Offshore assets: what do you need to know?
Accountancy firm BDO lay out the common queries about the tax benefits of keeping assets offshore.
Whilst many offshore accounts and assets are held for legitimate reasons, the Treasury’s ongoing efforts to close the tax gap by tackling offshore tax avoidance and tax evasion means that there is an increasing degree of scrutiny on all assets held offshore.
Many families are international and will therefore choose a specific location for their family wealth, often in a trust fund. Assets are held in a country where they feel they will have the best asset protection, with factors such as financial stability and the ability to fend off legal attacks also being considered.
Many offshore account holders also look to a country with a sophisticated banking system, their primary motivation not necessarily being to reduce their tax bill. The economic climate and resultant effect on the currency are also key factors considered by those looking to keep money offshore. Switzerland, for example, is well known for its stable currency and attracts many individuals who are looking to set up an offshore account for that reason. Provided that offshore accounts are disclosed in line with one’s domiciliary and residency status, this is perfectly legitimate.
Another reason for people to have offshore assets is if they have their money invested in offshore structures. Aside from possible investment opportunities, there is often a tax benefit associated with these arrangements.
As public and Government interest in the tax affairs of corporates and individuals has increased over the past year or so, the language surrounding this area has become increasingly nuanced and, on occasion, misused.
For example, reducing one’s tax liability is sometimes referred to as ‘tax planning’ and, in the past, used interchangeably with ‘tax avoidance’. Generally speaking, unlike deliberate ‘tax evasion’ (deliberately defaulting on your tax obligations), tax avoidance per se is not illegal, however if HMRC deem a tax avoidance scheme to be aggressive, or believe a tax arrangement to be artificial - i.e. whether or not the arrangement has the sole or main purpose of achieving an advantageous tax result – then they will challenge this.
HMRC investigates these arrangements on an individual basis and arrangements are often deemed to be overly aggressive even after they have been up and running for some time, but the core difference between these arrangements and ‘tax evasion’ is down to the fact that these are disclosed to HMRC. What is clear is that this is a complex area and one on which detailed, specialist advice is needed.
Failing to disclose offshore assets and the wealth generated from these in order to not pay tax on them is, on the other hand, deemed as tax evasion. This is not always deliberate - for example, we have dealt with many clients who have not properly disclosed offshore assets because they have inherited them and were not aware of the rules around disclosure. However, even those individuals unaware they are evading tax are still held to the same standard as ‘pre-meditated tax evaders’ in the eyes of the law.
Undisclosed offshore accounts are coming under much more scrutiny from HMRC, with a special unit - the Offshore Co-ordination Unit (OCU) – taking responsibility for co-ordinating efforts to track down offshore tax evaders.
There have also been a number of bilateral tax agreements aimed at encouraging disclosure of undisclosed offshore accounts. For example, in April the Treasury launched the Offshore Disclosure Facilities (ODFs) with the Isle of Man, Guernsey and Jersey. The agreements include new, automatic Tax Information Exchange Agreements between the UK and the Crown dependencies which will allow financial information on UK taxpayers with accounts in these jurisdictions to be reported to HMRC automatically each year.
Similarly, the Swiss-UK Tax Agreement is now active (as of 1 January 2013). This agreement means UK residents with undisclosed funds in Swiss banks now have a choice of either authorising full disclosure of their affairs to HMRC or facing a one-off levy for past liabilities. The Agreement also introduces a new withholding tax. This does not just affect ‘tax evaders’, as even non-domiciled individuals (and therefore, those with legitimate offshore accounts) could find themselves being charged the one-off levy if they haven’t properly confirmed their status to the relevant authorities.
Falling foul of HMRC can lead to sizeable penalties, naming and shaming and even jail. Whilst there can be clear benefits to holding assets offshore, anyone considering this should be careful to ensure they are complying with all rules and regulations.
This article was submitted by Dawn Register, a Tax Director at Accountancy Firm BDO.