BARNES ROFFE LLP

Offshore Tax Planning

DARTFORD FOOTBALL CLUB

21 MAY 2009

Residence

Assessment of Taxes• Capital Gains Tax

Resident or Ordinarily Resident, and:-• Domiciled: Worldwide gains• Not domiciled: UK situs property, with

remittance basis available for non UK situs property

Residence

Assessment of Taxes• Income Taxa) Resident or Ordinarily Resident,

Domiciled: Worldwide incomeb) Not Ordinarily Resident: Remittance basis

available on certain non UK incomec) 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

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

ResidenceRelieving Provisions• S830 ITA: If working abroad ignore UK

accommodation• S831 / S832 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 IR20 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.

ResidenceSummary• UK accommodation can be important• Its not only factor• If leaving UK, show a break in habit• S831 / S832 ITA can give relief if here

temporarily• A home abroad can help• HMRC’s position in IR20 is often without legal

basis and can’t be relied upon• 183 & 90 day rules are guides

Domicile

Three Types• Origin• Choice• DependencyAcquiring 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 BasisIncome / Gains Res, not Dom Res not Ord Res

Relevant foreign income

Overseas earnings **

Foreign gains

** Definition not the same. Better if not Ord Res

What is Remittance?• S809L 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 FA2008.

Previously only taxed proceeds on a subsequent sale of property in UK.

Remittances

TP

OtherWas OK. Now not

If “Other” is a relevant person

Remittances

TP

Non Rel Person Also a “no-no”

RelPerson

School fees forMinor grandchild

Child of Majority

Remittances

TP

Rel Person Possibly OK

Anyone

Proceeds

Sale

Asset

Remittance Basis• Claims (S809B 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• No claim required if no UK source

income and either:-a) < 18 throughout the year; orb) > 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

RB income/gains

Nominated

Taxed if remitted

£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) Foreign earnings not taxed2) Foreign trade, then rent, then investment

income not taxed3) Foreign gains not taxed4) Foreign earnings taxed5) Foreign trade, then rent, then investment

income taxed6) 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 £1m, capital gains of

many years, but inclusive of 2008/09 nominated amounts

• In 2009/10 had £200K o/s income & £600K o/s gains

• In 2008/09 had £300K o/s income & £500K o/s gains

Ordering Rules ~ Example• Taxed on £1m remittance as follows:-

a) £200K 09/10 income @ 40% = £80K

b) £600K 09/10 gains @ 18% = £108K

c) £200K 08/09 income @ 40% = £80K• Total of £268 is lower than the expected

£180K• 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.• S809Q(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 S809Q ITA.

Avoid Mixed Funds

Capital Income

Segregation Still OK

Hive off income

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.• S10A TCGA could charge in year of return.• 2007/08 & prior gains get indexation to 5th

April 1998 when remitted.

Foreign Capital Losses• To 5/4/08 o/s losses for non doms not

available.• Now available if no S809B ITA claim

(because on arising basis like anyone else).• Now also available on S809B claim if on

first such claim make election under S16ZA TCGA.

Foreign Capital Losses

Effect of election ~ order of set off• All UK & o/s capital losses aggregated

1) Set 1st vs o/s gains in year, remitted in year

2) Set 2nd vs o/s gains in year not remitted

3) Set 3rd vs UK gains arising in year

One off chance to elect (on 1st RB claim), applies for ever. Could be good or disaster!

Foreign Capital LossesEffect 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 LossesEffect 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 (S720 ITA)• Settlor / spouse excluded (S624 ITTOIA)• No UK source income if any UK beneficiary to

avoid trust rate (S812 ITA)• UK source income only taxed at source if no UK

resident beneficiary (S811 ITA)

Income Tax & Trusts

Trust Only taxed at source If no UK

beneficiary

Taxed on UK IIP beneficiaryOr UK discretionary beneficiary

On receipt

O/S Income

UK Income

Taxed @ trust rateIf a UK beneficiary

The restriction on UK source income can be avoided via use of offshore company

Income Tax & Trusts

Trust UK income hasBecome foreignSource income

UK Income

O/s Co

Income Tax & Trusts• Exclude settlor / spouse to avoid S720 et

seq ITA 2007, S624 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 S86 TCGA attribution of trust gains

CGT Shelter & Trusts• Capital payments taxed on UK bens (S87 TCGA)• ..but gains not attributed to non dom settlor under

S86 TCGA• S87 gains subject to S91 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

(S13 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 (S14A TCGA)

Problems with Offshore Co.s• S720 ITA et seq (transfer of assets abroad)• Motive defence if a proper trade• Bought co for cash? ~ S720 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, S624 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 (S507 ITTOIA)• Unlike trusts, income tax delayed, and tax free

remittances available

CGT, Trust + Company

TrustS13 TCGA

Gains attributedTo trust

Not settlor

S720 ITA riskOn income

O/s Co

Income

CGT, Trust + Company• If S720 ITA is in point, company income

assessed on settlor / transferor• This would offset any S624 ITTOIA charge

on interested settlor on income received from company

CGT, Trust + Company

Strategy• Company retains income (avoid S624 ITTOIA)• Trust “income” on sale of company• Trust gains to settlor only via S87 TCGA, not S86• Thus remittance basis applies• Going non resident pre remittance could be

effective subject to S10A 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• S720 ITA, S87 TCGA, S624 ITTOIA risks

Strategy for Residences

Hold via Offshore Company• Co UK resident via control?• PPR lost on sale, S13 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 ResidencesHold via Offshore Company Held in Trust• Co UK resident via control less likely in offshore

trust?• PPR lost on sale, S13 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 A11 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

S10A 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 (S260, S165 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• S720 ITA risk (transfer of assets abroad)• Motive defence ~ proper trade• S13 TCGA attribution of gains (RB if non

UK situs)

Offshore CompaniesHeld via UK Holding Company• S720 ITA risk largely avoided• S13 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 LLPContact details

Barnes Roffe LLPOffices 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