Company Formation and Management Services
The UK corporation tax is currently the second lowest in the G7. From April 2015, a uniform rate of 20% payable against the global net profits of a UK company. Including a UK entity in any structure can substantially help to secure significant cross border tax benefits. No other country has as many tax treaties as the UK and dividends, interest, royalties, consultancy fees or marketing commissions can all be received by a UK company without the levels of withholding tax or anti-avoidance rules that would apply to direct payments to an offshore entity.
UK Holding Companies
A UK company can be a useful vehicle for the collection or channelling of foreign dividend income received from qualifying subsidiaries. The general rule is that all dividends paid by a subsidiary to a UK parent company are subject to corporate income tax. Nevertheless, the UK grants double tax relief by way of a credit for foreign corporation tax underlying the dividends provided that the UK company holds, directly or indirectly, at least 10% of the share capital of the distributing company. If the foreign company is subject to a corporate tax rate of 20% or more, the credit will usually be a complete relief from UK corporation tax. If the UK company is itself owned by an offshore company, the dividend income received by the UK company can generally be absorbed by the offshore parent company without consequence to further taxation.
If the UK company owns a group of active subsidiaries (at least two) and one of these were to be sold, since 2002 the resulting capital gain arising to the UK holding company should not be subject to UK tax via a relief called the substantial shareholding exemption. For a company to benefit from the exemption, the holding company must hold at least 10% of the share capital of the subsidiary for a period of 12 continuous months within the two years prior to the disposal. The UK holding company and the subsidiary it is selling must both be trading companies, and their activities cannot include to a substantial extent activities other than trading activities. These conditions must be satisfied both before and after the disposal of the shares.
The UK has signed over 100 double taxation treaties and coupled with the attractive holding company regulations, the UK is an extremely attractive domicile to establish an international headquarters, especially for business expansion into Europe and the rest of the world.
UK Trading Companies
Offshore companies engaged in international trade can be perceived negatively but this issue can often be resolved by using a UK company in conjunction with an offshore company. A UK company involved with a commercial activity enters into an agreement with an offshore company under which it agrees that it will trade on behalf of the offshore company as its nominee. All contracts of purchase and sale and all invoicing will be made out in the name of the UK company, which will also receive any revenues as nominee for the offshore principal. The agreement should state that all monies received are received as nominee for the principal except for an agreed fee, which will be retained by the UK company. That fee is usually expressed as a percentage of the gross revenues received. The standard form is that 10% of profits are retained by way of fee by the UK company, resulting in an effective rate of corporation tax of around 2%.
It is essential that: no trading activity takes place in the UK; no UK-source income is generated; both the UK and offshore company are managed by a different board of directors not resident of the UK; and that the ultimate beneficial ownership of each company is distinctly different and should also be non-UK resident. The UK company should still be able to obtain a UK VAT number, its bank account can be located in the UK, and accounting and regular administration services can be provided and enabled in the UK.
UK Limited Liability Partnerships (LLP)
The essential feature of a LLP is that it combines the organisational flexibility and tax status of a partnership with limited liability for its members. This limited liability is possible because an LLP is a legal person separate from its members. However LLPs are “tax transparent” which means that each member, rather than the partnership itself, will be assessed to tax on their share of the LLP’s income or gains. Any non-UK source profits or gains made by an LLP will not be subject to UK tax unless the members are UK resident individuals or companies. There are no restrictions on the residence or nationality of the members of an LLP and therefore, if the members of the LLP are non-resident and the income of the LLP is non-UK source, the LLP will not be subject to UK taxation.
It should be noted that LLPs with overseas members cannot generally avail themselves of treaty benefits because of the LLP’s tax transparent status. In determining residence status a UK LLP would be deemed resident in the jurisdiction from which it is controlled, which would ordinarily be the jurisdiction in which its members are situated. There is an obligation for an LLP to file an annual partnership tax return whether the partners are taxed or not.
Family Investment Companies (FIC)
Inheritance tax (IHT) is a major issue for anyone that is UK domiciled or has assets within the UK. UK-domiciled individuals are subject to IHT charged against their worldwide estate at a rate of 40%. Gifts to an individual are potentially exempt transfers (PETs) provided that the donor survives for seven years after making the gift and provided that the donor does not continue to enjoy the gifted asset. With an FIC however, it is possible to eliminate IHT while also enabling a donor to enjoy some degree of control over the asset.
