RDRM33170 - Remittance Basis: Identifying Remittances: Conditions A and B: Condition B - collateral in respect of relevant debt
Foreign income and gains may be used as collateral for a loan which is brought to the UK or otherwise used for a purpose to which ITA2007/s809L(2) applies (that is, there is a relevant debt).
Such foreign income and gains used as collateral are used ‘in respect of’ the relevant debt, so there may be a taxable remittance at this point.
The foreign income or gains used as collateral may be used directly, that is, the lender may receive a charge over cash assets in a bank account. However it is more likely they will be offered indirectly, often in the form of an asset such as a property or bond note that is ‘derived from’ the foreign income or gains.
This situation only arises where remittance basis users offer their foreign income or gains for use as collateral for a relevant debt, whether to a UK-based or an offshore lender. In many cases UK property or non-taxable offshore property is offered as collateral in respect of a relevant debts; there is no remittance of this collateral within Condition B (ITA2007/s809L(3)(c)).
To determine the amount of remittance where foreign income or gains are used as collateral in respect of a relevant debt refer to RDRM35050 Condition B - Collateral in respect of relevant debt.
Foreign income and gains used to pay interest on the debt and to repay the borrowed capital are also ‘used in respect of’ a relevant debt, and will be taxable as a remittance. Thus there are potentially two possible sources of a taxable remittance charge in respect of the relevant debt - the foreign income or gains used as collateral and the foreign income or gains used to repay the debt.
In the majority of commercial situations, neither party to the relevant debt transaction expects or intends that the collateral offered as security will be taken by the lender. Instead it is planned that the loan will be serviced and the capital repaid without recourse to the security charge. In such cases using foreign income or gains to regularly service or make capital repayments in respect of the relevant debt effectively ‘masks’ the collateral being used. In such cases the only taxable remittance will occur as and when the foreign income or gains are used to service or repay the loan. The payments, and thus the taxable remittances, will be spread over the loan period.
In 2012/13 John, a remittance basis user takes out a loan for £200,000 from a Guernsey bank. John uses the loan to purchase a horse and a stable/paddock in Chester to indulge his young daughter’s latest hobby; so the loan is a relevant debt.
John offers as collateral for the loan a 5-year offshore bond, due to mature in 2015. He purchased this bond in 2010 (a year in which he was also a UK resident remittance basis user) using £200,000 of his untaxed relevant foreign income from that year.
John repays £18,000 of the loan (principle plus interest) in 2012/13, using his relevant foreign earnings from his separate employment in Guernsey.
John is using the offshore bond as collateral for the loan; the offshore bond derives directly from his foreign income so John is using his relevant foreign income in respect of the relevant debt. However John is also using his relevant foreign earnings to both service and repay the debt capital; this ‘masks’ the collateral and so John will only be regarded as remitting the £18,000 Relevant Foreign Earnings in 2012/13.
Note - In the example above, the relevant debt could also be serviced and repaid using non-taxable income or capital sources; in which case there would be no taxable remittances of foreign income or gains. However the servicing/repaying of the loan effectively masks the collateral offered, so there is still no remittance of the collateral in this circumstance.
In some cases, usually involving avoidance or non-commercial arrangements, the relevant debt is not serviced or repaid by the borrower, or only a token amount is offered. In these circumstances the foreign income or gains offered as collateral are being utilised in respect of the relevant debt, that is, to delay or minimise service charges or repayments. As there is only one possible tax charge in respect of the relevant debt, that is the charge HMRC will take. The charge is taken up-front when the collateral is offered. Such arrangements are expected to be rare.
This should not be mistaken with interest-only repayment terms, or commercial arrangements that offer payment breaks and so forth. Always check the terms and general availability of the loan arrangements on offer.
If you think there is a remittance of foreign income or gains offered as collateral in respect of a relevant debt you should obtain copies of all the relevant arrangements, including all loan agreements and repayment schedules.
If you require further advice a full submission should be made to Specialist Personal Tax, PTI Advisory , Foreign Income and Remittance Basis Team.