Offshore companies

Planning for international private clients often involves the use of non-UK resident companies, whether owned directly by individuals or through an offshore trust/company structure.

Offshore companies are mainly used for UK tax planning when the owner is non-resident or UK resident but not domiciled in the UK. For guidance on the taxation of non-resident individuals and UK resident non-domiciliaries, see the Non-resident individuals—overview and the Non-domiciliaries and the remittance basis—overview.

As a general rule, directly owned offshore companies holding investments and other assets cannot be used to shelter income and gains from UK tax if the owner is UK resident and domiciled. This is the effect of two codes, the transfer of assets code (TAA Code) directed at income and section 3 of Taxation of Chargeable Gains Act 1992 (TCGA 1992) at capital gains. See: UK resident individuals—taxation of income derived from assets held within offshore companies and UK resident individuals—taxation of capital gains derived from assets held within offshore companies below. See also Clarke's Offshore Tax Planning—Trusts and Companies:

  1. Chapter 6 Non—resident companies [6.1], and

  2. Chapter 15.1 Underlying

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FTT holds that OIGs and AIPs arising in offshore protected trusts are not protected foreign source income (Louwman v Revenue and Customs Commissioners)

Private Client analysis: The case of Louwman v Revenue and Customs concerned Ms Louwman, a UK resident non-domiciled taxpayer who had set up offshore protected property trusts on 7 March 2017, just prior to the implementation of the deemed domicile regime on 6 April 2017. Ms Louwman sought to shield income and gains in those trusts from taxation after she became deemed domiciled for the tax year commencing 6 April 2018, on the basis that the trusts were offshore protected property trusts and the income and gains in those trusts would not be attributed to her on an arising basis. HMRC assessed Ms Louwman to income tax on the basis that offshore income gains (OIGs) and accrued income profits (AIPs) that had arisen in the offshore protected trusts were subject to income tax on an arising basis. Ms Louwman resisted the assessments on the basis that these items of income were ‘protected foreign source income’. The matter went to the irst-tier tribunal for determination and the tribunal considered that the items of income were not ‘protected foreign source income’ on the basis that they could not be said to have a source, and particularly a foreign source. The tribunal therefore considered that they should be subject to income tax. The tribunal also considered that it was not appropriate to take a rectifying interpretation of the definition of ‘protected foreign source income’ in section 721A of the Income Tax Act 2007 (ITA 2007) even though OIGs and AIPs may have been omitted from the definition of protected foreign source income by the inadvertence of Parliament. Written by Ben Symons, barrister at Old Square Tax Chambers.

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