Remittance Basis: Introduction to the Remittance Basis: Transitional Provisions: Relevant foreign income and offshore loans
Paragraph 90 Schedule 7 Finance Act 2008
Prior to the introduction of the new remittance basis regime from 6 April 2008 an individual was able to avoid making a remittance by using relevant foreign income RDRM31140 to pay interest on a loan that had been obtained outside the UK and which had subsequently been received in the UK. The most common example of this was using an offshore mortgage from a non-UK bank to buy a house in the UK.
This situation applies only to debt serviced with relevant foreign income because the pre 6 April 2008 position for employment income and capital gains meant that these were always chargeable on the remittance basis if the individual met the appropriate not ordinarily resident (NOR) or non-domiciled (ND) status requirements.
Note: This applied only to interest payable on the loan. If relevant foreign income was used to repay the loan itself this would have been treated as a remittance to the UK; see ITTOIA05/s833 for years up to and including 2007-08.
Following the introduction of Chapter A1Part 14 ITA 2007 from 6 April 2008 these offshore loans become ’relevant debts’. This means that relevant foreign income used offshore to service the loan is now taxable as a remittance (refer to RDRM33160 Condition B - relevant debt).
The transitional rules apply to money borrowed outside of the UK to purchase residential property in the UK, in so far as it is serviced out of relevant foreign income only.
These provisions apply until 5 April 2028, or the date of change in the conditions of the loan where earlier, if:
- the money was lent outside the UK before 12 March 2008; and
- the loan was made for the sole purpose of acquiring an interest in residential property in the UK (refer to RDRM37020 Appendix 2)
and before 6 April 2008, if
- the money borrowed was received in the UK; and
- the money was used to acquire an interest in residential property in the UK; and
- the loan was secured on the interest in the property acquired.
The transitional provision provides that any interest on such loans that is paid from relevant foreign income only is treated as not having been remitted to the UK, if it otherwise would be so regarded by virtue of ITA07/s809L.
Note A - This transitional provision only applies to money borrowed by individuals. It does not apply, for example, to loans made to trustees or to offshore equivalents of close companies.
Note B - This provision applies only to payments of interest and does not include amounts used to repay the capital amount that was borrowed.
Note C - Only payments out of relevant foreign income RDRM31140 are treated as not remitted to the UK. This means that any payments of interest that are made out of
- relevant foreign earnings (sections 22 and 26 of ITEPA 2003)
- specific employment income from securities etc (section 41A ITEPA 2003); or
- foreign chargeable gains (section 12 of TCGA 1992)
are chargeable to UK tax by reference to the normal rules that apply to such amounts.
Note D - These ‘grandfathering’ rules are not available where the individual ceases to own an interest in the property in question.
In certain circumstances the transitional rules may apply to a ‘new’ loan, that is, a loan which was not the loan initially taken out to purchase the initial interest in property. The subsequent loan must have been made before 12 March 2008, and must have been made to enable the individual to repay another qualifying loan (that is usually the loan which was taken out to purchase the initial interest in the property) and for no other purpose. Also, the ‘new’ loan must have been used to repay the ‘initial’ loan before 6 April 2008. Repayment of the subsequent loan must have been secured on the relevant interest acquired in the residential property.
This means that subsequent loan(s) made before 12 March 2008 for purposes other than simply paying off the original mortgage, for example for home improvements, do not qualify.
Also refer to RDRM31510 details on variations to loans taken out before 12 March 2008 where these transitional provisions may cease to apply.