View the related Tax Guidance about Transfer of assets abroad
Transfer of assets abroad code
Transfer of assets abroad codeIntroductionThe code is a widely drafted set of anti-avoidance provisions that seek to prevent the avoidance of UK taxation by transferring assets abroad. For the code to apply, there needs to be a transfer of assets by a UK resident individual, such that income deriving from those assets becomes payable to a ‘person’ abroad. This guidance note outlines the elements of the code and where it fits into the non-UK resident trust landscape. In its simplest form, the code will attach to arrangements involving non-UK trusts, companies and foundations into which ‘assets’ are transferred by a UK resident individual. The definition of asset is very widely cast and can be sited within or without the UK.There is a degree of overlap between the provisions of the code and other provisions relating to the taxation of income or capital gains. These are noted in the text with an indication of which rules take precedence.In addition, there is a ‘motive defence’ to the charging provisions, which provides an exemption to the code where there is no tax avoidance purpose or where a genuine commercial reason for the transfer exists. See below. Refer to INTM600160 for a checklist of indicators of arrangements caught by the code.What is a transfer of assets abroad?The code applies when a ‘relevant transfer’ occurs. To counter what is regarded as an avoidance transaction, the individual who makes the transfer or who benefits from it becomes subject to income tax. The key terms are
Inbound migration
Inbound migrationReasons for an inbound migrationMigration describes the situation when a company changes its tax residence. A company which is not incorporated in the UK may become resident for tax purposes in the UK if it becomes centrally managed and controlled in the UK.The Government is currently consulting on whether or not to introduce a corporate re-domiciliation regime. The consultation closed on 7 January 2022 and the response is expected to be published by HMRC in due course.See the Residence of companies guidance note.In many cases, this may happen accidentally, but a well-advised company will avoid this by taking appropriate action to ensure that central management and control is kept outside the UK.However, in some cases, there may be tax benefits of a company becoming resident in the UK, for example:•to take advantage of a UK double tax treaty•to avoid the application of anti-avoidance rules such as the attribution of gains under TCGA 1992, s 3 (formerly TCGA 1992, s 13) ― see the Gains attributable to participators in non-UK resident companies guidance note ― or the transfer of assets abroad rules, see Example 1•to qualify under the subsidiary substantial shareholding exemption (TCGA 1992, Sch 7AC, para 3, which requires the investing company to be resident in the UK), see the Substantial shareholding exemption (SSE) ― overview guidance note which also sets out legislative changes in this area applicable from 1 April 2017
Non-domiciled and deemed domiciled beneficiaries
Non-domiciled and deemed domiciled beneficiariesIntroductionThe current tax position of non-domiciled and deemed domiciled beneficiaries of non-resident trusts is a complex landscape mapped by successive changes in the law. Before 2008, UK resident but non-domiciled beneficiaries were protected by a cost-free remittance basis option for income tax and, like non-domiciled settlors, they were exempt from attribution of capital gains within the trust. Major changes in 2008, 2017 and 2018 have incrementally brought non-domiciles into the regime under which UK domiciled beneficiaries of non-resident trusts are taxed.Changes introduced in 2008 scaled down some of the advantages of long-term non-domiciled status. The remittance basis charge was introduced to impose a cost on accessing the benefits of the remittance basis. See the Remittance basis ― overview guidance note in the Personal Tax module. At the same time, changes were made to the taxation of non-domiciled beneficiaries of non-resident trusts to bring their benefits from the trust within the scope of capital gains tax.Notwithstanding the imposition of a charge for the use of the remittance basis, public and political opinion continued to oppose the non-domiciled advantage. As a result, Finance (No 2) Act 2017 introduced the concept of deemed domicile for income tax and capital gains tax for the first time. Long-term residents of the UK, and those who were originally UK domiciled, can no longer benefit indefinitely from the remittance basis. Once they satisfy the conditions for deemed domicile, they become taxable on their worldwide income and gains.In conjunction with the introduction of
Tax on UK resident beneficiaries of non-resident trusts ― overview
Tax on UK resident beneficiaries of non-resident trusts ― overviewIntroductionUK resident beneficiaries of non-resident trusts are subject to UK tax on payments or benefits received from the trust. They are liable for income tax on income distributions from the trust and they may also be liable to income tax or capital gains tax on payments of capital from the trust.In contrast to UK settlors of non-resident trusts, the liability of beneficiaries is determined by the extent of their entitlement or the amounts actually paid to them. They have no UK tax liability in a year in which they have not benefited from the trust. See the Tax on UK resident settlors of non-resident trusts guidance note.This guidance note provides an overview of the tax treatment of both income distributions and capital payments, and provides links to more detailed material.Income or capitalIn order to establish which tax provision applies, one must first determine whether the payment or entitlement is of income or capital. With a non-resident trust, an income distribution is always subject to income tax in the UK resident beneficiary’s hands. A capital distribution may be subject to income tax or capital gains tax, or not subject to tax at all.The general rules, which apply equally to both UK resident and non-resident trusts, are that:•a payment out of available trust income is income of the beneficiary•a payment from capital, or from income which has been formally accumulated, is a payment of capital•exceptionally, a payment from trust
Notional income and anti-avoidance for tax credits
Notional income and anti-avoidance for tax creditsThis guidance note considers special tax credit rules which can treat someone as having income they have not actually received.Migration of tax credits to universal creditNew claims for tax credits are no longer possible as they have been replaced by the universal credit for all claimants. Existing claimants will continue to receive tax credits until they are migrated to the universal credit system. Migration will take place when a change in circumstances is reported or when a migration notice letter is received. This is expected to be completed in 2024. There is information about migration notice letters on the GOV.UK website.See the Universal credit guidance note.Anti-avoidance for tax creditsThe tax credits legislation makes very little mention of specific anti-avoidance rules. Instead, it refers to ‘notional income’ which is income that is treated as the claimant’s income even though the claimant did not receive it. For example, these rules apply where claimants:•deliberately get rid of income in order to claim or increase their tax credits•fail to apply for income to which they are entitled•provide a service for low rates of paymentTCTM04801When advising a director of an owner-managed company in relation to tax credits, this is a key point. Clients may think that drawing minimal income from their company will enable them to increase not only tax credit claims but also give access to other Government support. The notional income provisions overrule such an approach.There are four different types of notional income
