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For UK residents it was once possible to defer tax on UK trading profits received by an offshore company entitled to reliefs or exemptions from UK tax, under a UK double tax treaty. This technique is now too problematic to be recommended any more. The real show-stopper is s130 of the Taxation (International and Other Provisions) Act 2010 which stops the treaty exemption from enuring to the benefit of a UK resident. The treaty-protected income is now chargeable to UK income tax when it is deemed (by ss720-727 of the Income Tax Act 2007) to be the income of the UK resident shareholder / transferor. In effect s130 stops a tax treaty from being an antidote to ss720-727.
Some commentators take the view that UK residents can benefit from the use of low-tax EU companies to override UK anti-avoidance rules. It is valid to say that s720, by deeming income of, say, a Cyprus company to be the income of a UK resident participator, treats a Cyprus company less favourably than a UK company in the same set of circumstances. However, the reality is that a trade in UK property is a UK trade, and unless there is substantial economic activity in Cyprus, the ability to rely on the EU Treaty Freedoms to conduct a UK trade for UK resident shareholders is going to be questionable nowadays.
Non-EU registered offshore companies (e.g. BVI companies) conducting UK trades are simply chargeable to tax in the UK on the trading profit, either to UK corporation tax or basic rate income tax, depending on whether the BVI company has a permanent establishment in the UK or not. This is regardless of the fact that the BVI company's shareholders and directors are non-UK resident. For UK resident shareholders, use of a non-UK resident BVI company risks s720 income tax charges at the additional rate of 45%.
For UK resident but non-UK domiciled tax payers, trading in UK property via UK companies now seems the sensible course.
The rest of this article considers the tax planning possibilities that surround the use of UK companies as UK property traders for UK resident but non-UK domiciled taxpayers.
For a UK resident but non-domiciled tax payer conducting a property development business in the UK, the advantages of using a UK company include the following:
Alternatively, thought could be given to forming a BVI company instead of a UK company, and ensuring the BVI company is UK tax resident under management and control principles. This would be the case if the UK resident beneficial owner acts as the director. In this way the BVI company offers the following advantages:
For some clients who have legitimate reasons for confidentiality the BVI or other offshore company has the merit of not requiring a PSC register.
Whilst this short article has illustrated the potential problem areas of using offshore companies in UK property trades, the next Focus will examine how offshore companies may still legitimately protect non-UK resident shareholders from unnecessary UK tax exposure, in the course of UK property trades or investment activity.