• Source of family wealth is a non-UK business which pays 25% local tax on its net profits. Some profits are extracted under a Cypriot IP company regime which reduces the tax rate on those profits to 1.5%. Effective tax rate 15.6%.
  • Dividends have been paid up to the non-UK subsidiary of the non-UK resident trust over a number of years. Additional tax cost 0%.
  • The trustees now wish to lend £1m to a UK resident person for use in the UK. That is a capital payment taxed at the notional interest forgone, £22,500 @ 20% = £4,500. Further, profits of £1,184,342 less tax of £184,342 have to be generated to produce the £1m. Total tax cost – £188,842 (or 15.9%).
  • But HMRC will ask, is it really a loan, how will the UK person repay it if he / she has spent it on rent etc? In reality it is a gift, or trust distribution and not a loan.
  • The UK person then has a £450,000 tax charge on top of the corporate tax paid on the profits used to generate the dividend.
  • This brings total tax paid to £643,342, which is 53.56% the £1,184,342 of profit we started with.
  • Of course you have the flexibility to make payments and do what you want, but there are many ways of reducing the effective rate of tax using a trust, or using another tactic.

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