Tax Planning using English Companies
The corporation tax rates are one of the lowest in the European Union. Tax is levied at 20% on a UK company which has net profits under £300.000 and a tax rate of 26% is levied where the profits are above this figure. During the course of the current parliament the higher rate of corporation tax will be reduced to 23%.
1. UK Holding Companies
A UK company may be a useful vehicle for the collection or channelling of foreign dividend income received from qualifying subsidiaries. A UK holding company that owns a foreign qualifying subsidiary will not usually be subject to UK taxation upon receiving dividends from the foreign subsidiary. If the UK company is owned by an offshore company, the dividend income received by the UK company can be absorbed by the offshore parent company without consequence to further taxation.
A qualifying subsidiary is regarded as being a Company that is active and subject to corporation tax. Furthermore, a minimum of 10% of the subsidiary’s share capital must be owned by its UK parent and for a period of no less than 12 months. Subsidiaries that are registered in a tax haven will normally not be entitled to distribute their dividends without suffering UK corporation tax, but dividend income from a subsidiary registered in any tax friendly EU state, such as Malta, Cyprus and Gibraltar, should qualify as tax exempt.
This makes the UK company an extremely attractive holding company vehicle particularly for investment in Europe and elsewhere. In most cases it will be more attractive than competitive structures available in the Netherlands, Austria, and Switzerland etc.
If the UK company owns a group of active subsidiaries (at least two) and one of these were to be sold, the resulting capital gain arsing to the UK holding company should not be subject to UK capital gains tax. Even an offshore company, in such cases, can be owned by a UK holding company which should not suffer UK capital gains tax upon sale of its offshore subsidiary.
2. UK Company trading as a fiduciary
A UK company enters into an agreement with the offshore company. Under that agreement, which is committed to writing and executed by both parties, the UK company agrees that it will trade on behalf of the offshore company as its nominee. All contracts of purchase and sale, all the invoicing and all the general correspondence will be made in the name of the UK company and the UK company receives all the revenues from such business as nominee for the offshore principal. The agreement should state that all monies received are received as nominee for the principal save insofar as there will be an agreed fee which will be retained by the UK company. That fee is usually expressed as a percentage of the gross revenues received. The standard form is that 10% of profits and is retained by way of fee by the UK company.
The practice of HMRC is to accept, subject to certain conditions, that non UK source monies which are first received by the UK company but will ultimately be passed over to the offshore company are received as nominee and are not therefore subject to UK corporation tax. On the basis that 10% of profit is retained by the UK company, UK corporation tax will have to be paid on this amount. The effective rate of UK taxation will be reduced to approximately 2.8% (10% of the 28% maximum corporation tax rate).
In order to protect the trading profits from UK taxation it is essential that no trading activity must occur within the UK and no UK sourced income should be generated. Both the UK and offshore company must be managed by a board of directors that are non-UK resident and that the ultimate beneficiaries should also be non-UK resident.
3. UK Limited Liability Partnerships
This form of legal entity was created by the Limited Liability Partnerships Act 2000. The essential feature of a limited liability partnership (“LLP”) is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is possible because an LLP is a legal person separate from its members.
The LLP can do anything that a natural person could do. It has the ability to enter into contracts, own assets and will continue in existence in spite of any change in membership. Its existence as a separate legal entity makes it more closely akin to a company than to a partnership. The concept is similar to that of the US Limited Liability Corporation, a US legal entity which is not generally subject to US taxation. Although the LLP is a legal entity, it is taxed like a partnership so no tax is assessed on the LLP but profits are only taxed in the hands of the partners, so if a partner is a non-UK entity and does not trade in the UK, no UK tax should be liable. Thus it may be possible to create a non-UK taxable structure provided that the trading activities, its management and ownership are all outside of the UK and the profits are generated from a non-UK source.
4. United Kingdom – Still an offshore jurisdiction for non-domiciled individuals
Substantial taxation benefits accrue to those UK residents who are not UK domiciled. It is possible for the non-UK national who has no UK capital or income to reside within the UK whilst legally avoiding paying UK taxation.
A person who is UK resident but not UK-domiciled and taxed on the remittance basis pays income tax only on income and capital gains which arise within the UK and foreign income and gains which are remitted to the UK. A non domiciled person who has resided in the UK for the less than seven out of nine years simply has to make a claim to be taxed on the remittance basis in their UK self assessment form. However, if an adult non-UK domiciled person has resided in the UK for seven or more of the past nine years and they have overseas income or gains in excess of £2,000 they must pay the annual remittance basis charge of £30,000 to continue to avoid this basis of taxation.
