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HMRC internal manual

Employment Income Manual

The benefits code: beneficial loans: loans in foreign currencies: taxation of overseas loans

Section 181(2) ITEPA 2003

Treasury regulations may specify different official rates for use with certain loans made in the currency of a country outside the United Kingdom.

The loans are those the benefit of which is obtained by a person:

  • who normally lives in the country or territory in the currency of which the loan is made and
  • who has lived in that country or territory at some time in the period of six years ending with the year of assessment concerned.

The phrases normally lives and has lived at some time are not defined in the statute and so have their ordinary common-sense meanings.

An individual normally lives in the place (if any) where taking all the facts into account one would normally expect him or her to be in the absence of some special reason to the contrary (such as a temporary period of employment elsewhere).

The phrase has lived at some time carries an implication of continuity but not necessarily of permanence.

A table showing currencies for which official rates different from that generally applicable have been prescribed, what those rates are and for which periods they apply is at EIM26106.

Taxation of overseas loans in foreign currencies

An employment-related loan (see EIM26102) made to an employee who comes to work in the UK is within the scope of the beneficial loans rules if:

  • the loan is made at a time when the employee’s earnings are already chargeable to UK income tax as employment income (for example, if a loan is made after the employee has taken up employment in the UK and is resident and ordinarily resident in the UK for the year in which the loan is made); or
  • the loan is made in contemplation of the employee working or living in the UK (for example, if the loan is made as part of a package with a view to the employee working in the UK); or
  • the employee, at a time when the employee’s earnings are chargeable to UK income tax as employment income, in any way facilitates the continuation of a loan which was already in existence before the employee came to work in the UK.

As far as the final bullet is concerned, this is relevant where, for example, the loan is made not by the employer but by a third party such as a bank which is not connected with the employer and where the capital repayments and interest are deducted from the employee’s salary. In these circumstances, the question is whether the loan continues when the employee is in the UK without any further involvement by the employer, or whether the employer does something which makes it easier for the employee to continue to have the loan.

An employer would not be facilitating the continuation of a loan merely because

  • the loan is conditional on the employee continuing in the employment, or
  • the employer deducts the interest and repayments of capital from the employee’s salary.

If the employer pays a subsidy to the lender – for example, by paying annual interest on behalf of the employee – that would not necessarily mean that the employer was facilitating the continuation of the loan. The subsidy itself might however be taxable as an employment- related benefit under Section 201 ITEPA.

On the other hand the employer would be facilitating the continuation of the loan if

  • the loan was conditional on the employer continuing to make regular payments to subsidise the interest which the employer might cease to make at any time, or
  • the employer chose month by month or year by year whether to subsidise the loan.