19 September 2019 - Podcast
With effect from 4 August 2014, HMRC have changed, without notice, their stated position with respect to the treatment of commercial loans to UK resident and non-domiciled individuals. Action is required if individuals wish to avoid paying additional tax as a result of their existing arrangements.
When a UK resident but non-domiciled individual taxed on the remittance basis takes out a loan, either in the UK or overseas, which is secured on foreign income and gains and brings the funds borrowed into the UK, there are two aspects of the loan which may result in a remittance to the UK. The first is the use of the foreign income and gains as security, and the second is the use of foreign income and gains to pay interest due on the loan or repay the principal borrowed. Such loans have commonly been used by taxpayers seeking to buy property or invest in businesses in the UK or access funds to satisfy visa requirements.
On 14 August 2009, against a background of uncertainty as to the HMRC treatment of debts secured against foreign income or gains, HMRC introduced a statement in their guidance on the remittance basis (subsequently incorporated in the Residence, Domicile and Remittance Basis Manual) which provided that if, such a loan was made in a commercial situation, foreign income and gains used as security would not be treated as remitted and subject to tax. Any foreign income and gains used to service the debt would still be treated as a taxable remittance.
HMRC have termed their change of position a ‘withdrawal of concessional treatment', but it is rather a reinterpretation of the remittance basis rules introduced in 2008.
Example: _In 2013 Amelia, a UK resident and non-domiciled individual took out a loan of £5 million from a Swiss bank using her £5 million of foreign income and gains (or assets bought using them) as security. Amelia used the £5 million she had borrowed to buy a residential property in London. When Amelia entered into the arrangement she would only have been treated as remitting foreign income and gains if she used these to service the loan. If she used UK funds or clean capital to service the loan, there would have been no remittance. However, if Amelia entered into the arrangement today she would be treated as remitting the security (i.e. the foreign income and gains against which the loan is secured) and any foreign income and gains she used to service the loan would also be treated as a remittance. This creates a significantly higher tax liability for Amelia.
Whether or not HMRC's new guidance reflects the correct interpretation of the law is open to debate, but the announcement yesterday suggests that HMRC will challenge a taxpayer who takes a different view regardless.
What should I do now?
Taxpayers with loans secured on foreign income and gains will need to review their current arrangements and take advice on the appropriate steps to take. Equally any arrangements, whether or not formal security is in place, that envisage foreign income and gains being used in support of borrowing should be reviewed. Taxpayers contemplating putting such arrangements in place would be advised to refrain from doing so until matters are clarified.
For existing loans, HMRC have stated that a taxpayer will not be treated as having remitted the foreign income and gains used as security if the loan met the conditions of the ‘concession' and the taxpayer provides details of the amount of the loan remitted to the UK and the foreign income and gains used as security. The taxpayer must also i) give a written undertaking that the security will be replaced by non-foreign income or gains before 5 April 2016; or ii) repay the loan before 5 April 2016.
If the conditions are not met or the arrangements are not unwound before 5 April 2016, HMRC state that they will raise a charge by reference to the foreign income and gains used as security.
There remain a number of unanswered questions in relation to the new guidance, in particular it is not clear how HMRC will charge the remittance when the amount borrowed was brought to the UK in an earlier tax year when the concession was in place. It is to be hoped that further clarification will become available shortly.
For more information please speak to your usual Withers contact.