In April 2011 I wrote about the use of executive aircraft (also known as “bizjets”) and whether they should be considered as just expensive toys or are in fact justifiable business tools. I came to the conclusion that, even given the hugely depressed market conditions that we were experiencing at the time, there were several good reasons why, in the right circumstances, their use by company executives could be viewed as beneficial and therefore justifiable.
So two-and-a-half years on and with the economy in somewhat better shape in certain areas I thought I would re-visit the subject but this time also with an eye on the water-based equivalent – the superyacht.
Recently I had the pleasure of chairing the Second Gibraltar Superyacht Forum. The forum included its fair share of corporate back slapping and self-promotion that one expects at such events but nevertheless we came to the inevitable conclusion that, as an industry, we needed to do far more to attract these super sleek vessels – and their owners – to Gibraltar. No one has yet held a “bizjet” conference in Gibraltar but I would imagine the conclusion would be broadly similar.
That is not to say that we do not see superyachts and bizjets regularly here in Gibraltar. In fact I am able to indulge two of my passions – spotting interesting aircraft and yachts – from the same terrace without moving a muscle. And of course Marina Bay is soon to feature the luxury floating “yacht hotel” Sunborn, which aims to attract thousands of highly affluent guests every year.
But why do they come to Gibraltar and should we not be encouraging their owners, or at least their skippers, to stay a little longer? We should of course respect people's right to privacy but we might guess that many of these jets are flying in business leaders and entrepreneurs to discuss or sign deals. That is after all the whole point of our attractive commercial legislation, advantageous tax regime and strong professional services sector. But there are many other possible reasons. I know of one famous sportsman who simply uses our airport as a convenient stop off on his way to play golf at Valderrama. Still others may be heading for the playground that is Marbella, just 50 miles up the cost.
No matter the reason, these aircraft are generally delivering wealthy human cargo to our little bit of the Mediterranean. The conclusion we reached at the Superyacht Forum was that, in contrast, many of the superyachts we see here are more likely to be taking on fuel and other supplies rather than carrying their owners to Gibraltar as a destination in its own right. This must be a wasted opportunity.
Gibraltar may not offer the razzmatazz of St Tropez or Monaco (would we want it to?) but there are excellent facilities available at Marina Bay, Ocean Village and Queensway. And for business aircraft, the airport's excellent Wessex Lounge now boasts state of the art facilities although we remain some way from offering full facilities – known as FBO – to visiting aircraft, their owners and crews.
Gibraltar's yacht registry has an excellent global reputation but we cannot register aircraft here. By way of comparison, the Isle of Man has grown from a standing start into one of the world's largest “bizjet” registers in just a few years. And the Channel Islands are planning to pick up some of this action when their own register opens in Guernsey later this year.
But are there really that many corporate jets around? Well yes actually. Brian T Richards director of Sovereign's aviation division, RegisterAnAircraft.com, tells me that in any one year, new jet registrations around the world can be numbered in the hundreds. It may not sound a lot but when one bears in mind that these sleek machines can cost several million pounds – and in the case of Gulfstream's new flagship G650, upwards of 40 million sterling – one quickly begins to appreciate the industry's potential for high grade business.
Are yachts the same as jets? Can they really be categorised as business tools, especially in these straitened times when all forms of corporate excess are frowned upon? I guess the answer depends on the use to which one puts such an asset. One can pootle about in a yacht – as Miranda might say: “good word that, ‘pootle'”. The Oxford English Dictionary defines it as “moving or travelling in a leisurely manner”, which was first coined in the 1970s as a blend of “poodle” and “tootle”.
No matter, you can definitely pootle in a yacht. As a former private pilot myself I'd strongly suggest not pootling in the air – it is highly likely to ruin your day. Put simply, jets or their turboprop cousins can get to places quickly – often faster and more efficiently than a scheduled flight. But even the fastest superyachts are going to take considerably more time getting from one place to another.
In my 2011 article I used an example where a group of six people needed to travel from Gibraltar to Nice. By coincidence I now find that I need to travel this very route next month with a couple of colleagues as we are due to represent Sovereign's marine arm, RegisterAYacht.com, at the Monaco Boat Show, which is a train ride from Nice. What a palaver it is to get there! There are several options but all involve a stopover in both directions.
In the end we decided on Barcelona – by a curious and commercially cockeyed bit of planning, that city's annual boat show is on at the same time as Monaco so we get two for the price of one – but to do this we need to drive to Malaga in the first place. How much more efficient it would be if the three of us could simply be whisked directly from Gibraltar to Nice by a bizjet in little over an hour with – if my Finance Director is reading this, please note! – the requisite helicopter transfer at the other end to put us down in Monaco.
So to finish, I'll make a suggestion as to what we might do to attract these people and their “toys”. The “double move”. Why not specifically target those wealthy individuals or captains of industry who are in the fortunate position of owning (or at least having access to) both a corporate aircraft and a yacht? The latter could be moored down here semi-permanently and the owners could fly into our new airport any time they like – from anywhere in the world.
Is that a realistic proposition? Why not? It's already happening in a discreet way. You won't necessarily read about it in the Gibraltar Chronicle but it is happening – I know because some of our clients do just this – but we need to attract far more. How we best to go about this is the question – and one that I am happy to leave to the experts. There has already been a great deal of public investment in our airport and private investment in both our marinas so we should all work hard to attract more of these wealthy people and their entourages. After all wealthy people spend money so it has to be beneficial all round.
Sunday, September 8, 2013
Thursday, August 22, 2013
All the fun of the fair
In the pursuit of ‘fairness’, a new value-related annual charge is making the avoidance of UK inheritance tax on company-owned property registered offshore a lot trickier. Now may be the time to call in expert help
Whenever the UK Treasury or HM Revenue & Customs (HMRC) refer to “fair taxation” what they really mean is considerably increased taxation.
An example of this came in May last year when a consultation document entitled Ensuring fair taxation of residential property transactions was published.
The resulting draft legislation was published on 11 December 2012 outlining the new taxes and charges that will have to be paid by offshore companies which own property in the UK worth over £2m. There were some significant changes from the consultation paper. Next, the actual legislation was included in the Finance Bill 2013 and again showed changes from the draft, not least in the name of the new annual charge.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2m and which are owned by “non-natural persons” – this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Avoiding IHT
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property, after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non-UK asset and therefore not subject to UK IHT, as long as the owner is not UK domiciled.
Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty and land tax (SDLT) as any subsequent sale of the property could be affected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Pushing the envelope
Offshore companies which own property worth over £2m will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% capital gains tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively to third parties. Those who have purchased property purely as a buy-to-let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be affected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust, or even occupiers of the property.
Italian job
Let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (Part 3 of the Finance Bill 2013). The property’s value as at 1 April 2012 will determine the liability to ATED. The company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 .
This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However, until 30 April 2018, the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed. Broadly, the charge is reduced to reflect the number of days in the chargeable period during which the property was not held in the company, (FB s158(4) sets out the procedure for making the interim relief claim).
For example, if the property were to be sold to a third-party individual on 30 September 2013, the seller company could reclaim 50% of the original charge, which must be paid by 31 October 2013. The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary regulations to be published in the summer.
Capital gains tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013. The FB has inserted a new CGT code into TCGA 1992 to account for ATED-related gains. The calculation of the base cost is found in the new Schedule 4ZZA in TCGA. Refer to paragraph 3(2).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow directorship
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit-in-kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT as the asset would still form part of the beneficial owner’s estate. However, there would be CGT to pay – if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992.
Individual ownership
This plan would involve GS’s family members establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
From the above, it will be apparent that this is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, professor of law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
Whenever the UK Treasury or HM Revenue & Customs (HMRC) refer to “fair taxation” what they really mean is considerably increased taxation.
An example of this came in May last year when a consultation document entitled Ensuring fair taxation of residential property transactions was published.
The resulting draft legislation was published on 11 December 2012 outlining the new taxes and charges that will have to be paid by offshore companies which own property in the UK worth over £2m. There were some significant changes from the consultation paper. Next, the actual legislation was included in the Finance Bill 2013 and again showed changes from the draft, not least in the name of the new annual charge.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2m and which are owned by “non-natural persons” – this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Avoiding IHT
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property, after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non-UK asset and therefore not subject to UK IHT, as long as the owner is not UK domiciled.
Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty and land tax (SDLT) as any subsequent sale of the property could be affected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Pushing the envelope
Offshore companies which own property worth over £2m will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% capital gains tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively to third parties. Those who have purchased property purely as a buy-to-let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be affected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust, or even occupiers of the property.
Italian job
Let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (Part 3 of the Finance Bill 2013). The property’s value as at 1 April 2012 will determine the liability to ATED. The company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 .
This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However, until 30 April 2018, the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed. Broadly, the charge is reduced to reflect the number of days in the chargeable period during which the property was not held in the company, (FB s158(4) sets out the procedure for making the interim relief claim).
For example, if the property were to be sold to a third-party individual on 30 September 2013, the seller company could reclaim 50% of the original charge, which must be paid by 31 October 2013. The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary regulations to be published in the summer.
Capital gains tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013. The FB has inserted a new CGT code into TCGA 1992 to account for ATED-related gains. The calculation of the base cost is found in the new Schedule 4ZZA in TCGA. Refer to paragraph 3(2).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow directorship
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit-in-kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT as the asset would still form part of the beneficial owner’s estate. However, there would be CGT to pay – if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992.
Individual ownership
- There would be no ATED charge from 6 April 2014 onwards provided the transfer was made to the individual before that date.
- There would be no UK CGT on a future disposal provided GS used the property as his main residence throughout the entire period of his ownership.
- There would be no shadow director issues which can arise with corporate ownership.
- The property would be subject to UK IHT of 40% on GS’s death.
- The ability to mitigate the charge with debt or even bank finance has been severely restricted, as a new s175A IHTA 1984 which severely restricts the deductibility of debt on death has been inserted.
This plan would involve GS’s family members establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
- The property would be outside the charge to UK IHT.
- There would be no CGT on a future sale by the trustees.
- There would be no ATED from 1 April 2014.
- There is a 10-yearly charge of up to 6% on the net asset value of the trust’s UK assets. However the charge should be mitigated by the value of the loan the trust owes to GS on the 10th anniversary. This position needs to be carefully watched. It is possible that the debt may not be deductible under section 162A which is to be inserted into IHTA by the Finance Act. As yet it appears s.162A would not deny a deduction but it may be subject to further amendments before it hits the statute books.
- The trust would need to avoid selling the property, thereby realising a potential gain, when GS is UK resident. Otherwise GS would be subject to UK CGT to the extent that the value of his rent-free occupation could be matched with the gain made by the trust on the sale. The liability would be significant but can be avoided provided GS is not UK resident in the tax year of the disposal and is not caught by the five-year rule noted above.
From the above, it will be apparent that this is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, professor of law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
Thursday, July 18, 2013
How Deep is the Green
I have attempted in previous articles to ascertain whether the global economy is improving. Some “green shoots” had certainly been identified by economists but, as I found, it was much harder to determine the depth and extent of the “green-ness”.
In other words, can we say a recovery is really underway or is new growth so fragile that it could vanish at the first blow of the levanter? Worse, and to borrow an over-used phrase, could it be that the light glimpsed at the end of the tunnel is actually another train bearing down on us from the opposite direction?
As usual, I should remind you that these columns represent my personal opinion rather than those of my employer. This month, that disclaimer is necessarily broader than usual because my opinion is firmly skewed in one direction – that there are “green shoots” to be found and therefore reasons for optimism.
We should also bear firmly in mind that it’s not the same story for everyone. Far too many people – here in Gibraltar or further afield, notably Spain – are dealing with, or living in fear of, unemployment. Personal financial concerns remain the concern of the majority rather than the minority, whether it be paying bills now or worrying about savings in the future.
So where do I detect these green shoots of recovery? Beginning at home, I have always contended that Gibraltar has shown real resilience in facing the recent economic maelstrom. We are extremely fortunate here to have a robust, growing economy based on several, widely diverse, sectors – financial services, tourism, gaming and shipping to name a few.
So to call a recovery here might be misleading. Indeed one might say that Gibraltar is only now seeing the real impact of the financial woes that have affected the rest of Europe in recent years. Everyone is aware of the difficulties in distinct sectors – local banking to cite one example – but taken overall, opportunities are already presenting themselves in Gibraltar as we face the realities of a new economic order.
It is pleasing to see new businesses setting up in Gibraltar every month. Some of these represent brand new economic interests whilst others build on existing activities where we have proven experience and can offer highly trained personnel.
A good example of the latter is Hyperion Family Office, a recent addition to the Gibraltar finance scene although the principals are all well-known locally. I listened to an economic presentation at one of its recent breakfast events that was so positive about “green shoots” that I was in danger of turning green myself – with jealousy. But as the speaker was a client director at a global investment firm, you would perhaps expect him to be a “glass half full” type.
I follow several “barometers” in order to gauge how real any recovery might be. Stock markets around the world are very volatile but several of the major indices are at levels not seen for many years. Indeed some, such as the Dow Jones in New York and the DAX in Frankfurt, are at or close to “all time” highs. The trend in recent years has certainly been upwards. Why should this be, at a time of such economic upheaval?
There are several reasons. Firstly, the indices are simply representative of a broader picture. The UK’s FTSE100, for example, is a snapshot of the top 100 companies measured by their market capitalisation value. As companies fall by the wayside, others replace them so, by definition, the index measures only the top tier firms and some of these are doing very well indeed. There is a great deal of money sitting on the balance sheets of some of these companies just waiting to be used. Couple that with the possibility of increased lending from the banks and it becomes easier to understand the reasons for optimism that are starting to appear.
Staying in the UK – although this is also true in the US and elsewhere – the government may soon be able to recoup some of the money spent on the bank bailouts. The cost of these rescues has been one of the main drags on the budget deficit, so this should lead to a welcome reduction in the previously eye-popping national “overdraft”.
In Europe too, all is not doom and gloom. Although the state of many European economies remains highly volatile, the eurozone has not imploded. Latvia plans to replace its currency with the euro in 2014 and Croatia should have become the EU’s 28th member by the time this column is being read. It is good to see these positive developments at last. Time will tell if such confidence is justified.
