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If you trade via a UK company, the general rule is that it would be subject to UK corporation tax even if the controlling directors or shareholders were non UK resident.
As the company is a UK company it is classed as UK resident and is subject to UK corporation tax. Rates vary between 21% and 28%, however these are due to be reduced from 2011, with the highest rate reducing to 24% from 2014.
In terms of actually extracting cash from the company this could be easily achieved by extracting dividends.
If the shareholders are non resident they are taxed on dividends only to the extent that there is UK tax deducted at source. UK dividends have a notional tax credit of 1/9 attached, and the net effect is that non residents can receive dividends free of UK income tax.
Therefore they can extract profits from the company free of UK tax, however these profits will still have been subject to corporation tax in the UK company.
If the aim is to reduce the corporation tax on the company profits you would need to look at additional options.
The simplest way is to pay salary/bonuses to employees/directors. The salary/bonus would not be subject to income tax or NIC provided the directors were non resident and carried out the duties of employment overseas (aside from any incidental UK duties).
The company is permitted a tax deduction for all expenses incurred "wholly and exclusively" for the purposes of the trade.
Therefore in order for the company to substantiate a tax deduction for salary or bonus payments it would need to be linked to a benefit received by the company and for the purposes of its trade. This usually means that the salary/bonus payments need to be related to:
• Genuine services provided by the employees/directors to the company, and
• Calculated at an arms length rate for those services.
Essentially you would want to be able to argue that the company would make payments even if the employees/directors were otherwise unconnected with the company (ie not shareholders).
You could for instance look at paying both a market value salary for the duties undertaken by non resident directors as well as a bonus arrangement related to their specific fields of responsibility.
- using offshore holding company structure.
The main problem with using a company is that HMRC may seek to assess the occupation of the property as a benefit in kind under the employment income provisions. These provisions apply where "living accommodation is provided for a person...by reason of his employment". The amount charged is the annual value of the property plus notional rent based on a percentage of the amount by which the cost of the property exceeds £75,000.
There is no doubt that occupation of the UK residence would incur a benefit in kind tax charge if the shareholder is a director/employee and is UK resident.
This is because any accommodation provided by the company for a director/employee or his family is treated as provided by reason of the employment. As defined in Section 721(4) and (5) ITEPA 2003, family covers the employee's:
servants, dependants and guests.
Note that even if the shareholder is not a director or employee HMRC may still assess the occupation of the property as a benefit in kind.
This is because the term " director" is defined as including any member of the company if the affairs of the company are managed by the members themselves and "any person in accordance with those directions or instructions the directors of the company... are accustomed to act". These are also known as "Shadow directors" and are deemed to be employees for this benefit in kind charge.
Therefore if a shareholder is UK resident and can be said to manage the affairs of the company or give instructions to directors he is within the benefit in kind charge on occupation by himself or his family.
If the family member occupying the property was themselves a shadow director a potential benefit in kind charge could arise on them directly due to their UK residence status.
The above would also apply where the shareholder is a UK resident but claims the remittance basis due to his non domicile status. In this case benefits provided or enjoyed in the UK are classed as taxable remittances.
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Reducing UK company profits with a non resident salary/bonus
Posted By :
Posted At : Thursday, Aug 12, 2010
If you're non resident and operate a UK company one of the simplest ways to reduce UK corporation tax is to pay salary/bonuses to employees/directors.
The salary/bonus would not be subject to UK income tax or NIC provided the directors were non resident and carried out the duties of employment overseas (aside from any incidental UK duties).
The company is permitted a tax deduction for all expenses incurred "wholly and exclusively" for the purposes of the trade.
Therefore in order for the company to substantiate a tax deduction for salary or bonus payments it would need to be linked to a benefit received by the company and for the purposes of its trade. This usually means that the salary/bonus payments need to be related to:
• Genuine services provided by the employees/directors to the company, and
• Calculated at an arms length rate for those services.
Essentially you would want to be able to argue that the company would make payments even if the employees/directors were otherwise unconnected with the company (ie not shareholders).
You could for instance look at paying both a market value salary for the duties undertaken by non resident directors as well as a bonus arrangement related to their specific fields of responsibility.
If you wanted to extend the scope of the tax benefit you'd be looking at an offshore services company or potentially an offshore holding company.
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Losing UK domicile in 2010
Posted By :
Posted At : Thursday, Aug 05, 2010
Given the relatively high rate of UK inheritance tax, many people look to lose their UK domicile status when they leave the UK.
This has the advantage of ensuring that overseas assets are outside the scope of UK inheritance tax. It also means that they can hold UK assets via an offshore company to take UK assets out of the scope of UK inheritance tax.
