Before the 2008 changes to the ‘remittance basis’ it was not possible to separate a capital gain from the full disposal proceeds of an asset when considering a remittance of funds to the United Kingdom. The sale proceeds were considered to be an indivisible sum, comprising partly capital gain and partly original cost, making any remittance of the gain taxable albeit in part.
New Mixed Funds
However, this rule has been overridden by the ’mixed fund’ rules (at section 809Q of the Income Tax Act 2007). Technically, a mixed fund is anything which comprises of more than one category of income, gains or capital for one or more tax years. The crucial point is whether the mixed fund rules only apply from 5 April 2008 and that they are not backdated. This point has yet to be tested in the Courts.
Under these rules, it is necessary to identify each item of income or capital gain which has been paid into the account since 5 April 2008. So long as there is a capital gain mixed with at least one item of post April 2008 income, there will be a mixed fund. Purely from a tax planning point it may therefore be beneficial to create a mixed fund with an offshore capital gain and an item of income.
Transfer of Capital
Once you have a mixed fund, it is then possible to make an ’offshore transfer‘ from the mixed fund of each item of all income or capital gains received into the account since 5 April 2008 (section 809R(4) Income Tax Act 2007). In other words, you can clean out of the account to a new account overseas all the post 5 April 2008 income and gains, leaving the original capital (in this case the original purchase price of the investment concerned) remaining in the account. That remaining capital can be remitted freely to the United Kingdom without tax charge.
The offshore transfer passes the post April 2008 income and gains over to the new account. Basically, the rules treat the offshore transfer as containing the appropriate fraction of each post 5 April 2008 income or capital gain in the mixed fund account, or alternatively if the offshore transfer is all the income or gains, then the new bank account overseas is treated as being comprised of all those items of income or gains and nothing else.
Gifts to Adult Children: Dealing with Remitted Gains
Any remittance of gains to the United Kingdom for the benefit of a ’relevant person‘ will give rise to capital gains tax liability on the taxpayer who realised the gains in the first place.
Relevant persons include the husband or wife, children or grandchildren under the age of 18 but they do not include adult children. Gains can therefore be given away to adult children without a tax liability arising. To do this, the money must be transferred to an account overseas for the donee who can then bring the money tax free into the United Kingdom.
The funds should not be drawn by cheque on the current account which is then given to the donee in the United Kingdom and paid into a UK bank account as that is treated as a remittance by the donor.
A ‘non-dom’ can buy foreign items with your foreign income and bring them back to the UK without creating a remittance if they are valued individually at less than £1,000.