Capital Gains Tax anti avoidance rules for a offshore company
If you’re planning on using an offshore company to take advantage of the capital gains tax exemption then you’ll want to ensure that you carefully review the special anti avoidance rules that apply for capital gains tax purposes.
Broadly speaking these rules apply where a company is non resident if the shareholders are UK resident and domiciled. The effect of the rules is then to attribute the gain to the UK resident/domiciled shareholders. The gain apportioned is on a pro rate basis depending on the interest held in the company by the UK shareholder. This will usually follow the shareholdings, so a UK resident and domiciled shareholder owning 25% of the shares for instance would be attributed 25% of the capital gain in the offshore company. Where these rules apply, they therefore make it much more difficult to use an offshore company for the purposes of avoiding UK capital gains tax. Although the offshore company still has a capital gains tax exemption on the capital gain, the UK resident shareholder is then charged to UK capital gains tax at 18% or 28% depending on their marginal rate of tax.
There are though a few points that should be born in mind.
- the gain apportioned is the gain that would have arisen to the company. This means that you use the company rules to calculate the capital gain – not the rules that apply for individuals. The big advantage to this is that indexation relief is applied to the company’s base cost from the date of acquisition to the date of disposal. In a period of high or rising inflation, using an offshore company could be attractive as the indexation allowance could easily outweigh the loss of the £10,600 annual exemption that is available to individuals
- Any tangible property used wholly for the purposes of a trade carried on outside the UK is excluded from these anti avoidance rules
- Gains on currency are also excluded
- There is a de minims limit of 10%. Therefore if you club together with family or friends and each own <10% of the shares in an offshore company, there would be no attribution of corporate gains.
- Double tax treaties can provide that the gain is taxed wholly overseas. Where this is the case, HMRevenueCustoms accept that this can prevent there being any gain taxed under this provision.
- If you have an offshore trust holding the offshore company, the gains would be attributed to the offshore trust. Providing the trust is not a settlor interested trust you could look to hold the proceeds within the trust until beneficiaries were non resident when they could then extract the proceeds free of capital gains tax.
- UK residents who are non UK domiciliaries and who claim the remittance basis can avoid being attributed gains under these provisions by retaining the income/proceeds overseas.
There are therefore still methods to use the company to avoid the attribution of gains under these anti avoidance rules. We’ve looked at these in more detail on our Offshore Company – Tax Planning page.
Capital Gains Tax avoidance in a treaty country