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
Thursday, January 17, 2013
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.
2013 – Just another New Year?
In recent years, I have used my January column to try to make some sense of the year that has just passed and to posit some suggestions – which of course stop short of being precise predictions that I may have cause to regret – for the 12 months ahead.
So where are we now? Demand throughout the economy is sluggish because the banks are not lending nearly enough; property prices in many European countries remain in the doldrums and the euro is in crisis. Hang on, that’s pretty much what I wrote in January 2012 … and 2011 … and 2010. Well you get the picture. The reality is that five years into the downturn or crisis, not much seems to have changed.
In trying to make sense of the present economic situation, I thought it best to focus on areas that impact our lives here in Gibraltar. I have concentrated on growth rates in world economies and the continuing upheaval in Europe – especially how it impacts on the euro zone and the currency itself, the oft-criticised euro. And, as this is a finance column, you may be glad that it will not be another review of the Diamond Jubilee and the London Olympics. True, Gibraltar got into the spirit with our giant posters of HM The Queen – and even a re-painted post box – but the jury is still out on their economic impact.
On the financial markets, 2012 saw pitifully low or negative growth rates in many of the developed economies, particularly in Europe where virtually the whole continent remained in recession during 2012. However there were some notable exceptions elsewhere. As I reported in a pair of back-to-back articles – on the BRIC countries (Brazil, Russia, India and China) and Africa – annual GDP growth levels in some places are still 5% or more. All countries in Arica reported positive GDP growth for 2012, so in hindsight perhaps it was indeed rash for the Spanish prime minister to state “Spain is not Uganda”. One can understand that this caused some consternation in Kampala – at least judging by the scathing riposte that followed – particularly as its annual GDP growth rate is 5.2%. Uganda that is, not Spain!
In Europe, low or negative growth combined with reined-in government expenditure and hikes in personal taxation have led to a swathe of “austerity” budgets being announced during the year. And the people don’t like it. Several heads of governments paid the price at the ballot box – although Barack Obama bucked the trend and was re-elected by what turned out to be a surprisingly healthy margin.
Turning to the euro itself, the currency proved surprisingly resilient to external market forces during most of 2012. Across the EU bloc, difficulties continued to mount as the year went on. The 17 nations that use the euro are bound together in the unforgiving, inflexible straitjacket that is required for membership. They have learned the hard way that old fashioned economics simply don’t work when you are battling with a common currency that is not backed by a greater degree of fiscal, still less political, union. Such arrangements have generally not worked in recent history.
Any student of economic theory will know that the best way to deal with soaring debt and low demand leading to negative growth is to simply devalue your currency, manage interest rates whilst controlling inflation and allow the market to take care of its own recovery. True, the local burghers don’t care to see their assets shrunk but the strategy can be very effective. Consider the impressive progress Iceland has made since its near complete and unprecedented economic collapse in 2008.
But countries such as Spain, Portugal or Greece simply don’t have this option for as long as they remain part of the euro bloc. Faced with an over-valued currency and interest rates at historically low levels, they have very little room for manoeuvre. Hence the focus on austerity – lower government spending and higher taxes – which has caused so much unrest. In Germany, the opposite applies as German industry finds it increasingly difficult to sell high value manufactured goods abroad.
I recently read the most thought provoking analysis on the euro crisis written by a man who should know – George Soros, the man who famously netted a billion when sterling fell out of the ill-fated ERM mechanism in 1992. He advocates a simple choice for sorting out the mess. Either Germany must become a “benevolent hegemon” – which is another way of saying that she must support the other countries as they battle to make the books balance – or, and this is the fascinating part, that Germany itself should consider exiting the euro zone. I very much doubt we will see that in the next year but some serious re-arrangement of what was considered an inviolable currency union may become inevitable.
All of this affects us in Gibraltar given our geographical position and reliance on tourists from Spain and other euro zone states. Anyone importing goods from the EU into Gibraltar will be similarly affected by any changes in the currency’s value so this will certainly be something to watch in 2013.
