Inadvertent imports now a concern for private client professionals

Unintended changes in tax status should be at the forefront of private client advisors minds, according to several speakers at the recent STEP Annual Tax Conference.

New rules being implemented by HMRC mean that high-net worth individuals, particularly those who travel and live internationally, now have several new restrictions to be aware of – such as the change to remittance requirements on UK borrowing against foreign income and gains, and the ability for HMRC to classify someone as resident, in some cases, before they even enter the UK.

UK borrowing could land you in range of HMRC

HMRC has previously sought to tighten up restrictions on using foreign income or gains as collateral to be used to support UK borrowing. Using foreign income and gains as collateral has previously been seen as a neat way to access borrowing in the UK for res non-doms.

If they have income or assets elsewhere in the world but need to access borrowing to purchase UK property for example, those individuals would have been able to use their foreign income and gains as a way to set off their borrowing with a bank.

However, new changes from HMRC mean that this approach carries more risk than before. In theory, the system will enable HMRC to include foreign income in tax assessments, if it is being used within the UK to access finance. In practise however, the lines are less straightforward.

At the STEP event John Barnett of Burges Salmon explained that HMRC has decreed that if FIG is used as collateral against UK borrowing, then those assets are treated as remitted, and may be taxed. On the face of it that seems inconvenient but reasonable, however, there is a flaw. As Barnett noted, if borrowing is taken out, a bank will often reserve the right of set off against all the borrower’s assets, not just the proportion needed for the loan. This protects them in case of a default but lands the borrower in a bind for tax purposes.

He noted that due to the right of set-off held by banks, there is now the potential for all foreign income and gains to be caught and classed as collateral to the loan, regardless of the size of the loan in question.

Individuals therefore using FIG to gain access to a loan must now be cautious. The new ruling means, to take it to its full extent, that if you borrow just £1 in the UK, using FIG as collateral to secure the loan, then all of your income and assets (which are included in the bank’s right of set off) need to be remitted. So in theory you could end up paying tax on £10m just to borrow £1.

Barnett did note that this throws open an intriguing possibility. If returns are filled in according to prevailing practise, then this FIG has already been remitted to HMRC. And if it has already been remitted then it cannot be remitted again! “Have HMRC just turned everyone’s entire FIG into clean capital?” he asked. Perhaps, but he also wished anyone trying to argue that case with HMRC good luck.

Caution urged over inadvertent imports

It’s not just those already resident in the UK that need to be wary however, Barnett also pointed out a quirk in the residency rules that could affect international clients with Trust interests.

Using a case study of ‘Sandip’ he highlighted how a foreign national, the trustee of a family trust held offshore would need to be careful of new residency rules. In the example, Sandip resigns on the 1st May and moves to London on the 1st January. But – as he moves before the end of the tax year he is classed as a resident of the UK for the full financial year – which now includes his time as a trustee of the family trust, catching it within the UK’s tax framework.

Barnett noted that this is worth raising with clients planning a move to the UK as they may find that residency rules can apply before they even set foot in the country and that it was indicative of the need for private client advisors to be completely up-to-speed on all the latest HMRC edicts on residency and remittance of foreign income and gains and commercial and financial interests lest they be caught be HMRC rules inadvertently.