Using unremitted foreign income or gains as collateral for a loan used in the UK
In August 2014 HM Revenue & Customs (HMRC) announced fundamental changes affecting all UK resident but non-UK domiciled individuals (and some trustees and other relevant persons) who were planning to (or have already used) untaxed foreign income or gains as security for loans used in the UK.
Previously HMRC’s widely published approach was that, in commercial circumstances, such income or gains would not be treated as remitted. In an unexpected change, with no advanced warning, HMRC have withdrawn this ‘concessionary’ treatment.
From 4 August 2014 HMRC take the view that it is not possible to put in place such arrangements without remitting the income or gains used as security, resulting in a UK tax liability.
Special rules for existing arrangements have been proposed and following informal consultation we are expecting further announcements on some key issues around the time of the Chancellor’s Autumn Statement on 3 December 2014 and in the draft Finance Bill 2015 which is due to be published on 10 December 2014. For immediate comments on announcements made on these key dates please see our KPMG Tax Policy Cycle page.
Any individual affected by the above will need to consider the alternatives available for them. Clearly current plans should be reconsidered in light of this announcement.
Business Investment Relief
To facilitate inward investment into UK business by non-doms, Finance Act 2012 introduced Business Investment Relief (‘BIR’).
In short, BIR is designed to allow foreign income and gains to be invested in UK businesses without triggering a taxable remittance.
The main heads of the relief are as follows:
- The investment can be made by way of new shares or new debt;
- The target company must be a private company which either a) carries on a commercial trade or b) exists solely to invest in private companies carrying on a commercial trade or c) Is a member of an eligible trading group and controls a trading subsidiary;
- The target company cannot be used as a conduit to benefit the non-dom investor; and,
- On exiting the investment, the funds must be removed offshore within a limited time period.
Encouragingly, the legislation specifically includes the generation of income from land within the definition of ‘trade’ meaning BIR is potentially available on buy-to-let investments.
While the basic mechanics of the relief are a sensible realisation of the Government’s policy aims, the unwary non-dom investor could easily find themselves with a sizeable UK tax liability – the relief comes with specific anti-avoidance provisions designed to ensure that the relief cannot be abused. These anti avoidance provisions, when triggered, can potentially result in the amount invested being treated as a taxable remittance.
However, despite the severity of the anti-avoidance rules, this statutory relief provides enormous potential for non-doms who are correctly advised and use the relief in the way intended, i.e. for tax efficient access to UK business by non-doms while preserving clean capital for other UK costs.
Additional comfort on whether the proposed investment will qualify for the new relief is available through HMRC’s advance assurance service which will allow non-dom taxpayers to approach HMRC in advance of investing.
Speak to us today to find out more about the relief, how we can advise you and how we can assist with applications for advance assurance.
Domicile is largely determined in accordance with case law precedent which is old and complex and, recently, we have seen a notable increase in HMRC enquires into the domicile status of long term UK residents. Having appropriate evidence available to support a claim of being non-domiciled is essential.
That said, the complexity of the rules also means that those who are legitimately entitled to claim non-dom status often fail to do so resulting in a lost opportunity to structure their affairs more efficiently.
Contact us today to review your domicile status.
Finance Act 2013 contained amendments to the rules governing the non-dom spouse exemption for IHT. Previously only the first £55,000 of a transfer from a UK domiciled spouse to a foreign domiciled spouse was exempt. This limit was set in 1982 and was designed to stop assets being removed from the scope of UK IHT.
These changes increase that threshold to £325,000. This however, is still not as favourable as transfers between UK domiciled spouses where no limit applies. Consequently, these rules now also allow foreign domiciliaries to elect to be treated as UK domiciled for IHT purposes and so access the more favourable transfer regime.
However, this election will not always be beneficial; there are pros and cons which are dependent on the taxpayer’s individual circumstances. Contact us today to see how these changes impact you.