Pros and cons of using an offshore holding company under an offshore trust
It’s often preferred to use an offshore trust to hold the shares in an offshore company. This is partly for privacy reasons to provide privacy for the individuals forming the company, but it can have tax advantages too.
The main advantage is that establishing an offshore company as managed and controlled from overseas is less of a problem if the company is owned by a trust. The only people able to exercise control over the directors will be the non resident trustees.
Where you have a UK resident shareholder owning the company the big risk is that HMRevenueCustoms will class the shareholder as influencing the directors to such an extent that they are effectively standing aside and letting the UK resident shareholder run the company. By having foreign trustees exercising the control this is less of a risk.
You do however need to be careful to ensure that the company is really run by the directors or the trustees.
When you set up an offshore trust to hold investments you may be considering whether to also set up a holding company underneath the trust.
Advantages of holding company under the trust
Anti avoidance rules
An advantage of having an offshore holding company applies where the settlor is a beneficiary of the trust. In this case income arising in the company is only attributed to the settlor if the anti avoidance rules apply. These can be avoided by buying an existing company which contains the investments. The trust settlor could then be a beneficiary without being taxed on the income in the company/trust.
Where the trust has UK assets, by using a holding company this restricts UK tax on dividends and interest to any tax deducted at source – rather than the rate for trusts which is 50% for 2011.
Disadvantages of holding company under the trust
If the trust uses a holding company it is necessary to worry about the location of the management and control / company residence issues. If you just had the trustees holding the investments this would not be an issue.
Using a holding company can lead to credit for foreign tax on income to be lost. This is likely to only be an issue where income is not attributed to the settlor and is paid to beneficiaries.
If there is no company the beneficiaries could claim a tax credit for the foreign tax suffered. This advantage is lost if a holding company is interposed.