Andy Coyne looks at the UK Inland Revenue’s offshore tax amnesty and at other tax issues affecting expatriates
The idea that the UK Inland Revenue takes an ‘out of sight, out of mind’ approach to UK expatriates or offshore financial vehicles is one that should be dismissed straight away.
And the British taxman is aided by the fact that we are living in a world in which cooperation between jurisdictions is increasingly common and the pressure on tax havens to conform to international rules on transparency becoming more prevalent.
The offshore world has changed greatly in the last decade.
Two pieces of evidence.
 EU Tax Directive
As the Isle of Man, Guernsey and Jersey are UK Crown Dependencies, they too are affected by this legislation and financial institutions there are applying a 15 per cent ‘retention tax’ on interest earned or, alternatively, they will pass on information, via the local tax authority, to the saver’s home tax authority. Opting for the retention tax means information will not be passed onto the home country taxman.
Similarly, Continental Europe’s big ‘offshore’ centre, Luxembourg, now extracts a 15 per cent Withholding tax on interest payable on savings etc but it has been given a stay of execution with regard to information sharing until 2009.
The legislation is a result of much argument over a period of eight years or so and is far too complex to go into here. Suffice it to say, the European Union has wanted to clamp down on tax havens - many of which are British linked - for a long time, partly because in countries such as France tax evasion is endemic and Guernsey and Jersey being off their coast is seen as too much of a temptation for the average citizen. However, it is not all about continental Europeans. The UK exchequer is also acutely aware of the money being lost to tax evasion through the illegal use of offshore financial institutions by UK citizens.
The legislation is to be reviewed but there can be no doubt that the tide is in favour of increased disclosure.
It affects those with offshore bank deposits but also money market funds and some bonds.
Second piece of evidence.
That the Inland Revenue has recently offered a partial amnesty to holders of undeclared offshore bank accounts may at first glance suggest a degree of magnanimity on its part but, on further inspection, it suggests it is not going to let sleeping dogs lie.
The Revenue’s Offshore Disclosure Facility (ODF) is a one off opportunity for people to settle all undisclosed liabilities from offshore accounts for a fixed 10 per cent penalty.
But, as accountancy firm PricewaterhouseCoopers points out, the
possibility of criminal prosecution remains and investors still face a bill for up to 20 years of unpaid tax and interest.
Another leading tax specialist agrees with that conclusion.
Anton Lane, from Cheltenham-based wealth management consultant Specialist Tax Solutions, strongly urges taxpayers to seek professional advice before making any disclosures about their tax affairs.
“People should understand that no immunity from prosecution has been offered by the taxman,” he said.
“Even though future prosecution is only likely if they do not make a full disclosure, or if their evasion is significant, HM Revenue and Customs is reserving its rights to take action.”
It is believed that the partial amnesty will apply to hundreds of thousands of UK residents who have earned undeclared interest on offshore bank accounts. Crucially for expatriates, people who have worked overseas and retained their offshore accounts on their return to the UK will also be affected.
Those who do decide to make a disclosure have been told that the penalty imposed on any undeclared tax may be limited to 10 per cent of the amount due. However, where substantial sums are held in offshore bank accounts the penalty is likely to be more, Lane argues.
The amnesty scheme ends in November. The Revenue’s interest in taxation arising from offshore savings and investments has no end date.
What does it prove?
What the above proves is that in this era of transparency between authorities and their offshore dependencies careful tax planning is more essential than ever for expatriates and would-be expatriates. Knowing your tax status at any given time is crucial.
Generally speaking, permanent expatriates, those who have retired abroad, can happily keep their money offshore and avoid the UK exchequer.
It becomes more complicated for the working expatriate who may be on a short to medium term contract abroad and who then returns to the UK before heading overseas to take up another position. The Revenue’s position appears to be somewhat hazy in this regard and there seems to be an element of assessing cases on their individual merits. It is certainly worth checking with an adviser well in advance of returning to the UK about the taxable status of offshore savings and investments once you are back in the homeland.
Personal taxation
When it comes to personal taxation for UK expatriates, things are more cut and dried and depend on residency and Domicile.
There are a number of categories into which people fall. Liability to income tax and capital gains tax (CGT) generally depends on whether an individual is resident, ordinarily resident and domiciled in the UK. An individual is broadly liable to income tax on worldwide income if UK resident, or on UK income if non-UK resident.
In such circumstances they will be treated as non resident and not ordinarily resident from the day after departure to the day before returning to the UK.
Having such status means that they are not liable to pay tax on income or capital gains (CGT), provided these are accumulated offshore.
Domicile is more complicated and usually relates to a Domicile of origin, acquired at birth. Living in another country is not conclusive proof of an intention to change Domicile. This is an important area because it can have a major impact on inheritance tax (IHT) as an individual who is UK domiciled is liable to IHT on chargeable ‘property’ on a worldwide basis. A non-UK domiciled individual is only liable to IHT on chargeable property in the UK.
An individual can be deemed domiciled in the UK for IHT purposes if he or she was UK domiciled at any time in the three years immediately preceding the time at which the question of Domicile is to be decided or, alternatively, UK resident for at least 17 out of the last 20 years.
Simply put, any UK citizen, wherever based, remains UK domiciled unless permanently emigrating through official channels.
For those leaving the UK to work full time abroad they will be treated as Non-resident and not ordinarily resident if the employment abroad lasts for a whole tax year. Visits to the UK should total less than 183 days in any tax year and average less than 91 days in a tax year over a period of four years or more.
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