New tax rules for loans taken out by “non-doms” will cause disputes over the interpretation of the law, the Chartered Institute of Taxation (CIOT) has said.
The government said on 4 August that it was withdrawing its current treatment for commercial loan arrangements secured using unremitted foreign income or gains as collateral for a loan in the UK.
HMRC said it changed the law because it was seeing large numbers of arrangements which it did not consider to be commercial and which were not within the intended scope of the guidance. It didn’t consult before the announcement, the CIoT said.
Individuals who are resident in the UK but domiciled elsewhere pay UK tax on their UK income and UK gains as they arise.
They are only taxed on non-UK income when they bring it (“remit” it) into the UK.
The change on loan tax rules applies to when a non-dom takes out a loan - in the UK or elsewhere which they use in the UK - for example to buy a property, the CiOT said.
If that loan is repaid using foreign income or gains the law has always recognised that repayment as an indirect remittance.
John Barnett of the CIoT said: “When the current rules on non-dom remittances were introduced in 2008 the law was unclear but many people thought that the use of these funds as collateral for a loan did not give rise to a tax charge.
“HMRC practice until now has followed that view but they are now saying they will charge tax in these circumstances. This will inevitably 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.”
For example, if 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.
According to the CiOT, under the old rule HMRC treated this as a remittance only in obvious attempts to avoid tax.
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, the CIoT added.
“This will cause significant practical difficulties for banks and their customers and generates significant uncertainty for them,” Barnett said.