Long-Term Residents – Offshore Companies Print
Until 5 April 2017 a non-domiciled remittance basis user was protected from the Transfer of Assets Abroad (“TOAA”) legislation which attributes income of overseas companies to its shareholders. From 6 April 2017, the ability to claim the remittance basis is lost where the individual is treated as deemed domiciled in the UK by being resident here for more than 15 out of the past 20 years.
Unless the individual can show that the offshore company was not set up for the purposes of avoiding UK tax, or there is a genuine commercial reason why the company is situated
in the particular territory, then the income and gains of the company, or the proportion relating to his shareholding is likely to be taxable on that individual.
The individual may be taxable at income tax rates of up to 45% on the overseas income of the offshore company.
If the individual has not yet been resident in the UK for 15 out of the past 20 years he should consider putting his shares in the offshore company into an overseas trust before he becomes deemed domiciled in the UK. This would then give him the protections discussed in the section on Offshore Trusts.
If the individual has already been resident in the UK for more than 15 out of the past 20 years, then by putting the shares into a trust he may trigger an IHT charge equal to approximately 20% of the value of the offshore company, which is unlikely to be an attractive route.
The individual could consider moving the management and control of the offshore company to the UK. This can usually be achieved by appointing UK resident directors in place of the overseas directors, holding all board meetings in the UK, signing any contracts in the UK, and making all major decisions here. The company will become liable to UK corporation tax on its income and gains, and the TOAA legislation falls away. This would potentially reduce the rate of taxation from 45% to 19% whilst the income remains within the company. However it should be noted that in the Budget on 4 March 2021 it was announced that the main rate of corporation tax would increase to 25% with effect from 1 April 2023. Additional tax would become payable by the individual if income is extracted by way of dividends, or if the company is liquidated.
Protection against the TOAA legislation may also be available where the offshore company is situated in the EU under the freedom of movement principles. However this is restricted to cases where it can be shown that the transaction is considered to be genuine, and that a UK tax liability would constitute an unjustified and disproportionate restriction on an EU treaty freedom.
A genuine transaction under the EU treaty must be carried out at arm’s length and that any assets transferred and income arising to a person must be used or arise from overseas activities constituting of the provision of goods or services to others on a commercial basis. This is unlikely to assist where the EU company carries out passive investments.