With the focus of the UK HMRC targeting tax avoidance and the moves in European jurisdictions to ‘out’ tax evaders and so called ‘fiscal ghosts’, Steve Bold of The Family Office Europe, a practice dedicated at assisting UK expats, writes here to explain some of the tax implications of moving abroad and living in Gibraltar and Spain.

In Lord of the Rings Gandalf, when asking about the “One Ring”, asks “Is it secret, is it safe”. This phrase perfectly describes the conundrum facing many UK ex pats in Gibraltar and Spain.

For many years now UK expats have been merrily moving to sunnier climes to take advantage of friendlier tax regimes in the knowledge that the UK HMRC would find it difficult to impose little or no tax on any income or appreciation in the value of their assets or investments. However, many have been living on borrowed time, so what can they do about it to ensure that, although their position is no longer necessarily secret, at least their assets can be made safe from unwanted raids by the HMRC or even the Spanish Hacienda.

What has changed?

Over the past 10 years, there has been a sea change in the way HMRC and other jurisdictions have approached so called tax avoidance by its citizens. In essence, a pro-active and aggressive information gathering capability has been implemented and expanded upon. Unfortunately whilst treading this path the policies have had unexpected and unwanted side effects on legitimate tax planning.

The road began with the Offshore Disclosure Facility that morphed into the Liechtenstein Disclosure Facility, the Swiss Accord and numerous UK centric opportunities for doctors, plumbers, teacher’s et al to take advantage of an “amnesty” to disclose non-taxed income or gains to HMRC.

The European Savings Directive ensured that EU banks had an obligation to disclose to account details if asked by another member and more recently, the USA led Foreign Account Tax Compliance Act (FATCA) legislation is gaining momentum.

In the 2013 Budget George Osborne reaffirmed the UK’s policy to go after non-compliant expats and follow the lead of the USA.

The US FATCA is being mirrored by the UK in what is being dubbed “Son of FATCA”. This will require foreign banks and financial entities to find any UK account holders and disclose their balances, receipts, and withdrawals to the HMRC and in appropriate cases subject these to an agreed withholding tax on income from UK financial assets held by the banks or financial entities. The owners of these foreign-held assets must report them to HMRC or risk hefty penalties on understatements of income in an undisclosed foreign financial assets.

The Spanish authorities have brought in a law that requires any person living in Spain to disclose their worldwide assets. Living in Spain simply means being physically present in Spain for more than 183 days per annum, which many expats will fall into despite claiming residence elsewhere. This includes a long list of bank accounts, trusts, company shareholdings, investments such as offshore bonds and so on. Pensions are exempt from reporting but if this “big brother law” is ignored, and the Spanish are being very creative in the way they are seeking out ‘fiscal ghosts’, then the penalties are substantial.

Does this represent an intention to introduce a new “ expat tax” – I would suggest that this is quite likely.

So keeping things secret seems to be a thing the past.

So how do you keep your assets “safe” and compliant?

Firs things first- have you really left the UK for tax purposes?

Too often, we have met high net worth individuals who, just because they have -left the UK and have kept within the restrictions imposed by HMRC guidance notes, think they are safe from any further UK tax. It is not as simple as that, especially from 6 April 2013.

From 6 April 2013, the UK has introduced a statutory residence test to replace the vague and often contradictory guidance previously available. This finally sets out in legislation tests to determine whether an individual has really left the UK.

The rules will set out the meaning of:

• Residence; including how the 90 nights rule in the UK will operate and of greater importance, the use of ties to the UK as a determining factor. Prior to the legislation HMRC used a 93-question guide to help determine whether an individual had properly broken their ties to the UK. This will have a significant effect on entrepreneurs who may still have businesses in the UK.
• Workdays in the UK; these will be restricted to 31 days per annum where an individual works for at least 5 years in the UK.

In addition, the legislation contains other definitions and provisions that will seek to make it more difficult to become truly non-resident unless almost all ties are broken with the UK.

HMRC will soon have access to passport information. From 2014 the border agency will log the arrival and departure of UK passport holders. So any thought of fudging the number of nights in the UK will become very difficult. The HMRC are also monitoring credit card use to see whether or not an individual’s expenditure is greater than any income that they are declaring.

It is vital for anyone who has left the UK or intends to leave the UK permanently to seek professional advice. So if you are considering a move to or close to Gibraltar, take Cat 2 residence and sleep at right, take advice.

Inheritance Tax (IHT) – Domicile not Residence!

So, you have determined you are now not resident in the UK. That’s fine for income tax and capital gains tax but what about your legacy. How will your family cope when you have gone?

It will come as a nasty shock to some non-residents that, although you may be safe from attack by being unexpectedly resident, you may not be safe from IHT.

Inheritance Tax (IHT) is based on your domicile and has nothing to do with where you may be resident. Domicile is determined by where your father was born and for many UK expats losing their UK domicile is extremely difficult if not nigh on impossible.

Jurisdictions have different rules when it comes to succession. Most EU members have a Napoleonic succession regimes which set out how a deceased’s estate is to be allocated. This is often at odds with UK IHT and as a consequence it is sensible to have two wills, one say in Spain/Gibraltar and one effective in the UK. This is a simple protection measure but there are other steps you can take to protect your assets from the ravages of a 40% IHT bill on death.

Asset Protection

How then can you ensure that your assets are safely held and you can sleep peacefully at night as:-

• Hiding them abroad is a thing of the past,
• UK residents need to be aware of changes which will affect their tax position, not only whilst actually in the UK, but also if you have or intend to move.
• Those who have already moved need to be aware of the implications in their chosen country of residence and also watch out for any pitfalls during or after their move.
• Be aware of all your options. The current economic climate requires a different approach to planniing your tax affairs with asset protection being paramount. Advice should always be sought and any actions carefully thought through.

Over the past three years The Family Office (Europe) has helped a number of wealthy individuals arrange their affairs in a manner that gives them more control of their assets in a protected environment. All our clients have, after some simple restructuring, become truly non-resident. Some have taken Category 2 status here in Gibraltar. Others have become resident in Spain using a variety of tax compliant strategies.

Example

Richard ran a successful business in the UK and wanted to relocate to Sotogrande to educate his children in the International School, whilst his wife was a keen equestrian. He was initially advised to take Category 2 status in Gibraltar, but it was obvious from outset that he would be living in and commuting from Spain. He had set up a new software business in Spain to mirror his UK business and was employing local people. We advised on taking the Beckham Strategy in Spain as his other business income from the UK, and investment income outside the UK from a previous business sale would be exempt from assessment. By structuring his income more efficiently, we were able to ensure that he was legitimate in Spain, had left the UK properly and was able to sleep at night.

The Family Office Europe aims to help high net worth individuals and their families navigate through the shark invested waters that exist in many offshore jurisdictions where “the man in the pub” always has the best ideas on how to arrange your affairs!

The Family Office Europe, its affiliated businesses, TFO Tax Strategies Ltd based in Gibraltar and TFO Tax LLP in the UK, and appointed Advisory Board, are well placed to help with all these pressures.

Mike Nicholls is an Advisory Board Member of TFO Tax Strategies Ltd.

Written by: Steve Bold of The Family Office Europe