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HMRC internal manual

Savings and Investment Manual

Relief for interest paid: arrangements minimising risk to borrower: examples

Arrangements minimising risk to borrower: examples

Scheme 1

A partnership is set up by the scheme promoters. The partnership carries on business wholly outside the UK. The investor is tax resident in the UK but is domiciled outside it. The scheme takes advantage of and depends on the non-domiciled status of the investor because this status prevents the investor from being taxed on profits from the partnership that are not remitted to the UK.

The investor borrows cash in the UK to invest in the partnership, and the partnership then simply puts the money on deposit offshore. After (say) 12 months the investment is repaid together with interest but this is not remitted to the UK. The investor as a non-domiciled individual is not taxable on his or her share of the partnership profits because that profit does not have a UK source and is not remitted to the UK.

As the interest on the loan is paid in the UK, the investor claims relief against other UK income for the interest payments. This other income on which the individual is liable to UK tax is unrelated to the avoidance scheme (and is most likely to be UK employment income). The result is that although the individual is economically flat, the interest relief substantially reduces the amount of UK tax payable.

Scheme 2

An investor borrows money in a weak currency (such as Turkish Lira) which charges a high rate of interest to compensate the lender for the weakness of the currency.

The money is immediately converted into a strong currency, such as Japanese Yen that pays a low rate of interest. The Yen are invested into a partnership which invests the money into low interest Japanese Government bonds.

At the end of the year the investor removes from the partnership an amount equal to the Yen initially invested and the interest received. The interest rates set for the two currencies reflect in part the amount that the weaker currency is expected to fall in value compared to the stronger. Therefore over the year the Turkish Lira is expected to have fallen relative to the Yen so that the withdrawal will be sufficient (when converted back to Turkish Lira) to pay both the initial sum borrowed and the interest due.

The investor is therefore economically flat on the transaction There will be a charge to tax on his or her share of the small amount of interest arising from the bonds but will generate a post-tax advantage by being able to claim interest relief for the high interest paid on the Turkish Lira loan.