Bowman Offshore Bank Transfers on Offshore transfers

Bowman Offshore Bank Transfers on Offshore transfers

A non-UK domiciled but resident client has used the remittance basis since 2008/09 and made an
election under TCGA 1992, s 16ZA. Remittances have been made to the UK from a mixed offshore fund.

My non-UK domiciled client has used the remittance basis since 2008/09 and made an election under
TCGA 1992, s 16ZA. He remitted a significant amount of funds to the UK in 2011/12 from a “mixed fund”
foreign bank account (one of several).

The deposits have been analyzed between (broadly) income, gains and clean capital for every year.
However, my queries concern the treatment of withdrawals that are not remittances to the UK or transfers
to other foreign bank accounts.

First, it would appear that income, gains and capital of the fund should not be allocated to the alienation
of funds used for personal foreign expenditure (e.g. payment of a foreign electricity bill). Is this correct?
Such items would, of course, deplete the bank account without any unremitted funds being matched.

Second, $20,000 was withdrawn in 2009/10 to acquire some foreign shares that were sold at a $5,000
loss in 2010/11 (the $15,000 proceeds being deposited in the same bank account).

I have treated the withdrawal as an “offshore transfer” thereby preserving the source of the $20,000
under the anti-avoidance rules (ITA 2007, s 809R (4)). I am also aware of the requirement to trace foreign
income and gains through a series of transactions (see HMRC’s manuals at RDRM35030) that prevent,
for example, reinvested income being converted into gains.

My question is how the $15,000 receipt should be analyzed if the source of the original acquisition was
$8,000 income, $3,000 gains and $9,000 capital. Is $8,000 income deemed to be deposited first,
followed by $3,000 gains and finally $4,000 capital?

I cannot find a rule governing the order of priority. If the loss was large enough, some unremitted income
could be “lost”, potentially giving double relief for the capital loss (reduction of unremitted income and
the capital loss). Surely this cannot be right?

Could any readers shed light on this?

Reply from Nick Harvey, Dixon Wilson

The use of funds that are held overseas and used for personal foreign expenditure is treated as an offshore
transfer on the basis that they are not onshore transfers because any transfer that does not fall within ITA
2007, s 809Q is automatically within ITA 2007, s 809R(5).

This is subject to the anti-avoidance rule in s 809R (6), which states that the funds transferred should not
fall within s 809Q before the end of the tax year and, on the basis of the best estimate that can reasonably
be made at that time, s 809Q will not apply in relation to them (ie that the funds subject to the offshore
transfer are not subsequently remitted to the UK and there is no expectation that they will be in future).

Clearly, if the money has been spent on a foreign electricity bill, there is no such prospect and, as such, the
personal foreign expenditure will result in a proportional reduction of the unremitted foreign income,
capital gains and clean capital in the account.

With regard to Dollared’s second query, accounting for the original investment as an offshore transfer
appears to be the correct approach. The problem, as Dollared states, is in interpreting the derivation
principle where an investment containing the unremitted income and gains is sold at a loss.

HMRC’s Residence, Domicile and Remittance Basis Manual at RDRM35030 does address a similar
scenario where £25,000 of unremitted income is used to purchase a car which is subsequently brought to
the UK at a time when the car is worth just £14,000.

In this case, HMRC state that they would treat the original £25,000 income as remitted. Unfortunately,
the manuals do not cover the position if the car was sold abroad and the £14,000 was remitted to the UK.

One would hope that a purposive approach enables one to limit the income and gains remitted to the
amount of funds received in the UK. Any other approach would make it impossible, in many scenarios, to
disclose remittances on a “worst case scenario” basis.

For example, a remittance of £100 from a mixed fund which has been in existence for decades should be
accepted by HMRC as a remittance of £100 income if the taxpayer does not wish to pay for the
professional costs of analyzing the funds passing through the account since inception.

However, if the derivation principle is taken to its extreme, there is nothing stopping an inspector arguing
that the £100 could have derived from income of £1m which was invested (very) badly indeed.

It is arguable that each element of the $15,000 proceeds should be proportionally reduced (giving $6,000
income, $2,250 capital gains and $6,750) and full disclosure made on the 2011/12 tax return.

However, it may be more prudent to treat the proceeds in the way suggested by Dollared because this will
provide the highest tax take. If the loss was larger (say $12,000), it would be sensible to treat the proceeds
of $8,000 as no longer containing any clean capital or capital gains so that a subsequent remittance would
be treated entirely as income of $8,000 (assuming taxable remittances are limited to the amount received
in the UK as suggested above).

I am not sure that I agree with the suggestion by Dollared that such an approach could result in double
relief (as a result of the reduction of unremitted income and the benefit of the capital loss). What if the
$20,000 investment had become completely worthless?

The income/gains attaching to the offshore transfer could clearly never be remitted, but one would
imagine that the capital loss (arising perhaps through a negligible value claim) in these circumstances
would still be allowable under TCGA 1992, s 16ZA.

Dollared’s queries are a good reminder that the mixed fund rules are often unworkable in practice and my
own experience is that HMRC will accept a pragmatic approach.

Closer look... remittances from foreign income or gains

The reply from Nick Harvey raises the issue of remittances derived from foreign income or gains. HMRC’s
Residence, Domicile and Remittance Basis Manual at paragraph RDRM35030 provides examples of
calculating the amounts of remittances from abroad where non-cash value is involved. In each of the
examples, the person involved is a remittance basis user.

In HMRC’s “example 3”, Johanna is a remittance basis user whose son has guitar lessons with a master
guitarist, Kurt, every week. Johanna has a timeshare apartment in Morocco and pays £8,400 from her
relevant foreign earnings each year which allows her to use the apartment for four weeks every year.

In 2013/14, rather than pay Kurt in cash for the guitar lessons, they agree that he may use the apartment
for two weeks in June 2013. Here the consideration (the use of the Moroccan apartment) for the service
provided in the UK derives indirectly from Johanna’s relevant foreign earnings and the amount remitted
is related to the amount of income and gains from which the consideration derives, i.e. £4,200.

In example 4, Marianne purchased a car abroad for £25,000 from her foreign chargeable gains. The car is
therefore treated as derived from foreign income and gains. Instead of bringing it straight to the UK, the
car is kept in Italy.

A few years later she brings the car to the UK for the use of her and her daughter. At this time the
approximate market resale value of the car is £14,000. However, the amount remitted is still £25,000, i.e.
an amount equal to the chargeable gains from which the property was derived.

HMRC’s example 5 shows the converse. Ali purchases a sculpture in Sweden in 2012/13 for £80,000
using relevant foreign earnings. He gives the sculpture to his wife who keeps it at her mother’s home in
Stockholm.

In 2015/16 Ali’s wife brings the sculpture to the UK. The sculptor has become famous, and the work has
appreciated in value to £120,000.

As a result of Ali’s wife bringing the sculpture from Sweden to the UK, Ali has made a taxable remittance
of £80,000 in 2015/16, i.e. the original amount of foreign income used to purchase the sculpture.