Bulletins | December 4, 2014

Changes to offshore loans for UK property

Background

Back in 2008 the Finance Act introduced sweeping changes to the way non-UK domiciled individuals resident in the UK were to be taxed.   The Government’s principal objective was to extend the definition of “remittance” so that it would be easier for overseas income and gains to be taxed in the UK when they (or assets representing the same) were brought, enjoyed or used in the UK.  Having said that, the legislation was far from clear cut and as a result HMRC published detailed guidance on how it would treat certain arrangements in light of the new legislation.  Some of that guidance was on “relevant debts” – i.e. where an overseas loan is brought to the UK (e.g. to purchase a UK property) and the security for the loan comprises untaxed foreign income and gains.

HMRC’s 2009 Guidance

Provided the overseas loan was on commercial terms and foreign income or gains were not being used to meet interest payments or repay capital, HMRC confirmed that it was possible to use foreign income and gains as security without triggering a taxable remittance for UK tax purposes.  They further confirmed that if clean capital was used to service the debt or repay the loan then a remittance would not arise.

Many non-domiciled individuals resident in the UK have since relied upon HMRC’s Guidance when structuring their property purchases.  They have been careful to ensure that they entered into commercial arrangements and used clean capital to service or repay the debt.  As a result HMRC’s tax take has been minimal and without the resources to investigate the “commerciality” of all the arrangements, they were significantly motivated to change their stance which was announced without notice on 4th August.

HMRC’s new 2014 Guidance

With immediate effect, on 4 August HMRC revised their Guidance stating that they would deem there to be an immediate remittance where foreign income or gains were being used as security for a loan used in the UK. Furthermore, the servicing of or repayment of the loan with foreign income and gains would still constitute a remittance .  In short, a double remittance could now arise and this is not limited to loans relating to property.

With the benefit of hindsight HMRC now refer to their 2009 Guidance as “concessionary” and the August announcement as a withdrawal of their concession.  However, it remains to be seen whether this was the case and whether legally they are able to introduce and withdraw concessions in this manner bearing in mind we now have legislation specifically dealing with Extra Statutory Concessions.  Professional bodies such as CIOT, The Law Society, STEP, The Expatriate Forum and ICAEW met with HMRC on 11th September to obtain further clarity.  However it would appear that HMRC are standing their ground and might be prepared to face judicial review proceedings in the future.

What type of loans are caught?

  • Secured lending (i.e. a loan secured over real estate, an investment portfolio or a cash deposit comprising mixed funds).
  • Overlapping secured lending (i.e. a secured loan where some of the secured assets are in the UK and some are outside the UK, or some are clean capital and some are not).
  • Floating charges on an “all monies” basis (unless HMRC change their view after they have reviewed typical T&Cs ).

Unsecured lending will not be caught even if it is made on the basis of offshore accounts and investments comprising foreign income and gains managed by or disclosed to the lender.

Transitional Relief

Individuals affected have been requested to notify HMRC; this is a request and not a legal obligation.  If the arrangements satisfy the published 2009 Guidance the foreign income/gains will not be taxed PROVIDED THAT by 31 December 2015 a written undertaking is provided to HMRC confirming that before 6 April 2016 either:

  • the offending form of security will be changed to clean capital; or
  • the loan remitted to the UK will be repaid.

HMRC will issue an assessment if:

  • the arrangements are not commercial (i.e. fall foul of the 2009 Guidance);
  • the written undertaking is not adhered to; or
  • it is discovered that a notification has not been made,

unless the arrangements are restructured by 6 April 2016.

Next steps for existing arrangements

  • For tax years up to and including 2011/12 – if Self Assessment Tax Return filed on time, do nothing because the tax payer acted in line with HMRC’s published practice and the enquiry window has now closed (Note: HMRC might not take this view).
  • For tax years from 2012/13 onwards – do nothing if felt the arrangements are commercial and sit neatly with the 2009 Guidance and the debt arrangements have already come to an end.
  • For arrangements remaining in place after 4 August 2014 – restructure to limit security to clean capital (i.e. non-relevant foreign income or gains) or UK real estate possibly in conjunction with a third party guarantor.
  • Consider making a claim for Business Investment Relief before 31 January 2015 for qualifying loans brought into the UK on or after 6 April 2012.
  • Be careful about restructuring: further drawdowns (i.e. via an open facility), automatic renewals and revolving loans might be seen as new debt arrangements.

Options for future property purchases

  • Structure before an individual becomes UK tax resident when clean capital is easier to identify/create.
  • Make use of Business Investment Relief.
  • Make use of borrowings from non “relevant” persons.
  • Make use of derivatives and secondary credit facilities.

HMRC are considering further guidance, perhaps in the form of FAQs but advisors would prefer revised and clearer legislation. Draft clauses have been submitted to HMRC for their review so this area of the law and HMRC’s Guidance is likely to continue to develop making regular review of existing and new arrangements essential.

Should you have any queries, please do not hesitate to contact Camilla Wallace or Kate Davies.