Wealth Structuring – PCC
What is a PCC?
A protected cell company, or PCC can be thought of as being a standard limited company that has been separated into legally distinct portions or cells. The income, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC’s overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. A PCC therefore operates as a “hub and spoke” arrangement with a central core and individual cells, although legally it is a single company.
PCCs have provided a means of entry into the captive insurance market to entities for which it was previously uneconomic. The overheads of a protected cell captive can be shared between the owners of each of the cells, making the captive cheaper to run from the point of view of the insured, whilst continuing to ensure that the assets of each cell remain ring-fenced.
What can I transfer into a PCC?
Generally speaking there are no formal restrictions as to what may be transferred to a PCC. However, due to the necessity to monitor the value of a PCC the administrator may restrict transfers to those assets that can easily be valued, i.e. listed stocks rather than private company shares.
Where a PCC is either listed on a recognised stock exchange or generally, where there are a large number of cells each owned separately, it will not meet the definition of a close company. Therefore, any gains arising within a cell will not be attributed back to the individual shareholder regardless of his domicile status. The shares in the individual cell are themselves foreign assets (non-UK) and as such are excluded assets for the purposes of inheritance tax for non-UK domiciles.
A capital gain arising on the future sale of the cell shares would be taxable in the hands of a non-domicile on the remittance basis. For non-UK domiciled individuals resident in the UK for more than 7 out of the last 9 years this will only be taxed on the remittance basis provided the £30,000 levy has been paid, following changes introduced in the Finance Act 2008.
A PCC therefore offers all cell shareholders the ability to roll-up capital gains indefinitely, regardless of the location of the underlying assets and the domicile status of the cell shareholder and without the need to pay the £30,000 annual non-domicile levy. When the time comes to sell the cell shares, a non-UK domiciled shareholder may wait until he permanently leaves the UK or instead may pay the £30,000 levy for that year only. UK domiciled shareholders must either leave the UK permanently (minimum of 5 complete tax years) or introduce other tax planning to avoid their gain being taxable immediately.
As a single company, each PCC will have its own memorandum and articles of association which will dictate the policies of the company and each cell. Generally however, a cell of a PCC will be unable to borrow, although this and other limitations can be overcome by ensuring that the only asset held by the PCC cell itself is a shareholding in another overseas company, which may be a close company. That company may borrow, invest in property, art, racehorses or any other asset class that may have been excluded under the PCC itself.
Foreign source income exceeding £2,000 p.a. received by a non-UK domicile will be taxable in the UK whether or not it is remitted here, unless the individual concerned has paid the £30,000 levy. A PCC cell will block this income from being assessed in the UK as it would not arise to the individual but rather, arises within his structure.
However, it is important to note that there are anti-avoidance provisions which apply to attribute income back to the individual beneficiary in the UK, where assets are transferred abroad. For most non-UK domiciles these anti-avoidance provisions should be of little concern as the assets that would be transferred to a PCC are likely to already be located abroad. However care must be taken for assets held personally by UK residents, regardless of their domicile status.
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