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Q&A: Withdrawal of HMRC concession on commercial loan arrangements for non-doms

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Karen Bowen, tax director at Francis Clark, answers questions about HMRc's recent change in practice.

What has happened?

On 4 August 2014, HMRC unexpectedly announced a change in practice in respect of non-domiciliaries taking out commercial loans secured against their foreign income and gains. Any new loans taken out from 4 August 2014 that are secured against foreign income or gains will cause the remittance of the collateral if the loan proceeds are remitted to the UK.

What was the previous practice?

The guidance was set out in the previous version of HMRC’s Residence, domicile and remittance basis manual at RDRM33170. This can now only be accessed by the National Archives website (see

The previous guidance stated that the servicing and repayment of a loan set up under commercial terms effectively masked the collateral offered on the basis that there was no expectation or intention that the security would be taken by the lender. In that case, loan proceeds could be brought to the UK without any remittance of the collateral. Funding interest payments or loan repayments from foreign income or gains caused a taxable remittance but many non-domiciliaries used non-foreign income/gains thereby eliminating a tax charge.

Loans not set up commercially or that were not serviced regularly were treated differently. If the collateral included the non-domiciliary’s foreign income or gains, this caused a taxable remittance at the point the loan was brought to the UK.

Why has HMRC withdrawn the concession?

HMRC says the concession was withdrawn because of the large number of arrangements which are not considered to be commercial and not within the scope of the concession. It gives the example of loans repaid from non-foreign income or gains that are not charged as remittances despite the loan proceeds having been used in the UK and secured against foreign income or gains.

HMRC refers to its original practice as being a concession, but it was not presented in that way and technical reasons were given as to why commercial and non-commercial loans were treated differently. Furthermore, HMRC’s previous examples specifically pointed out that a relevant debt could be serviced and repaid using non-taxable income or capital sources without causing a taxable remittance.

Why does HMRC regard this as a remittance?

HMRC considers that a remittance of the collateral takes place as a result of ITA 2007 s 809L(3) which concerns relevant debts.

In most cases, the loan will be secured against a mixed fund and ITA 2007 s 809Q(1)(b) states that a remittance from a mixed fund requires a transfer to take place. HMRC’s guidance refers to this in RDRM35270 and says the offering of the security is when the transfer takes place. This would, however, seem to be a wide interpretation of ‘transfer’ and it is questionable whether HMRC is correct.

What about existing loans?

Any remittance basis user who has taken out a loan secured on foreign income or gains is potentially affected if the loan has been used in the UK or is intended to be used in the UK. HMRC has advised that these individuals need to either repay the remitted parts of their loans (using non-foreign income or gains to prevent a taxable remittance) by 5 April 2016 or to replace the security with non-foreign income or gains by 5 April 2016.

If the loan security is to be replaced by 5 April 2016 with non-foreign income or gains, HMRC also requires the individual to provide a written undertaking that that is the case by 31 December 2015. I have received confirmation from a HMRC lead technical adviser that where a notification is not made by 31 December 2015 but the collateral is replaced by non-foreign income and gains by 5 April 2016 there should be no taxable remittance. However, the technical adviser goes on to say that making the notification ensures the terms of the announcement are fully met and may prevent an unnecessary enquiry into the individual’s tax returns.

If the security is not replaced by non-foreign income/gains or the loan is not repaid before 5 April 2016, a remittance of the collateral will be treated as made. HMRC’s announcement does not state when that remittance would be treated as occurring but the response from the HMRC lead technical adviser states the remittance is made when the loan is brought to the UK. It would seem that HMRC believe discovery assessments may be raised for closed years unless the taxpayer made a full disclosure of the transaction on the return. I am not convinced this interpretation by HMRC is correct.

HMRC has confirmed that a double charge will be applicable if the loan brought to the UK is secured against foreign income and gains and is subsequently repaid using other foreign income or gains. It would seem that HMRC consider it reasonable to tax the same loan amount twice in that situation.

Some individuals may not be in a position to repay the loan by 5 April 2016 and do not have alternative non-foreign income/gains to use as collateral. These individuals face a very expensive process of working out what foreign income/gains were remitted when the loan was brought to the UK, but there may yet be hope that loans brought to the UK in earlier closed years are beyond the reach of HMRC.

What about the future?

It is not clear that HMRC’s latest interpretation is correct, but following HMRC’s statement individuals taking out loans from 4 August 2014 will need to use non-foreign income/gains as collateral or have an unsecured loan to prevent a remittance occurring if the loan proceeds are to be used in the UK.

Depending on the reason for bringing funds to the UK, it is possible that other reliefs may be applicable such as business investment relief or gift aid for payments to eligible charities. Going forward, it will be important for remittance basis users to properly segregate foreign income and gains from other funds held offshore and to take advice before making a remittance or using offshore assets as loan collateral.