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December 5, 2022

It wasn’t me I Promise! Capital Gains made by Foreign Companies Apportioned to UK Shareholders

Generally, non-UK residents are not subject to UK Capital Gains Tax ("CGT") (with some notable exceptions such as the disposal of UK residential property).

However, there is legislation in place whereby chargeable gains accruing to non-UK resident companies can be attributed to UK resident shareholders (TCGA 1992, S.3). Similar rules apply to beneficiaries of non-UK resident settlements, but this has not been considered in this article.

Who do these rules apply to?

These rules apply to non-UK resident companies which would be a ‘close company’ if it was in the UK. A close company can include a company which is controlled by five or fewer shareholders.

No apportionment is made to a shareholder if the shareholder and those ‘connected’ with them have 25% or less of the shares in the foreign company. These rules can also apply to 'indirect participators' in a foreign company.

In order to prevent double taxation, these rules do not apply to a gain where the company would be already subject to a charge to non-UK resident CGT.

What is the effect of these rules?

Where these rules apply, the chargeable gains made by the foreign company will be apportioned to the shareholders in accordance with their shareholding. If an individual is UK resident but non-UK domiciled, they should seek professional advice on whether the remittance basis can be utilised.

This apportionment will only apply to gains which are ‘connected to avoidance’, that are not ‘connected with a foreign trade’ and some or all of the gain would not be chargeable to Corporation Tax on the company.

A gain will be ‘connected to avoidance’ unless it can be shown that the disposal of an asset by the company or the acquisition/holding of the asset by the company was not part of a scheme or arrangement for the avoidance of CGT or Corporation Tax.

A gain is ‘connected with a foreign trade’ if it accrues on the disposal of an asset used only:

  1. For the purposes of a trade carried on by the company wholly outside the UK; or
  2. For the purposes of a foreign part of a trade carried on by the company partly within and partly outside the UK.

Whilst gains are apportioned, an apportionment can be made for the losses, but the losses have restricted use so tax advice should be sought on this point on the best way to utilise these losses.

What happens if the company distributes the profit?

Depending on when the foreign close company distributes the capital profit from the gain, any tax paid on the above rules could potentially be credited against any tax due on the dividend received by the shareholder. This is to prevent double taxation.

What happens if the shareholder eventually sells the shares in the foreign company?

If a UK resident individual eventually sells the shares, they will potentially make a chargeable gain. If the UK shareholder pays CGT on the apportioned gain discussed above and have not utilised the tax from the previous gain as a credit, this could potentially be used as an allowable cost when calculating the chargeable gain on the eventual sale of the shares.

If you require assistance with determining whether these rules apply to you or your clients, please contact a member of our team.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice on non-UK company capital gains before taking any action.

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