UK Tax Blog

Digital permanent establishments - how effective are they?

Mon, 09 Aug 2021 10:14:00 +0000

In many cases, a source country would treat a fixed place of business or a PE as a taxable source of income.

Most double treaties include a business profits article which generally provides that business profits are only taxed in a jurisdiction where there is a permanent establishment. It then provides a definition of a PE that will override domestic law.

This is important as firstly not all countries apply a PE definition and may for instance just tax income that has a taxable source in their state. Under the domestic rules it would be taxable, but under the treaty if there was no PE then the income wouldn’t be taxable in the source country.

In terms of digital activity, the position relating to a PE is interesting.

In many cases, the provision of digital services in a jurisdiction does not give rise to a PE. This applies to the provision of digital goods remotely as well.

However, as, some jurisdictions have a concept of a digital PE.

Take for instance India. This applies a specific digital PE to try and tax foreign companies providing digital services in India.

It arises where:

Aggregate payments for goods, services or property carried out by a non-Indian resident including the download of data or software in India, exceed INR 20 million.
There is systematic and continuous soliciting of business activities or engaging with at least 300,000 users in India.

However, if you were tax resident in a country that had a double tax treaty with India, you’d look at the scope of tax on business profits and the definition of a PE article which would override the domestic tax treatment in India.

For example, Article 7 of the India - China treaty states:

‘The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State, but only so much of them as is attributable to that permanent establishment.’

As such, the digital PE itself would only be relevant either if you weren’t resident in a treaty jurisdiction or if the treaty did not apply to you.

The 2 key problems with digital service taxes

Wed, 28 Jul 2021 10:13:00 +0000

DSTs in one form or another have been unilaterally enacted by around 15 jurisdictions, including Austria, France, Spain, Kenya, the UK, Italy, India, Tunisia and Turkey.

There are some big differences among DSTs that have been enacted or proposed, in terms of rate levels, thresholds and the activities covered which we will look at shortly.

DSTs are calculated on revenues instead of profits. This makes it simpler for tax authorities as revenues are generally harder to underreport.

There are generally 2 key disadvantages to DSTs

Firstly, as they are a tax on gross revenue, companies with a low profit margin can suffer a high effective tax rate. So, for instance a company with digital sales of 10M would suffer tax of 400,000 if the DST rate was 4%. If its profit margin was 10%, this equates to a 40% effective tax rate.

The other is as they are a tax on gross revenue and not profits they are generally outside the scope of double tax treaties. As such, they don’t qualify for treaty relief and generally no tax credit in the residence jurisdiction.

Why is the taxation of digital services so difficult?

Wed, 21 Jul 2021 09:43:00 +0000

Two key general principles of the current international tax system are that:

Firstrly, foreign companies don't become subject to a country’s corporate income tax until they have created a permanent establishment (PE) there; and
Secondly, income should be taxed wherever the value of a good or service is created.

As such, most countries require some form of permanent establishment (PE) in their jurisdiction in order to give rise to a right to tax the income. In addition, double tax treaties, which overlay the domestic law, generally require a PE.

This means, the concept of a permanent establishment, doesn’t really apply to the digital sector. If taxing rights are computed from the profit collected from a fixed presence within a country, the business model of most tech and digital companies means can generate large revenues with little to no actual physical presence in a country. Defining a taxable presence, is therefore much more difficult.

Additionally, the intangible nature of the goods and services sold makes it difficult to both define value creation, and then link this value creation to a specific tax jurisdiction. For instance, in the case of the usage of user data, how do you calculate the value that arises from the generation, storage and use of the data?

Summary of the new global minimum tax (Pillar 2)

Tue, 20 Jul 2021 09:31:00 +0000

Key Mechanisms

The aim of the Pillar Two proposals is to ensure that MNEs pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in. It seeks to achieve this, broadly by the operation of two mechanisms:

the Global Anti-Base Erosion (GloBE) rules; and
a separate Subject to Tax Rule (STTR).

The operation of the rules at a high level is relatively straightforward:

GloBE – This computes the effective tax rate (ETR) of an MNE in the countries it operates in based on the tax base and taxes suffered on a jurisdictional basis. This ETR is then compared to an agreed global minimum ETR which will be set at a minimum of 15%.

If an MNEs jurisdictional ETR is below the global minimum ETR, the MNE will be liable for an additional amount of tax in its parent company’s residence jurisdiction to bring the total amount of tax on the excess profits up to the global minimum ETR (referred to as “top up tax”).

The top up tax is collected by applying an “Income Inclusion Rule” (IIR) or where no IIR applies by the application of an “Under Taxed Payments Rule” (UTPR). Both the IIR and the UTPR use a common tax base and a common definition of taxes.

STTR - This is separate from the above GloBE rules and is not based on the ETR calculation but adopts a payments-based approach. It is a treaty based rule that applies to certain related party payments that take advantage of low nominal rates of taxation in the jurisdiction of the payee and allows the source jurisdiction to impose additional taxation on the difference between the tax paid on these payments and an agreed minimum rate of between 7.5% to 9%.

The STTR has priority over the GloBE rules.

10 Reasons To Use An LLP

Mon, 16 Mar 2015 07:04:00 +0000

10 Reasons To Use An LLP

1. Flexible business structure. 2. Key individuals can be rewarded and retained by offering share of income profits and capital profits on a disposal without having to resort to establishing share schemes such as the EMI. 3. If the business of an LLP is acquired by a third party purchaser, they can claim tax relief on the amortised amount of the goodwill acquired. Whilst this can be achieved similarly in a company (where the company sells the business as opposed to the shareholders selling the shares) it avoids the double tax charge that arises where the buyer does not want to purchase the shares. 4. Where there is a corporate member, excess profits can be allocated to the member and are taxed at corporate rates subject to various anti avoidance rules. 5. Individual members profit share allocations are not liable to employers NIC. By contrast anyone using a company would suffer employers NIC at 13.8% on salary or bonus payments. 6. Where individuals possess business knowhow, the value of this knowhow can be introduced into the LLP. The individual members can draw surplus cash from the business against their capital account (represented by the knowhow) without an immediate tax charge. In a company, if a director or shareholder borrow from the company there is a tax charge under s455 Corporation Tax Act 2010 where they borrow in excess of the balance of their directors capital account with the company. There is currently no similar tax charge where an individual member borrows from an LLP against their capital account. 7. There are no taxable benefits in kind on individual members so there is no requirement for P11Ds. Any non-business element is added back to taxable profits. 8. Favourable tax savings where cars are provided to individual members. 9. Non-resident partners can avoid all UK taxes providing there is no UK trade carried out.If a UK company was used this would remain subject to UK corporation tax irrespective of the residence of the shareholders. 10. If all profits are extracted from a company there is not usually a massive difference in the actual tax payable on the profits as an LLP versus a limited company, particularly for profits under £200K. The LLP though can provide other tax planning opportunities as above.

