases (3 above) are Sterling Trust v CIR; Scottish Provident v Allan; and Duke of Roxburg v CIR.

If in 09/10 remittance basis claimed and if in 09/10 say RFI 50 was credited to the same account and then on 5.4.10 a remittance of say 90 occurred the new mixed fund rules would apply. Remittance would comprise the 50 RFI which arose in 09/10 plus 13 (08/09 interest) plus 27 (08/09 capital gain). Nothing demed remitted re 07/08.

[Barry Hallam]

Maths - thanks once again for your time.

The example does help to focus on the position. I have two queries.

1) in your examples the remittance to the UK was at the end of the year - would you agree that whenever a withdrawal is made from an account you can only look at what was in the account at the time. So your example works provided the "asset" purchased with the £70 was not UK situs or brought to the UK. If it was there would be a remittance of £70 RFI from 2007/2008 even though the account subsequently had some income and gains arising. Or are you able to wait until the end of the year and establish what arose and treat that as being remitted first.

2)I don't quite follow your example into 2009/2010. At 5 /4 / 09 the account consisted of £143 which was wholly 2007/08 RFI (the interest and gain having been remitted as part of the £250. So if £50 is added in 2009/10 and £90 remitted on 5 / 4 / 10 shouldn't that be taken as the £50 arising in 2009/10 plus £40 out of vthe 2007/08 RFI. How can you count the interest 9£13) and part of the gain (£27) twice?

There must be a great number of Non Doms going onto the arising basis but the HMRC guidance gives almost no detail of how to deal with, what must be, a very common situation. It seems from what you say that it should be be very straightforward to segregate old and new funds simply by withdrawing anything that arose after 5 / 4/ 08.

Thanks

[maths]

Re your para (1):

The application of the mixed fund remittance rules in FA 2008 apply only where post 5.4.08 income/gains are involved.

The rules are applied at the date of the remittance of such income/gains not on a tax year basis.

However, pre FA 2008, what was remitted was determined on a tax year basis not at the time of the actual remittance.

As taxpayer in our example is taxed on arising basis for 08/09 and given that the only income arising in 08/09 is 13 of interest If as you suggest 70 of RFI arising in 07/08 was used to purchase asset in 08/09 which was UK situs or brought to the UK (for benefit of the particular individual) the FA 2008 mixed fund rules are inapplicable ie what has been remitted determined on tax year basis not at time of remittance. If this is correct then the remittance is 13 (ie income taxed on arising basis) plus only 67 form 07/08 RFI.

Re your para (2):

I agree your comments. My 09/10 example was premised on no remittances in 08/09 ie only remittance was the 90 in 09/10. Should have made it clearer.

I agree with you that a lot of how FA 2008 will apply in practice is still unclear and I am not suggesting that my analysis is correct but is my best stab at it!!

[Barry Hallam]

Maths - I think we're getting there! Thanks for your continued input.

I think I am clear now what happens regarding remittances, but do you apply the same rules to a withdrawal from an account which does not become a remittance e.g. a transfer to another offshore account or do you apply the post 2008 rules for a remittamce basis user i.e. you take a bit of everything in the account.

If it is the former it must be simple to "clean up" an account and leave the funds offshore.

[maths]

The "offshore transfer" concept was only introduced in FA 2008; it is only applicable re post 5.4.08 income/gains.

Thus, the "appropriate proportion" approach (s809R(4)) can only apply where a transfer is effected from one offshore account to another where the transfer is from a mixed fund which contains post 5.4.08 income/gains.

Using the figures from the continuation second of my examples above (ie where 50 RFI arises in 09/10 and remittance basis claimed for 09/10 and assuming no remittances in 08/09) and let's assume a transfer of 90 is effected from the offshore account to another in 09/10.

The transfer of 90 would appear to be an offshore transfer (ie one offshore account to the other). The only post 5.4.08 income/gains for 09/10 is the 50 RFI. Thus, even under the pro rate approach the whole 50 is assumed to have been transferred from one account to the other.

Thus, 40 (ie 90 less 50) is till to be accounted for.

An examination of the account for 08/09 is thus needed (the arising basis tax year).

Presumably what is now remitted between the two accounts is the whole of the 13 RFI plus a balancing 27 of gain (both already taxed on the arising basis); ie the offshore transfer rules not applying as the remittance basis of taxation does not apply to these categories as already taxed on arising basis.

[letha]

Are we more or less saying that if you have gains that you are now declaring on the arising basis that the first money you bring in is the gain that you have reported? Does it really matter if it comes from the very same account? For example if you have a broakerage account in the states you will find that when selling shares they will have to put the total proceeds into the account in which the shares are held. You have the same issue with dividends and interest with any American financial institutions. Banks in say Jersey have a system whereby they put the interest from one account into another to avoid mixing funds. This system is designed around the UK tax rules but American Financial institutions are doing nothing to cater for UK tax rules. I had been lead to believe that if you set up an account and then move everything that you are reporting on the arising basis into it that this would not be considered to be mixed funds. So you have accounts A,B,C and you create account X. When you make a capitla gain in account A you move it within the first day or two to Account X. You have a dividend in Account B and you do the same and you have interest in account C and you do the same. So the amount in account X is equal to the total you have declaired on the arising basis. You declare 150 you remit 150.

[maths]

I am a little unclear as to the point you are trying to make?