The UK Government has signed a landmark agreement with the Swiss government over taxation of undeclared Swiss bank accounts. This guide answers some questions on the agreement.
The UK and Swiss governments have agreed a deal on Swiss bank accounts. Do I need to be concerned?
If you have funds in a Swiss bank account and you have not declared the income or gains earned on that account to HM Revenue & Customs (HMRC) you are likely to be affected by the agreement. Even if you have declared the income and gains from your Swiss bank account, you may also be affected. The agreement marks a change in the way that banking will be conducted in Switzerland and further advice should be taken in relation to your particular circumstances. Account-holders who do not take action (see below) will have their Swiss bank account subject to a levy, even if the income and gains arising has been declared to HMRC. The agreement will give HMRC the ability to obtain information on named individuals, which is an extension of the current position.
What are the main features of the agreement?
- The agreement will come into force on 1 January 2013.
- Accounts held by individual UK taxpayers in Switzerland will be subject to a one-off levy of between 21 - 41%, depending on various factors, including how long the assets have been in Switzerland. The levy will also take into consideration withdrawals from the account for a specified period. Only those accounts open on 31 December 2010 and still open 31 May 2013 will be subject to the levy.
- Accounts held by individual UK taxpayers in Switzerland who die on or after 1 January 2013 will be subject to a one-off levy of 40%.
- A lifetime withholding tax on income and gains derived from Swiss bank accounts will be introduced from 1 January 2013. Investment income will suffer a 48% withholding tax, and capital gains will be subject to 27% withholding tax. Dividend income will suffer a 40% withholding tax.
- Account holders who do not want to suffer the one-off levy, the lifetime withholding tax or the one-off levy on death can consent to the disclosure of their data to HMRC.
- Payment of the one-off levy will only clear those tax liabilities relating to assets included in the figure of capital used in the payment calculation. Additional tax (plus interest and a penalty) may be due in various circumstances. These include where funds have been withdrawn from the account, and where a disclosure facility was previously used, for example the Offshore Disclosure Facility in 2007 or the New Disclosure Opportunity in 2009, and HMRC discover that the previous disclosure was incomplete or the assets are derived from "criminal sources".
- The UK will be able to request from Switzerland the bank details of up to 500 named individuals each year (for the first three years, such number to be reviewed annually from the beginning of 2016). This information will probably primarily be used in the context of prosecutions. This power does not allow HMRC to embark upon "fishing expeditions".
- Swiss banks have begun writing to affected customers as to the impact on them, what their obligations are and what rights they have. The banks are giving their customers a limited period of time to enable them to come to a decision about their preferred course of action. Account-holders should ensure that they have evaluated all options available to them before deciding on a course of action.
Who will be affected by the deal?
Any UK individual with a bank account, trust or company in Switzerland will be affected by the agreement. Swiss banks will be checking their records to identify such individuals. If banks do not have current information about their customers, account-holders may be contacted when they do not meet the relevant criteria. They should contact the bank to avoid suffering the one-off levy, as outlined above.
Money from a wide range of sources is held in Switzerland, much of it for decades. Examples include:
- People who have worked abroad and opened Swiss bank accounts to hold their earnings, and failing to declare the account on their return to the UK. Typical examples include those working in the oil and gas sectors, and money earned from international trade;
- Inter-generational. A lot of "old" money has been held in Switzerland for two or three generations. This was the hardest for HMRC to "unlock";
- Money moved to Switzerland in the past to avoid exchange controls or international sanctions, particularly those applying to former UK colonies such as Rhodesia. This money could not be declared to HMRC because that would involve divulging the source;
- Money hidden in Swiss bank accounts to avoid detection by a spouse, with a subsequent divorce. Spouses hiding their assets in this way may have perjured themselves during the divorce proceedings, and legal advice should be taken.
Is there a minimum amount which you need to have held in Switzerland to become eligible for this?
No. If you have a Swiss bank account, or trust or company, irrespective of the level of funds held, you will be affected by the agreement.
I am not domiciled in the UK but have an undeclared bank account in Switzerland – what is my position?
The above options (one-off levy or disclosure) apply to affected account-holders not domiciled in the UK. In addition, other options are available. You will need to provide the bank with a certificate produced by, for example, a lawyer which confirms that he has verified your personal tax return to confirm that you are not domiciled, that you have claimed, or intend to claim the remittance basis of assessment (if appropriate) for 2010/11 and/or 2011/12 and your non-domicile status is not in dispute with HMRC. Failure to do so will result in a deduction to regularise past liabilities and a withholding tax on future income and gains.
The one-off levy on death will not apply to non-UK domiciled persons provided that confirmation of the deceased's domicile status has been obtained from a lawyer (or other professional adviser).
There are also other considerations affecting non-UK domiciled individuals and it is strongly recommended that you take specialist advice.
I understand that the Swiss Bankers Association (SBA) says that the agreement only affects UK residents. I have a home in the UK and also in other countries. Am I resident for the purposes of the Swiss agreement?
Whether you are tax resident in the UK depends upon a number of factors, not just where you may have a home. If you are in doubt we can offer you specialist advice. However, the SBA has issued a statement confirming that the agreement affects "British Taxpayers". For these purposes you should take "British" to mean "UK". If your bank writes to you and you do not think you should be included (for example, you do not consider yourself to be resident in the UK), you should not ignore the letter (otherwise your account will be subject to the one-off levy).