Can you 'choose' where to pay tax?

Tue, 10 Mar 2015 03:13:00 +0000

A common question is 'Can you choose where to pay your tax?'. In other words if you're a non UK resident and are selling a UK asset can you choose whether to pay tax in the UK or overseas? This is common where the UK asset that is being sold is a former main residence. In this case the capital gains tax charge in the UK will be lower than in many other countries due to principal private residence relief and lettings relief. It's not possible to choose in which country you pay tax though. Usually your country of residence has taxing rights over your worldwide income and gains (unless it applies the territorial or remittance basis) and therefore in this case you'd suffer a tax charge overseas. There is no facility to elect for the tax to be borne in the UK. In the case of UK assets the UK would also often have the right to tax any gain but if you're non UK resident any gain would be exempted in any case. If you wanted to be subject to the UK tax regime as opposed to the overseas regime you'd need to be UK resident and non resident overseas. You could also potentially establish treaty residence in the UK to ensure that under the treaty the UK retains the taxing rights. Therefore you can 'choose' to the extent you can vary your residence status, but you can't file an election between two different countries to choose where you pay tax.

When UK doms can use an offshore trust tax efficiently

Thu, 05 Mar 2015 02:41:00 +0000

We're often asked about when an offshore trust can be used tax efficiently. It can be very attractive for non doms - but what about UK domiciliaries? In this article we look at when offshore trusts can be used by UK doms. Using an offshore trust involves a number of UK anti avoidance rules. Firstly to establish the trust as non resident you would need to ensure that all of the trustees were non resident. If you establish a trust as non resident there are a variety of potential UK tax advantages, however the benefits will be heavily restricted. We'll look at the UK tax implications below Inheritance tax The transfer to a UK discretionary trust would usually be a chargeable lifetime transfer, and the trust itself would be subject to the inheritance tax regime for discretionary trusts. As such there would be a 10 year anniversary charge and an exit charge on the distribution of assets from the trust. However providing the settlor survives for 7 years from the date of the transfer the assets transferred would usually be excluded from their estate for IHT purposes. If you used an offshore trust, the inheritance tax implications would be similar. The transfer to the trust would be a chargeable lifetime transfer ('CLT') for IHT purposes, and therefore a transfer of value above your remaining nil rate band would be subject to a lifetime IHT charge. If the trust was a non resident trust you would not be able to defer gains on the transfer to the trust. If the trust was an excluded property trust it would be outside the scope of the UK IHT discretionary trust regime. However in order for it to be an excluded property trust it would need to hold non UK assets and be established by a non UK domiciliary. If you are a UK domiciliary the trust would therefore be subject to the usual regime of 10 yearly anniversary charges and exit charges. Capital Gains Tax There are some very far reaching anti avoidance rules that apply to UK domiciliaries establishing offshore, non resident trusts, especially in terms of capital gains. The non resident trust would be outside the scope of UK CGT, unless it held assets used in a UK trade. In addition it would be likely there would be no CGT levied in the overseas jurisdiction where the trust is resident. This gives the offshore trust a clear advantage over a UK trust. However there are two key anti avoidance rules that can apply. Firstly S86 TCGA 1992 which attributes gains of an offshore trust to UK resident settlors if defined people are actual or potential beneficiaries or receive a benefit. The term "defined person" included the settlor/their spouse, their children and their childrens spouses and their grandchildren and their grandchildrens spouses. This is a very wide anti avoidance rules and means that an offshore trust could only be used to shelter gains if your the spouse, children and grandchildren (and their respective spouses) were all totally excluded from benefiting from the trust. If they weren't then the settlor would be taxed on the gains of the trust during their lifetime. In the future after they were deceased the gains would effectively be taxed on distributions to the the beneficiaries (see below). Income As a non resident trust it would be exempt from UK income tax on foreign income. Therefore by retaining trust income producing investments overseas the trust could avoid a UK income tax liability. There are provisions to arttibute income to UK individuals if they transfer assets to an offshore trust and have the power to enjoy or benefit from the trust. Therefore in order for the settlor to avoid being taxed directly on the income of the trust they would need to ensure that they and their spouse was totally excluded from benefiting from the trust. If the trust beneficiaries were UK resident children and grandchildren, the trust could therefore initially operate as an effective shelter for foreign income. On the settlors death it could then become a CGT shelter. It should be noted that a distribution to the UK beneficiaries would be subject to UK income tax. However the scope of the tax charge would vary. Broadly speaking there are two options to extract cash from the trust: • Income distribution • Capital distribution Income distributions Distributions of income to a UK beneficiary are subject to UK income tax. Capital distributions Capital distributions from an offshore trust will be taxed under the anti avoidance rules. There are two sets of rules that could apply. Firstly there's the transfer of asset provisions that can apply to tax capital distributions as income where there is accumulated 'relevant' income in the trust. 'Relevant' income for this purpose means income that arises to the offshore trust which can be used to provide a benefit for the beneficiary concerned. Income is only taken into account once for this purpose. Therefore rental income for instance received by the trust and held in the trust would be treated as relevant income for this purposes. If there is any relevant income in the trust and a capital distribution is made the capital distribution could be taxed on the UK resident beneficiary as income to the extent of the relevant income. This is subject to the motive exemption. If there is no relevant income in the trust or if the motive exemption applied there would be no tax charge under this provision. However, in this case the beneficiary would be subject to CGT if there are capital gains in the trust. The capital gains tax charge on the beneficiary effectively looks to tax capital gains that have arisen to the trust (but were exempt as it's non resident) on the beneficiary. There would need to be a separate pool to match the gains with capital payments to beneficiaries. The gains are only allocated to capital payments once. Why make an income distribution? Lots of offshore trusts distribute trust income as income. This has some advantages including: • Withholding tax borne by the income is set against UK tax charged on the beneficiary • The income could be directed at low or nil income beneficiaries (eg children) • UK tax is avoided if the beneficiary is non resident or non domiciled and claims the remittance basis (and retains the income abroad). Complexity of capital distributions Capital distributions can be very complex. It's essential that the trustees provide a full computation of their income and gains for each year. It is necessary to know the total since inception of the trust less any previously allocated to income or capital payments. If there is no relevant income or capital gains in the trust there would be no tax on the receipt, at least at the date of the payment. If relevant income or capital gains arose in the future a tax charge could well apply in the future. One option to wash out gains in the trust could be to distribute the trust fund to a non resident or a non dom beneficiary. These distributions would not be taxed either for offshore income or capital gains (subject to the non dom claiming the remittance basis & retaining the receipt abroad). If the entire trust fund or an amount equal to the net trust gains to date was distributed there should be no further UK tax. In the latter case they could then wait a year and distribute the other trust assets to UK beneficiaries free of UK tax. In terms of whether to use an offshore or UK based trust, this is something that you would need to consider. However, if the beneficiaries are to remain UK resident the income/gains would be subject to UK tax on the trust distributions. The tax treatment of offshore trusts is also very complex and you would incur substantially higher charges in terms of the initial set up and ongoing trust management expenses (including appointing non resident trustees etc).

