Individuals resident in the UK, but not domiciled here, have historically been able to use the “remittance basis” of taxation when calculating their UK tax liability on non-UK source income & capital gains. The remittance basis allows them to pay UK tax on such income or capital gains only if they remit them to the UK. The term “remit” means, loosely, to bring the income or gains into the UK, whether directly (e.g. by transfer to a UK bank account) or indirectly (e.g. by repaying UK credit card spending with unremitted foreign income or gains).
Historically, a lot of work was done to identify the source of funds brought into the UK, as only that part made up of foreign income or gains was chargeable to UK tax. Although the rules have changed considerably in recent years, this basis remains available to non-UK domiciled individuals, on a year-by-basis, where it is to their advantage.
An approach that worked quite nicely was to take out an overseas loan and then remit the borrowed funds to the UK; a loan being neither income nor gains. However, if foreign income or gains were used as security for the loan, it was HMRC’s stated opinion that the individual would be considered to have remitted foreign income or gains to the extent of the amount actually brought into the UK. This view, whether correct or not, caused a potential problem, in that where foreign income or gains were also used to fund the repayments on the loan, then the amounts repaid were also treated as indirect remittances, which raised the prospect of double taxation.
HMRC recognised the issue and published a concession which applied to loans made on commercial terms that were regularly serviced from foreign income or gains. In those circumstances, only the repayments would be taxed in the UK and not the underlying capital. Unfortunately, HMRC now say that large numbers of arrangements have been made which are considered to be neither commercial nor within the intended scope of the concession. Notwithstanding that there has been no consultation, HMRC have just announced the withdrawal of the concession with effect from 4 August 2014, so that money brought into or used in the UK under a loan facility secured by foreign income or gains will now 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 also constitute taxable remittances and so non-UK domiciled individuals with such loans will be in a very difficult position.
Fortunately, there is a period of grace to permit existing loan arrangements to be unwound. HMRC will take no action to assess remittances if the loan arrangements were within the terms of the concession and:
- a written undertaking (which is subsequently honoured) is given by 31 December 2015 that the foreign income or gains used as security either have 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). HMRC will assess remittances if the notification indicates that the conditions will not be met, or the notification is not in fact met, or it is discovered that no notification was made and arrangements were not unwound within the specified period.
As ever, there is no substitute for planning matters well in advance and UK-resident, but non-domiciled, clients with commercial loans that were brought into the UK should take advice as soon as possible. Any non-domiciled individuals contemplating a move to the UK should always seek tax advice before they become resident here and undertake proper pre-arrival remittance planning.
Carl Barwick – Tax Manager
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Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272 or visit http://www.westbury.co.uk.