RDRM35270 - Remittance Basis: Amounts Remitted: Mixed Funds: Remittances from mixed funds - collateral in respect of relevant debts
When foreign income and gains are used as collateral for a relevant debt they are used ‘in respect of’ the relevant debt, so there will be a taxable remittance when the loan is brought to the UK. Refer to RDRM33170 Condition B - Collateral in respect of relevant debt.
Often the collateral offered will be an asset which is itself a mixed fund. In such a case, the taxable amount is the foreign income and gains that were used to purchase the asset in the first place.
Example 1
In 2014-2015 John, a remittance basis user takes out a loan for £200,000 from a Guernsey bank. John uses the loan to purchase a horse and a stable/paddock in Chester to encourage his young daughter’s latest hobby. The loan is a relevant debt.
John offers up, as security for this loan, a charge on his Guernsey farmhouse, which he purchased for £320,000 in 2010-2011.
- £60,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2008-2009
- £50,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2009-2010 and £120,000 using foreign chargeable gains from that same year
- The remainder was met using clean capital from a family inheritance in 2007-2008 and 2008-2009.
John has used his foreign income and gains as collateral, in respect of a relevant debt. The use of the collateral creates a taxable remittance, the amount of the remittance is the foreign income and gains used to acquire the asset. £50,000 relevant foreign income from 2009-2010, £120,000 foreign gain from 2009-2010 and £60,000 relevant foreign income from 2008-2009. The amount of the remittance is £230,000, it is not capped at the amount of the loan.
Example 2
As per example 1 except that the farmhouse which John offers as collateral in respect of the relevant debt was purchased for £150,000 in 2010-2011. It is now worth £250,000.
- £60,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2008-2009
- £50,000 of the purchase price was met using John’s un-remitted relevant foreign income from 2009-2010
- The remainder was met using clean capital from a family inheritance in 2007-2008
John has used his foreign income and gains as collateral, in respect of a relevant debt. The use of the collateral creates a taxable remittance.
Any increase in the value of the farmhouse is ignored. The amount of the remittance is £50,000 relevant foreign income from 2009-2010 and £60,000 relevant foreign income from 2008-2009.
Example 3
Alice, a remittance basis user, takes out a £500,000 loan from a Guernsey bank. Alice uses an overseas bank account as collateral for the loan. The overseas account used as collateral contains unremitted foreign income of £300,000 from 2017-2018 and £300,000 unremitted foreign chargeable gain from 2017-2018.
Alice uses £400,000 of the loan to acquire a plot land in the UK and the loan is a relevant debt because it has been used to acquire land in the UK. Alice uses £100,000 of the loan to acquire artwork which she keeps in her flat in Spain.
Only £400,000 of the £500,000 loan has been brought to the UK so the amount of the remittance is capped at £400,000. The mixed fund ordering rules are used to establish the make up of the capped remittance. In this case, the amount remitted is £300,000 foreign income for 2017-2018 and £100,000 foreign chargeable gain for 2017-2018.
Example 4
As per example 3 but the overseas bank account offered as collateral contains £100,000 unremitted income from 2017-2018, £100,000 unremitted foreign chargeable gain from 2017-2018, £200,000 unremitted income from 2016-2017 and £200,000 foreign chargeable gain for 2016-2017.
The amount of the remittance is capped at £400,000 and the mixed fund ordering rules are applied to establish the make up of the capped remittance. The make up of the capped remittance is
£100,000 unremitted foreign income from 2017-2018.
£100,000 unremitted foreign chargeable gain from 2017-2018
£200,000 unremitted foreign income from 2016-2017.