There are even encouraging signs in the housing market – where everything went wrong in the first place. There are real reasons for optimism in several countries. In Spain, foreign buyers – in particular Russians – are coming back into the market by acquiring whole blocks of so-called “toxic debt” directly from the banks. Hmm! Buying Spanish property on the cheap hoping to make a quick buck when prices recover? We have heard all this before, but it’s a start.
Unemployment in Europe remains the greatest challenge to a sustained recovery. Recent figures show an overall rate of 11% unemployed across the EU (the lowest being Austria, which reported 5%, and the highest, Greece, at 27%). We read alarming reports of the situation leading to an entire “lost generation”.
But consider other parts of the world where the impact of the global recession has been muted, or at least less marked, than in Europe. Over the past year I have written about the successes of the BRICS countries – Brazil, Russia, India, China and South Africa. Although beset by different problems, all five are economic powerhouses; they remain priority targets for the Gibraltar government which is targeting them as a source of inward investment. I also pointed out recently that GDP is growing in all 60+ African countries. That is to say there is no “recession” anywhere on that continent – from Algeria to Zimbabwe.
Speaking of Zimbabwe, I read a fascinating article recently by Matthew Parris, former MP and now one of my favourite columnists. In it, he described a recent visit to the country he knew as Rhodesia when growing up there as a boy. He didn’t hide the enormous problems the country faces but in highlighting the benefits of the travel experience there – reasonable prices, incredible safaris and tourist sites far less crowded than, say, Kenya – he got me thinking.
Tourism is one of the fastest growing business sectors worldwide. Given cheaper air travel and more choice generally, personally tailored itineraries are easy to arrange, especially online. If a recovery really is underway, people will be looking to travel more.
To return home to Gibraltar in summing up, I don’t speak for the government, or the local Chamber of Commerce – which compiles empirical data as part of its day job – but I see what I see. Look around you. Yes there are difficulties; some companies are reducing their staff complement, or even closing up altogether. But I see encouraging signs too. Many firms, including Sovereign where I work, are taking on staff regularly as business grows. The official Gibraltar Gazette keeps publishing new business applications – many of them made by local people. On the tourism front, more visitors will lead to more spending and so it goes on.
That is why I welcome the publicity afforded Gibraltar by a string of TV programmes shortly to air, ranging from documentaries to police dramas. We will also be seeing Michael Portillo and Top Gear mention our home. It all builds on the impression that there is much more to our tiny corner of the Mediterranean than apes on a rock. In fact that may be a good way for all of us to help this effort. Spread the word that we have apes, and a whole lot more. Summer in Europe may be the time when everyone else is on holiday but down here it should be busier than ever for all of us. Enjoy the sun!
In other words, can we say a recovery is really underway or is new growth so fragile that it could vanish at the first blow of the levanter? Worse, and to borrow an over-used phrase, could it be that the light glimpsed at the end of the tunnel is actually another train bearing down on us from the opposite direction?
As usual, I should remind you that these columns represent my personal opinion rather than those of my employer. This month, that disclaimer is necessarily broader than usual because my opinion is firmly skewed in one direction – that there are “green shoots” to be found and therefore reasons for optimism.
We should also bear firmly in mind that it’s not the same story for everyone. Far too many people – here in Gibraltar or further afield, notably Spain – are dealing with, or living in fear of, unemployment. Personal financial concerns remain the concern of the majority rather than the minority, whether it be paying bills now or worrying about savings in the future.
So where do I detect these green shoots of recovery? Beginning at home, I have always contended that Gibraltar has shown real resilience in facing the recent economic maelstrom. We are extremely fortunate here to have a robust, growing economy based on several, widely diverse, sectors – financial services, tourism, gaming and shipping to name a few.
So to call a recovery here might be misleading. Indeed one might say that Gibraltar is only now seeing the real impact of the financial woes that have affected the rest of Europe in recent years. Everyone is aware of the difficulties in distinct sectors – local banking to cite one example – but taken overall, opportunities are already presenting themselves in Gibraltar as we face the realities of a new economic order.
It is pleasing to see new businesses setting up in Gibraltar every month. Some of these represent brand new economic interests whilst others build on existing activities where we have proven experience and can offer highly trained personnel.
A good example of the latter is Hyperion Family Office, a recent addition to the Gibraltar finance scene although the principals are all well-known locally. I listened to an economic presentation at one of its recent breakfast events that was so positive about “green shoots” that I was in danger of turning green myself – with jealousy. But as the speaker was a client director at a global investment firm, you would perhaps expect him to be a “glass half full” type.
I follow several “barometers” in order to gauge how real any recovery might be. Stock markets around the world are very volatile but several of the major indices are at levels not seen for many years. Indeed some, such as the Dow Jones in New York and the DAX in Frankfurt, are at or close to “all time” highs. The trend in recent years has certainly been upwards. Why should this be, at a time of such economic upheaval?
There are several reasons. Firstly, the indices are simply representative of a broader picture. The UK’s FTSE100, for example, is a snapshot of the top 100 companies measured by their market capitalisation value. As companies fall by the wayside, others replace them so, by definition, the index measures only the top tier firms and some of these are doing very well indeed. There is a great deal of money sitting on the balance sheets of some of these companies just waiting to be used. Couple that with the possibility of increased lending from the banks and it becomes easier to understand the reasons for optimism that are starting to appear.
Staying in the UK – although this is also true in the US and elsewhere – the government may soon be able to recoup some of the money spent on the bank bailouts. The cost of these rescues has been one of the main drags on the budget deficit, so this should lead to a welcome reduction in the previously eye-popping national “overdraft”.
In Europe too, all is not doom and gloom. Although the state of many European economies remains highly volatile, the eurozone has not imploded. Latvia plans to replace its currency with the euro in 2014 and Croatia should have become the EU’s 28th member by the time this column is being read. It is good to see these positive developments at last. Time will tell if such confidence is justified.
There are even encouraging signs in the housing market – where everything went wrong in the first place. There are real reasons for optimism in several countries. In Spain, foreign buyers – in particular Russians – are coming back into the market by acquiring whole blocks of so-called “toxic debt” directly from the banks. Hmm! Buying Spanish property on the cheap hoping to make a quick buck when prices recover? We have heard all this before, but it’s a start.
Unemployment in Europe remains the greatest challenge to a sustained recovery. Recent figures show an overall rate of 11% unemployed across the EU (the lowest being Austria, which reported 5%, and the highest, Greece, at 27%). We read alarming reports of the situation leading to an entire “lost generation”.
But consider other parts of the world where the impact of the global recession has been muted, or at least less marked, than in Europe. Over the past year I have written about the successes of the BRICS countries – Brazil, Russia, India, China and South Africa. Although beset by different problems, all five are economic powerhouses; they remain priority targets for the Gibraltar government which is targeting them as a source of inward investment. I also pointed out recently that GDP is growing in all 60+ African countries. That is to say there is no “recession” anywhere on that continent – from Algeria to Zimbabwe.
Speaking of Zimbabwe, I read a fascinating article recently by Matthew Parris, former MP and now one of my favourite columnists. In it, he described a recent visit to the country he knew as Rhodesia when growing up there as a boy. He didn’t hide the enormous problems the country faces but in highlighting the benefits of the travel experience there – reasonable prices, incredible safaris and tourist sites far less crowded than, say, Kenya – he got me thinking.
Tourism is one of the fastest growing business sectors worldwide. Given cheaper air travel and more choice generally, personally tailored itineraries are easy to arrange, especially online. If a recovery really is underway, people will be looking to travel more.
To return home to Gibraltar in summing up, I don’t speak for the government, or the local Chamber of Commerce – which compiles empirical data as part of its day job – but I see what I see. Look around you. Yes there are difficulties; some companies are reducing their staff complement, or even closing up altogether. But I see encouraging signs too. Many firms, including Sovereign where I work, are taking on staff regularly as business grows. The official Gibraltar Gazette keeps publishing new business applications – many of them made by local people. On the tourism front, more visitors will lead to more spending and so it goes on.
That is why I welcome the publicity afforded Gibraltar by a string of TV programmes shortly to air, ranging from documentaries to police dramas. We will also be seeing Michael Portillo and Top Gear mention our home. It all builds on the impression that there is much more to our tiny corner of the Mediterranean than apes on a rock. In fact that may be a good way for all of us to help this effort. Spread the word that we have apes, and a whole lot more. Summer in Europe may be the time when everyone else is on holiday but down here it should be busier than ever for all of us. Enjoy the sun!
Confidentiality, tax avoidance and evasion
Dennis Healy, when he was the UK Chancellor of the Exchequer, once said that “the difference between tax avoidance and tax evasion is the thickness of a prison wall.” What he meant was that there is a fine line between tax evasion, which is illegal, and tax avoidance which might be frowned upon but is legal. Put another way, if someone gets married and the unplanned consequence is that tax is saved that is lucky. If that person gets married and the main reason is to save tax, it is tax avoidance. If that person tells the tax authorities that they are married when they are not in order to save tax it is tax evasion.
Governments all around the world, including China, need to find more money and are under great pressure to collect more tax. Tax departments are becoming more sophisticated and better at catching tax cheats. Many are mounting concerted campaigns to convince the public that tax avoidance is illegal and immoral. It is not the former but is arguably the latter. The public relations war is being lost by wealthy tax payers. The vast majority of the population is paid a straight-forward wage and has little or no opportunity to reduce their taxes.. Even if there were tax saving possibilities it is likely that the fees they would pay to properly implement any kind of tax planning would be more than the tax saving. It is hardly surprising, then, that the majority do not like the idea that the wealthy minority employ professional advisors to reduce their taxes or simply hide their money, fail to declare taxable income and illegally evade tax.
As professional advisors, we clearly see nothing wrong in engaging in legitimate tax mitigation. That is not necessarily a view which the majority will agree with. Frequently we find it necessary to point out to those who judge tax saving to be immoral that it is also possible for us to advise them how to pay more tax if they feel that any sort of tax saving is wrong. Rarely is that offer taken up.
There is a worldwide effort being made to prevent tax evasion. Swiss banks are now being forced to offer up details of clients so that their home tax authorities can check that the capital in their accounts has had tax paid upon it and that the revenue generated on the capital sum is also being taxed correctly. In many cases it appears that this is not the case and that some naughty people have been using Swiss bank secrecy to assist their efforts to evade tax by failing to declare correctly on their tax forms. Who would have thought it!
Another question we frequently hear asked is how the home tax authority will find out if an individual fails to declare their income correctly. It is a strange question from otherwise law abiding persons but the answer is that normally they find out because the tax payer tells them. The process of being caught out generally starts with a tax investigation. This could be triggered by an obvious disparity between lifestyle and declared income. Last Christmas the Italian authorities visited the ski resort of Cortina and started investigation procedures against the large number of Italian citizens who were arriving in Lamborghini’s and Ferrari’s but had been declaring either no income or only minimal income. They promised to conduct the same exercise on the Amalfi Coast this summer against those parking up in large boats. Investigations can start because another person is investigated and a connection is noted between them and the tax payer. Or it can start due to a random audit. Frequently the information which leads to an audit is supplied by an aggrieved ex-employee or spouse. Normally if a tax authority suspects that income is not being properly declared it will give the tax payer the chance to come clean and make a full disclosure of undeclared income. At this point the tax payer will have no idea what the tax authority knows – or if indeed they know anything. If the tax man does know about some undeclared income then he will not indicate what so the tax payer will have no information about what they are looking for. The burden of proof is always on the tax payer. They are guilty until proven innocent on tax matters even if their criminal code provides for innocence until guilt is proven beyond reasonable doubt on all other matters.
If the tax payer satisfies the authority that he has fully and properly declared everything previously undeclared the normal result is a tax bill, a hefty fine and interest. If he fails to come clean the normal result is criminal prosecution and frequently a prison sentence. Legend has it that a world famous jockey used to ride races all over the world and opened bank accounts wherever he raced. Most of what went into the foreign bank accounts was not declared as required back in his home country. On enquiry by his tax authority he reluctantly provided what he said was a list of all foreign bank accounts and undeclared income. He confirmed that this was indeed everything he had not previously declared. The tax authority then issued him with a substantial bill which he promptly offered to pay using a cheque drawn on an account he had failed to reveal. He went to jail for a number of years. Hence the joke that the only 18 stone man to ride a Derby winner was this jockey’s cell mate.
Most countries, now including Hong Kong, Singapore, China have signed tax treaties which contain exchange of information clauses. All offshore financial centres such as BVI, Cayman etc, under pressure from the OECD, have been forced to sign Tax Information Exchange Agreements (TIEAs) which can be used by onshore countries to obtain information about the ownership of offshore companies, trust and bank accounts. Banking secrecy laws are being rolled back or removed altogether as evidenced by the details supplied recently by Lichtenstein and Switzerland to various tax authorities around the world. And finally if a tax authority cannot obtain the information legally then they are paying thieves who stole it to give it to them. My law studies suggested to me that it was illegal to pay for stolen information or property but apparently this law does not apply to governments. Recently a Swiss banker who was actually jailed for assisting US citizens to evade tax was awarded US$120 million for handing over details of the US tax evaders he assisted.
In short, banking secrecy and confidentiality has either completely disappeared or will completely disappear in the near future. Any tax plan which relies on the detail not being revealed is probably tax evasion and is probably going to be revealed and get the perpetrators, including their advisors, into a great deal of expense and trouble. So get it right and seek professional advice. Getting it right will almost certainly involve a degree of inconvenience and expense but should keep the tax payer out of trouble and out of jail. I suppose the other way of looking at it is that not seeking advice and just trying to hide taxable money involves two levels of saving: There is no need to pay professional fees and the end result is likely to be free board and lodge provided by your home penal authorities.
The Chinese tax authorities have quickly become much more knowledgeable and efficient at collecting tax. The tax code in China is quite basic but it is interpreted by different tax inspectors in different ways. Normally those tax inspectors consider offshore companies and trusts to be ineffective for saving tax. The tax system relies upon the tax payer properly declaring his taxable income and if there is doubt about whether income is taxable then it should be declared and the tax man can decide whether that income taxable or not. He rarely decides it is not. Chinese nationals appear to becoming increasingly sophisticated as well. They do have large amounts of money in Swiss banks and this has as much to do with security as with tax saving. They want to know that they have money outside the country in case something goes wrong inside the country. Spending some money and seeking professional advice as to how to give the best possible protection to that money and making legitimate tax savings is of increasing importance. Do not take short cuts and just try and hide money. It will not work. There are legitimate structures available which will protect assets held abroad and ensure that the money within them is not subject to tax. So why risk being a tax evader if you can achieve the same savings and protection with a legitimate, legal and compliant structure?
Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
Governments all around the world, including China, need to find more money and are under great pressure to collect more tax. Tax departments are becoming more sophisticated and better at catching tax cheats. Many are mounting concerted campaigns to convince the public that tax avoidance is illegal and immoral. It is not the former but is arguably the latter. The public relations war is being lost by wealthy tax payers. The vast majority of the population is paid a straight-forward wage and has little or no opportunity to reduce their taxes.. Even if there were tax saving possibilities it is likely that the fees they would pay to properly implement any kind of tax planning would be more than the tax saving. It is hardly surprising, then, that the majority do not like the idea that the wealthy minority employ professional advisors to reduce their taxes or simply hide their money, fail to declare taxable income and illegally evade tax.
As professional advisors, we clearly see nothing wrong in engaging in legitimate tax mitigation. That is not necessarily a view which the majority will agree with. Frequently we find it necessary to point out to those who judge tax saving to be immoral that it is also possible for us to advise them how to pay more tax if they feel that any sort of tax saving is wrong. Rarely is that offer taken up.
There is a worldwide effort being made to prevent tax evasion. Swiss banks are now being forced to offer up details of clients so that their home tax authorities can check that the capital in their accounts has had tax paid upon it and that the revenue generated on the capital sum is also being taxed correctly. In many cases it appears that this is not the case and that some naughty people have been using Swiss bank secrecy to assist their efforts to evade tax by failing to declare correctly on their tax forms. Who would have thought it!
Another question we frequently hear asked is how the home tax authority will find out if an individual fails to declare their income correctly. It is a strange question from otherwise law abiding persons but the answer is that normally they find out because the tax payer tells them. The process of being caught out generally starts with a tax investigation. This could be triggered by an obvious disparity between lifestyle and declared income. Last Christmas the Italian authorities visited the ski resort of Cortina and started investigation procedures against the large number of Italian citizens who were arriving in Lamborghini’s and Ferrari’s but had been declaring either no income or only minimal income. They promised to conduct the same exercise on the Amalfi Coast this summer against those parking up in large boats. Investigations can start because another person is investigated and a connection is noted between them and the tax payer. Or it can start due to a random audit. Frequently the information which leads to an audit is supplied by an aggrieved ex-employee or spouse. Normally if a tax authority suspects that income is not being properly declared it will give the tax payer the chance to come clean and make a full disclosure of undeclared income. At this point the tax payer will have no idea what the tax authority knows – or if indeed they know anything. If the tax man does know about some undeclared income then he will not indicate what so the tax payer will have no information about what they are looking for. The burden of proof is always on the tax payer. They are guilty until proven innocent on tax matters even if their criminal code provides for innocence until guilt is proven beyond reasonable doubt on all other matters.
If the tax payer satisfies the authority that he has fully and properly declared everything previously undeclared the normal result is a tax bill, a hefty fine and interest. If he fails to come clean the normal result is criminal prosecution and frequently a prison sentence. Legend has it that a world famous jockey used to ride races all over the world and opened bank accounts wherever he raced. Most of what went into the foreign bank accounts was not declared as required back in his home country. On enquiry by his tax authority he reluctantly provided what he said was a list of all foreign bank accounts and undeclared income. He confirmed that this was indeed everything he had not previously declared. The tax authority then issued him with a substantial bill which he promptly offered to pay using a cheque drawn on an account he had failed to reveal. He went to jail for a number of years. Hence the joke that the only 18 stone man to ride a Derby winner was this jockey’s cell mate.
Most countries, now including Hong Kong, Singapore, China have signed tax treaties which contain exchange of information clauses. All offshore financial centres such as BVI, Cayman etc, under pressure from the OECD, have been forced to sign Tax Information Exchange Agreements (TIEAs) which can be used by onshore countries to obtain information about the ownership of offshore companies, trust and bank accounts. Banking secrecy laws are being rolled back or removed altogether as evidenced by the details supplied recently by Lichtenstein and Switzerland to various tax authorities around the world. And finally if a tax authority cannot obtain the information legally then they are paying thieves who stole it to give it to them. My law studies suggested to me that it was illegal to pay for stolen information or property but apparently this law does not apply to governments. Recently a Swiss banker who was actually jailed for assisting US citizens to evade tax was awarded US$120 million for handing over details of the US tax evaders he assisted.
In short, banking secrecy and confidentiality has either completely disappeared or will completely disappear in the near future. Any tax plan which relies on the detail not being revealed is probably tax evasion and is probably going to be revealed and get the perpetrators, including their advisors, into a great deal of expense and trouble. So get it right and seek professional advice. Getting it right will almost certainly involve a degree of inconvenience and expense but should keep the tax payer out of trouble and out of jail. I suppose the other way of looking at it is that not seeking advice and just trying to hide taxable money involves two levels of saving: There is no need to pay professional fees and the end result is likely to be free board and lodge provided by your home penal authorities.
The Chinese tax authorities have quickly become much more knowledgeable and efficient at collecting tax. The tax code in China is quite basic but it is interpreted by different tax inspectors in different ways. Normally those tax inspectors consider offshore companies and trusts to be ineffective for saving tax. The tax system relies upon the tax payer properly declaring his taxable income and if there is doubt about whether income is taxable then it should be declared and the tax man can decide whether that income taxable or not. He rarely decides it is not. Chinese nationals appear to becoming increasingly sophisticated as well. They do have large amounts of money in Swiss banks and this has as much to do with security as with tax saving. They want to know that they have money outside the country in case something goes wrong inside the country. Spending some money and seeking professional advice as to how to give the best possible protection to that money and making legitimate tax savings is of increasing importance. Do not take short cuts and just try and hide money. It will not work. There are legitimate structures available which will protect assets held abroad and ensure that the money within them is not subject to tax. So why risk being a tax evader if you can achieve the same savings and protection with a legitimate, legal and compliant structure?
Howard Bilton is an UK and Gibraltar barrister, professor at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
UK- NEW LEGISLATION ON TAXATION OF OFFSHORE COMPANIES WHICH OWN UK PROPERTY
In May last year the consultation document entitled “Ensuring fair taxation of residential property transactions” was published. As always, whenever the UK Treasury or HMRC refer to “fair taxation” what they really mean is considerably increased taxation. The resulting draft legislation was published on 11th December 2012 outlining the new taxes and charges which will have to be paid by offshore companies which own property in the UK worth over £ 2 Million. There were some significant changes from the consultation paper. Next, the actual legislation was included in the Finance Bill 2013 and again showed changes from the draft not least in the name of the new annual charge.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2 million and which are owned by “non-natural persons” - this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property , after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non UK asset and therefore not subject to UK IHT as long as the owner is not UK domiciled. Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty (SDLT) as any subsequent sale of the property could be effected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Offshore companies which own property worth over £2 million will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% Capital Gains Tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. Those who have purchased property purely as a buy to let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be effected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust or even occupiers of the property but let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (1). The property’s value as at 1 April 2012 will determine the liability to ATED (2). The Company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The Company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 (3). This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However until 30 April 2018 the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed (4). Broadly, the charge is reduced to reflect the number of days in the chargeable during which the property was not held in the company (5). For example if the property were to be sold to a third party individual on 30 September 2013, the seller Company could reclaim 50% of the original charge (6). The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary Regulations to be published in the summer.
Capital Gains Tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013 (7).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow Directorship issues
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit in kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the Company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT (8) as the asset would still form part of the beneficial owner’s estate. However there would be CGT to pay- if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992
Advantages of individual ownership
This plan would involve GS’s family member establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the Company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The Company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
Non UK domiciled purchasers should henceforth use a similar trust structure to the above. Domiciled purchasers should consider purchasing via a QNUPS structure.
From the above it will be apparent that is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
The main features of the legislation will only affect properties which either are, or will become, valued at more than £2 million and which are owned by “non-natural persons” - this being a reference to companies, partnerships, funds and the like, not to persons with strange personal habits.
Previously many buyers of UK property chose to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT) which would otherwise be charged at 40% on the whole value of the property , after allowances, upon the death of the owner. If a company owns the property the asset becomes the shares of the company, which is a non UK asset and therefore not subject to UK IHT as long as the owner is not UK domiciled. Owners who are UK domiciled are subject to IHT on their worldwide assets so pay IHT on the shares. Company ownership also facilitated the avoidance of stamp duty (SDLT) as any subsequent sale of the property could be effected by a transfer of the shares in the company leaving title to the property in the UK unaltered. This allowed the purchaser to avoid SDLT and/or allowed the seller to charge more, or a bit of both.
Offshore companies which own property worth over £2 million will now be faced with an annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax was to be called the Annual Residential Property Tax (ARPT). In the legislation it was called the Annual Tax on Enveloped Dwellings (AETD). I wonder which committee came up with that one? The companies will also pay 28% Capital Gains Tax (CGT) on resale.
Corporate trustees are not subject to these new taxes. There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. Those who have purchased property purely as a buy to let investment may well be able to rely on this and ignore the new legislation. Those who do, or may, live in their property will be effected.
The best structure going forward will depend on a variety of factors including the tax residency and domicile of the owners and any intended beneficiaries of the trust or even occupiers of the property but let us consider the example of Mr Guiseppe Sixpack (GS) an Italian resident and domiciled individual who intends to move to the UK during the current tax year (i.e. between 6 April 2013 and 5 April 2014). GS, through an offshore company, holds the freehold of a residential property in London which he will live in. The property was acquired in November 2001 for £1,400,000 and is currently valued at £4,000,000. It is not currently rented out and there is no mortgage.
As the property was beneficially owned by a company on 1 April 2013, the company will be subject to ATED (1). The property’s value as at 1 April 2012 will determine the liability to ATED (2). The Company is currently liable to pay a charge of £15,000. The first chargeable period runs from 1 April 2013 to 31 March 2014. The Company must file a return for the first chargeable period by 1 October 2013 and pay the charge by 31 October 2013 (3). This is a transitional measure and the return for the second chargeable period, commencing 1 April 2014, must be filed by 30 April 2014. The tax for the second chargeable period must be also paid by that date. The property will need to be re-valued on 1 April 2017 to cover the ATED returns for the five years starting on 1 April 2018. However until 30 April 2018 the charge should be limited to £15,000 payable by the 30 April each year. To correctly calculate the charge the property must be independently valued by a professional such as a chartered surveyor.
It is possible for a company to obtain relief where it does not hold the property throughout the whole chargeable period. This is known as interim relief and must be claimed (4). Broadly, the charge is reduced to reflect the number of days in the chargeable during which the property was not held in the company (5). For example if the property were to be sold to a third party individual on 30 September 2013, the seller Company could reclaim 50% of the original charge (6). The precise procedure for claiming the relief and the contents of the ATED Return will be fleshed out by HMRC in supplementary Regulations to be published in the summer.
Capital Gains Tax (CGT)
The legislation provides that a company which holds a property on 1 April 2013 that is within the scope of the ATED charge is deemed to have acquired the property for its market value on 5 April 2013 (7).
The property was acquired in November 2001 for £1,400,000 and it is assumed that it had a value of £4m on 5 April 2013.
Shadow Directorship issues
If GS were to occupy the property in the future rent free there is a danger that he would be subject to an annual benefit in kind tax charge as he would be treated as a shadow director. The case of Dimsey v Alan established that the benefit in kind provisions do extend to shadow directors.
For these three reasons, it is likely to be more tax efficient to consider moving the property out of the Company. Mr GS has a number of options to mitigate the applicable taxes.
If the property were gifted to GS there would be no SDLT as there is no mortgage. There should be no charge lifetime IHT (8) as the asset would still form part of the beneficial owner’s estate. However there would be CGT to pay- if the property at the time of value was worth more than the £4,000,000 April 2013 value. Here there is a nasty trap. If GS was resident when the company sells the property the whole of the gain since acquisition could be attributed to him under s 13 TCGA 1992
Advantages of individual ownership
- There would be no ATED charge from 6 April 2014 onwards provided the transfer was made to the individual before that date.
- There would be no UK CGT on a future disposal provided GS used the property as his main residence throughout the entire period of his ownership (9).
- There would be no shadow director issues which can arise with corporate ownership.
- The property would be subject to UK IHT of 40% on GS’s death.
- The ability to mitigate the charge with debt or even bank finance has been severely restricted (10).
This plan would involve GS’s family member establishing a new dry trust (i.e. a single asset holding trust) with a nominal cash sum. GS would sell the Company shares to that trust. The consideration would be a loan note equal to the market value of the property on the date of the share transfer. The Company would be liquidated by the trust. The liquidation would not cause a SDLT issue as there is no mortgage.
Advantages
- The property would be outside the charge to UK IHT.
- There would be no CGT on a future sale by the trustees.
- There would be no ATED from 1 April 2014.
- There is a ten yearly charge of up to 6% on the net asset value of the trust’s UK assets. However the charge should be mitigated by the value of the loan the trust owes to GS on the tenth anniversary (11).
- The trust would need to avoid selling the property, thereby realising a potential gain, when GS is UK resident. Otherwise GS would be subject to UK CGT to the extent that the value of his rent free occupation could be matched with the gain made by the trust on the sale. The liability would be significant but can be avoided provided GS is not UK resident in the tax year of the disposal and is not caught by the 5 year rule noted above.
Non UK domiciled purchasers should henceforth use a similar trust structure to the above. Domiciled purchasers should consider purchasing via a QNUPS structure.
From the above it will be apparent that is a highly technical area and expert advice is, as always, strongly advised.
Howard Bilton is a UK and Gibraltar barrister, Professor of Law at Thomas Jefferson School of Law, San Diego and Chairman of The Sovereign Group.
- Refer to Part 3 of the Finance Bill 2013
- FB 2013, Section 99(2)(b)
- Refer to the FB 2013, Schedule 33, Part 2, para 4.
- FB, s97
- FB s158(4) sets out the procedure for making the interim relief claim
- This must be paid by 31 October 2013.
- The FB has inserted a new CGT code into TCGA 1992 to account for ATED related gains. The calculation of the base cost is found in the new Schedule 4ZZA in TCGA. Refer to paragraph 3(2).
- Under IHTA 1984, s 94
- Under TCGA 1992, S10A
- It has inserted a new s175A IHTA 1984 which severely restricts the deductibility of debt on death
- This position needs to be carefully watched. It is possible that the debt may not be deductible under s.162A which is to be inserted into IHTA by the Finance Act. As yet it appears section 162A would not deny a deduction but it may be subject to further amendments before it hits the statute books.