Entity classification
Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:•Introduction to CFCs•Shareholder issues ― international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:•the availability of business asset disposal relief (previously known as
Domicile
DomicileIntroductionDomicile is one of the key factors to consider when deciding whether, or to what extent, an individual is liable to tax in the UK. The other is residence, see the Residence ― overview guidance note. As mentioned below, non-domiciliaries are able to use the remittance basis of taxation in the UK, which means that their foreign income and gains are not taxable in the UK unless they are brought to the UK. This guidance note explains what domicile is, why it matters, how to change it and how to report non-domiciled status to HMRC. Note that other countries may have different interpretations of domicile from the UK.In Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025 and that the UK taxation of worldwide income and gains will be based on conditions relating to an individual’s residence status rather than their domicile. This means that the concepts of domicile and deemed domicile will no longer be relevant for income and gains arising on or after 6 April 2025. For details of the changes, see the Abolition of the remittance basis from 2025/26 guidance note.Currently, an individual’s domicile and deemed domicile status also determines their liability to inheritance tax (IHT), as discussed below, and it is also expected that this will move to a residence-based regime. The technical rules will be consulted on before the new regime takes effect, which will not be before 6 April 2025. One proposal is that there
Shareholder issues ― international corporate structures
Shareholder issues ― international corporate structuresThis guidance note outlines how an international corporate structure can affect the tax position of UK resident individuals who are shareholders, as follows:•gains made in the corporate structure may be taxable on the shareholders personally ― see the Gains attributable to participators in non-UK resident companies guidance note•income arising in the corporate structure may be taxable on the shareholders under the transfer of assets abroad rules•special rules apply to individuals holding shares in offshore fundsIn addition, certain reliefs such as under the EMI or EIS schemes require that the group carries on business in the UK. However, other reliefs, such as business asset disposal relief (previously known as entrepreneurs’ relief), are available regardless of where the holding company is located, and regardless of where the group carries on business. See the Enterprise investment scheme ― introduction, Enterprise management incentive schemes and Conditions for business asset disposal relief guidance notes.It is important to consider these issues when advising an international corporate group, as they will determine the after-tax return to the shareholders.Similar rules may apply to shareholders resident in other countries, and these should also be considered. Local tax advice would be required for this purpose.Transfer of assets abroadThe objective of these rules is to charge tax on income which has been transferred to a non-resident entity (including a company), and which would otherwise have been subject to tax in the hands of a UK resident individual.These rules are complex and
Foreign self-employment
Foreign self-employmentTrading in another jurisdiction involves many issues, only some of which involve taxation. Advice should be taken, not only in relation to tax but on the wider business implications. For an overview of the points to consider for certain jurisdictions see Tolley's Global Mobility: Personal Taxes. For example Tolley's Global Mobility: Personal Taxes, IR2.8. which covers the Republic of Ireland.This note deals in broad outline with the tax issues facing a self-employed person who is trading overseas. It then considers some issues that are specific to partners.The tax regime in the overseas country is also very important. Its specific rules, and the ways in which the two systems interact should both be explored before decisions are taken. This note does not discuss any tax issues that might arise in other jurisdictions.Is there an overseas operation?A sole trader or partnership that is based in the UK and merely sells goods or services to customers overseas is not normally subject to foreign taxes on profits. To be taxable there must generally have a permanent establishment. Different rules may apply for VAT, see below.A permanent establishment is usually either a fixed place of business in the overseas country, or a ‘dependent agent’. A dependent agent is one who habitually exercises authority to do business on behalf of the UK enterprise. The meaning of permanent establishment is discussed in detail in the Permanent establishment guidance note.If the UK business has premises overseas that are used only to store or display goods, or
Non-domiciled and deemed domiciled settlors
Non-domiciled and deemed domiciled settlorsSignificance of domicile for non-resident trustsThe extent of a trust’s liability to UK income tax and capital gains tax is dependent upon its residence status. Within the trust, the liability of a non-resident trust is restricted to UK source income. See the UK tax position of non-resident trusts guidance note.Since non-resident trusts may escape liability to UK taxation on their foreign income and gains, there are extensive anti-avoidance rules which charge UK residents who have created or benefited from them. These provisions and their application to UK resident and UK domiciled individuals are described in more detail in other guidance notes in this sub-topic. Their scope is so wide that the incidence of tax on UK domiciled settlors and beneficiaries of non-resident trusts is at least as burdensome, if not more so, than that of UK resident trusts.However, for non-UK domiciled settlors, there has been some mitigation from UK tax liabilities. Historically, individuals of foreign domicile who became resident in the UK have been able to avoid UK taxation by retaining their wealth within an offshore trust. By claiming the remittance basis of charge, a non-domicile could limit his UK tax liabilities to the income and gains he brings in to the UK. Meanwhile, if he chose a low tax jurisdiction for his trust, the non-remitted income and gains could accumulate virtually tax-free within the protection of the trust.Changes were introduced in 2008 to scale down some of the advantages of long-term non-domiciled status. The
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