On the 4th August last year that HMRC made a quite unexpected announcement. It revolved around a change in practice surrounding the use of unremitted foreign income or gains as collateral for loans enjoyed in the UK. Such loans, contrary to prevailing practice, would become taxable.
As a result UK resident ‘non-doms’ (RNDs) who have availed themselves of the remittance basis – taxed on foreign money brought in to/ enjoyed in the country – might find themselves faced with a significant and unexpected tax demand. Yikes.
HMRC’s first interpretation
Of course, if one was to ask HMRC , they would say that they are removing a concession. Poppycock of course.
The previous treatment was HMRC’s interpretation of the legislation. In other words, it was what their best tax brains could come up with after reading the legislation. This was there conclusion of what ‘right amount of tax’ was.
What was this first interpretation then? Well, in a nutshell, it was that in the majority of commercial situations using foreign income and gains to provide security for a loan would not create a taxable remittance.
The subsequent ‘servicing’ of that loan out of previously unremitted income or gains was, however, taxable. As such, the loan was serviced out of clean capital then no tax charge arose.
HMRC had explicitly stated in its previous guidance that:
‘…the relevant debt could also be serviced and repaid using non-taxable income or capital sources; in which case there would be no taxable remittances of foreign income or gains.
However the servicing/repaying of the loan effectively masks the collateral offered, so there is still no remittance of the collateral in this circumstance.‘
HMRC’s second attempt
The revised HMRC guidance clearly changes the treatment. It seeks to tax the amount of collateral secured on unremitted taxable income or capital sources. The right amount of tax is now a different amount of tax on the same transaction despite no change in the law!
HMRC states that this volte face will apply immediately to new loans and retroactively to existing loans. However, one important qualification to this is that it does not affect loans where the funds are used under the Business Investment Relief (BIR) rules.
Taxing the deemed remittance, based on the unremitted taxable income or capital used as collateral, means that this income or gains can be used to service or repay the loan without a further tax liability arising.
However, one must be careful because if the loan is serviced or repaid from different foreign income or gains to that used as collateral then HMRC will come and demand a second scoop of tax from the trough.
Transitional arrangements have been proposed for any loan which is already in situ. That said, there are a number of wrinkles which need to be ironed out.
HMRC guidance states that all RND taxpayers operating such a structure should notify HMRC. However, if the position is subsequently unwound by 5 April 2016, there will be no tax charge. It is unclear as to why HMRC think they have such an authority to impose a disclosure deadline.
Of course, ‘unwinding’ such arrangements is easier said than done.
As ever, if you have any queries regardless this unwelcome development then please let us know.