Winema Gaven Bowman Offshore Bank Transfer on Offshore transfer

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Second, $20,000 was withdrawn in 2009/10 to acquire some foreign shares that were sold at a $5,000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.