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Residence, Domicile and Remittance Basis Manual

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Remittance Basis: Identifying Remittances: Conditions A and B: Condition B - relevant debt

A taxable remittance may also occur when the individual’s foreign income or gains are used outside the UK, whether directly or indirectly, in respect of a relevant debt. It also occurs when anything deriving from those foreign income and gains, whether directly or indirectly, is used in respect of a relevant debt (ITA07/s809L(3)(c) and (d)).

A relevant debt is any debt that relates, directly or indirectly, to the money, property or service identified by Condition A RDRM33120 or Condition D RDRM33480, or the qualifying property or service identified by Condition C RDRM33260 as brought to, used, received or provided in the UK by or for the benefit of relevant person RDRM33030 (ITA07/s809L(7)).

Broadly, this provision prevents individuals using an overseas loan, overdraft or similar credit facility to pay for the purchase or use of property in the UK, or to pay for a service provided in the UK and escape any tax charge because their foreign income or gains are applied offshore to service and repay the debt, and not brought to or used in the UK.

Both the foreign income and gains used to pay interest on the debt and to repay the borrowed capital is taxable as a remittance.

Note: refer to RDRM31400 for transitional provisions that may apply to relevant debts acquired before 6 April 2008 in respect of residential property in the UK.

In most cases involving relevant debts, it will be the foreign income or gains themselves that are used outside of the UK (refer to examples 1 to 4). However you may come across situations where whatever is used in respect of the relevant debt is not the foreign income and gains themselves, but is derived from them (examples 5 to 7).

Example 1

In May 2006 Katrina, a remittance basis user, borrows money from an overseas bank to buy shares in a UK company. This is a relevant debt as it relates to property (shares) in the UK which is for the benefit of a relevant person (Katrina).

From 6 April 2008 any foreign income or gains that Katrina uses in respect of the loan, for example to service or to repay the loan, are taxable as a remittance.

Example 2

On 6 April 2015, Gary, a remittance basis user, borrows money from an overseas bank to buy an apartment in Solihull.

The loan is a relevant debt because money is used in the UK, and it is in respect of property (the apartment) which is used in the UK for the benefit of a relevant person (Gary).

Example 3

In October 2012 Robina, a remittance basis user, borrows money on a fixed-rate loan from an overseas bank to buy a car for Mark, a relevant person. Robina pays £x each month from 1 November 2012, making 24 monthly payments. She uses her foreign chargeable gains to make these repayments.

The loan is a relevant debt because it is respect of property (the car) which is used in the UK by a relevant person (Mark).

Example 4

In August 2011 Karen, a remittance basis user, uses an interest-free overdraft facility on her Jersey bank account to pay UK school fees for her 14 year old daughter Lauren. She also uses the remainder of the facility to pay for Lauren to attend a summer school in France organised by a French university. Karen repays the overdraft from her relevant foreign earnings between August and November 2011.

There is a debt (the overdraft) which relates in part to a service provided in the UK (the schooling) to a relevant person (Lauren) - this part is a relevant debt. However part of the overdraft facility is not a relevant debt because it does not relate to a service provided to Lauren in the UK, but to a service provided in France.

Karen therefore has taxable remittances in 2011-12 of the relevant foreign earnings used to service and repay the part of the overdraft that is a relevant debt.

Also refer to the later example under RDRM35040 Conditions A and B - remittances in respect of relevant debt

Example 5

Ali, a remittance basis user, purchases a sculpture in Sweden in October 2012 (refer to the earlier example). He takes out an interest-free loan with his US bank to fund this purchase, repayable within 1 year. In November 2012 he gives them to his wife as an anniversary gift.

She initially keeps it at her mother’s home in Stockholm, but 6 months later in March 2013 Ali’s wife decides to bring the sculpture to the UK to display in her UK garden. In October 2013 Ali arranges with the US bank that he will repay the loan by giving them an oil painting which is currently in his apartment in Miami, which he had purchased in May 2011, using his relevant foreign earnings, and some capital inherited from an uncle.

There is a debt (the loan from the US bank) which relates to property (the sculpture) which is brought to the UK by a relevant person (Ali’s wife, in March 2013). The oil painting which derives, in part, from Ali’s relevant foreign earnings, is used outside the UK in respect of this relevant debt. There is a taxable remittance in 2013-14, the tax year in which the painting is used to pay the relevant debt.

The remittance occurs when the foreign income or gains are regarded as used in respect of the relevant debt (2013-14) not when the property is first used in the UK by a relevant person (2012-13).

Also refer to the later example under RDRM35040 Conditions A and B - remittances in respect of relevant debt

Note: For the purposes of this example assume there is no chargeable gain on the transfer of the painting to the bank.

Example 6

Francine, a remittance basis user, has a Spanish courtyard created at her house in Brighton by a specialist Spanish contractor, Paulo (Also refer to the earlier examples). She takes out an unsecured loan from her French bank, which she uses to pay Paulo.

Francine has several French government bonds, which she purchased entirely from her relevant foreign income, and a German government bond which she acquired using her foreign chargeable gains.

In September 2010 Francine gives the German bond to her bank as the first part of repaying this loan.

There is a relevant debt (the unsecured loan) which relates entirely to a service provided in the UK (the building work on the Brighton property) to a relevant person (Francine). The German bond derives wholly from Francine’s foreign chargeable gains, and is used outside the UK in respect of this relevant debt.

Also refer to the later example under RDRM35040 Conditions A and B - remittances in respect of relevant debt

Example 7

Kumar sets up and is a beneficiary of a non resident trust with £1,000,000 capital which the trustees invest in overseas property which produces income that would be chargeable on Kumar if he remitted it to the UK.

The trust borrows £500,000 from an offshore lender to buy a UK asset which Kumar uses in the UK. The trust pays the interest on the loan with the income from the letting of the overseas property.

There is a relevant debt (the loan) which is used to purchase an asset in the UK (property used by a relevant person). The income used to service the loan is regarded as a taxable remittance, chargeable on Kumar.