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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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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 - see RDRM33160).

The foreign income and gains used as collateral are used ‘in respect of’ the relevant debt, so there is a taxable remittance when the loan is brought to the UK.

The collateral containing the foreign income and gains may be a charge over cash assets in a bank account or other possessions, such as property or financial instruments that are ‘derived from’ foreign income or gains.

This situation only arises where remittance basis users offer their foreign income or gains 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 debt; there is no remittance of this collateral within Condition B (ITA2007/s809L(3)(c)) as the property used as collateral will not contain foreign income or gains.

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.

Example 1

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 2010-11 (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 (principal 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; both the £200,000 foreign income from 2010-11 and the £18,000 foreign earnings from 2012-13 are regarded as remitted 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 in respect of the servicing payments.

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.

Note - Previous HMRC guidance did not follow the position given above and suggested that collateral in “commercial” situations was not taxable if “regular” servicing payments were made. This guidance was updated on 4 August 2014. A copy of the previous version of RDRM33170 can be found on The National Archives site at http://webarchive.nationalarchives.gov.uk/20140721132938/http:/www.hmrc….. If you require further advice a full submission should be made to Specialist Personal Tax, PTI Advisory, Foreign Income and Remittance Basis Team.