UK Tax Authority (HMRC) ‘Nudge’ Letters

As the UK tax authority (‘HMRC’), are returning to normal operations, they are revising their approach to encourage compliance. HMRC have at their disposal vast pools of information from overseas jurisdictions, from Companies House and from the Land Registry. They are using this data to subtly push people towards compliance, which is why they are called ‘nudge’ letters. The letter is designed to prompt or nudge the taxpayer into reviewing their tax returns and finances to determine whether further income or gains need to be notified to HMRC.

HMRC has recently issued ‘nudge’ letters to UK taxpayers who it believes hold crypto assets. The letter advises them that Capital Gains Tax issues can arise on any gains realised from the sale, or deemed disposal, of crypto assets. This can include the outright sale of crypto assets for cash, exchanging one crypto asset for another or using crypto assets to acquire goods or services.

What should you do if you get a ‘nudge’ letter?

It is important to undertake a thorough review of your sources of income and gains to consider if your filings are correct and complete. If you are sure that everything is in order, you can respond to HMRC to this effect.

The HMRC ‘nudge’ letter asks the individual to sign and complete a ‘certificate of tax position’ declaration. This includes a confirmation of understanding that a false declaration is a criminal offence and can result in an investigation or even criminal prosecution. There is no legal obligation on the taxpayer to sign the declaration and if your affairs are in order it may be best to respond to HMRC by letter rather than with the ‘certificate of tax position’ provided.

If you have overlooked a source of income or gain, then this will need to be corrected as soon as possible. Different disclosure routes are available depending on the individual’s circumstances and one such route is via the Digital Disclosure Service (DDS).

How We Can Help

It is advisable for the individual to seek specialist tax advise on receipt of a HMRC ‘nudge’ letter.

Our tax team, in the UK office, can help you review your tax position and can respond to HMRC and confirm what action, if any, will need to be taken to resolve the matter. In our experience, getting the strategy right to resolve the enquiry, in the most cost-effective way, is the key to minimising any potential damage.

For more information, please contact Paul Webb or Karen Dyerson at the Dixcart office in the UK: advice@dixcartuk.com as soon as possible to discuss the position.

Posted in Tax

Guernsey – Tax Efficiencies for Individuals, Companies and Funds

Background

Guernsey is a premier international financial centre with an enviable reputation and excellent standards. The Island is also one of the leading jurisdictions providing international corporate and private client services and has developed as a base from which internationally mobile families can organise their worldwide affairs through family office arrangements.

The island of Guernsey is the second largest of the Channel Islands, which are situated in the English Channel close to the French coast of Normandy. Guernsey combines many of the reassuring elements of UK culture with the benefits of living abroad. It is independent from the UK and has its own democratically elected parliament which controls the Island’s laws, budget and levels of taxation.

Taxation of Individuals in Guernsey 

For Guernsey income tax purposes an individual is; ‘resident’, ‘solely resident’ or ‘principally resident’ in Guernsey. The definitions relate primarily to the number of days spent in Guernsey during a tax year and, in many cases, also relate to the days spent in Guernsey in several preceding years, please contact: advice.guernsey@dixcart.com for further information.

Guernsey has its own system of taxation for residents. Individuals have a tax-free allowance of £12,175. Income tax is levied on income in excess of this amount at a rate of 20%, with generous allowances.

‘Principally resident’ and ‘solely resident’ individuals are liable to Guernsey income tax on their worldwide income.

Attractive Tax Caps

There are a number of attractive features of the Guernsey personal taxation regime:

  • ‘Resident only’ individuals are taxed on their worldwide income, or they can elect to be taxed on their Guernsey source income only and pay a standard annual charge of £40,000.
  • Guernsey residents falling under any one of the three residence categories, detailed above, can pay 20% tax on Guernsey source income and cap the liability on non-Guernsey source income at a maximum of £130,000 per annum OR cap the liability on worldwide income at a maximum £260,000 per annum.
  • New residents to Guernsey, who purchase an ‘open market’ property, can enjoy a tax cap of £50,000 per annum on Guernsey source income in the year of arrival and the subsequent three years, as long as the amount of Document Duty paid, in relation to the house purchase, is at least £50,000.

Additional Benefits of the Guernsey Tax Regime

The following taxes are not applicable in Guernsey:

  • No capital gains taxes.
  • No wealth taxes.
  • No inheritance, estate or gift taxes.
  • No VAT or sales taxes.