When UK residents can use an offshore company for good business planning

Mon, 23 Feb 2015 12:51:00 +0000

The main income tax anti avoidance rules relating to UK residents using offshore companies are contained in the transfer of asset provisions. These rules apply where the following conditions are satisfied: • There must be a transfer of assets by an individual • As a result of the transfer income becomes payable to a non-resident person. • The transferor must have power to enjoy that income in some way, or receive/be entitled to receive a capital sum. • The transferor must be resident in the UK in the year of liability. If all of these conditions are fulfilled, the income which becomes payable to the offshore company/trust is deemed to be that of the individual who made the transfer, to the extent he has power to enjoy that income. The UK tax authorities take a wide view of what constitutes a transfer of assets. For example these rules may apply: • where an individual transfers cash to establish a non-resident trust, or • subscribes for the share capital of an offshore company, or • where an individual transfers assets such as shares or property to a new or existing non-resident trust or other person or company abroad. It can also apply where intangible assets are transferred; for example a UK individual may transfer his services to an offshore company. It's rarely worth arguing that there is no transfer of assets, as the scope of the rule is very wide. Therefore in practice any UK residents that look to transfer any income producing trade or assets into an offshore company will be very concerned with this provision as it will mean that they will still be taxed in the UK. Motive exemption There is though an exemption from these anti avoidance rules where you can show that: • avoidance of taxation was not the purpose or one of the purposes for which the transfer was effected or • the transfer and any associated operations were genuine commercial transactions and weren't designed to avoid tax (note this is UK tax) Actually persuading the Revenue that you can take advantage of this exemption can in practice be difficult. So who can take advantage of the motive exemption? The main cases where you'll be able to take advantage of the motive exemption are: • Where you carry on a business abroad. Provided the reason for the use of an offshore company is commercial you'll be able to claim exemption from the income tax avoidance rules. So you'd be looking at any arguments that support your requirement to use an local company (eg for commercial purposes having a locally incorporated company may be preferred by customers etc). • Where the offshore company is set up by someone who is not UK resident and not at that time concerned with UK tax. Note that avoiding foreign taxes is OK and won't be caught by the avoidance rules, it's just if the offshore company is set up to avoid UK taxes that it will be caught. If the individual subsequently comes to the UK he would then have a good claim for the motive exemption. There are also provisions to tax other family members that benefit from the offshore company, but again they would have a good claim for the motive exemption. If a UK resident owning an interest in an offshore company can take advantage of this, they can use the offshore company as an income shelter avoiding tax on the income. They would need to obviously ensure they didn't extract dividends above their basic rate band otherwise tax would be charged on those. A good way to access the cash could be to extract tax free after becoming non resident in the future. There is no provision for a "clearance" or other advance ruling on the application of the motive defence. Claims to the motive defence may appear in the Foreign Pages of the Tax Return. The additional information section of the return may also be used to provide additional information about a claim.

CGT for non-residents from April 2015

Mon, 16 Feb 2015 06:36:00 +0000

Non-residents selling UK residential property will be subject to CGT on disposals from April 2015.Currently they are exempt from CGT on disposals of investment property providing they are non resident for at least 6 tax years. The changes will therefore have a massive impact on on residents selling any kind of residential property. So sales of former homes or buy to lets will be within the scope to UK CGT. Whilst the higher rate of CGT is 28% its worthwhile bearing in mind the following factors:

It won't apply to sales of commercial property. So non-residents can still sell this free of CGT

The 28% CGT charge is based on your other UK taxable income. So if you're non-resident and have no other UK income or gains the first £32K of gain (approx) would would taxed at 18%. In addition you'd also have the annual CGT exemption to offset first as well. This means that for a couple the effective CGT charge on gains less than around £100K would be significantly less than 28%. A joint gain of £100,000 for instance could have an effective CGT rate of just 15%.

The new CGT charge applies to gains from April 2015. There are various ways that you can calculate this. In particular you can value the property at April 2015 and only pay CGT on any uplift in this value on disposal or you can time apportion any gain over your total period of ownership and just pay CGT on the gain from April 2015.

You can still reduce any gain by claiming Principal Private Residence relief but these rules are changing quite a bit from April 2015 as well. In particular you won't be able to qualify for the PPR relief exemption unless you are either resident in that country (ie the UK if you want to claim relief on UK property) or you spend at least 90 nights in that country. The problem with the 90 nights requirement is that you may then be UK tax resident depending on your other ties etc under the statutory resident test.There are various options where you can avoid becoming a UK tax resident and still qualify for the PPR relief exemption (eg see How to establish non residence and still qualify for PPR relief. We've summarised the interaction of the various rules for non-residents from April 2015 in this tax calculator: Residential Property CGT Calculator For Non-Residents

Problem with using a UK company if going overseas

Thu, 12 Feb 2015 00:00:00 +0000

This is something that many people overlook, but given the number of people emigrating and working from overseas (eg telecommuting) it's well worth bearing in mind. Imagine this. You write a few e-books and decide to sell them over the internet. As you live in the UK you know all about the advantages of a UK company and therefore transfer the rights to the books to the company at start up and trade via the UK company. Five years later, the company has become profitable, and generates royalties of £75K per annum. You have got sick of life in the UK and want to move to Cyprus. There is no problem with you personally moving to Cyprus, the downside is that the e-books are locked in the UK company. Any transfer of the e-books out of the UK company would crystallise a gain in the UK company, based on the market value of the books (likely to be substantial if they're generating £75K pa) and the original acquisition cost (nominal). Therefore the fact that you never set foot in the UK would not stop the UK taxman taking 20% of the profits of the UK royalty company. The fact that Cyprus is generally regarded as a royalty tax haven wouldn't matter to you as you wouldn't be able to take advantage of it (at least not without incurring a hefty tax cost). The other downside of retaining a UK company is that you can't completely sever your ties with the UK, as you'll still be in receipt of UK dividends. You could incorporate an overseas company to hold the shares but this is 'messy'. If you're trading personally you won't have any of these problems. There is no deemed disposal of assets when you cease to be UK resident (unlike in many countries) and you could just carry out the trade from overseas. Provided you have no UK trade there will then be no UK tax charges.

