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October 8, 2014updated 01 Feb 2016 10:18am

Government's surprise tax changes will harm UK's international appeal

By Spear's

The government introduced an unwelcome new measure over the summer which is already having untoward effects, says Edward Burton of Maurice Turnor Gardner

The UK tax system for residential property has undergone many changes over the last few years. At the same time as discouraging purchasers from using corporate envelopes to hold residential property through the annual tax on enveloped dwellings, the government also restricted the use of borrowing to mitigate inheritance tax liability. The outcome of the consultation on extending capital gains tax on residential real estate to all non-residents is also awaited.

On 4 August 2014 HM Revenue & Customs made an unexpected and unwelcome announcement, which might have a more subtle impact on UK resident non-UK domiciliaries (so-called RNDs) acquiring residential property in the UK.

It has always been the case that RND purchasers need to think about how purchase funds are going to be brought into the UK. In certain cases, the ‘remittance basis’ of taxation may mean that bringing funds into the UK to make the purchase can itself be taxed. Funding purchases, and whether ‘clean funds’ are available that can be brought to the UK without further tax is therefore a key consideration. In many cases, the solution has been to borrow funds from a third party, with the lending secured against foreign assets.

Until recently, HMRC’s published guidance confirmed that borrowings secured against untaxed foreign income or capital gains could be brought into the UK without triggering a taxable remittance, provided that the loan was made on commercial terms and serviced regularly.

However, on 4 August HMRC announced that, with immediate effect, it had changed its published stance on the use of borrowing secured against foreign assets and any new arrangements secured against foreign income or gains will be treated as giving rise to a remittance of the collateral as and when the loan proceeds are used/enjoyed in the UK. In addition, if the loan is subsequently serviced or repaid from other foreign income or gains, there may be a second remittance. Double tax could therefore result.

Unfortunately the change also affects existing loans. HMRC’s announcement states that existing arrangements must be disclosed where foreign income or gains have been utilised as collateral for a loan brought to the UK and no remittance declared. Provided such disclosure is made, no tax will be payable as a result of these arrangements if the loan is repaid or the collateral replaced before 5 April 2016.

This announcement has given rise to strong opposition. Not only was it made without consultation, but it completely undermines the government’s commitment not to make further substantive changes to the remittance basis for the rest of this Parliament and creates further uncertainty for foreign investors looking to the UK for investment opportunities.

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This new approach will make it harder for many RNDs to borrow funds using additional offshore collateral, which could have a negative impact on their ability to identify tax-efficient funds from which UK purchases can be made.

We are already aware of transactions that have stalled because the announcement has meant that the potential purchasers could not rely on the additional security of their foreign assets to fund the purchase price. Only time will tell whether this change will have a wider impact on the residential property market.

Edward Burton is a lawyer at boutique private wealth law firm Maurice Turnor Gardner LLP. He specialises on prime and super prime residential property

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