Making use of your spouses offshore tax status
Note - This is an archived article and does not reflect the recent tax changes. Visit the members area for an uptodate version of this article.
You've probably read articles of how some of the UK's richest businessmen use their offshore status to avoid UK taxes. It doesn't stop there though. Even though you may be a UK resident domiciliary, if you're lucky enough to have a spouse that has a form of 'offshore' status, you too should be able to reap the rewards.
The most famous example of this is the BHS owner, Philip Green, who thanks to his wifes non UK resident status can route substantial dividends (we're talking over £800Million) through his wife and avoid UK income tax in full.
Whilst you won't have access to the top level advisers that he can use, this doesn't mean that you also couldn't use similar techniques to reduce your UK tax bill.
The key point of course is that you have a spouse that is in a tax priviliged position. This could either be because:
- He/She is a non UK domiciliary (I'll assume we're referring to wife)and/or
- She is a non UK resident
If she's a non UK domiciliary the chances are she'll either have been born overseas to foreign parents, or whilst she was born in the UK, her parents (or at least her father) was foreign and she has demonstrated substantial links with her home country (eg property there, close family ties etc) and she makes it clear that she does not intend to remain in the UK permanently.
Ideally she would not also have been UK resdent for the last 17 years, as if she has, she'll be deemed UK domicile for inheritance tax purposes. Whilst there are still benefits that can be obtained, this deemed domicile does make it much less attractive.
If she's non UK resident she will need to spend the significant proportion of the year overseas. In addition, she would a no ongoing connection with the UK, and the UK would not be her 'home' in the ordinary sense of the word. If she was looking at having more ties with the UK (for example sharing a home here with you for up to the 90 days per tax year limit) she should ideally be located in a country with which the UK has a tax treaty and she could then obtain treaty residence overseas. This would rule out many of the complete tax havens (as they have no tax treaty with the UK) but a low tax haven such as Cyprus could be considered.
The benefits of a non UK domiciled spouse
If you are UK resident and domiciled but your spouse is UK resident but nonUK domiciled, this opens up some interesting opportunities for you as a couple.
Many people want to use an offshore company to hold UK or overseas assets. Unfortunately for a UK resident domiciliary many of the advantages in using offshore companies are elimnated by anti avoidance legislation. If however your spouse is non UK domiciled you can use him/her to hold assets or even use offshore companies and trusts in a tax effecive manner. Some of the key opportunities could include:
- Establishing an offshore company to hold UK assets, particularly property that was not occupied by any directors or shareholders. The main benefit of this is that it would take the assets held in the company outside the scope of UK Inheritance tax ('IHT'). As a non UK domiciliary is only charged to IHT on their UK estate holding the UK property via an offshore company effectively changes the assets from UK to overseas for IHT purposes.
You would need to be careful with this, particularly to ensure that the company is controlled from overseas, and that no property owned by the company was occupied by UK resident directors or shareholders (otherwise a UK income tax charge could arise on the director).
- Another benefit is that as a non UK domicilary it makes it much easier for them to use an offshore company to avoid UK tax on any capital gains. For UK resident domiciliaries there are strict anti avoidance rules that class gains that arise to many offshore companies as being those of UK resident shareholders. However, if you arrange for a non domiciled spouse to own the shares the company sell assets and realise gains without a risk of the taxman arguing that they should be taxed on them personally as a shareholder.
- Holding overseas assets. If you planned to purchase overseas assets it would make sense to hold these via your non domiciled spouse. Not only would these assets then be outside the scope of UK Inheritance tax, but in addition the remittance basis could apply to overseas income and gains. This means that your wife (and therefore in reality you as a couple) would only be taxed on any overseas income or gains generated by the asset if the income or proceeds were actually brought into the UK. This is therefore a significant advantage particularly where an overseas property business was being developed as the proceeds could be reinvested overseas free of tax.
- Establishing an overseas trading company. If you wanted to establish a company to trade overseas, again providing the company could be established as controlled from overseas (eg using overseas directors) having your Spouse as the shareholder means that dividends could be received free of UK income taxes provided the cash was retained overseas. If you were the shareholder you'd be taxed in full on the dividends received at your marginal rate of income tax.
- Establishing an offshore trust. This is much easier if the settlor (ie the person who creates the trust) is a non UK domiciliary. Ideally when looking at an offshore trust you'd be looking at forming an 'excluded property trust'. Unfortunately you can only do this if you're a non UK domiciliary and transfer non UK assets. Don't worry about the 'non UK asset' requirement as you can usually sidestep this requirement by holding assets via an offshore company.
The benefit in forming an excluded property trust is that its outside the scope of UK Inheritance tax. Nowadays when you're forming a trust the potential IHT liability will be paramount particularly given that transfers to most forms of trust could not result in an immediate charge to IHT. As well as the IHT benefits the trust should also be exempt from UK CGT and if the settlor is a non UK domiciliary many of the anti avoidance rules also won't apply. This means that the non domiciliary spouse can be a beneficiary of the trust and won't be caught by the anti avoidance rules that tax them on gains of the trust. So when you're looking at using trusts, non UK domiciliaries are at a big advantage.
