Everything in order
The advantages of the Liechtenstein Disclosure Facility (LDF) have been widely discussed, especially by UK tax experts: any asset in the world that a UK-domiciled taxpayer has not yet disclosed can be legally declared by using the LDF to create a ‘footprint’ in Liechtenstein. Given the rapid changes afoot and the clear momentum worldwide toward individuals ensuring that their financial assets are fully declared, a solution such as the LDF offers an excellent opportunity for wealthy UK nationals to regularise their tax affairs and at the same time benefit from immunity from prosecution.
The LDF is seen as the only structured and safe way to get financial affairs sorted out in an orderly fashion for good, so the scheme can help clients in their long-term wealth planning. Take, for example,1 a wealthy family going through a divorce. When settling their financial affairs, it was found that there was an undeclared account with a Swiss bank. It was decided with the help of tax experts that the best way to move forward was to use the LDF and then distribute the funds among the parties in equal parts.
Another elderly couple sought advice as they had inherited funds in a previously undeclared account in Luxembourg from a distant relative. Embarrassed by this windfall, and intending to distribute the inherited assets while they were alive, they quickly decided with their tax accountant that the LDF was the best way for them to move forward with a clear conscience and get on with their lives.
Elsewhere, the child of a family who owned a small manufacturing business in north Wales learned that his deceased parents had invested their savings in a small cottage in southern France, which they never declared. Thanks to advice from a British tax advisor in France, he could disclose the house by creating a footprint account in Liechtenstein. Thereafter, he was free to legally sell it at his pleasure and to invest the proceeds in his vintage car collection.
The LDF is the best route for parties who wish to regularise their tax affairs
Even resident, non-domiciled citizens can use the LDF to their advantage. Another family had previously banked with an institution that was unfamiliar with their UK tax status. Because of this, the bank invested in UK assets continuously in an asset management scheme and at the same time mixed capital and income at discretion, while the family was making regular remittances to the UK. The LDF is now a vehicle they use to bring their financial affairs into order. They have set up correct accounting and reporting as required in these circumstances.
HMRC has announced an increased focus on tax investigation, hiring more tax investigators to find those who have not come forward to disclose funds. Those they discover will be liable to pay fines and back taxes on undeclared funds, as well as interest amounting to about 150 per cent of the principal. Not playing by the rules can be expensive and, on top of the hefty fines, can also ruin the existence of previously respectable members of the public.
It is therefore good news for many that HMRC has agreed to extend the deadline for the LDF tax amnesty from 2015 to 2016. According to HMRC, this is because of the unexpectedly high demand for the facility: it has already achieved more than the number of applications for disclosures originally expected for the whole period. This achievement in itself shows the attractiveness of the LDF, which has helped more than 2,000 wealthy families and individuals to clear their tax affairs. Many people are concerned that they may suddenly find themselves at the centre of a tax investigation, but thanks to the LDF, there is no need to stay in hiding, worrying about being detected by one of the international information exchange programmes that exist between governments.
There are two ways to take advantage of the LDF. The first is to establish an account with a Liechtenstein bank and fund it with a meaningful amount compared to the total amount to be declared. Alternatively, if a trust or holding vehicle is involved, the title can be transferred to a Liechtenstein entity, for example by adding Liechtenstein trustees to a trust, creating a bare trust or using nominee services via the principality.
Usually, the providers in Liechtenstein also offer tax-based accounting services, whereby UK residents taking advantage of the LDF can identify reportable income and realised capital gains over ten years. If LDF participants do not yet have a UK tax solicitor or accountant advising them, a list of trustworthy partners will usually be provided on request. The process is then started by that UK advisor after the Liechtenstein footprint has been established.
The process can be implemented very quickly, giving participants peace of mind that they have taken the necessary steps towards the legal declaration of their assets. Another attraction of the LDF is that, after paying the necessary dues and completing the process, participants are not criminalised for their previous non-declaration of assets, which can happen in other jurisdictions.
