Margin Protection

Question 1

Explain the situation of withholding tax in the UK.

Answer 1

Borrower does not need to pay withholding tax as it makes payments to a UK Bank (Qualifying Lender).

At end of bank’s accounting year, it will pay tax due on interest payments received to HMRC.

Question 2

Withholding tax

Answer 2

Borrower deducts 20% at source and pays it directly to HMRC. It pays the rest of the interest to the Bank.

Question 3

Explain the tax gross-up clause.

Answer 3

Borrower will have to make a gross-up payment if there has been a change in the law.

Change in law means Bank is not a Qualifying Lender anymore, so withholding tax would apply, and Bank would receive less interest.

Bank protects itself with gross-up clause - receives full amount and Borrower pays 20% to HMRC out of its own pocket!

Question 4

Increased costs clause

Answer 4

Change in law increases Bank’s costs in providing the loan = can pass these costs to the Borrower