Written by 

Dan Collins EY

Guernsey has a lot to offer high net worth individuals and their families, but what needs to be done to help them prepare for the move? Dan Collins, Senior Tax Manager at EY, explains.

Guernsey is a beautiful island, and offers a great lifestyle to anyone looking to relocate.

Home to 63,000 people, it is the second largest of the Channel Islands, but retains a very traditional feel.

From a lifestyle perspective, whether you are into cliff walks or kayaking, fishing or flying, Guernsey has everything to offer.

From a business perspective, Guernsey offers a stable and well-regulated environment. It is highly regarded in the international finance industry with experienced lawyers, accountants, trustees, asset managers and fund administrators.

Guernsey operates a very attractive tax regime, whilst maintaining a position at the forefront of international transparency initiatives. We are seeing an increasing number of individuals moving to Guernsey as a result of proposed tax changes in the UK. Indeed, the impending reform of the UK’s ‘non-dom’ regime from April 2017 will make Guernsey an attractive jurisdiction for a number of individuals.

Guernsey income tax

Guernsey offers a flat rate of income tax of 20 percent, no capital gains tax, no inheritance tax and no VAT or other sales taxes. Taxes on local property (akin to rates) are low in comparison to many other jurisdictions.

For individuals with substantial income, there is a maximum annual tax charge of £220,000 covering worldwide income, or £110,000 for non-Guernsey income. Alderney offers a special cap of only £50,000 per annum.

Alternatively, a standard income tax charge of £30,000 may apply to certain individuals who are resident in Guernsey but spend significant time in another jurisdiction.

  • Minimising Guernsey-sourced income

If you are in a position to benefit from one of the tax caps in Guernsey, seek to minimise any income with a Guernsey source. In this way, you can limit your Guernsey tax to £110,000 on all foreign income. If your circumstances mean you qualify for the standard charge, this could limit your total Guernsey tax liability to £30,000.

  • Minimise taxes in other countries

Even if you structure your affairs to minimise Guernsey tax, watch for taxes in other countries. For example, some countries may require withholding of tax from investment income which you might not be able to reclaim. Speak to an investment adviser in conjunction with a tax adviser to ensure investment choices take this into account.

Particular care is needed with rental property. Most countries will continue to tax profits on rental property even if you are no longer a tax resident. For example, if you hold UK rental property, you will continue to be subject to UK tax on any profit. In addition, you may also be subject to UK capital gains arising on the subsequent disposal of the property even if you become non-UK resident. If you hold UK property through a company, watch for penal tax charges that may apply depending on your circumstances – if this applies, you may wish to restructure.

  • Take advantage of tax incentives

Guernsey is introducing new legislation which will enable tax-free distributions of accumulated company profits which arise before you become Guernsey resident. If you have profits accumulated in a non-Guernsey company, it may be preferable to wait until arriving in Guernsey before making distributions. There will be time limits to qualify for tax-free distribution in Guernsey, but this relief, which was announced in the 2017 Guernsey Budget, is intended to be an incentive to relocate to Guernsey.

  • Seek professional advice

Tax rules are often complex, and over the last few years have been changing rapidly. Relocating from one jurisdiction to another presents opportunities, but also gives rise to risk. Obtain specific advice for your situation when planning your move to ensure that all aspects are considered, especially if you are the settlor or beneficiary of a trust, or own shares in a company.

UK aspects

If you are currently living in the UK, there are certain other aspects to consider. If you have non-real estate assets which are sitting at a gain, you may wish to become Guernsey resident before disposing of the property. By crystallising the gain while non-UK tax resident, you could mitigate the UK capital gains tax. However, if you return to the UK and become resident within five complete tax years, the UK capital gains tax may become payable.

Finally, UK inheritance tax has long been the subject of tax planning. If you are domiciled in the UK, then inheritance tax could potentially apply to the value of your estate. It is still possible to leave the UK and adopt a domicile of choice in Guernsey so that UK inheritance tax would only apply to certain UK assets. This requires careful thought as it requires a permanent move and severing of ties.

You may be a non-dom impacted by the proposed changes applying from April 2017. New rules will deem you to be UK domiciled if you are resident in the UK for 15 out of 20 years. By leaving the UK for Guernsey for a period of time, you may be able to break your UK residence, and remain a non-dom, returning to the UK in due course. Deemed domicile will remain for five complete tax years, or three years from acquiring a non-UK domicile of choice if later.

Guernsey offers a unique prospect for relocation to help mitigate your overall tax exposure and to protect your wealth.

Guernsey’s tax regime is attractive, but it is not, and should not be, all about tax. Many private clients are finding out that moving to Guernsey is a great lifestyle choice.

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Planning ahead

Although tax planning will always be specific to your own facts and circumstances, the following are common aspects to consider before relocating:

  • Understanding tax residency

Most countries tax individuals on the basis of ‘tax residence’. Tax residence is usually determined by the number of days (or nights) spent in a particular country, but may also be based on certain ties to that country, such as a family home or close family.

In most countries, if you are a tax resident, you will pay tax in that country on your worldwide income. This means that in order to benefit from Guernsey’s favourable tax regime, it is important to become Guernsey tax resident, but more importantly to lose your current tax residence. Consider carefully what steps are required to lose your current tax residence. This may mean limiting the number of days you spend there, or could involve more fundamental changes such as disposing of property or severing other ties. You need to be comfortable that the necessary changes are feasible without compromising the lifestyle you want.

Seek advice to ensure you fully understand what you need to do to lose your current tax residence (and not accidentally regain it) and to become Guernsey tax resident.

  • Income versus capital

A key aspect of Guernsey’s tax regime is the absence of capital gains tax. This provides an opportunity to rebalance any investments you currently hold into assets which generate capital gains (i.e., capital growth assets) rather than income (e.g., dividends and interest). It is common for wealthy Guernsey residents to hold an investment portfolio of assets which primarily give rise to capital gains. Watch for accumulation funds which roll up income within the fund, as these may be taxed as income in Guernsey.

An original version of this article was first published in eprivateclient's 2017 Guernsey report, January 2017.