It's frequently the case that a person may be UK resident but intends on becoming non UK resident at some point in the future. In relation to a UK company owner what they're looking for are any options available to them to reduce the rate of UK tax that they're paying.

In terms of mitigating liability to UK income tax the key point is to consider retaining maximum profits within the current UK company and keep cash extractions to within the basic rate tax band, if possible. If cash was extracted predominantly as a dividend receipt there should be no UK income tax for a basic rate taxpayer. Any amounts in excess of the basic rate tax band would be taxed at an effective 25%.

If however they retain cash in the company and extract this when they are non UK resident they would not be charged to UK income tax on the receipt. There is also no withholding tax for dividend payments made overseas and therefore if they were located in a tax haven or other jurisdiction with favourable rules in relation to overseas dividend receipts the cash could be extracted free of tax.

The overall tax rate would then be the corporation tax originally suffered on the company profits at 21 - 29.75%. If they sold the shares as non UK resident individuals they could also sell the shares in the company free of UK CGT.

The main downside to this is that the company, as a UK incorporated company would remain charged to UK corporation tax, even if the shareholders were based overseas. The one exception to this could be to ensure residence in a double tax treaty country and claim the company to be treaty resident overseas. If the UK company then had no fixed base of working in the UK (ie no UK permanent establishment)it would be taxed on profits arising overseas.

If the shareholders were looking at generating new products or services in the period prior to becoming non UK resident they could also consider holding any new products personally and trading as a partnership. They could then leave the UK in the future and assuming the trade was not classed as a UK trade the profits generated after they left the UK would be outside the scope of UK taxes.

Another option would be to transfer any new products to an offshore company or trust or use the offshore company as a form of recharging company to accumulate profits tax free overseas. Provided the company was non UK resident the company would not be taxed in the UK, on the basis there was no UK trade. If any cash was extracted from the company, this would clearly be subject to UK income tax, however provided the entity was established in a low tax jurisdiction and no cash was extracted until after they became non UK resident there could be no tax liability on the companies profits.

Note that any transfer of an existing trade to the new offshore company would be difficult. Given the current trade is already revenue producing it would be likely to have a significant value. As such a transfer from the UK company to an offshore company would crystallise a gain in the UK company, which would be subject to corporation tax.

The main problems in using an offshore company are:

- Company residence

- Transfer of assets abroad legislation

The offshore company would be classed as UK resident if its management and control was situated in the UK. If the shareholders 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 the shareholders. In this case the company would be controlled from the UK and would be UK resident.

Another option in terms of residence would be to use an offshore trust to hold the shares. The offshore trust would need to have overseas trustees and in conjunction with the overseas directors this may make it easier to establish non UK residence for the company. The use of a trust would however complicate matters particularly in terms of UK IHT and the shareholders would need to be excluded from the list of potential beneficiaries and trustees in order for the trust to be established as non UK resident and to prevent anti avoidance rules impacting.

The other issue with the use of an offshore company is the transfer of assets abroad provisions .

The conditions for these anti avoidance rules 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 in some way,


• 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.

The main exemption to this would be to argue that the 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 avoidance rules may not apply. In order to use a directly owned offshore company you would need to argue that the motive defence applied.

Using any form of offshore entity to reduce tax for UK resident domiciliaries is always difficult. The most straightforward option to mitigate tax would be to restrict income extractions, however if this is not sufficient the use of an offshore company would then need to be considered with the residence position as well as the application of the motive defence being considered.