RFIG21600 - Statutory Residence Test (SRT): Temporary non-residence: Distributions from closely controlled companies
Treatment of payments made through intermediaries
Distributions from companies
Sections 401C, 408A and 413A ITTOIA 2005
Where an individual receives, or becomes entitled to, distributions from a UK or overseas company during a period of temporary non-residence, and the company is:
- a close company
- an overseas company which would have been a close company had it been UK resident
And that individual is either:
- a material participator in the company
- an associate of such a participator
at a point within the tax year of departure (the UK part if split year treatment applies) or the 3 previous tax years, then the distributions are charged to UK tax as if the individual received them in the period of their return.
Post-departure trade profits
For individuals who become UK resident on or after 6 April 2026 after a period of temporary non-residence, the charge will apply to the full amount of the dividend or distribution, including any part that relates to trade profits that arose in the period of temporary non-residence.
If the individual is taxed on the dividend in a country other than the UK whilst temporarily non-resident, they will be able to offset any foreign tax paid against the UK income tax due on the dividend. Individuals will need to provide the amount of foreign tax paid on their Self Assessment tax return to claim the credit.
For individuals who became UK resident before 6 April 2026 after a period of temporary non-residence, if the distribution was a dividend, the charge did not apply to dividends that related to trade profits that arose in the period of temporary non-residence. HMRC accept any just and reasonable attribution of dividends to post-departure trade profits that accords with the facts. But where a company had built up substantial reserves at the point the individual became non-resident and a dividend was subsequently paid in a period of temporary non-residence, HMRC consider the dividend is substantially made up of pre-departure profits, to the extent of the accumulated reserves, at the point the period of temporary non-residence started.
Example 1
Carl leaves the UK on 10 April 2026 to live in Estonia. On 1 June 2027 he receives a dividend of £250,000 from a UK close company in which he is a participator. He is taxed at 20% in Estonia and Carl therefore pays £50,000 of foreign tax.
Carl remains in Estonia and is non-UK resident for the 2026-27, 2027-28 and 2028-29 tax years, until he returns to the UK on 1 May 2029. Under the temporary non-residence rules, Carl is chargeable to tax on the dividend he received and owes £81,898.41.
The total tax due by Carl will be the UK tax less any foreign tax paid, which means Carl will owe UK tax of £31,898.41. Carl will be able to claim this credit by declaring the full dividend and providing details of the foreign tax paid on it in his tax return for the tax year 2029-30.
Treatment of payments made through intermediaries
If payments from a close company to a participator, or associate of a participator, are made with interposing steps, for example attempting to arrange the payments through various overseas trusts or shell companies during a period of non-residence, and if it is reasonable to suppose that the purpose of the arrangements was to avoid the distribution being charged to UK income tax, then the payment can be treated as though made directly from the close company. This is the case even if all or part of the arrangements involved loans.
Example 2
A UK close company makes a payment to a non-resident company, which loans the funds to the individual during a period of temporary non-residence. It might be argued that this is a loan from an overseas company, and not within the scope to UK tax; however, under the anti-avoidance provisions, this is treated as a distribution made to the individual directly from the close company; that it was a loan does not matter. This test of 'reasonable to assume' applies only in cases where there appears to be arrangements in place to avoid a charge to tax that would exist if a dividend had been paid directly.