On 20 December the much-anticipated review of the controversial Loan Charge legislation was published. Whilst there is welcome news for some, there are as many questions as answers and for many people, until further guidance is provided by HMRC, there is still no certainty of the position.
In responding to the Loan Charge Review conducted by Sir Amyas Morse, HMRC have confirmed the following changes to the Loan Charge rules will be enacted:
- Loans made before 9 December 2010 will now not be subject to the Loan Charge legislation (originally it applied to all loans made after 6 April 1999)
- Loans made after that date but where reasonable disclosure was made to HMRC but HMRC did not open an enquiry and are now out of time to do so will also fall outside of the charge.
- For individuals who do still have a loan charge, they can now elect to spread the amount of their outstanding loan balance as at 5 April 2019 evenly across 3 tax years: 2018/19, 2019/20 and 2020/21.
- HMRC will refund voluntary payments already made in order to prevent the loan charge arising and included in a settlement agreement reached since March 2016 (when the loan charge was announced) for any tax years where the loan charge no longer applies (i.e. loans made before 9 December 2010)
There are also some further refinements regarding ability to pay, but these are the main changes.
Richard Coombs, tax partner at Bates Weston gives his comments on the loan charge review:
“For any loans made before 9 December 2010 the position is clear. However, many people will have entered schemes after that date and whether they are subject to the loan charge or not will depend on whether there has been “reasonable disclosure”. HMRC have indicated that further guidance will be issued on this point, as the current wording is very subjective. My guess would be that HMRC will require a relatively high level of disclosure to have been made for a taxpayer to avail themselves of the exemption, but we will have to wait and see.
And what about clients who decided to repay their loans in full prior to 5 April 2019 in order to prevent the loan charge arising? HMRC clearly made this an option for all clients at the time – in fact they really only gave two options: repay the loan or pay the loan charge. Those clients who had pre 9 December 2010 loans and decided to repay them, now face the prospect of a tax charge when money is ever taken out of the trust again (since taking money out of such a trust by pretty much any means has been taxable for nearly a decade). Had they done nothing, however, they would have not had a charge. The report makes no allowances for such people who have been effectively forced to take a course of action which, as it turns out, was unnecessary. It will be interesting to see whether HMRC addresses this issue (I suspect not).
Many people will have already settled with HMRC and will want to know where they stand. Where the settlement was on a “voluntary restitution” basis, HMRC have confirmed that they will be entitled to a full refund of the settlement amount. This will be for cases where there was no HMRC enquiry and settlement was entered into purely to avoid the loan charge arising. The precise mechanics of how this process will work is still to be clarified, and HMRC have indicated that refunds will not be able to be processed until the summer, but it is clearly excellent news for some.
However, for many others who have settled, the position is unaltered by the proposed changes. Where HMRC already had an open enquiry into the scheme then the settlement entered into is simply a settlement of the historic position. The loan charge was no more than a cattle prod to encourage people to settle sooner rather than later and therefore its removal for certain loans has not changed the technical position. Perversely, it may actually have saved some people money in the long run, given that the settlement terms were more beneficial than would otherwise have been the case and the acceleration of the settlement process may have saved further interest on overdue tax had the process dragged on for many more years.
So, whilst the announced rule changes are welcome for some, for many the changes don’t go far enough and it is now clear that the loan charge will still bite. And for the large numbers in no man’s land, where it isn’t clear whether the rules apply or not, we will need to wait to see further guidance from HMRC to clarify these areas of uncertainty.”