BARNES ROFFE LLP Offshore Tax Planning DARTFORD FOOTBALL CLUB 21 MAY 2009
Residence Assessment of Taxes • Capital Gains Tax Resident or Ordinarily Resident, and: 1. Domiciled: Worldwide gains 2. Not domiciled: UK situs property, with remittance basis available for non UK situs property
Residence Assessment of Taxes • Income Tax a) Resident or Ordinarily Resident, Domiciled: Worldwide income b) Not Ordinarily Resident: Remittance basis available on certain non UK income c) Not domiciled: Remittance basis available on certain non UK income
Residence Assessment of Taxes • Inheritance Tax a) Domiciled: Worldwide assets b) Not domiciled: UK situs assets only
Residence • Not defined in legislation • Different depending on arrival / departure • Arrival: 90 days PA may be enough • Leaving: 70 days PA may be enough • If Ord Res (below) leaving for occasional purpose may still leave you resident • A whole year away should make you non resident
Residence Ordinary Residence • Not defined in legislation • Common sense can apply • Resident with some degree of continuity • No cases where ordinarily resident without being resident
Residence Relieving Provisions • S 830 ITA: If working abroad ignore UK accommodation • S 831 / S 832 ITA: If in UK temporarily not intending to stay, ignore UK accommodation • This applies only to certain income & circumstances • UK accommodation is relevant if purpose not temporary
Residence Cases: Shepherd (2006) • Airline pilot set up home in Cyprus • In 99/00 in UK < 90 days • Had UK residence & used it habitually • Purpose (landing planes) not temporary
Residence Cases: Gaines Cooper (2007) • Was held resident because had not left UK for more than a temporary purpose, and used UK home • HMRC included days of arrival & departure (outside IR 20 guidance), but even in a year with < 90 days, still held him resident
Residence Cases: Grace (2008) • BA pilot, South African, set up home in SA and family & ties were there. Had houses at Gatwick and SA & used both. • Here > 90 days (including arrival / departure). • Found not resident (temporary purpose) • HMRC’s argument that Ord Res, not Res, was thrown out.
Residence Summary • UK accommodation can be important • Its not only factor • If leaving UK, show a break in habit • S 831 / S 832 ITA can give relief if here temporarily • A home abroad can help • HMRC’s position in IR 20 is often without legal basis and can’t be relied upon • 183 & 90 day rules are guides
Domicile Three Types • • • Origin Choice Dependency Acquiring a new domicile is difficult ~ loads of case law
Domicile Origin • • • At birth (father’s) unless parents unmarried (mother’s) Continues until acquire new domicile of choice or dependency Default domicile if a domicile of choice or dependency ends without a new one starting
Domicile Choice • • • Must be > 16 years Need new residence plus permanent intention (selling old residence helps) Not enough to leave UK permanently for destination(s) unknown
Domicile Dependency • • • Must be < 16 years for this to displace origin Child acquires if parent has new domicile of choice At 16 years becomes a domicile of choice
The Remittance Basis Income / Gains Res, not Dom Relevant foreign income Overseas earnings ** Foreign gains Res not Ord Res ** Definition not the same. Better if not Ord Res
What is Remittance? • • S 809 L ITA 07 conditions A & B, or C, or D Focus on A & B only Effect: Money &/or Property derived from offshore income / gains brought to UK by a “Relevant Person”, or provides service for or otherwise benefits a “Relevant Person”. “Property” is identified with the income / gains used to acquire it
Remittance Basis • • Relevant Person is the taxpayer, spouse, minor child or grandchild of taxpayer. Remittance in specie taxed post FA 2008. Previously only taxed proceeds on a subsequent sale of property in UK.
Remittances TP Other Was OK. Now not If “Other” is a relevant person
Remittances TP Rel Person School fees for Minor grandchild Non Rel Person Child of Majority Also a “no-no”
Remittances TP Anyone Proceeds Asset Rel Person Sale Possibly OK
Remittance Basis • • • Claims (S 809 B ITA) must state whether not Ord Res, Non Dom, or both. No claim needed if offshore (“o/s”) income & gains do not exceed £ 2000. Planning point: If o/s income & gains are, say, £ 2, 400, remit £ 400. Then apply remittance basis without claim. Only £ 400 is taxed.
