RDRM33170 - Remittance basis: identifying remittances: Conditions A and B: Condition B - collateral in respect of relevant debt
Source: gov.uk (2025-04-07)


Overview (#Overview)

When does the remittance take place (#When does the remittance take place)

Example 1 (#Example 1)

Example 2 (#Example 2)

Example 3 (#Example 3)

Overview

Foreign income and gains may be used as collateral for a loan which is brought to the UK or otherwise used for a purpose to which section 809L ITA 2007 applies, that is, there is a ‘relevant debt’ (see RDRM33160 (https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm33160)).

The foreign income and gains offered as collateral are used ‘in respect of’ the relevant debt, so there is a taxable remittance when the loan is brought to, or is within, the UK.

The collateral comprising the foreign income and gains may be a charge over cash assets in a bank account or other possessions, such as property or financial instruments that are ‘derived from’ foreign income or gains.

There will only be a remittance where remittance basis users offer their foreign income or gains as collateral for a relevant debt, whether to a UK-based or an offshore lender. Where UK property or non-taxable offshore property only is offered as collateral in respect of a relevant debt there will be no remittance of this collateral within Condition B (see section 809L(3)(c) ITA 2007) as the property offered as collateral will not comprise of foreign income or gains.

To determine the amount remitted where foreign income or gains are used as collateral in respect of a relevant debt refer to RDRM35050 (https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm35050).

Foreign income and gains used to pay interest on the debt and to repay the borrowed capital are also ‘used in respect of’ a relevant debt and will be taxable as a remittance. This means that there could potentially be more than one source of taxable remittance charge in respect of the relevant debt - the foreign income or gains used as collateral and the foreign income or gains used to repay the debt. There may also be other events during the life of a loan that could involve foreign income being used as collateral, giving rise to another taxable remittance. Where the same foreign income or gains have been used as collateral at the outset of the loan and are also subject to a later use, such as to repay the loan, section 809P(12) ITA 2007 limits the amount remitted to the amount of the foreign income or gains, to prevent the same foreign income or gains being charged to tax more than once - see RDRM35010 (https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm35010).

When does the remittance take place

Foreign income or gains are used in respect of a relevant debt when they are used to agree the terms of the loan, or to satisfy the terms of the loan. If the loan is not a relevant debt initially, the foreign income or gains offered as collateral will be remitted at the point the loan becomes a relevant debt.

There will also be a remittance where the terms of an existing loan are varied at a later date, and foreign income or gains are used to secure the amended terms of the loan. If the same foreign income and gains are used on variation as were used as the original collateral for the loan, section 809P(12) ITA 2007 will prevent the same income and gains from being remitted and charged to tax twice, but any other foreign income or gains used as collateral will be remitted at that point.Where, whilst the loan is outstanding, additional foreign income or gains are used to make up a shortfall in the original collateral, or to replace the foreign income or gains originally used as collateral, or to replace any ‘clean capital’ used as collateral, there will be a taxable remittance at that point of the additional foreign income or gains. This is because the replacement foreign income or gains will have been ‘used’ in respect of a relevant debt at the time they substitute the foreign income or gains originally used as collateral. Where a bank account containing foreign income or gains is offered as collateral and further foreign income or gains are simply added to that account with the original foreign income or gains used as collateral remaining in the account, and there is no variation in the loan terms that would constitute a new use of the bank account as collateral, there is not likely to be a remittance on the addition of those funds.

Example 1

In 2022-2023 John, a remittance basis user, takes out a loan for £200,000 from a Guernsey bank. John uses the loan to purchase a horse, stable and paddock in Chester to encourage his young daughter’s latest hobby, so the loan is a relevant debt.

John offers as collateral for the loan a 5-year offshore bond, due to mature in 2025. He purchased this bond in 2020-2021 (a year in which he was also a UK resident remittance basis user) using £200,000 of his relevant foreign income from that year.

John repays £18,000 of the loan (principal plus interest) in 2022-2023, using his relevant foreign earnings from his separate employment in Guernsey.

John is using the offshore bond as collateral for the loan; the offshore bond derives directly from his foreign income, so John is using his relevant foreign income in respect of the relevant debt. However, John is also using his relevant foreign earnings to both service and repay the debt capital; both the £200,000 foreign income from 2020-2021 and the £18,000 foreign earnings from 2022-2023 are remitted in 2022-2023, as Condition B (section 809L(3)(c) ITA 2007) is met.

