Loans Secured on Overseas Income or Gains Print

For some years HMRC had stated in their manuals that the use of unremitted foreign income or gains as collateral for an offshore loan used to acquire an asset in the UK would not be treated as a remittance of the foreign income provided that interest is paid at a commercial rate on the borrowings, and there is no set-off arrangement. The legislation in this area is unclear, and HMRC had not previously acknowledged whether this was a form of concessionary treatment, as they had remained silent on this question.

On 4 August 2014 HMRC announced that the concessionary treatment is being withdrawn. According to the new guidance where a loan which has been secured on foreign income or gains is brought to the UK, it will be treated as a remittance of that amount of the foreign income or gains.

Where loan arrangements were within the above terms the borrower had until 5 April 2016 to either replace the loan, or replace the security without triggering a tax charge in the UK. The borrower had to give a written undertaking to HMRC by 31 December 2015 that the security would be replaced or the loan repaid by 5 April 2016. This notification had to include a note of the amount of foreign income or gains used as collateral and the amount of the loan remitted to the UK.

In many cases these loans are used to fund the purchase of a home in the UK, and it may be possible to replace the existing collateral, and use the home as security, or possibly another home overseas, or clean capital.

Several of the accountancy professional bodies attended a meeting with HMRC and the Treasury in September 2014 to discuss these issues, and a case was put forward by the professional bodies that a more generous form of grandfathering treatment for those individuals who had taken loans on the understanding of HMRC’s guidance prior to August 2014.

On 15 October 2015 HMRC issued a Policy Paper in which it was acknowledged that for some of the loan arrangements in place at 4 August 2014 it may not be possible to replace the foreign income or gains used as collateral, and HMRC stated that it would not seek to apply the changes announced on 4 August 2014 to arrangements where the loan was brought into or used in the UK before 4 August 2014. This was welcome news for those individuals affected by these changes.

The new rules remain unchanged for loans brought into or used in the UK on or after 4 August 2014.

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