The Media: A Rant

There is a saying that there are lies, damned lies and government statistics. A recent article by the Financial Times of London, based upon research carried out by the “International Inequalities Institute of the London School of Economics (LSE)” (who have certainly lived up to their name), is proof that the saying referred to above is not limited to just governments. And no, the study wasn’t anything to do with COVID statistics and modelling, that was Imperial…

According to the FT (and we paraphrase), the study used anonymised data from 40m self-assessment returns, which found a big mismatch between the statutory headline tax rates and the reality of what wealthier people paid. The study shows that those receiving £10m a year paid an effective average tax of just 21%, while one in ten people taking home more than £1m paid a lower rate than a worker on £15,000

In other words, the rich are not paying their fair share and the richer you are, the less you pay, thereby increasing the inequality the crusaders are, well, crusading, against. They make this point by pointing to the average effective tax rates paid by each “income” group and if your effective headline rate is lower than the headline rate you are not paying your “fair share”. We have, of course, been down this rabbit hole before with Google, Amazon, Starbucks and the like – there is no such thing as “fair share”. That’s just an arbitrary, subjective concept wielded by social justice campaigners and politicians who somehow think their moral compass is the defining guide when it comes to tax matters.

However, in order to make their case, the researchers argue that everyone receives income, even if they receive amounts that are taxed as capital gains, because the majority of capital gains are just “income repacked as gains”. This is a remarkable leap of logic, but a very handy one if you want to argue that a tax rate is too low.

The researchers also have it in for those in receipt of investment income as the dividend rates are less than employment income. They do, however, cheerfully admit that they do not include the corporation tax paid by the companies that pay the dividends, which more than levels the playing field. And speaking of the playing field, they include the 2% National Insurance “top-up” as a tax, but not the main payments of National Insurance when looking at tax. Whilst we agree there is an argument for including National Insurance as a tax, the way they have done so is a little illogical, to say the least.

There is definitely a discussion to be had as to how income and gains should be taxed and whether there is a case for taxing them at the same rate (flat rate tax anyone?).  That said, making your argument using what appear to be self-serving assumptions does suggest you have little faith in your, err, arguments.

Please contact Andrew Parkes on +44 7522 229 589 or andrew.parkes@AndersenTax.co.uk

The UK Offshore Trusts Register

Since 2017, all trusts that are liable to pay UK tax of any kind (including non-UK trusts) must be registered on the UK trust register which is web-based and operated by HMRC. Trustees must have a Government Gateway account in order to report the relevant information at https://www.gov.uk/guidance/register-a-trust-as-a-trustee. Not only does the register ensure that trusts are properly registered with HMRC, it also meets the requirements of the EU’s Fourth Money Laundering Directive.

The Fifth Money Laundering Directive, which was implemented on 10 January 2020, introduces significant changes to the register, many of which non-professional or non-UK trustees may not be aware of. The main changes are as follows:

1. the register is no longer only available to government authorities, it will now also be accessible by third parties with a legitimate interest;
2. trusts which have registered previously will be required to provide additional information;
3. regardless of whether tax liabilities are due, all UK trusts are required to register;
4. trusts outside of the EU which enter into business relationships with a UK service provider or acquire UK real estate, will be required to register; and
5. when entering into a business relationship with an “obliged entity” (i.e. an entity subject to AML rules such as banks, estate agents, accountants or solicitors), trustees must supply the trust’s registered beneficial ownership information. It is the responsibility of the service provider to report any discrepancy between information received from trustees as part of due diligence procedure and the register.

When registering, the following information will be required:

1. name of the trust;
2. formation date of the trust;
3. place from which the trust is administered;
4. details of the trust’s assets including location and value;
5. ‘Identity’ of the settlor, trustees, protector and any other persons who have control over the trust; and
6. ‘Identity’ of the beneficiaries or classes of beneficiary.

For the purpose of identifying individuals, there is a requirement to report their name, date of birth and national insurance number (if UK resident). For non-UK resident individuals, an address and passport/ID number must be provided.

The following registration deadlines apply:

• Trusts formed prior to 10 March 2020 must register by 10 March 2022
• Trusts formed after 10 March 2020 must register within 30 days
• If there are any changes to the beneficial owners of the trust, the register must be updated within 30 days from the date of change

Once registered, trustees will be required to make an annual declaration that the details on the register are correct. Information provided will be retained on the register for 6-10 years after the trust is terminated or at the point at which information becomes outdated.

As mentioned previously, all UK trusts must register along with any non-UK trusts that have a UK tax liability (such as income tax, capital gains tax, inheritance tax or stamp duty). However, there are some exceptions to this where information is already available via other platforms (i.e. Charitable trusts registered on the Charity Commission) and/or there is minimal risk of the trust being used for money laundering or terrorist financing purposes.

