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Investing In The UK Through An Offshore Company To Avoid UK Tax

Capital Gains Tax Holding UK investment via an offshore company would look at first glance to be a good way of avoiding UK capital gains tax. As the company is non UK resident,and provided the assets aren’t used for the purpose of a UK trade they will be exempt from UK capital gains tax (or more correctly corporation tax on the capital gain).

Note though that this tax exemption only applies if the company retains the cash until the shareholder is non UK resident or if the cash is retained overseas. Any extraction of the proceeds would be taxed to the extent that they were remitted to the UK. So whether a simple dividend is paid or if the company is liquidated and a capital distribution is paid the cash would need to be retained offshore. If you wanted to enjoy the proceeds in the UK you’d need to think about methods of remitting the proceeds with minimal UK tax implications.

A big problem with using an offshore company is in ensuring it’s controlled from overseas. If it was controlled from the UK it would be UK resident and as such taxed in full on any capital gains realised. If the company owns UK assets it makes it more difficult to avoid the company being classed as UK resident.

Inheritance taxUsing an offshore company is a big advantage for inheritance tax purposes, as it converts a UK asset into an overseas asset. As non UK domiciliaries are not subject to Inheritance tax on overseas assets they can then avoid tax on the UK property owned by the offshore company. One point to note here is that it’s important that the company shares pass on registration. They will then be classed as located where the share register is – which if this is outside the UK will ensure that the shares are excluded property.

Income taxA directly owned foreign holding company can at the most only achieve only a a partial avoidance of UK tax. Income tax, unlike capital gains tax is still taxed on UK source income. Therefore even if an offshore company is used, UK tax will still be charged on UK income.

However there are benefits to be obtained from using an offshore company. For example there can be a saving of higher rate tax as non resident companies are subject to the lower or basic rate of tax in respect of UK source income. Note though that you can obtain some income (eg UK bank interest) free of UK tax. This is because tax on this income is restricted to tax deducted at source if the recipient is a non resident.

SummaryAn offshore company investing in the UK can look to achieve the following tax benefits:

Avoidance of capital gains tax
Avoidance of inheritance tax
Partial avoidance of income tax

Anti avoidance rulesAside from the company residence position – which is always an issue where you have an offshore company with UK shareholders there are also the anti avoidance provisions to consider.

Note that there is also the related issue that if an individual exercises control over the company and makes it UK resident there is a risk that he may be a shadow director and any benefits provided to him (or his family) from the company would be charged to income tax.

The main anti avoidance provision that applies to income is S739. Although there is an exemption for non UK domiciliaries this does not apply to the company’s UK income.

Therefore if the offshore company had UK investment income this provision would deem the income of the company to be that of the person establishing/transferring to the company originally.

Another useful point to note is that S739 applies to any foreign registered company.

When can the anti avoidance rules be avoidedOne is where the UK individual buys a company that already has the UK investments in it. Provided he doesn’t inject any further assets to the company he shouldn’t be within the scope of the legislation (as he’s not made a transfer of assets resulting in income accruing to the company).

Secondly there is the motive defence which applies where the transfer was not for the purposes of avoiding UK tax, and was for a wholly commercial purpose. One case where this is more easily satisfied is where a non domiciliary established the company before coming to the UK.

When can the offshore non resident company be used as a tax shelter for UK investments?It can be used to avoid UK Inheritance tax It can be used to avoid UK tax on any capital gain It can be used as a partial shelter for UK income if S739 is avoided in one of the above ways.

However any extraction of the income or proceeds from the company to the UK would be subject to UK tax. Therefore ideally income/proceeds should be retained overseas.

Tax and Financial Strategy for Canadians – Donate, Recover Your Taxed Income and Invest

An early start in your tax and financial planning will Canadian taxpayers to save money that later serves to invest wisely. Learning about tax credit opportunities in the beginning of the year as part of your financial planning can make you save money later on. Tax planning always involves taking decisions early that later will have a n effect in how much money do you save. One way to save in taxes and give your financial planning a boost is with the “Donate, recover your taxed income, and invest” strategy.

