Newsflash – HMRC issues updated guidance with respect to the use of foreign income or gains to secure loans used in the UK
Non-UK domiciled remittance basis taxpayers need to be aware of revised guidance recently issued by HMRC. Effective 4 August 2014, HMRC will take the position that foreign income and gains contained within a non-UK account will be considered a taxable remittance as soon as they are pledged as collateral for a loan used in the UK. This represents a change to its previous position which was that a loan used in the UK, secured against assets representing foreign income or gains, would not give rise to a taxable remittance, provided that the loan was “commercial” and it was “serviced.”
It is important to note that HMRC has not changed their previous view with respect to servicing a loan used in the UK. If foreign income or gains are used to pay interest or principal on a loan, it will continue to be treated as a taxable remittance of those income or gains. Also important to note is that no tax charge is applicable if clean capital is used to make interest or principal payments.
If a loan used in the UK is secured by foreign income and gains but was in place prior to 4 August, HMRC will not take action to assess a remittance charge if certain steps are taken. First, an individual is required to notify full details of the loan to HMRC including the amount of foreign income or gains used as collateral and the amount of the loan remitted to the UK. Then, one of the following has to happen in order to permanently avoid remittance charges from being applicable:
(1) The individual must give written notification by 31 December 2015 that the foreign income or gains either has been or will be replaced by non-foreign income or gains before 5 April 2016, or
(2) The individual must repay the loan before 5 April 2016.
If the above conditions are not met, or notification is not made then HMRC will assess a remittance charge on the foreign income and gains used to secure the existing loan.
If you currently have a loan used in the UK that is secured with foreign income or gains, we encourage you to seek tax advice to ensure that you take the proper steps to avoid unnecessary remittance charges. And, if you’re deemed to be affected by these changes, please also do not hesitate to reach out to your MASECO Adviser to discuss any potential impact on your wealth planning strategy.