L-Day 2026: Simplifying treaty relief for interest payments

In summary

• HMRC’s consultation explores options for simplifying the UK’s regime for overseas interest payments, including the possibility of greater reliance on self assessment and taxpayers certification
• Any move away from relief at source under the Double Tax Treaty Passport (DTTP) regime could reduce administration but increase uncertainty around treaty entitlement, beneficial ownership and anti-abuse requirements
• Reform options include expanding domestic exemption regimes and modernising the DTTP scheme to introduce a registration-based approach
• Any solution should aim to minimise the risk of borrowers being required to make payments of withholding tax where the tax would subsequently be repaid under a double taxation treaty

The consultation runs until 7 September 2026 and seeks views on how the current framework could be simplified while continuing to protect against abuse and inappropriate claims to treaty benefits.

The UK requires withholding tax at the basic rate, currently 20%, to be deducted from yearly interest paid overseas, unless an exemption applies or treaty relief is available. Many UK double taxation treaties include an exemption or reduced rate for interest income. Treaty relief at source generally requires HMRC to issue a direction first; otherwise, withholding applies and relief may need to be obtained by repayment claim.

The consultation is relevant for businesses and investors that rely on treaty relief and the use of the Double Tax Treaty Passport (DTTP) scheme as part of their financing arrangements.

In particular, the consultation will be relevant for banks, private equity, real estate and infrastructure groups, private credit funds, securitisation vehicles and other non-bank lenders. Sovereign wealth and pension investors are also likely to be interested in understanding how any revised framework operates and whether it affects existing arrangements.

The consultation broadly seeks views on whether treaty relief can be administered more efficiently while maintaining appropriate safeguards, for example by streamlining existing processes or through greater reliance on taxpayer certifications and self-assessment. As part of this, the consultation asks questions on related matters, such as reporting requirements, certifications and approaches adopted in other jurisdictions.

The discussion is not without precedent. Across a range of regimes for domestic exemption, principles have been designed to balance reliance on exemptions against safeguards.  The qualifying private placement (QPP) regime, real estate investment trust (REIT) and property authorised investment fund (PAIF) withholding rules, and, historically, the withholding tax regime for authorised investment funds (AIFs) are all examples.

The consultation also notes that the treaty relief system for royalties broadly operates on a self-assessment basis.

The consultation suggests a possible solution would be a move to a self-assessment approach for treaty withholding, alongside safeguards and reporting requirements. It remains open as to whether this would be introduced as an alternative or replacement for the current relief at source, reclaim and DTTP framework.

Indeed, in certain treaty cases where competent authority approval is required for treaty access to be granted, it’s likely that a framework for granting treaty benefits in some circumstances would need to be retained.

A self-assessment process should remove administrative friction but may come at the cost of reduced certainty and risks, for example, in relation to beneficial ownership. Under the current process, many financing structures obtain a DTTP relying on HMRC’s approach and guidance relating to special purpose vehicles (SPVs) within the tax manuals. This provides comfort that beneficial ownership will not normally be challenged where an SPV is funded through listed financing instruments.

The current process also provides certainty in some cases for structures where the beneficial owner is not the lender of record, which may be the case with securitisation structures. Any move to self-assessment would likely increase the focus on treaty entitlement questions such as residence, beneficial ownership and anti-abuse conditions, which are currently filtered in part through HMRC’s direction process.

For intra-group financing and within fund structures, a move to self-assessment may also have an impact on tax due diligence, with the examination of how treaty relief has been applied being a key consideration. If moving to self-assessment, it will be important that any collection mechanism for failed withholding, interest and penalties is proportionate – for example, not holding borrowers liable for under-withholding where reasonable belief or reasonable procedures were in place.

Notwithstanding this, lenders and counterparties, such as servicers or paying agents, will not want inappropriate exposure to risk. It would therefore be necessary to carefully consider qualifying lender language within loan documentation to ensure that this is appropriate, remains consistent with gross-up provisions where relevant and is consistent with the framework of any amended withholding tax regime.

An option for essentially moving to self-assessment would be extending the QPP regime to apply in a broader range of scenarios. The QPP exemption applies a domestic exemption in respect of certain unconnected borrowing where beneficial owners are entitled to treaty relief and certification is provided. If QPP was opened toto other financing arrangements, the regime could still include certification requirements or potentially rely on Common Reporting Standard (CRS) certifications. Essentially, this equates to moving to a treaty documented status system, similar to the US regime with W8 forms.

Alternatively, the DTTP Scheme could be reformed, for example by allowing a broader range of transparent entities to be able to access the DTTP scheme. The current requirement for transparent entities to have investors resident in the same treaty jurisdiction is often a barrier to obtaining a DTTP, even where investors are treaty eligible. The scheme could also address the position for partnerships where there is a mix of treaty and non-treaty partners, when again, investors are currently unable to claim gross payment despite qualifying under treaty or domestic exemptions.  

Another way of streamlining the existing framework would be for lenders to register instead of applying for a DTTP.  A DTTP reference could be granted automatically as part of registration, with borrowers then reporting gross payments to HMRC on Form CT61. A possible benefit of this would be the reduction of administration by eliminating the requirement for borrowers to file a DTTP2 form, without passing risks relating to beneficial ownership to borrowers.

The framework could be amended by formally adopting existing HMRC practice in relation to SPVs and the international fiscal meaning of beneficial ownership, for example by legislating to clarify how the quoted Eurobond exemption applies to SPVs with listed debt.

The consultation document states that the pause of the current concession, relating to treaty relief concerning the collection of withholding tax where treaty relief applies but directions were not appropriately received, is not being consulted on. It will be important that any reform minimises or removes the risk of borrowers being required to make payments of withholding tax where the tax would subsequently be repaid under a double taxation treaty.

One potential concern, albeit outside the scope of the consultation as drafted, is whether any move to a reasonable-belief based approach could be accompanied by transitional or retrospective measures to address cases affected by the current pause of the concession.

Approval code: NTEH7072639