Tax reprieve for non-doms on overseas loans

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The tax authority is being toasted in some of the most expensive houses in London after it abandoned a retrospective crackdown on loans secured on foreign assets.

The reversal has softened the impact of a rule change that was expected to force some wealthy “non-doms” — foreign residents who can exempt offshore income from UK tax — to sell their homes.

David Kilshaw of EY, professional services firm, said: “For non-dom property owners this is the very definition of the early Christmas present.”

HM Revenue & Customs’ decision amounts to a reprieve for thousands of non-dom property owners who faced paying tax of up to 45 per cent on overseas income or capital gains used as collateral to finance purchases in Britain.

The new tax treatment will apply for property purchased after August 2014. But HMRC has decided to “grandfather” its original approach, ensuring that the tax-efficient financing used to buy property before that date will not need to be unwound.

HMRC said it had made its decision “after careful consideration”, once it emerged that some property owners who had relied on HMRC’s original guidance faced difficulties in unwinding their financing.

In its original announcement in August 2014, HMRC said it was withdrawing the concession relating to the tax treatment of offshore collateral because it was seeing “large numbers of arrangements” not considered to be within its intended scope.

The decision sparked anger from many non-doms and their advisers who said the disruption and costs being faced by clients who had followed explicit HMRC guidance was eroding the UK’s appeal to wealthy individuals.

The Institute of Chartered Accountants in England and Wales criticised “the extreme nature of the change in the HMRC position from a stance that was favourable to the taxpayer to a position that could result in a penal double tax charge”.

HMRC initially batted off criticism by arguing its August 2014 rule was not retrospective. It said it gave people who had already bought property with loans secured on foreign assets a “grace period” of until April 2016 to refinance or sell their properties; after that they would be charged tax.

But last week, it announced a rethink. It said: “Discussions with representative bodies since the announcement have brought to light that for some loan arrangements it may be difficult or impossible to unwind or replace the foreign income or gains used as collateral.”

James Badcock, a partner of Collyer Bristow, a law firm, welcomed the latest reversal of HMRC’s position. He said: “For a time HMRC was seeking to levy additional tax from people who had followed its guidance accurately. Taxpayers have a legitimate expectation of consistency from HMRC and these types of changes make the UK less attractive to those considering moving here.”

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