How double tax relief works when you sell an overseas property

Sun, 08 Feb 2015 09:44:00 +0000

Unless you sell an overseas property that is situated in a tax haven the chances are you'll have to pay some form of overseas tax on any profit you make on the disposal. If you're also UK resident and domiciled you'll also have to pay UK Capital Gains Tax on any gain made on the property disposal. Being charged to both UK and overseas tax on the same gain is clearly not equitable and therefore the UK has 'double tax relief' rules to prevent the same gain being taxed twice. There are basically two forms of relief:

Credit relief, or
Expense relief

Credit relief allows you to offset overseas tax directly against your UK CGT liability. By contrast Expense relief just gives the overseas tax as a deduction when computing your capital gain. Clearly credit relief is a much better bet as you're offsetting against tax rather than the gain. Expense relief would usually be used where there is no UK capital gain. In this case credit relief would be no good (as there's no tax to offset the overseas tax against). Using expense relief though can still give you relief for the overseas tax. When looking at credit relief there are a couple of key considerations:

Firstly is the UK tax more or less than the overseas tax, and
Secondly is the overseas and UK gain both calculated on the same period of ownership.

Where you have a case of the period of ownership being the same but the UK tax is less than the overseas tax you'll just offset the overseas tax to reduce the UK tax charge to nil. Any excess overseas tax would be lost. Where you have a case where the period of ownership on which the gain is based is different in the UK from overseas you'll need to restrict the overseas tax based on the UK period of ownership. So if you had overseas tax of £20,000 and a UK period of ownership of 5 years but an overseas period of ownership of 10 years you'd reduce the tax eligible for double tax relief to £5,000. The main case where you'd be looking to do this restriction for the overseas tax would be where the overseas property was purchased before March 1982. For UK tax purposes you'd rebase the asset at March 1982 but the overseas tax may well be based on the original purchase date and cost. Given that the UK rate of CGT is now 18% or 28% you'll find that overseas tax credits will eliminate or at least substantially reduce the UK tax liability in many cases. Unless you're investing in an offshore tax haven, many countries will have rates of CGT on local property at rates higher than 18%/28% which would therefore fully cover your UK CGT liability. Remember to convert the foreign tax to sterling at the date of disposal.

About the Author

The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA). He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author. Google+ =============================================================

Disclaimer

============================================================= i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice. ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer. These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.

Offshore bonds for non UK domiciliaries

Fri, 06 Feb 2015 05:10:00 +0000

For any non doms looking at ways to hold assets abroad without being liable to the £30,000, £60,000/£90,000 annual charge, identifying overseas investments that don't crystallise income can be crucial. One way of avoiding having any income at all is to use an offshore investment bond. This is a type of insurance based product (but with minimal insurance cover) which allows you to invest into an offshore fund. If you invested in a UK bond the fund manager would be subject to tax on the fund profits. However an offshore bond would be free of UK tax which allows your investment to grow at a higher rate. Pros to using an Offshore Bond The key benefit for non UK domiciliaries though is that offshore investment bonds don't generate income and therefore there is often no income tax charge during the lifetime of the bond. It's usually only when you sell it (known as 'encashing' the bond) that there is a UK tax liability. This is attractive for non UK domiciliaries if they're otherwise subject to the £30,000/£60,000/£90,000 charge for using the remittance basis of tax as they could instead invest in an offshore bond and just opt for the arising basis - saving themselves the £30,000/£60,000/£90,000. Providing they hold overseas investments via the offshore bond they'll avoid generating any income and therefore there would be no UK tax liability. This is a neat way to sidestep the £30,000/£60,000/£90,000 requirement. Offshore investment bonds also allow withdrawals of up to 5% of the initial investment per tax year which aren't classed as income. This means that you can extract cash from the bond free of UK tax. You may have heard of this referred to as a 5% exemption. Strictly speaking it's not though an exemption as it only postpones any charge until the maturity of the bond or subsequent disposal. Having said that if your circumstances change so that you are non resident or not otherwise liable to tax the 5% extractions would operate as an effective exemption as at the time the deferred charge arises no tax would be payable. Many non doms have been looking to use offshore bonds to hold assets abroad and avoid the £30,000/£60,000/£90,000 tax charge. They could therefore invest funds into an offshore bond and simply opt for the arising basis of tax. They wouldn't lose their UK allowances, wouldn't need to pay the £30,000 tax charge and there would be no tax on the bond as any extractions would be covered by the 5% allowance. They'd then ensure that they had left the UK for the later disposal of the bond and avoid UK tax in full. Cons of Offshore Bonds You should however be careful. If you're UK resident at the date of the 'disposal' of the bond you'll then be subject to income tax on the gain made under special tax rules. This means that you could be taxed at rates of up to 45% on the gain made (subject to relief). By contrast as a UK resident if you'd invested in overseas investments directly you'd have the annual exemption and the much lower CGT rate of 18% or 28%. Another drawback is that if you're UK resident when you sell/encash the bond the remittance basis won't apply even if you're a non dom. (Unlike practically all other overseas assets). The other drawback is in terms of actually funding the offshore bond. The finance act is drafted very wide in terms of defining a remittance. So you'd need to watch out if you were looking at transferring cash from overseas bank accounts which consist of untaxed income or gains to an offshore bond. The finance act states that there is a remittance where two conditions are satisfied:

Money or other property is brought to the UK, or is received or used here, by or for the benefit of you, your wife or partner, children or grandchildren aged under 18: or
the property is, or is wholly or partly derived from, the income or capital gain,

In the case of a bringing your 5% withdrawals into the UK Condition 1) is satisfied the question would be whether 2) is met. In particular whether the remitted cash derives from the overseas income or gain (directly or indirectly). The Revenue use tracing rules to trace gains through different investments so there could be a case for arguing that the cash remitted although not taxed as capital constitutes a remittance of the earlier income or gain. This would then mean that the earlier income or gain would be taxed on a remittance of cash from the offshore bond even if you had opted for the arising basis. Therefore whilst offshore bonds can certainly be effective in terms of deferring income to allow the arising basis to be used (and therefore avoiding the £30,000 tax charge) you'd need to be careful if you used untaxed income or gains to purchase the bond.

