Offshore companies
Benefits for a non-UK resident and/or non-domicile owning UK assets
If you are non-UK domiciled but wish to own assets which are legally situated in the UK, such as land or UK company shares, then these assets will be exposed to inheritance tax (IHT) on your death. This exposure can be avoided by holding the assets in an offshore company. (If the asset consists of your main residence in the UK, this might create other tax issues which would need to be managed carefully so further advice should be sought in such circumstances.)
Similarly, if you are non-UK resident and own UK property which generates an income then this income will be exposed to UK tax at a maximum rate of 40%. This exposure can be reduced to 20% by owning the property in an offshore company.
Case study
Mr Gates purchasing a UK property
Mr Gates, who is neither UK resident nor a UK domicile, is considering purchasing a UK property. If the property is purchased via an offshore company the liability to UK taxation on the rental income can be restricted to 20% for as long as he remains a non-UK resident.
There will be IHT benefits to Mr Gates if he holds the property via an offshore company as any UK property held directly by Mr Gates will be subject to 40% IHT on his death. If UK property is held via an offshore company, the asset included within Mr Gates’ estate on death is shares in an offshore company, a non UK asset. Consequently, no IHT will be payable on the UK property on death.
Benefits for a non-UK domiciled UK resident
If you are UK resident but are investing in UK property, and wish to do this through a company, an offshore company will almost certainly be more tax efficient than a UK company. This is because a UK company pays corporation tax at a maximum rate of 28% on any profit on the sale of the company and further tax of either 18% or 25% on any extraction of the proceeds from the company.
Therefore, the cumulative tax burden is 41% if the company is wound up after making the disposal, or 46% if it pays you a dividend. If, instead, an offshore company is used the individual CGT rate of 18% will apply to the capital gain provided the proceeds are distributed by a liquidation of the company within three years.
Case study
Mr Cook purchasing a UK property
Mr Cook, who is UK resident but non-UK domiciled, is considering purchasing a UK property via an offshore company.
Supposing the company purchases a property for £1.2 million and eventually sells it for £2.7 million (realising a profit of £1.5 million), the resulting tax liability would be as follows:
Example of Mr Cook's potential tax liabilities
Example 1 - Sale of property by UK Company followed by a dividend extraction of the profits on sale
|
|
Amount |
UK tax payable |
|
Gain on disposal of the property by the UK company (tax at 28 per cent) |
£1,500,000 |
£420,000 |
|
Dividend extraction (UK higher rate tax at an effective rate of 25 per cent) |
£1,080,000 |
£270,000 |
|
Total tax paid |
|
£690,000 |
Example 2 - Sale of property by UK Company followed by a liquidation of the Company by Mr Cook
|
Amount |
UK tax payable |
|
|
Gain on disposal of the property by the UK company (tax at 28 per cent) |
£1,500,000 |
£420,000 |
|
Liquidation of the company by Mr Cook, the company’s value being the gain of £1.5 million less the tax already paid of £420,000 (tax at 18 per cent) |
£1,080,000 |
£194,400 |
|
Total tax paid |
|
£614,400 |
Example 3 - Sale of property by offshore company followed by a liquidation of the company by Mr Cook
|
|
Amount |
UK tax payable |
|
Gain on disposal of the property by the offshore company (tax at 18 per cent) |
£1,500,000 |
£270,000* |
|
Liquidation of the company by Mr Cook ( the company’s value being the gain of £1.5 million less the tax already paid of £270k) |
£1,230,000 |
nil |
|
Total tax paid |
|
£270,000 |
* UK CGT payable by Mr Cook personally when the property is sold by the offshore company
An offshore company can also be used to shelter from CGT arising on the sale of assets other than UK land (such as, private company shares) or from non-UK assets. This is achieved by using another company incorporated in a country with which the UK has a suitable double tax treaty. The effect is to defer the tax on the capital gain arising until the proceeds are paid out as a dividend. This tax can, in turn, be avoided by being non-UK resident at the time.
The information above should not be construed as the provision of tax advice. We are not qualified to provide tax advice and recommend that you seek advice from a professional tax adviser. Levels and bases of tax referred to above are those applying under legislation in force at the time of writing the relevant article. These levels and bases may change and the availability and value of any tax relief will depend on your individual circumstances. Customers may also be subject to the tax regime where the offshore company is held.
