Back to the issue of offshore companies and trusts for UK residents, additionally to the previously discussed CFC regulations covering mainly UK legal entities, there also exist certain anti-avoidance provisions targeting UK resident individuals. Those are mainly contained in S739-742 of ICTA 1988. Those provisions mean to prevent UK residents from using foreign companies and trusts, which would allow them to avoid paying UK taxes.
Anti-avoidance regulations refer to situations where a UK individual undertakes a transfer of assets in favor of a non-resident person (company, trust) under the following conditions:
- as a result of that transfer, the income becomes payable to an offshore person/entity;
- the transferring individual (the transferor) has power to enjoy that income in some way;
- the transferor is ordinarily resident in the UK in the year of liability.
If all of the above conditions are met, the income payable to that offshore person (offshore company or trust), whether received from UK or foreign sources, is deemed to be the income of the transferor, to the extent he has power to enjoy that income.
These rules can apply if you settle an offshore trust, or subscribe to shares in a foreign company, or simply transfer assets or property to an already existing foreign trust, or a company, or a person abroad.
If you fall under the above regulations, all deductions and allowances are applicable to the reported income of the foreign entity, same as to your personal income. Further dividends and distributions from the same income of the offshore entity are free of tax, given they are already included in and taxed as your personal income. In case more than one UK person are likely to be charged on the same income, the HM Revenue and Customs (HMRC) will seek to agree with the taxpayer a “just and reasonable” division of liability.
Power to Enjoy Income
It doesn’t matter if you didn’t enjoy any income yet from such transfer, the key factor is to have the power to enjoy income in some way and/or be entitled to the capital sum. So far, even if no factual distributions are made by the foreign entity in your favor, you are still liable with its income in the amount attributable to you.
Same regulations refer to the transfer of assets where another UK resident receives the right to enjoy the income. With the only difference, that now it’s that other person, beneficiary, becomes liable for tax instead of the transferor.
Transfer of Assets
From the point of view of the HM Revenue and Customs, the transfer of assets can be done directly or indirectly, including by means of a sale or purchase, or a gift.
These regulations also involve situations when the UK individual is not only transferring but also is associated with the transfer. If you consider arranging a transfer through a chain of companies, or any other series of transactions contemplated as one scheme and developed to masquerade the transfer, this will not save you.
Exemption from the Rule – Motive Test
The exemption, which in practice can be difficult to get, is being granted by the Section 741, if you persuade the HMRC:
- that the transfer transactions had a non-fiscal purpose and did not have a tax avoidance purpose, or
- that the transfer was a genuine commercial transaction and, again, was not constructed to avoid UK tax.
The latter option, being called “bona fide commercial”, is meant to apply only to the furtherance of trade or business, and not to the making or managing of investments.
One more exemption to the rule is non-UK domiciled individuals. Individuals who are ordinarily resident but not domiciled in the United Kingdom may be assessable under Section 739 or 740. However, the legislation restricts the liability of a non-domiciled individual, broadly applying a “remittance basis” to income and benefits received outside the UK. In fact, that means that the rule does not apply to non-domiciliaries until they remit their offshore profits to the UK.
The above is a very brief and non-technical summary of the regulations and should not be used as guidance without professional advice.