HMRC have published guidance on the withdrawal of the concessional treatment for commercial loan arrangements in the context of the remittance basis.

Under the rules in Chapter A1 of Part 14 of ITA 2007 there is a remittance of foreign income or chargeable gains if:

• money or other property is brought to, or received or used in the UK by or for the benefit of a relevant person, and
• foreign income or gains are used outside the UK (directly or indirectly) in respect of a relevant debt (section 809L(3)(c) ITA 2007) relating (wholly or in part, and directly or indirectly) to certain property (within section 809L(7) ITA 2007).

Where, as a remittance basis taxpayer, someone:

• has obtained a loan in the UK or overseas secured using foreign income or gains that remains overseas, and
• remitted part or whole of that loan to the UK

they are considered to have remitted foreign income or gains to the extent of the loan amount remitted. For example, if someone has 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 they are making a taxable remittance of £100,000 at that point.

This has always been HMRC’s view of the law. However, it was recognised that there is another potential source of taxable remittances in respect of secured loans. If someone made loan repayments using a different source of foreign income or gains they would make a second remittance at that point. The result would be taxable remittances of double the amount of loan brought to the UK.

Accordingly, in 2010 a concession was published in HMRC’s guidance manual RDRM33170. This concession applied to loans made on commercial terms that were regularly serviced from foreign income or gains. In those circumstances only the servicing payments would be taxed and not the use of the underlying collateral.

HMRC is seeing large numbers of arrangements which are not considered to be commercial and not within the intended scope of the concession. For example, loans repaid from non-foreign income or gains that are not charged as a remittance, despite foreign income or gains collateral having been used in the UK.

HMRC’s revised position

The concessional treatment for commercial arrangements has been withdrawn from 4 August 2014 and HMRC is replacing the relevant guidance. From that date, money brought to or used in the UK under a loan facility secured by foreign income or gains will be treated as a taxable remittance of that amount of foreign income or gains. If the loan is serviced or repaid from different foreign income or gains, the repayments of capital and interest will constitute remittances in the normal way.

HMRC’s position on arrangements set up before 4 August 2014

Taxpayers are advised to notify full details to HMRC if they have used foreign income or gains as collateral for a loan and have not declared a remittance. HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the concession in RDRM33170, provided:

• the individual gives a written undertaking (which is 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).

Further information is available at the above link.