That Swiss Account …
On 6 October 2011 the UK Swiss Tax Agreement on Co-operation in Tax Matters (‘the UK Swiss Agreement’) was signed, and it is expected to come into force on 1st January 2013 (subject to the national legislation being in place in both countries before then). It will have important implications for those who are within the UK tax net and have, directly or indirectly, a beneficial interest in financial assets or bank accounts in Switzerland. Unless appropriate advice and action is taken those affected could be in for a nasty shock.
In recent times, UK taxpayers with offshore assets that have not been properly declared in their tax returns have been able to take advantage of offshore disclosure facilities made available by HMRC (‘the Revenue’). The origin of the foreign assets may be earnings from a business that have been squirreled away without being declared, or an inheritance from a kind aunt. The taxpayer has placed the funds in an offshore bank account or portfolio because they either do not know what to do about the situation or have chosen to do nothing. The offshore disclosure facilities offered the taxpayer the incentives of allowing these problems to be tidied up with the Revenue and only reduced penalties being charged. Given that there are possible criminal sanctions for evading tax, and penalties can now reach a maximum of 200% of the unpaid tax, a lot of people have taken advantage of these facilities. The Revenue, on the other hand, welcomed the collection of tax for past events and the fact that tax will be paid in the future on these assets as well.
The UK Swiss Agreement, however, seeks to attack the problem of those UK taxpayers with financial assets or bank accounts in Switzerland who have so far not made a disclosure to the Revenue. From next year such taxpayers will be faced with some decisions to make. Broadly there are two decisions, and for each decision there are two options. The first decision concerns how to regularise the position to date (‘the one-off payment’), and the second concerns how to regularise the on-going position (‘the lifetime withholding tax’).
UK Resident and Domiciled
For those who are UK resident and domiciled, for each decision there will only be the options of:
1) maintaining anonymity but paying away part of the capital of the assets or income/gains as they arise (the payments being made to the Revenue via the asset holder (e.g. bank) and Swiss authorities); or,
2) allowing a disclosure to be made to the Revenue.
As regards regularising the position to date, if the first option is selected then a one-off payment of the capital value of the assets is taken by the asset holder. The value of the payment is calculated according to a formula and will be between 21% and 41% of the total capital value (calculated according to provisions in the UK Swiss Agreement). This payment will in most cases clear all liability for income tax, capital gains tax, inheritance tax and VAT, and associated interest and penalties.
For the on-going position the taxpayer will need to decide whether anonymity is to be preserved and a lifetime withholding tax is paid on the income and gains of the assets as they arise, or alternatively if disclosure is to be made. The rates for the withholding tax are in line with, but slightly less than, the top rates of UK tax as they are collected as they arise and so earlier than on a self assessment basis (40% on dividend income, 48% on other income and 27% on capital gains).
The one-off payment and lifetime withholding tax are unlikely to be the correct rates of tax to apply to the particular assets, income or gains, and so disclosure will often be the better option for UK resident and domiciled taxpayers.
If no option is selected by 31 May 2013 as regards the one-off payment then anonymity will be preserved and the tax payment will automatically be taken by the asset holder. Similarly, the lifetime withholding tax will commence once the agreement comes into force (1 January 2013) unless the option to disclose is chosen.
UK Resident and Non-UK Domiciled
Those who are not domiciled within the UK but are resident here have additional options as regards the one-off payment. As they can also opt out of it, or apply it only to income and gains with a UK source or those that are remitted to the UK. There will be no or only limited clearance of past tax liabilities if these options are chosen. The lifetime withholding tax also only applies to income and gains with a UK source or those that are remitted to the UK. The taxpayer will need to supply the asset holder with a certificate as to their domicile supplied by a lawyer, accountant or tax adviser in order to select this option.
Withholding Tax on Death
There is also provision for a withholding tax (at 40%) to apply when the UK taxpayer dies, but this is only in the case of UK resident and domiciled taxpayers. Again, there is the option of disclosing the relevant details to the Revenue to avoid a withholding tax being taken.
Liechtenstein Disclosure Facility (‘LDF’)
Thankfully, for those who own Swiss assets but have not paid the correct amount of tax, there is a disclosure facility currently open with the Revenue. The LDF allows those with offshore undisclosed assets to establish a link with Liechtenstein (if one did not exist already), disclose their position to the Revenue and benefit from the Revenue looking no further back than 1999, much reduced penalty rates and also removing the threat of criminal prosecution for tax evasion (which the UK Swiss Agreement does not). If the taxpayer acts quickly enough, their tax position can be regularised in a cost efficient manner and the UK Swiss Agreement need not cause such concern.
Penningtons Solicitors LLP,
33 Gutter Lane,
London EC2V 8AR
Tel: +44 (0)20 7457 3074
This article is a summary of recent developments and, whilst every care has been taken to ensure the accuracy of the information provided, it should not be regarded as a substitute for advice in any particular case. Every case is different and you must not act solely on the basis of information contained here. BILA and the article’s author make no warranties as to the accuracy of the information contained in the article and are not responsible for the content of external websites. Where opinions have been expressed, they are the personal opinions of the author and do not constitute professional advice on any level, nor do they represent the opinions of BILA.