HMRC revises taxation of UK resident non-domiciliary funding

HMRC's 'withdrawal of concessional treatment' is both completely out of the blue, and has also left UK non-doms with many unanswered questions, says Sarah Cormack

HMRC has altered the way in which it treats commercial loans to UK resident and non-domiciled individuals with effect from 4 August 2014, further restricting planning opportunities for remittance basis users. Those who wish to avoid paying additional tax as a result of their existing arrangements must now unwind them. Equally, clients who become UK resident or are seeking to rely on their offshore monies for tax efficient UK funding, will also need to look to alternative means of funding.

UK resident but non-domiciled individuals taxed on the remittance basis have commonly used foreign income and gains as security for borrowing (either in the UK or overseas) to generate funds for tax free remittance to the UK. However, this planning gave rise to concerns that the borrowing may result in a remittance to the UK in two distinct ways. The first is the use of the foreign income and gains as security, and the second is the use of foreign income and gains to pay interest due on the loan or repay the principal borrowed.

On 14 August 2009, HMRC introduced a statement in their guidance on the remittance basis ruling that, if such a loan was made in a commercial situation, foreign income and gains used as security would not be treated as remitted and subject to tax, but foreign income and gains used to service the debt would still be. This provided much needed clarity and many UK resident non-doms organised their affairs accordingly.

HMRC has termed the reversal of this position as a 'withdrawal of concessional treatment'. However, the nature of HMRC's previous statement implies that this is rather a reinterpretation of the remittance basis rules introduced in 2008. Whether or not the new guidance reflects the correct interpretation of the law is open to debate, but it must now be likely that HMRC will challenge a taxpayer who takes a different view, regardless.

Taxpayers with loans secured on foreign income and gains should review their current arrangements and seek to unwind the structure before 5 April 2016. HMRC has stated that for existing loans, a taxpayer will not be treated as having remitted the foreign income and gains used as security if the loan met the conditions of the 'concession', and details of the amount of the loan remitted to the UK and the foreign income and gains used as security were provided. The taxpayer must also: a) give a written undertaking that the security will be replaced by non-foreign income or gains before 5 April 2016; or b) repay the loan before 5 April 2016.

If the conditions are not met or the arrangements are not unwound before 5 April 2016, HMRC states that it will raise a charge by reference to the foreign income and gains used as security. Equally, any arrangements, whether or not formal security is in place, that envisage foreign income and gains being used in support of borrowing should be reviewed. Taxpayers contemplating putting such arrangements in place should refrain from doing so until matters are clarified.

There are many unanswered questions in relation to the new guidance; in particular it is not clear how HMRC will charge the remittance when the amount borrowed was brought to the UK in an earlier tax year, when the concession was in place. We look forward to further clarification from HMRC.

Practical Example

In 2013 Jane, a UK resident and non-domiciled individual, took out a loan of £5m from a Swiss bank, using her £5 million of foreign income and gains (or assets bought using them) as security, and used it to buy a residential property in London. When Jane entered into the arrangement she would only have been treated as remitting foreign income and gains if she used these to service the loan.

However, if Jane entered into the arrangement today she would be treated as remitting the security (i.e. the foreign income and gains against which the loan is secured), and any foreign income and gains she used to service the loan would also be treated as a remittance. This creates a significantly higher tax liability for Jane.

Sarah Cormack is a partner at Withers