RDRM37050 - Remittance Basis: Appendices: Appendix 5 - Foreign income and gains as collateral

Remittance basis clarifications

1. When foreign income or gains are used as collateral when does the remittance take place?

A remittance will occur if foreign income or gains are used in respect of a relevant debt. HMRC considers that foreign income or gains will be used in respect of a relevant debt, if they are used to agree the terms for the loan or used to satisfy the terms of a loan. If the loan is not a relevant debt initially, the foreign income or gains used as collateral will be remitted at the point the loan becomes a relevant debt.

2. Is it accepted that where the original collateral remains in place but that collateral itself generates further overseas income and gains, there is no additional remittance as a result of the additional income and gains arising, even where the assets representing those income and gains form part of the security for the loan?

HMRC considers that the point at which foreign income or gains are remitted will depend on the particular facts. If the loan terms are conditional on the foreign income or gains used as collateral, or foreign income or gains are used to satisfy the terms of the loan, the foreign income or gains have been used in respect of a relevant debt and there will be a taxable remittance.

3. Would the answer still be the same if, as a result of investment losses, the original collateral (although not having been withdrawn) is reduced below the amount of the loan?

If foreign income or gains are used to make up a shortfall in the collateral originally offered, there will be a taxable remittance. At this point, the foreign income or gains have been used in respect of a relevant debt because they have been used to satisfy the terms on which the loan was provided.

4. Are foreign income or gains used (and remitted) in respect of a loan if they are not part of the formal security package, but can be used by the bank to repay the loan in the event of a default as the result of a general pledge contained in the bank’s standard terms and conditions

If the loan or the repayment terms are conditional on the availability of the foreign income or gains used as collateral, HMRC considers the foreign income or gains have been used in respect of the debt and there will be a taxable remittance.

5. For there to be a remittance, does the customer need to take some positive action to use foreign income or gains as security for the loan?

There doesn’t need to be some positive action on behalf of the customer for there to be a remittance of foreign income or gains used as collateral.

For example, if, at the point the relevant debt is taken out, the collateral offered is £250,000 capital held in a nominated account. £10,000 clean capital is subsequently withdrawn from the account but on the same day a foreign gain of £10,000 is paid into the account. Although the individual may not have taken a formal step of offering the foreign gain to the lender as collateral, the foreign gain has been used in respect of the relevant debt. The foreign gain has been used in respect of the debt because the payment into the account prevented a breach of the terms of the loan.

6. Where the overseas income and gains which are used as security for the relevant debt exceed the amount of the debt, is it HMRC’s practice to limit the amount of the remittance to the amount of the debt plus any accrued interest?

Where the full amount of the loan has been brought to the UK the amount of foreign income or gains taxed as a remittance is not capped at the amount of the loan. The amount of the remittance will be the full amount of foreign income or gains that are used as collateral for the loan.

Where only part of the loan has been brought to the UK, s809P (10) ITA 2007 caps the extent of the amount of the collateral remitted to the total of the loan brought to the UK. S809P (10) ITA 2007 applies only where part of the loan has been brought to the UK.

7. Will HMRC look at any provisions in the arrangements between the taxpayer and the bank as to the priority of any security held by the bank in assessing what has been remitted to the UK?

For example, A borrows £500,000 from a bank to purchase a property in the UK for £750,000. The bank takes a charge over the property but also has security over A’s portfolio with the bank in Switzerland. The agreement with the bank however specifies that the bank must attempt to enforce its security over the property before it can enforce against the portfolio. As the value of the property is in excess of the amount of the loan, do HMRC accept that there is no remittance of any foreign income and gains contained in the portfolio?

If the provision of the loan or the repayment terms are conditional on the availability of the foreign income or gains used as collateral, the foreign income or gains are used in respect of the debt and there will be a taxable remittance. In the above scenario, there will be a taxable remittance of the foreign income or gains in A’s portfolio with the bank in Switzerland.