In our blog Neither a borrower (with foreign income or gains used as collateral) nor a lender be… published on 3 September 2014, we reported on HMRC’s withdrawal of its concession with respect to foreign income and gains used as security for loans used in the UK by UK resident non-UK domiciled individuals (‘non-doms’) claiming the remittance basis. Consequently, using foreign income or gains as security for a loan used in the UK is treated as a taxable remittance. Following discussions with representative bodies, HMRC has announced that it will not apply this change to arrangements where the loan was brought into or used in the UK before 4 August 2014.

Background

Broadly, the remittance basis of taxation allows UK resident non-doms to shelter overseas income and gains from UK tax unless they are remitted to the UK.

In the relevant legislation, remittance is given a wide meaning. If foreign income and gains are used ‘in respect of’ a relevant debt, there is a taxable remittance to the UK.  A relevant debt includes a loan which is brought to or used in the UK. If a remittance basis user (“RBU”) takes a loan from a non-UK bank, uses that loan in the UK and applies his offshore income and gains to service the capital or the interest of the loan, the use of those income and gains would be a taxable remittance. Some RBUs have used their overseas income and gains as security for such loans; on a strict reading of the relevant legislation there would also be a taxable remittance in these circumstances, i.e. a taxable remittance of the income and gains used as security. This is because the income and gains used as security would be “in respect of” a relevant debt. This remittance would be in addition to any remittance made by using foreign income and gains to repay the loan interest and capital.

In a guidance note issued in 2009, HMRC stated that in commercial situations, an RBU’s foreign income or gains being used as security for an offshore loan used in the UK, would not constitute a taxable remittance of the funds used as security. However, on 4 August 2014, HMRC unexpectedly changed its approach. It announced that foreign income or gains used as security for a loan used in the UK will be treated as a taxable remittance, irrespective of whether a loan was on commercial terms. HMRC cited the widespread misuse of the ‘concession’ as the reason for the change.

Following the change, a transitional period was introduced for RBUs who had relied on the previous guidance. RBUs were asked to provide HMRC with the details of the loan and were given two choices:

  1. undertake that the foreign income or gains used as security has been or will be replaced by non-foreign income/gains by 5 April 2016; or
  2. repay the loan, or part of the loan, remitted to the UK before 5 April 2016.

The announcement was an unwelcome shock to those who had relied on HMRC’s original guidance and many were faced with substantial re-financing costs or a sizeable tax bill.

October 2015 update

On 15 October 2015, HMRC made yet another surprise announcement. HMRC acknowledged the difficulty and unfairness of requiring RBUs to restructure their arrangements which had been based on its guidance as issued in 2009.

From 15 October 2015, RBUs who have used or brought in borrowed funds to the UK secured on foreign income or gains before 4 August 2014 will not be subject to the rules announced on 4 August 2014. Further, for those loans brought to or used in the UK before 4 August 2014, there is no longer a requirement to repay or replace foreign income and gains collateral with non-foreign income and gains collateral before 5 April 2016.

It should be noted that HMRC’s latest announcement will not apply to loans brought into or used in the UK on or after 4 August 2014. In such cases, if the loan is secured on foreign income and/or gains, there will be a taxable remittance.

Comment

Whilst the ‘grandfathering’ provisions are good news for RBUs who were having to reorganise their affairs in light of HMRC’s August 2014 announcement, they may come too late for those who have already incurred expenses in restructuring their loans. Further, the series of guidance notes highlight the need to be cautious in following any statements of policy issued by HMRC as they can be subject to change without notice.