Clampdown on the overseas cash cows By Josephine Cumbo
Financial Times Published: April 8 2005 15:37
tax havenUK-based savers with money in savings accounts in European tax havens are being urged to make sure they don't unwittingly get caught in the net of a new clampdown on cross-border tax evasion.
Banks and other financial institutions with offshore bases in low-tax territories such as the Isle of Man and Guernsey, have begun writing to their clients making them aware of a little-publicised European Union savings directive, expected to come into force in July.
Under the directive, financial institutions in EU member states will be required to hand over to the relevant tax authority information about savings income received by EU individuals not resident in the country where the account is held.
The information will be handed to the tax authority where the account holder is resident so that it can be compared with what has been declared on their domestic tax returns.
Payments affected include interest on bonds, savings certificates, term deposits, current accounts and savings accounts. Other types of income, including company dividends, pensions and rents are not considered to be savings income.
The Inland Revenue says the directive - which only applies to individuals and not companies and most trusts - will have little impact on those who legitimately declare their savings income received outside the UK.
However, it could potentially have an administrative and tax issues for impact on those who are currently legally not required to declare offshore-derived income, such as UK residents who have offshore domiciles.
Under the directive, UK residents with overseas domiciles will need to get a certificate of disclosure from the Inland Revenue, which requires them to declare all their overseas investments to the authority, if they are to continue holding accounts in the EU as individuals.
Alternatively, they could sign a certificate of disclosure with their overseas bank permitting their account details to be exchanged with the Revenue.
Accountants say these new demands may cause headaches for some non-domiciles.
"You will have to declare your investments and get confirmation that the Revenue is aware of them," says Stephen Humphreys, partner in the financial services division of accountants Moore Stephens. "If they haven't structured their affairs correctly, they could end up being taxed."
Humphreys says that non-domiciles have an option to set up an "excluded property" trust, which can contain all their overseas-based assets, including property, savings and investments.
These trusts are popular with non-domiciles and are an easy way to "tidy your affairs" from an IHT perspective, he says.
"Those non-domiciled people who aren't confident or haven't taken advice on bringing money into the country should really be the the ones going down the trust route before July," Humphreys says.
But complicating matters for individuals holding offshore accounts is the fact that the EU has allowed Austria, Belgium and Luxembourg to apply a withholding tax for a "transitional" period, as an alternative to requiring them to exchange account-holder information with other member countries.
This means that if you have accounts in these countries, your details will not be disclosed to the Inland Revenue. But your savings will be automatically taxed at 15 per cent from July 2005, increasing to 20 per cent in 2008 and 35 per cent from 2010.
UK tax authorities say the directive will have no effect on those who properly declare their income from overseas savings accounts.
Part of the monies collected in these countries will be handed over to the Inland Revenue.
In addition certain UK dependent territories - including Jersey, Guernsey and the Isle of Man - will be either exchanging information or imposing a withholding tax.
Tax advisors say UK residents should check the policies of both the country and financial institutions where their overseas accounts are held, to ensure they follow the correct measures to avoid being suddenly taxed at 15 per cent from July.
"If you may get caught by it [the directive], make sure you will be happy to be caught by it," says Graham Parrot, tax partner, with Ernst Young in Guernsey.
"People should look and see if they are caught what they need to do to make sure they don't get into difficulty."
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