Immigration to Guernsey

The Dixcart Information Note: Moving to Guernsey – The Benefits and Tax Efficiencies contains additional information about moving to Guernsey. Please contact the Guernsey office if you have any specific questions or require any additional information regarding immigrating to Guernsey: advice.guernsey@dixcart.com

Taxation of Companies and Funds in Guernsey

What are the Advantages Available to Guernsey Companies and Funds?

  • A key advantage for companies registered in Guernsey, is a ‘general’ corporate tax rate of zero.

There are a number of additional advantages:

  • The Companies (Guernsey) Law 2008, the Trusts (Guernsey) Law 2007 and the Foundations (Guernsey) Law 2012, reflect Guernsey’s commitment to providing a modern statutory basis and increased flexibility for companies and individuals using the jurisdiction of Guernsey. The laws also reflect the importance placed on corporate governance.
  • Guernsey’s Economic Substance regime was approved by the EU Code of Conduct Group and endorsed by the OECD Forum on Harmful Tax Practices, in 2019.
  • Guernsey is home to more non-UK entities listed on the LSE markets than any other jurisdiction globally. LSE data shows that at the end of December 2020 there were 102 Guernsey-incorporated entities listed across its various markets.
  • Legislative and fiscal independence mean that the Island responds quickly to the needs of business. In addition the continuity achieved through the democratically elected parliament, without political parties, helps deliver political and economic stability.
  • Located in Guernsey, there are a wide range of internationally respected business sectors: banking, fund management and administration, investment, insurance and fiduciary. To meet the needs of these professional sectors, a highly skilled workforce has developed in Guernsey.
  • 2REG, the Guernsey aviation registry offers a number of tax and commercial efficiencies for the registration of private and, off-lease, commercial aircraft.

Formation of Companies in Guernsey

A few key points are detailed below, outlining the formation and regulation of companies in Guernsey, as embodied in the Companies (Guernsey) Law 2008.

  1. Incorporation

Incorporation can normally be effected within twenty four hours.

  • Directors/Company Secretary

The minimum number of directors is one. There are no residency requirements for either directors or secretaries.

  • Registered Office/Registered Agent

The registered office must be in Guernsey. A registered agent needs to be appointed, and must be licensed by the Guernsey Financial Services Commission.

  • Annual Validation

Each Guernsey company must complete an Annual Validation, disclosing information as at 31st December of each year. The Annual Validation must be delivered to the Registry by 31st January of the following year.

  • Accounts

There is no requirement to file accounts. However, proper books of account must be maintained and sufficient records must be kept in Guernsey to ascertain the financial position of the company at no greater than six monthly intervals.

Taxation of Guernsey Companies and Funds

Resident companies and funds are liable to tax on their worldwide income. Non-resident companies are subject to Guernsey tax on their Guernsey-source income.

  • Companies pay income tax at the current standard rate of 0% on taxable income.

Income derived from certain businesses, however, may be taxable at a 10% or 20% rate.

Details of Businesses Where a 10% or 20% Corporate Tax Rate is Applicable

Income derived from the following types of business, is taxable at 10%:

  • Banking business.
  • Domestic insurance business.
  • Insurance intermediary business.
  • Insurance management business.
  • Custody services business.
  • Licensed fund administration business.
  • Regulated investment management services to individual clients (excluding collective investment schemes).
  • Operating an investment exchange.
  • Compliance and other related activities provided to regulated financial services businesses.
  • Operating an aircraft registry.

Income derived from the exploitation of property located in Guernsey or received by a publicly regulated utility company, is subject to tax at the higher rate of 20%.

In addition, income from retail businesses carried out in Guernsey, where taxable profits exceed £500,000, and income from the importation and/or supply of hydrocarbon oil and gas are also taxed at 20%. Finally, income derived from the cultivation of cannabis plants and income from the use of those cannabis plants and/or licensed production of controlled drugs is taxable at 20%.

Further Information

For additional information regarding personal relocation, or the establishment or migration of a company to Guernsey, please contact the Dixcart office in Guernsey: advice.guernsey@dixcart.com

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission.

Dixcart Fund Administrators (Guernsey) Limited: Protection of Investors Licence granted by the Guernsey Financial Services Commission

Non-UK Domiciled Individuals – the Importance of Pre-arrival UK Tax Planning

Introduction

Due to the impact it can have on an individual’s UK tax liability, it is vital that domicile is fully understood by those wishing to relocate to the UK permanently.