In this example, the relevant debt could also be serviced and repaid using non-taxable income or capital sources in which case there would be no taxable remittances of foreign income or gains in respect of the servicing payments. The amount of foreign income used as collateral would still be remitted to the UK.

Example 2

In 2015-2016, Danika, a remittance basis user, takes out a 5-year loan for £500,000 from a Jersey bank which she uses to purchase a house in Devon for £500,000, so the loan is a relevant debt. Danika offers as collateral for the loan a Swiss investment account containing £500,000 of her foreign income from that year.

In 2020-2021, Danika varies the terms of the loan to extend it for a further 5 years and enable her to fund renovations to the house. In order to secure the amended terms, Danika uses both the Swiss investment account, which at the time of the variation contains just £200,000 of her foreign income, and a property in France that she purchased with £300,000 of her foreign gains in 2013-2014 (a year in which she was also a UK resident remittance basis user).

Danika has two taxable remittances to the UK. In 2015-2016 there is a remittance of the foreign income in the Swiss investment account, because Danika has used this foreign income in respect of a relevant debt when she offered it as collateral to secure the loan. The loan amount is £500,000, so the amount of foreign income used as collateral is £500,000, and therefore all the funds in the Swiss investment account are treated as remitted in 2015-2016.

In 2020-2021, there would be a remittance of the foreign income in the Swiss account and the foreign gains used to purchase the French property. This is because there has been a variation in the terms of the loan, and a new use of Danika’s foreign income as collateral in respect of a relevant debt to secure the new loan terms. The loan amount is £500,000, as Danika has neither repaid any of the loan capital nor increased her borrowing. So, the amount of foreign income used as collateral is £500,000. Therefore, Danika has used the £200,000 of foreign income in her Swiss account in respect of a relevant debt. The French property derives from Danika’s foreign gains, so she has also used her £300,000 of foreign gains in respect of a relevant debt. However, the £200,000 of foreign income in the Swiss account that Danika used as collateral in 2020-2021 was the same foreign income that she used in 2015-2016, so section 809P(12) ITA 2007 would reduce the amount remitted in 2020-2021 in relation to the foreign income that has already been remitted and taxed.

Danika would therefore have remitted £500,000 to the UK in 2015-2016 and £300,000 to the UK in 2020-2021 as Condition B (section 809L(3)(c) ITA 2007) is met on both occasions.

Note – Previous HMRC guidance did not follow the position given above and suggested that collateral in ‘commercial’ situations was not taxable if ‘regular’ servicing payments were made. This position ceased to apply from 4 August 2014. A copy of the previous version of RDRM33170 setting out that position can be found on The National Archives site.

Example 3

In 2017-2018, Lin-Manuel, a remittance basis user, takes out a 4-year loan for £180,000 from a Swiss bank which he uses to purchase a car in the UK for £180,000, so the loan is a relevant debt. Lin-Manuel offers as collateral for the loan a Swiss investment account containing £500,000 of his foreign income from that year.

In 2017-2018 there is a remittance of the foreign income in the Swiss investment account, because Lin-Manuel has used this foreign income in respect of a relevant debt when he offered it as collateral to secure the loan. The loan amount is £180,000, so the amount of foreign income used as collateral is £180,000, and therefore £180,000 of the funds in the Swiss investment account are treated as remitted in 2017-2018.

In 2018-19 Lin-Manuel withdraws £350,000 from his Swiss investment account. The account balance at the end of 2018-19 is £150,000. In 2019-20 Lin-Manuel realises that he needs to add funds to the account to fulfil his collateral obligations under the loan agreement and so he transfers in £120,000 of foreign gains from 2017-18 from a different offshore bank account into the Swiss account. There will be a taxable remittance at the point additional foreign income or gains are used to make up the shortfall in the original collateral. As only £150,000 of the original foreign income remains within the Swiss investment account, this means that £30,000 of the foreign gains are remitted in 2019-20.

If you think there is a remittance of foreign income or gains offered as collateral in respect of a relevant debt you should obtain copies of all the relevant arrangements, including all loan agreements and repayment schedules.