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.

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.

Offshore companies owning UK residential property need to take urgent action

There are many companies who acquired UK property many years ago so their base value for CGT purposes will be very low. On resale of the property those companies are going to face a very heavy tax bill.

Additionally, companies which own a property worth more than £2 million will now be subject to an annual tax which is being referred teas "Mansion Tax".The amount will vary according to value but will be a minimum of £15,000 and a maximum of £140,000.

These charges are going to greatly impact on the investment value of such properties. Both charges can be avoided by transferring the property from the company to individual owners but, particularly for older buyers or those in poor health, that will not be attractive as it will mean that the property is subject to UK Inheritance Tax(IHT) at 40% of the total value if anything happens to the owner. Obviously it won't concern the owner themselves as the charge will only be triggered when they are past caring but many will be concerned to try and preserve wealth for the benefit of their family and heirs. For that reason, individual ownership will only seem interesting if the ultimate owners are young and/or intending to sell the property sooner rather than later. Those owners are likely to be in the minority. Insurance is likely to be an alternative way of covering the IHT but is likely to be expensive especially for older owners.

HMRC did announce, scene exemptions from the new charges. More detail of those exemptions have now emerged so the planning opportunities have now become clearer.

The first exemption announced was that professional trustees holding residential property would not be subject to the new 15% rate of Stamp Duty Land Tax (SDLT) that was introduced in April this year. They will also be exempt from the Mansion Tax but there is no general exemption from the new CGT charge which previously did not apply to non UK residents. Exemption from CGT can be obtained if the trustees and a beneficiary occupying the property both claimed Principal Private Residency relief. This would normally apply where the property is occupied by any beneficiary or any number of different beneficiaries of the trust. CGT might also be avoided by 'selling' the property by changing the beneficiaries of the trust or if the trustee was private trust company by changing the ownership of the trustee or by both In fact there appear to be so many potential ways to avoid CGT and so many difficulties in collection that the latest rumour is that HMRC may decide not to introduce this new extension. At this stage it would be unwise to assume that CGT will not apply.

Discretionary trusts are subject to a ten yearly charge which could be as much as 6% of the capital value of the property. This is an attempt by HMRC to claw back some of the 40% IHT which is lost if UK property is held within trust The way the ten year anniversary charge is calculated is complicated so 6% is certainly the maximum but it will generally work out to be between 3% and 6% depending on value and other circumstances. Luckily this charge is only payable on the equity in the property If loans are used to purchase the property, the tax is payable only on the difference between the capital value and the loan amounts. For this reason it seems as though a two trust structure may give the best of all worlds.

One trust set up by non-UK domiciled person, can receive the capital amount needed to purchase the property. That amount is then loaned to another trust which actually buys the property. The loan amount is then deducted from the value of the property for the purposes of calculating the 10 year tax. The loan could be sufficiently large to reduce the tax tea nominal or zero amount.

The above does not work for those who are still domiciled in the UK because the transfer into trust would trigger the lifetime IHT charge of 20% For UK domiciled persons it is better to use a Qualifying Non UK Registered Pension Scheme (QNUPS). A QNUPS is a pension trust that enjoys special UK IHT treatment .The pension trustees (typically corporate trustees) are exempt from the new 15% SDLT charge and from the Mansion Tax. A QNUPS is not subject to the ten year anniversary charge. The terms and conditions necessary for the trust to qualify as a QNUPS do mean that access to the capital is somewhat restricted. The property can be sold and the money can be re-invested in another property or anything else allowed for under the pension rules but the pension holder would only able to take the money out of the QNUPS according to the rules of the scheme. Those rules normally allow the pensioner to take a lump sum out on retirement and then the rest in drawdown. That restriction may not suit everybody so the trust structure wit be preferable for non doms.

Happily, a gift by a non UK company to either a trust or a QNUPS can be made free of SDLT as long as there is no mortgage in place on the property.

If there is a mortgage then SDLT is payable on the mortgage amount so the transfer could prove expensive to do now but will result in large savings in the future.

Trusts owning residential property are subject to higher rates of tax on rental income. They pay up to 50%. To reduce the tax on income the income rights can be vested in an offshore company wholly owned by the trust when the property is acquired. The tax rate is then reduced to 20%.

Anybody who owns UK property worth £2 million or which may become worth £2 million in the future should take action now. There is a window of opportunity to rebase the capital cost as long as this is done before April next year.

