UK and International Tax news

HMRC Revises Position On The Remittance Basis And Loans

Monday 11th August 2014

HMRC has recently announced the withdrawal of concessionary treatment for commercial loan arrangements where unremitted foreign income or gains is used as collateral for a loan enjoyed in the UK.

Under existing rules in s.809 ITA07, there is a remittance of foreign income or chargeable gains if money or other property is brought to, or received or used in the UK by or for the benefit of a relevant person and foreign income or gains are used outside the UK (directly or indirectly) in respect of a relevant debt.

Where a remittance basis taxpayer obtains a loan in the UK or overseas, secured using foreign income or gains that remains overseas, and remit part or whole of that loan to the UK, the taxpayer will be considered as having remitted foreign income or gains to the extent of the loan amount remitted.  For example, a £1m loan facility is secured by foreign income or gains of £1m.  £100,000 is borrowed and brought to the UK. HMRC will conmsider that a taxable remittance of £100,000 has been made at that point.

HMRC says that this has always been its view of the law. However, it was recognised that there is another potential source of taxable remittances in respect of secured loans. If loan repayments are made using a different source of foreign income or gains, HMRC argues that a second remittance has been made at that point.

The result would be taxable remittances of double the amount of loan brought to the UK.  Accordingly, in 2010 a concession was published in HMRC’s guidance manual at RDRM33170. This concession applied to loans made on commercial terms that were regularly serviced from foreign income or gains. In those circumstances only the servicing payments would be taxed and not the use of the underlying collateral.

HMRC has now said that it is seeing large numbers of arrangements which are not considered to be commercial and not within the intended scope of the concession. For example, loans repaid from non foreign income or gains that are not charged as a remittance, despite foreign income or gains collateral having been used in the UK.

The concessional treatment for commercial arrangements is being withdrawn and HMRC is replacing the guidance at RDRM33170, with effect from 4 August 2014. Money brought to or used in the UK under a loan facility secured by foreign income or gains will be treated as a taxable remittance of that amount of foreign income or gains. If the loan is serviced or repaid from different foreign income or gains, the repayments of capital and interest will constitute remittances in the normal way.

With regard to arrangements set up before 4 August, taxpayers should provide full details to HMRC where foreign income or gains have been used as collateral for a loan and have not declared a remittance.

HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the concession in RDRM33170, provided a written undertaking (which is subsequently honoured) is given to HMRC by 31 December 2015 that the foreign income or gains security either has been, or will be replaced by non foreign income or gains security before 5 April 2016, or the loan or part of the loan that was remitted to the UK either has been, or will be repaid before 5 April 2016.   The notification should include the amount of foreign income or gains used as collateral and the amount of the loan remitted to the UK (if not the full amount).

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