UK resident but non-domiciled individuals can elect to be taxed on the remittance basis in the UK. This will allow them to only be taxed on income and gains that they remit to the UK.
Up until recently HMRC took the view that a loan used in the UK but secured against offshore assets representing foreign income and gains, in the form of cash or investments, did not constitute a remittance of those assets provided that the loan was “commercial” and regular payments were made to the lender.
However, since 4 August 2014, HMRC’s new position is that offshore cash and investments used as security for loans used in the UK will be deemed to have been remitted to the UK as soon as they are pledged as security.
As previously, foreign income and gains used to make repayments of interest and capital against such a loan will constitute a remittance of that income. This is in line with HMRC’s previous position. No tax charge will occur if ‘clean capital’ is used to make the repayments.
This change in position will affect UK resident non-domiciled individuals who:
- Have already borrowed money to use in the UK and used their offshore cash and investments as security; or
- Are contemplating borrowing money for use in the UK using their offshore assets as security.
It should be noted where the secured assets are ‘clean’, i.e. pure capital, no tax charge will arise from the remittance.
Where a UK resident non-domiciled individual falls under option 1 above, HMRC will allow a grace period for restructuring – no action will be taken if the loan arrangements fall within the original guidance as long as the individual:
- Makes a full disclosure to HMRC with details of the total amount of foreign income and gains used as security and the amount of the loan remitted; and either
- Confirms in writing by 31 December 2015 that the amount of foreign income and gains used as security has been or will be replaced by another security before 5 April 2016; or
- Repays the loan (or part of the loan that was remitted to the UK) by 5 April 2016.
Failing to comply with the above would result in the foreign income and gains part of the secured amounts being deemed as remitted to the UK and a tax charge calculated on the amounts.
For further information on any of these points, please contact one of our tax partners: Clare Munro or Phil Moss.