As an income shelter where you and your wife are excluded from benefitting from an offshore company

One of the main issues with using an offshore company are the anti avoidance rules that attribute income to UK shareholders or other beneficiaries who can benefit from offshore companies.

The conditions for these rules to apply are (broadly speaking):

  • There must be a transfer of assets by an individual
  • As a result of the transfer income becomes payable to a non-resident person.
  • The transferor must have power to enjoy that income in some way, or receive/be entitled to receive a capital sum.
  • The transferor must be ordinarily resident in the UK in the year of liability.

If all of these conditions are fulfilled, the income which becomes payable to the offshore company is deemed to be that of the individual who made the transfer, to the extent he has power to enjoy that income.

Power to enjoy income

Note that one of the above conditions is that the UK resident must have power to enjoy the income arising to the non-resident company (eg as a shareholder of the overseas company). Even if they did not actually receive any income from the company it is the potential to enjoy the income that is important. As such they would not have to actually receive any of the income at all.

Therefore the simplest option for someone who wanted to use an offshore company tax efficiently could be to use the company for the benefit of their children, grandchildren or other family members. Providing the person who formed the company and their spouse were excluded from benefiting from the company they wouldn’t be caught by these anti avoidance rules.

In practice this would usually mean ensuring that the transferors weren’t shareholders in the company and that dividends from the company weren’t routed back to them from the real shareholders. This is all part and parcel of the economic circumstances supporting the actual reality with the individuals forming the company suffering the loss of income from the company.

By excluding themselves from benefiting from the company the income of the offshore company would not be assessed under these rules on them. The offshore company could therefore be an attractive shelter for foreign income.

Note that:

  • Capital gains could still be attributed to UK shareholders
  • Any dividends extracted from the company by UK resident shareholders would be subject to UK tax unless they were non domiciliaries claiming the remittance basis