Author: John Forde
What is happening?
Under pressure from the EU, the UK government is narrowing the scope of two key anti-avoidance measures that affect the taxation of offshore structures (e.g. non UK companies and non UK resident trusts).
A further draft of the proposed new legislation was released on 11 December 2012.
The rules will come into effect when the Finance Bill 2013 receives Royal Assent (expected to take place in July 2013) but certain aspects will apply retrospectively.
Why does it matter?
The anti-avoidance rules in question seek to negate the advantages a UK resident might enjoy by using an offshore structure.
The rules are complex but, in very broad terms, they treat a capital gain made by an offshore company as actually made by a UK resident shareholder and any income arising to an offshore structure as the income of the taxpayer who created it (or if the person who created the structure is excluded from benefiting from it, then the income is attributed to other taxpayers as and when they receive benefits).
The amendments narrow the scope of when a taxpayer with an interest in an offshore structure would be caught by these anti-avoidance provisions.
It would be worth reviewing existing offshore structures to see whether the relaxation to the rules would prove useful in your case. Moreover, as the Capital Gains Tax rules will have retrospective effect from 6 April 2012, it may be worth reviewing disposals that have already taken place to see whether they would now be exempt from a tax charge.
Examples of situations when the proposed amendments might prove useful
A new “motive defence” is being introduced to the provision that applies to capital gains (section 13 TGCA 1992) so that it will not “bite” unless avoiding UK taxation was the main purpose, or one of the main purposes, for setting up the non UK company in the first place.
At present, the rule applies automatically regardless of the reason why a non UK company was established. The new defence might therefore assist where families with no connection to the UK set up an investment holding structure but then fall within the scope of the anti-avoidance rule when a family member subsequently becomes UK resident.
Another example of a potential application of the new “motive defence” might be where a non UK company was established to acquire foreign real estate because using a local company was a legal requirement in the jurisdiction in question.
In addition, section 13 will now no longer apply unless the UK resident has at least a 25% stake interest in the offshore company (previously the threshold was only 10%). This may assist UK residents who have minority interests in joint ventures with non residents.
There has always been a form of “motive defence” in respect of the Income Tax avoidance rules (the so-called “transfer of assets abroad” rules). However, these defences could not be claimed if tax mitigation played more than an incidental part in the decision to establish the structure.
A new defence will be added which will mean that offshore structures will now also be exempt if, viewed objectively, any income derives from “genuine” economic transactions. As this new defence does not take account of the purpose for establishing the structure, it may assist where an offshore structure is established with UK tax considerations in mind (previously such a consideration could have proved fatal to claiming the “motive defence”).
A further new defence to the Income Tax provisions will be available if the taxpayer is able to argue that the application of the anti-avoidance provisions would represent an unjustified and disproportionate restriction on their EU treaty freedoms (such as the free movement of capital or free movement of goods). This may be useful where an offshore structure includes a company in another EU jurisdiction.
John Forde, Associate, Fladgate LLP (email@example.com)