Foreign gains via non-resident company

Foreign Gains accruing to non-resident companies whose shares are owned by UK tax residents may be taxable in the UK.

Background

Usually, a company not resident in the UK is not normally liable to UK tax nor its shareholders.

Thus, UK residents could avoid tax by holding assets overseas via a foreign company.

Rule

Since 27 November 1995, foreign gains accruing to non-resident companies whose shares are owned by UK tax residents are attributed to the UK tax resident and taxable in the percentage of shares held by them in that foreign company.

Note, NO gain is taxed in case percentage of shares held is less than 25% on and after 06/04/2012.

Example

Mr A opens a company in India and buys a house. After few years company sells the house. Indian company will pay taxes on the gain in India and Mr A will also be liable to pay taxes on the gain in UK.

Foreign tax relief is available. DTAA may also be applicable.

Losses

Foreign losses accruing to non-resident companies are NOT attributable to UK tax resident. However, current year losses are allowable to get a net gain figure.

Reliefs

Two main reliefs:

  • Assets used for a trade; or
  • Where tax avoidance was not the main purpose

Source:

HMRC CGT Manual CGT57200P onwards

TCGA Section 3 onwards

Acknowledgement:

  1. Para 49.7 in Tolley’s Capital Gains Tax Main Annual
  2. Bloomsbury Capital Gains Tax
  3. For further reading, visit our Worldwide Disclosure blog.