Not that the effects make themselves felt only within the euro zone countries. I have written many times about the effect on the UK but 2012 was also a difficult one for Switzerland, itself one of the wealthiest countries in the world. Investors around the world piled into the Swiss franc, which resulted in an unsustainable rise in its value against other currencies. Anyone who has visited Switzerland recently will know that an already expensive country has in recent years become even less affordable. The Swiss government responded by pegging the Swiss franc against the euro in an attempt to protect its economy – at huge financial cost.
So let’s finish closer to home in Gibraltar as we turn the year. Some of my retailer friends with shops in Main Street tell me that 2012 may have seen more tourists than ever before, largely as a result of the higher number of cruise ship visits – on occasion three ships visited on the same day – but question whether this has actually increased total spending. Austerity affects the mind-set of everyone, including the well-heeled.
For others in Gibraltar, the global downturn continues to mean serious hardship in some sectors but new opportunities are also emerging. In my case, I am confident that Gibraltar’s attractiveness as a pension (QROPS) jurisdiction should result in further growth in that area. This should lead to new employment. One could cite several other examples including insurance, funds and the like and future columns in the Gibraltar Magazine will deal with these exciting areas.
So what will happen in 2013? If I could predict the future, I probably wouldn’t be here running a trust company and writing articles for you to enjoy, dear reader. Don’t get me wrong, I enjoy the work – although the idea of simply lazing on a beach somewhere hot at this time of year does have a certain appeal. But, without putting my career on the line, there are some finance-related matters that I feel relatively safe predicting for the 12 months ahead
Demand throughout the economy will be sluggish because the banks are not lending nearly enough; property prices in many European countries will remain in the doldrums and the euro will be in crisis. Oh dear, that’s how I started this piece. Let’s see how true these comments remain at the turn of 2014. And one last prediction - Chelsea will get another new manager!
For me, leaving 2012 at least means I can move on from the significantieth birthday that befell me last June. Let’s hope that 2013 will see some improvement in the overall global economic position and that any green shoots we are seeing are allowed to flourish and develop.
I wish you and your loved ones a very happy, prosperous new year 2013 from all of us at Sovereign
So where are we now? Demand throughout the economy is sluggish because the banks are not lending nearly enough; property prices in many European countries remain in the doldrums and the euro is in crisis. Hang on, that’s pretty much what I wrote in January 2012 … and 2011 … and 2010. Well you get the picture. The reality is that five years into the downturn or crisis, not much seems to have changed.
In trying to make sense of the present economic situation, I thought it best to focus on areas that impact our lives here in Gibraltar. I have concentrated on growth rates in world economies and the continuing upheaval in Europe – especially how it impacts on the euro zone and the currency itself, the oft-criticised euro. And, as this is a finance column, you may be glad that it will not be another review of the Diamond Jubilee and the London Olympics. True, Gibraltar got into the spirit with our giant posters of HM The Queen – and even a re-painted post box – but the jury is still out on their economic impact.
On the financial markets, 2012 saw pitifully low or negative growth rates in many of the developed economies, particularly in Europe where virtually the whole continent remained in recession during 2012. However there were some notable exceptions elsewhere. As I reported in a pair of back-to-back articles – on the BRIC countries (Brazil, Russia, India and China) and Africa – annual GDP growth levels in some places are still 5% or more. All countries in Arica reported positive GDP growth for 2012, so in hindsight perhaps it was indeed rash for the Spanish prime minister to state “Spain is not Uganda”. One can understand that this caused some consternation in Kampala – at least judging by the scathing riposte that followed – particularly as its annual GDP growth rate is 5.2%. Uganda that is, not Spain!
In Europe, low or negative growth combined with reined-in government expenditure and hikes in personal taxation have led to a swathe of “austerity” budgets being announced during the year. And the people don’t like it. Several heads of governments paid the price at the ballot box – although Barack Obama bucked the trend and was re-elected by what turned out to be a surprisingly healthy margin.
