Remitting money from mixed funds: the ordering rules

Residence & Domicile Oct 8, 2020

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.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.