However, losing UK domicile status is not an easy task. It's often been said that it is harder to lose UK domicile than UK residence, and whilst this is still true the current approach to residence status certainly narrows the gap between the two.
Most people who are UK domiciled will have a UK domicile of origin (due to their parents being UK domiciled). As such when they leave the UK they will need to show that their domicile of choice is overseas.
Note that for inheritance tax purposes there are provisions which deem you to be UK domiciled for 3 years after leaving the UK. Therefore you would need to wait for 3 years in any case.
However, what's of more importance is that if you have the UK as a domicile of origin, in order to lose this you need to actively make an overseas country a domicile of choice.
This involves actually residing there and having sufficient intention to remain there for the rest of your days ie permanently. If there was no such intention then the domicile of origin would revive.
As such if you did not show sufficient intention to reside in a specific country you would remain a UK domiciliary. This is something that HMRC seem to be taking much more notice of.
This is a risk that many non doms face as they may move overseas for a few years intending to move on elsewhere. This would not be sufficient to establish an overseas domicile of choice.
It's therefore not enough to simply show a desire never to return to the UK, you need to actually show a desire to live overseas in a particular country.
Of course if you have a foreign domicile of origin this would also not be an issue as even if you failed to establish an overseas domicile of choice your domicile of origin would revive and you would still be non UK domiciled for UK tax purposes (subject to the deemed domicile rules).
It's therefore very important when looking at establishing a foreign domicile of choice that you can fix your residence and intentions in a particular country.
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Avoiding a taxable remittance to the UK by using multiple transfers
Posted By :
Posted At : Thursday, Jul 29, 2010
Looking at the non dom legislation governing remittances there are various tests that need to be satisfied before a remittance is classed as a 'taxable remittance'. In this article we look at one opportunity that could avoid these remittance tests.
The legislation provides a wide definition of a remittance.
There are 3 key ways that it can tax remittances back to the UK. In the legislation this is referred to as Conditions A(&B), Condition C or Condition D.
Condition A is satisfied where money or property is brought to or received or used in the UK by or for the benefit of a relevant person.
Condition C applies to "gift recipients".
Condition D applies to "connected operations".
Looking at an example
Jack is a non dom who gifts an overseas painting (representing unremitted overseas income) to an offshore trust from which he and his spouse are excluded from benefiting.
The trust then gives the painting to Jacks adult child, Bob.
Bob then brings the painting into the UK and allows Jack and his Mother to use it there at no cost. Is this a remittance?
Assuming that the gifts are genuine gifts and given that the trust and Bob aren't relevant persons for the purposes of the legislation there could be an argument that there is no taxable remittance.
Condition A
Of key importance for this Condition (as opposed to Conditions C and D) is that it is capable of applying only where the property brought to, received or used in, the UK is property which belongs to a relevant person at that time.
For Conditions C and D to apply it's exactly the opposite and the property brought to the UK needs to be owned by someone who is not a relevant person.
Therefore in this case there is no remittance under Category A as Bob is not a relevant person in relation to Jack (as he's an adult, and not a minor child).
Condition C
This applies to property which belongs to a person who is not a relevant person and to whom the individual, i.e. Jack, has made a gift of money or other property which is or derives from the income or gains.
Therefore it follows that this is only applicable where the person owning the property which is brought to, received or used in the UK received that property (or property from which it derives) from the Non-Dom himself i.e. the individual whose income or gains are in question.
Based on this in this example as Bob has not received any property from Jack there should not be a remittance under this category.
Condition D
This applies to property brought to, received or used in the UK which belongs to a person who is neither a relevant person nor a gift recipient and where, that owner received it as a result of a disposition made by a relevant person to or for the benefit of that owner.
Therefore although this wider than Condition C the recipient still needs to have received it from a relevant person.
So again, Condition D shouldn't apply as Bob did not receive the painting from a relevant person.
It may therefore be possible to argue that there was no taxable remittance in this case.
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The new CGT rules and how they apply to non residents and non doms
Posted By :
Posted At : Monday, Jul 19, 2010
As we all know the maximum CGT rate has increased substantially for disposals after 22 June 2010.
However, the recent Finance Bill has produced some useful clarifications on the transitional rules that will apply, in particular when disposals are treated as arising before or after 23 June 2010. This is clearly crucial in assessing whether gains will be charged at 18% or 28%.
Non residents
Non-residents are exempt from CGT, however in many cases they need to remain overseas for a period of at least 5 complete tax years to avoid the gain being charged in the tax year of their return.
If they don't satisfy the 5 year non residence requirement, any gains realised during the period of non-residence are treated as arising in the year they again become resident.
