Mark Davies takes a turn as The Tax Doctor

Following the UK-Swiss Rubik agreement, German Hilda and her son must notify HMRC of their domicile to untangle their liabilities on a Swiss bank account and trust, writes Mark Davies of Mark Davies & Associates.

The case

Hilda was born and raised in Germany by German parents. At the start of her career, she lived in Switzerland where she opened a Swiss bank account, which now receives substantial interest. In 1984, she moved to London to pursue her career, marrying an Englishman the following year.

Hilda files tax returns every year, but only reports her UK income and gains. She has maintained links to her family in Germany, where she owns a second home, and intends to leave the UK on retirement.

She has an adult son, Franz, for whom she set up a discretionary trust in Switzerland in 2005 on the advice of her bank. He was born in the UK in 1986 but now lives and works in Germany. He still owns a home in London, where he receives his bank statements and correspondence, and he visits the UK to see his mother.

Hilda recently received a letter from her Swiss bank asking how she wishes to report her Swiss income to the UK authorities for both past and future liabilities. She had not realised she needed to report this income as she did not bring any of the funds into the UK. She is now concerned that she and Franz may have a UK tax liability in respect of the Swiss deposits in her name and in his trust.

The prescription

Hilda has been contacted because of the recent UK-Swiss Rubik agreement, which obliges Swiss banks to ask their clients to deal with past liabilities by paying a lump sum or by confirming they are tax compliant. Clients must also disclose their income to HM Revenue & Customs (HMRC) or pay a punitive withholding tax.

The purpose of the agreement is to make it more difficult for UK residents to avoid paying tax. HMRC estimated £3.12 billion in unpaid taxes would be collected in 2013/14. However, the Office of National Statistics reported that only £800 million was collected in 2013.

HMRC underestimated non-dom numbers

HMRC underestimated the number of people resident in the UK who hold Swiss bank accounts and are non-domiciled in the UK.

For example, in the absence of a claim to the contrary, HMRC will assume Hilda is resident and domiciled in the UK, and therefore subject to tax on her worldwide income. However, Hilda is in fact domiciled in Germany. As such, she can claim the remittance basis, which will mean she is only taxable on the foreign income remitted to the UK.

In the past, the remittance basis only needed to be claimed. But, since April 2008, non-domiciled individuals who have been resident in the UK in seven out of the last nine tax years are required to pay the remittance basis charge of £30,000 per annum (increasing to £50,000 for those resident for 12 out of the last 14 tax years).

Payment decision

In respect of past liabilities, Hilda needs to decide whether to pay the one-off charge or voluntarily disclose her tax liability to HMRC.

Her tax liability would amount to the remittance basis charge for the tax years after 5 April 2008, or she can opt to pay tax on a rising basis if it is cheaper, along with interest and penalties. Looking to the future, she must also decide whether to withhold or disclose her Swiss interest.

Trust income tax liabilities

Franz is UK domiciled and the beneficiary of a Swiss trust, but he is only liable for UK tax on any trust income or capital distributions that he might receive while tax resident in the UK.

The trustees, and therefore the trust’s bankers, may believe Franz is a UK resident because he uses a correspondence address in London. However, unfortunately for HMRC, it may transpire that he is non-UK resident, making his foreign income and gains non-taxable in the UK.

Franz’s position is more complicated than it seems at first glance as he is outside the scope of the agreement. However, he needs to demonstrate this to the Swiss bank. This is often where problems start and professional advisers are needed.

Where a lot of tax is at stake, it might be better to use other campaigns, such as the Liechtenstein Disclosure Facility, which may offer more favourable terms.

Mark Davies is director of Mark Davies & Associates

Read the full article in New Model Adviser here.