Note that for Inheritance tax purposes you can also be deemed UK domiciled if you're resident in the UK for the previous seventeen years, and also for three years after you actually lose your UK domicile. Therefore you would need to be careful to ensure that your spouse, although born and domiciled overseas, was also not UK resident for seventeen (of the previous twenty) years.
Limited interspouse transfers
You should also note that if you are UK domiciled but your spouse is a non UK domiciliary the usual IHT exemption for transfers between spouses will not apply and the tax free amount will be reduced to £55,000. This will be important as if you planned to make use of your nil rate band (£300K for 07/08) on a transfer to children and leave the remaining estate to your spouse you could see a large tax liability. You would in this case need to ensure that overseas assets were transferred to your spouse as soon as possible to enable you to survive for seven years after the date of the gift (and thereby making the gifts exempt from IHT).
Non resident spouse
As well, or even instead of a spouse being non UK domiciled you could have a spouse that is non UK resident, whereas you're UK resident. This could be for a number of reasons, (eg although you remain a couple you lead largely separate lives) however the main reason would be where one spouse works overseas and the other remains in the UK.
Anyone who is non UK resident has some big advantages in terms of UK tax (ie the above non domiciliary advantages and more!). In fact as a non UK resident they will largely be outside the UK tax system. In many cases it would only be if they have any UK business assets or property investments that there may be any tax at all.
So, if you have any assets at all, your wife could hold them free and sell them in the future free of CGT. This applies to UK as much as overseas assets, and the only caveat is that if the assets are acquired before they leave the UK they would need to remain non UK resident for at least five complete tax years to avoid UK CGT forever.
In terms of UK shares, having a non UK resident spouse is very attractive and is something that one of the UK's most successfull businessmen. Philip Green, uses to his advantage. In his case he's a UK resident, but his wife is non UK resident - being a resident of Monaco. Dividends from his UK companies are paid to his wife who is the shareholder and as she's non UK resident, there is no UK tax at all on the dividends. In addition, and this is in practice an important point - as she's a resident of Monaco, for all intents and purposes a nil tax haven, there will also be no overseas tax.
If you're wife is non UK resident there is no point paying dividends that would be taxed in the UK at 25%, to her to be taxed at a higher rate. Therefore your first step is considering this should be to find out the overseas tax rate. If your spouse can obtain residence overseas in a nil or low tax country you'll stand the best chance of significantly lowering your tax bill.
Any budding property entrepreneurs would be well advised in this case to put property assets in their spouses name, in order to avoid CGT on a future disposal.
In terms of income tax, a non resident is exempt from tax on overseas income. Therefore you could have overseas rental properties held by the spouse and income tax avoided in full, even if the rental income was subsequently transferred into a UK bank account (unlike the position for non UK domiciliaries above who would be taxed if the cash was brought into the UK).
The only tax that would not be directly impacted by the non resident status would be Inheritance tax. To avoid this the overseas resident spouse would need to also obtain non UK domicile status.
Interspouse transfers
Where spouses are UK resident there is not normally any rush to transfer assets as you can transfer free of tax pretty much up until you decide to sell. Does this apply for transfers between a UK resident and a non UK resident? Well yes it still does. The Revenue and courts have both looked at this and agreed that just because one spouse is non UK resident does not mean that the exemption for interspouse transfers should not be available. Therefore in theory it's possible to do this:
Mr X has a UK property standing at a £500K gain. His wife is working in Cyprus and is a tax resident there. He transfers the property to his wife who then sells the property. As she's a non UK resident the gain is exempt from CGT provided she spends more than five years abroad. She can then pass the proceeds into a joint account and effectively 'gift' some of these to her husband. In this case, the property gain would also be exempt from Cyprus tax.
If you were looking at undertaking something like this you'd need to be careful to ensure that ownership was actually transferred and that your spouse was really non UK resident.
As well as this a non resident spouse is also outside the scope of many of the anti avoidance provisions as stated above for a non UK domiciliary. Therefore offshore companies and trusts could be formed more effectively, eg to hold property investments or even shares. In addition as the spouse is non resident showing that any overseas company is controlled from outside the UK should be pretty straightforward.
Summary
There are therefore some significant advantages to having a spouse with a form of 'offshore status even if you yourself remain classed as a UK resident, UK domiciliary.
Having a non UK resident spouse is preferred as they are exempt from CGT on most assets as well as avoiding income tax in full on overseas income. This is particularly useful for owning shares in a UK company or holding any assets expected to show significant capital appreciation. In addition forming offshore entities can be made and UK tax avoided in many cases.
If you've got a non UK domiciled spouse this is mainly useful for overseas investments, when UK CGT and income tax can be avoided in full provided the cash is retained overseas. You could though form overseas trusts and companies with less UK tax implications.
About the Author
The Author of this article 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.
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