Planning for joint accounts

Sun, 01 Feb 2015 05:57:00 +0000

Joint bank accounts may be a flexible and practical solution for the management of money on a day to day basis. Many couples have joint accounts to make paying bills and arranging household finances easier. It is not uncommon for elderly parents to ask one of their children to become a joint signatory on their bank account, to assist them in operating the account as they get older. However, joint accounts can present several problems if one of the account holders dies. These include quantifying the extent of the deceased's share of the funds, identifying who is entitled to receive those funds and ascertaining the inheritance tax treatment. Succession issues Normally, the balance in a joint account will pass to the surviving account holder on death by right of survivorship, outside the terms of the deceased's Will. This is because almost all joint accounts will be held as "joint tenants" rather than as "tenants in common". Consequently, there is often no need to wait for probate; the survivor will simply provide the death certificate to the bank and it will transfer the money into the survivor's sole name. The normal mandate on a joint bank account provides for this and enables either of the named parties to withdraw the whole amount for his own benefit while they are both alive. However, although this may be the starting position as regards the account holders and the bank, the parties' rights as against each other may depend on what else they have agreed and the purpose for which the account was opened and how it has been operated. The true position may require careful consideration. This can be a difficult job of piecing together the facts and circumstances, occasionally involving acrimony, as there is usually no written evidence to clarify the position. Joint accounts are often run on the basis of an informal mutual understanding between the account holders but once one of them dies, that may be difficult to ascertain. This was demonstrated in the recent case of Drakeford v Cotton and Stain [2012] EWHC 1414(Ch), where an elderly mother set up and fully funded a joint bank account with one of her daughters. It was agreed that when the joint account was established, the deceased had not intended to give her daughter a beneficial interest. However, over time, the mother's intentions changed since she made it clear to the daughter and to her son that the daughter should inherit the account after her death. The court came to this conclusion on a review of the surrounding circumstances including evidence that the mother had fallen out with her other daughter, and wished to disinherit her. There is a long line of cases on joint bank accounts with a variety of different outcomes as each turns on its own facts. The parties' intentions are key but ideally the position should be properly documented. Inheritance tax issues Joint accounts are common between spouses and civil partners. While they are both alive, interest from a joint bank account is normally taxed 50/50 as they are treated as owning the funds in equal shares. If the funds are owned in unequal shares, they will still be taxed on the 50/50 basis unless they make a joint declaration to be taxed according to their beneficial interests. Other joint account holders will usually hold the funds as "joint tenants" and will also be taxed equally on the income unless in fact they hold the funds unequally as "tenants in common", in which case they will be subject to income tax on their share of the interest. HMRC pays close attention to joint accounts after a death, particularly if there is a significant amount of tax at stake. They are not greatly interested in joint accounts held by spouses and civil partners where funds passing from one spouse or civil partner to the other are normally 100% exempt from inheritance tax. However, for unmarried couples and other combinations of joint account holders, a greater degree of scrutiny will be required as to how much tax is due and who is liable for that tax. It can not be assumed that the deceased will be treated as owning 50% of the funds and that inheritance tax will only apply to that half share. Similarly, it can not be assumed that any inheritance tax due will be paid from the deceased's general estate; more often it will be payable by the surviving joint account holder if they inherit the funds by survivorship. The Inheritance Tax Return that must be submitted after a death calls for a surprising amount of detail including:

the name of the other account holder and their relationship to the deceased;

the date on which the joint ownership began;

the amount provided by each joint owner;

how any income from the account was dealt with;

withdrawals from the joint account. HMRC will normally regard each account holder as beneficially entitled to the proportion of the account attributable to their contributions. So, if the deceased provided all the money, the whole amount will be subject to inheritance tax on his death. The reservation of benefit rules are in point where a person places funds in a joint account with someone else and either receives all the interest or has the right to withdraw all the money (as is normally the case). Withdrawals generally count against each party's contributions but where there is a lot of activity on an account, it may be extremely difficult to unravel the movements. Any withdrawals in excess of the funds provided by each joint owner will potentially constitute a gift to the other party. This in itself has inheritance tax consequences and may also be relevant for income tax purposes. Another recent case, Pflum v HMRC [2012] UKFTT 365 (TC), concerned the question of whether withdrawals from a joint bank account were taxable remittances. An account which was funded entirely by a non-domiciled UK resident was drawn on by his girlfriend in the UK. It was held that the withdrawals became the property of the girlfriend and at the time these were not taxable remittances by him. However, since Finance Act 2008, the boyfriend would now be taxable on his girlfriend's withdrawals under the same set of circumstances as she would be a 'relevant person' in relation to him. These recent cases serve as a reminder of some of the issues to be aware of with joint accounts, where the position may be more complicated than it first appears.

How to take advantage of the 'normal expenditure' exemption and avoid Inheritance tax