Sunday, June 9, 2013
The Price of Hidden Costs
As I write this, we have just celebrated the May Day public holiday in Gibraltar and the UK is about to close for the early May Bank Holiday. Having the day off here in the middle of the working week made for a nice change of course but it also set me thinking about the cost of the one-day shutdown.
May Day is of course marked in several other European countries, as well as North America, as a commemoration of the traditional Spring festival, and in many other countries around the world it is also celebrated as International Workers' Day. It may be very popular to have these days off – particularly as the weather turns warmer here in the southern Mediterranean – but there is a cost to business, and therefore to the economy, that may not be immediately obvious.
First, I thought I’d take a closer look at the number of public holidays. I am often told we get too many here, but is this really correct? It’s certainly true that in 2013 at least we are getting four more days than the UK – Commonwealth Day, Worker’s Memorial Day, the Queen’s Birthday, as well as Gibraltar Day itself.
But in comparison with other countries, we seem to be about right. By my calculation we enjoy 12 public holidays annually. True, this is somewhat less than Spain but then each autonomous region adds its own “fiestas” on top. A report by ABC News last year named the lucky Argentines as being the most fortunate as they had a total of 19 days off last year.
In the UK and Gibraltar we don’t call them “bank holidays” any more. When I was young, I used to be told that bankers were the top of the pile so when they had a day off, so did we all. It was one of the arguments sold me when I joined a bank all those years ago. Not quite the same today, methinks!
All of this is in addition to paid time off, which also varies from country to country. It has always struck me as odd that the US is one of the countries one associates most with leisure time but it remains one of the most stingy when it comes to paid time off. Two working weeks annual leave is still very common.
But think of an organisation close to you and consider for a moment the cost of even one extra day off to that business. In my case, Sovereign employs around 80 people locally so if taking a five-day working week that is almost four working months. Crikey, I’m beginning to sound like our Finance Director but it does all add up to a lot of time – and money.
This can be of even more concern to smaller firms where cash flow is very tight – a start-up perhaps. I went on to think about other hidden costs that a business might consider and what, if anything, can be done to mitigate them.
Here in Gibraltar, as summer approaches, staff working in government – and some private sector firms too – start looking forward to summer hours, It’s a great idea in theory but of course there’s another side too. Leave aside the obvious shorter working week – it’s to be assumed that any organisation or firm allowing reduced working hours during the summer takes account of this when setting pay levels. The “hidden cost” applies also to other businesses – such as ours – who have to work with the fact that government offices are simply not open from mid-afternoon during the summer.
There is a definite cost to this and of course the potential for some clients or customers who have a choice to simply look elsewhere – i.e. away from Gibraltar. Don't worry dear reader, this is a personal column and of course I am not going to start a campaign here. It would be a brave politician indeed who would dare to tackle this and of course there is another more positive side to the summer hours arrangement for families and local business. I’m just pointing out that it does cost us all, that‘s all.
Staffing is only part of the issue. There are many other costs involved in day to day business. This is true for any company “selling” something, be it any kind of service, a widget or indeed a bar or restaurant. At Sovereign, I am always stressing the importance of considering the “client acquisition cost”. There is no point selling something – anything – for £10 if it has cost £12 to produce. My friends in retail will immediately say “ah, a loss leader you mean”. They would define that as selling something at a loss to encourage someone to buy more from you somewhere else. As my economics tutor taught me – “focus on the word loss boy”. Not a bad thought, that.
The wide range of hidden costs that goes into producing and selling anything can be quite daunting – especially for a new business. It may upset those salesmen we all know or “business development managers” as they’re likely to be called these days. But the price you secure from your end-user client must cover everything and should still leave a surplus if you are to stay in business. So what costs am I concerned about here?
There are some obvious things. Let’s assume the widget or service being sold is either already made or finely tuned so we have something tangible to sell. What costs are involved in getting to meet your customer? Drive into Spain for 100km (and back), pay some tolls, buy some lunch on the way and the costs soon mount up. Fine if you’re selling something expensive but be careful that the dangling carrot of the sale doesn’t tempt you into spending too much in an effort to pluck it from the tree (I know carrots don’t grow on trees but you know what I mean).
Then consider what in my view is the most commonly overlooked “hidden” cost of all – that incurred by you, or your business development manager, whilst out seeking that elusive carrot. To carry on the metaphor, consider the tomato growing just over there that you did not secure – because you were dealing with the carrot. The economist will call this the “opportunity cost” or to quote the dictionary “the loss of potential gain from other alternatives when one alternative is chosen”.
I have often come across situations where a colleague (or maybe a competitor!) spends more time on what may appear to be an easier “sale” – rather than stretching themselves to secure that elusive but perhaps more demanding and therefore lucrative business. The point about opportunity cost is that if one spends time today doing something – anything – then the opportunity to do something else is of course lost for ever. The hidden cost could be significant.
Other costs may not be “hidden” but, if they are not considered at the outset, can be just as detrimental to the bottom line. I could cite several examples but perhaps one of the best is insurance. I don’t mean the obvious things such as fire and theft protection but such areas as public liability or directors and officers insurance. The cost adds up – but of course the implications of not protecting a business in this way could be catastrophic.
There can be any amount of hidden costs to consider, especially when setting out in business for the first time. Some can be mitigated by outsourcing if one can realistically get certain functions performed at a lower cost elsewhere. But the cost in pounds and pence should not be the only consideration. For example, there is no point in outsourcing something if in doing so you are cutting yourself out permanently of the same business.
As always when considering new ventures, my advice is to take professional advice from the outset. Our firm has whole departments dedicated to assisting businesses – both here and around the world – looking at such issues. But whether or not you decide to approach a specialist corporate service provider or not, do take soundings from others. Look at the costs you know about and keep looking for those hidden costs; it is managing those effectively that will make all the difference in the world to whatever venture you are contemplating.
http://www.sovereigngroup.com/offshore-news/press-room/gm/gm_201306.htm
May Day is of course marked in several other European countries, as well as North America, as a commemoration of the traditional Spring festival, and in many other countries around the world it is also celebrated as International Workers' Day. It may be very popular to have these days off – particularly as the weather turns warmer here in the southern Mediterranean – but there is a cost to business, and therefore to the economy, that may not be immediately obvious.
First, I thought I’d take a closer look at the number of public holidays. I am often told we get too many here, but is this really correct? It’s certainly true that in 2013 at least we are getting four more days than the UK – Commonwealth Day, Worker’s Memorial Day, the Queen’s Birthday, as well as Gibraltar Day itself.
But in comparison with other countries, we seem to be about right. By my calculation we enjoy 12 public holidays annually. True, this is somewhat less than Spain but then each autonomous region adds its own “fiestas” on top. A report by ABC News last year named the lucky Argentines as being the most fortunate as they had a total of 19 days off last year.
In the UK and Gibraltar we don’t call them “bank holidays” any more. When I was young, I used to be told that bankers were the top of the pile so when they had a day off, so did we all. It was one of the arguments sold me when I joined a bank all those years ago. Not quite the same today, methinks!
All of this is in addition to paid time off, which also varies from country to country. It has always struck me as odd that the US is one of the countries one associates most with leisure time but it remains one of the most stingy when it comes to paid time off. Two working weeks annual leave is still very common.
But think of an organisation close to you and consider for a moment the cost of even one extra day off to that business. In my case, Sovereign employs around 80 people locally so if taking a five-day working week that is almost four working months. Crikey, I’m beginning to sound like our Finance Director but it does all add up to a lot of time – and money.
This can be of even more concern to smaller firms where cash flow is very tight – a start-up perhaps. I went on to think about other hidden costs that a business might consider and what, if anything, can be done to mitigate them.
Here in Gibraltar, as summer approaches, staff working in government – and some private sector firms too – start looking forward to summer hours, It’s a great idea in theory but of course there’s another side too. Leave aside the obvious shorter working week – it’s to be assumed that any organisation or firm allowing reduced working hours during the summer takes account of this when setting pay levels. The “hidden cost” applies also to other businesses – such as ours – who have to work with the fact that government offices are simply not open from mid-afternoon during the summer.
There is a definite cost to this and of course the potential for some clients or customers who have a choice to simply look elsewhere – i.e. away from Gibraltar. Don't worry dear reader, this is a personal column and of course I am not going to start a campaign here. It would be a brave politician indeed who would dare to tackle this and of course there is another more positive side to the summer hours arrangement for families and local business. I’m just pointing out that it does cost us all, that‘s all.
Staffing is only part of the issue. There are many other costs involved in day to day business. This is true for any company “selling” something, be it any kind of service, a widget or indeed a bar or restaurant. At Sovereign, I am always stressing the importance of considering the “client acquisition cost”. There is no point selling something – anything – for £10 if it has cost £12 to produce. My friends in retail will immediately say “ah, a loss leader you mean”. They would define that as selling something at a loss to encourage someone to buy more from you somewhere else. As my economics tutor taught me – “focus on the word loss boy”. Not a bad thought, that.
The wide range of hidden costs that goes into producing and selling anything can be quite daunting – especially for a new business. It may upset those salesmen we all know or “business development managers” as they’re likely to be called these days. But the price you secure from your end-user client must cover everything and should still leave a surplus if you are to stay in business. So what costs am I concerned about here?
There are some obvious things. Let’s assume the widget or service being sold is either already made or finely tuned so we have something tangible to sell. What costs are involved in getting to meet your customer? Drive into Spain for 100km (and back), pay some tolls, buy some lunch on the way and the costs soon mount up. Fine if you’re selling something expensive but be careful that the dangling carrot of the sale doesn’t tempt you into spending too much in an effort to pluck it from the tree (I know carrots don’t grow on trees but you know what I mean).
Then consider what in my view is the most commonly overlooked “hidden” cost of all – that incurred by you, or your business development manager, whilst out seeking that elusive carrot. To carry on the metaphor, consider the tomato growing just over there that you did not secure – because you were dealing with the carrot. The economist will call this the “opportunity cost” or to quote the dictionary “the loss of potential gain from other alternatives when one alternative is chosen”.
I have often come across situations where a colleague (or maybe a competitor!) spends more time on what may appear to be an easier “sale” – rather than stretching themselves to secure that elusive but perhaps more demanding and therefore lucrative business. The point about opportunity cost is that if one spends time today doing something – anything – then the opportunity to do something else is of course lost for ever. The hidden cost could be significant.
Other costs may not be “hidden” but, if they are not considered at the outset, can be just as detrimental to the bottom line. I could cite several examples but perhaps one of the best is insurance. I don’t mean the obvious things such as fire and theft protection but such areas as public liability or directors and officers insurance. The cost adds up – but of course the implications of not protecting a business in this way could be catastrophic.
There can be any amount of hidden costs to consider, especially when setting out in business for the first time. Some can be mitigated by outsourcing if one can realistically get certain functions performed at a lower cost elsewhere. But the cost in pounds and pence should not be the only consideration. For example, there is no point in outsourcing something if in doing so you are cutting yourself out permanently of the same business.
As always when considering new ventures, my advice is to take professional advice from the outset. Our firm has whole departments dedicated to assisting businesses – both here and around the world – looking at such issues. But whether or not you decide to approach a specialist corporate service provider or not, do take soundings from others. Look at the costs you know about and keep looking for those hidden costs; it is managing those effectively that will make all the difference in the world to whatever venture you are contemplating.
http://www.sovereigngroup.com/offshore-news/press-room/gm/gm_201306.htm
Thursday, April 25, 2013
Sovereign acquires The JLJ Group, a specialist provider of China Entry and Growth Services
Hong Kong, 25th April 2013 - The Sovereign Group, the independent,
international wealth management and corporate services provider, has
acquired The JLJ Group, an integrated services provider that accelerates
international companies' ability to understand and operate in the China
market.
JLJ, which has offices in Shanghai and Beijing, will be combined with Sovereign's existing operations in China. The new Shanghai office will employ 20 staff, while another five employees will be based in the Beijing branch.
The JLJ Group was formed in 2003 and has wor
ked with over 600 clients, including government organisations and companies of all sizes – from Fortune 500 multinational corporations and global brands, to a variety of small and medium-sized enterprises.
JLJ services include market research and consulting, company formation and accounting outsourcing, which make it a perfect addition to Sovereign's global business.
Howard Bilton, Chairman of The Sovereign Group, said: "Setting up a business in China is particularly fraught with difficulties and can involve enormous bureaucracy. We have been working with JLJ for some time and recognised their considerable expertise in this area. This acquisition allows Sovereign to offer its worldwide clientele an efficient and high quality service for those wishing to do business in China and strengthens the Sovereign global offering.”
Timothy Lamb, Managing Director of The JLJ Group, said: "We are excited about the opportunities this acquisition brings us to expand our service offerings while being part of a global company of dedicated professionals.”
In 2012, 44% of global Foreign Direct investment (FDI) inflows were hosted by only five countries. China attracted the lion's share of USD 253 billion (or 18% of total) followed by the United States (USD 175 billion), Brazil (USD 65 billion), the United Kingdom (USD 63 billion) and France (USD 62 billion) – Source: FDI in Figures, published by Investment Division, Secretariat of the OECD Investment Committee, April 2013).
Ends.
About The Sovereign Group
The Sovereign Group's core business is setting up and managing companies, trusts, pensions and other compliant structures to meet the specific personal or business needs of its clients. Typically these would include tax planning, wealth management, succession planning, foreign property ownership and facilitating cross-border business.
The first Sovereign office opened in Gibraltar in 1987 and the Group now has offices in over 25 international finance centres worldwide. This enables us to provide local expertise on an international scale and gives clients access to a global service from a local point of delivery. In all jurisdictions that require us to be licensed we have applied for, and been granted, the appropriate authorisations.
We work with public companies, charities and professional law and accountancy firms, but the majority of our clients are individuals – expatriates, entrepreneurs, consultants, private investors and high net worth individuals and their families.
To serve our client base better we have further developed a wide range of supporting services that includes international pensions, asset management, specialist tax advice, ship and yacht registration, insurance, immigrant investor programmes, as well as trademark and intellectual property registration and protection.
