Relevant Debts, Collateral and the Remittance Basis

23 / 02 / 2022

In 2021, HMRC changed how they would treat the foreign income or gains of a UK resident remittance basis taxpayer when used as collateral for a relevant debt that is brought to or used in the UK (the “Loan“). This represents a second and controversial change to their guidance, making the technical position uncertain for non-UK domiciliaries and their advisers.

The pre-2014 position

Before August 2014, so long as the Loan was on commercial terms and the borrower planned to service it and repay the principal without recourse to the collateral (instead using other funds to make such repayments), s/he would “effectively mask the collateral being used” and thereby avoid a taxable remittance of any foreign income and gains comprised in the collateral if any of the borrowed funds were brought to or used in the UK.

The 2014 change

The first change to these rules came on 4 August 2014 when HMRC amended their published guidance (effectively withdrawing their concession) by confirming that:

• the foreign income and gains comprised in the collateral in respect of a Loan, are in fact remitted to the UK if any funds from the Loan are brought to or used in the UK; but

• that the amount of income and gains that was treated as remitted to the UK was capped at the value of the Loan.

Taxpayers were given until 5 April 2016 to repay such Loans to avoid triggering taxable remittances on account of such collateral.

The 2021 change

On 18 May 2021, HMRC updated their guidance to change their position yet again. This time, there is no grace period to restructure or pay back the Loans.

As a result of this change, the current situation appears to be as follows, according to HMRC:

1. Where all the borrowed funds in respect of a Loan are brought to or used in the UK:

a. all foreign income and gains comprised in the collateral are treated as remitted to the UK, with no available cap; and

b. there is also a taxable remittance if foreign income and gains are used to service the Loan (this is consistent with the pre-2014 approach).

2. Where not all the borrowed funds in respect of a Loan are brought to or used in the UK:

a. the value of the remitted foreign income and gains comprised in the collateral is capped at the value of the Loan; and

b. as above, there is also a taxable remittance if foreign income and gains are used to service the Loan. 

Tips

  1. It is prudent where the taxpayer has provided collateral for a Loan, that s/he keeps at least £1 of the borrowed money outside the UK to avoid an unlimited remittance of the foreign income and gains comprised in the collateral.
  2. Where a non-UK resident moves to the UK, s/he should consider any loan arrangements where they have used collateral and the loan has been used in the UK, prior to relocating.
  3. Some commentators have suggested that where UK taxpayers have already applied HMRC’s 4 August 2014 guidance to cap the remittance of foreign income and gains comprised in the collateral, notwithstanding that all the borrowed funds were used in the UK, HMRC might be out of time to issue a discovery assessment, thereby creating additional clean capital.
  4. Where possible, advice should be taken at the time of making the Loan, and before bringing any of the borrowed funds into the UK.