UK/Swiss tax agreement - who, what and when?
The UK and Switzerland have finally signed an agreement intended to deal with certain types of offshore tax evasion – for certain UK-based Swiss account holders, the choice from 2013 is disclosure to HMRC of Swiss assets, or substantial withholding taxes. HMRC expects to get its hands on several billion pounds in this way. The agreement still needs to be scrutinised by Parliament and ratified in Switzerland, but it seems reasonably certain that it will be in place by 2013.
Who does it affect?
Anyone with certain types of bankable assets in Switzerland who is resident in the UK, has a UK address or holds a UK passport.
The measures are only supposed to catch UK taxpayers but Swiss banks are likely to have to err on the side of caution, so that anyone with a UK address on their bank account or a UK passport could find themselves caught by the withholding even if they are not UK taxpayers – the agreement contains audit processes and anti-abuse measures to minimise the risk of Swiss banks simply refusing to co-operate. In addition, the agreement assumes UK residence in certain cases:
- anyone whose principal private residence is in the UK (based on the due diligence records of the Swiss account operator) will be deemed to be resident in the UK for the purposes of this withholding. UK non-residents with Swiss accounts will need to be careful to ensure that their main residence on the account is not in the UK;
- anyone with a UK passport with affected assets will need to be able to provide a tax residence certificate issued by a country other than the UK to avoid the withholding taxes. Without a certificate of tax residence, anyone with a UK passport will be deemed UK resident for the purposes of this withholding.
Anything bankable – cash, precious metals, shares, stocks, securities, options, debts, forward contracts, structured products etc – booked or deposited with a Swiss bank, securities dealer or similar.
Assets not affected
Physical assets – real estate, chattels, contents of safe deposit boxes – and most insurance contracts (but not insurance wrappers). Holding your physical stock certificates in a Swiss safe deposit box seems to be ok (as they are still in your name with the company and therefore traceable, it seems), depositing them with a bank for them to hold on your behalf isn't as the shareholder would be the bank and the beneficial ownership would be less traceable.
For taxpayers who don't disclose, Switzerland will deduct a withholding tax in 2013 on assets held in Switzerland at 31 December 2010. First, there will be a one-off withholding of between 19% and 34% to settle past tax liabilities. The exact withholding rate will vary between individuals, and will be based on the age of the account and amounts held in the account since 2003. This withholding will then be calculated on the value of assets in Switzerland on 31 December 2010, and paid over to the UK Treasury – no details of the UK bank account holders will be passed over, just the cash. This one-off withholding won't settle past liabilities in some cases where there is or has been a investigation into the individual's tax affairs.
Then, from 2013, a new Swiss withholding tax close to UK top rates (48% on investment income and 27% on gains) will apply to funds of UK residents in Swiss bank accounts, unless the accounts have been disclosed to HMRC, and the withheld tax paid to the UK Treasury. Again, no details of the asset holders are passed over to the UK. The provisions for information exchange in the UK/Swiss tax treaty will also be beefed up, with the intention of making it easier for HMRC to establish whether a UK taxpayer has a Swiss bank account.
Anyone who is UK resident but non-domiciled and taxed on the remittance basis will have to get their domicile status certified by a tax professional to be able to escape the withholding taxes. To escape the one-off charge, the individual will have to have claimed the remittance basis in 2010/11 and/or 2011/12. The domicile status will then have to be certified again each year to escape the ongoing withholding.
The withholding taxes can be avoided by disclosing Swiss bank accounts to HMRC and settling any unpaid UK tax liabilities: even UK resident non-domiciled individuals taxed on the remittance basis will have to make some disclosure to avoid withholding (in addition to providing the certificate above), although disclosure in that case can be done by disclosing untaxed UK remittances to the Swiss bank, which will then make a one-off payment on the individual's behalf of the untaxed amount – a form of self-assessment penalty at 34%. Non-domiciled individuals should make sure they take advice though, as it's not wholly straightforward.
For UK taxpayers who are not on the remittance basis, it might be worth considering whether the Liechtenstein Disclosure Facility is an option for making the disclosure. The LDF terms may be more beneficial than the Swiss one-off withholding, and can be invoked by opening a bank account in Liechtenstein now – there's no need for the existing assets that will be disclosed to have been held in Liechtenstein. Again, this is a complex area and taxpayers will need to take advice!
Finally, the withholding taxes can, of course, be eliminated by removing the relevant assets from Switzerland before the end of this year. Again, that should be subject to advice to make sure that a move doesn't create more problems than it solves.