HMRC are still to provide further guidance with regards to exempted trusts; however, some examples of those confirmed to be exempt are listed below:

• Charitable trusts
• Registered pension schemes
• Statutory trusts, for example trusts arising from intestacy or upon a court order such as a divorce. This also includes implied and constructive trusts
• Trusts created for the benefit of vulnerable beneficiaries
• Employee trusts, including approved share option and profit sharing schemes
• Trusts holding life/critical illness policies where there is no surrender value

It is important to point out that although these trusts are not required to register in order to comply with the EU’s Fifth Money Laundering Directive, if a trust has a UK tax liability then it will still be required to register, regardless of whether it is listed as exempt from registration for EU Directive purposes.

If you have any questions or would like to know more,
please contact Julian Nelberg on +44 7803 502 555 or julian.nelberg@AndersenTax.co.uk

or Lizze Corkery on +44 7729 667 616
or elizabeth.corkery@AndersenTax.co.uk

The taxation of offshore trusts and pitfalls to beware of!

Under UK tax law, a trust will be ‘settlor interested’ if the settlor and spouse are not specifically excluded from benefiting. The consequences of this are that income and gains of the trust are taxed in the hands of the settlor as they arise, subject to the domicile status of the settlor.

For UK resident and domiciled individuals, self-settled offshore trusts are often of little benefit since assets settled upon trust are (subject to a few exceptions) subject to an immediate inheritance tax (IHT) charge of 20% and income and gains of the trust are taxed to the settlor on an arising basis. The situation, though, is quite different for UK resident non-domiciled (RND) individuals for whom offshore trusts remain very advantageous despite changes to the taxation of RNDs introduced by the March 2017 Finance Bill (which were withdrawn due to the snap election and subsequently enacted with retrospective effect from 6 April 2017 as originally planned).

Trusts, however, should be approached with caution. The circumstances in which they can be used are relatively limited and for many individuals the thought of losing control of their wealth isn’t particularly appealing despite the potential tax benefits. Whilst steps can be taken to provide the settlor with a degree of control (ranging from the appointment of a Protector, to reserving specific powers all the way to creating a Private Trust Company structure), these will potentially taint the tax status of the trust.

Notwithstanding these words of warning, trusts are beneficial to RNDs provided careful planning steps are taken. This is because RNDs can benefit from the remittance basis of taxation (i.e. foreign source income/gains are liable to UK tax only to the extent they are remitted to the UK). In the context of a settlor interested offshore discretionary trust, income and gains arising to the trust will not be liable to UK taxation provided they are kept offshore and not remitted to the UK. Furthermore, RNDs contributing assets to the trust will not be liable to the 20% entry charge referred to above since they are outside the scope of IHT. However, the benefits of the remittance basis don’t last forever, and there are certain pitfalls RNDs need to avoid to ensure their offshore trust remains protected.

The remittance basis – make sure you claim it! 

It is vital that RNDs file a UK tax return and elect the remittance basis to ensure they are not taxed on their worldwide income. The remittance basis is a yearly election, and failure to claim for a particular tax year will result in worldwide taxation. However, this rule does not extend to the non-UK income and most gains of a protected offshore trust (see below).

The Remittance Basis Charge

HMRC wouldn’t allow individuals to file on this basis without getting something in return eventually. After much political debate about the fairness of the remittance basis, and taxation of RNDs generally, the Remittance Basis Charge (RBC) was introduced on 6 April 2008. RNDs that have been resident in the UK for seven of the past nine tax years, are required to pay the RBC of £30,000 in order to claim the remittance basis for that year. For RNDs that have been resident for 12 of the past 14 tax years, the RBC increases to £60,000.

Of course, at this point it is necessary to consider whether paying the RBC is more beneficial than being subject to worldwide taxation. This is essentially a cost/benefit exercise and will depend on the level of the RNDs offshore income and gains. If the RBC exceeds the RNDs potential UK tax liability, or the benefits are marginal, then filing on the arising basis may be the best option.

Becoming ‘deemed domiciled’ and keeping your trust protected

RNDs that have been resident in the UK for 15 of the last 20 tax years are now considered ‘deemed domiciled’ for UK tax purposes, which means they are taxed in the UK on their worldwide income and gains. That is, the remittance basis of taxation is no longer available to them.

