On 4 August 2014, HMRC published new guidance on the application of the remittance rules to certain loans. Non-UK domiciliaries (Non-Doms) are entitled to claim a preferential method of taxation known as the remittance basis. The advantage of the remittance basis is that although the Non-Dom pays tax in the usual way on their UK source income and gains, foreign source income and gains are only taxable in the UK to the extent that they are remitted to the UK.
The term remittance is defined widely and not only includes monies physically brought into the UK, but also monies (representing foreign income and gains) that are used in respect of a loan which is used in the UK. Often offshore loans are made to provide a Non-Dom with funds in the UK.
It is clear that a taxable remittance is made in relation to these loans where the interest or capital repayments are serviced using foreign income or gains. What is less clear is what happens when foreign income and gains is used as collateral or security against such a loan?
Up until recently HMRC’s view, as stated in their manuals, was that using foreign income and gains in relation to a loan brought to the UK would not give rise to a taxable remittance. Many Non-Dom’s -relying on this guidance – have used foreign income and gains as collateral against loans providing them with funds in the UK.
HMRC have now changed their mind and are saying such arrangements undertaken after 4 August 2014 will give rise to a taxable remittance of the collateral funds. Furthermore, if the interest and capital repayments on the loan are later serviced with different foreign income and gains, there may be a second tax charge on the same “remittance”.
Non-Doms with existing loans will need to review the collateral offered. If foreign income and gains has previously been offered as collateral they have two choices, either:
- Repay the loan before 5 April 2016; or
- Write to HMRC before 31 December 2015 to inform them that foreign income and gains used as collateral will be replaced by non-foreign income and gains.
Any outstanding loans using foreign income and gains as collateral at 6 April 2016 will be treated as a taxable remittance of those income and gains. In addition new loans taken out from 4 August where foreign income and gains are used as collateral will also be treated as a taxable remittance.
HMRC’s u-turn on the treatment of such loans is disappointing not least because:
- Back in 2010 the Government had promised that they would not further change the tax rules for Non-Doms to provide some stability in the tax landscape.
- It is unclear what has prompted this change of thinking ‘out of the blue’.
- HMRC refer to their old guidance as a concession, which in the author’s view is a little disingenuous.
Update (10 October 2014)
CIOT, STEP, the Expatriate Forum, ICAEW Tax Faculty and The Law Society met with HMRC on 11 September to discuss this change while CIOT also wrote to HMRC on 8 August. A note of the 11 September meeting (and which refers to the CIOT letter of 8 August) has been published although HMRC has not formally approved it. Highlights from the note and CIOT’s letter include:
- CIOT pointed out that they were not convinced that HMRC’s position was ‘concessionary’ but rather it reflected the legal position.
- CIOT noted that there was very often no tax avoidance motive in structuring loans using foreign income or gains as collateral. Rather it was due to complexities imposed by banks, complexities arising from the use of different commercial devices including, inter alia, different forms of collateral, secondary securities or aa-monies security (or indeed a combination of devices).
- The professional bodies noted that the transitional rules are inadequate and should either be fully grandfathered or a longer transitional period should apply (to reflect the long term nature of most loans e.g. to purchase the main home).
- The professional bodies gave the view that any interpretation should be legislated to give clarity as it was clear the 2008 rules are insufficient.
- HMRC reaffirmed its view that the date of a remittance is when the loan monies are brought to the UK. This includes pre-4 August loans but they would not confirm the discovery position for closed years nor would they give a general view that non-disclosure would not be regarded as ‘careless’.
- HMRC confirmed that the transitional rules would apply to contracts exchanged prior to 4 August but completion occurring on or after that date.
The only HMRC concession is that referred to in the final bullet point and this is, of course, welcome. The ‘discovery’ position is very interesting. Recent cases have demonstrated that the bar is set very low when HMRC seek to make a ‘discovery’; however, whether a clear change of policy can be characterised as a discovery is another matter.