Q: I have an offshore bank account but it is not located in Liechtenstein. Can I transfer my funds to Liechtenstein now and take advantage of the LDF terms?
A: Provided the offshore bank account was not opened through a UK branch or agency of a bank you can establish an asset in Liechtenstein and you will then be eligible to participate in the LDF. You will only be taxed from 6 April 1999, the fixed 10 percent penalty and the composite rate of tax. For example, 20 years ago you went to Zurich and opened a bank account directly with a Swiss bank and made a substantial deposit. You have not reported the interest received for the last 20 years. If you establish an asset in Liechtenstein with a qualifying Financial Intermediary your liability will be limited to the period from 6 April 1999.
If the offshore bank account was opened through a UK branch or agency you will not be able to secure LDF terms. Although there is nothing to stop you moving your bank account to Liechtenstein and making your disclosure through the LDF, you will not qualify for liabilities being limited to the period from 6 April 1999, the fixed 10 percent penalty and the composite rate of tax.
Q: I have two overseas bank accounts which were opened 20 years ago; one in Jersey which was opened through a UK branch or agency and one in Liechtenstein. Business profits have been diverted to both accounts. Can I utilise the Liechtenstein Disclosure Facility (LDF) to make my disclosure?
A: This is a difficult area which remains the subject of debate.
Because there is a Liechtenstein asset there is assurance against a criminal tax investigation.
The Liechtenstein account is straightforward. You can disclose under the LDF and obtain the liabilities being limited to the period from 6 April 1999, the fixed 10 percent penalty and the composite rate of tax will apply to 5 April 2009.
LDF terms may not apply to the Jersey account because it was opened through a UK branch or agency.
Q: I have a UK tax liability arising from undeclared income, profit or gains but there is no offshore connection. Could I disclose this through the LDF?
A: Although it is possible to move the assets to Liechtenstein and make a disclosure through the LDF, the favourable terms will not apply.
Q: Are the rules different for deceased persons or in relation to inherited funds?
A: Broadly speaking, undisclosed income tax and capital gains tax liabilities relating to deceased persons can only be recovered for the 6 years preceding the date of death. The normal 20 year rule is set aside and HRMC is unable to levy penalties.
However, there is generally no time limit for recovering inheritance tax from a deceased person's estate. Under the LDF terms, inheritance tax liabilities will be restricted to the period from April 1999 onwards so there could be a significant tax saving using this option.
Q: What happens if I am currently under investigation?
A: Where someone is "under investigation" they cannot participate in LDF. The term "under investigation" means suspicion of serious tax fraud and the person has been formally notified by HMRC that an investigation has commenced (this would be under HMRC's Contractual Disclosure Facility / Code of Practice 9 procedure) or the person has been arrested for a criminal tax offence.
Q: I have previously been investigated but did not disclose a Liechtenstein account or asset?
A: Normally, HMRC would consider a criminal prosecution if they discovered that knowingly you did not disclose your Liechtenstein assets. Under the terms of the LDF, however, there is assurance against a criminal tax investigation. The limitation of liabilities to the period from 6 April 1999 and the composite rate of tax to 5 April 2009 will apply. However, the 10 percent penalty will not apply and is likely to be at least 30 percent of the unpaid tax.
Q: What is the composite rate of tax set out in the LDF?
A: This is a single rate of 40 percent which can be used to calculate an amount HMRC will accept in satisfaction of unpaid tax liabilities. This will cover income tax, capital gains tax, inheritance tax, corporation tax, stamp duty and VAT. The Composite Rate Option applies for periods 6 April 1999 to 5 April 2009 only.
The composite rate will be applied to all income, profits, gains and other sums chargeable with no reliefs or deductions available to be allowed. The Composite Rate Option applies for periods 6 April 1999 to 5 April 2009 only
At first glance 40 percent does not look like a bargain. However, the following example demonstrates the benefits.
Mr Smith is a UK resident and domiciled for tax purposes. In 2000 he made a capital gain of £1m which he did not report in his tax return. The proceeds from the disposal of the asset £1m were transferred to a Liechtenstein Foundation which is treated as a discretionary trust. The income generated thereafter is £200k. Mr Smith has withdrawn £100k from the Foundation and after 10 years the Foundation is worth £2m. The tax position is set out below.