Turning to the euro itself, the currency proved surprisingly resilient to external market forces during most of 2012. Across the EU bloc, difficulties continued to mount as the year went on. The 17 nations that use the euro are bound together in the unforgiving, inflexible straitjacket that is required for membership. They have learned the hard way that old fashioned economics simply don’t work when you are battling with a common currency that is not backed by a greater degree of fiscal, still less political, union. Such arrangements have generally not worked in recent history.
Any student of economic theory will know that the best way to deal with soaring debt and low demand leading to negative growth is to simply devalue your currency, manage interest rates whilst controlling inflation and allow the market to take care of its own recovery. True, the local burghers don’t care to see their assets shrunk but the strategy can be very effective. Consider the impressive progress Iceland has made since its near complete and unprecedented economic collapse in 2008.
But countries such as Spain, Portugal or Greece simply don’t have this option for as long as they remain part of the euro bloc. Faced with an over-valued currency and interest rates at historically low levels, they have very little room for manoeuvre. Hence the focus on austerity – lower government spending and higher taxes – which has caused so much unrest. In Germany, the opposite applies as German industry finds it increasingly difficult to sell high value manufactured goods abroad.
I recently read the most thought provoking analysis on the euro crisis written by a man who should know – George Soros, the man who famously netted a billion when sterling fell out of the ill-fated ERM mechanism in 1992. He advocates a simple choice for sorting out the mess. Either Germany must become a “benevolent hegemon” – which is another way of saying that she must support the other countries as they battle to make the books balance – or, and this is the fascinating part, that Germany itself should consider exiting the euro zone. I very much doubt we will see that in the next year but some serious re-arrangement of what was considered an inviolable currency union may become inevitable.
All of this affects us in Gibraltar given our geographical position and reliance on tourists from Spain and other euro zone states. Anyone importing goods from the EU into Gibraltar will be similarly affected by any changes in the currency’s value so this will certainly be something to watch in 2013.
Not that the effects make themselves felt only within the euro zone countries. I have written many times about the effect on the UK but 2012 was also a difficult one for Switzerland, itself one of the wealthiest countries in the world. Investors around the world piled into the Swiss franc, which resulted in an unsustainable rise in its value against other currencies. Anyone who has visited Switzerland recently will know that an already expensive country has in recent years become even less affordable. The Swiss government responded by pegging the Swiss franc against the euro in an attempt to protect its economy – at huge financial cost.
So let’s finish closer to home in Gibraltar as we turn the year. Some of my retailer friends with shops in Main Street tell me that 2012 may have seen more tourists than ever before, largely as a result of the higher number of cruise ship visits – on occasion three ships visited on the same day – but question whether this has actually increased total spending. Austerity affects the mind-set of everyone, including the well-heeled.
For others in Gibraltar, the global downturn continues to mean serious hardship in some sectors but new opportunities are also emerging. In my case, I am confident that Gibraltar’s attractiveness as a pension (QROPS) jurisdiction should result in further growth in that area. This should lead to new employment. One could cite several other examples including insurance, funds and the like and future columns in the Gibraltar Magazine will deal with these exciting areas.
So what will happen in 2013? If I could predict the future, I probably wouldn’t be here running a trust company and writing articles for you to enjoy, dear reader. Don’t get me wrong, I enjoy the work – although the idea of simply lazing on a beach somewhere hot at this time of year does have a certain appeal. But, without putting my career on the line, there are some finance-related matters that I feel relatively safe predicting for the 12 months ahead
Demand throughout the economy will be sluggish because the banks are not lending nearly enough; property prices in many European countries will remain in the doldrums and the euro will be in crisis. Oh dear, that’s how I started this piece. Let’s see how true these comments remain at the turn of 2014. And one last prediction - Chelsea will get another new manager!