In general terms, if a non-domiciled individual wishes to move to the UK permanently and has no intention to return to their previous country, then there is a strong case they will be considered UK domiciled for tax purposes.

Effective tax planning, pre-UK arrival is therefore critical to avoid potential costly surprises in the future.

UK Domiciled vs Non-domiciled Impact

Firstly, let us briefly look at the UK tax implications for a person who is UK domiciled versus non-domiciled. Please note that both individuals are UK tax resident in the year for this illustration.

Mr UK Domiciled

  • Liable to tax on worldwide income and gains
  • Worldwide assets are subject to UK inheritance tax

Miss Non-domiciled

  • Worldwide income and gains are taxable on the arising basis
  • A claim for the remittance basis can be made which will mean Miss Non-domiciled will only be taxed on her foreign income and gains if she remits it to the UK. If it is kept offshore, she will not be subject to UK tax
  • Non-UK situs assets are excluded from UK inheritance tax

From this, we can see that Miss Non-domiciled position is usually more advantageous from a UK tax perspective. 

Determining your Domicile

In establishing whether a new domicile of choice has been created, careful consideration must be taken for the following points before making a decision to move to the UK:

  • the intentions of the individual;
  • their permanent residence;
  • their business interests;
  • their social and family interests;
  • ownership of property; and
  • the form of any Will that they have made.

This list is by no means exhaustive and there is no single criteria which determines whether an individual is or is not domiciled in the UK. Instead, a ‘balance of probabilities’ approach is taken.

Defend your Domicile

Taking into account the above, it is therefore essential to have provisions in place before arriving in the UK, to defend any potential challenge from HMRC.

Domicile enquires can be lengthy and intrusive should HMRC doubt an individual’s non-domicile claim. This can involve months or even years of correspondence involving various questions into; background, lifestyle and family and social connections, both from a historic perspective and to establish future intentions.   

Acquiring and maintaining evidence of strong, ongoing links to the country of domicile is crucial for those claiming non-domiciled status, and so is evidence of an intention to leave the UK at a future date. This can be particularly problematic on death, potentially bringing a foreign estate within the scope of UK inheritance tax.

To avoid any hiccups in the future, it may be worth considering having a domicile statement prepared, to provide contemporaneous evidence supporting the claim . 

Case Law

IRC v Bullock: Mr Bullock had a domicile of origin in Nova Scotia. He lived in England for 40 years. His wife did not want to live in Nova Scotia. Mr Bullock hoped to return there should he persuade his wife to change her mind or should he survive her. It was held by the Courts that he had a real determination to return rather than a vague aspiration. Accordingly he retained his Nova Scotian domicile of origin and had not acquired an English domicile of choice.

In contrast:

Furse v IRC: Mr Furse expressed a wish to live in England for the rest of his life save only for a contingency that he would return to the USA, should he cease to be physically able to take an active interest in his farm (situated in England). The Courts decided that this intention was so vague as to impose no limit on his intention to remain in England. Accordingly he had acquired an English domicile of choice.

Summary 

From the above we can see it is difficult to make a judgement without fully examining an individual’s position in detail.

An individual’s domicile status is a fundamental factor in determining his/her liability to UK tax. It also has implications for other branches of the law.

Due to HMRC’s increased number of investigations into the tax affairs of non-domiciled individuals, you should be prepared to present a robust defence in the event of any challenge from HMRC. A domicile statement can greatly assist, to provide evidence of an individual’s intentions, where it is supported by the facts, and can be particularly useful in situations where enquiries are opened by HMRC after death.

Additional Information

If you require additional information on this topic and further guidance regarding your domicile status, please contact your usual Dixcart adviser or speak to the Dixcart office in the UK: advice.uk@dixcart.com

Property Taxes in Portugal – The Importance of Getting it Right

Popularity of Portuguese Property

Portugal features as an all-time favourite with picturesque views of ancient and new buildings on the sunny hills of this new favourite European gem. A zoomed in view of these include glazed blue ceramic tiles, or azulejos, covering the exterior walls of buildings.

Property has recorded double digit percentage growth in various sectors listed by numerous real estate service companies in recent years and the expectation is that this will continue – with an increased demand and reduced supply than previously seen.