This strategy can help you to keep more of your hard-earned dollars and boost your family’s net worth. The Income Tax Act allows Canadian taxpayers to make donations to registered charities and then claim up to 50% of the amount donated. If you take advantage of a donation, your tax refund will increase as much as twice the size you thought it was. It lets you to recover close to 30% of our salary income withheld by the government as income tax. It is like having a raise every year of 30%.

Personally, part of our tax and financial planning has been participating with Mission Life Financial, helping us to finance AIDS pharmaceuticals donated to a registered Canadian charity. After hours of research, analysis and due diligence, I decided to take part in this tax saving strategy with the following very successful results: In 2008, I got a tax credit of Cdn$8,977.23, and in 2009, the tax credit was Cdn$8,544.24. For 2010 I already donated and I’m expecting a tax credit close to Cdn$21,729.

The questions you might have now are: What we’ve done with this money? How much of these money has used to fuel our financial planning strategy? How much our net worth has increased? I’ll tell you that the 2008 tax credit helped me to juggle the economic downturn where, thanks God, I became unemployed; therefore, we didn’t do any investment. With 2009 tax credit, I learned how to invest in tax liens in USA and started investing in tax liens in Indiana’s commissioner’s sales. We foreclosed in 4 properties, and today, our net worth increased exponentially. With 2010 tax credit, we are planning to do the same: Invest in tax liens.

Managing and building personal wealth is very important and can start with this excellent tax and financial planning strategy. Having the funds available for investment purposes it’s often a challenge but participating in a tax saving program like Mission Life Financial could be the mean of freeing capital or cash that otherwise is not available. Donating, recovering your hard-earned income, and invest; again and again, year after year, it’s very simple and an easy strategy to do. If I have been able to do it, any Canadian taxpayer can do the same. It is not rocket science. It is decision taking action.

How to Fix Income Taxes

In 1913 the U.S. Congress enacted the 16th amendment to the Constitution which made income tax a permanent reality and gave the Congress the legal authority to tax income for both personal and corporate income. Since then that has been the only thing constant in the evolution of the every changing tax code. The difference between man-made and God made, is that when man gets a hold of something the only thing constant, is change.

I have prepared taxes for over 20 years. I don’t think that the tax code in its sense of “fairness” has been any worse. When you have college graduates who because of the high cost of a secondary education, took out student loans and are now struggling to payoff their debt come to find out that they can not deduct their interest paid, something is wrong. The reason is because the tax code is claiming that their income is too high for them to take the deduction. I say isn’t that the reason why they went to school? Others may say, well that sounds correct, these people are rich, why should they get a deduction and pay less income tax.

But if you look at the threshold, you are barely in the middle class when you go over the amount stated in the tax code. If your single or a head of household your deduction starts to phase out when you have a modified gross income of $65,000 and is non deductible at $80,000. This is double if your married filing jointly. For a single mom with two kids $80,000 is NOT rich. After I prepare her income taxes, many times even after paying 10% in federal with holding tax, she still has a couple of thousand to pay the rest of the income tax owed. I as a C.P.A. feel for their situation and try to come up with solutions for her in the future.

On the other hand, there are single mothers who barely work. Never went to school, have two children. When I am finished preparing their income tax, they get easily over $5000 as a refund, many times they do not even pay one dollar to the U.S. Treasury. You would think they would be happy with the large refund, however sometimes they get disgruntled because “last year I got more”.

This is just one example I can go on and on. Just talk to any tax preparer and their eyes will light up when you ask them if the tax code is fair. So I do not want to beat on a dead horse. This article shall focus on the solution and not the problem.

