Remittance Basis – HMRC Change Stance on Loan Collateral
HMRC have recently changed their guidance in relation to the use of overseas funds as collateral for loans by remittance basis users.
Those with existing arrangements in place should take tax advice now to see whether a disclosure is necessary and whether they can take action to come within transitional rules rather than risk a retrospective tax charge.
The Change in HMRC’s View
The remittance basis allows non-UK domiciled taxpayers to elect to be taxed only on their UK source income and gains, plus foreign income and gains remitted to the UK (rather than their worldwide income and gains). Depending on the amount of years the taxpayer has been UK resident, a remittance basis charge of £30,000/£50,000 may apply for using scheme.
Previously HMRC offered a ‘concession’ whereby overseas funds which derived from foreign income and gains and used as collateral for a loan used in the UK would not be treated as a remittance, provided that the loan was serviced and repaid on normal commercial terms.
However, HMRC have changed their practice such that they will now treat the underlying income and gains from which the collateral is derived as a taxable remittance.
The change in stance, appears to be the result of an increase in the number of people taking out loans using overseas collateral but servicing the loan from UK income such that there is no remittance of either the collateral or the funds used to repay the loan.
HMRC say that the concession was only intended to apply where overseas funds would be used to repay the loan and taxed as a remittance at that point. However, this stance seems somewhat at odd with the previous published guidance which specifically referred to the possibility of the loan being repaid from UK funds.
For those with existing arrangements in place, HMRC say that full details should be provided to them and that they will not seek to retrospectively apply the remittance basis to the foreign income or gains from which the collateral was derived where:
a. The loan arrangements were within the terms of the previous concession,
b. The taxpayer gives a written undertaking by 31/12/14 (and which is subsequently honoured) that the foreign collateral will be replaced by UK collateral by 5/4/16, or
c. The loan (or the part of the loan which was used in the UK) either has been or will be repaid before 5/4/16.
Are HMRC Correct?
A further point to note is that, at this stage it is unclear whether the previous ‘concession’ was in fact a concession at all, because there is a case to suggest that it was simply the correct interpretation of the law in which case HMRC’s current guidance could be subject to challenge.