UK: Tax-Efficient Regimes and Sectors

UK Tax Efficient Regimes and Sectors

Trusts – The concept of trusts was founded in England in the 12th and 13th centuries during the Crusades, when a crusader would entrust his property and wealth to, say, a close friend or another family member (the “trustee”) to ensure his family’s protection, and to ensure his property remained intact while he was away fighting. The trustee became responsible for managing the crusader’s property and financial affairs until his return or after his death.

Today, trusts are sophisticated financial vehicles, many of them located offshore to limit or eliminate tax liability, used to protect personal and business assets – but the original concept remains the same, whereby the management of the assets in the trust is carried out by trustees whose job it is to ensure those assets remain secure. For individuals, trusts are particularly useful for gifting assets, either during one’s lifetime or on death, in order to reduce inheritance tax liability (see “Personal Taxes: Inheritance and Gifts Taxes”).

For businesses, a trust can prove useful in protecting the business assets, especially where property is involved. Family businesses stand to benefit from reduced inheritance tax, as property placed in trust can be passed to the next generation under the potentially exempt transfer rules, and so incur limited tax liability.

Overseas trusts are subject to a residency test, which generally depends on the tax residence status of the trustees. If all trustees are tax resident in the UK, the trust is deemed to be UK-resident. If some of the trustees are tax resident in the UK, then the settlor’s tax residence or domicile status applies, whereby if the settlor is UK-resident, the trust is generally deemed to be UK-resident also. Therefore, where all trustees are non-UK resident, or where the settlor and some of the trustees are non-UK resident, there are possible tax savings on trust income and gains where the trust is located in a lower tax jurisdiction. Double tax agreements can also serve to reduce or exempt the trust’s UK tax liability.

Venture Capital Trusts (VCTs) offer tax incentives to encourage individuals to invest in small companies whose shares are not listed on a recognised stock exchange. VCTs are themselves listed on the London Stock Exchange and are managed by fund managers. Investors subscribe for or buy shares in the VCT, which in turn invests in trading companies.

Tax reliefs are available to individuals aged 18 years and over who invest in HMRC-approved VCTs. Dividend income from ordinary shares is exempt from income tax. Additionally, there is 30% income tax relief on the amount subscribed for shares in the tax year on condition that they are new ordinary shares that carry no preferential rights or rights of redemption for a five-year period from their date of issue. The 30% income tax relief can be offset against any income tax liability due, whether at the lower, basic or higher rates. Income tax relief is subject to a maximum GBP200,000 of subscribed VCT shares in a tax year, and the relief must be claimed in the year in which the shares were issued.

There is also capital gains tax exemption on disposal of the VCT shares.

Foundations – Charitable trusts and foundations can be established by anyone wishing to set aside assets or income for a charitable cause. Apart from the philanthropic aspects, with careful planning, charitable trusts and foundations can prove useful in reducing a wealthy individual’s or a business’s tax liability.

Donations to charitable trusts and foundations benefit from tax relief; additionally, the trust or foundation itself is exempted from corporation and inheritance taxes, and generally from business rates where it operates from its own premises. The trust or foundation may, however, need to register for VAT where it supplies a significant amount of goods and services.

Donations given via GiftAid benefit from an additional tax claim – for every GBP1 donated, the charity can claim another 25 pence from HM Revenue & Customs (HMRC). In the case of higher-rate taxpayers, the claim from HMRC is the difference between the basic rate and the rate on the donation.
Real Estate Investment Trusts – A real estate investment trust (REIT) is a quoted company that owns and manages property, whether residential or commercial, with the aim of producing an income. For investors, it is a useful vehicle for investing in property without having to purchase the property themselves.

The investor becomes a shareholder of the REIT, and income is therefore paid as dividends (and so is subject to lower taxation – see “Personal Taxes: Rates of Income Tax, Allowances and Tax Credits”). A REIT is exempt from corporation tax. Furthermore, the investor is subject to stamp duty of 0.5% on share purchases, and not at the stamp duty land tax rate of up to 4% of the value of the property (see “Personal Taxes: Property Taxes and Stamp Duty”).

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UK Tax-Privileged Business Sectors

Companies with profits of up to GBP300,000 benefit from a lower corporation tax rate of 20%. Marginal rate relief may apply where taxable profit falls between GBP300,000 and GBP1.5m, which can reduce the company’s corporation tax liability.

The UK government announced in January 2010 allowances of up to GBP160m per oil or gas field in a remote region to the west of Shetland, in deep Atlantic waters. The aim is to encourage oil and gas producers to tap into some of the UK’s remaining oil and gas reserves.

Film tax relief is available for British films intended to be shown commercially in cinemas. To qualify for the relief, at least 25% of total production costs must relate to activities in the UK. The Manchester Film Tax Credit Unit deals with most tax aspects for companies eligible for this relief.

Income generated from commercial woodland and forests is free from income tax and corporation tax. Increases in the value of growing timber are free from capital gains tax (although rises in land prices are subject to capital gains tax), and commercial woodland and forests owned for over two years qualify for 100% business property relief from inheritance tax.

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UK Crown Dependencies

The UK’s Crown Dependencies (i.e. the Isle of Man and the Channel Islands, which include Jersey and Guernsey) fall outside the UK’s tax jurisdiction, and offer individuals and businesses substantial tax advantages through the dependencies’ lower tax regimes, while maintaining close ties with the UK.

Each jurisdiction has its own well-established trust laws, and the dependencies are well-developed financial and legal centres. Each offers various investment opportunities, including qualifying investor funds and QROPS (qualifying recognised overseas pension schemes). The UK has double taxation agreements with the Isle of Man, Jersey and Guernsey. There are no secrecy laws, but confidentiality is key to ensuring investor confidence.

Personal income tax is 20% in all jurisdictions – which compares favourably with the UK top income tax rate of 50% introduced in April 2010; there are no inheritance, capital gains or capital transfer taxes, and there is no purchase or sales tax in Guernsey and Jersey. Income earned by EU residents from savings in the Crown Dependencies is subject to withholding tax of 35%, under the EU Savings Directive; however, from July 1, 2011, withholding tax under the Directive no longer applies in the Isle of Man, which has moved to the automatic exchange of information option under the Directive, whereby details of the individual’s identity, residence, and savings income received are reported to the tax authority in which the individual is resident.

Note that the “zero/10” system described below does not apply to individuals carrying on a trade or profession – the personal income tax rules apply, although normal business expenses can be deducted in calculating tax due.

Residency rules are generally similar to those of the UK in terms of time spent on the islands. However, residency rules in Guernsey and Jersey are further complicated, as the two jurisdictions have imposed limits on immigration to prevent overcrowding on the islands. These rules can be circumvented by the individual maintaining a presence on the island, but without purchasing a dwelling there (known in Guernsey as being “resident but not solely or principally resident” on the island).

An individual who owns a residential property on the Isle of Man can be resident on the island for up to four months within any two-year period without incurring liability to Manx income tax, subject to various conditions.

In terms of corporation tax, each of the Crown Dependencies has moved to a “zero/10” taxation system, whereby companies registered on the islands are taxed at 0% on profits, and banks and certain other financial institutions at 10% on profits. Most dividend payments and income are exempt from taxation. Along with the absence of VAT in Guernsey and Jersey, the Crown Dependencies are therefore useful jurisdictions in which to register a business and to access UK and EU markets, while limiting tax liability through careful tax planning.

See under Low Tax Jurisdictions: Isle of Man, Jersey and Guernsey for further information.

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