Tue, 27 Jan 2015 11:06:00 +0000

An inheritance tax exemption that is often overlooked is the exemption for 'normal expenditure out of income'. Where this applies it can lead to amounts paid to family/relative/a trust to be excluded from a deceased's estate when calculating any inheritance tax charge. In order for payments under the normal expenditure out of income exemption to be exempt, the following conditions must be satisfied: - the transfer must be made as part of the normal expenditure of the transferor - it must be made out of his income - after allowing for all transfers forming part of his normal expendiure, the transferor was left with sufficient income to maintaion his usual standard of living. All three conditions must be satisfied and the onus is on the tax payer to show that they are all satisfied. HMRC accept that it could be that only part of a transfer actually meets the conditions and you'd therefore have a situation where part of a gift was excluded from the estate and the remainder was included. 'Normal expenditure' means that based on the particular transferor, the payment was typical for them. Ideally a regular pattern of payments should be made, or an agreed percentage (eg 10%) of net income would need to be shown to be paid to the recipients. One way that expenditure could be classed as 'normal' would be for an individual to have assumed a commitment or adopted a firm resolution regarding his future expenditure and thereafter complied with it. There would therefore need to be evidence supporting the regular payments. This could be a simple family agreement indicating payments to be made by (for example) a father to his children. A common example is where a specific payment is to be made monthly or annually . This could be (for example) payments of £2,808 per tax year into a stakeholder pension for the benefit of a child. If a regular cash transfer is to be made to a child, a good option would be to consider making any payments under a deed of covenant. This would be likely to satisfy HMRC that a pattern of expenditure will be in place. In essence the final condition above relates to whether the deceased would have sufficient income to live on after making the transfers in question. His usual standard of living is taken to generally be the standard prevailing at the time of the transfer. HMRC could therefore look to see details of the net income of the deceased and compare this with the usual costs of living they incur. Frequently Asked Questions on this exemption Here's some of the top FAQ's that people have when considering this exemption. When considering regular payments from income, do you take gross or net income? Net income Do I need to survive for a certain number of years for the payments to be exempt? No, unlike potentially exempt transfers there is no survivorship requirement and you would avoid Inheritance tax on the payments made irrespective of the survivorship period Does there have to be a worthy purpose for the regular payments or can they be for anything to anybody? No for this exemption there is no specific requirement as to the purpose of the payment Must any beneficiaries be of a minimum age to receive payments? No Are there any problems with beneficiaries that are non UK resident? No. Can the money be saved by the younger beneficiaries for future education costs? Yes Could I pay for my care home out of capital and give all of my income away to avoid Inheritance tax under this exemption? No you could not. Ine of the requirements is that you must have sufficient income remaining after any gifts such that tou can maintain your standard of living. Payment of carehome fees out of capital would prevent the exemption applying. Is it better to give away excess income and be taxed on the full estate at death, or give large sums of money now to children as potentialy exempt transfers ('PETs')? This is the $64,000 question and would probably depend crucially on the size of the estate in question. If the estate was large it may well be worthwhile considering a transfer of a proportion of any capital to reduce the estate to the value of the nil rate band. This would be a PET, and provided the person making the gift survived for at least 3 years, a form of taper relief would apply to potentially reduce the amount of IHT charged. If he survived for a period of seven years after the date of the gift , the value of the gift would be excluded from his estate for IHT purposes. These PET's could also be combined with regular payments out of income, to further reduce the size of any estate although these would presumably be reduced as the available income would also be reduced.

Maximising Tax Relief For Interest

L J Hadnum — Sat, 24 Jan 2015 07:05:00 +0000

If you own a buy to let property minimising income tax on the rental income will no doubt be a key issue. Given the highest income tax rate is at 45% this can represent a significant reduction in your take home profits. One of the main tax deductions will be your tax deduction for interest. The tax legislation states that you'll obtain a tax deduction for any interest you incur 'wholly & exclusively' for the purposes of the lettings business. So in the straightforward scenario where you have a purchase a buy to let property with a buy to let mortgage, the interest on the mortgage will clearly be allowed as a tax deduction as it's 100% used for the purposes of the lettings business. The same rule will apply if you already own the buy to let property and you take out another loan which is used to do up or renovate the buy to let property. Again in this case the loan is 100% for the use of the buy to let property. Multiple properties If you have more than one buy to let properties this is treated as a rental business for tax purposes. This means that once a rental business has started, all activities will be treated as carried out in the course of one business. Any later expenditure leading up to the letting of the second and later properties is part of the rental business and can be deducted. So once you've got the first property up and running any future loans for any properties would be deducted from the rental business profits as a whole (even for example if the second property was not actually let yet). Source doesn't matter Another key point to bear in mind is that the source of any debt doesn't matter. As the Revenue manuals state: '…The security for borrowed funds does not determine the use of those funds. It is very common in small businesses for loans to be secured on the proprietor's home, because that is the only substantial owned asset. This is not relevant to the consideration of the use of the funds borrowed. Similarly guarantees given by another person do not affect the use of the funds…' So you could have debt secured over your main residence which would qualify for interest relief if the funds were used for the rental business. Wider application of the rule for capital withdrawals In fact though the rules go much wider than just applying if the debt was used 'wholly & exclusively' for the purposes of the letting. You could for example have a case where an individual owned a property as a main residence. This may be valued at £200,000. They may want to purchase a new property for themselves to live in, and rent out there existing main residence. In this case they could remortgage the existing property to £100,000 and use this to finance a purchase on the new main residence they were to occupy. Would the interest on the £100,000 qualify for relief? You would think not based on the 'wholly & exclusively' requirement as its clearly been used to purchase a private residence. In fact though interest on the £100,000 could qualify for relief. The Revenue state that business owners (including buy to let landlords) are entitled to withdraw their capital from the business, even though substitute funding then has to be provided by interest bearing loans. In the example above it could be regarded as funding the transfer of the property to the business at its open market value. So they'd argue that the wholly & exclusively requirement is still being met. Whether debt is raised on a main residence to purchase a BTL (clearly allowable for interest relief) or whether debt is raised on the current BTL which is then used to purchase a main residence the capital account is the same. In the latter case they're extracting cash from the business. The fact that it needs to be replaced with interest bearing debt doesn't impact on the fact that the interest is incurred wholly & exclusively for the purposes of the business. Note that the position is completely different if the capital account is overdrawn. In other words you can't be classed as extracting your capital from the business as there is no capital left. In this case if you took on debt which was extracted you'd be classed as extracting the debt -- and if it wasn't used for business purposes the interest would not then be deductible. This could be the case if you've already took significant value out of the rental business. Any debt? The above looks at debt secured on the property (ie mortgage debt). What about other forms of debt - is that also allowable? In theory it should also apply to other debts. Providing there is sufficient capital in the business the interest bearing debt is replacing the funds that have been withdrawn from the rental business.

Internet trading and UK tax

Tue, 20 Jan 2015 09:47:00 +0000

Some people seem to think that just because they're conducting their business over the internet as opposed to via a more traditional 'bricks and mortar' set up, they're not subject to UK taxes. Whilst if you're a non resident, trading over the internet certainly creates problems in terms of identifying the 'taxing jurisdiction' - but if you're a UK resident buying and selling over the internet this will rarely apply. The Revenue have been looking at the tax position of internet trading for some time. It was well reported last year that they were looking at 'ebayers' in particular as it's a difficult area to regulate. In the past they have put a new banner on their website as a general reminder that along with landlords, internet traders may still have a liability to UK tax. If you do sell items over the internet it's well worth taking advice to find out if you register with the Revenue. It's not straightforward as there a number of different classifications for your activities (ranging from a simple hobby to capital disposals to trading). We've looked at the position in our article: When you'll be taxed on ebay and internet profits. As always its free to members.

