There are now only three months remaining for clients to tidy up their offshore tax affairs before the penal penalty regime on underpaid tax kicks in. Most people turn off at the mention of offshore tax matters as they believe it does not affect their clients but this could apply where the clients simply hold a foreign rental property or have a foreign bank account. From 30 September 2018 the new regime known as the ‘Requirement to Correct’ will be applied, where there is underpaid tax arising from the holding of offshore interests, of whatever nature.
The penalties arising can be as high as 200% of the unpaid tax, with mitigation to 100%, with no ability to negotiate. There may be a ‘reasonable excuse’ as to why penalties do not apply but it will be very difficult to meet this definition.
For example reasonable excuse will not apply:
- If a client set up an offshore trust in which income has arisen that should have been reported in his tax return, even if the client sought tax advice from someone associated with the tax planning at the time and it was decided that a tax liability did not arise.
- If the client sought independent advice and the adviser looked at their affairs holistically and had the full facts made available to them, there should be reasonable excuse. The tax and interest would still be payable but the large penalties should not arise.
To avoid any uncertainty, the Worldwide Disclosure Facility allows a taxpayer to declare this unpaid tax before 30 September without these high penalties. This reporting can often be restricted to four years, depending upon the circumstances.
HMRC now have the capabilities of extracting information on clients from their various international databases which makes the ability to file under the Worldwide Disclosure Facility a particularly attractive option.
Therefore, the next three months are a good time to undertake a health check of a client’s affairs, with a view to hopefully confirming their affairs are in order or if not, making disclosure before 30 September.
The health check could include:
- A review of trusts where there are UK resident beneficiaries to ensure no benefits provided by the trust have been omitted from the beneficiaries’ tax returns.
- Ascertaining whether they hold any property overseas on which any rental income has been under declared.
- Asking whether they have any overseas bank accounts where they haven’t declared the income, no matter how small.
- A review of a settler’s current domicile position to ensure that the new rules that protect income and capital gains arising in an existing offshore settlement from being taxed on the settler, continue to apply. Many years may have passed since the settlement was created and the settler’s intentions may have changed which affects their domicile and in turn, affects the protected status of the trust.
- A review of the domicile position of the settler at the time the settlement was created. It may be that an independent review is needed to cover the settler, not only to advise that no tax has been underpaid but also should that later independent ruling be found to be incorrect, to protect them from penalties under reasonable excuse.
- A review of offshore trusts to ascertain that any 10 year charges to inheritance tax or exit charges have been properly reported. This will also include any 10 year charges that arose since 5 April 2017 where the trust holds UK residential property through an offshore company.
HMRC are taking a much stronger stance on domicile than before and therefore it is important to review the position continually to ensure correct reporting is made.