CIOT Concerned About Double Tax On Non Dom Loans

Changes to the way that HM Revenue and Customs (HMRC) taxes loans secured by non-domiciled persons (“non doms”) using foreign income and gains will lead to disputes over the true interpretation of the law, the Chartered Institute of Taxation (CIOT) has warned.

HMRC has announced that it is to withdraw its concessional treatment of commercial loan arrangements secured using unremitted foreign income or gains as collateral for a loan enjoyed in the UK. HMRC says that it is seeing large numbers of arrangements which are not considered to be commercial and are not within the intended scope of the concession.

Effective August 6, 2014, money brought to or used in the UK under a loan facility secured by foreign income or gains will be treated as a taxable remittance of that amount of foreign income or gains. If the loan is serviced or repaid from different foreign income or gains, the repayments of capital and interest will constitute remittances in the normal way.

CIOT spokesperson John Barnett said of the news: “When the current rules on non-dom remittances were introduced in 2008 the law was unclear but many people thought that the use of these funds as collateral for a loan did not give rise to a tax charge. HMRC practice until now has followed that view, but they are now saying they will charge tax in these circumstances. This will inevitably lead to extensive battles over the true interpretation and people and their banks rearranging their affairs so that they do not fall foul of HMRC’s new view.”

“Where different pools of unremitted foreign income and gains are used to provide collateral and subsequent repayment, HMRC are suggesting that both amounts should be charged to UK tax – a form of double taxation.”

He continued: “Non-doms living in the UK are only taxed on their non-UK income to the extent that they bring it (remit it) into the UK. This change relates to a situation where a non-dom takes out a loan – in the UK or elsewhere – which they use in the UK, for example to buy a property. If that loan were repaid using foreign income or gains the law has always recognized that repayment as an indirect remittance.”

“What is less clear is the situation where the offshore income or gains are used as collateral for the loan. In most situations the collateral is just a safety net and the loan will be fully repaid using other means. HMRC previously took a view that this should be treated as a remittance only in obvious avoidance cases. The withdrawal of this treatment could mean that there is a remittance, even if the arrangement was always that the loan would be repaid using monies already in the UK.”

“This will cause significant practical difficulties for banks and their customers and generates significant uncertainty for them. These proposals leave a number of questions unanswered. For example, it is common for banks to have a right of set-off against all assets owned by a customer taking out a loan, so, even if the primary collateral is in the UK, the bank could also have offshore assets as secondary security. What would happen in this situation?”

The change repeals a concession made in guidance manual RDRM33170 in 2010. This concessions applied to loans made on commercial terms that were regularly serviced from a different source of foreign income or gains. To avoid tax being charged twice, in those circumstances, only the servicing payments were taxed, and the underlying collateral was not.

As a result of the repeal of this concession, taxpayers must notify HMRC if they have used foreign income or gains as collateral for a loan and not declared a remittance. HMRC will take no action to assess those remittances if the loan arrangements were within the terms of the concession in RDRM33170, provided that certain conditions are met.

The taxpayer must give a written undertaking by December 31, 2015, that the foreign income or gains security either has been, or will be, replaced by non-foreign income or gains security before April 5, 2016, or the loan or part of the loan that was remitted to the UK either has been, or will be, repaid before that date.

The CIOT will be writing to HMRC to raise its concerns about the proposals. Barnett criticized the Department for failing to consult industry on the matter. He pointed out that given that non-doms were told in 2010 that no further reforms would be introduced during the current parliament, this initiative will do little to “enhance the UK’s reputation as a place to do business with certainty.”