Taxing assets abroad
The most common schemes or arrangements devised to minimise UK taxes (if you are UK resident) place assets in the hands of an offshore trust, offshore company, or non-resident individual. Income from the assets is then taxed offshore and escapes UK tax. The problem is that if you then derive some form of benefit from that income you will find that you have an income tax charge under the UK’s anti-avoidance provisions.
When you are ordinarily resident in the UK, you are taxed on your worldwide income whether or not you actually receive it in the UK. When you are non-resident, you are, in general, only taxed on your foreign income to the extent that it is brought in, or remitted to the UK.
Trusts: If you set up an offshore trust, and you retain an interest in the trust (so you are not excluded in any way from benefiting from its income), then you will be taxed on the income of the trust. This will also apply to you if you were non-resident when you set up the trust, and then became UK resident at a later date.
Companies: If you transfer some of your assets to an offshore company, and derive a benefit from the income of those assets, anti-avoidance rules apply to tax you as if the company’s income is your own. These apply even if you do not directly own the company. Offshore companies which are under the control of UK residents are subject to Controlled Foreign Company (CFC) anti-avoidance provisions. These serve to remove any corporation tax advantage that may be obtained by setting up the company in a low tax jurisdiction.
Individuals: If you transfer your property to another individual, whether resident or non-resident in the UK, but you continue to derive benefit from that income, you will be taxed on it as if you still owned the asset which produced it. There will not be a double tax charge if your property is already taxed in the UK under the remittance basis.
The rules targeting tax avoidance through the transfer of assets abroad are very far-reaching. They apply where a UK resident enjoys income or a capital sum derived from an asset. The rules further extend to impose a tax charge by virtue of related transactions. So the individual who is taxed need not necessarily be the same person as the one who transferred the assets abroad originally.
Anti-avoidance legislation is extremely complex. Please contact us if you are thinking of transferring assets abroad or if you think you might be affected by these rules.