5. Offshore solutions for UK domiciled and resident persons and long term non-UK domiciled persons
Simple offshore structures have ceased to be effective in reducing taxes for UK taxpayers due to a raft of anti-avoidance legislation that has now been implemented. This legislation requires any UK resident and domiciled person to declare their interest in the offshore company or trust and attributes the profits of an offshore company to any UK beneficial owners, in proportion to their interests, whether they receive those profits or not. As from April 2008, non UK domiciled persons that have lived in the UK for 7 years out of the last 9 and who do not elect to pay the annual remittance basis charge (RBC) of £30,000 will also be responsible for reporting and payment of taxation on their worldwide income and capital gains.
However, life insurance contracts may be used to “decontrol” the offshore structure for UK tax purposes and allow an offshore structure to be most effective in deferring taxes indefinitely. The UK treats life insurance contracts very sympathetically. If the shares of an offshore company are owned by an insurance company and form part of the assets of an insurance contract then the attribution rules referred to above should no longer apply.
If the structure is to be used for investment purposes then the UK resident may decide to take out the policy directly in his own name. As the policyholder he should not be taxed on the investment returns from the policy’s assets as they arise because the attribution rules referred to above would not apply. The policyholder can transfer an unlimited amount of tax paid cash into the structure without triggering a lifetime inheritance tax charge. This charge will almost certainly arise where a UK resident makes a transfer into a trust (offshore or onshore). Only cash should be transferred in exchange for the life insurance policy.
The tax advantages afforded through life insurance have been tested at the House of Lords and the Law Lords decided that parliament had created a specific tax regime for life insurance contracts. We have also taken opinions from leading tax counsels on the tax efficacy of these arrangements and can arrange for such opinions to be written to clients upon request.
6. QNUPS (Qualifying Non-UK Pension Schemes)
Under UK legislation introduced in 2004, effective from 6 April 2010, UK resident individuals are entitled to transfer their non UK pension assets to a Qualifying Non UK Pension Scheme (QNUPS for short). This is an overseas pension scheme which is recognised by HM Revenue & Customs (HMRC). QNUPS are open to UK domiciles, including those permanently residing in the UK or overseas.
On moving abroad many British expatriates will still have an exposure to UK inheritance tax on their UK and worldwide estate as they will be considered by HMRC as domiciled in the UK. Domicile is not easily shed and the exposure to UK inheritance tax can continue many years after ceasing to live in the UK.
Our QNUPS pension is registered and regulated with the Guernsey income tax office and is bound by the rules that govern Guernsey Pensions.
UK registered pension scheme funds (e.g. a SIPPS fund) that have enjoyed UK tax relief should not be transferred to a QNUPS.
The QNUPS we recommend are established so that the underlying investments are not subject to tax and with careful planning the pension fund can be invested on a tax free basis until retirement date
The pension fund can be used by the member during his lifetime and any remaining balance can be passed on to his chosen heirs upon the member’s death. However all distributions made to the member or to other beneficiaries will be subject to UK income tax (IT) should the recipient beneficiary be UK resident at that time.
There is no UK inheritance tax levied on the investments in the pension when the member dies. With careful planning such taxes may also be avoided in the member’s country of residence and forced heirship issues may be avoided.
There is no limit on the amount that can be contributed into a QNUPS. This may be attractive to higher level taxpayers who may wish to transfer taxed paid wealth or assets to the QNUPS to mitigate UK tax on the income generated from the same which would reduce their current exposure to the top rate of tax and thus increase the level of funds available for their retirement.
There is no age limit at which a member may wish to set up a QNUPS, although if over 75 years of age they would need to take some benefits, which itself can also create opportunities for potential tax savings with careful planning.
The Investment Management of the Plan can be directed by the Member or can be delegated to an Investment Manager of the Member’s choice.
7. FLPs (Family Limited Partnerships)
FLPs are limited partnerships formed under the Limited Partnerships (Guernsey) Law 1995 (as amended). The standard format is for a Guernsey company to be formed and act as the General Partner with responsibility for managing the FLP. The other partners would be the Limited Partners and would normally be family members who wished to benefit from the assets but have no responsibility for managing same and would have no liabilities in relation to the partnership. A General Partner has unlimited liability for the debts of the FLP but because that partner is a limited company the liability is limited that way.
