On 4th August 2014, HMRC amended its guidance regarding the enjoyment of offshore loans in the UK.
Before that date HMRC accepted that a UK resident, non-UK domiciled remittance basis user could borrow funds offshore, secured against unremitted untaxed foreign income and/or gains, and use the funds in the UK without triggering a taxable remittance provided that the loan:
- was made on commercial terms; and
- the payments of loan interest and the repayments of loan capital were made when they fell due and that all of these payments were funded out of clean remittable capital (whether borrowed or other funds).
In these circumstances, HMRC accepted that the servicing and repayment of the loan “masked” the collateral such that the offshore assets (against which the loan was secured) were not “used in respect of the debt”, even though most practitioners regarded HMRC’s interpretation as generous and, therefore, vulnerable to being withdrawn at short notice.
HMRC announced that it would treat all offshore loans taken out on or after 4th August 2014, which are used in the UK, as triggering an immediate taxable remittance of any offshore income or gains, used as security for the loan and it granted an amnesty in respect of pre-existing loans provided that the taxpayer:
- notifies HMRC in writing of the pre-existing loan arrangements before 31st December 2015; and
- repays or replaces the collateral for the loan by 5 April 2016 with other assets that do not comprise untaxed offshore income or gains.
What should those affected do?
Clearly no further borrowings should be remitted to the UK, until new arrangements have been put into place.
The simplest solution would be to repay the loan out of clean capital or out of funds which will trigger the lowest UK tax charge.
Alternatively, it may be possible to put forward another asset (which represents clean capital) as collateral for the loan, such as an overseas property, or alternatively a property belonging to a third party.
It is also important to:
- ensure that HMRC is notified of the pre-existing loan before 31 December 2015;
- consider other ways of remitting untaxed funds to the UK without triggering UK tax charges, such as by taking advantage of business investment relief; and
- take steps to preserve any clean capital for future remittances to the UK.
In order to identify the best way forward for your particular circumstances, please speak to your usual Saffron adviser, or Nicholas Hughes.