For more information, please contact:
Tiffany Pinkstone, Asia Tel: +852 2542 1177 Email: TPinkstone@SovereignGroup.com
Ian LeBreton, Europe Tel: +350 200 76173 Email: ILeBreton@SovereignGroup.com
Or visit the site: www.SovereignGroup.com
For more information on The JLJ Group, please visit www.JLJGroup.com or contact info@JLJGroup.com
JLJ, which has offices in Shanghai and Beijing, will be combined with Sovereign's existing operations in China. The new Shanghai office will employ 20 staff, while another five employees will be based in the Beijing branch.
The JLJ Group was formed in 2003 and has wor
ked with over 600 clients, including government organisations and companies of all sizes – from Fortune 500 multinational corporations and global brands, to a variety of small and medium-sized enterprises.
JLJ services include market research and consulting, company formation and accounting outsourcing, which make it a perfect addition to Sovereign's global business.
Howard Bilton, Chairman of The Sovereign Group, said: "Setting up a business in China is particularly fraught with difficulties and can involve enormous bureaucracy. We have been working with JLJ for some time and recognised their considerable expertise in this area. This acquisition allows Sovereign to offer its worldwide clientele an efficient and high quality service for those wishing to do business in China and strengthens the Sovereign global offering.”
Timothy Lamb, Managing Director of The JLJ Group, said: "We are excited about the opportunities this acquisition brings us to expand our service offerings while being part of a global company of dedicated professionals.”
In 2012, 44% of global Foreign Direct investment (FDI) inflows were hosted by only five countries. China attracted the lion's share of USD 253 billion (or 18% of total) followed by the United States (USD 175 billion), Brazil (USD 65 billion), the United Kingdom (USD 63 billion) and France (USD 62 billion) – Source: FDI in Figures, published by Investment Division, Secretariat of the OECD Investment Committee, April 2013).
Ends.
About The Sovereign Group
The Sovereign Group's core business is setting up and managing companies, trusts, pensions and other compliant structures to meet the specific personal or business needs of its clients. Typically these would include tax planning, wealth management, succession planning, foreign property ownership and facilitating cross-border business.
The first Sovereign office opened in Gibraltar in 1987 and the Group now has offices in over 25 international finance centres worldwide. This enables us to provide local expertise on an international scale and gives clients access to a global service from a local point of delivery. In all jurisdictions that require us to be licensed we have applied for, and been granted, the appropriate authorisations.
We work with public companies, charities and professional law and accountancy firms, but the majority of our clients are individuals – expatriates, entrepreneurs, consultants, private investors and high net worth individuals and their families.
To serve our client base better we have further developed a wide range of supporting services that includes international pensions, asset management, specialist tax advice, ship and yacht registration, insurance, immigrant investor programmes, as well as trademark and intellectual property registration and protection.
For more information, please contact:
Tiffany Pinkstone, Asia Tel: +852 2542 1177 Email: TPinkstone@SovereignGroup.com
Ian LeBreton, Europe Tel: +350 200 76173 Email: ILeBreton@SovereignGroup.com
Or visit the site: www.SovereignGroup.com
For more information on The JLJ Group, please visit www.JLJGroup.com or contact info@JLJGroup.com
Monday, April 15, 2013
Expats and tax: own company could help contract worker
Short-term contract worker
Personal status:
family man who travels for work on his own
Expat Status:
short-term contract worker, usually for four to six months and in the UK one to three months between contracts
Financial status:
contract terms vary, approx. £80,000 tax-free
Our intrepid contract worker is UK-resident under both the existing residency test and the new Statutory Residency Test (SRT), which has just been introduced.
His family lives in the UK and he spends, on average, four months a year in the UK in-between contracts. He is not employed – because he is self-employed – so cannot fall within the full-time work overseas exemption.
It is possible for a person who is a contractor to become non-UK resident if their work is performed overseas in a way that is equivalent to someone working full-time overseas. But our contractor's work is sporadic and he spends too many days (more than 90) in the UK. So he is counted as UK-resident, despite carrying out all his work overseas.
It is quite likely that his income would also be taxed in the country in which the work is performed. If the income were taxable in both countries, for example in the UK, as the country of residence, and France, as the country where the work is performed, a double taxation agreement (DTA) could determine which country has the right to tax his income.
Unless the contractor has a fixed place of business, say an office, in the other country, his country of residence would normally have the exclusive right to tax his income.
UK tax could be mitigated by making contributions to a UK-registered pension scheme such as a self-invested personal pension (SIPPS). Contributions to a registered scheme attract full UK income tax relief as long as they do not exceed £50,000 per annum (reducing to £40,000 from next year).
Tax-efficient structuring could be achieved by setting up a company. It would be possible to use an offshore company but this would have to be managed and controlled from offshore, which would necessitate him employing overseas directors. He would also be subject to various anti-avoidance rules so would need to carefully structure the ownership of the company to avoid these. The expenses of both are unlikely to be justified for this level of earnings.
He would, however, benefit from incorporating a UK company to contract with the various firms he works for. The company would pay tax of only 20pc on profit. From the gross income, the company could deduct all reasonable expenses according to normal UK rules including any payments made to his SIPPS.
He would obviously need some money to live on and so would need the company to pay him a salary. This could be kept relatively low to take advantage of the lower tax rates. He could also arrange for the company to pay dividends to top up his total income as and when required.
As long as his total income was below £41,000 per annum there would be no further tax payable on dividends received. This arrangement would give him great flexibility to be paid what he wanted when he wanted and take advantage of differing and lower tax bands. Any income he left within the company would suffer no further tax.
Arrangements similar to this can be caught by IR35, which is an anti-avoidance provision to stop what were essentially employees being paid through a company to avoid tax. Readers may recall the stink when it was revealed that many senior BBC figures had set up corporate structures through which they took their income. IR35 would not apply to our contractor, as he is bona fide self-employed, so incorporating would give him tax savings and much flexibility.
Personal status:
family man who travels for work on his own
Expat Status:
short-term contract worker, usually for four to six months and in the UK one to three months between contracts
Financial status:
contract terms vary, approx. £80,000 tax-free
Our intrepid contract worker is UK-resident under both the existing residency test and the new Statutory Residency Test (SRT), which has just been introduced.
His family lives in the UK and he spends, on average, four months a year in the UK in-between contracts. He is not employed – because he is self-employed – so cannot fall within the full-time work overseas exemption.
It is possible for a person who is a contractor to become non-UK resident if their work is performed overseas in a way that is equivalent to someone working full-time overseas. But our contractor's work is sporadic and he spends too many days (more than 90) in the UK. So he is counted as UK-resident, despite carrying out all his work overseas.
It is quite likely that his income would also be taxed in the country in which the work is performed. If the income were taxable in both countries, for example in the UK, as the country of residence, and France, as the country where the work is performed, a double taxation agreement (DTA) could determine which country has the right to tax his income.
Unless the contractor has a fixed place of business, say an office, in the other country, his country of residence would normally have the exclusive right to tax his income.
UK tax could be mitigated by making contributions to a UK-registered pension scheme such as a self-invested personal pension (SIPPS). Contributions to a registered scheme attract full UK income tax relief as long as they do not exceed £50,000 per annum (reducing to £40,000 from next year).
Tax-efficient structuring could be achieved by setting up a company. It would be possible to use an offshore company but this would have to be managed and controlled from offshore, which would necessitate him employing overseas directors. He would also be subject to various anti-avoidance rules so would need to carefully structure the ownership of the company to avoid these. The expenses of both are unlikely to be justified for this level of earnings.
He would, however, benefit from incorporating a UK company to contract with the various firms he works for. The company would pay tax of only 20pc on profit. From the gross income, the company could deduct all reasonable expenses according to normal UK rules including any payments made to his SIPPS.
He would obviously need some money to live on and so would need the company to pay him a salary. This could be kept relatively low to take advantage of the lower tax rates. He could also arrange for the company to pay dividends to top up his total income as and when required.
As long as his total income was below £41,000 per annum there would be no further tax payable on dividends received. This arrangement would give him great flexibility to be paid what he wanted when he wanted and take advantage of differing and lower tax bands. Any income he left within the company would suffer no further tax.
Arrangements similar to this can be caught by IR35, which is an anti-avoidance provision to stop what were essentially employees being paid through a company to avoid tax. Readers may recall the stink when it was revealed that many senior BBC figures had set up corporate structures through which they took their income. IR35 would not apply to our contractor, as he is bona fide self-employed, so incorporating would give him tax savings and much flexibility.
Thursday, March 21, 2013
The Gentle Art of Finance
I am generally office bound at work, but occasionally I am let out for a day or two! In February, I represented the Sovereign Art Foundation at ARCOmadrid, which is one of Europe’s most important art fairs. The event was well attended by buyers and collectors from around the world, and it was a hugely rewarding experience for an amateur art enthusiast like me.
The fair took place just after Picasso’s “Femme assise près d’une fenêtre” sold for £28.6m at Sotheby’s in London, where a further 18 sale lots raised more than £1m. The pieces at ARCOmadrid may not have been in quite the same league as those executed by Málaga’s favourite son, but I was struck by the “full” prices being demanded. It set me thinking as to why the art market should be thriving even at a time of financial stress.
In Gibraltar we enjoy a very well-established art scene and can boast an impressive number of first class artists. Several art groups – including Gibraltar DFAS with which I am associated – cater to the ever-growing public interest. Despite the downturn, I know several local collectors who continue to acquire art, much of it locally produced. Whilst it’s true that many artists around the world live from hand to mouth, it’s also clear that, here in Gibraltar at least, there is a living to be had from art.
Whilst the economic crisis has affected millions of people globally, there remains a great deal of cash available – if you know where to look for it. Much of this is corporate money, stashed on balance sheets around the world, but rich people – many of whom buy art – are still rich. Some have seen their wealth seriously eroded in recent years but others continue to do very well. Art offers a potentially attractive investment for a proportion of that wealth.
Interest earned on traditional bank deposits remains pitifully low – and some say this is likely to be the case for years to come. Equities are volatile – although several world “bourses” or stock markets have notched up impressive gains in recent months. When you ponder the possible choices available to a wealthy investor, it becomes rather easier to see why art might make an attractive alternative investment.
In a Gibraltar Magazine column a couple of years ago, I set out a few reasons why one might consider entering the art market as an investment. For the wealthy, successful entrepreneur, a lot of what I said then till holds true today – maybe it always has done so. But what about ordinary people like me who are interested in art but don’t have millions at their disposal. Is there scope for us too to combine that interest with investing?
There are some obvious areas to consider at the outset: the artist; the subject; the medium; the cost (not be confused with value); and the extent to which you have market knowledge and a discerning eye. All this may lead you to seek the advice of an art professional. Collecting should be fun but if you are also intending it as an investment, caution should be exercised.
So how do I go about it myself? My budget is limited so the question I ask before adding to my modest collection is always the same. Can I imagine having the piece hanging on my wall for many years to come? A year ago, I was passing the rather excellent Gibraltar Art Gallery and there was a piece in the window that simply had my name on it (not literally of course) or, to be more accurate, my partner’s name. Sure enough, after a couple of days’ deliberation we decided we just had to have it and soon another picture was hanging on our walls. So why did we do it? Was it because it might be worth considerably more in years to come? No. We bought it because we liked the piece and, as the Gibraltarian artist who painted it knows very welI, we have since come to love it.
That’s not to say that amateurs cannot be lucky. Two decades ago at a Fuengirola rastro (or street market), I bought a piece from a struggling artist who has since gone on to find critical acclaim and commercial success. The piece that I purchased for hardly any money – my weekly grocery bill cost more – is today worth the price of a small car. But am I likely to sell it? No fear. It’s part of the family now. Although it could be described as a “marmite” work – you either love it or hate it – everyone who visits us comments on it and we can’t imagine being without it.
So when acquiring art perhaps the first consideration should be “why”? If it’s to enjoy and hang on the wall, then forget the idea of selling it for a quick profit. If on the other hand, one imagines that a particular artist is going to sell very well in the future then acquiring one or more pieces early on in their career is likely to be a good move.
The second consideration should be where to put it. Storage might be the only option but I would always say “on display” for people to enjoy. And if not just for you and any visitors to your house, then you could consider reaching a wider audience in a gallery or on loan to a private or public collection. The latter may of course also help to enhance the provenance and value of the work as well as the reputation of the artist, however you should be careful to ensure that your ownership is watertight before undertaking such a move. Insurance is equally important. Protection from fire or any other catastrophic event is of course necessary, but so is the security risk.
There are also ways to get involved in the art market without necessarily buying the pieces themselves. In the same way that one can get invest in the gold market without purchasing “physical” metal, there are several specialist funds that invest in art. An individual investor is in fact buying into the fund which is itself undertaking the art purchase. I have even come across funds that allow investors to temporarily “borrow” pieces from the fund. It’s obviously not the same as owning the piece outright but, like car clubs, it may give you an opportunity to enjoy something that would usually be beyond your budget and which you can change when the mood takes you.
So is art a sensible investment to consider in uncertain times? As regular readers will know I can only express my personal opinion. Under the right circumstances, art is well worth considering as an alternative asset class, particularly for large investment portfolios. Exposure to the art market may also provide useful diversification.
As an art enthusiast, I’ve always felt that art can teach you so much about the world – a bit like the stamp collecting of my childhood. Owning a piece – any piece – can be a joy in itself. Acquire something you like; if the value increases over time, so much the better. If you are like me you will simply grow to love the pieces and never want to part with them, so the investment side becomes less critical.
A wealthy Hong Kong-based friend is a passionate collector. Even with more than one home, he has run out of space to house his collection. Once I asked, “why not dispose of some pieces?” His withering look by way of reply taught me that even sophisticated connoisseurs get to love their art. There is something out there for everyone on the art scene; I encourage you to take a closer look.
The fair took place just after Picasso’s “Femme assise près d’une fenêtre” sold for £28.6m at Sotheby’s in London, where a further 18 sale lots raised more than £1m. The pieces at ARCOmadrid may not have been in quite the same league as those executed by Málaga’s favourite son, but I was struck by the “full” prices being demanded. It set me thinking as to why the art market should be thriving even at a time of financial stress.
In Gibraltar we enjoy a very well-established art scene and can boast an impressive number of first class artists. Several art groups – including Gibraltar DFAS with which I am associated – cater to the ever-growing public interest. Despite the downturn, I know several local collectors who continue to acquire art, much of it locally produced. Whilst it’s true that many artists around the world live from hand to mouth, it’s also clear that, here in Gibraltar at least, there is a living to be had from art.