The FIC should, from the outset, issue multiple classes of shares however it will be important for the head of family to be the unique shareholder of all share classes before any share reorganisation takes place. We recommend that the following classes of share are authorised:
- A shares, which carry voting rights but not rights to income or capital
- B shares. which may carry rights to income but no voting rights and no rights to capital
- C shares, which carry no voting rights and no rights to income but all rights to capital
From the outset the head of family will make a transfer of assets in exchange for becoming a registered shareholder of all share classes. There is no chargeable transfer because assets have simply been exchanged such that there is no resulting loss to their estate. Thereafter the Class C shares can be gifted to family members. Class B income shares can be retained by the head of family. The B shares may have a modest value but it would be minor compared to the value of the Class C shares. The Class A voting shares will have little or no value but will allow the holder to control the FIC and therefore dictate what happens to the assets owned by the FIC. As a result, the head of family can continue to administer corporate assets without interference but will have given away the substantial value – which is contained in the Class C shares. UK IHT is therefore eliminated or reduced provided that the head of family survives for seven years after giving away the valuable Class C shares.
Once a UK entity is incorporated, we provide a domiciliary service, which includes the provision of company secretarial, registered office and nominee shareholder services. Full management services from our own licensed corporate directors are also available and highly advisable in most cases. Re-mailing services are available at modest cost for all companies established by Sovereign.
Note: Ancillary services
In addition to providing incorporation, domiciliary and management (directorship) services, a range of ancillary services at competitive prices is available on request. These services include, but are not limited to: provision of dedicated telephone lines; office and personnel assistance; designated staff members (temporary or permanent availability); assistance with office relocation, introduction to real estate agents, government agencies and other third parties.
Trust Formation and Trustee Services
Trusts have many applications and advantages, including the protection and preserving of assets, tax planning or just avoiding the expense and delays of obtaining probate under a will. They also provide a high degree of confidentiality.
Under UK legislation, different types of trust are taxed differently. The main types of trust are:
- Bare trusts – Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they are 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.
- Interest in possession (IIP) trusts – These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
- Discretionary trusts – These are where the trustees can make certain decisions about how to apply trust income, and sometimes the capital. Depending on the trust deed, trustees can decide:
- what gets paid out (income or capital)
- which beneficiary to make payments to
- how often payments are made
- any conditions to impose on the beneficiaries
- Accumulation trusts – This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.
- Mixed trusts – These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.
- Settlor-interested trusts – These are where the settlor or their spouse or civil partner benefits from the trust. The trust could be an IIP trust, an accumulation trust or a discretionary trust.
Sovereign has extensive experience of dealing with the establishment and administration of trusts and appropriate planning for income tax, capital gains tax (CGT) and inheritance tax (IHT) purposes.
Our knowledge of the tax legislation relating to trusts and the duties and obligations of trustees enables us to ensure that trusts are properly managed – dealing with annual accounts, filing tax returns and liaising with beneficiaries over distributions. With our international reach, we can also advise clients with cross border interests and working with other jurisdictions to administer trusts and estates.
Private Trust Companies
A Private Trust Company (PTC) is a company formed for the specific purpose of acting as trustee of a single trust, or a group of related trusts. This enables family members to participate in the management of the company and therefore in the decisions that need to be taken by the PTC as trustee, including decisions relating to the control and management of companies owned by the trustee.
This degree of participation would not be possible if the trustee was a third party professional trust company, which will often not be in a position to offer the settlor the degree of flexibility and the speed of response that they require – and its employees cannot be expected to be as familiar with the business of companies owned by the trust as the family members themselves. Decisions may have to be referred internally or external advice obtained before they can be put into effect and, if a change of trustee is desired, it can be a lengthy and expensive process. Under the PTC structure, these problems can be largely avoided. Directors familiar with the business make the decisions and, if a change of direction is desired for the management of the trust, this can be achieved simply by changing the board of the PTC. A PTC can therefore provide greater comfort for the settlor that his or her objectives in creating the trust will be met.
It is usual and advisable to have at least one director who is a trust expert because running a trust company is complicated and is also very different from running a normal company. To avoid any challenge to the status of a trust, we believe it is vital to have expertise on the board to add substance and credibility to the PTC and to ensure that the PTC – and any trusts that it administers – is run correctly. The directors of the PTC must remember that all decisions that they take in relation to the trust must be in the interests of all beneficiaries.
Generally an offshore trust will only be subject to the offshore tax regime if it is administered by a trust company that is managed and controlled offshore. To achieve this, it will generally be necessary to have at least a majority of directors residing offshore. If the settlor is an onshore resident, then they could be one of the directors, but onshore family members should not form a majority on the board.
More important than the constitution of the board will be the ultimate ownership of the PTC because this will, if the owners feel it necessary, allow them to remove directors and replace them. In this way the aim of having more control over the affairs of a trust would not be compromised, even if no family members were represented on the board, provided that ownership is in the hands of the settlor or his family. For this reason a PTC is best set up as a company limited by guarantee whose members can be appointed and removed, or cease to be members, upon death or the attainment of a certain age. As a result, the ultimate control of the PTC can rest with the family irrespective of the constitution of the board of directors, thereby giving the settlor added comfort, while also avoiding any problems associated with having to transfer shares upon the death of a member.