The shifting sands of security
Since 2014, HMRC has taken the position that this is the case when foreign income or gains are used as security for a relevant debt. Crucially, the collateral does not need to actually be called in to satisfy the terms of the loan; if it is “used” to “agree the terms of the loan” HMRC will consider this sufficient and a remittance will occur.
Without any forewarning or announcement, HMRC has recently updated its own guidance on these rules and has expanded the position further. The relevant points are found in HMRC’s Residence, Domicile and Remittance Basis Manual at RDRM35270 (which was amended in May 2021) and within Appendix 5 (which was introduced in December 2020).
There are three principal changes that practitioners should be aware of.
1. Foreign income and gains not offered as formal security can potentially be remitted
Appendix 5 of HMRC’s Manual includes several “remittance basis clarifications” as questions posed to HMRC and its responses.
One of the questions asks whether foreign income or gains are “used” (and therefore remitted) in respect of a loan if they are not part of the formal security package, but can be used by the bank to repay the loan in the event of default as a result of a general pledge contained in the bank’s standard terms and conditions.
HMRC’s response to this is that if the loan or the repayment terms are “conditional” on the availability of the foreign income or gains, they consider the foreign income or gains have been “used” in respect of the debt and there will be a taxable remittance.
This gives rise to the potentially worrying scenario where a client may have taken a loan from a bank without offering any formal security over foreign income and gains, but may have also signed a general pledge agreement as part of their wider banking arrangements (which would allow the bank to access funds in other accounts in the event of default).
Whilst this should not present a problem if no mention of the general pledge is made in discussions or documentation relating to the loan, HMRC could argue that the loan being given to the client was “conditional” on the general pledge being in place, and therefore the foreign income and gains in the other accounts are in effect informal security and are remitted when the loan is brought to the UK.
2. Additional amount remitted when the collateral itself generates income and gains
HMRC also seems to take the position that future income and gains accruing on the assets held as security (for example, if the collateral is a cash account and interest is received, or if the collateral is an investment portfolio and it generates profits) will also be treated as remitted as they arise if they are held in the account over which the bank has security.
In effect, the amount that will be remitted when the collateral is “used” in respect of the relevant debt (for example, when the loan is brought to the UK) can be greater than the amount originally offered as security.
3. No cap on the amount that can be remitted
Perhaps an even more concerning change of position by HMRC is that the guidance has now been amended to clearly state that where the amount of the foreign income and gains used as security for a relevant debt exceeds the amount of the loan, if the full amount of the loan is brought to the UK the amount of the collateral treated as remitted is not capped at the amount of the loan. HMRC previously took the opposite view.
Take an example where a remittance basis user has secured a £1m loan to purchase a property in the UK and has offered his £3m offshore portfolio in Switzerland as collateral for the loan. If he then uses the entire £1m loan in the UK, HMRC’s position is that £3m of the offshore income and gains offered as collateral would be remitted to the UK.
Bizarrely, due to a specific provision in the legislation this is not the case where only part of the loan is brought to the UK. In these circumstances, the amount of the collateral remitted would be capped to the value of the loan brought to the UK. If we take the example above, if the remittance basis user only brought £990,000 of their £1m loan to the UK then only £990,000 of their potential £3m collateral of offshore income and gains would be treated as remitted to the UK.
Whilst we understand that there are relatively few of these loan arrangements in place which use offshore income and gains as collateral (due to the changes announced in August 2014), more lending situations could now be brought into scope and there could be an issue even when formal collateral is not offered.
We understand that HMRC has been asked by the various professional bodies to clarify the position, but in the meantime practitioners, investment bankers and wealth managers should be wary of these arrangements.