Withdrawal of concessional treatment for commercial loan arrangements

HMRC announced on 4 August 2014 that a concession for overseas loans remitted to the UK was being used in a way that was not intended, and to bring existing arrangements into line with HMRC’s application of the remittance basis to loan collateral arrangements going forward from that date.

A transitional period to 5 April 2016 was intended to provide adequate opportunity to alter all arrangements where the loan was brought into or used in the UK before 4 August 2014, ensuring there was no penalty for relying on the concession when the arrangements were set up.

Discussions with representative bodies since the announcement have brought to light that for some loan arrangements it may be difficult or impossible to unwind or replace the foreign income or gains used as collateral.

To ensure the transitional period does not have an unintended effect, after careful consideration HMRC has decided it will, with effect from today, not seek to apply the change announced on 4 August 2014 to arrangements where the loan was brought into or used in the UK before that date. From today (19 October 2015), there is no requirement to repay or replace foreign income and gains collateral with non-foreign income and gains collateral before 5 April 2016.

The effect of the withdrawal of the concession is maintained for arrangements where the loan is brought into or used in the UK on or after 4 August 2014. This ensures HMRC’s change of practice operates as intended.

Under the rules there is a remittance of foreign income or chargeable gains if:

a. money or other property is brought to, or received or used in the UK by or for the benefit of a relevant person, and

b. foreign income or gains are used outside the UK (directly or indirectly) in respect of a relevant debt.

Where, as a remittance basis taxpayer you:

*  have obtained a loan in the UK or overseas, secured using foreign income or gains that remains overseas, and

*  remit part or whole of that loan to the UK

you are considered to have remitted foreign income or gains to the extent of the loan amount remitted.

For example, if you have a £1 million loan facility secured by foreign income or gains of £1m, and £100,000 is borrowed and brought to the UK, then you 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 you made loan repayments using a different source of foreign income or gains you would make a second remittance at that point. The result would be taxable remittances of double the amount of loan brought to the UK.

As a result 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.

The concessional treatment for commercial arrangements was withdrawn with effect from 4 August 2014. From that date money brought to or used in the UK under a loan facility secured by foreign income or gains is 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.

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