Offshore Companies Print
The income of an offshore company is attributed to and taxable on a UK resident shareholder if he has power to enjoy the income, and he is unable to show that the Transfer of Assets Abroad (“TOAA”) anti-avoidance provisions do not apply. The protections that apply to trusts do not protect an individual who directly holds shares in an overseas company.
This includes all overseas income as well as UK source income. However, if the shareholder is not domiciled in the UK then on making a claim to the remittance basis, and payment of the remittance basis charge, if relevant, he will not have to pay UK tax on the company’s offshore income unless he remits some or all of that income to the UK.
Capital gains of offshore companies do not benefit from the rebasing provisions for offshore trusts unless the company is owned by an offshore trust. Capital gains arising to an offshore company are attributed to a UK resident participator (shareholder) based on the proportion of the company he owns. This is referred to as a Section 3 charge, being under the provisions of Section 3 TCGA 1992 (formerly Section 13 TCGA 1992).
There are various exceptions to the Section 3 charge:
A de-minimis exemption so that no gain is attributed to the participator where he and his associates interest in the company does not exceed 25%.
Gains accruing on assets used and used only:
For the purposes of a trade carried on wholly outside the UK; or
Where the company carries on a trade partly in the UK and partly outside the UK; the disposal of an asset used for the part of the trade carried on outside the UK.
Gains on property, or an interest or right in that property where the property is used to provide furnished holiday letting accommodation situated outside of the UK, provided that:
For the 12-month period ending with the date of disposal, and each of the preceding periods of 12 months the property has been used to provide furnished holiday letting accommodation that has been let commercially. The minimum qualifying period is 36 months, and it appears that property held for less than this amount of time will not qualify for this exemption.
Gains on assets which were used for Economically Significant Activities, that is:
Activities which consist of the provision by the company of goods or services to others on a commercial basis and involve:
The use of staff, in numbers, with competence and authority;
The use of premises and equipment; and
The addition of economic value, by the company, to those to whom the goods or services are provided;
Commensurate with the size and nature of those activities.
Where neither the acquisition, or the holding of the asset by the company, nor the disposal of the asset by the company formed part of a scheme or arrangements of which the main purpose, or one of the main purposes, was the avoidance of liability to corporation tax, or CGT.
If an attributed gain relates to the disposal of a UK situs asset, then this will be liable to UK CGT. Where the asset disposed of is an overseas asset, then the participator may claim the remittance basis (subject to payment of the remittance basis charge if applicable) and would only need to pay CGT if he remits all or part of the proceeds to the UK. The attributed gain is calculated as if it is chargeable on the company, so will benefit from indexation relief up to December 2017 when this relief was terminated.
Unlike offshore trusts and their underlying companies, companies owned directly by individuals do not benefit from any protections when the shareholder becomes deemed domiciled in the UK under the “15 out of 20 year” rule, and this may mean that the individual approaching the 15th year of residence in the UK should seriously consider restructuring his company holdings before becoming deemed domiciled in the UK. If he does nothing, he could face the additional tax liabilities as set out above. If the shares are settled into a trust before he becomes deemed domiciled, then the trust protections as outlined in the section on Trusts above will apply. This is discussed further in the section on Long Term Residents – Offshore Companies.