Non-dom loan rule change set to cause disputes

by Calum Fuller

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06 Aug 2014

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HM Revenue and Customs

NON-DOMICILES could be set to clash with HM Revenue & Customs over plans for its treatment of loans secured by non-doms using foreign income and gains, the CIoT has warned.

The government announced this week it was withdrawing its current treatment for commercial loan arrangements secured using unremitted foreign income or gains as collateral for a loan enjoyed in the UK. HMRC said this was because it was seeing large numbers of arrangements which it did not consider commercial and which were not within the intended scope of the guidance. There was no consultation prior to the announcement.

Currently, no tax charge is due in that circumstance, but HMRC is set to introduce a levy, something the CIoT expects will lead to "extensive battles over the true interpretation and people and their banks rearranging their affairs so that they do not fall foul of HMRC's new view".

Where different pools of unremitted foreign income and gains are used to provide collateral and subsequent repayment, HMRC are suggesting that both amounts should be charged to UK tax - "a form of double taxation", CIoT spokesman John Barnett said.

He added: "Non-doms living in the UK are only taxed on their non-UK income to the extent that they bring it (remit it) into the UK. This change relates to a situation where a non-dom takes out a loan - in the UK or elsewhere - which they use in the UK, for example to buy a property. If that loan were repaid using foreign income or gains the law has always recognised that repayment as an indirect remittance.

"What is less clear is the situation where the offshore income or gains are used as collateral for the loan. In most situations the collateral is just a safety net and the loan will be fully repaid using other means. HMRC previously took a view that this should be treated as a remittance only in obvious avoidance cases. The withdrawal of this treatment could mean that there is a remittance, even if the arrangement was always that the loan would be repaid using monies already in the UK.

"This will cause significant practical difficulties for banks and their customers and generates significant uncertainty for them."

A spokesman for HMRC said: "The concession being withdrawn because it only applies to loans on commercial terms, but it has been difficult to demonstrate that loans from a bank are not commercial arrangements, even where regular repayments are not made. In those circumstances, with the provision of the collateral not being taxed under the concession, the money borrowed is being used in the UK without creating a taxable remittance."

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