Michele Bachmann, when she was running for president in 2012, was astonished when she learned that about 50% of the population in the United States do not pay income tax. She was astonished because everyone in the United States is protected by our military, which cost upwards of a trillion dollars per year, and her point was that people should at least pay one dollar. In reality it is worse than that, because most of those people who do not pay income tax get free money from the federal government. They are actually in the negative tax bracket. That is why Christmas, I have said, is not in December it is actually in February, the beginning of tax season. Sorry I regressed. But this gets me to my point.

This taxing of income is counter productive. I have told clients when their income tax got really high, was to take long vacations. Don’t work, don’t be productive. Why would you want to keep on working for less of the pie? Only stupid people work their asses off so that they can pay a higher percentage of their income to the U.S. Treasury. The “poor” are the smart ones. They get something for nothing. But what gets me is that they still complain. The people who are paying the taxes should be the ones complaining. They are paying for themselves and then some.

Our tax structure is insane. No one has come to me and said, “Rich, this year I want to pay a boat load of income tax. I mean really whack me.” It is always “Lets try to keep the taxes as low as possible.” So the dilemma is how do we as a nation pay for all the federal government programs that have to be paid and at the same time have it viewed, by most, as fair.

The only way to do this is with a hybrid consumption/income tax system. We are familiar with the consumption that it is another way of saying sales tax. Yes, this is the best way to fundamentally have everyone pay into the system. The trick is to get a percentage that will pay the programs needed and at the same time not curtail spending. I am not so much worried about spending because we as Americans love to spend. It is practically a hobby.

Many people feel that corporations are not paying their fair share. They have lawyers and accountants whose only job is to find out creative ways to minimize the corporations taxes. All in the name of the shareholders. Of course the CEO and executives do not get any bonuses or stock privileges, oh no. Corporations spend a tremendous amount of money purchasing goods and services and all of that would be taxed. Poor executives, it’s a shame when your paid only a million or two.

Think about it, all the money that criminals get from selling illegal drugs would get taxed when they go out and buy. Right now, the current tax structure misses out on all of that income. That was one of the main reasons why marijuana was legalized in Colorado and Washington.

What this tax structure does is spread out the amount of people paying into the system, it increases it two-fold. Unfortunately for some, Christmas will only be in December, however if your income is low you will still qualify for all of the other programs that the federal government already has, Medicaid, food stamps, etc. Also with taxes coming in from everyone people can not say that only some are providing when others are not. This is huge. The country would have a we sense and not a me versus you sense. I remember after 9/11 when everyone started buying flags and putting them on their cars and homes, it was this country coming together. It was beautiful to see. This nation needs more of that. If that can be accomplished this country will have no boundaries.

The hybrid tax structure has a second element. The one aspect that I agree with our current taxing structure is the, the more you make the more they take doctrine. Basically if you have more than most then you should pay more than others. It is true, so to compensate for the “rich” there would still be an income tax. But this would be for people, as Obama had drawn the line in the sand in 2013, making approximately $200,000 and higher. This is about the top 2 or 3% of the population. This way we can dramatically cut the IRS. It will still have some function but with only 2% of the population filing taxes there won’t be much to do. Also this income tax plan will still keep an eye out on corporations with some sort of threshold. The best way is to introduce certain tax rates and see how they function. I would keep the tax rates low on corporations because remember you got them paying the consumption tax. Also we want them to be competitive in a global world.

I believe changing what we now have to something that is different is not out of the realm possibility. We already are doing this with regards to sales tax. We can transition fairly quickly. The states are already collecting sales tax which is a consumption tax so why can’t the federal government have a national sales/consumption tax.

The other benefit to this plan is that everyone will have a say in how much tax they pay. Remember if you do not spend you don’t get taxed. As a result you will have saved money and hopefully put it aside in an account. Having money saved is a factor in means testing. This can have a positive effect on the reduction of federal spending and also decrease our federal deficit. This can teach us, as a by product, how to save and decrease our dependence on a failing social security system. We as a nation will be converted from spenders to savers.