Whilst the economic crisis has affected millions of people globally, there remains a great deal of cash available – if you know where to look for it. Much of this is corporate money, stashed on balance sheets around the world, but rich people – many of whom buy art – are still rich. Some have seen their wealth seriously eroded in recent years but others continue to do very well. Art offers a potentially attractive investment for a proportion of that wealth.
Interest earned on traditional bank deposits remains pitifully low – and some say this is likely to be the case for years to come. Equities are volatile – although several world “bourses” or stock markets have notched up impressive gains in recent months. When you ponder the possible choices available to a wealthy investor, it becomes rather easier to see why art might make an attractive alternative investment.
In a Gibraltar Magazine column a couple of years ago, I set out a few reasons why one might consider entering the art market as an investment. For the wealthy, successful entrepreneur, a lot of what I said then till holds true today – maybe it always has done so. But what about ordinary people like me who are interested in art but don’t have millions at their disposal. Is there scope for us too to combine that interest with investing?
There are some obvious areas to consider at the outset: the artist; the subject; the medium; the cost (not be confused with value); and the extent to which you have market knowledge and a discerning eye. All this may lead you to seek the advice of an art professional. Collecting should be fun but if you are also intending it as an investment, caution should be exercised.
So how do I go about it myself? My budget is limited so the question I ask before adding to my modest collection is always the same. Can I imagine having the piece hanging on my wall for many years to come? A year ago, I was passing the rather excellent Gibraltar Art Gallery and there was a piece in the window that simply had my name on it (not literally of course) or, to be more accurate, my partner’s name. Sure enough, after a couple of days’ deliberation we decided we just had to have it and soon another picture was hanging on our walls. So why did we do it? Was it because it might be worth considerably more in years to come? No. We bought it because we liked the piece and, as the Gibraltarian artist who painted it knows very welI, we have since come to love it.
That’s not to say that amateurs cannot be lucky. Two decades ago at a Fuengirola rastro (or street market), I bought a piece from a struggling artist who has since gone on to find critical acclaim and commercial success. The piece that I purchased for hardly any money – my weekly grocery bill cost more – is today worth the price of a small car. But am I likely to sell it? No fear. It’s part of the family now. Although it could be described as a “marmite” work – you either love it or hate it – everyone who visits us comments on it and we can’t imagine being without it.
So when acquiring art perhaps the first consideration should be “why”? If it’s to enjoy and hang on the wall, then forget the idea of selling it for a quick profit. If on the other hand, one imagines that a particular artist is going to sell very well in the future then acquiring one or more pieces early on in their career is likely to be a good move.
The second consideration should be where to put it. Storage might be the only option but I would always say “on display” for people to enjoy. And if not just for you and any visitors to your house, then you could consider reaching a wider audience in a gallery or on loan to a private or public collection. The latter may of course also help to enhance the provenance and value of the work as well as the reputation of the artist, however you should be careful to ensure that your ownership is watertight before undertaking such a move. Insurance is equally important. Protection from fire or any other catastrophic event is of course necessary, but so is the security risk.
There are also ways to get involved in the art market without necessarily buying the pieces themselves. In the same way that one can get invest in the gold market without purchasing “physical” metal, there are several specialist funds that invest in art. An individual investor is in fact buying into the fund which is itself undertaking the art purchase. I have even come across funds that allow investors to temporarily “borrow” pieces from the fund. It’s obviously not the same as owning the piece outright but, like car clubs, it may give you an opportunity to enjoy something that would usually be beyond your budget and which you can change when the mood takes you.
So is art a sensible investment to consider in uncertain times? As regular readers will know I can only express my personal opinion. Under the right circumstances, art is well worth considering as an alternative asset class, particularly for large investment portfolios. Exposure to the art market may also provide useful diversification.
As an art enthusiast, I’ve always felt that art can teach you so much about the world – a bit like the stamp collecting of my childhood. Owning a piece – any piece – can be a joy in itself. Acquire something you like; if the value increases over time, so much the better. If you are like me you will simply grow to love the pieces and never want to part with them, so the investment side becomes less critical.
A wealthy Hong Kong-based friend is a passionate collector. Even with more than one home, he has run out of space to house his collection. Once I asked, “why not dispose of some pieces?” His withering look by way of reply taught me that even sophisticated connoisseurs get to love their art. There is something out there for everyone on the art scene; I encourage you to take a closer look.
Offshore Solutions
Sovereign was established in Gibraltar in 1987 and now the company has offices in all the major international finance centers. It has a total of 27 offices till date with offices in Bahrain, Dubai, Gibraltar, Isle of Man, Cayman Islands, British Virgin Islands, etc. Sovereign currently manages over 7,000 structures for a wide variety of clients worldwide. The majority of the clients are individuals, expatriates, entrepreneurs, freelance consultants, private investors, or wealthy persons and their families. Sovereign have developed a wide range of supporting services embracing asset management, corporate finance and fund raising, specialist tax advice, ship and yacht registration, insurance broking, credit cards, as well as trademark and intellectual property registration and protection. Offshore Companies are often demonized in the media, which paints a picture of investors illegally stashing their money away in banks located on an obscure Caribbean island where the tax rate is next to nothing. While it’s true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore Companies may offer you many advantages. Such as:
Minimizing Taxation: Offshore companies established in low or zero tax jurisdictions may reduce, delay or even completely eliminate the tax burden on the company.
Holding Company: The offshore company can easily hold shares in Bahraini Companies (As WLL or SPC), and in other companies outside Bahrain at the same time. So it can act as A Holding Company for an individual`s shares in different entities. The following diagram illustrates the example.
Asset Protection: Placing your personal assets into a separate legal entity is generally a good idea whether you place them in a traditional company within your home country or you place them in an offshore company. Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities.
Simplicity: One often overlooked aspect of offshore company incorporation is the relative simplicity of the process. Offshore company formation in many jurisdictions is a quick and seamless process and Sovereign aims to make your offshore incorporation as simple as possible. Additionally, ongoing requirements for offshore companies are often more relaxed than for “onshore” companies.
Confidentiality: Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions
Which are the most popular offshore jurisdictions? British Virgin Islands (BVI), Ras Al Khaima (UAE), Hong Kong, Seychelles, and Cayman Islands. What makes the British Virgin Islands such prime location for offshore banking? British Virgin Islands (BVI) are a British dependency located in the Eastern Caribbean; the government is stable and promises to remain that way. There is a good commercial and professional infrastructure and the government is actively encouraging the development of the offshore finance business. BVI became the clear market leader for corporate services in the Caribbean after the introduction of the International Business Companies Act in 1984 which created the International Business Company (IBC). This IBC became the industry preferred offshore company.
BVI Company Characteristics - Shareholder: A minimum of one shareholder is required, any nationality.
- Directors: A minimum of one director is required, can be the shareholder.
- No Taxation
- No cash capital required
- No Physical Office required
- Incorporation time 48 hours
- Business activity can be one or more at the same time.
- Very useful tool to hold shares, open a bank account, set-up a representative office in Bahrain, own assists, property, yacht, piece of art etc.
- Total incorporation fees including first year government fees in around: BD700 with no hidden costs
Minimizing Taxation: Offshore companies established in low or zero tax jurisdictions may reduce, delay or even completely eliminate the tax burden on the company.
Holding Company: The offshore company can easily hold shares in Bahraini Companies (As WLL or SPC), and in other companies outside Bahrain at the same time. So it can act as A Holding Company for an individual`s shares in different entities. The following diagram illustrates the example.
Asset Protection: Placing your personal assets into a separate legal entity is generally a good idea whether you place them in a traditional company within your home country or you place them in an offshore company. Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities.
Simplicity: One often overlooked aspect of offshore company incorporation is the relative simplicity of the process. Offshore company formation in many jurisdictions is a quick and seamless process and Sovereign aims to make your offshore incorporation as simple as possible. Additionally, ongoing requirements for offshore companies are often more relaxed than for “onshore” companies.
Confidentiality: Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions
Which are the most popular offshore jurisdictions? British Virgin Islands (BVI), Ras Al Khaima (UAE), Hong Kong, Seychelles, and Cayman Islands. What makes the British Virgin Islands such prime location for offshore banking? British Virgin Islands (BVI) are a British dependency located in the Eastern Caribbean; the government is stable and promises to remain that way. There is a good commercial and professional infrastructure and the government is actively encouraging the development of the offshore finance business. BVI became the clear market leader for corporate services in the Caribbean after the introduction of the International Business Companies Act in 1984 which created the International Business Company (IBC). This IBC became the industry preferred offshore company.
BVI Company Characteristics - Shareholder: A minimum of one shareholder is required, any nationality.
- Directors: A minimum of one director is required, can be the shareholder.
- No Taxation
- No cash capital required
- No Physical Office required
- Incorporation time 48 hours
- Business activity can be one or more at the same time.
- Very useful tool to hold shares, open a bank account, set-up a representative office in Bahrain, own assists, property, yacht, piece of art etc.
- Total incorporation fees including first year government fees in around: BD700 with no hidden costs
Safeguarding Wealth
Making a will is often a sensible way for an individual to put his or her affairs in order. But the administration of a deceased’s estate can often be costly, can result in long delays and very often involves a large bill, especially in the UAE. Setting up a trust, on the other hand, can eradicate delays, costs and protect assets from future creditors as well as provide anonymity.
What is a trust and how does it work? Setting up a trust is a better alternative to making a will during one’s lifetime. A trust is a financial tool whereby property is transferred from one person (the settler) to another (the trustee), who holds and administers it for the benefit of specific beneficiaries. The assets are managed by the trustee or the team of trustees, as per the terms and conditions of the trust deed, which also lays down the rights and interests of the beneficiaries.
What are the merits of setting up a trust? With a trust, you can make any number of arrangements for the distribution of your assets in a very convenient and flexible way. You may wish to provide a course of income for your spouse or make provision for the education of your children. A trust can also be used to overcome forced inheritance claims, a particular problem in countries of Islamic tradition.
How far does a trust assist in asset protection? A common motivation for establishing a trust is to preserve family assets against mismanagement and spendthrifts. An individual may want to ensure that the wealth accumulated over a lifetime is not dissipated or divided up, but is preserved as one fund. The fund can then accumulate further with provision for payments to the members of the family as necessary, preserving some assets for later generations.
How is the trust structure relevant for family business? Setting up a trust may ensure that the business built by the settler will continue after their death. If the company shares are transferred into a trust prior to the death of the settler, the unnecessary liquidation of the family business can be prevented. In case family members have little business experience, the trustees can be instructed to retain the business, keep the company running and provide payment to members of the family from dividend income.
Will a trust assist in holding international property? A portfolio of international property can be held under one single trust. In some circumstances, depending on local laws, a ‘local company’ may be required to set up under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai Freehold property, and have a Trust acting as a shareholder of the company).
How does one determine the credentials of trustees? Reputable and well-regulated jurisdictions such as Gibraltar have been found at the forefront of best practices in the area of trusts. Professional trustees are required to be licensed, use the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC). Sovereign Trust International Ltd is one such licensed professional trustees. The company is regulated and covered by professional indemnity insurance. Vikrant Pangam is a Trust and Estate Planning Specialist and Managing Directory at Sovereign Group’s office in Abu Dhabi. The opinions expressed by the author are his own.
What is a trust and how does it work? Setting up a trust is a better alternative to making a will during one’s lifetime. A trust is a financial tool whereby property is transferred from one person (the settler) to another (the trustee), who holds and administers it for the benefit of specific beneficiaries. The assets are managed by the trustee or the team of trustees, as per the terms and conditions of the trust deed, which also lays down the rights and interests of the beneficiaries.
What are the merits of setting up a trust? With a trust, you can make any number of arrangements for the distribution of your assets in a very convenient and flexible way. You may wish to provide a course of income for your spouse or make provision for the education of your children. A trust can also be used to overcome forced inheritance claims, a particular problem in countries of Islamic tradition.
How far does a trust assist in asset protection? A common motivation for establishing a trust is to preserve family assets against mismanagement and spendthrifts. An individual may want to ensure that the wealth accumulated over a lifetime is not dissipated or divided up, but is preserved as one fund. The fund can then accumulate further with provision for payments to the members of the family as necessary, preserving some assets for later generations.
How is the trust structure relevant for family business? Setting up a trust may ensure that the business built by the settler will continue after their death. If the company shares are transferred into a trust prior to the death of the settler, the unnecessary liquidation of the family business can be prevented. In case family members have little business experience, the trustees can be instructed to retain the business, keep the company running and provide payment to members of the family from dividend income.
Will a trust assist in holding international property? A portfolio of international property can be held under one single trust. In some circumstances, depending on local laws, a ‘local company’ may be required to set up under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai Freehold property, and have a Trust acting as a shareholder of the company).
How does one determine the credentials of trustees? Reputable and well-regulated jurisdictions such as Gibraltar have been found at the forefront of best practices in the area of trusts. Professional trustees are required to be licensed, use the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC). Sovereign Trust International Ltd is one such licensed professional trustees. The company is regulated and covered by professional indemnity insurance. Vikrant Pangam is a Trust and Estate Planning Specialist and Managing Directory at Sovereign Group’s office in Abu Dhabi. The opinions expressed by the author are his own.
Sunday, February 17, 2013
Expats and tax: the lowdown on living the high life in Cyprus
CASE STUDY:
Retired
Personal status:
Couple in their early sixties.
Expat status:
Retired to Cyprus five years ago.
Financial status:
UK pensions income about £35,000 per annum. UK investment income £20,000 per annum. Flat in Cyprus now worth £350,000. UK family house worth £500,000. UK investment property worth £500,000 with mortgage of £300,000 and rented out.
This couple will be tax resident in Cyprus and subject to Cyprus tax on their worldwide income. The maximum tax rate in Cyprus is 35pc but there is also a "tax" of up to 20pc as a "Defence Contribution".
The UK pension income would generally be subject to withholding tax in the UK, but the UK and Cyprus have ratified a tax treaty that normally gives the taxing right only to Cyprus. Pension income accumulated from services rendered abroad is taxed at a rate of only 5pc for amounts exceeding €3,420.
Moving the pension to a qualified recognised offshore pension scheme (QROPS) would be advantageous as the special member payment charges that apply to UK-registered schemes would be avoided.
The most punitive charge is the special 55pc death charge imposed on the remaining fund after the member's death. It should also mean that the couple could drawdown a greater level of income from their pensions as the UK's drawdown limits also cease to apply.
