These changes affect UK RND (UK resident, non-UK domiciled) opting for the remittance basis regime and who:
- Take out a loan overseas.
- Use unremitted overseas income or gains as collateral for the loan.
- Use the funds raised from the loan to purchase UK assets.
- Use unremitted overseas income or gains to service the loan.
Prior to August 2014, HMRC’s view was that there were potentially two taxable remittances:
- a) the foreign income or gains used as collateral; and
- b) the foreign income or gains used to service the loan.
In order to avoid a potential double taxation, HMRC conceded that income and gains at point a) above would not be treated as a taxable remittance.
After August 2014 HMRC withdrew the concession so that for loans brought to the UK after this date there are potentially two taxable remittances.
In May 2021, HMRC added to its guidance the following points which are causing concern:
- Even where a loan from an overseas bank is taken out without offering any formal security over foreign income and gains, HMRC could potentially treat the loan as a taxable remittance if the client also signed a general pledge agreement, allowing the bank to access funds in other accounts (i.e. income and/or gains accounts) in the event of default;
- Where the amount of the foreign income and gains used as security for a relevant debt exceeds the amount of the loan, if the full amount of the loan is brought to the UK, the amount of the collateral treated as remitted is not capped at the amount of the loan.
For example:
A UK RND borrows Euro 1 million, remits that Euro 1 million to the UK, but the income/gains collateral requested by the bank is Euro 5 million.
Under the previous HMRC guidance, the expected remittance would have been Euro 1 million. Unfortunately, under the new guidance it would mean a taxable remittance of Euro 5 million. The above seems both unfair for the taxpayer and in contrast with the previous view of HMRC.
CIOT, STEP and other professional bodies have asked HMRC for clarification, and whether at least part of the recent updates to its online guidance could be amended/repealed.
