Individuals who are UK tax resident but not UK domiciled, and claim (at a cost) the remittance basis relief are not taxed on their non UK income and gains unless these are remitted to the UK. This can be very beneficial for those individuals, particularly if those non UK sources of income and gains are located in a country with a low or nil tax rate.
Claiming the remittance basis can though cause practical problems. For example if an individual wants to buy a property in the UK their UK income and assets on their own may be insufficient to allow them to buy the property they want. If the individual brings in their non UK income and gains for the purchase, that will be taxed as a remittance.
A practical way to deal with that is for the individual to take out a loan from a bank, using the non UK income and gains (or more likely assets derived from that non UK income and gains) as security for the loan. The Revenue’s own manual confirmed that, provided the loan was on a commercial basis (the loan is being serviced on a commercial basis), the fact that it is secured against non UK income and gains would not mean that this would be treated as a remittance to the UK of that income and gains. Using the non UK income and gains to make loan interest payments or loan repayments would though be a remittance.
However this week, the Revenue stated their view that using offshore income and gains in this way as security for a loan is a remittance. Their statement says that they regard the practice set out in their manuals as simply a concession rather than a statement of the legal position, and were withdrawing that concession with immediate effect.
Though there may be some question on whether the Revenue’s view of the legislation is technically correct, in practice anyone who has a loan secured against non UK income and gains is at risk of being taxed on it as a remittance. The Revenue say that individuals should notify them if they have used non UK income and gains as collateral for a loan and have not declared a remittance. The notification should include the amount of non UK income or gains used as collateral and the amount of the loan used in or remitted to the UK (if not the full amount).
The Revenue say that they will not impose a tax charge, if the individual either:-
- gives a written undertaking to the Revenue, by 31 December 2015, that any non UK income or gains used as security has been or will be replaced by UK income or gains, or clean capital security by 5 April 2016 (and then this does happen); or
- the loan will be repaid before 5 April 2016.
Any UK resident but non UK domiciled individual who claims or has claimed the remittance basis, and has a loan secured against non UK income or gains (or assets derived from that income and gains) needs to consider what action to take. They will need to consider notifying the Revenue and how they want to deal with the loan going forward. They should therefore discuss this with their adviser as soon as possible.