Depending on the type, income from investments in the UK might be subject to withholding tax in the UK, but this would generally be credited against tax due on the same income in Cyprus under the tax treaty. Moving the investments offshore should avoid any UK tax. Dividend income is exempt from tax in Cyprus but is still subject to the Defence Contribution at 20pc. Capital gains on qualified securities and funds are also tax-exempt in Cyprus.
The rental income on the investment property would be liable to UK tax but all expenses of maintenance and interest on the loan could be deducted. The couple could elect to be taxed according to the non-resident landlord scheme so the rental income can be received gross. The income after expenses would be subject to UK tax at the individual rates, but the couple would still enjoy their tax-free personal allowance, so the maximum rate would probably be only 20pc. Tax paid in the UK on rental income is allowed as a credit against tax due in Cyprus.
Their main concern should be UK inheritance tax (UK IHT). If they intend to remain in Cyprus for the rest of their lives, they could be domiciled in Cyprus. If so they would not be subject to UK IHT on their worldwide estate. Contrary to popular belief, the fact that they still own UK property would not be a barrier to claiming a non-UK domicile.
Irrespective of domicile, they would still be liable to UK IHT on any UK-situated assets. They each get an allowance in the UK of approximately £325,000, so a total allowance of £650,000. The total equity (value less loans) in their UK properties is £800,000. This would still leave them with a UK IHT liability of 40pc of the balance, being about £70,000. If they were still UK domiciled, IHT would bite on the whole of their estate. This would give them a substantial IHT bill in the UK. The couple should get certainty on their domicile.
There are steps they could take to mitigate IHT. If they are not domiciled in the UK, they could turn their UK investments into non-UK investments by transferring them to offshore companies so their asset was the shares in the non-UK company rather than the UK property itself. The shares would not be subject to UK IHT. The new penal taxes on residential property held by offshore companies apply to properties worth more than £2 million, so won't affect them.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
Retired
Personal status:
Couple in their early sixties.
Expat status:
Retired to Cyprus five years ago.
Financial status:
UK pensions income about £35,000 per annum. UK investment income £20,000 per annum. Flat in Cyprus now worth £350,000. UK family house worth £500,000. UK investment property worth £500,000 with mortgage of £300,000 and rented out.
This couple will be tax resident in Cyprus and subject to Cyprus tax on their worldwide income. The maximum tax rate in Cyprus is 35pc but there is also a "tax" of up to 20pc as a "Defence Contribution".
The UK pension income would generally be subject to withholding tax in the UK, but the UK and Cyprus have ratified a tax treaty that normally gives the taxing right only to Cyprus. Pension income accumulated from services rendered abroad is taxed at a rate of only 5pc for amounts exceeding €3,420.
Moving the pension to a qualified recognised offshore pension scheme (QROPS) would be advantageous as the special member payment charges that apply to UK-registered schemes would be avoided.
The most punitive charge is the special 55pc death charge imposed on the remaining fund after the member's death. It should also mean that the couple could drawdown a greater level of income from their pensions as the UK's drawdown limits also cease to apply.
Depending on the type, income from investments in the UK might be subject to withholding tax in the UK, but this would generally be credited against tax due on the same income in Cyprus under the tax treaty. Moving the investments offshore should avoid any UK tax. Dividend income is exempt from tax in Cyprus but is still subject to the Defence Contribution at 20pc. Capital gains on qualified securities and funds are also tax-exempt in Cyprus.
The rental income on the investment property would be liable to UK tax but all expenses of maintenance and interest on the loan could be deducted. The couple could elect to be taxed according to the non-resident landlord scheme so the rental income can be received gross. The income after expenses would be subject to UK tax at the individual rates, but the couple would still enjoy their tax-free personal allowance, so the maximum rate would probably be only 20pc. Tax paid in the UK on rental income is allowed as a credit against tax due in Cyprus.
Their main concern should be UK inheritance tax (UK IHT). If they intend to remain in Cyprus for the rest of their lives, they could be domiciled in Cyprus. If so they would not be subject to UK IHT on their worldwide estate. Contrary to popular belief, the fact that they still own UK property would not be a barrier to claiming a non-UK domicile.
Irrespective of domicile, they would still be liable to UK IHT on any UK-situated assets. They each get an allowance in the UK of approximately £325,000, so a total allowance of £650,000. The total equity (value less loans) in their UK properties is £800,000. This would still leave them with a UK IHT liability of 40pc of the balance, being about £70,000. If they were still UK domiciled, IHT would bite on the whole of their estate. This would give them a substantial IHT bill in the UK. The couple should get certainty on their domicile.
There are steps they could take to mitigate IHT. If they are not domiciled in the UK, they could turn their UK investments into non-UK investments by transferring them to offshore companies so their asset was the shares in the non-UK company rather than the UK property itself. The shares would not be subject to UK IHT. The new penal taxes on residential property held by offshore companies apply to properties worth more than £2 million, so won't affect them.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
Thursday, February 14, 2013
Pensions - consider your options
So it’s one
month into the New Year. Might I be so bold as to ask how your 2013 resolutions
are going? Fear not. Lest you’ve forgotten, this is a finance column – so your
weight, consumption of alcohol and tobacco, and whether you’ve yet made any use
of that trial gym membership you were given for Christmas, are not my concern.
I’m conducting an audit of your financial resolutions.
You know how it goes. Spend less, pay off those credit cards, save more etc. And the resolution that has gained more currency in recent years – organise, or maybe re-organise, your pension arrangements.
Why are pensions taking up so many more column inches these days? After all, you can’t pick up one of those expat freebie newspapers in Gibraltar or the Costas without seeing endless articles and ads for one pension provider or another. I seem to be spending much more of my time these days speaking to individuals and intermediary firms about pensions and I think there are several straightforward reasons for the increasing level of interest.
Put simply, the realisation is dawning (or perhaps it dawned some time ago) that not only is life expectancy increasing, but the population itself is ageing. What I mean of course is that the proportion of older people compared to younger generations is increasing year by year. This is due to the double effect of a reducing birth rate (although there doesn’t seem to be much evidence of this in Gibraltar!) coupled with advances in health care and a better awareness of health issues in general.
There is nothing revolutionary in any of this of course. What has changed in recent years – as always this is just my own personal opinion – is the impact of the financial crisis, which affects everyone in one way or another. Five years on and the global economy shows no sign of bouncing back. One of the consequences is that individuals have to take more responsibility for their financial arrangements to see them through later life after retirement. As we all know, more people are living well into their 80’s, 90’s and beyond, so even retiring at 65 generally means you are making financial preparations for a long time ahead. And, of course, for anyone wishing to retire earlier the situation becomes even more critical.
When considering pension arrangements, the general advice has always been that the earlier contributions are started the better the final result. But in reality do young people in their 20’s actively consider pensions these days? Please don’t write in if you are doing so, but my belief is that not enough people are being encouraged to provide for their financial future. When I was in my 20s the bank for which I then worked forced me to join their final salary scheme – more of which shortly. But these days, I can understand why “twenty somethings” feel that other things take priority. Paying off student loans, saving for deposits on first homes or even just rental contracts are just a few examples. And then life changing events such as marriage and children come along too.
I remember when I was 25 that my projected retirement age of 60 seemed a very long way away. But of course, as my fellow quinquagenarians will attest, it seems to catch up with you very quickly. So it’s rather disconcerting to read in the press of poor investment performance, less than perfect advice being given (or even worse, no advice at all) and the like. Couple these negatives with the apparent complexity of available options and one can see why the whole issue of pensions can appear to be so off-putting.
So let’s turn to a couple of terms you will see in the press and try to demystify these confusing acronyms. I begin with the most commonly seen – QROPS – which stands for Qualifying Recognised Overseas Pension Scheme. These can be used by British expatriates and others who have spent time working in the UK and have built up a pension there. QROPS enables them to transfer the value of such pensions into a non-UK scheme. But why would they do this? The reason is that leaving the pension behind in the UK means that it remains subject to UK pensions law. UK income tax may be deducted at source – regardless of where one might now be living; UK investment restrictions continue to apply; and, on death, succession issues cause real concern.
For a more in depth look at these schemes, readers may wish to look back to my article in October last year (all back issues on are online at www.thegibraltarmagazine.com). The legislation that governs QROPS was introduced in 2004 although it came into effect two years later. Eagle-eyed readers of the financial press may also have seen reference to a similar looking acronym – QNUPS. Again this refers to a pension governed by underlying UK legislation and the acronym itself stands for Qualifying Non-UK Pension Scheme.
You know how it goes. Spend less, pay off those credit cards, save more etc. And the resolution that has gained more currency in recent years – organise, or maybe re-organise, your pension arrangements.
Why are pensions taking up so many more column inches these days? After all, you can’t pick up one of those expat freebie newspapers in Gibraltar or the Costas without seeing endless articles and ads for one pension provider or another. I seem to be spending much more of my time these days speaking to individuals and intermediary firms about pensions and I think there are several straightforward reasons for the increasing level of interest.
Put simply, the realisation is dawning (or perhaps it dawned some time ago) that not only is life expectancy increasing, but the population itself is ageing. What I mean of course is that the proportion of older people compared to younger generations is increasing year by year. This is due to the double effect of a reducing birth rate (although there doesn’t seem to be much evidence of this in Gibraltar!) coupled with advances in health care and a better awareness of health issues in general.
There is nothing revolutionary in any of this of course. What has changed in recent years – as always this is just my own personal opinion – is the impact of the financial crisis, which affects everyone in one way or another. Five years on and the global economy shows no sign of bouncing back. One of the consequences is that individuals have to take more responsibility for their financial arrangements to see them through later life after retirement. As we all know, more people are living well into their 80’s, 90’s and beyond, so even retiring at 65 generally means you are making financial preparations for a long time ahead. And, of course, for anyone wishing to retire earlier the situation becomes even more critical.
When considering pension arrangements, the general advice has always been that the earlier contributions are started the better the final result. But in reality do young people in their 20’s actively consider pensions these days? Please don’t write in if you are doing so, but my belief is that not enough people are being encouraged to provide for their financial future. When I was in my 20s the bank for which I then worked forced me to join their final salary scheme – more of which shortly. But these days, I can understand why “twenty somethings” feel that other things take priority. Paying off student loans, saving for deposits on first homes or even just rental contracts are just a few examples. And then life changing events such as marriage and children come along too.
I remember when I was 25 that my projected retirement age of 60 seemed a very long way away. But of course, as my fellow quinquagenarians will attest, it seems to catch up with you very quickly. So it’s rather disconcerting to read in the press of poor investment performance, less than perfect advice being given (or even worse, no advice at all) and the like. Couple these negatives with the apparent complexity of available options and one can see why the whole issue of pensions can appear to be so off-putting.
So let’s turn to a couple of terms you will see in the press and try to demystify these confusing acronyms. I begin with the most commonly seen – QROPS – which stands for Qualifying Recognised Overseas Pension Scheme. These can be used by British expatriates and others who have spent time working in the UK and have built up a pension there. QROPS enables them to transfer the value of such pensions into a non-UK scheme. But why would they do this? The reason is that leaving the pension behind in the UK means that it remains subject to UK pensions law. UK income tax may be deducted at source – regardless of where one might now be living; UK investment restrictions continue to apply; and, on death, succession issues cause real concern.
For a more in depth look at these schemes, readers may wish to look back to my article in October last year (all back issues on are online at www.thegibraltarmagazine.com). The legislation that governs QROPS was introduced in 2004 although it came into effect two years later. Eagle-eyed readers of the financial press may also have seen reference to a similar looking acronym – QNUPS. Again this refers to a pension governed by underlying UK legislation and the acronym itself stands for Qualifying Non-UK Pension Scheme.
The two types of
scheme are similar but each is used for different reasons. A key
differentiating factor is that funds that have not benefitted from UK tax
relief should be used in a QNUPS. If one has a QROPS, it is always going to be
a QNUPS. But a QNUPS is not necessarily going to be a QROPS. Are you still with
me? It’s not difficult to see why you should seek advice.
But why should
this concern us in Gibraltar? In the case of QROPS, the answer is that these
types of arrangements concern individuals with a UK pension who are living
abroad (or are able to demonstrate an intention to emigrate), so one can easily
understand why the English-speaking press in Spain is awash with pension
service providers trying to promote their pension schemes.
But the same
rules also apply to anyone who has a UK pension and who has now left the UK:
and, of course, there are many Gibraltarians in this position. My advice to
anyone who has worked in the UK at some point and therefore has a UK pension,
is to consider carefully whether or not a QROPS might be suitable. It may be
that the UK pension is relatively modest. If one worked in the UK for just a
few years this is likely to be the case. So you should check whether the QROPS’
provider you are speaking to offers a “lite” version of their scheme –
typically these are more keenly priced, although there may be restrictions on
the investments allowed within the pension and so on.
As always,
professional advice should be sought as early as possible because individual
circumstances need to be considered. What works for your friend at the golf
club may not work for you. For example, I am often asked if final salary
pensions can be switched to a QROPS. They can, but one needs to consider very
carefully whether this would be a wise move. Such pensions (if you can get them
at all these days) are unusually highly-prized because the pension you receive
is based on the final salary that you were drawing when you left the company
concerned. Index-linked schemes, where future pension payments match inflation,
are of course the best of all.
The one thing
that is clear with pension planning is that you shouldn’t wait until you retire
to start considering your options. It could be that you are living on your
pension and other investments for almost as long as you are living on a salary
or running your own business. And that goes for your dependents too. It
therefore makes sense to pay as much attention to your future needs in financial
planning as you do your current ones. So organising, or re-organising, your
pension arrangements is one New Year’s resolution that you should stick to. Now
off you go the gym!
Monday, February 4, 2013
Alan Montegriffo joins Sovereign Insurance Services
Gibraltar-based Sovereign Insurance
Services has marked the beginning of the New Year by expanding its business in
Ocean Village. The company has acquired the general insurance book of Eurolinx
Limited and as a result, well-known local insurance personality Alan
Montegriffo has joined the expanding team.
Commenting on the acquisition, Sovereign
Insurance Services Managing Director Geoff Trew said that although organic
growth was positive, the Eurolinx general insurance book would allow the
business to grow exponentially over the coming year. He added that the company
is delighted that Mr Montegriffo is joining the team. Mr Trew pointed out that
Neil Entwistle has also recently joined the company, and that he will
concentrate on working with the Sovereign Group offices world-wide to generate
international insurance business opportunities for their Gibraltar, London and
international insurance markets.