In this example, under the terms of the LDF there would be a tax saving of £326k (£806k - £480k) using the composite rate tax option. In addition, there would be the corresponding savings on interest and penalties. The Foundations tax liability can also be settled through the LDF.
|| Normal Position
|| Composite Rate
|| Foundations Liability|
| Capital Gain-£1m at 40 percent
| IHT on transfer- £1m at 20 percent
| Income of £200k at 40 percent
| IHT exit charges- £100k at 6 percent
| IHT 10 year charge £2m at 6 percent
Q: The MOU talks about a five-year special disclosure facility but the time frame looks longer?
A: That's right; the actual period is six years and seven months from 1 September 2009 to 5 April 2016. 5 April 2016 is the last date HMRC will issue a registration certificate. The timetable for submitting a disclosure within 7 or 10 months thereafter continues to apply.
Q: Is there any advantage if I come forward now?
A: There are a number of compelling reasons for taxpayers to register for the LDF sooner rather than later, particularly if they are worried about their situation:
- Peace of mind at an early stage.
- The longer you leave your disclosure the more expensive it becomes. Restriction of liabilities to the period from 6 April 1999, and composite rate of tax option will only apply for the ten tax years 1999/00 to 2008/09. For tax years from 6 April 2009, the composite rate of tax cannot be used. However, HMRC has introduced a single charge rate (SCR) as an alternative for calculating liabilities under the LDF. HMRC will consider each tax year (to 2015/16) in isolation after the year has ended. If a SCR is made available HMRC will announce publicly the terms, procedures and rate of charge at the appropriate time. The SCR is availalbe for the 2010-11 tax year in 'limited terms', including a 50 percent charge and only for those holding relevant property in Liechtenstein on 1 September 2009. If a penalty is due for years after 5 April 2009 it will be charged in accordance with the law applicable at the time and may reflect any future budget changes. However, HMRC has stated that for 2009/10 penalties will be 20% of the underpaid tax in most cases and 30% in cases of suspected serious fraud. In addition, from 6 April 2011, the new offshore asset penalty regime will apply, so that penalties (as above) will increase to a multiple of 1.5 times for a category 2 country and will double for a category 3 country.
- The ability to use funds for whatever purpose, for example, return funds to the UK, pass to the next generation, large capital purchase.
- The ability to optimise your tax position going forward at an early stage as part of your move towards tax transparency. This is equally important as fixing historic mistakes.
Bear in mind that under the terms of the MOU your advisor can approach HMRC and discuss your situation on a "no names" basis. Your advisor should be able to obtain assurances from HMRC regarding how your disclosure will be treated on the basis of the information provided. When you are happy with the assurances, you can safely volunteer your name.
Q: I’ve heard that the availability of the favourable terms offered by the LDF has been restricted?
A: Taxpayers who have reported tax avoidance schemes under the DOTAS rules, or been subject to an HMRC enquiry which has been ongoing for more than three months, will be unable to take advantage of some of the favourable terms offered under the Liechtenstein Disclosure Facility (LDF), following the signing of a fourth joint declaration between HMRC and the government of Liechtenstein in August 2014.
The LDF was launched in 2009 with the aim of allowing those with undisclosed offshore liabilities to come forward and to facilitate the disclosure of those liabilities. HMRC believe that the LDF has been increasingly used for purposes outside that aim. In particular, during 2013 a number of individuals with liabilities linked to existing enquiries into Employee Benefit Trusts (EBT) registered for the LDF. Taxpayers will no longer be able to benefit from:
- A 10% fixed penalty (for periods to 5 April 2009)
- Assessments limited to years from 1999/00
- The Composite Rate Option (CRO) which can eliminate certain liabilities, such as IHT, in return for taxing income and gains at 40% rather than calculate actual liabilities
The circumstances in which access to the full favourable terms will not be available fall into three broad categories:
- Issues where no disclosure of new information has been made (e.g. DOTAS cases).
- Cases where the issue being disclosed is already subject to an intervention that began more than 3 months before the application to enter the LDF.
- Cases where there is no substantial connection between the liabilities being disclosed and the offshore asset held by the taxpayer on 1st September 2009.
The announcement coincides with HMRC's decision to close its preferential settlement opportunity for EBTs in March 2015.