Remittance Basis • a) b) No claim required if no UK source income and either: < 18 throughout the year; or > 18 and UK resident less than 7 of previous 9 years. From now on assume a UK res non domiciliary, here 7 out of 9 years and claiming remittance basis.
Remittance Basis • • Consequences of Claim Foreign income / gains taxed under remittance basis (else arising) Loss of SPA / AEA For non doms here 7 ex 9 years, £ 30, 000 charge
Nomination • • £ 30, 000 represents a tax charge on unremitted income / gains. Remittances are taxed in excess. Must nominate income / gains on which the charge applies (such that nominated income / gains at normal tax rates = £ 30, 000)
Nomination • • If nominate too little (say £ 1), you are deemed to have nominated such income as would lead to a £ 30, 000 charge. Such “deemed nomination” occurs whether you have such income or not! The nomination “franks” remittances of nominated amounts. Could cover £ 120, 000 worth of foreign dividends if own < 10%. Nominate as you please.
Remittances Taxed if remitted RB income/gains Nominated £ 30, 000 charge to leave offshore
Remit Nominated Amount? • • • Remit RB income / gains ~ taxed as what they are, unless from a “mixed fund” Remit nominated income / gains, when you have unremitted RB income / gains ~ all o/s income / gains re-characterised for ever. Taxed on remittances per “ordering rules”.
Ordering Rules 1) 2) 3) 4) 5) 6) Foreign earnings not taxed Foreign trade, then rent, then investment income not taxed Foreign gains not taxed Foreign earnings taxed Foreign trade, then rent, then investment income taxed Foreign gains taxed
Ordering Rules • Remittances matched against o/s income / gains of year of remittance, then previous year, then the year before that etc…
Ordering Rules ~ Example • • Igor is non dom RB user, UK res for 10 yrs In 2009/10 he remits £ 1 m, capital gains of many years, but inclusive of 2008/09 nominated amounts In 2009/10 had £ 200 K o/s income & £ 600 K o/s gains In 2008/09 had £ 300 K o/s income & £ 500 K o/s gains
Ordering Rules ~ Example • a) b) c) • • Taxed on £ 1 m remittance as follows: £ 200 K 09/10 income @ 40% = £ 80 K £ 600 K 09/10 gains @ 18% = £ 108 K £ 200 K 08/09 income @ 40% = £ 80 K Total of £ 268 is lower than the expected £ 180 K This applies for ever (2010/11 50% rate!)
Ordering Rules ~ Example Planning Points • Deemed nominated amounts do not count when determining whether nominated amounts have been remitted • Nominate £ 1 only • Do not remit nominated amounts!
Mixed Funds • • • Pre FA 2008 rules: Remittances presumed to be income to extent income paid into fund. New rules for 2008/09 & later. S 809 Q(4) ITA imposes order when remittance from a mixed fund.
Mixed Funds Mixed Fund: • Income from more than one year &/or; • “Capital” from more than one year &/or; • Income & capital &/or; • Different types of income.
Mixed Funds Order: • Employment income, not taxed • Trade, rent, other, not taxed • Gains, not taxed • Employment income, taxed • Trade, rent, other, taxed • Gains, taxed
Mixed Funds Application: • On a year by year basis; • Previously all years aggregated. • This leads to a curious outcome: -
Mixed Funds Curiouser & Curiouser: • Suppose income / gains in a mixed fund: £X • Reinvest in an asset: £X • Sell in later year for £Y. • Ordering rules in year of remittance say £(Y-X) is capital gain. • £X= Capital. Not taxable? • Consequence of use of “capital” in S 809 Q ITA.
Avoid Mixed Funds Hive off income Capital Income Segregation Still OK Remit Capital
Remittance ~ Reliefs • • • Remittances taxed in year of remittance. Not taxed on remittance of income arising in a year of non residence. For income arising when resident, but remitted when not resident, not taxed unless non resident for temporary purpose, come back within 5 years, and resident for 4 of 7 years before leaving ~ in which case, taxed in year of return.
Remittance ~ Reliefs • • • In specie remittance OK if: Jewellery, watches, clothing bought ex foreign trade / rent / investment income, and for use by taxpayer, spouse, minor child or minor grandchild. Relief lost if used by persons other than those.
