Offshore Income and UK Tax Misconceptions

Income and earnings received or held in offshore bank accounts or other structures, such as businesses or trusts, are frequently assumed to be exempt from UK taxation by UK residents and domiciled individuals.  Below are situations where individuals may think no tax is due.

A misconception that any income or gains in bank accounts outside the UK are not taxable.

If you are a UK tax resident and domiciled (born to parents who maintain their permanent residence here or moved to the UK and view it as your permanent home), you are taxed on your worldwide income and gains. This implies that income and gains received in the UK or offshore bank account are subject to UK tax.

A false perception that Off Shore Company is a separate entity and has nothing to do with the UK domiciled or Resident Directors or Shareholders.

In cases when the owners of an offshore company are British citizens or permanent residents (domiciled), several tax implications must be considered before the company may acquire or hold any assets. In some situations, the company must submit UK tax returns and pay UK Tax on its worldwide revenues. In other circumstances, anti-avoidance regulations imply that UK-based individuals who profit from offshore company income are taxed on it. In addition, due to the different tax rules for companies and individuals, the same income may be taxed twice. If an offshore trust holds the company, the issue becomes much more complex, with even another layer of technical anti-avoidance requirements to consider.

Taxpayers should get a second look if anti-avoidance rules have not been followed since there are few situations they would not be enacted. Moreover, withholding information from HMRC might increase the likelihood of it proceeding to maximise its tax take by using the existing penalty regime and the additional penalties for failure to correct.

A myth that trusts are structured to avoid income tax in the UK. 

Offshore trusts established by or for UK residents offer few tax benefits.  UK source income generating at the trust level is taxable in the UK on the trustees, who are required to complete a UK trust tax return irrespective of the trust’s residence status (unless all beneficiaries are non-UK residents). Offshore trust capital gains are complex and complicated and must be appropriately managed. Anti-avoidance legislation may also apply to UK resident settlors or beneficiaries of offshore trusts. Offshore trusts with UK settlors remain subject to UK inheritance tax (IHT). The trustees must file IHT returns and pay IHT when assets leave the trust every ten years. If a UK resident benefits from the trust property, further IHT costs may arise upon death.

I did not get any profit; Why should I declare it?

An individual could arise a loss due to a transaction that took place outside of the United Kingdom, such as the leasing of a foreign property or the selling of an overseas asset. In practical terms, the UK tax situation isn’t so easy.

• If a transaction takes place in a foreign currency, the subsequent loss may be a profit when exchanged for the British pound – the situation depends on the exchange rate at the relevant purchase and disposal dates for UK tax purposes;
• An activity’s or transaction’s outcome must be determined based on UK tax regulations. The basis of assessment and rules concerning tax treatment of costs may differ between the UK and the transaction’s location.

I have paid my share of Tax abroad. 

The amount of UK taxes owed may exceed the amount of foreign taxes paid, not all foreign taxes will be eligible to be deducted against UK tax liabilities (some types of taxes are explicitly excluded), or that relief will be granted only in the form of a reduction rather than a direct tax credit. Therefore, it is essential to use caution to ensure that the appropriate amount is claimed and paid in the United Kingdom.