RDRM74750 - Temporary repatriation facility: Scope of designation: BIR investments: Mixed fund investments

Where an individual makes a qualifying investment on which business investment relief (BIR) has been claimed using foreign income and gains from a mixed fund, the BIR rules provide that the initial investment is treated in the same way as an offshore transfer – see section 809VO ITA 2007 and RDRM34540. This means that the qualifying investment will contain a proportionate amount of the kinds of income and capital that were in the mixed fund immediately before the transfer was made.

Where amounts of foreign income and gains that comprise the qualifying investment have been designated under the temporary repatriation facility (TRF), the investment holding will contain TRF capital. From 6 April 2025, amendments to section 809VO provide for disposals where a holding contains both TRF capital and undesignated foreign income and gains, by allowing the original proportions to take account of what has become TRF capital. This is done by reducing the amount of each kind of income or gain by the amount which has been designated in a tax year after the tax year in which the investment was made.

When there is a part disposal of the qualifying investment, the disposal will be treated as comprising TRF capital first, to the extent that it is available, and then a proportional amount of each of the types of income and gains that remain. This is because disposals from mixed fund qualifying investments are also treated in the same way as offshore transfers, with the exception that from 6 April 2025, TRF capital takes priority where it has been designated in a tax year after the tax year in which the investment was made.

Example

Benji is UK resident and a former remittance basis user. In the 2023-24 tax year Benji acquired shares to the value of £500,000 in a UK company using funds from an offshore bank account which contained £5m, comprising:

  • £2m foreign employment income
  • £2m foreign dividend income
  • £1m foreign gains

He claimed BIR on the £500,000 investment, which, following the offshore transfer rules, comprised:

  • £200,000 foreign employment income
  • £200,000 foreign dividend income
  • £100,000 foreign gains

Benji decides to take advantage of the low TRF rate in 2025-26 and designates £150,000 of the invested foreign employment income and £150,000 of the invested foreign dividend income in his 2025-26 tax return, paying the TRF charge of £36,000 (12% of £300,000).

On 1 July 2026 Benji disposes of £450,000 of his investment. This is treated as comprising TRF capital to the extent that it is available, and then a proportional amount of each of the kinds of income and gains that remain. But first, the original proportions must be adjusted to take account of the TRF capital. Therefore, Benji’s £500,000 investment is treated as comprising:

  • £300,000 TRF capital
  • £50,000 foreign employment income (reduced by £150,000 designation)
  • £50,000 foreign dividend income (reduced by £150,000 designation)
  • £100,000 foreign gains

As a result, Benji’s part disposal of £450,000 is treated as comprising:

  • £300,000 TRF capital
  • £37,500 foreign employment income
  • £37,500 foreign dividend income
  • £75,000 foreign gains

The £300,000 of TRF capital will be treated as remitted on disposal and will be exempt from a further tax charge. Benji will need to take a mitigation step in relation to the undesignated £150,000 in order to prevent that amount from being subject to a taxable remittance at the end of the grace period.

If Benji took a mitigation step in relation to the £150,000, or instead decided to remit the £150,000 at the end of the grace period and pay tax at the usual rates on the remittance, he would have a remaining investment in the company of £50,000 which comprises:

  • £12,500 foreign employment income
  • £12,500 foreign dividend income
  • £25,000 foreign gains

Alternatively, Benji could designate the £150,000 when completing his Self Assessment tax return for 2026-27 and pay the TRF charge on this amount, which means he would not be required to take a mitigation step, and he will benefit from the lower TRF rate.

If Benji does decide to make a designation in the amount of £150,000, it will not automatically comprise the proportions of income and gains above, because Benji can decide what income and gains his designation consists of. Benji can choose from any of the undesignated foreign income and gains that he invested. He may therefore choose to designate all his remaining foreign income and some of his foreign gains.

This means that the £150,000 Benji designates in his 2026-27 return comprises:

  • £50,000 foreign employment income
  • £50,000 foreign dividend income
  • £50,000 foreign gains

Therefore, Benji’s remaining investment in the company of £50,000 will comprise £50,000 foreign gains instead of income and gains in the proportions above.