Foreign Chargeable Gains • • Remittances of non dom RB user gains (realised whilst resident) are charged. Not charged if remitted whilst non resident. S 10 A TCGA could charge in year of return. 2007/08 & prior gains get indexation to 5 th April 1998 when remitted.
Foreign Capital Losses • • • To 5/4/08 o/s losses for non doms not available. Now available if no S 809 B ITA claim (because on arising basis like anyone else). Now also available on S 809 B claim if on first such claim make election under S 16 ZA TCGA.
Foreign Capital Losses Effect of election ~ order of set off • All UK & o/s capital losses aggregated 1) Set 1 st vs o/s gains in year, remitted in year 2) Set 2 nd vs o/s gains in year not remitted 3) Set 3 rd vs UK gains arising in year One off chance to elect (on 1 st RB claim), applies for ever. Could be good or disaster!
Foreign Capital Losses Effect of election ~ Example 1 UK Gain £ 30, 000 o/s unremitted gain £ 30, 000 UK Loss (£ 30, 000) Tax if election made: £ 5, 400 Tax if election not made: £nil
Foreign Capital Losses Effect of election ~ Example 2 UK Gain £nil o/s remitted gain £ 30, 000 UK Loss (£nil) o/s loss (£ 30, 000) Tax if election made: £nil Tax if election not made: £ 5, 400
Income Tax Shelter via Trust • • UK Res non dom settlor (always non dom, analysis for UK doms very different) Non resident trustees (else trust taxed in UK) Discretionary (IIP beneficiary taxed) Foreign source income (S 720 ITA) Settlor / spouse excluded (S 624 ITTOIA) No UK source income if any UK beneficiary to avoid trust rate (S 812 ITA) UK source income only taxed at source if no UK resident beneficiary (S 811 ITA)
Income Tax & Trusts UK Income Taxed @ trust rate If a UK beneficiary Trust Only taxed at source If no UK beneficiary O/S Income Taxed on UK IIP beneficiary Or UK discretionary beneficiary On receipt The restriction on UK source income can be avoided via use of offshore company
Income Tax & Trusts UK Income Trust O/s Co UK income has Become foreign Source income
Income Tax & Trusts • • • Exclude settlor / spouse to avoid S 720 et seq ITA 2007, S 624 ITTOIA; For o/s income in discretionary o/s trust, tax deferred until distribution to UK resident discretionary beneficiary (subject to remittance basis). Ultimate deferral if emigrate.
CGT Shelter & Trusts • • • Need non resident trustees for o/s trust If transfer of UK assets, CGT triggered If transfer of o/s assets, CGT triggered, but not for remittance basis user Can use assets anywhere If a UK dom settlor, exclude settlor, children, grandchildren & spouses to avoid S 86 TCGA attribution of trust gains
CGT Shelter & Trusts • • • Capital payments taxed on UK bens (S 87 TCGA). . but gains not attributed to non dom settlor under S 86 TCGA S 87 gains subject to S 91 TCGA “parking charge” (max 28. 8% (+10% for 6 years)) Thus CGT can be deferred until paid out If paid to settlor, remittance basis applies Hold offshore and emigrate?
