Remittances from a "mixed fund"

I've been living in the UK for a few years, paying taxes on the remittance basis and never making any remittances. Earlier this year I was looking into bringing some money over to buy a house and was horrified by the complexity and uncertainty around the taxation of remittances. I ended up paying an accountant to lay out my options, and partly because I was still confused and somewhat skeptical I'm here to check the accountant's verdict against the clearly substantial expertise of people on this board.

My takeaway was that my US-based accounts (one savings account, one brokerage account) are considered "mixed funds", in the sense that they contain both capital and income; remittances from mixed-fund accounts are taxed according to how much of each kind of asset is in the account; if you only bring over part of a mixed-fund account, the different kinds of assets are taxed following a sequence specified by HMRC. (I was told that I could have set things up differently before coming to the UK by creating separate accounts for capital, income, etc, but that it is now too late. Even so, I'd kind of like to know what I could have done.) Anyway, the key thing that I found very surprising (and the main reason why I wanted to check here) is that the accountant said that capital remittances are taxed as *capital gains*. That is, if I had a mixed fund in the US that consisted of a cash gift I had received (say) plus interest on that cash, then when I bring this money to the UK I pay tax on the interest component as if it were income in the UK, and on the capital component as if it were capital gains in the UK, i.e. at 28%. Does this fit with your knowledge of HMRC's rules? What if I had created separate accounts: would remittances from a "capital" account be taxed as capital gains?

The most valuable thing the accountant told me (which should have been clear to me before) was that you can get around all of this by declaring the arising basis during the year in which you bring over money. By his calculations this worked out better than the remittance basis for a year in which I bring over a chunk of money, but then again this is based on the assumption that all of the capital I remit from a mixed fund would be taxed as capital gains.

Thanks in advance for your wisdom -- I hope I've explained the situation clearly.

Just wondering how you invest the brokerage money as it is important for how the money is taxed by HMRC. Are you in US funds or individual bonds and shares?

I have cash in a savings account and ETFs in a brokerage account.

Again, what really surprised me was the accountant's claim that the capital I bring from a US saving account would be taxed as capital gains in the UK; this is after I pay income tax on the first X I bring over from that account, where X is the amount of interest income in the account.

Are the ETFs HMRC reporting? Also are you a US citizen?

I'm not familiar with the remittance rules, but surely you will only pay capital gains tax on capital gains....not the underlying principal.

The ETFs are HMRC reporting, yes.

But the example the accountant gave was actually for bringing over cash from an account with interest income and cash in it -- he insisted this would be taxed as capital gains (once I had paid tax on the interest component). I suspected this was wrong and I hoped someone here could tell me whether my suspicion was correct, before I complain to the guy's boss and refuse to pay.

Thanks for giving it some thought.

The ETFs are HMRC reporting, yes.

But the example the accountant gave was actually for bringing over cash from an account with interest income and cash in it -- he insisted this would be taxed as capital gains (once I had paid tax on the interest component). I suspected this was wrong and I hoped someone here could tell me whether my suspicion was correct, before I complain to the guy's boss and refuse to pay.

Thanks for giving it some thought.

Sounds completely wrong to me. You'd pay tax on the interest to HMRC, and then resource it to the UK so you can take a FTC on your US taxes. There's no tax when you simply bring cash into the UK.

Yes nun, that is what I thought and why I was so skeptical about what I was being told. The accountant was telling me "I know, it's completely bonkers". But if he's wrong I don't want to pay for his bogus research! I wish I could find the correct policy in the HMRC guidance to save myself paying this bill.

Again, thanks.

I thought that I might offer some observations on this question.

Use of remittance basis
Perhaps a starting point is the question of whether the remittance basis is advantageous. A few points on this-
•   If you claim the remittance basis you will lose the personal allowance (assuming that your income level has not already meant that it is not available) and the capital gains tax annual exemption.
•   If you claim the remittance basis and remit some dividend income, you will pay a higher rate of tax on your dividends as a remittance basis use than you would paying on the arising basis.
•   If you do not claim the remittance basis, you might find that you pay more tax in the UK but less in the US.
•   The least attractive position is to claim the remittance basis and then a few years later remit your overseas income and gains.

Mixed funds
The UK introduced statutory rules on mixed funds in 2008. The rules apply most often to bank balances but the same principles apply to trace through other assets.

The starting point is to consider what might be termed “clean capital”. This is basically funds held prior to establishing UK residence, plus inheritances and similar. Where an account (or indirectly an asset) has a mixture of clean capital then the mixed fund rules come into play.

The fundamental rule is that remittances from a mixed fund are deemed to be first made from income or gains that will give rise to UK tax liabilities and only when this is exhausted from clean capital.

The details of these rules specify within this general principal the types of income or gain which come first, and also the tax years to which they relate. For instance, suppose a bank account had some dividends and the proceeds of a sale at a gain paid into it, as well as some clean capital then the detailed rules say that the first part of any remittances is deemed to be the dividends, before the gain on the sale and finally the clean capital.

The rules do not say that when matching against income is exhausted the remainder is a capital gain. You can only match against the income and gains that have arisen after commencing residence.

Overall there is a lot that can be said on these two aspects but perhaps these comments will be of some use.

Excellent summary Dunedin, particularly around the definition of clean capital and interest/dividend.

Excellent summary Dunedin, particularly around the definition of clean capital and interest/dividend.

Yes it was an informative post and explains why the entire amount of a remittance might be taxed as capital gains.


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