Disposing of part of your garden

Sun, 18 Jan 2015 09:36:00 +0000

If you're considering selling part of your garden to a property developer, the tax implications are of crucial importance. The disposal of land is a chargeable disposal for capital gains tax ('CGT') purposes. However the key consideration in tax terms will be whether principal private residence ('PPR') relief will operate. Where an individual has occupied a property as a residence either wholly or partly for their period of ownership a proportion of the capital gain resulting on the disposal of the property is exempt. This is calculated on the following basis: Capital gain x period of occupation/period of ownership However, when a residence has gardens or grounds with it, the extent of the garden or grounds of a person's residence which automatically qualifies for relief is 0.5 hectares (approx 1.25 acres). In other words if the garden or grounds do not exceed this area relief for the whole of the garden or grounds is automatically due. Therefore the first consideration when considering a disposal of your garden should be the size of the garden/grounds in question. If they are less than 1.25 acres there should be no problem with the disposal as HMRC traditionally accept that this would be covered by PPR relief. If the garden or grounds exceed this relief may be available for a larger area if the grounds are required for the reasonable enjoyment of the dwelling house as a residence, having regard to the size and character of the dwelling house. This is frequently a matter that will be looked at by the district valuer, and he will bear in mind - the size and character of the dwelling house - what part of that dwelling house has been used as its owner's residence - what land is required for the reasonable enjoyment of that residence Note that the permitted area (ie the area that meets the reasonable use and enjoyment test) is a specific area, and as well as determining the extent of the permitted area the District Valuer will determine where the permitted area is. Each disposal of a piece of land which has been part of the garden or grounds of a residence can attract private residence relief if some or all of the land sold falls within the permitted area. Therefore a key issue will be to determine the extent and location of the 'permitted area' for your property, to assess whether the land disposal will fall within this area. If it does PPR relief will, in principle, be available. Aside from simply selling the land to a developer, a further option would be to actually undertake the development yourself and subcontract the work to local builders. The potential profits are greater but what we're really concerned with are the post tax profits. For example its better to make £100K tax free, than £150K that is taxed at 40% or 45%. As regards the building of a new property the first point to consider would be how this activity will be treated for tax purposes. There are broadly two options, either treat it as a capital transaction or as a trading transaction. If the intention in developing the the property was to develop and sell the property with the intention of making a profit, HMRC could argue that you were a property trader. By contrast capital transactions are usually retained for property investments, eg an individual purchasing a property to rent out. The distinction impacts on how any 'profit' is treated and taxed. A property trader would be subject to income tax on any profit, whereas the disposal of a property investment would be subject to capital gains tax ('CGT') on any gain arising. In some circumstances trader treatment can be beneficial, particularly as it allows for a greater offset of expenses. Whether HMRC would agree to capital or trading treatment will depend on a number of issues, including: - Whether you have undertaken this kind of activity before - How long the property will be held prior to disposal - Will the property be rented out - Whether you anticipate doing this again If they accept that this is a capital transaction, this would allow the offset of the various CGT reliefs such as the annual exemption and PPR relief. Occupation of the new property as a residence would be beneficial as this could also allow principal private residence ('PPR') relief to be offset. In addition if you decided to let the property lettings relief could also be offset. One option if a full development of a new property is envgisaged would be to build a new property and then move into this permanently. Provided the 'old' main residence is sold within three years of the date that they move into the new property there would be no CGT charge. Similarly provided the new property is occupied for a sufficient period to make it a main residence there should be no CGT charge on a future disposal of this.

Inheritance tax and your family company

Tue, 13 Jan 2015 05:08:00 +0000

Given the current rate of Inheritance tax is 40% this can represent a substantial tax charge, particularly if you have valuable assets such as shares in your family company. The key relief for inheritance tax is business property relief ('BPR'). This provides for a 100% relief against the value of shares in an unquoted trading company. Therefore if your shareholding qualified it would effectively be excluded from your estate for IHT purposes. Ensuring that your shareholding qualifies for full BPR can reap dividends as this would then avoid the 40% tax charge on the value of the shareholding. However, as you'd expect this is not straightforward and there are a number of obstacles to gaining full relief. Obstacles to full BPR relief Firstly BPR is not due where the business carried on by the company, consists wholly or mainly of making or holding of investments. There is no statutory definition of 'wholly or mainly' and HMRC would look at the main activities of the business, and to its assets and sources of income or gains, over a reasonable period. If your company was wholly or mainly involved in the holding of investments no BPR would be due. Assessing whether the company is involved 'wholly or mainly' in investment activities can be complex. HMRC would look at the accounts and assess the assets, income and time involved in the relevant activities to assess whether the investment aspect exceeded 50% of the total activities. Any type of investment activities can be taken into account for this, however the most common are having substantial cash balances and also let properties on the balance sheet. A review of the accounts by HMRC would instantly highlight these assets and they would then look in detail at whether the company was 'wholly or mainly involved in an investment activity. In many cases the investment activities of the company would not make the company an investment company. However there can still be a restriction. Note that if the company fails the test above and is wholly or mainly involved in an investment activity there would be no BPR. Excepted assets The other restriction applies a proportionate restriction for any 'excepted assets'. Excepted assets are assets that are not: used mainly for business purposes in the last two years (or, if shorter, their period of ownership). required for future use in the business at the time of the transfer/death. It's important to note that cash balances can be excepted assets, to the extent that they are not required for day to day activities or for specific business plans. Therefore if you had substantial levels of cash in your company you would need to be able to support the use of the cash in the company. For instance are you looking at a potential acquisition or the purchase of new machinery etc. Is the cash required for other business purposes eg a buffer in the case of legal claims etc. If there is a viable business reason for the holding of the cash this could ensure that the cash was not an excepted asset. It should also be noted that 'business purposes' is much broader than 'trading activities'. Therefore if the company includes both a trading activity and property investment, providing the extent of the property investment business does not cause the shares to fail the first test (above), it could be argued that the property investment assets are not excepted assets, as they are used for business purposes. HMRC have been known to challenge this on the basis that the investment activity is not a business (usually due to lack of active involvement by the directors). If some of the assets of the company are excepted assets the amount of the transfer qualifying for BPR, is the value of the shares gifted multiplied by the fraction below: Gift x Total assets - Excepted assets/Total assets There would then be a proportionate restriction in the amount of BPR. If there is a risk that there could be a restriction in BPR consideration should be given to extracting the cash from the company tax efficiently.

Where is your pension taxed?

