Offshore corporation retirement plan for UK resident

[newcapitalistnomad]

Dear All,

As per the title I am a UK resident currently working as a consultant through my limited company. As it is typically done for the limited company contractors here I draw:

• small salary before the tax kicks in (up to £12.5k/year)
• pay to a private pension from the gross revenue before any taxes are due (up to £40k/year) – this is very tax efficient way of savings, the drawback is that you can’t access this cash until you are 55 (soon it will be 57) but it works for me. When retired the money drawn will be taxed at the normal rate at that time.
• everything above that is taxed with corporation tax currently @19%.
• From the remaining pot of money I pay myself dividends (first 2k @ 0% tax, next [email protected]%, and anything above @32.5%) for obvious reasons I try to avoid/minimise drawing dividends the 32.5%.
• What I don’t take as dividends stays on the company account as cash or is invested and creates my second pension/saving pot which I can draw on if/when I want (subject to tax)

I think this set up works okay and provided I don’t get much into the higher divided rate the taxes are fair and reasonable but just thinking how this could be optimised in context of my future plans .

Just to mention I plan to retire or semi-retire when my children will go to universities in next 8 – 10 years - I will be about 55 at that time. When retired my wife and I plan to move somewhere to the Mediterranean coast to live there permanently - preferably in one of the EU country as we have EU passports.

Provided I have multiple clients and for each client I have multiple contracts I think it would be perfectly doable for me to:

• Set up a second offshore company somewhere in the zero/low tax jurisdiction
• Split my work and
  • run some contracts through my UK company – enough to support myself and my family (first, third and fourth bullet point in the current arrangement as listed above)
  • Remaining contracts run through the second company (in the low tax country) and keep all revenues within the this company (investing as a company in some fairly stable and liquid financial papers). All or most work and management will still be done from the UK which I understand might be a sticking point!?
• upon my retirement I would move to this low tax country or to another low tax country, spend there 183days of one year and draw all saved revenues at zero/low tax and after that move with all in cash into my final destination. In theory I could spend a bit longer in the low tax country but the chances are the countries will be not where we would like to live.

I have few questions though

• is it legal within the UK system? I wouldn’t want to do anything which would cause me paying massive penalties or even worse imprisonment. I know that being UK tax resident I have to tax my worldwide income but as I mention I wouldn’t take any income from the offshore company while staying in the UK.
• If this is legal arrangement, what would be the best country to incorporate the second company considering: financial/political stability, set up and operating costs, paperwork/bureaucracy etc. ?
• How much would it cost to set up and operate such offshore corporation?
• Any other things to consider or alternative strategies ?

 

[TravelAfficionado]

Any offshore company that you set up is likely to have a permanent establishment (PE) in the UK, since, as you admit, it will be managed from the UK. The offshore company will thus be subject to UK corporation tax.

Therefore, you should probably just continue operating through your UK company. This will also keep operating and advisory costs lower for you.

Once you retire abroad, you can continue to take dividends from the UK company. You can structure this so that there is no UK tax to pay, particularly since the UK does not charge withholding tax on dividends.

At the receiving end, you can live in a low or no tax country, or a non-dom regime like Malta, and basically pay no tax on the dividend income.

 

[anon557432]

Simpler way is to set up a second limited company, lets call it B.

Company A lends company B the excess funds and company B invests it. When you retire you can live off the dividends from company B.

Its fairly common in the UK to do this:
https://www.foxymonkey.com/how-to-invest-your-company-profits/

 

[newcapitalistnomad]

Thanks globaljetset for the clarification. I thought it might be too good and too easy to be true.
But just out of curiosity when you say “the offshore company will thus be subject to UK corporation tax” how it is done in practice? If I set up a company say in Dubai, would I also have to register it somehow in the UK and file the annual tax returns for it? Or would it be done under my personal tax returns? The UK “permanent establishment” is just home office in my private house, my computer, phone and myself.

 

[Martin Everson]

I guess you may have read the below thread already.

https://www.offshorecorptalk.com/threads/best-tax-strategy.29734/post-135981
Lol...nothing is legal in UK . I would just focus on lowering your UK effective corporate tax rate legally.

What one could do is just keep building those pension pots and eventually purchase a whole life annuity with your pension pots. You could perhaps then retire in Spain. You would then pay a max of 23% tax on a small portion of your annuity income. So I think at 55 years old you would only pay a max of 23% tax on 45% of the annuity income you receive in Spain. The amount of the annuity taxed becomes smaller as you get older also.

I would be very careful going down offshore route while living in UK under HMRC. Times are gonna get really tough revenue wise in UK following the brexit decision so expect a more aggressive HMRC towards any sort of offshore scheme.

P.S This is not tax or pension advice - just commentary. So seek professional advice in that area .

 

[TravelAfficionado]

Thanks globaljetset for the clarification. I thought it might be too good and too easy to be true.
But just out of curiosity when you say “the offshore company will thus be subject to UK corporation tax” how it is done in practice? If I set up a company say in Dubai, would I also have to register it somehow in the UK and file the annual tax returns for it? Or would it be done under my personal tax returns? The UK “permanent establishment” is just home office in my private house, my computer, phone and myself.

Yes, you would need to register your Dubai company with HMRC to pay UK corporation tax. Here's the link:
https://www.gov.uk/limited-company-formation/set-up-your-company-for-corporation-tax

 

[Barney2201]

The only real way to avoid Corp tax is to live in a different location, we moved to Guernsey for that reason. Could you operate from Channel Islands?

 

[newcapitalistnomad]

Thanks all for your answers and advise.

@ Barney2201 - business wise I probably could operate from the CIs but for family reasons relocating is not really an option for me at this time.

@anon557432 - I will look into setting up a second company in the uk and the advantages this may offer

@Martin Everson - no I didn’t read the thread you provided (it has restricted access and I didn’t subscribe to the Mentor Group yet). Also you mentioned lowering your UK effective corporate tax rate legally. Are there any known techniques/strategies (other than saving into a pension and split shares between myself and my wife?

 

[Martin Everson]

@Martin Everson - no I didn’t read the thread you provided (it has restricted access and I didn’t subscribe to the Mentor Group yet). Also you mentioned lowering your UK effective corporate tax rate legally. Are there any known techniques/strategies (other than saving into a pension and split shares between myself and my wife?

Ahh sorry didn't realize the post was in Mentor Group but it pretty much mentioned to do what you did already in your first post that's why I thought you may have read it . Corporate tax isnt biggest issue with UK company. It is the higher rate income tax you pay when you want to remove the post corporate tax income above your personal £12,500 tax free allowance and tax free dividend allowance.

Therefore the most common technique is to just have a share shareholder resident in a tax free country drain all the profits out of the company as tax free dividends. That's what Sir Philip Green did with his Arcadia group PLC owned by Taveta Investments Ltd. He had has wife live in Monaco as shareholder of Taveta Investments Ltd draining all post corporate tax income tax free.