The head of the family transfers the family property to the FLP. The FLP agreement would normally state that he retains the financial benefits of ownership by him retaining the right to any profit distributions and to the capital on a winding up of the FLP. Thus initially there is no loss to the estate of the head of the family and therefore no UK Inheritance Tax (IHT) consequences. The General Partner, the Guernsey limited company, has responsibility for managing the assets. The Limited Partners, the other family members, contribute nominal amounts of capital and in return get limited rights to benefit from the FLP property. Over time the rights to benefit can be transferred from the General Partner to the Limited Partners. Those transfers would be treated in the UK as potentially exempt transfers (PETs) for UK IHT purposes so as long as the head of family survives the transfers by 7 years they could be made free of lifetime IHT. After transfer, the assets are out of the estate of the head of family so would no longer be chargeable to UK IHT upon the death of the head of family even though he can still retain control of those assets after the value has been transferred.
FLPs are therefore rather like discretionary trusts with the General Partner being similar to the trustee and the Limited Partners being similar to the beneficiaries. They have many advantages over trusts for UK domiciled persons. If property were transferred to a discretionary trust there would be an immediate charge to lifetime IHT of 20%. This is not the case with a transfer of property to an FLP. Going forward, recent changes in UK tax legislation impose ongoing tax charges on trusts and their beneficiaries and settlors which make them particularly unattractive. No such charges are made in respect of Guernsey FLPs.
Although there are no restrictions on the nature of assets which can be placed into a FLP, they tend to be used to hold assets such as property, securities and shares in family businesses.
If the FLP were to become insolvent, there is no liability on Limited Partners to repay capital distributions they may have received from the FLP unless the FLP was insolvent at the time of the distribution, although the liability to repay in such circumstances only runs for 6 months from the distribution date.
In summary then, FLPs provide a method of transferring property between generations free of UK IHT but give similar asset protection and other domestic advantages to a trust. They allow the head of family to retain control over the family assets whilst passing the value in those assets to other family members in a controlled and orderly manner without tax consequence.
8. QROPS (Qualifying Recognised Offshore Pension Schemes)
On moving abroad many British tax payers will have left their UK pension rights retained in their existing arrangements. These private pensions remain subject to UK pensions law with the effective requirement to purchase an annuity at a later stage (and in any case no later than attaining 75 years of age without the later prospect of huge tax charges otherwise). Additionally UK taxation may be suffered on pension payments.
Under UK legislation introduced in 2004, effective from April 2006, expatriates or UK residents who have a demonstrable intention to move overseas may transfer the value of their UK pension rights to a non-UK pension scheme and thus avoid all the normal restrictions imposed on the pension fund if it remained in the UK. The transfer must be made to a Qualifying Recognised Overseas Pension Scheme (QROPS for short) that is approved by HM Revenue & Customs (HMRC).
There are a number of basic conditions that must be fulfilled in order for a transfer to a non-UK pension scheme to be considered advisable. Cases should be examined on an individual basis but the basic rules are:
The pension holder must become non-resident of the UK and remain so for at least five complete UK tax years.
The existing UK pension scheme can be in drawdown (i.e. benefit is being paid from the fund directly – an approach now referred to as “unsecured income”) before transferring to a QROPS. However, there are restrictions and if the permitted lump sum (nearly always 25% of the value of the pension rights) has been taken, no further lump sums are allowed.
UK rules impose a statutory lifetime allowance relating to the amount payable from UK registered pension schemes that will be treated as tax-privileged. For the tax year 2010/11 this allowance is £1.8m. Transferring benefits to a QROPS is known as a crystallization event and the value of pension rights transferred in excess of the lifetime allowance will be taxed at the rate of 25%.
The QROPS we recommend are established so that the underlying investments are not subject to tax and with careful planning the pension fund can be continued until retirement date on a tax free basis.
The Investment Management of the Plan can be directed by the Member or can be delegated to an Investment Manager of the Member’s choice. With over 300,000 British tax payers looking to relocate and move indefinitely overseas every year many will have contributed during their lifetime to a UK pension and very often the pension fund has to be frozen or paid up since non-UK residents can no longer contribute to the same pension owing to the fact that they will not be able to enjoy any tax relief due to the fact that they have moved overseas and become non-UK residents. Our firm can efficiently transfer a UK pension to our Guernsey registered QROPS which is also registered with HMRC contrary to many QROPS providers.