Remittance Basis Users: Beware of giving collateral over foreign income and gains for UK loans
In light of an HMRC change of practice, remittance basis users need to take additional care if providing collateral over non-UK assets for loans brought into or taken out in the UK.
HMRC’s change of practice is highlighted in a recent (21 December 2021) note (“the Joint Note”) prepared by three of the UK professional bodies, STEP, CIOT and ICAEW. In particular, whereas previously remittances triggered by reference to collateral were capped at the amount of the loan brought into the UK, the cap no longer applies in cases where the entirety of the loan is brought into or used in the UK.
The change of practice means that where the non-UK collateral represents or is derived from previously unremitted foreign income and gains (“FIGs”), then once the entirety of the loan is brought to the UK, all of the FIGs over which collateral has been given are remitted even if worth many times more than the value of the loan. Where only part of the loan is brought into the UK, however, and because of particular provisions in the Income Tax Act 2007, the remittance of FIGs given as collateral is limited by reference to the amount of the loan brought to or used in the UK.
If a remittance basis user brings the entirety of a loan of £1m into the UK, for example, but provides collateral for the loan over their non-UK bank accounts containing £2m of previously unremitted FIGs, then on the basis of the latest HMRC practice, the loan will trigger remittances of £2m. On the other hand, if the remittance basis user brings only £900,000 of the loan of £1m into the UK, the remittance of FIGs is limited to the amount of the loan brought into the UK, being £900,000. There would, of course, be further remittances if interest payments and capital repayments are made from a separate pool of previously unremitted FIGs.
Before HMRC’s most recent change of practice, even if the entirety of the loan had been brought into the UK, the amount of FIGs given as collateral that would be remitted was limited to the amount of the loan. Furthermore, under an HMRC concession of 2010, withdrawn in 2014, there was in effect no remittance of FIGs given as collateral provided the loan in question was fully commercial.
HMRC’s latest practice is contained in changes made to the HMRC Manual on Residence, Domicile and the Remittance Basis. The changes were made in three stages, from 17 December 2020 to 21 July 2021 but, as pointed out in the Joint Note, the changes were not announced by HMRC.
Furthermore, as far as we are aware, there is no “grandfathering” under HMRC’s latest practice, of previous loan arrangements made by remittance basis users. This means that HMRC might now consider there to have been additional remittances in past tax years of FIGs given as collateral where the full amount of any loan in question was brought into the UK. However, the implications of this for the remittance basis taxpayer are not fully clear.
As the Joint Note points out, there are a number of uncertainties in connection with HMRC’s practice on remittance of FIGs used as collateral for UK loans. The fact of HRMC’s changes of practice in this area may undermine confidence in their approach. There is furthermore uncertainty over the nature of the collateral that leads to FIGs being remitted by reference to a loan brought into, or taken out in, the UK. It appears that FIGs are remitted even when the form of the collateral falls short of being a formal charge or pledge. According to HMRC’s current practice, it suffices if the loan is “conditional” on the FIGs used as collateral. The professional bodies have sent the Joint Note to HMRC for comments and we hope that some clarification might emerge from this.
In the meantime, the Joint Note has highlighted the need for caution on the part of remittance basis users providing collateral over non-UK assets for loans brought into or taken out in the UK. The Joint Note also highlights the possibility that past loan arrangements might need to be revisited, including for compliance purposes.
For further detail and background on the points made in this blog you can refer to the Joint Note itself, which can be found here.
Disclaimer
This note reflects our opinion and views as of 24 February 2022 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.