The Remittance Basis, What Rules Apply To You?
The remittance basis rules make it clear that if a UKRND borrows money from a non-UK lender the loan proceeds are brought into the UK (e.g., for purchasing a property or settling fees and services costs) then the loan has become a “relevant debt”.
This means that the funds used to service the loan (interests and principal) using the cash derived from untaxed non-UK income/gains, will be treated as being remitted into the UK, crystallising any tax due under the remittance bases rules.
E.g., An individual owns a property in the UK bought with an offshore loan, any repayment of the capital will be a taxable remittance if paid from unremitted foreign income and gains on which the remittance basis has been claimed, even if the repayment is made abroad to a non-UK bank.
In addition, if offshore income/gains are used as collateral or security for a “relevant debt”, this collateral will be considered to be remitted too. This is a highly disadvantageous tax outcome for the client and if there are concerns that the client is inadvertently doing this, then you should escalate to the Wealth Planner.
Where a client wants to book a credit facility against a particular account then care needs to be taken to ensure that the debit interest postings, paying the bank interest loan interest, are taken from the correct account in line with the specific client instructions
By default, where an account is set up solely to book an overdraft, loan or mortgage, interest payable in respect of that overdraft, loan or mortgage will be debited from the same account as to where the overdraft, loan or mortgage is booked. Clients will need to provide the Bank with specific instructions to transfer funds from one of their other accounts in order to pay the interest due.
UKRND clients must take advice when entering into offshore loan arrangements, in particular:
How will the offshore loan be used?
Will the proceeds be brought into the UK?
Has collateral been isolated so as not to include unremitted offshore income/gains?
Is the account set up appropriate for the credit requirements and tax-efficient for UKRND purposes? Are the terms and conditions of the pledge and lending agreement appropriate?
Loans against clean capital (matched loans) used to make investments are still considered to be effective but, as ever, clients need to take independent tax advice
UKRND clients may wish to structure their lending strategy whereby they collateralise a loan (which is not a relevant debt / where proceeds are not used in the UK) with clean capital.
This is a structure that clients may request on a reverse enquiry basis; the bank shall not market this structure as it is considered to be a tax-advantaged product. Pictet believes that it can still support this offer though.
The structure enables the client to leverage up to purchase non-UK investments, and to collateralise the loan using the clean capital account.
The loan should be serviced using the income and principal from the non-UK investments. The Clean capital account should not need to be accessed in principle to service the loan.