It seems the view of the tax planning and accounting industry is that currently the LDF is the best and probably the cheapest route for concerned parties who wish to regularise their tax affairs and regain full control of the underlying assets.2 The Swiss agreement has not yet been ratified by the UK and Switzerland parliaments. As long as this is the case, there is no real Swiss alternative to the LDF and there is no other viable alternative to help wealth owners regularise tax affairs quickly without being criminalised.
At the same time, HMRC has made it clear that it is continuing to use information obtained on the basis of tax information exchange agreements with other countries – or indeed from data leaks – against those who have not used the time to bring their tax affairs in order. Waiting, therefore, is not a well-advised option.
Investors who have gone through the LDF process have the freedom to use their funds freely – for tax-compliant asset management purposes, for investment or for consumption. Those who want their heirs to inherit pleasant future possibilities instead of a bundle of complicated problems, with the burden of potential legal action, are advised to take advantage of the LDF now rather than later.
Comparing the Swiss and Liechtenstein routes
UK-Swiss withholding tax
Liechtenstein Disclosure Facility (LDF)
What it is
Based on the EU savings agreement, the contract between the UK and Switzerland regulates the anonymous deduction of a withholding tax on Swiss bank accounts of UK account holders.
The LDF agreement between the UK and Liechtenstein outlines a disclosure process for internationally diversified assets that includes immunity from criminal prosecution.
Which assets are affected?
All assets held in Swiss bank accounts by UK-related beneficiaries. This includes: accounts in own name through structures; insurance wrappers.
Worldwide assets of UK-related beneficiaries in need of regularisation. This includes: accounts in own name through structures; insurance wrappers.
What is resolved?
Securing the status quo of assets held in bank accounts in Switzerland.
Regaining full control over globally diversified assets by gaining tax compliance in a calculable process.
For past liabilities: 19% to 34%. For future investment income and gains: 27% to 48% each year.
Taxation of income/capital gains with the individual tax rate of the respective taxpayer from 1999 to 2009; or A single composite rate of 40% tax for all income, profits and gains, which will cover all UK taxes, with no reliefs or other deductions allowed (this may be attractive for clients with inheritance tax liabilities for the past ten years).
Normally 10% for 1999 to 2009, based on the tax payable. 20% to 30% from 2009, based on the tax payable.
Privacy and risk
From Swiss bank’s perspective, the client stays anonymous. The Swiss government shares with UK government information on undisclosed asset outflows. No tax compliance assured.
Giving up anonymity by making the disclosure to HMRC. Protecting privacy with ‘no naming and shaming’. Reducing risk effectively in becoming tax compliant.
Treatment of non-doms
To avoid withholding tax, non-doms have to deliver proof of compliance to HMRC via a tax advisor. Special conditions apply for the one-off charge as well as for 2013 and on.
Non doms may use the LDF to resolve tax matters with HMRC and to become tax compliant.
LDF advantages cannot be ignored
About the author: Fiona Fernie is a Partner in the Tax Investigations team at BDO, London
Given uncertainty around the application of the UK-Swiss Tax Agreement and the government’s well-publicised need to tackle the budget deficit, this recent extension (to 2016) of the LDF is not surprising.
Since the LDF was launched, there has been a steady stream of interest from clients. In return for disclosure, HMRC will charge a fixed penalty of 10 per cent on unpaid duties up to 5 April 2009; for tax years thereafter the penalty is subject to negotiation. The terms of the LDF are particularly favourable in light of the other options for tax disclosure, and the risk of HMRC opening an investigation. The LDF covers all UK taxes, including inheritance tax, which is helpful for executors dealing with death estates as offshore money is often passed down the generations. It is possible to transfer certain assets into Liechtenstein to qualify for the special terms of the LDF.
It is advisable to disclose early when using the LDF as the level of benefit derived from the terms of the agreement decreases as time passes: the tax, interest and penalty will all only get higher the longer a taxpayer waits to come forward.
HMRC is taking an increasingly hard line on tax evasion and, with information exchange between jurisdictions getting more sophisticated, the advantages of the LDF cannot be ignored. The environment for tax evaders is tightening, and this is the best option to avoid getting caught.
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