Using international pension schemes to own start-up UK trading companies

A UK-domiciled and resident technological inventor has developed some brilliant technology that will be directly beneficial to the environment now and, if embraced globally, promises to be of huge benefit to future generations, writes Simon Denton, Managing Director of Sovereign (UK) Limited.

Expenditure on qualifying research and development will receive generous relief from UK corporation tax, so it is essential that the IP is ring-fenced and held within a dedicated corporate structure. This will be separate from a second UK company that will then be licenced to exploit the IP through royalty agreements with partners around the world.

The UK will remain as the centre of vital interests of this international structure because it offers a secure, well-regulated operating environment with an internationally low rate of corporation tax and one that also benefits from minimal taxes on income flows.

The UK has one of the largest double tax treaty networks in the world and, despite leaving the European Union, has long standing tax treaties with all the European countries that provide for favourable and straightforward reciprocal tax arrangements.

Importantly, the UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies, regardless of where the shareholder is resident. It also levies no capital gains tax on disposals of subsidiaries by a holding company of a trading group subject to meeting the qualifying conditions for the Substantial Shareholdings Exemption (SSE) – own at least 10% of the ordinary shares in the company for a continuous period of 12 months during the two years before disposal.

Further, the UK does not charge capital gains tax on the sale of shares in the holding company that is situated in the UK by non-residents. So, if the holding company is itself disposed of by non-UK owners, whether individual or corporate, there is no exposure to UK capital gains tax.

There is anti-avoidance legislation in the shape of the UK’s controlled foreign company (CFC) regime, but this is designed to target the artificial diversion of UK profits rather than exempt foreign profits where there is no risk to the UK tax base.
The UK remains an ideal location in which to base a holding company structure. However, given that the founder of the business is relatively young – still 10 years away from the official pension retirement age of 55 – it was decided that the UK companies should be owned by a fully-managed Isle of Man holding company that is, endorsed by independent tax advice received by the founder, held by a Qualifying Non-UK Pension Scheme (QNUPS).

Under this structure, provided that the control and management is properly exercised in and from the Isle of Man, the resulting benefits are:

• Dividends paid upstream to the Isle of Man company will not be exposed to UK dividend tax.
• Potential gains on the Isle of Man company selling the UK companies should be relieved from UK taxation.
• The Isle of Man company will not be exposed to any local taxation.
• In the event of the founder’s untimely death, the value of all arrangements, both passive and active, should not be exposed to UK Inheritance Tax because the ultimate ownership is held by a QNUPS.
• The increasing value of underlying assets within the QNUPS will not be exposed to the UK lifetime allowance and UK annual allowance, regardless of any existing UK pension provisioning.