HMRC have, however, provided relief for those RNDs with offshore settlor interested trusts who become deemed domiciled.  RNDs who were resident in the UK on or after 6 April 2017 and settled a trust before they became UK deemed domiciled, would otherwise be taxed on an arising basis in respect of trust income and gains. However, those trusts are given ‘protected’ status, meaning the settlor is not taxed on the non-UK income and most gains as they arise (UK residential property, UK business property, carried interest and offshore income gains are still subject to UK tax). The trust and its assets are therefore protected from UK taxation.

It is possible for a trust to lose its protected status. If an addition has been made to the trust after 6 April 2017 and the individual is deemed domiciled in the UK at the time, then the trust no longer has this protected status. This would bring the trust within the scope of UK tax and the RND would be taxed on the income and gains on an arising basis. It is therefore vital not to make any contributions to offshore trusts once an individual has become deemed domiciled.

Certain additions into the trust can be disregarded, allowing the trust to maintain its protected status; however, the rules around this are complex and require advanced planning.

Do I need to disclose this to HMRC? 

If you are a UK resident, non-domiciled settlor of an offshore settlor interested trust and you have not reported the income and gains on your tax return when you should have, then a disclosure will need to be made to HMRC using their Worldwide Disclosure Facility in order to settle any outstanding tax liability.

When making a disclosure like this, HMRC have the power to request the accounts of the trust and various other pieces of information, to ensure the disclosure is correct and there are no more compliance errors. If HMRC discover you have been non-compliant, severe penalties can apply.

What should I do?

If you are the settlor of an offshore trust and are concerned about any of the issues raised above, we can help. We have a great deal of experience with regards to the planning of offshore trusts, as well as dealing with HMRC disclosures and investigations.  More information on disclosures to HMRC and the information they are able to obtain, can be found in our next article below.

If you have any questions or would like to know more,
please contact Miles Dean on +44 7785 770 431 or miles.dean@AndersenTax.co.uk

or Luke Jenkinson on +44 7494 157 948
or luke.jenkinson@AndersenTax.co.uk

Offshore Assets: Automatic Exchange of Information

If you are a UK tax resident filing on the arising basis by virtue of being UK domiciled or otherwise, you are required by law to declare your worldwide income and gains to HMRC. HMRC have significant powers regarding offshore assets and it is important to understand what information is provided to HMRC by third-parties and your disclosure obligations.

Can HMRC obtain information about my offshore structure?

Yes – Originally agreed in 2014, the OECD developed the Common Reporting Standard (CRS) which requires all financial institutions to automatically exchange information annually with other jurisdictions. HMRC began to receive information under the UK’s Automatic Exchange of Information Agreements from October 2018.

The upshot of CRS means that offshore financial institutions have a duty to report information about account holders to HMRC, including but not limited to:

• name and address;
• country of tax residence;
• total value of the accounts held at the end of the calendar year; and
• income produced in the account (i.e. interest and dividend income, proceeds on the disposal of assets etc.)

What does HMRC do with this information?

HMRC analyses the data received and compares this to what is reported on an individual’s tax return. If HMRC discover non-compliance where income and/or gains have been omitted from an individual’s tax return, severe penalties can apply.

The actions that HMRC are able to take, include:

• assessment of penalties against Individuals ranging from 100% to 300% of tax due on undisclosed income (in some cases, an asset based penalty may also apply);
• any entity that fails to prevent tax evasion can be liable to unlimited fines; and
• possible strict liability criminal offence for failure to report offshore income or gains.

To enable HMRC to sort through the high volume of information provided under the CRS, timeframes in which HMRC may raise an assessment into an individual’s tax return have been extended to 12 years (extended to 20 years where HMRC deems there to be deliberate tax evasion).

The level of penalty assessed will depend on various factors, including:

• if the disclosure was prompted by HMRC or voluntarily by the individual;
• if the non-compliance was deliberate and / or concealed; and
• if the individual has a ‘reasonable excuse’ for non-compliance (i.e. if the individual received advice from a tax adviser).

Do I need to make a disclosure to HMRC?

It is important to review your previous tax filings to ensure you have been compliant. If you are in any doubt, we are available to assist in reviewing your offshore assets and to advise on whether a disclosure should be made.

If you believe a disclosure to HMRC needs to be made in order to declare previously omitted income or gains, our team can assist with making a disclosure through HMRC’s ‘Worldwide Disclosure Facility’.

We can further assist by:

• calculating additional tax due and estimating penalties to be assessed; and
• corresponding with HMRC on your behalf, including in relation to any queries which arise due to the disclosure and negotiating the best possible outcome.

If you have any questions or would like to know more,
please contact Julian Nelberg on +44 7803 502 555 or julian.nelberg@AndersenTax.co.uk

or Luke Jenkinson on +44 7494 157 948
or luke.jenkinson@AndersenTax.co.uk