What is an interesting misconception is that property prices are driven predominantly by the Golden Visa program – in actual fact, the Portuguese Golden Visa accounts for an insignificant portion of property purchases, when considered in comparison to total property purchases in Portugal.

This reflects that there are various factors in Portugal influencing properties prices, including: the fact that Portugal is the new acclaimed California, the new European Silicon Valley, it is ranked one of the best places to live and work in the world, it is an attraction magnet for digital nomads, as well as offering a 10-year tax holiday for the affluent, and there is more.

Property has always been a favourable investment class for many – and that is no different now. This raises the importance of understanding the related tax consequences for holding property in Portugal.

Below Dixcart have summarised some of the tax implications applicable in Portugal.

What are the Tax Consequences for My Rental Income?

Rental income, for individuals is taxed at a flat rate of 28% – for both resident and non-resident Portuguese holders of property. It is worth noting that residents may use the marginal scale rates if lower – although it is unlikely they will be able to do so.

Qualifying expenses may be used to reduce the taxable income due – provided it forms part of the income producing activity.

Corporate tax rates for rental income depend on residency status: non-resident entities may be subject to 25% tax, whereas local Portuguese companies will be subject to tax at rates between 19% to 21% in mainland Portugal and 11.9% to 14.7% for properties located in the autonomous region of Madeira.

When is Stamp Duty Applicable?

Stamp duty is applicable on a variety of transactions in Portugal – this may occur when a property is inherited or when a property is purchased. Please refer below for more details.

What Inheritance Tax Implications Exist for Property (or is it Stamp Duty that Applies)?

Although inheritance tax is not applicable in Portugal, stamp duty does apply.

For the purposes of stamp duty, inheritance or gifts may fall into one of two categories – those which are exempt, and those taxed at a flat rate of 10%. Inheritances by close relatives, such as parents, children and spouses, are exempt from stamp duty. All other inheritances and gifts are taxed at a flat stamp duty rate of 10%.

Stamp duty is payable for the respective property, even if the recipient does not live in Portugal.

If you are a UK domicile, your Portugal property will form part of your UK estate for UK inheritance tax purposes.

Stamp Duty on the Purchase of a Property

Stamp duty on the purchase of a property is charged at a rate of 0.8% at the higher of the purchase price or VPT (the rateable value, attributed by the tax authorities). The VPT in most cases is much lower than the actual purchase price of the property.

The purchaser must pay this duty, prior to signing the final deed, and proof of payment will need to be provided to the notary.

VAT may be applicable on the purchase of new builds in particular situations.

Property Transfer Tax

Property transfer tax, namely IMT (Imposto Municipal sobre Transmissões Onerosas de Imóveis), is applicable each time ownership is transferred. The tax is required to be paid by the purchaser prior to the final deed of sale being signed (as the original copy of proof of payment needs to be shown to the notary at the time of the property exchange).

The tax paid, is calculated on the higher of the purchase price or the VPT.

The property transfer tax rate is largely dependent on the ultimate use of the property and whether it is your first or second home, with the rates varying between 0% and 6%.

Annual Municipal Property Tax (IMI)

Annual municipal property tax, or IMI (Imposto Municipal sobre Imóveis), is payable by the person who is the property owner as at 31 December of the previous year, and is based on the VPT. The rate applied ranges from 0.3% to 0.8%, and is dependent on whether the property type is classified as urban or rural (classified by the Portuguese tax authorities based on the location of the property). Note that any investor or company located in a blacklisted tax jurisdiction, in accordance with the Portuguese tax authority, will be subject to a flat rate of 7.5% IMI.

An additional annual municipal property tax, namely AIMI (Adicional ao IMI), is chargeable for any VPT value exceeding €600,000, for all residential properties and construction plots, at a rate of 1%. Thus, the first €600,000 will be subject to the IMI at the respective IMI rate, and the excess value above €600,000 will be subject to AIMI at rates that vary between 0.4% and 1.5%.

Please note that AIMI is not only considered for a single property but considered per owner and therefore, if more than one property is held, the cumulative VPT needs to be considered. If the cumulative VPT value of all properties held by a single owner exceed €600,000, AIMI will be applicable on the value of the properties held, exceeding this threshold.

What Tax Consequences are Applicable Upon the Sale of a Property?

Capital gains tax is applicable on the sale of a property, unless purchased before 1989.

