Remittance Basis: Identifying Remittances: Conditions A and B: Transitional provisions - loans taken out prior to 5 April 2008
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; refer to ITTOIA05/s833 for years up to and including 2007-08.
Following the introduction of Chapter A1 Part 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 RDRM33040 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 Appendix 2 RDRM37020)
- 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 the next page for details on variations to loans taken out before 12 March 2008 where these transitional provisions may cease to apply.
Before 11 March 2008 Jennifer draws down £100,000 from a mortgage loan with a non-UK bank that is secured on a residential property in the UK, with interest payments made out of relevant foreign income. On 10 March 2008 she draws down a further amount of £21,000 from this mortgage (still secured on the UK property) to fund some home repairs.
Although the full £121,000 has been lent before 12 March 2008, only £100,000 relates to the acquisition on the interest in the property, so it is only the interest payments in relation to the £100,000 draw-down of the loan that are not treated as a remittance.
Charles is a UK resident remittance basis user and has lived in the UK for several years. He has an existing mortgage that was taken out in 2005 with a non-UK bank that is secured on a house in the UK in which Charles, his wife and children all live. Charles pays interest on the loan out of his untaxed relevant foreign income.
The existing mortgage facility includes an open credit facility that allows Charles to borrow (draw-down) additional funds. On 15 March 2008 Charles uses the credit facility to borrow a further amount of £100,000 that he intends to use to buy an additional interest in his residential property. The terms and conditions of the original loan facility apply to the further draw-down.
The draw down of additional funds after 12 March 2008 represents a further advance of the mortgage under the original terms, so it is not regarded as ‘another debt’ secured on the property. It is a ‘relevant debt’ for the purposes of s809L.
However, only money that has been lent before 12 March 2008 qualifies under the terms of FA2008/para 90.
Only the relevant percentage amount of the interest payments that must be made by Charles that are in relation to the part of the loan received before 11 March 2008 are eligible for exemption from tax.
Samantha is a UK resident remittance basis user. On 1 March 2008 she agreed a mortgage facility with an overseas bank of £1,000,000 to use to purchase a UK property. Samantha intends to pay interest on the loan out of her ‘relevant foreign income’.
On 10 March, Samantha agreed to purchase a residential property and the bank transferred £750,000 to her Solicitor’s account that was in turn transferred to the person selling the property. Because the money was lent to enable Samantha to acquire an interest in the property (and for no other purpose) the £750,000 is covered by ‘grandfathering’.
On 10 March the bank transferred the remaining £250,000 of the agreed lending facility to Samantha’s bank account in the Isle of Man where it remained until 10 May 2008 when it was remitted to the UK and used to acquire a further interest in the residential property. Because this £250,000 was received in the UK after 6 April 2008 the interest payments that must be made in respect of this ‘additional’ amount of £250,000 are, from 10 May onwards, a taxable remittance of Samantha’s overseas income and gains.
Johan is a UK resident, non-domiciled remittance basis user. He arranges with an overseas bank that he will be able to borrow £1,000,000 to buy a UK house. Contracts for the purchase of the property were exchanged in October 2007 but completion of the sale did not take place until 31 March 2008 and the mortgage funds were not transferred by the bank until completion. Under the terms of the mortgage facility the money is regarded as ‘lent’ by the bank at the time it is transferred.
The conditions for grandfathering relief are not met. That is because, although the agreement was made before 12 March 2008 and the funds were received in the UK and used to acquire the interest in the property before 6 April 2008, the money was not borrowed (drawn down) until after 12 March 2008.
Jim is a UK resident non-domiciled remittance basis user who came to the UK in July 2007. He made an offer to purchase a residential property in the UK in November 2007. The deal became unconditional in February 2008 and entry to the property (completion) was agreed for 16 March 2008. Jim has an offshore mortgage the loan offer for which was made before 12 March but the funds were not transferred by the bank until 16 March.
The loan interest does not qualify under the terms of the grandfathering provisions for offshore mortgages. That is because FA08/para 90 applies only where the loan was made before 12 March 2008. This means that the money had to be in the hands of Jim (or for example in his Solicitor’s client account) before that date.
Emilie is a UK resident non-domiciled remittance basis user who has agreed with her bank in France that she will borrow £5,000,000.
Before 12 March 2008, £4.5 million of the facility is initially drawn down and the money is used by Emilie to purchase a residential property in the UK.
Subsequently (and before 12 March 2008) a second tranche of £500,000 was drawn down under the same loan facility, also outside the UK. The money from the second draw down was used to refurbish the residential property purchased by the first draw down.
The effect of FA2008/para 90(1) is to provide transitional provisions for loans made for the purpose of acquiring an interest in residential property in the UK. In this scenario, there are effectively two separate loans, even though they were made under a single facility letter. It is the drawdown of the money rather than the facility letter which constitutes the lending of the money. Therefore the first £4.5m drawn-down was money lent to the individual before 12 March and used to purchase a UK residential property and for no other purpose and was secured on that interest. That being the case, the transitional conditions will apply if, and to the extent that, relevant foreign income is used to pay interest on the debt.
However, because the second £0.5m tranche of money was used to refurbish the property rather than to acquire an interest in it, it is does not meet the conditions set out para 90(1)(b). Any relevant foreign income which is used to pay interest on this part of the debt will be treated as a taxable remittance in the UK.
Maurice is a UK resident, non-domiciled remittance basis user who borrows £1,000,000 from an overseas bank to purchase a UK residential property.
The loan is drawn down before 12 March 2008 but the bank required Maurice to obtain two guarantees for repayment of the debt, of which only one is secured on the UK residential property.
Repayment of a debt secured on the property itself is regarded as falling within the provisions of FA08/para 90 regardless of what guarantees might also exist. Likewise, any repayments made under such a guarantee will also be covered by the paragraph. However, any repayments made under a guarantee which is not secured on the UK property will not be covered.
Julia is a UK resident non-domiciled remittance basis user who borrows £1,000,000 from an overseas bank. Only £750,000 of the loan was used to purchase a UK residential property and qualifies for ‘grandfathering’ under the terms of FA08/para 90.
In this case it is acceptable to calculate the qualifying interest element based on the loan capital ratio (that is, the part of the loan which meets the paragraph 90 conditions over total capital of the loan facility), and apply that ratio to the total amount of interest due.
Note: The actual approach in any specific case will depend entirely on the terms of the loan agreements.
If you experience any difficulty in applying these provisions please refer the case, with full details of the loan transactions etc. to the Specialist Personal Tax, PTI Advisory, Foreign Income and Remittance Basis Team.