In August last year, the Revenue unexpectedly announced it was revising the loan policy for non-doms, so that money held overseas would be subject to tax if it was being used as collateral to acquire a UK loan.
Non-dom individuals can choose to be taxed on a remittance basis, which means – instead of being charged on worldwide income and gains – they are only taxed on British income or gains brought to or used in the UK. This regime is often used by non-doms to borrow money for UK property.
Foreign funds
Last year’s reversal of the non-dom loan policy meant that borrowed foreign funds used in the UK would be taxable, even if a non-dom had opted to be taxed on a remittance basis.
Non-domiciles had until 5 April 2016 to replace the foreign income or gains security with ‘non-foreign’ income or gains in order to avoid a hefty tax bill.
However, the British tax office has now decided to return to its previous regime where overseas funds used as loan collateral are not treated as a remittance.
Careful consideration
“Discussions with representative bodies […] have brought to light that for some loan arrangements it may be difficult or impossible to unwind or replace the foreign income or gains used as collateral,” HMRC said in a public notice published on Thursday.
“To ensure the transitional period does not have an unintended effect, after careful consideration HMRC has decided it will, with effect from today, not seek to apply the change announced on 4 August 2014 to arrangements where the loan was brought into or used in the UK before that date.
“From today, there is no requirement to repay or replace foreign income and gains collateral with non-foreign income and gains collateral before 5 April 2016.”
Worried clients
Helen McGhee, senior associate at New Quadrant Partners, said HMRC’s latest announcement is good news for those worried clients who were contemplating having to restructure their assets.
“When the change of practice was announced last August, many practitioners were seriously concerned about HMRC setting a precedent that on any given day it might unilaterally decide to change the way they would interpret the law and penalise taxpayers in the process,” she said.
“Hence some very serious lobbying and we are glad that this has come to fruition.”
Almost impossible
“HMRC have recognised that in many circumstances it would be almost impossible to restructure loan arrangements or replace collateral in such a short space of time, and the grandfathering is therefore most welcome.”
McGhee said, however, that caution will still need to be had with any new arrangements: “Hopefully since 4 August 2014 no collateralised loan monies have been remitted.”
