Bowman Offshore Bank Transfers on Offshore transfers

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.