HMRC has tightened its stance with regard to unremitted offshore income.Nick Barnes, Head of Research
What was the old system?
There were two possible sources of a taxable remittance charge in respect of the relevant debt – the foreign income or gains used as collateral and the foreign income or gains used to repay/service the debt. HMRC has always regarded foreign income and gains used to pay interest and to repay the borrowed capital on loans secured in the UK as taxable remittances. In 2010, HMRC allowed a “safe harbour” where loans were made on commercial terms and regularly serviced from foreign income or gains. In those circumstances HMRC accepted that only the servicing payments (i.e. repayment of borrowed capital and interest) were taxed and not the use of the underlying collateral.
What are the changes?
With effect from 4th August 2014, the 2010 concession has been withdrawn and money brought into or used in the UK under a loan facility secured by foreign income or gains is now treated as a taxable remittance. For example, if you have a £1 million loan facility secured by foreign income or gains of £1 million, and £100,000 is borrowed and brought to the UK, then you are making a taxable remittance of £100,000.
However, mortgage interest on foreign mortgages or loans secured on UK properties, which were taken out before 12 March 2008 and where the terms have not been varied since then, may still be paid from offshore untaxed income without triggering a taxable remittance. This applies to loans which were taken out specifically with the purpose of acquiring an interest in UK residential property. This favourable treatment will apply until 5 April 2028, or until the conditions attaching to the loan or mortgage change if earlier.
With regard to existing security arrangements set up before 4th August, HMRC requires notification of full details if foreign income or gains have been used as collateral for a loan and have not been declared as a remittance. HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the 2010 concession, provided:
– a written undertaking is provided (and subsequently honoured) by 31 December 2015 that the foreign income or gains security either has been, or will be replaced by non-foreign income or gains security before 5 April 2016, or
– the loan or part of the loan that was remitted to the UK either has been, or will be repaid before 5 April 2016
The notification should include the amount of foreign income or gains used as collateral and the amount of the loan remitted to the UK (if not the full amount).
What are the potential implications for you?
Anyone who has taken out a loan secured on offshore assets, and who has brought the loaned funds to the UK, will need to review their position without delay.
The first point to note is whether or not a loan secured on offshore assets could be seen to give rise to a taxable remittance in the UK – this will depend on how the initial purchase of the offshore assets was funded. If the funding of the purchase can be traced back to untaxed overseas income or capital gains, then in HMRC’s view the remittance of the loan will be taxable in the UK to the extent of the income or capital gains, subject to any transitional measures.
Anyone currently in the process of buying a UK residential property and who has arranged borrowing on the security of offshore funds instead of a conventional UK mortgage may find themselves in a particularly difficult position, especially if contracts have been exchanged. It may not be possible to unwind the existing arrangement and not everyone may be able to repay the loan, nor even pay any tax amounts which may now become liable.