Is it ever worth parking money in a tax haven?

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Nadhim Zahawi’s sacking takes some of the heat out of the political controversy surrounding his tax affairs. But the case leaves some intriguing questions for other UK taxpayers.

FT Money has previously looked into how HM Revenue & Customs levies penalties on people who, like Zahawi, are judged to have made tax return errors.

Now we examine another issue — tax havens. Zahawi’s father acquired founder shares in YouGov, the polling company co-founded by his son. The shares appear to have been owned by an offshore trust. They were held through a company called Balshore Investments registered in Gibraltar, where there is no capital gains tax or dividend tax.

Zahawi said his father’s shares, amounting to 42.5 per cent of the equity, were “in exchange for some capital and his invaluable guidance”.

But the sum of around £5mn that Zahawi reportedly paid HMRC last year — including a 30 per cent penalty — relates to him paying insufficient tax on profits from the sale of YouGov shares. He said HMRC had “disagreed about the exact allocation” of his father’s stock.

Setting aside the details, the saga raises questions over the use and abuse of offshore structures.

How can I lower my tax bill via an offshore structure?
If you’re UK domiciled and resident for tax purposes, setting up an offshore structure to hold assets is “almost always” pointless, says Tim Stovold, head of tax at accounting firm Moore Kingston Smith.

Domicile is the country which is your permanent home, and forms the basis of inheritance tax liability. Residence depends on how much time you spend in the UK in a year. If you are resident you will normally pay UK tax on all your worldwide income and gains.

An offshore structure’s administration fees would be at least £15,000 to £20,000 a year. Wide-ranging anti-avoidance rules are designed to ensure the tax treatment of gains and income is the same as if you held the assets in the UK or sometimes worse.

Non-residents would not normally be liable for UK income or capital gains taxes. So if non-UK resident family members invest through an offshore company owned by a trust, UK income and capital gains tax rules don’t apply to them — even when the underlying business is UK-based.

For example, they could own the shares through a vehicle based in a low or no tax location — such as Gibraltar, Cyprus, Jersey, Guernsey, the Isle of Man and the Cayman Islands. Their offshore structure would not have to pay UK taxes on distributions or gains from the UK resident’s company.

What might go wrong?
There are traps for the unwary. A UK resident who benefits from an offshore structure which they didn’t set up would pay tax on distributions received. But they could allow gains and income to roll up largely tax free inside the trust, and so defer tax due.

However, it is different if you, as a UK resident and domiciled person, were involved in putting assets into the trust in the first place. Then, you can’t defer tax but must pay as and when gains and income are generated.

Also, if a UK resident gives away assets to a non-resident family member which are placed in an offshore structure from which the UK resident can benefit they may be judged to be avoiding tax. If the transfer isn’t on a commercial basis HMRC may argue that it is the UK resident who has effectively set up the trust or company, and demand tax.

Also, if you are a UK-resident trust beneficiary and family members who are not UK resident are paid proceeds from the trust which they give to you, you would have to pay UK tax on the so-called “onward gift” if they gave you the money within three years of being paid by the trust.

Even this isn’t the end of the complications: if you need more detail you’d better ask a lawyer.

Why use offshore trusts at all?
An offshore trust isn’t necessary to secure tax advantages for non-residents of the UK nor, as we have seen, does it help UK-domiciled individuals avoid tax.

But trusts can offer privacy and convenience and serve as useful succession vehicles. Emma Chamberlain, a barrister at Pump Court Tax Chambers, says: “Trusts enable assets in different jurisdictions to be held without the need for complicated and long probate procedures on a death.”

What about UK inheritance tax?
Those who are UK domiciled — even if not resident in the UK — would, on setting up a trust, have to pay an immediate inheritance tax charge of 20 per cent on assets put into the trust in excess of the nil rate band, currently £325,000, unless these assets qualify for inheritance tax relief, for example shares in unlisted trading companies.

The perks of non-domiciles, called non-doms, have been cut in the past decade. But still, for your first 15 years of UK residence, you can pay set annual charges and claim “remittance basis” — paying tax on overseas gains or dividends only when you bring the proceeds to the UK.

After 15 years, you are usually deemed UK domiciled, pay UK tax on worldwide income and gains, and fall into the scope of UK IHT.

UK-resident non-doms approaching the 15-year mark can set up a “non-resident trust” to hold non-UK assets, which can remain free of IHT indefinitely, known as an “excluded property settlement”. Gains and income can continue to be rolled up tax free, provided the UK resident takes no benefit from the trust.

Caroline Le Jeune, partner at accounting firm Blick Rothenberg, says: “The effect is not so different from claiming the remittance basis, but the individual no longer owns the assets and will be taxable on them if they try to access them.”