What are the options for holders of Swiss bank accounts with undeclared funds?
The options are limited:
- Allow the Swiss bank to deduct the one-off levy and, from 1 January 2013, the lifetime withholding tax and pay it to the UK authority anonymously;
- Disclose to HMRC. You should consider whether you can disclose through the Liechtenstein Disclosure Facility (LDF) and if so, whether it is tax-efficient to do so. There are non-financial benefits to the LDF (including immunity from prosecution for tax offences, and finality in your tax affairs), which may be more important than the financial considerations. There may be other disclosure options available to you but you will lose anonymity with these as you will do with the LDF;
- Close the account and move the funds to another jurisdiction. However, the Swiss banks have agreed not to assist individuals to avoid the one-off charge and will inform the UK authorities of the top 10 destinations to where funds have been transferred. This is not an option to be recommended.
HMRC has confirmed in its frequently asked questions on the agreement that it will be possible to pay the one-off levy on one account but to disclose another account, provided the two accounts are separate accounts. It confirms that sub-accounts will automatically be treated in the same way as the main account.
What are the penalties and could I go to prison?
The one-off levy is taken in lieu of historic tax liabilities on the funds, as well as the interest and penalty that would normally apply. Individuals who agree the one-off levy or make a voluntary disclosure and fully co-operate with HMRC are unlikely to be at risk of prosecution. However, you can still be prosecuted if the funds in the Swiss bank emanate from criminal activities or from systematic tax fraud. Taxpayers who are prosecuted, and convicted (which may result in a custodial sentence), may also face a confiscation order.
HMRC may investigate individuals who have abused previous disclosure facilities using their criminal powers, as part of their commitment to tackling tax evasion. This may result in prosecution.
How likely is it that I will be targeted by HMRC?
HMRC has become increasingly successful in targeting wealthy individuals. There is a much higher risk than in the past that HMRC is, or will become, aware of your offshore assets. HMRC receives information from a wealth of sources, including their investigations into the affairs of other taxpayers, informers, stolen data and overseas authorities.
The penalties for offshore evasion have been increased to a maximum of 200% of the tax unpaid. In certain circumstances, criminal proceedings will be initiated.
The agreement allows HMRC to request information from Switzerland in respect of up to 500 named taxpayers per year (for the first three years, such number to be reviewed annually from the beginning of 2016) where HMRC suspects the possibility of the taxpayer having funds in Switzerland. HMRC does not need to specify with which bank it believes funds may be held. If HMRC intends to request information about you, you will normally be notified by HMRC in advance of its request to Switzerland unless HMRC believes by notifying you there is a serious risk that the tax won't be collected.
Can I move my assets somewhere else?
Yes, but this course of action is not recommended.
If account-holders decide to remove their funds from Switzerland they are taking a high-risk approach. The financial world is becoming a smaller place, and the UK Government can be expected to sign similar agreements with other jurisdictions in the coming months and years.
HMRC is putting resources into tackling offshore tax evasion. Those caught by HMRC will face high penalties, of up to 200% of the tax liability, as well as a higher tax bill than if taxpayers voluntarily disclose, or use the UK-Swiss agreement. In certain circumstances, tax evaders will face prosecution.
The Swiss deal is an opportunity to regularise an individual's tax affairs (in relation to Swiss assets), while, potentially, retaining anonymity. Account-holders should also consider the other options available, including the Liechtenstein Disclosure Facility (LDF) as there may be a better solution. The UK-Swiss agreement has been designed to encourage individuals to regularise their tax affairs, but it is not a disclosure facility. Taxpayers with other irregularities in their tax affairs should consider using the Liechtenstein Disclosure Facility (LDF). The UK-Swiss agreement offers an opportunity to become UK tax-compliant but may not be the best option for all account-holders.
When will the one-off levy be introduced and will there be an amnesty before then?
The agreement will come into force on 1 January 2013. The one-off levy will be deducted from affected Swiss bank accounts on 31 May 2013.
HMRC has not announced any amnesty before then and the text of the agreement indicates that none will be forthcoming. The risk remains that if HMRC contact you before the Swiss deal comes into force, you will not be able to opt for the one-off charge, and you may be subject to an intrusive investigation into your tax affairs.
In most cases it should be possible for individuals to resolve past tax liabilities under the LDF, which is available now.
Are the Swiss banks obliged to hand over my financial details to HMRC?
The Swiss authorities will carry out audits of the Swiss banks to ensure they are complying with their obligations under the agreement. Your details will only not be passed over if you suffer the one-off levy and pay the withholding tax on future income and gains.
HMRC can currently obtain information from the Swiss authorities, but they need to provide certain details before the bank will release information.
Under the agreement, it will be easier for HMRC to obtain information on a named individual. HMRC will be able to obtain banking details of up to 500 named individuals per year (for the first three years, such number to be reviewed annually from the beginning of 2016). These details are expected to be used in the prosecution of tax evaders.
What if I am tax compliant, how do I prove it?
It is legal to hold a bank account in Switzerland, providing any income or gains arising therefrom are declared to HMRC, and the funds in the account have been taxed, as necessary. Taxpayers who are UK-compliant can authorise their Swiss bank to release their details to HMRC for verification. Taxpayers who are deemed not to be compliant by HMRC can expect an investigation into their affairs.
Is the agreement final?
Yes. The agreement will come into force on 1 January 2013.