Trust & Company Management: International reach and depth of service

Milestone GRP - The main trend over the last decade has been global integration and compliance. How has this im- pacted  Gibraltar's economy and how has it impacted  the Trust and Company Management industry in particular?

Mr. Ian Le Breton - Looking at compliance, we are regulated by the Financial Services Commission (FSC) with a strong but, at the same time, cooperative hand. They have turned what could otherwise have been extremely onerous, difficult to im- plement policies, into something that remains costly and time consuming, but is  done with a cooperative spirit with them. From  time to time we have discussions  with them,  and the relationship is good. I describe it as a hand in hand approach, not a hand in glove one. It is a partnership type of approach. There is lot of new regulation to take on, and other internati- onal groups, the OECD, IMF, the EU, are going to impact us.

You need to have a pragmatic view and simply live with this, and even the Government cannot  do anything about it. We work with this, whether we like it or not, we have to move with the times  and we do it fairly successfully. That means  that Gibraltar can look to the world and say that we comply with all these groups; we are signing all these TIEAs, we might soon have double tax  agreements, and we’ve moved from being considered an offshore financial centre to what  it is now an international specialised financial centre.

Milestone GRP -  Gibraltar and the  Government  are often described as agile and nimble. Do you agree with that cha- racterization?

Mr. Le Breton - It is very true. Agile and nimble, but also po- sitively reactive is the type of word  to describe it. Proactive too, as we tend, in Gibraltar, to identify trends and adapt to them. That is what we do in Sovereign and a number of firms with whom we share the space in Gibraltar, too. We need to reinvent ourselves as we go along, and any firm like us that does not have this approach is going to find themselves falling behind because legislation and rules are changing all over the world at all times. So if you cannot be agile and nimble then you are lost. That  takes us back to our small but  perfectly formed nature.

It is not difficult to talk to the Government's departments, even to members of the  Government themselves, if we need to, quickly. Obviously legislation changes take time but we cer- tainly have a good rapport with these people and that means that we can be agile and nimble.

Milestone GRP - How has the global downturn affected the growth of the company? What  areas are you are develo- ping?

Mr. Le Breton - We have certainly seen growth  despite the economic downturn. In the last 4 years our staffing has grown by 10%  or more.  As  for our product  here, it is certain that

there is an increasing depth to our services. We do a certain amount of work on the personal pension side, particularly the UK transfers, the  Qualifying Recognised Overseas Pension Schemes (QROPS), and Qualifying Non-UK Pension Schemes (QNUPS), which is a different model altogether but has simi- larities. We are  expending our marine division that is based in  Gibraltar, looking at yachts, and last year we  established an aviation division. Again looking at clients with big jets, big yachts: these are the  types of clients we need to approach anywhere. So our strategy is to use these subsidiary groups to look at markets in a slightly different way.

Milestone GRP - How have Gibraltar’s infrastructure deve- lopment contributed to  these specific opportunities, such as the registration of yachts or aircraft?

Mr.  Le Breton -  The growth  of Gibraltar's  infrastructure  is extremely useful to us. For Sovereign it is important that the infrastructure continues to develop in Gibraltar, not just for the business itself, but also for our staff. It is important that they continue to find this an attractive place to live and work. From Sovereign's point of view, we are one of 25 offices, so whilst we were established here in 1987 and here is where everything started and it continues to be our largest base.

Milestone GRP - Are there any limitations to operating here?

Mr. Le Breton - There are limitations. We are never going to land a jumbo jet at the airport, so are we going to set up direct links with New York with 300 people on board  a plane? No, we will not. But, using this as an example, we have infrastruc- ture that is not right here but just a short drive up the road in Malaga where we have  a full international airport, so that is not a real limitation.
We have a wonderful  time  zone advantage,  the  climate  is great, and this is important since people are attracted to Gib- raltar for its climate and lifestyle. A lot of people like our firm are doing what they can to build it up. We have a lot of compe- tition out there, but generally overall we are doing a good job. I encourage executives from wherever they are in the world to come and have a look.
Milestone GRP - As a well established foreigner in Gibraltar, what do you see as existing misconceptions about the place?

Mr. Le Breton - One area I want to work on is the impression that Gibraltar is just open for the British. That is not the case. Brits make up a percentage of the client base, but just a  per- centage of it, and that is a message I want to get across. We are ready to build our market from around the world. Europe is obviously a main area of course, but there are advantages for other parts of the world, too. Gibraltar is a good place to headquarter a company and maybe the CEOs from around the world may want to start considering that, and then come to talk with us when they do.