When are shareholders personally liable for tax on company gains?

Tax avoidance

Generally, companies which aren’t resident in the UK don’t pay corporation tax (CT) except those relating to gains made from selling some types of UK asset. This seems to allow for a simple tax saving arrangement for individuals resident in the UK, i.e. owning foreign assets through a non-UK resident company. While not every ownership through a foreign company involves tax avoidance HMRC is alive to the possibility of this type of arrangement and has rules to counter it.

What if the anti-avoidance rules apply?

Where the anti-avoidance rules apply to assets owned by a foreign company, capital gains it makes are taxable on the company’s shareholders as if they had make the gains personally. The gain taxable on each shareholder is in proportion to their shareholding in the company.

What isn’t avoidance?

HMRC anti-avoidance rules don’t apply in every case of a property being owned through a foreign company. It would be unreasonable where say, the company runs a business abroad and owned assets related to its trade. For example, a company might own its trading premises in the foreign country. A gain made from selling it would not trigger the anti-avoidance rules. The rules are more precisely targeted.

Anti-avoidance rules

The first condition for the anti-avoidance rules to apply is that the non-UK company would count as a “close company” if it were a UK company. A close company is, broadly, one owned or controlled by five or has fewer individuals. For example, a company owned by just an individual and their spouse would be a close company.

It's not possible avoid the “close company” label by sharing ownership of the company with close family members to avoid the five-individuals test. All the family's shares in the company are added together for this purposes.

Even if the company and shareholders meet the conditions for the anti-avoidance rules to apply, if the shareholder and persons connected with them, e.g. close family members, don’t together own at least 25% of the company the anti-avoidance rule is ignored, meaning they won’t have to pay tax on the gains the company makes.

A further get out clause

The anti-avoidance rules were overhauled in 2013 to be more relaxed. In our experience, because the old version of the rules existed for many years the more changes aren’t well known. One of the key difference is that the anti-avoidance rules now only apply where ownership of the property through a foreign company is “part of a scheme or arrangements of which the main purpose, or one of the main purposes, was avoidance of liability to capital gains tax or corporation tax”. Owning a property to prevent problems with foreign succession or other rules and regulations is no longer a trigger for the anti-avoidance rules.