HMRC withdraw concessional treatment for commercial loan arrangements

HMRC announced that as of 4^th August 2014 a significant concession for remittance basis taxpayers would be removed with immediate effect.

The concession, included within HMRC’s manuals (RDRM33170), effectively allowed individuals to secure lending against their foreign income and gains (typically a portfolio(s) held with a bank) and transfer the funds to the UK without tax charge if the lending was at a commercial rate (again, typically provided by the bank holding the assets).

HMRC introduced the concession in order to stop individuals being assessed to tax in relation to both the initial loan and the payments used to service the loan, the assumption being that foreign income and gains would be used to make repayments/service interest. The unintended consequence of the concession was that individuals could service the loan from either UK funds or ‘clean capital’ without triggering a tax charge in relation to either the initial loan or the repayment.

A great number of resident non domiciled individuals have used this planning in order to access funds held outside the UK without tax charge, often for the purpose of acquiring property, or to invest in UK businesses (though note, other reliefs are available in this respect).

The withdrawal of the concession affects both existing and future lending arrangements.

HMRC have stated that as of the 4^th August 2014 funds brought to/enjoyed in the UK relating to a loan facility secured on foreign income and gains will be treated as a taxable remittance. In addition, the loan repayments will also be taxable if serviced from a different source of foreign income and gains.

Where an arrangement which relies on the concession is already in place, of which there will be many, HMRC have stated that a written undertaking must be made by 31^st December 2015 that the loan will be replaced by security representing non foreign income and gains or repaid by the 5^th April 2016. This represents a small concession by HMRC to allow taxpayers to re-arrange their affairs, but the timeline is short, and there is obviously potentially a funding issue.

Edwin Coe LLP provide specialist advice to clients who are subject to the remittance basis of taxation and are ideally placed to assist those who need to review their current and future arrangements  in light of the above changes.

If you require further information about this topic please contact a member of our Tax team.

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