Hawksford considers recently announced UK tax changes for non-domiciliaries from a Swiss perspective

Following the election victory of the Conservatives, the UK’s Budget announced significant changes to the taxation of non-domiciliaries.

Commentary - 15/12/2015

At the time of writing, the detailed legislation is not available, and further details are anticipated early in the New Year.  

The outline of the proposals bring forward the point of 'deemed' domicile status for inheritance tax to those with 15 out of 20 years of UK residency, changes to the way benefits from offshore trusts are taxed for income and capital gains tax, and introduce worldwide taxation on income and gains arising outside of trusts for the 'deemed' domiciled.

These are accompanied by a raft of tax changes, over the past five years, making owning residential property in the UK less attractive for non-domiciliaries.  These include higher rate stamp duty on purchase of property in a company, annual tax on property owned in a company, inheritance tax on property owned in a property, and capital gains tax on sales or gifts by all non-residents.

In the past year these have been joined by legislation and a consultation aimed at tax avoidance by fund managers: carried interests and the use of partnerships, and remuneration structured as capital rather than income. 

Many non-domiciliaries living in the UK are awaiting the detail of the legislation and may be considering their options, with a view to relocating.  These individuals may have both property and family in the UK, with children at school, and the statutory residency test will have to be carefully watched to ensure non-UK residency.

UK residents looking to move may be considering Switzerland which is at the centre of Europe with a cosmopolitan society equalling London. Having an integrated expat community to plug into is important for people looking to relocate, and it extends well beyond high profile celebrities. Switzerland has beautiful cities like Lucerne and Zurich, world-class art galleries, restaurants and bars, and winter and summer sports.  It is also very welcoming to foreigners wishing to relocate, recognising that they will bring benefit and value to the country.

This welcome extends to taxation.  The tax rates vary significantly between the cantons, but for foreigners not looking to work in the country a special 'forfait' can be agreed, limiting the taxation on their worldwide income and gains to a fixed sum.  Individuals working in the country can, to a great extent, limit their tax by choosing where they live.  However a high earner in one of the big cities, at worst, can expect to pay only half the tax of their equivalent in London. The tax advantages end on naturalisation, which many nevertheless choose to do.  Inheritance tax varies with the canton, with all but a few levying none on those leaving to spouse or children/direct descendants.

Switzerland benefitted from an inflow of talent moving from London after the changes to the taxation of non-domiciliaries in 2008, particularly in the fund management industry.  The fund industry in Switzerland is mature, well serviced and well regulated.  There have been indications that Swiss funds will be passported into AIFMD.  In terms of tax, the cantons have the flexibility, and willingness, to negotiate special deals to funds looking to relocate.

The UK-Swiss double-tax agreement on income and capital gains tax can assist in this for those who become Swiss resident.  Switzerland is also one of the few countries to have an inheritance tax double-tax agreement with the UK, and for those without UK passports, this currently overrides the three (to become five) year tail of UK deemed domicile for those leaving the UK.

The current round of changes in the UK are anticipated to come into effect 6 April 2017, the UK tax year sitting uneasily with those of most countries around the world, including Switzerland, which generally run from 1 January.  This means clients looking to relocate would be advised to start considering their options early, to ensure that any existing structures are generally and fiscally effective in Switzerland, and to start negotiations with the tax office on their canton of choice. 

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