What are offshore trusts? Why are they so commonly used to hold real estate properties or money abroad in continental Europe? The truth is that UK tax residents with undeclared overseas assets have only months to get their affairs in order or risk extraordinary sanctions from HMRC. This is because several tax havens such as Gibraltar or BVI´s have agreed to exchange financial account information with the UK and other countries worldwide from September 2017.

Background

Many British citizens who moved overseas a few decades or more ago were commonly advised to move their assets into discretionary trusts – mostly in Gibraltar, BVI´s or Bahamas - with little thought for UK tax liabilities. This was understood as a sophisticated manner to shelter assets from UK inheritance tax or even to avoid income tax and capital gains tax on their earnings.

Of course, setting up a trust is and for centuries has been utterly lawful. Indeed, trusts in England date back to the Knights Templar of the 12th century who used to left their landed estates to trustees to pass on to their children should they die while on crusades in the Middle East. The question is whether assets held on trust and any income or capital gains are declared for tax purposes. Not doing so might be deemed as pure tax evasion. 

 

Common Structure used to hold assets in mainland Europe

 The use of trusts became overwhelmingly popular among those willing to invest on real estate properties in continental Europe, being this especially popular in target countries such as Spain and France.

Most common structures in such cases is as follows: 

Click here to view diagram

 In most cases these structures have ceased to be efficient whatsoever. Further, apart from becoming clearly inefficient, the above structure leads to exorbitant costs. Especially when compared with fully legal and tax efficient UK vehicles such as Family Investment Companies (FIC´s). The latter has become extremely common for UK tax residents whose estate is above GBP 1mill as such vehicle enables wealth to be passed on to future generations with minimum tax implications.

 

The problem: OECD´s Common Reporting Standard 

International tax transparency is set to increase dramatically from September 2017 as more than 100 countries have committed to exchange information on a multilateral basis under the OECD´s Common Reporting Standard (CRS). 

The list of signatories’ countries surprisingly includes Gibraltar, the British Virgin Islands, Anguilla and Bermuda, among many others. Indeed, all the mentioned signatories are early adopters of the CRS which means that they have agreed to exchange financial account information with the first group of participating jurisdictions by September 2017. 

Up to 31 December 2015, HM Revenue and Customs (HMRC) gave incentives to encourage British citizens to come forward and clear up their tax affairs. No incentives apply from such date whatsoever. 

 

The solution: Worldwide Disclosure Facility

However, before automatic exchange and new sanctions come into force, the HMRC has opened the Worldwide Disclosure Facility (WDF), which is to be deemed as the final chance to come forward before HMRC use CRS data and toughen the approach to offshore noncompliance. 

The WDF opened on 5 September 2016 and will close on 30 September 2018, when the new sanctions will be introduced to reflect HMRC’s toughening approach. You can still make a disclosure after that date but those new terms will not be as good as those currently available.  When is it advised to use the WDF?

The WDF is available to anyone who wants to disclose a UK tax liability that relates wholly or partly to an offshore. The latter includes unpaid or omitted tax relating to:

  • income arising from a source in a territory outside the UK;
  • assets situated or held in a territory outside the UK;
  • activities carried on wholly or mainly in a territory outside the UK; 
  • anything having effect as if it were income, assets or activities of a kind described above; or
  • funds connected to unpaid tax which are transferred offshore 

For example, should you have become beneficial owner of a trust indirectly owning real estate property in a third country such as Spain or France, you would need to check whether inheritance tax in the UK was duly calculated and paid. Otherwise, it would be highly advisable to regularise your tax situation forthwith. 

Disclosure to HMRC

For taking advantage of the WDF you must first notify HMRC of your intention to make a disclosure. The HMRC will subsequently send you an acknowledgement and you will have 90 days to make full disclosure. You must make full payment (unpaid tax, interest and penalties) in accordance with your disclosure on the same date that you disclosure is submitted.

Benefits of using the disclosure facility

The terms of the WDF are clearly less favourable than previous disclosure facilities. Nonetheless, HMRC states that after 30 September 2018 new sanctions will be introduced to reflect their increasingly hard-line approach to compliance. 

If disclosing by means of the WDF, provided that you comply fully with HMRC and your disclosure is correct, HMRC will not seek to impose a higher penalty, except in “exceptional circumstances”. Importantly, if you make a disclosure under the WDF you may still be liable to criminal prosecution. However, HMRC states that criminal investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate. 

 

Given the above and in the view of an imminent toughening approach, individuals with undeclared offshore assets, income or gains should take advice now on making use of the WDF. Further, even if you don’t have to disclose anything as no tax liability has arisen, it might be the proper time to revisit your asset holding structure so as to make it catered for tax compliance and efficiency principles.