06 January 2022


On 18 May 2021 HMRC made unannounced changes to their manuals on whether foreign income and gains ('FIG') used as collateral for loans by remittance basis users ('RBUs') would give rise to a remittance.  See our earlier article:  'Take 3'.

In response the leading professional bodies in the UK (CIOT, ICAEW and STEP) published a joint guidance note on 21 December 2021 (the 'Guidance Note') to assist non-doms and their advisers 'in considering the technical and practical issues' arising from the new way HMRC treats loan collateral for non-doms who use (or used) the remittance basis.

Reading between the lines, the professional bodies seem to suggest that HMRC may have shot itself in the foot!

Whilst we await HMRC’s response to the Guidance Note, we highlight some key practical issues resulting from the different technical views presented by the professional bodies. 

For further information about the 2014 and May 2021 changes, please also see our articles, 'Take 1', and  'Take 2'.

A timeline of HMRC’s changing views

2008: As long as the RBU borrowed funds on commercial terms and made regular loan repayments, then FIG provided as collateral for a relevant debt was not taxed as a remittance. HMRC’s interpretation prevented the relevant debt from being taxed twice: the FIG 'used' to service and/or repay the loan would be a taxable remittance but the FIG provided as collateral to the loan was not 'used…in respect of a relevant debt' within the meaning of s809L(3)(c) Income Tax Act 2007 ('ITA 2007').    

2014 and 2015: HMRC withdrew the above 'concession' and decided that the FIG provided as collateral to a loan was in fact 'used…in respect of a relevant debt'.  Although RBUs who were caught by the change either had to repay the loan or replace the security with clean capital to avoid a UK tax charge on the borrowed funds previously remitted, remittances made before 4 August 2014 were protected by the 'grandfathering' arrangements announced in 2015.  HMRC also confirmed their view that the amount of remittance was capped at the amount of the relevant debt and not the amount of FIG 'used' as collateral (s809P(4) ITA 2007). Therefore, it was not necessary to clarify in what circumstances the FIG was 'used…in respect of a relevant debt' in practice, if the amount of remittance was capped at the amount of the relevant debt in any case.

2021: Whilst the amount of remittance is still capped if less than the full amount of the loan was brought to the UK (s809P(10) ITA 2007), HMRC has decided that the cap no longer applies to instances where the full amount of the loan is brought to (or borrowed in) the UK. Consequently, the full amount of the FIG 'used' as collateral, even if it is far greater than the value of the relevant debt, is capable of being taxed as a remittance under this new approach.  Now the question returns, in what circumstances is the FIG 'used…in respect of a relevant debt'? 

What is 'used' as collateral?

Since our article ('Take 3') was published in June 2021, HMRC has updated RDRM35050 three times and clarified the collateral subject area in one of the amends:

'Freda has used her foreign income as collateral, in respect of a relevant debt. The amount so used is the untaxed relevant foreign income that was used to acquire the painting - £160,000 in this case. '

In this example, it is straightforward to quantify the amount of FIG 'used' to acquire the collateral (i.e. the painting) in respect of a relevant debt. However, as highlighted in RDRM37050, the position is often far from straightforward for may RBUs. Suppose the standard terms and conditions of the lending bank also included a general pledge of all of Freda’s FIG held by the bank in the event of a default. If the loan was 'conditional' upon Freda accepting the standards terms and conditions, then HMRC would consider that all of such FIG was 'used' as collateral.

At a meeting back in 2014, HMRC asked the professional bodies to provide standard terms and conditions in order to consider when a FIG is 'used' as collateral in further detail.  However, as discussed above, it was previously not necessary for HMRC to answer this question when the amount of taxable remittance was capped at the amount of the relevant debt and not the amount of FIG 'used' as collateral.  The Guidance Note presents different views on what lending arrangements would be regarded as collateral and it will be useful to see if HMRC can clarify their position in their response to the Guidance Note.   

Is HMRC correct?  

In the case of Aozora1which looked at whether HMRC’s manuals give rise to legitimate expectation, HMRC argued that it has a limited role in collecting taxes and 'it is not therefore reasonable for taxpayers to rely on HMRC's interpretation of the law'.  HMRC’s latest interpretation of loan collateral is based on all of the following premises being correct:

  1. FIG provided as collateral is 'used…in respect of a relevant debt' within the meaning of s809L(3)(c) ITA 2007;
  2. The amount remitted is equal to the amount of FIG 'used' which includes collateral under ss809L(3)(c) and 809P(4) ITA 2007; and
  3. If the amount of borrowed funds brought to the UK is less than the full amount borrowed, then the amount of FIG remitted is capped as per s809P(10) ITA 2007. Conversely, if the full amount of borrowed funds is brought to the UK, then all the FIG 'used' as collateral is a taxable remittance.

Although the professional bodies considered alternative interpretations of the law in the Guidance Note, they conclude by stating that 'they do not advocate a particular view'.

Why have the professional bodies seen fit to issue guidance, but then to sit on the fence in this way?

The answer seems to be that, while for some taxpayers, HMRC’s view would result in a very large remittance, for others, they might – unusually – prefer HMRC to be correct!  This depends on which years the taxpayer borrowed.

Which years are which?

2020 and after

If an RBU borrowed in the 2020/21 and 2021/22 tax years (and in some cases for the 2019/20 tax year), or the RBU has an open enquiry for an earlier year, then they will generally want HMRC’s latest interpretation to be incorrect.

For those years, HMRC is still in time to open an enquiry. Therefore, under HMRC’s current view, an RBU could have remittances far exceeding the amount of the loan if they have 'used' FIG as collateral in respect of a relevant debt which has been brought to the UK. 

It would be absurd but it means that Freda could have remitted £1m of FIG as 'collateral' held by the bank when the loan was only £100,000 and the painting pledged as a security for the loan was only worth £160,000.

2019 and before

On the other hand, if a taxpayer borrowed in the 2018/19 tax year or earlier (and also if, having borrowed in 2019/20, they filed their self-assessment tax return early) (in each case assuming that there isn’t an existing open enquiry), then they may well want HMRC’s latest interpretation to be correct!

This is because of two statutory provisions:

  1. S29(2) Taxes Management Act 1970 ('TMA 1970') provides that a taxpayer will not be subject to a discovery assessment outside the 12-month limit if they filed a tax return in accordance with the prevailing practice at the time. The professional bodies’ guidance gives very good evidence of what that prevailing practice was in those earlier years.  HMRC seems likely, therefore, to be out of time for these years.
  2. s809P(12) ITA 2007 provides that if something is remitted once it cannot be remitted again. This seems to apply (although the professional bodies don’t say so outright) even though the first remittance was not taxed (due to HMRC being out of time).

If Freda filed her tax return accordingly for these years, then under HMRC’s latest view, s809P(12) ITA 2007 and s29(2) TMA 1970, she could have created £1m of clean capital because the £1m of FIG was already remitted and HMRC is now out of time to issue a discovery assessment on the loss of tax.

The effect seems to be that HMRC may just have cleaned up large chunks of FIG for many non-doms!

How can we help?

Burges Salmon's tax specialists have substantial experience in tax, trusts, and estate planning.  If you wish to discuss any of the matters raised in this article, please do get in touch with Emma Heelis-Adams or your usual contact within the team.

This article was written by Emma Heelis-Adams and Myra Leung.


1 R (oao Aozora GMAC Investment Ltd) v HMRC [2019] EWCA Civ 1643

Key contact

Emma Heelis-Adams

Emma Heelis-Adams Partner

  • Private Client Services
  • International Tax
  • HNW and UHNW Individuals

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