The Finance Bill states that where the resumption of residence is during 2010-11, all gains are treated as arising before 23 June 2010, and are therefore chargeable at the single rate of 18 per cent.
Non-doms
General rule
Many non-doms taxed on the remittance basis have been wondering what is the position where a gain was made on a disposal before Budget Day but was not remitted until after Budget Day.
The new Finance Bill states that for anyone taxed on the remittance basis for 2010-11, gains remitted to the UK are treated as arising at the time they are remitted (so that the time of remittance determines whether the gains are treated as arising before 23 June 2010 or on or after that date).
We've got more on these and other changes (including the changes for mixed fund remittances) in this article:The new CGT rules for non residents and non doms
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How the increase in CGT makes offshore bonds more attractive
Posted By :
Posted At : Thursday, Jul 08, 2010
The rise in the rate of CGT should make offshore bonds even more attractive.
The profit when you sell an offshore bond is taxed as an offshore income gain, and is subject to income tax. On disposals before 23 June 2010 we have an 18% rate of CGT, but income tax at 40% or 50%. As from 23 June 2010 the rate of CGT for a higher rate taxpayer will be 28%.
Although this is less than the rate of income tax, when you take into account the other advantages of offshore bonds (see below) this can make them more attractive.
The difference in the tax rates is a huge difference and is a disincentive to anyone looking to invest in the offshore bond market. Mutual funds for instance are taxed under the capital gains rules and therefore benefit from the 18% rate of CGT.
An increase in the rate of CGT will therefore be beneficial for offshore bonds as investors start to return.
Why offshore bonds are attractive investments
It's not just the aligning of income tax and CGT rates that makes bonds attractive.
Even under the previous regime with the flat 18% CGT rate, offshore investment bonds in particular (when containing income-producing assets) have been an attractive investment when compared to direct equity investment.
This is because, with an offshore bond, any income from the underlying funds 'rolls up' until a chargeable event is triggered.
Offshore bonds can also invest in a wide range of assets and have no tax deducted on their long term business fund, allowing investors to benefit from true gross roll up, as neither the fund nor product are taxed (other than irrecoverable withholding tax on certain funds) on an ongoing basis. The tax charge is then deferred until a chargeable event occurs.
Personal allowance increases?
In addition, the coalition papers clearly put the Liberal Democrat's policy of increasing the personal allowance for income tax purposes to £10,000 before any cut in inheritance tax.
As from April 2011 the personal allowance will be increased by £1,000. This would also benefit sales of offshore bonds. This is because no tax charge is deducted from the life funds themselves and policies can be assigned to non-tax payers.
A greater allowance corresponds with the ability of non-tax payers to crystallise a larger gain before being subject to tax.
The small print will, as always, be vitally important.
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Avoiding the 28% CGT rate with joint ownership
Posted By :
Posted At : Thursday, Jul 01, 2010
Purchasing jointly with someone else can substantially reduce the capital gains tax ('CGT') charge particularly where they are low/no taxpayers.
Not only do you get the benefit of their annual CGT exemption, but you can also utilise an additional basic rate band which can be taxed at 18%, as opposed to 28% on you (assuming you've used your basic rate band).
Therefore you'll see planning such as:
Making effective use of a spouses basic rate band
If you have a spouse who is a basic rate taxpayer or who has a very low income it makes even more sense to transfer an interest in the property to them prior to a disposal. The transfer to the spouse would be a tax free transfer and this would then allow an additional annual exemption and basic rate tax band to be offset.
Buying with a child
Buying with a child can also be advantageous to make use of their annual exemption and basic rate tax band. You would need to ensure that the property (or other asset) was actually purchased with them as the joint owner. If not, and you tried to transfer an interest in the property to them before a sale this would crystallise a capital gain on you.
Although for income tax there are anti avoidance rules that can tax income arising to a child on the parent where the income arises from a transfer from the parent, there is no such rule for capital gains tax purposes.
This means that a parent could purchase with their children whether they were above or below the age of 18. They would however need to ensure that the actual ownership interests represented reality and that the children were entitled to their share of the property/asset etc.
Note that the child would not even need to be a non taxpayer to benefit. If they had a small income they could utilise the remaining part of their basic rate tax band which could significantly reduce the effective CGT rate. There would be nothing to prevent the child gifting proceeds back to the parent in the future depending on the precise circumstances.
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Emergency Budget Tax Changes
Posted By :
Posted At : Wednesday, Jun 23, 2010
Well, the Emergency Budget has now come and gone. There have been a number of tax changes, however its fair to say the Chancellor hasn't gone as far as many people thought.
Here's the key changes as they affect our members:
(1) Capital gains tax increase
After all the talk of an increase to 40% or 50% this has been watered down. Higher rate taxpayers pay 28%, whereas gains within the basic rate band will continue to be taxed at 18%.
