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.