Use of Offshore Company • • • Residence determined by location of management and control Income arising from co subject to remittance basis Gains (non trade assets) attributed to participators (S 13 TCGA), even if non dom post FA 2008 Need 10% or more of a “close” company Remittance basis applies to attributed gains on non UK assets (S 14 A TCGA)
Problems with Offshore Co. s • • • S 720 ITA et seq (transfer of assets abroad) Motive defence if a proper trade Bought co for cash? ~ S 720 won’t apply as the transfer of UK funds has not caused income to flow into company
Offshore Funds • • • Collective investment scheme within FSMA 2000 Treated as o/s company If non distributor (<85% income distributed), sale gains treated as income (mostly) gains (OIGs) CGT risk on death ~ no CGT free uplift if non distributor Income tax delayed until remitted (compare trusts where taxed as arising on interested settlor, S 624 ITTOIA). Tax deferral achieved (until emigration? )
Life Policies • • • O/s life policies available on any third party life CGT chargeable if bought for consideration, else not If not acquired for consideration, gains on maturity / surrender taxed as income 5% PA tax free capital remittance (S 507 ITTOIA) Unlike trusts, income tax delayed, and tax free remittances available
CGT, Trust + Company S 720 ITA risk On income Trust S 13 TCGA Gains attributed To trust Not settlor O/s Co Income
CGT, Trust + Company • • If S 720 ITA is in point, company income assessed on settlor / transferor This would offset any S 624 ITTOIA charge on interested settlor on income received from company
CGT, Trust + Company Strategy • Company retains income (avoid S 624 ITTOIA) • Trust “income” on sale of company • Trust gains to settlor only via S 87 TCGA, not S 86 • Thus remittance basis applies • Going non resident pre remittance could be effective subject to S 10 A TCGA (time abroad)
IHT & Non Domiciliaries • • • Non UK situs property not in estate, whilst non dom Become deemed domiciled if UK resident for 17 of 20 consecutive years for all IHT purposes (not income tax or CGT) Act before then, especially regarding excluded property settlements
IHT & Non Domiciliaries • • Property in excluded property settlement not in estate, even if become UK dom Make excluded property settlement whilst non dom, to hold non UK property Better still if non resident, to avoid CGT on transfer Transfer gains now in settlement (post FA 2008)
IHT & Non Domiciliaries • • • Transfer gains in trust will taint clean capital & create mixed fund Therefore avoid adding to existing excluded property settlements ~ make a new one! Need to be non dom to avoid IHT entry charges on non UK property UK Unit trusts also excluded in such a settlement S 720 ITA, S 87 TCGA, S 624 ITTOIA risks
Strategy for Residences Hold via Offshore Company • Co UK resident via control? • PPR lost on sale, S 13 TCGA gain attribution, no remittance basis as UK situs • Benefit in kind? • Remittance basis is available on share sale • Not the best idea!
Strategy for Residences Hold via Offshore Company Held in Trust • Co UK resident via control less likely in offshore trust? • PPR lost on sale, S 13 TCGA gain attribution to trustees, so deferred for settlor • Benefit in kind? • Occupancy is a deemed (remitted) capital payment matched with any actual capital gain in trust ~ ensure house is only asset in structure • CGT deferral hard, but not impossible
Strategy for Residences Hold via Offshore Trust • PPR election possible • Gifts with reservation legislation mean probably still in estate, or pre-owned asset charges apply
Strategy for Residences Hold via Retained Interest Settlement • Barnes Roffe product • Removes from estate in 6 months • Works for UK & non UK domiciliaries
Strategy for Debt Speciality Debt • Situs where deed is physically located • An obligation under seal securing a debt • Need a jurisdiction that recognises deeds
Leaving UK • • • ESC A 11 allows split year treatment for income tax No split year for CGT. All gains in year of departure are taxed (subject to RB) Gains while non resident not taxed on return if S 10 A TCGA complied with (not taxed if UK assets) Sale of UK business still taxed while non resident Sale of shares not taxed, so pre-incorporate
Leaving UK • • Gains on assets held over (S 260, S 165 TCGA) crystallise …but not if have held for six years, or if going abroad to work and return within three years without having sold the asset Gains on assets held over under EIS / VCT crystallise …but not if have held for three years, or if going abroad to work and return within three years without having sold the asset
Trust Migration • • All assets deemed sold / reacquired at open market value Triggers charge on trustees
Company Migration • • All assets deemed sold / reacquired at open market value Triggers charge on company A migrating 75% subsidiary (S) of UK holding company (H) has gains passed to H Crystallise only if H migrates, S ceases to be a subsidiary or if S sells assets within 6 years
Offshore Companies Directly held • S 720 ITA risk (transfer of assets abroad) • Motive defence ~ proper trade • S 13 TCGA attribution of gains (RB if non UK situs)
Offshore Companies Held via UK Holding Company • S 720 ITA risk largely avoided • S 13 TCGA attribution of gains to H Co. • Controlled Foreign Company legislation applies if o/s tax < 75% UK tax • Immigration of S & payment of tax free dividend to H a possibility • H’s tax free money could go to an EBT • For details of that and more, see you at the next seminar!
Barnes Roffe LLP Contact details Barnes Roffe LLP Offices at Central London, East London, Uxbridge and Dartford • • • Keith Mason - Tax Partner - direct line 01322 620216 k. mason@barnesroffe. com Mario Cientanni – Corporate Finance Partner - direct line 01322 620201 m. cientanni@barnesroffe. com Duncan Stannett – General Partner – direct line 01322 620202 d. stannett@barnesroffe. com
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