For me, leaving 2012 at least means I can move on from the significantieth birthday that befell me last June. Let’s hope that 2013 will see some improvement in the overall global economic position and that any green shoots we are seeing are allowed to flourish and develop.
I wish you and your loved ones a very happy, prosperous new year 2013 from all of us at Sovereign
Tuesday, January 1, 2013
UK PUBLISHES DRAFT LEGISLATION ON OFFSHORE COMPANIES WHICH OWN UK PROPERTY
The consultation document
entitled “Ensuring fair taxation of residential property transactions” was
published in May this year. 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 outlining
the new taxes and charges which will have to be paid by offshore companies
which own property in the UK. There have
been some significant changes from the consultation paper. There is still a small chance that there will
be alterations before the enactment of the actual legislation in April next
year but no further surprises are expected and it would be unusual if there
were any more changes. Property owners should plan accordingly.
The main features of the proposed
legislation will affect properties which either are, or will become, valued at more than £2 million and which are
owned by “non-natural persons”. This is
a reference to companies, partnerships, funds and the like, not to persons with
strange personal habits.
Previously many buyers of UK
property have chosen 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. As a company never dies
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 the
tax catches the whole estate. Many UK expatriates will remain UK domiciled
despite living abroad for many years. Offshore 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
would mean the incoming purchaser avoided SDLT and allowed the seller to charge
more or made it easier to sell as it was cheaper for the buyer, or a bit of
both.
Offshore companies which own
property worth over £2 million will now be faced with:
1. An
annual charge of a minimum of £15,000 and a maximum of £140,000 depending on
value. The new tax is called Annual Residential Property Tax (ARPT).
2. Capital
Gains Tax (CGT), which was previously not paid by non UK resident sellers
whether they were individuals or companies, will be charged on resale at a rate
of 28%.
New offshore company purchasers
will pay stamp duty at 15% whereas natural persons will pay stamp duty at the
bargain rate of only 7%.
A transfer of property to an
individual or individuals (presumably the beneficial owner or owners of the
company) who own the company will avoid these charges but expose those
individuals to UK inheritance tax at 40% so this is an option which will appeal
only to the very young and very healthy who are quite certain of their own
longevity. For those less certain of
their own mortality this will not be a sensible option. It is possible to cover the liability by life
insurance but actuaries have of solvent life insurance companies have got it
right. You will pay more than you receive so this is an expensive option which
normally appeals most to life insurance salesmen.
The good news is that there are
exemptions from the above taxes. The
main one of these is that corporate trustees are not subject to these new taxes.
For most, transferring property already owned by an offshore company to an
offshore trust will be the most cost effective way forward. For new purchasers making
the purchase via an offshore trust will be best. 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. The problem here is that
even a single day of occupation by anyone connected with the company at any
time when that company owned the property would cause the exemption to be lost
so this is somewhat inflexible and inherently risky.
Luckily, there has been one
change to the original proposals. CGT will be based upon the difference between
the sale price and the presumed value at April 2013. Originally the CGT was to be based upon the
original acquisition value and resale price.
This is obviously an improvement for those who purchased a long time ago
and have seen the value of their investment rise considerably. Even those who
have bought unwisely will have made a big paper profit so this is welcome news
but would not seem to make much difference to the correct structure going
forward.
Trustees who hold UK assets are subject
to the ten year anniversary charge which could be as much as 6% of the value of
the property but this charge is only made on the equity on the property. The equity on the property is the difference
between the property value and any loans against the property. It is therefore recommended that the
properties be laden with debt whether that be loans from a bank or from loans
injected by the Settlor or other persons associated with the trust.
Between now and April 2013,
properties can still be transferred to a new structure without CGT
applying. After April any changes in
ownership are likely to result in tax consequences and the annual charge will
start biting. In summary, there is a
brief window when action can be taken at minimal cost to avoid future CGT and
ARPT so urgent action is required. Prevarication
or inaction is likely to result in significant additional costs.
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.
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