The rules governing remittances of income and gains to the UK are very complicated, and nowhere more so than where loans are concerned. This is reflected in the fact that HMRC has changed its position multiple times in relation to the use of loaned funds that have been secured or guaranteed using untaxed (ie otherwise not remitted to the UK) foreign income or gains (FIGs) of a remittance basis user.
Who is affected?
The most recent change in interpretation, in 2021, potentially affects anyone who is or has been taxed in the UK on the remittance basis and who has a ‘relevant debt’ – ie borrowings brought to or used in the UK by a ‘relevant person’.
In effect, if an individual is UK resident and provides security, guarantees or other collateral for a loan to themselves or other relevant persons, they may be affected.
Since 2014, it has been HMRC’s view that where untaxed FIGs have been used as collateral for a relevant debt, a remittance occurs when the borrowed funds are brought to/used in the UK even if the foreign collateral is never called upon and the loan is ultimately wholly repaid out of other funds.
For example, consider the situation where a trust borrows £1m to buy a UK property and the loan is secured over a personal share portfolio held by the settlor which contains £10m of untaxed FIGs.
How much has actually been remitted to the UK? On the face of it, this looks obvious – the loan is £1m and the collateral includes more than that amount in FIGs, so it might be expected that there is a £1m remittance. However, HMRC disagrees.
HMRC considers that where the whole of the amount borrowed is remitted to the UK, there is a taxable remittance of all untaxed FIGs used as collateral for the loan. In our example, this means that borrowing £1m by way of a loan and remitting it creates a tax charge on £10m of FIGs.
On the other hand, HMRC says that if only part of the borrowed funds are remitted, the taxable amount is limited to the actual amount remitted to the UK. If the trustee borrows £1m but only remits £950,000 to the UK, the settlor will not be taxed on £10m but on the £950,000 actually used in the UK.
Is this right?
One of the reasons why HMRC’s view has changed over time is because the original legislation on remittances and debt is very unclear, and it is therefore possible to have radically different interpretations of how the remittance rules work.
However, when facing specific guidance explaining how HMRC expects remittances and amounts constituting remittances to be taxed, it would be a very bold move for a taxpayer to adopt a different approach, and we would recommend that any borrowing is structured with HMRC’s most recently stated view of the remittance position firmly in mind.
What should you do?
Where loans have been taken out and the funds have been remitted in full since 2014, there may be a need to review and amend previous tax return disclosures.
For loans taken out in future, the issue of collateral creating a taxable remittance of more than the amount borrowed will need to be considered in all cases. It may be possible to limit the problem by borrowing a larger amount than is required in the UK, and keeping or spending the balance offshore, so that the collateral deemed to be remitted is limited to the value of the loan actually used in the UK. In our example above, borrowing and remitting £1m with collateral of £10m FIGs creates a tax charge on £10m. Borrowing £1m and remitting £950,000 still creates a taxable remittance, but one that is limited to the amount actually brought to the UK. If the other £50,000 is retained/used to pay professional fees outside the UK, then it can never be remitted, which stops the excess charge from crystallising.
It would not be a surprise to see further changes to HMRC’s view on this area of taxation in future. To fully protect against this, if possible, borrowed funds being used in the UK should never be secured on assets containing untaxed FIGs. If this is not possible, the amount of such FIGs should be limited to the loan value, for example by holding collateral in a separate account. Advice would need to be taken when considering this, but cautious structuring now could provide valuable future-proofing against the next time that HMRC changes its mind.
For more information, please get in touch with Rachel de Souza, or your usual RSM contact.