Home from home
Eric and his wife Cristina moved to London from Portugal three years ago to work in the headquarters of an international bank. They arrived with the intention of spending at least three years in the UK, so they will both be UK-resident and ordinarily resident for tax purposes from the date of arrival.
Their long-term intention is to return to Portugal, so they have not acquired a new domicile of choice in the UK. This means each will be taxed on their UK income and gains on an arising basis, and on foreign income and gains – also on an arising basis – unless they claim to be taxed on the remittance basis under s809B of the Income Tax Act 2007, as their non-UK-domicile status permits.
They are fairly settled now, each having been offered promotion in the London headquarters, and they have decided they want to stay in London for around ten years. They have made an offer to buy a house in Kensington, near their friends.
Both Eric and Cristina have substantial rental income from offshore properties that is paid into their Jersey bank account. They do not need to bring this income into the UK, so they have been claiming the remittance basis for each tax year since their arrival.
Their claim for the remittance basis means that each loses their personal allowance – GBP9,440 in 2013/14 – and their annual exemption from capital gains tax – GBP10,600 in 2013/14.
Eric’s friend Paulo, who is also non-UK-domiciled, has suggested they take out an offshore mortgage. Paulo bought his house in 2007 and says he chose an offshore mortgage because the interest rates were much lower than in the UK and because the mortgage payments that he funds from offshore income are not treated as a remittance.
Eric’s accountant explains that this rule changed from 6 April 2008 and that payments from relevant foreign income to service an offshore mortgage taken out on or after 12 March 2008 are now treated as ‘relevant debts’, so relevant foreign income used to service such a debt is now taxable as a remittance. Relevant foreign income is a collective term for income arising from various sources outside the UK, such as foreign property income, foreign dividends and foreign interest.1 A relevant debt includes any debt where the lending relates to property in the UK.
Payments made from relevant foreign income to service an offshore mortgage are now treated as 'relevant debts'
If Eric and Cristina can afford to fund a mortgage for their London home from their UK income (or from clean capital offshore), that will be preferable, as they would then avoid a deemed remittance of income or gains from offshore. Otherwise, interest payments funded from their rental income will be a remittance regardless of whether they are paid to a UK-based mortgage lender or an offshore lender.
Mortgages such as Paulo’s, taken out before 12 March 2008, are ‘protected’ mortgages and continue to benefit from the favourable treatment that applied when they were taken out. The protection is limited to the interest element of the mortgage payments (and does not protect capital repayments, which will be treated as remittances). This protection comes to an end in April 2028, or when the mortgage ends or is varied, if before that date. Note that the law before 6 April 2008 allowed other types of foreign income, such as relevant foreign earnings2 and foreign chargeable gains,3 to be used to pay the interest as well.
Paulo is thinking of remortgaging his home to obtain a better rate of interest. For tax-planning purposes, it would be better for Paulo to continue with his existing protected mortgage and avoid taking out a new offshore mortgage (or amending the terms of his protected mortgage) that will fall within the post-2008 rules for taxable remittances.
Paulo would also be advised to make the interest payments on his protected mortgage either from mixed funds or from bank accounts containing foreign income, as such payments will not be deemed to be taxable remittances.
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