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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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Remittance Basis: Amounts Remitted: Mixed Funds: Remittances from mixed funds - collateral in respect of relevant debts

When foreign income and gains are used as collateral for a relevant debt they are used ‘in respect of’ the relevant debt, so there will be a taxable remittance when the loan is brought to the UK. Refer to RDRM33170 Condition B - Collateral in respect of relevant debt.

Often the collateral offered will be an asset which is itself a mixed fund. In these circumstances the mixed fund ordering rules at section 809Q(4) apply to the asset offered as security. In such a case, the taxable amount is made up of the same amounts of capital and foreign income and gains that were used to purchase the asset in the first place.

The ‘transfer’ is the offering of the asset as collateral in respect of the relevant debt and any formal charge is registered to the lender (where appropriate). The analysis is carried out on the date immediately before the collateral is so offered.

Example 1

In 2014-15 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 encourage his young daughter’s latest hobby. The loan is a relevant debt.

John offers up, as security for this loan, a charge on his Guernsey farmhouse, which he purchased for £320,000 in 2010-11.

  • £60,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2008-09
  • £50,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2009-10 and £120,000 using foreign chargeable gains from that same year
  • The remainder was met using clean capital from a family inheritance in 2007-08 and 2008-09.

John has used his foreign income and gains as collateral, in respect of a relevant debt. The use of the collateral creates a taxable remittance, the amount of the remittance is ‘capped’ at the amount of the debt, which is £200,000 [see RDRM35050].

The farmhouse is regarded as consisting of

Relevant Foreign Income 2008-09 £60,000
     
  2009-10 £50,000
Foreign chargeable gain 2009-10 £120,000
Clean capital 2007-08 £40,000
  2008-09 £50,000

The mixed fund rules apply to determine the order of remittances. John will be regarded as remitting £50,000 RFI and £120,000 foreign chargeable gains from 2009-10, and £30,000 RFI from 2008-09.

Example 2

As per example 1 except that the farmhouse which John offers as collateral in respect of the relevant debt was purchased for £150,000 in 2010-11. It is now worth £250,000.

  • £60,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2008-09
  • £50,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2009-10
  • The remainder was met using clean capital from a family inheritance in 2007-08

John has used his foreign income and gains as collateral, in respect of a relevant debt. The use of the collateral creates a taxable remittance, the amount of the remittance is ‘capped’ at the amount of the debt, which is £200,000.

The farmhouse is regarded as consisting of

Relevant Foreign Income 2008-09 £60,000
     
  2009-10 £50,000
Clean capital 2007-08 £40,000

The mixed fund rules apply to determine the order of remittances; John will be regarded as remitting £110,000 RFI.

Any increase in the value of the farmhouse is ignored.

Example 3

Freda, a remittance basis user receives an interest-free loan of £100,000. She uses the loan to purchase a plot of land in the UK, so the loan is a relevant debt. Freda gives, as collateral for the loan, a general right to the bank over her many current and savings accounts and investment portfolio held with them.

Ignoring accrued interest, the ‘cap’ on the amount of collateral regarded as used in respect of the relevant debt is £100,000. The ‘transfer’ is the offering of the asset as collateral so an analysis of Freda’s accounts over which the charge is granted would be needed to analyse the credits into each account immediately before the date of transfer, in order to determine the constituent parts of each account for s809Q(4) purposes.

In these circumstances the terms and conditions surrounding the loan and the collateral offered should be examined carefully as this may prioritise the order of the accounts against which any ‘collateral’ charge will be taken; for example it may prioritise current or savings flexible accounts over high-interest period or notice accounts. The s809Q(4) analysis should reflect this priority.