Significant Changes are being made to the Treatment of Foreign Loans for UK Non-Doms.
In early August HMRC, the UK tax authority, announced a change to the manner in which foreign loans taken by individuals who are UK resident and UK non-domiciled (‘resident non-doms’) are treated. The change affects foreign loans made to resident non-doms, that are secured on that individual’s foreign income or gains and the loan funds are then remitted to the UK.
In 2009 as part of the then recently introduced rules establishing the remittance basis of taxation for resident non-doms, HMRC confirmed that where a UK resident non-dom obtained a loan on normal commercial terms, providing security with his foreign income or gains, the foreign loan would not be treated as a remittance of the individual’s foreign income or gains provided to the lender as security.
However, foreign income or gains used to repay the loan or the loan interest would be treated as a remittance and taxable in the UK as such.
At the time, HMRC considered it would be unfair to tax as a remittance the income or gains offered as security and then also to tax the foreign source funds remitted to the UK to repay the loan.
The position has now changed and with retrospective effect.
On the 4 August HMRC announced that the ‘concession’ summarised above, had been withdrawn in the light of what HMRC considers are a large number of arrangements that are being used to abuse the concession. From now on funds remitted to the UK via a foreign loan arranged by a UK resident non-dom who provides foreign income or gains as security, will be considered as an immediate taxable remittance of the funds provided as collateral for the loan. It remains the case that foreign funds used to pay interest or repay the loan will continue to be treated as a taxable remittance.
For loans that are currently in place HMRC is offering UK resident non-doms a ‘period of grace’ to reorganise their finances providing that they:
- Provide a written undertaking that any foreign income or gains used as security for a loan have been or will be replaced as security by UK income or gains before 5 April 2016. The deadline for the provision of the undertaking is the 31 December 2015; or
- All or that part of the foreign loan that has been remitted to the UK has been or will be repaid before 5 April 2016.
- HMRC will require notification of both the amount of the loan remitted to the UK (and possibly the total amount of the loan) and the amount of the foreign income or gain provided as security.
If these steps are taken and the foreign loan repaid before 5 April 2016 the loan and the collateral funds will not be treated as a remittance and subject to UK tax.
It is expected that HMRC will provide further details and guidance and we will provide an update once the details are known.