Sun, 11 Jan 2015 05:13:00 +0000

If you're receiving a pension from overseas it's important to be able to establish in which country it is taxed. As a UK resident you are usually taxed on your worldwide income, which would include a pension from overseas. If you are a UK resident, non UK domiciliary you will be able to claim the remittance basis of tax. If you do this your overseas pension will only be taxed in the UK to the extent that you actually bring it into the UK, however you may lose your UK allowances and need to pay the £30,000 RBC if you've been UK resident for more than 7 tax years. Note that a UK resident receiving a pension from overseas can claim a 10% reduction in the pension before calculating any UK income tax. This also applies to social security pensions but does not apply to anyone subject to the remittance basis of tax. As well as the UK though, when looking at where a pension is taxed you'll need to consider the overseas country where the pension is paid. This may well also subject the pension to tax. If you're taxed in the UK and abroad you can claim double tax relief for UK tax purposes to ensure that you aren't taxed twice on the same income. This will usually operate as a tax credit to reduce any UK income tax charge due. In many cases though you would look to a double tax treaty to assess where a pension is to be taxed. If you're after a list of the UK double tax treaties have a look at this: List of double tax treaties If we look at a random country - eg Egypt you'll see that if you scroll down there is an article 18 headed pensions. This states: 'Subject to the provisions of paragraphs (1) and (2) of Article 19 pensions and other similar remuneration paid in consideration of past employment to a resident of a Contracting State and any annuity paid to such a resident shall be taxable only in that State. The term `annuity` means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.' This is therefore saying that unless Article 19 applies, a pension paid to a UK resident from Egypt will be taxable on in the UK. Article 19 is in respect of government service and paragraphs (1) and (2) state that: 'Remuneration or pensions paid out of public funds of the United Kingdom or Northern Ireland or of the funds of any local authority in the United Kingdom to any individual in respect of services rendered to the Government of the United Kingdom or Northern Ireland or a local authority in the United Kingdom in the discharge of functions of a governmental nature, shall be taxable only in the United Kingdom unless the individual is an Egyptian national without also being a United Kingdom national. Remuneration or pensions paid by, or out of funds created by Egypt or a political subdivision or a local authority thereof to any individual in respect of services rendered to the Government of Egypt or a political subdivision or a local authority thereof, in the discharge of functions of a governmental nature, shall be taxable only in Egypt unless the individual is a United Kingdom national without also being an Egyptian national.' This is therefore stating that a government service pension (eg a civil service pension) is taxed only in the country where it is paid. So in the case of an Egyptian individual resident in the UK but receiving an Egyptian pension it would be taxed in Egypt only (and vice versa) unless he is a UK and non Egyptian national. The terms of a double tax treaty can therefore significantly amend the UK's domestic tax rules. If you look at some of the other treaties you'll find that most of them follow the same rules as above, namely:

Most pensions are taxed in the country of residence

Government service pensions are taxed in the country of payment There are though some notable exceptions such as Cyprus where the treaty states: (1) Any pension and any annuity derived from sources within one of the Contracting States by an individual who is a resident of the other Contracting State and subject to tax in that other State in respect thereof shall be exempt from tax in the first-mentioned Contracting State. This therefore ensures that the pension is taxed only in the country of residence. Other countries that adopt the rule that all pensions are taxed in the country of residence include Australia, New Zealand and Canada.

Setting up an offshore joint venture

Sun, 04 Jan 2015 09:31:00 +0000

Many people ask whether they can use an offshore company to carry out their trade and avoid UK tax. For most people this is very difficult to do due to the two main problems in using an offshore company:

Company residence
Transfer of assets abroad legislation

Company residence The offshore company would be classed as UK resident if its management and control was situated in the UK. If you are UK resident the only way you could argue that the company was non UK resident would be to appoint an independent overseas board of directors. Nominee directors would not be acceptable to HMRC if they acted purely as nominees for you. In this case the company would be controlled from the UK and would be UK resident. We've looked in detail at how this test operates in the following article: Overseas directors and the central management and control test You'd therefore need to ensure that control was definitely overseas. Anti avoidance rules The other issue with the use of an offshore company is the transfer of assets abroad provisions principally contained in what used to be S739 (now S720 ITA). The conditions for this to apply are:

There must be a transfer of assets by an individual
As a result of the transfer income becomes payable to a non-resident person (eg an offshore company or trust).
The transferor must have power to enjoy that income
The transferor must be ordinarily resident in the UK in the year of liability.

If all of these conditions are fulfilled, the income which becomes payable to the offshore company is deemed to be that of the individual who made the transfer for UK tax purposes. This is a wide provision and therefore any disposal of assets by an individual to a non-resident company or trust is a transfer of assets for these purposes. What if you're non UK domiciled? If you are non UK domiciled an amended form of the anti avoidance rules would apply. You could be effectively exempt from the anti avoidance provisions provided the cash in the offshore company is retained abroad. However to achieve this a non UK domiciliary would need to claim the remittance basis. If you've been UK resident for 8 tax years you would then be subject to an annual £30,000 tax charge for the privilege of using the remittance basis (and avoiding the anti avoidance rules). This rises to £60,000 after 12 years of UK residence and £90,000 after 17 years. For many people this is unlikely to be tax efficient. Therefore whilst using an offshore company is possible you may have difficulties both in terms of the company residence and avoiding the anti avoidance rules. Setting up an offshore joint venture Rather than forming an offshore company controlled by you from the UK an alternative option could be to set up a joint offshore company with an overseas colleague or supplier company where you could do projects together. In many cases this could be a good option. You could ensure that control was not from the UK, and could potentially utilise an exemption from the anti avoidance rules. The main exemption to the avoidance rules is where a motive exemption applied. Under this you would essentially need to argue that the purpose of the transfer was not to avoid tax, and that it was a bona fide commercial transaction. The main application of the motive defence is to trading scenarios where a taxpayer carries on business abroad. It will be in point where a taxpayer carries on business abroad, and where for example a trader incorporates a local company for commercial reasons the anti avoidance rules should not apply. In order to use a directly owned offshore company you would need to argue that the motive defence applied. As such you would need to provide reasons to support the use of an offshore company to ensure that the primary reason for using the company were the business benefits. If you're establishing a new JV arrangement there should be few problems in establishing the commercial justification for the overseas company. Providing the company was then carrying out a trade overseas it should be exempt from UK tax on the trading profits. Clearly any profits extracted from the company would be taxed in the UK for any UK resident shareholders. Structure of the Joint Venture You'd be looking to structure the joint venture as a form of corporate entity. As such you'd avoid a partnership arrangement. Under a partnership arrangement the partners would be automatically taxed on the profits generated as it would be classed as a 'transparent entity'. Any of the offshore IBC's would therefore be effective for incorporating the joint venture.