On 4 August 2014, the UK Revenue (“HMRC”) abruptly changed its position on the taxation of UK resident, non-UK domiciled remittance basis users (“non-doms”) using foreign income/gains as collateral for borrowings used in the UK. It stated that from 4 August 2014 using foreign income/gains in this way would result in a taxable remittance. To avoid a charge arising in relation to existing loans, non-doms were told that they had to reorganise or repay those loans before 5 April 2016.
HMRC has today announced that it will not apply this change to arrangements where the loan was brought into or used in the UK before 4 August 2014. As a result, non-doms using foreign income/gains as collateral for borrowings brought to or used in the UK before 4 August 2014 do not need to repay the loan or replace foreign income and gains collateral with non-foreign income and gains collateral.
A non-dom is only subject to UK tax on foreign income and gains if they are “remitted” to the UK. Remittance has a wide meaning.
If a non-dom:
- borrows money from an offshore bank and brings that money to, or uses it in, the UK (e.g. to buy a UK house); and
- uses his foreign income or gains “in respect of” the debt (e.g. to pay the interest on the loan or repay all or part of the capital sum)
the non-dom is treated as remitting the foreign income/gains and will be taxed on that income/gains.
So, if the non-dom’s foreign income or gains are used to pay interest on the debt or repay the borrowing, that will be a taxable remittance of the foreign income or gains used for this purpose.
On the strict wording of the relevant legislation, if an individual uses his foreign income and/or gains as collateral for the bank borrowing, that too would be a taxable remittance of the foreign income/gains as the non-dom would be using his foreign income/gains “in respect of” the debt.
Until 4 August 2014, HMRC took the view that, in most normal, commercial, situations, the use of a non-dom’s foreign income/gains (or investments representing them) as security for an offshore borrowing would not, of itself, constitute a taxable remittance of the foreign income/gains. This meant that if UK taxed income or gains or clean capital was used to service the debt or pay off the loan, there was no remittance either of the assets used as security or of the funds used for repayment (as these are not subject to the remittance basis in any event). This treatment, whilst concessionary, was published by HMRC in its Manuals, which are publicly available documents. It is recognised by HMRC that taxpayers rely on its published statements, and this statement was indeed relied on widely by non-doms.
HMRC’s change of position
On 4 August 2014, withdrew this concessional treatment, without warning, even for commercial arrangements. HMRC had always warned that this treatment would not apply in cases involving avoidance or non-commercial arrangements.
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 the foreign income or gains being used as collateral. Foreign income and gains used to pay interest on the debt and/or to repay the borrowed capital will also, as before, constitute a taxable remittance. Thus there are potentially two possible sources of a taxable remittance charge in respect of the debt – the foreign income or gains used as collateral, and the foreign income or gains used to repay the debt (or pay interest on the debt).
Position of non-doms who had relied on concession
HMRC has today announced that it will not apply this change to arrangements where the loan was brought into or used in the UK before 4 August 2014.
Previously, HMRC had said that non-doms using foreign income/gains as collateral for borrowings brought to or used in the UK would have to:
- notify full details of the loan to HMRC; and
- give a written undertaking by 31 December 2015 that the foreign income or gains security either had been, or would be replaced by non-foreign income or gains security before 5 April 2016; or
- repay the loan or the part of the loan that was remitted to the UK before 5 April 2016
in order to avoid being taxed on those foreign income or gains.
Today's announcement means that non-doms using foreign income/gains as collateral for borrowings brought to or used in the UK before 4 August 2014 do not need to repay the loan or replace the foreign income and gains collateral with non-foreign income and gains collateral.
However, care should still be taken to ensure that any extension or refinancing of a pre-4 August 2014 loan is not tretaed as a 'new' loan.
This announcement is welcome as, in many cases, in particular where a loan was taken out to purchase a UK house or fund UK living expenses, it would have proved very difficult to reorganise the arrangements. Sadly, it is of no comfort to those who have already spent time and money reorganising their affairs on the basis of HMRC's statement of 4 August 2014. It is regrettable the HMRC did not give the issue more thought before announcing its abrupt change of view in August 2014.