So this will go back to the pre 2008 regime of checking your other taxable income etc to determine whether gains fall within the basic rate band (£37,400) or not.
The increase in CGT will apply from today (ie 23 June).
(2) Annual exemption still £10,100
There was talk of this being reduced to £2K in line with the Lib Dem proposals. This has not been the case and it remains at £10,100.
There are special provisions to deal with gains between 6 April 2010 and 23 June 2010 (essentially they don't come into play when considering how much of your basic rate band is used) and for the offset of the annual exemption and losses. We've an article on our site looking at the CGT changes in detail (Details of the increase in the rate of CGT to 28%).
(3) Entrepreneurs Relief increased
The 10% effective rate of CGT for gains within the Entrepreneurs Relief threshold is retained. They've even increased the Entrepreneurs Relief limit to £5,000,000 (from the current £2,000,000).
(4) Corporation tax cuts
Corporation tax is to be cut from 28% to 27% from April 2011. There will be further cuts of 1% per year down to 24%.
Most of our members won't be impacted by this though as it only applies to profits above £1.5M.
Profits within the £300,000 small company band will be taxed at 20% (as opposed to the current 21%) as from April 2011.
This means that as from April 2014 we'll have:
- Profits of up to £300K taxed at 20%
- Profits of between £300K and £1.5M taxed at 25%
- Profits of above £1.5M taxed at 24%
The biggest savers will be companies with profits of between £300K and £1.5M which are currently taxed at an effective 29.75%.
(5) Furnished holiday relief retained
The proposed removal of furnished holiday reliefs will no longer apply. This means you can still get the generous CGT reliefs etc on the disposal of these properties (even more important now CGT has increased!).
They will however be consulting on changes for 2011 including an increase in the number of days the property needs to be available to qualify as a FHL.
(6) Capital allowance cuts
From April 2012 Capital allowances will be cut to 18% from 20% and 8% from 10%.
(7) Increase in personal allowance
There will be an increase in the personal allowance to £7,475 from April 2011. However to pay for this they will reduce the basic rate band by £2,500 and the NIC Upper earnings limit by £1,650. The final figures will be released in the Autumn.
(8) The rates of income tax remain the same.
(9) NIC to increase
As previously proposed NIC will increase by 1% from 2011.
(10) Seafarers relief extended
The tax exemption for seafarers now includes individuals resident in EU/EEA countries.
(11) VAT to increase to 20% from 4th Jan 2011.
(12) No specific changes to the tax treatment of Non Doms other than the review promised in the coalition agreement.
(13) No change to the CGT exemption for non residents (which was a concern for many of our members).
(14) Changes to Pension relief
They're considering restricting pension tax relief from 6 April 2011, by "significantly reducing" the annual allowance. They've said that the new annual allowance may be in the region of £30,000 to £45,000.
We have numerous articles on our website at www.wealthprotectionreport.co.uk looking at the changes
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Using uncompleted contracts to fix the disposal date before 22 June
Posted By :
Posted At : Thursday, Jun 17, 2010
We've look at methods to fix the disposal date before 22 June in some of our key articles eg:
More advanced strategies for triggering capital gains before the Emergency Budget
Fixing the disposal date before 22 June to reduce your capital gains tax
However, of interest to many is the use of uncompleted contracts.
Remember that the main aim here is to have the gain charged under the current 18% CGT rate as opposed to a 40% or 50% rate.
There is of course a key downside to crystallising a disposal:
There is a risk that for whatever reason you may not be affected by an increased CGT rate. In this case you would then have crystallised the gain and would be subject to a CGT charge, even though you may not have arranged an external disposal.
There are options that could allow you to mitigate this risk - most notably by using uncompleted contracts.
Uncompleted contracts
Usually the date of disposal of an asset is the date of the exchange of contracts. However this only applies where there is an actual completion. If there is no completion then exchange of contracts on their own would not crystallise a CGT charge.
Therefore one option would be to just enter into a contract with a friend or controlled company prior to 22 June, but NOT complete before 22 June.
If there is an increase in the rate of CGT that is applicable to you, you would then carry on and complete the contract. The date of the exchange would be the date of disposal for CGT purposes.
Therefore by entering into an unconditional contract for the sale of an asset, this provides a hedge against an increase in capital gains tax rates, with the date of exchange being treated as the date of disposal in the event of an increase in rates.
The benefit of this is route is that if the CGT rate doesn't increase you could just leave the contract uncompleted. There would then be no disposal for CGT purposes and you'd just be classed as retaining the asset.
This route potentially gives you the best of both worlds.
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Benefits of Membership
