Interest to NR

Interest to NR

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My Thailand client has decided to loan circa £100k to a UK company (his friend’s) and he will get interest about £10k a year. His tax returns in the past were straight forward – only one property investment in UK. Now im just wondering on the treatment of this interest? I understand section SAIM1170 ‘non-residents’ says that a non-UK resident person is taxable on savings and investment income under ITTOIA 2005, Part 4, but only on UK-source income. Will there be a UK liability on the NR lender and is this "disregarded income"?.I also went through the DTT with Thailand but im not sure how to treat this when the income is earned.

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By Steve Kesby
30th Jun 2014 11:45

It will be disregarded income...

... but the company is obliged to deduct tax of 20% at source on the interest, and the client's UK tax liability will be limited to that amount (assuming that he isn't eligible for a personal allowance to set against the property rental income).

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By ps119v17
30th Jun 2014 15:55

@Steve Kesby

Thanks for the reply. But as a non-resident, couldnt he just make a declaration in respect of that he is not ordinarily resident in the UK (BAM44030), so he receives interest on this account with no tax taken off.

 

In addition i take this as non-trading income. The loan is to a company that intends to hold property investments.

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By Steve Kesby
30th Jun 2014 15:59

The declaration...

... to which you refer will only work for interest paid by building societies banks and other deposit takers (covered by BAM44030 - now CFM75060), who do not then need to deduct tax if they receive such a declaration (on form R105).

The requirement now is just that they are non-resident though. Ordinary residence ceased to be a consideration from 2013/14 onwards.

However, there isn't a corresponding provision for the payment of yearly interest by companies, who need to deduct tax irrespective of the residence status of an individual.

It's investment income, irrespective of what the company to whom the loan is made does.

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By ps119v17
30th Jun 2014 17:07

One more question

Thanks @Steve once again. One last question – I seem to recall that this only applies to UK sourced loans. Will drafting the loan in a way that the loans are specifically “not” UK source eg foreign jurisdiction of the loan etc avoid the withholding tax levy. Or are there any cases where non-resident loans are excluded from withholding tax levy?

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By Steve Kesby
30th Jun 2014 17:38

What is and what isn't UK source...

... isn't defined for income tax purposes. But what is and what isn't an asset situated in the UK is defined in TCGA 1992, s. 275, and a debt is situated in the UK if (and only if) the creditor is resident in the UK. That's consistent with article 12(6) of the UK/Thailand treaty.

So I'd say that interest paid by a UK resident company, on a loan made to it, is UK source income whatever else you seek to do to try and prevent that being the case, and it's legitimately taxable in the UK (subject to a 25% cap in the treaty, which isn't an issue).

That would mean that a Thai resident ought to be able to legitimately claim credit relief in Thailand, as would be the case for the tax on the property income, subject to there being sufficient Thia tax on the income to set it against.

I can't see anything else in the legislation that could be used to avoid the deduction.

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Replying to Steve Kesby:
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By ArranP
01st Nov 2016 05:09

I have an interest this also.

With a loan made to a UK Ltd company by non resident lender (Mr Orange), the UK Ltd company is required, by HMRC, to withhold 20% of interest payable to the non resident lender and pass it onto HMRC. So Mr Orange receives 80% of the interest.

With a corporate bond issued by a UK company and bought by a non resident (Mr Orange). The interest or in this case, the coupon is paid gross to the bond holder. As the Mr Orange the bond holder is non UK resident, the coupon received is classed as diss-regarded income. So Mr Orange receives 100% of the interest.

I'm by no way an expert, but it seems to me, that using the loan method tax is deducted, but using the bond method no tax is deducted. Am I missing something our is classifying the funds as a bond rather than a loan more efficient?

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Replying to ArranP:
By JCresswellTax
01st Nov 2016 09:36

It would probably be a good idea to start a new thread rather than drag up one that is over two years old.

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By ps119v17
01st Jul 2014 09:44

Thanks @Steve

very helpful. thanks once again

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