Thursday, 14 August, 2014

Change to UK tax laws - implications for non-UK domiciled individuals.

HM Revenue & Customs (HMRC), the UK's tax authority, made an unexpected change to the tax regulations for non-UK domiciled individuals that they announced on 4 August 2014. The change relates to loans secured against overseas assets or monies - and will impact individuals and those using offshore trust / company structures.

Background
Income or capital gains from overseas assets are liable to taxation when brought into the UK. However, under a 'concession' in the tax regulations, a non-UK domiciled individual could bring into the UK a loan from a third party secured against overseas assets belonging to the non-UK individual that are producing income or gains without being liable to pay tax.

This was accepted practice and featured in HMRC guidance. The loan could be used for any purpose and was often used to purchase a family home in the UK, to fund personal living expenses or for business investment purposes. Tax would be payable if or when loan repayments were made using overseas income and gain - or if there was a default on the loan resulting in the security being called-in by the lender. Loan repayments could have been made from 'clean capital', for example UK taxed monies, and there would not have been a taxable remittance in those circumstances.

New requirements
HMRC has removed this 'concession' with effect from 4 August 2014. Loans secured against foreign assets or monies (including non-UK income or capital gains) that are taken out on or after this date and brought to the UK will now be liable for taxation. Existing loans that were in keeping with HMRC's previous guidance will not be taxed provided that:

  • the loan (or the part of the loan that was brought into the UK) is or will be repaid before 5 April 2016; or
  • the non-UK domiciled individual submits a written undertaking by 31 December 2015 that the security for the loan will be replaced by 'clean capital' or UK assets before 5 April 2016.

Urgent action needed
The new tax regulations mean that non-UK domiciled individuals making use of the previous 'concession' on overseas secured loans should, where possible, seek to restructure or repay their loan by 5 April 2016.

It is important to note that all existing secured loan arrangements will have to be declared to HMRC, although there is no deadline for this specified in HMRC's announcement. HMRC will require details of the amount of the loan remitted to the UK (if not the full amount) and the amount of overseas monies and assets used as security.

HMRC has made this change to the tax regulations and is requesting notification of existing secured loan arrangements after becoming aware of a large number of secured loans which it considered to be non-commercial, and not within the intended scope of the previous guidance.

HMRC say existing secured loans will not be taxed provided the necessary action is taken (see above). However, HMRC are likely to examine previous secured loans to check whether they came within the former guidance - and compiling and keeping relevant supporting documentation and a record of the transaction history will be important.

It is likely that HMRC may seek to argue a lack of commerciality in many of the disclosed arrangements and they may try to tax the original remittance of the loan to the UK in some way.

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