UK residents and foreign partnerships
HMRC have closed down a tax scheme which seeks to avoid UK tax by diverting
UK trading profit from a UK resident individual to a foreign partnership
comprised of foreign trustees. The scheme has sometimes been used to shelter
UK property development profits from UK tax.
The scheme was designed to ensure that the income of a partnership continued
to belong to the UK resident who received the income as beneficiary of the
foreign trust, whilst avoiding taxation through the protection of the
partnership under a double tax treaty.
Legislation is being introduced into Finance Bill 2008 which will:
clarify retrospectively, that double tax treaty
protection is not available to a UK person having an indirect interest
in the partnership.
Also prevent other structures from protecting UK
persons from charge under the terms of ‘business profits’ articles of
The first measure will have retrospective effect whereas the second will
have effect from 12 March 2008.
UK law taxes a UK resident beneficiary of certain trusts on the income to
which they are entitled under the trust arrangement as it arises. Currently
users of the idea argue that the ‘Business Profits Article’ common to most
tax treaties, exempts partnership profits from UK tax, not only in the hands
of foreign partners but also in the hands of the UK beneficiaries. A UK
resident partner would currently not be protected, hence the interposing of
HMRC state that ‘the UK resident should be taxable in the UK on his or her
share of the profits of the partnership comprised of the foreign trustees’.
HMRC now make clear that their view is that tax treaties cannot exempt UK
residents from UK tax on any profits of a foreign partnership to which they
are entitled. The second, new measure, will ensure that the Business Profits
Article in the UK’s tax treaties cannot be read as preventing income of a UK
resident being chargeable to UK tax.
As a result of this new legislation, it will no longer be more
beneficial to use an offshore partnership structure as an alternative to
a UK resident partnership for UK based activities (in particular
As the change is retrospective because HMRC contend that the legislation
has been in place since 1987, any structures which use an offshore
partnership held by trusts with UK resident beneficiaries will be
affected such that any previous tax returns submitted to HMRC may be
Furthermore, the second measure which prevents a taxpayer from relying
on the Business Profits Article in UK tax treaties to prevent income
from a UK resident being chargeable to UK tax will mean that other
company structures which have previously been used to shelter profits
from income tax will no longer be effective for UK resident individuals.