The tax consequences vary dependent on whether you are resident or non-resident. In addition, the use of the property and the way that the proceeds from the sale are utilised are paramount, as this may have a significant impact on the related tax consequences applicable.

The tax is calculated on the difference between the selling price and the acquisition value (adjusted for inflation rates, net of documented costs incurred when the property was acquired, coupled with any capital improvements within the last 12 preceding years of the sale).

As a Portuguese tax resident, 50% of the gain is required to be paid. If the property was held for a period of two years or more, inflation relief may also be applicable. Capital gains, on your property, are added to your other annual income and are taxed at marginal tax rates of up to 48%.

It is worth noting that gains resulting from the sale of a primary residence are exempt for residents, if you reinvest all of the proceeds (net of any mortgage on the property), in another main home in Portugal or the EU/EEA, before the property is sold (a window of up to 24 months), or within 36 months of the disposal of the property, provided you live in the new property, within 6 months of the purchase.

Capital gains are taxed at 28% for non-residents individuals and 25% for non-resident companies.

However, the tax consequences in Portugal are not the only consideration to bear in mind. One also needs to consider the double taxation treaty and local laws and regulations applicable in the country of tax residency.

A typical example of this for a UK resident, is the fact that UK tax residents also pay tax on the gain from the Portuguese property in the UK, however, under the double taxation treaty, any tax paid in Portugal may be credited against the tax due in the UK.

Is there a Preferred Structure to Hold Property in Portugal?

A topical query – what is the most preferred and tax efficient structure to hold property in Portugal?

Although the answer may vary dependent on objectives and circumstances from one investor to the next, as well as the purpose for such properties, it is worth noting that as a non-tax resident investor wishing to invest in property to earn rental income, holding such a structure through a Portuguese company may be more beneficial with tax rates varying between 19% to 21% and 11.9% to 14.7%, for properties located in Portugal mainland and the autonomous region of Madeira respectively, in comparison to the flat rate of 25% for non-resident entities.

For residents, holding a primary residence in their personal capacity, may be more beneficial from a capital gain point of view. Thus, each situation needs to be considered on a case-by-case basis.

Other considerations, however, need to be taken into account, such as the operational costs for running a company and ensuring appropriate substance exists. The cost of holding a property through a corporate structure may thus not exceed the benefit in all circumstances.

Alternative qualitative benefits may include the fact that corporate structures provide an extra layer of asset protection, which may be considered invaluable for many individuals located in jurisdictions exposed to considerable financial and other types of risk.

Summary of Property Tax Consequences

To summarise the tax and costs applicable for purchasers, owners, sellers and others, as discussed above, please refer below:

Purchaser:Owner:
IMT (Property Transfer Tax)Stamp DutyNotary/Registration CostsLegal expensesIMI (Annual Municipal Tax)AIMI (in addition to IMI)Running costs (such as water and electricity)
Seller:Others:
Capital gainsCommission to real estate agencyInheritance tax

The related tax rates may be summarised as follows:

Individuals
 ResidentsNon-Residents
Capital Gains TaxPrimary residence may be subject to exemptionSecond property will be taxed at 28%28%
Rental IncomeLower of 28%; orMarginal tax rate.28%
Companies
 ResidentNon-Resident
Capital Gains Tax28%25%
Rental IncomeRespective company tax rate, namely: Madeira: 11.9% to 14.7%Portugal: 19% to 21%25%

Why is it Important to Engage with Dixcart?

It is not just the Portuguese tax considerations on properties, largely outlined above, but also the impact from where you may be tax resident and/or domiciled, that need to be considered. Although property is typically taxed at source, double taxation treaties and double tax relief need to be considered.

A typical example is the fact that UK residents will also pay tax in the UK and this will be calculated based on UK property tax rules, which may be different to those in Portugal.  They are likely to be able to offset the Portuguese tax actually paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK. Dixcart will be able to assist in this regard and to help make you aware of your obligations and filing requirements.

How else may Dixcart Assist?

Dixcart Portugal have a team of experienced professionals who may assist with various aspects regarding your property; efficient tax planning, legal support (for the sale or purchase of a property), accounting and tax support and the incorporation and maintenance of companies.

Further to this, if you would like a deemed tax calculation to be performed, you may reach out to our offices in Portugal and/or Madeira for this information: advice.portugal@dixcart.com

Dixcart have helped many with this service and look forward to assisting you with your next property advice and/or transaction.