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18th May 2015
Posted in Articles, Featured Articles, International Tax, Private Client by Forbes Dawson
The Issue
There has always been much talk in pubs about how UK tax can be avoided by simply running an operation through an offshore company in somewhere like Jersey. This is usually rubbish. There is quite a lot of UK tax anti-avoidance legislation which simply acts to assess the income and gains on the shareholders. Therefore people who try this can end up paying a lot of fees for nothing and find themselves the subject of a tax enquiry.
The Opportunity
But let’s not throw the baby out with the bath water here. TCGA section 13 (which is the capital gains bit of the above legislation) only comes into effect for a shareholder who owns over 25% of a company. Therefore there will be cases where it does make sense for groups of investors to set up in Jersey (say) on the basis that any gains which are made can be enjoyed tax free in Jersey. There will still be tax implications when funds are extracted from such a company but often the funds will not be extracted and will be rolled forward into new investments.
In some cases there may be advantages in using Jersey holding companies where future share sales are envisaged but it would usually only make sense to do this when capital gains tax would be payable at 28% (rather than the 10% Entrepreneurs’ Relief rate). Great care is required in respect of these kinds of structures and they will generally only be appropriate if they are set up from the outset or if there is a compelling commercial reason for doing so which will allow HMRC to provide tax clearance.
There can also be scope for shareholders to realise their investments tax-free down the line if for example they leave the UK when they retire.
Example
Four business associates set up a Jersey company to invest in commercial property. After 5 years the company sells the property for a gain of £2M. A UK company would have been subject to tax of £400,000 but the Jersey company pays no tax. Furthermore TCGA section 13 cannot operate on the shareholders as they do not hold more than 25%. Therefore gross proceeds will be available for investment in further projects.
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