HMRC has changed how it treats loan arrangements for non-doms who use the remittance basis. The change is likely to have a very significant and immediate impact on many non-doms who have taken out loans secured on offshore assets to assist with UK funding. Banks dealing with non-doms may also have to review and revise their security arrangements.
Relevant Debts
If borrowing is undertaken in or brought to the UK then there can be a remittance if foreign income or gains are 'used in relation to' that borrowing outside the UK. This obviously catches paying interest or repaying such borrowing, but the rules arguably go wider. There has always been a question over whether using foreign income or gains as collateral for such borrowing is caught.
Previously, HMRC ignored the 'use' of the income and gains as collateral – provided the loan was on commercial terms, the collateral was not treated as remitted. Instead, HMRC took the view that only the funds used to service and/or repay the loan would be treated as remitted. This was logical – the collateral is only 'used' if it is claimed by the lender because the borrower defaults.
New Approach
HMRC have just altered their Manual with immediate effect on 4 August 2014.
HMRC now take the view that where a loan is secured against offshore income or gains and the borrowed funds are remitted to the UK, there is a remittance of the offshore income or gains used as security (up to the value of the borrowed funds remitted to the UK). Further, if the loan is serviced using offshore income or gains this may generate a second remittance. This will have a significant effect on many entirely commercial arrangements put in place by well-advised non-doms.
Any remittance basis taxpayer who was considering taking out a loan secured on offshore assets, or has already done so but not yet remitted the funds to the UK, should seek advice before taking any further steps.
Existing arrangements
Where taxpayers have existing arrangements which are affected by this change, HMRC says they will either need to repay the loan or replace the security with clean capital before 5 April 2016 to avoid a UK tax charge on the borrowed funds previously remitted. In either case, HMRC state that you should notify full details of any existing arrangements to HMRC. HMRC will take no action to assess past remittances provided:
(a) HMRC take the view that the existing loan arrangements are within the terms of their previous concession; and
(b) the loan is repaid before 5 April 2016 or a written undertaking is sent to HMRC by 31 December 2015 undertaking to replace the security by 5 April 2016.
Serious and immediate implications
It is far from clear whether HMRC's new position is the correct interpretation of the legislation – it is arguable that the concession, which they have now withdrawn, was not a concession at all but the correct interpretation of the legislation.
This change goes far beyond dealing with problem tax avoidance, and causes several obvious issues. In particular, it is not clear what effect the change has on secondary and superfluous security, 'all-monies' charges and floating charges. HMRC are relying on the idea that funds are 'used' when they are offered to a lender as security. That seems questionable – funds are 'used' in this sense only when the lender takes the security on a default. There are also serious problems with how this new treatment will apply to mixed funds.
In the meantime, any remittance basis users contemplating bringing borrowed funds into the UK should seek advice before doing so. Further, any remittance basis users who have previously remitted borrowed funds to the UK (secured on offshore income and gains, relying on the concession), should consider their options, including possible alternative security, in advance of the 31 December 2015 deadline.
To discuss the steps you or your clients need to take, please contact: John Barnett or Suzanna Harvey.