UK: UK Resident Non Domiciliaries

Non-UK domiciliaries' loans with certain offshore collateral
Last Updated: 12 June 2015
Article by Smith & Williamson


HM Revenue & Customs (HMRC) made an unexpected announcement on 4 August 2014 on the taxation of unremitted foreign income or gains used as collateral for a loan enjoyed in the UK. As a result, UK resident individuals who are not domiciled in the UK, generally known as 'resident non-doms' (RND) on the remittance basis (ie taxed on money brought into the country) could face an unexpected and significant tax bill on the full balance of any outstanding loan if such a loan has been enjoyed in the UK, whether taken out in the UK or where the funds have been brought into the UK to finance, for example, property or businesses in the UK.

Interpretation of the legislation

HMRC's previous interpretation

The announcement says that HMRC has withdrawn a previous concession. However, the previous treatment was seen as HMRC's interpretation of the legislation, necessarily filling in the gaps in the legislation and that HMRC has now changed its interpretation.

Previously, HMRC's guidance interpreted the legislation in the majority of commercial situations as not treating as taxable remittances arrangements for commercial loans enjoyed in the UK secured using unremitted foreign income or gains as the collateral for a loan. What was considered however was the subsequent servicing of that loan, taxing as remittances any payment of interest or capital repayment that was paid out of previously unremitted income or gains, although where that servicing was paid out of clean capital no tax charge arose.

HMRC had explicitly stated in its previous guidance that:

'...the relevant debt could also be serviced and repaid using non-taxable income or capital sources; in which case there would be no taxable remittances of foreign income or gains.

However the servicing/repaying of the loan effectively masks the collateral offered, so there is still no remittance of the collateral in this circumstance.'

HMRC's new interpretation

The revised HMRC guidance changes that treatment and taxes the initial amount of collateral secured on unremitted taxable income or capital sources. HMRC states that the rules would apply immediately to new loans and retroactively to existing loans, eg where used to buy property or invest in business since 6 April 2008, although this does not seem to affect loans where the funds are used under the Business Investment Relief (BIR) rules and for some 'closed years'.

Taxing the deemed remittance, based on the unremitted taxable income or capital used as collateral, means that this income or gains can be used to service or repay the loan without a further tax liability arising. However, if the loan is serviced or repaid from different foreign income or gains to that used as collateral, then HMRC has confirmed that the repayments of capital and interest will continue to be treated as remittances. Care is therefore required as the result could be double taxation – ie of the original loan and the repayments. Example 1, John, in HMRC's guidance at RDRM33170 demonstrates this – see the links below.

Transitional arrangements

Transitional arrangements have been proposed for existing loans, although a number of issues are still to be resolved. The initial HMRC guidance states that all RND taxpayers with loans already in place must notify HMRC of the existence of such loans, but will not be caught by the new rules if they effectively 'unpick' existing arrangements by 5 April 2016, by either:

  • replacing the assets used as collateral with non-foreign income or gains security; or
  • repay the loan or part of the loan that was remitted to the UK.

Although HMRC has no authority to impose a disclosure deadline, for practical purposes, HMRC says it would prefer RND taxpayers to give a written undertaking (which is subsequently honoured) of any intentions to unpick the loan by 31 December 2015.If disclosure is not made, an enquiry is more likely.

It is recognised that unpicking arrangements will be difficult for many RNDs, who may find it difficult to replace current financing arrangements. HMRC has indicated that it will consider cases of hardship sympathetically, although it is unclear what that entails.

Issues now clarified by HMRC

HMRC has advised that where a loan was used for a business investment relief (BIR) qualifying purpose, it is possible to make a BIR claim instead of taking the mitigating steps that are needed by April 2016. A possible constraint is the time-limit for making a BIR claim, which is the 31 January anniversary of the filing deadline for the tax year, for instance 31 January 2016 in relation to a claim for BIR for 2013/14.

For overlapping collateral, where part of the collateral is in the UK and part overseas, or where part is represented by clean capital and part by other funds, HMRC has stated that the UK assets would be deemed as the 'first' collateral. Therefore, HMRC would only look at offshore collateral to the extent that it was required to cover any remaining balance of the value of the loan,

Subject to loan terms, if the security exceeds the loan, and where there is no contractual collateral priority in place, then the amount treated as remitted will be limited to the amount of the loan brought into the UK, subject to the remittance basis mixed fund ordering rules in cases.

While fact dependent, we gather than HMRC is likely to treat contracts exchanged prior to 4 August, where full completion was on or after 4 August, as within the transitional rules, even if the loan was not being brought into use or used in the UK before this date.

The 2011/12 and prior years' enquiry windows have closed in most cases and HMRC has said it does not currently intend to open up those years. HMRC has also indicated that it does not intend to make blanket provisional enquiries into RNDs for 2012/13, so as to effectively extend the time limit for enquiry beyond 31 January 2015.


It is not certain whether the transitional provisions or legislation will be amended to provide grandfathering for pre-existing loans, so they are not affected by the changes.

If taxpayers are unable to unpick existing arrangements before 5 April 2016, it is likely that the original loan would be treated as a remittance and hence falling into charge, when the loaned monies are brought to the UK. However, HMRC is still considering this issue as changes in collateral may give different answers.

Where a loan facility is reviewed on a regular basis eg monthly, known as a 'revolving loan', it has not been confirmed if any 'roll over' post 3 August 2014 would be considered a new loan, such that the transitional provisions would potentially not apply. HMRC is currently considering this issue.

HMRC has not fully clarified how the changes will impact on loans where the bank has a general right of set off or floating charges over assets.

HMRC has acknowledged that it will only make discovery assessments where it has the legal right to do so. It has also accepted that where a return had already been submitted on the basis of the previous guidance it would probably not be treated as careless, hence restricting the discovery power to open earlier years. However, beyond that, it seems that cases will be fact dependent and HMRC has not provided assurances.

HMRC has indicated they would view cases sympathetically where hardship is caused by the new interpretation of the regulations, but guidance on what constitutes hardship is not available. It is not clear if having to sell the UK family home to fund the tax charge would be classed as hardship.


Reversing previous guidance, without warning and retroactively, damages a taxpayer's legitimate expectation of how the UK tax system will treat them. It is, at a minimum, unhelpful, especially given the Government's assurances that this area of tax would not be further changed during this Parliament.

Given the retroactive nature of the change, that it may not be easy to reverse structures and the potential for double taxation, it seems likely that there may be some challenges through the courts on this issue.

It is however appreciated that HMRC and HM Treasury are looking at the impact of the changes and considering comments made, particularly around the effect on RNDs and lenders who were trying to be compliant and follow HMRC guidance. The impact of the change on lenders subject to the Banking Code is being considered by HMRC – it is understood that its initial reaction was that this should not represent a breach of the code.

One possible compromise that has been suggested by representatives is a pragmatic extension of the transitional provisions.

The HMRC news alert is at:

The revised guidance is at:

The original guidance is at:

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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