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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

Remittance Basis: Amounts remitted: Quantification: Condition B - Collateral in respect of relevant debt

When foreign income and gains are used as collateral for a relevant debt they are used ‘in respect of’ the relevant debt, so there may be a taxable remittance at this point. (refer to RDRM33170 Condition B - Collateral in respect of relevant debt).

The amount of the foreign income or gains that are so used in respect of the relevant debt will be restricted to the amount of the capital loaned, together with any accrued interest (where applicable). The amounts due will depend, to some extent on the terms on which the security is offered.

Example 1

Freda, a remittance basis user takes out an interest-free loan for £100,000; with allegedly no requirement for repayment until an indeterminate future date. She uses the loan to purchase a plot of land in the UK, so the loan is a relevant debt.

Freda offers as collateral for the loan a French painting, currently in her Parisian apartment. She purchased this painting in an earlier tax year in which she was also a UK resident remittance basis user, using £160,000 of her untaxed relevant foreign income from that year. The painting is still worth £160,000.

Freda has used her foreign income as collateral, in respect of a relevant debt. The amount so used is ‘capped’ at the amount of the debt, which is £100,000 in this case.

The reason for this is obvious if you consider what would happen in the very unlikely event that the lender immediately ‘seized’ the collateral in the painting to repay the £100,000 debt in full. The lender would realise £160,000 from the painting; the lender would retain £100,000 to satisfy the debt owed and return £60,000 to Freda (ignoring accrued interest, penalties and service charges). So only £100,000 of the collateral is used in respect of the debt.

Also refer to RDRM35270 Mixed Funds - collateral in respect of relevant debt