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Mixed funds and treatment of overdraft

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Hi all. 

Having a bit of a crisis, it is Mid-January so t's the season for it.

We have a client who has a large mixed fund in USD. We converted all transactions into pounds at the transaction date so we can ensure gains are taxable correctly.

There is deviation from cash balance as losses are allocated to clean capital only as a proportion that relates to clean capital (i.e. the income and gains are untouched). We also have the issue that gains are computed using the same day/next 30 days whilst the base cost from the security mixed funds is based on the holding removed. So the proceeds per the bank and the transfer in are unlikely to match. This deviation is rather large. I am taking this deviation into account when working out the currency movement (whether this should actually be done is something I wasn't sure but was told to do). 

How should we treat when he goes into overdraft? What we have been doing is the following and I am not convinced this is right

1. Purchases are made of shares so the constituent parts are eradicated and the balance is overdraft. The security mixed fund mimics this. The overdraft is repaid by means of a loan. The loan offsets against the loan in the cash account and I can then recategorise the overdraft in the security mixed fund. This makes sense. 

2. Where it becomes tricky is when the overdraft is partially repaid by loan and then sales or just repaid by sales. We are treating what is leaving the security mixed fund as an offshore transfer but then offsetting against the overdraft insofar as there is overdraft and any sales after this is then introduced in its constituent parts. This does not work in my head.

What I am expecting is that we need to recategorise the funds used to purchase the overdraft, however this becomes cyclical where what was purchased is then sold. Unless we ignore the ones where purchased into overdraft and sold by subsequent disposals to repay. Thereby bring able to recategorise the purchase of other securities?

I am at a loss. Its getting quite late in the day and I was hoping to get an independent opinion. It's the kind of thing that's affecting other work and outside of work. I of course want to do it right.

This issue is made worse by the fact that the balance eventually gets low because of deviation as mentioned above that it remains overdrawn, though in cash terms it is positive. At the start the pattern of the mixed fund follows that of cash, but this stops. 

Sorry for the length, I hope it makes sense. Any advice is greatly appreciated. 

I hope you all are having a better busy season than I. 

Replies (5)

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Hallerud at Easter
15th Jan 2020 10:08

What is your client?

Why does he need to keep double entry accounts for CGT transactions?

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Replying to DJKL:
By Rumpeldunk
15th Jan 2020 10:17

Thanks for your response. Sorry context helps, the individual is non-dom. By double entry are you referring to the recategorising?

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Replying to Rumpeldunk:
Hallerud at Easter
15th Jan 2020 10:43

No, I was referring to your record keeping, you mention deviation from bank etc.

Surely for UK purposes each different security purchased just goes into its CGT pool for subsequent CGT calculation, you translate from USD to sterling on the relevant date. How it is financed is academic. Whilst squaring all the transactions with a bank balance is great, as it aids ensuring completeness, is it really necessary?

Alternatively I have totally misunderstood your post. I have assumed your client has some non UK recognised US wrapper around the investments and needs to report the underlying individual gains, or is this assumption incorrect?

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By Tax Dragon
15th Jan 2020 11:33

I assume there have been remittances.

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By accountantccole
15th Jan 2020 12:59

I couldn't follow the trail -is there an off shore portfolio? - completely confused by the overdraft angle.
What is being remitted?
I try to get my clients to split their pots so income all goes in one place and it is clear what is income/gains and what is capital
It's January - fried brain season.

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