On 4 August 2014, HMRC announced an important change in the treatment of loans used in the UK by ‘non-doms’ (individuals who are resident but not domiciled in the UK), and who are taxed on the remittance basis. Yesterday, HMRC announced that if will not seek to apply that change to arrangements where the loan was brought into or used in the UK before 4 August 2014.
Prior to the announcement in August 2014, HMRC had issued guidance stating that where foreign income or gains were used as security for a loan which was brought to the UK (or was obtained here), they would not treat the security as being remitted to the UK but would instead look to the funds used to service the debt, being both interest and principal repayments. If clean capital funds were used to service the loan, then there would be no remittance. If previously untaxed foreign income or gains were used to service the loan, then these would be treated as remittances.
In August 2014, HMRC withdrew their guidance in relation to this practice, and referred to the previous treatment as ‘concessionary’.
HMRC’s revised view
HMRC’s announcement in August 2014 stated that, with effect from 4 August 2014, funds raised in, or brought to, the UK under a loan facility secured against funds representing foreign income and gains will be treated as remittances of the income or gains secured. If interest payments or loan repayments are subsequently made from different foreign income or gains this will result in a further remittance and, effectively, a double charge.
As announced in the Brief published by HMRC yesterday, this change in HMRC’s treatment remains in place for loans brought into or used in the UK on or after 4 August 2014 but their view on the treatment of loans already in place before 4 August 2014 has been relaxed.
Loans before 4 August 2014
In the August 2014 announcement, HMRC indicated that where non-doms had used foreign income or gains as collateral for a loan before 4 August 2014 and had not declared a remittance, they should notify full details to HMRC. These arrangements would not be regarded as giving rise to a tax liability provided they were within the terms of HMRC’s previous practice and by 31 December 2015 the taxpayer gives a written undertaking (which is subsequently honoured) that:
- the existing security either has been or will be replaced before 5 April 2016 by security that does not represent foreign income or gains; or
- the loan (or part of the loan) that was remitted to the UK either has been repaid or will be repaid before 5 April 2016.
However, as detailed in the HMRC Brief published yesterday, following subsequent discussions with representative bodies, HMRC has now recognised that in some cases it would be difficult or impossible to unwind or replace the foreign income or gains used as security for a loan. HMRC has therefore announced that the above requirements will not apply to arrangements where the loan was brought into or used in the UK before 4 August 2014.
As detailed in yesterday’s announcement, for loans taken before 4 August 2014 there is no longer a requirement to repay or replace foreign income and gains used as security for a loan with UK income or gains or other security which would not be taxable on remittance to the UK before 5 April 2016 to avoid a tax charge.
It is important to note that for all loans taken out on or after 4 August 2014 HMRC’s change of policy as announced last August will continue to apply and 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 from different foreign income or gains, the repayments of capital and interest will constitute remittances.
If you have taken a loan secured by untaxed foreign income or gains and are not sure whether you are affected by HMRC’s recent announcement, please contact your usual Moore Stephens tax adviser