Sovereign Insurance Services is a
subsidiary of the wider Sovereign Group whose global Head Office is located in
Main Street. Now boasting a total staff complement of almost 80 locally, Sovereign
has offices in a further 23 locations worldwide.
Group Finance Director Gerry Kelly, himself
based in Gibraltar, welcomed the acquisition adding that Sovereign Group
remains interested in any further suitable opportunities, both locally and
abroad. He commented that two further deals were being considered at present.
Sovereign Insurance Services is a fully
licensed insurance broking intermediary and is based at new state of the art
premises at Ocean Village’s Promenade. They arrange all types of Insurance
cover for both personal and corporate clients worldwide where coverages include
such specialist lines as healthcare, construction, corporate liability,
contingency and kidnap & ransom. Benefitting from their location at the
Ocean Village marina, a full range of marine and aviation based insurance
services are also available.
Thursday, January 17, 2013
Making the most of a fresh start abroad
CASE STUDY
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
Tuesday, January 15, 2013
STARBUCKS AND AMAZON FACE TAX FURY
Poor old Starbucks and Amazon (and we can add a few other notable heavyweights to that list) are getting it in the neck. The two cases are very different. Both are accused of aggressive or “unfair” tax avoidance. Unfair seem to be a term used by commentators when they can’t think of anything specific to complain about. The main complaint seems to be that both companies generate revenues in the UK and don’t pay much UK corporation tax. They do both contribute to the UK plc by employing people in the UK who pay tax, by paying VAT and National Insurance and by spending money with providers of goods and services. They do contribute but do they contribute enough or a “fair amount”? Importantly neither are UK companies. They are both headquartered in the US.
Starbucks extract royalties out of the UK which reduce or eliminate most of its profits. Many of the Starbucks coffee shops in the UK are franchises- joint ventures with a local corporate partner (apparently they won’t grant franchises to individual entrepreneurs). The franchise agreement would typically provide that Starbucks will provide expertise, systems, know-how and the use of the Starbucks name in return for a royalty. A royalty is charged on turnover and is an expense to the operator which, obviously, reduces local taxable profit as do its other overheads such as rent and wages. Starbucks also operates its own coffee shops in the UK and is allowed to charge the same royalty, but no more, as it would charge a franchisee. Apparently the royalty is 4.7% of turnover. Tax agreements, normal practice and logic all dictate that it is reasonable for a company that has spent millions, probably billions, advertising and marketing its brand to be able to charge for the use of that brand. Starbucks in the
US has made the brand valuable by aggressively promoting it as a sign of quality. All big brands do the same. People visit the Starbucks coffee shops because they are called Starbucks. Without the Starbucks name business would probably reduce. Certainly the franchisees value the use of the name and for Starbucks expertise etc and are prepared to pay for that use. It is a condition of the franchise agreement. If you don’t value what Starbucks provide don’t sign the agreement.
International tax agreements, which override local tax legislation, dictate how royalties are treated and give companies tax certainty. The UK and the US have signed a tax treaty which provides that royalties can be paid gross and without withholding tax. The receipt of the royalty in the US would add to the profits, made by Starbucks in the US and be subject to US corporation tax. In theory the royalty will not escape taxation – it will just be taxed in the US rather than the UK. What seems to have offended here is that the royalties are not being sent to the US but rather to the Netherlands. The UK and Netherlands have concluded a similar tax treaty. Royalties can be sent to the Netherlands tax free. Those royalties are subject to tax in the Netherlands but the Netherlands allows royalties and interest to be paid onwards and deducted as an expense without tax being withheld on either. We don’t know what happens to the to the income received in the Netherlands but standard planning is for the Netherlands company to be paying away most of the royalty income it receives to a zero tax company. This would leave little or no taxable profit in the Netherlands so the royalty being paid out of the UK escapes tax in both the UK and the Netherlands.
These arrangements may be obnoxious to the UK but it doesn’t cost the UK any tax. If the royalty was paid directly to the US, no UK tax would be payable on that amount. The US might well complain if it is not getting tax on the royalties sent to the Netherlands but that is a matter for the US IRS. The US have rules designed to capture and tax the profits of offshore companies used by Starbucks. They can bring those rules to bear if they can and wish. It is not clear whether anybody has ascertained whether or not the royalty payments going out of the UK are being taxed in the US. All we know is that they are not being taxed in the UK which is both logical and legal. An UK company doing business in the US would receive similar treatment and can extract royalty payments without suffering US. It could receive the royalties in the Netherlands if it wished.
The Amazon case is quite different. Amazon trades with the UK and not in the UK. It sells books, CDs and other items in the UK but has not set up a taxable entity in the UK. Generally if an US company sends goods to the UK, payment is sent to the US and is revenue belonging to and taxable only in the US after expenses. Tax is not payable on revenue only on profit. International tax treaties contain a “permanent establishment article”. That article clearly states what you are allowed to do within a country without being subject to tax in that country. Typically the treaty will state that a treaty partner company can maintain “facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise” without creating a taxable presence. On the other hand it may not maintain a place of management; a branch; an office; a factory; a workshop; without creating a Permanent Establishment and thereby becoming taxable.
Amazon has set up a subsidiary in Luxembourg. It is the Luxembourg company which sells the goods to UK residents. If a customer logs on to Amazon.co.uk and buys something that transaction is processed through a Luxembourg server owned by a Luxembourg company and managed by persons resident in Luxembourg. The sales process is automated so does not require much by way of personnel. The warehousing and distribution of the goods in the UK probably requires many more people. That is not particularly unusual. If the US and Luxembourg treaties signed by the UK provided that UK tax had to be paid if the foreign company had a warehouse and distribution centre in the UK, Amazon would probably move that facility out of the UK. Delivery of goods would be slower but it could easily fulfill orders through a server in Luxembourg and a warehouse in, for example, Ireland. If the Luxembourg company was removed from the equation there would still be no UK tax payable as sales would be made to UK persons by the US company and any and all profits made from those sales would be taxed in the US, not in the UK. Again the UK is not losing revenue because of the Luxembourg arrangements.
The tax treaties which allow Starbucks and Amazon to avoid tax in the UK were signed to encourage trade between the tax treaty partners and give certainty as to which country was able to tax the revenue. They have achieved that. Advisors are using these treaties creatively to try and reduce the overall tax burden by parking profits in a third country. It could be argued that Amazon and Starbucks are “borrowing” the Luxembourg and Netherland treaties respectively and shouldn’t be allowed to use those treaties because their main and head office is not located there. But they do have companies in those countries and it would seem unrealistic to deny them the use of the treaty because they have less personnel in those countries then they do in others. Perhaps if they couldn’t plan like this they would just move their company to a lower tax country instead. We saw quite a number of companies exiting the UK and now individuals exiting France to escape tax hikes. Countries compete to attract business and investment. Tax is one factor. Expertise, living standards, infrastructure and even the weather also play a part in attracting people and businesses.
The UK could increase taxable profit by denying a deduction for the royalty payable to Starbucks. That would discourage big companies from doing business with the UK unless all other countries in the world did the same.
Amazon employ a large number of people in the UK. Amazon are different to Starbucks in that they probably don’t need an operation in the UK and would not have one if it led to having to pay large amounts of tax which they could otherwise avoid. Starbucks cannot sell and deliver hot coffee over the internet. Starbucks need shops in the UK which must pay UK tax on profits made in the UK so the only question is how that profit is taxable and who gets the right to tax profits. I think the reality is, and politicians and HMRC know this, that businesses are very mobile and it does not pay to kill the golden goose by increasing tax rates or denying reasonable deductions against taxable profit. It makes great headlines for newspapers and politicians to knock the greedy corporate who has huge revenues but little tax (in the UK) but the reality is a bit different.
It is interesting to note that the Guardian- which seems to have been the main critic of both these companies- has a turnover of £195 million but pays no tax. Its accounts show it is making a loss. It would probably argue that there is nothing “artificial” about these accounts but if it was advocating a tax on turnover, it may no longer be in existence due to its losses being greatly increased by that tax.
Starbucks extract royalties out of the UK which reduce or eliminate most of its profits. Many of the Starbucks coffee shops in the UK are franchises- joint ventures with a local corporate partner (apparently they won’t grant franchises to individual entrepreneurs). The franchise agreement would typically provide that Starbucks will provide expertise, systems, know-how and the use of the Starbucks name in return for a royalty. A royalty is charged on turnover and is an expense to the operator which, obviously, reduces local taxable profit as do its other overheads such as rent and wages. Starbucks also operates its own coffee shops in the UK and is allowed to charge the same royalty, but no more, as it would charge a franchisee. Apparently the royalty is 4.7% of turnover. Tax agreements, normal practice and logic all dictate that it is reasonable for a company that has spent millions, probably billions, advertising and marketing its brand to be able to charge for the use of that brand. Starbucks in the
US has made the brand valuable by aggressively promoting it as a sign of quality. All big brands do the same. People visit the Starbucks coffee shops because they are called Starbucks. Without the Starbucks name business would probably reduce. Certainly the franchisees value the use of the name and for Starbucks expertise etc and are prepared to pay for that use. It is a condition of the franchise agreement. If you don’t value what Starbucks provide don’t sign the agreement.
International tax agreements, which override local tax legislation, dictate how royalties are treated and give companies tax certainty. The UK and the US have signed a tax treaty which provides that royalties can be paid gross and without withholding tax. The receipt of the royalty in the US would add to the profits, made by Starbucks in the US and be subject to US corporation tax. In theory the royalty will not escape taxation – it will just be taxed in the US rather than the UK. What seems to have offended here is that the royalties are not being sent to the US but rather to the Netherlands. The UK and Netherlands have concluded a similar tax treaty. Royalties can be sent to the Netherlands tax free. Those royalties are subject to tax in the Netherlands but the Netherlands allows royalties and interest to be paid onwards and deducted as an expense without tax being withheld on either. We don’t know what happens to the to the income received in the Netherlands but standard planning is for the Netherlands company to be paying away most of the royalty income it receives to a zero tax company. This would leave little or no taxable profit in the Netherlands so the royalty being paid out of the UK escapes tax in both the UK and the Netherlands.
These arrangements may be obnoxious to the UK but it doesn’t cost the UK any tax. If the royalty was paid directly to the US, no UK tax would be payable on that amount. The US might well complain if it is not getting tax on the royalties sent to the Netherlands but that is a matter for the US IRS. The US have rules designed to capture and tax the profits of offshore companies used by Starbucks. They can bring those rules to bear if they can and wish. It is not clear whether anybody has ascertained whether or not the royalty payments going out of the UK are being taxed in the US. All we know is that they are not being taxed in the UK which is both logical and legal. An UK company doing business in the US would receive similar treatment and can extract royalty payments without suffering US. It could receive the royalties in the Netherlands if it wished.
The Amazon case is quite different. Amazon trades with the UK and not in the UK. It sells books, CDs and other items in the UK but has not set up a taxable entity in the UK. Generally if an US company sends goods to the UK, payment is sent to the US and is revenue belonging to and taxable only in the US after expenses. Tax is not payable on revenue only on profit. International tax treaties contain a “permanent establishment article”. That article clearly states what you are allowed to do within a country without being subject to tax in that country. Typically the treaty will state that a treaty partner company can maintain “facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise” without creating a taxable presence. On the other hand it may not maintain a place of management; a branch; an office; a factory; a workshop; without creating a Permanent Establishment and thereby becoming taxable.
Amazon has set up a subsidiary in Luxembourg. It is the Luxembourg company which sells the goods to UK residents. If a customer logs on to Amazon.co.uk and buys something that transaction is processed through a Luxembourg server owned by a Luxembourg company and managed by persons resident in Luxembourg. The sales process is automated so does not require much by way of personnel. The warehousing and distribution of the goods in the UK probably requires many more people. That is not particularly unusual. If the US and Luxembourg treaties signed by the UK provided that UK tax had to be paid if the foreign company had a warehouse and distribution centre in the UK, Amazon would probably move that facility out of the UK. Delivery of goods would be slower but it could easily fulfill orders through a server in Luxembourg and a warehouse in, for example, Ireland. If the Luxembourg company was removed from the equation there would still be no UK tax payable as sales would be made to UK persons by the US company and any and all profits made from those sales would be taxed in the US, not in the UK. Again the UK is not losing revenue because of the Luxembourg arrangements.
The tax treaties which allow Starbucks and Amazon to avoid tax in the UK were signed to encourage trade between the tax treaty partners and give certainty as to which country was able to tax the revenue. They have achieved that. Advisors are using these treaties creatively to try and reduce the overall tax burden by parking profits in a third country. It could be argued that Amazon and Starbucks are “borrowing” the Luxembourg and Netherland treaties respectively and shouldn’t be allowed to use those treaties because their main and head office is not located there. But they do have companies in those countries and it would seem unrealistic to deny them the use of the treaty because they have less personnel in those countries then they do in others. Perhaps if they couldn’t plan like this they would just move their company to a lower tax country instead. We saw quite a number of companies exiting the UK and now individuals exiting France to escape tax hikes. Countries compete to attract business and investment. Tax is one factor. Expertise, living standards, infrastructure and even the weather also play a part in attracting people and businesses.
The UK could increase taxable profit by denying a deduction for the royalty payable to Starbucks. That would discourage big companies from doing business with the UK unless all other countries in the world did the same.
Amazon employ a large number of people in the UK. Amazon are different to Starbucks in that they probably don’t need an operation in the UK and would not have one if it led to having to pay large amounts of tax which they could otherwise avoid. Starbucks cannot sell and deliver hot coffee over the internet. Starbucks need shops in the UK which must pay UK tax on profits made in the UK so the only question is how that profit is taxable and who gets the right to tax profits. I think the reality is, and politicians and HMRC know this, that businesses are very mobile and it does not pay to kill the golden goose by increasing tax rates or denying reasonable deductions against taxable profit. It makes great headlines for newspapers and politicians to knock the greedy corporate who has huge revenues but little tax (in the UK) but the reality is a bit different.
It is interesting to note that the Guardian- which seems to have been the main critic of both these companies- has a turnover of £195 million but pays no tax. Its accounts show it is making a loss. It would probably argue that there is nothing “artificial” about these accounts but if it was advocating a tax on turnover, it may no longer be in existence due to its losses being greatly increased by that tax.
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