Remitting money from mixed funds: the ordering rules

Most people who are UK resident, non-domiciled and who use (or have used) the remittance basis of taxation know that they should only remit funds from a capital account if they don't want to pay taxes on the funds remitted. And most people who intend to benefit from this advantageous tax system will have created a capital account prior to coming to the UK that allows them to live in the UK without having to pay any tax on the funds they bring over.

But sometimes, people will only have been made aware of those rules once they are in the UK. Or they might have created a capital account without enough funds to maintain their lifestyle. In those instances, they will have to bring revenue from what the HMRC calls mixed funds. A mixed fund account is an account that has capital and revenue mixed together. If they need to remit funds from such an account, they will have to pay some tax. But the calculation of that tax can very complex because of what the HMRC calls the ordering rules, and which have been in place since 2008.

Each mixed fund account is actually a series of virtual buckets which are increased or decreased every time there is money coming in or out of the account. There are 8 buckets per tax year:

1. UK employment income
2. Foreign employment income not subject to a foreign tax
3. Other foreign income (i.e. trade profits, rental income or investment income) not subject to a foreign tax
4. Foreign capital gains not subject to a foreign tax
5. Foreign employment income subject to a foreign tax
6. Other foreign income (ie. trade profits, rental income or investment income) subject to a foreign tax
7. Foreign capital gains subject to a foreign tax
8. Any funds not covered above (i.e. capital)

Every time money comes into a given account, it goes into the corresponding bucket for that specific tax year.

But when money is remitted to the UK, one needs to allocate those funds to one or multiple buckets using the ordering rules. First money is taken from funds of the current tax year in the order stated above (ie. out of UK employment income first, then foreign employment income not subject to a UK tax, etc). If the amounts relating to the current tax year have been fully used (or if there are no funds relating to the current tax year) then one starts using the funds of the previous tax year in the same order. The process is repeated for earlier years in reverse chronological order.

If money is spent or transferred offshore rather than in the UK, those rules don't apply however. In that case the funds removed have to be taken out of each available bucket pro-rata of the contents of the initial source on the day of the transfer.

It's easy to see that this calculation can be extremely fastidious, especially if the account goes back many years or if it's used for petty transactions throughout the year. This is why, once you know you might need to use a mixed fund for remittances in the future, one should avoid adding funds to it and reduce the outgoing transactions to a minimum.

The only exception to those rules are for people using the Overseas Workday Relief (OWR). In such an instance it's possible to benefit from a simplified mechanism where instead of considering each transcation, you can assume that all transactions during the year where done on April 5th, the last day of the tax year. It makes the calculation a lot simpler but in order to be able to use this special case, the taxpayer needs to have created and used a qualified account for each tax year where he wants to make the claim. You can refer to our article on the OWR rules for more details.

As you can see, the rules are quite complex and it's why it's preferrable to avoid having to transfer mixed funds into the UK if you can. If you can't, here are the keypoint to keep in mind:

Capital vs. Mixed Fund Accounts:

• Ideally, non-domiciled individuals should remit from a pure capital account to avoid UK tax.
• Mixed fund accounts contain both capital and revenue, making remittances more complex.

Mixed Fund Buckets:

• There are 8 buckets per tax year, ranging from UK employment income to capital.
• The ordering of these buckets is crucial for determining how remittances are taxed.

Ordering Rules for Remittances:

• Remittances are allocated starting with the current tax year's buckets, then moving to previous years in reverse chronological order.
• Within each year, the buckets are used in the specific order you outlined.

Offshore Transfers:

• Different rules apply for money spent or transferred offshore, using a pro-rata approach.

Complexity and Record-Keeping:

• These rules can indeed be very complex, especially for accounts with many transactions over multiple years.
• Careful record-keeping is essential for accurate tax reporting.

Overseas Workday Relief (OWR):

• This offers a simplified calculation method, treating all transactions as occurring on April 5th.
• Requires the use of a qualified account for each relevant tax year.