These case studies involving the Liechtenstein Disclosure Facility demonstrate the wide variety of circumstances in which it can be used to allow individuals to bring their affairs up to date and unlock their offshore funds at relatively low cost.
Undeclared inheritance
Tax problems often come to light when the owner of offshore funds dies. However, in one case the owner of a £1m offshore deposit died in 1986 and his family simply held on to the funds without declaring anything to the UK authorities.
Under normal circumstances, HMRC can look back around 20 years in such cases (only six years in cases of failure to take reasonable care following changes to time limits with effect form the end of March this year). However, there is no such limit for inheritance tax (IHT) so, if it had discovered these funds, the tax charge for the family would have been very large. Normally, £400,000 of inheritance tax would be due plus accumulated interest on that tax (which would be huge since 1986), as well as substantial penalties.
However, the LDF offered an opportunity to resolve the UK tax position at low cost. Under the LDF, the tax due on the inheritance is nil because everything before April 1999 is ignored. The potential charge of £400,000 plus interest and penalties was saved forever and the family simply had to pay tax on the interest earned on the deposit.
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Long term deposit
A client had deposited £1m in a Swiss account 20 years ago earning interest at an average rate of 5%. The interest had not been declared for UK tax purposes. Tax, interest and penalties on the £1m over 20 years accumulated under another disclosure route would have amounted to a total of around £1.2m. With our advice, the client created a presence in Liechtenstein and used the LDF. Under the LDF the total cost of disclosure is approximately £550,000, saving over £650,000 for the individual.
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Inheritance tax saving
An individual approached us about offshore funds received from an inheritance in 2006. The funds had been held offshore by his late father and never declared to the UK tax authorities in his lifetime or after his death – and inheritance tax (IHT) was not paid. With our advice, he was able to use the composite rate tax arrangement within the LDF to disclose the funds and the offshore income received from them. Under the rules of the LDF, this is deemed to be a full settlement for all outstanding liabilities, including IHT, preventing a substantial liability arising on the inheritance. Similar IHT saving opportunities exist for funds inherited prior to 1999.
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Self-employed profits
A UK business owner diverted £1m of business profits from UK self-employment into a Swiss bank account between 1986 and 1998: none of the money was declared on his UK tax returns. Interest of £100,000 was earned on the funds since 1998. Under other disclosure routes, the tax he would have to pay is 40% of almost all of the above, ie £440,000 plus interest and (at least) a 30% penalty. Making use of the LDF, the tax due is just £40,000 – all the undeclared business profits escape tax – saving £400,000 plus interest and penalties.
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Diverted company profits
The owner of a family company had been sending funds offshore to his personal bank account for a number of years without putting the money through the company’s official books. In this situation, there was potentially corporation tax, VAT, section 455 charges on the ‘overdrawn participator’s loan account’, national insurance contributions and a beneficial loan to think about.
For simplicity, we have rounded down the diverted profits to £1m: this would have given rise to at least the following taxes:
| Corporation tax at 28% on the net of VAT amount | £238,000 |
| VAT at 17.5% | £149,000 |
| s.455 on participator’s loan account (assuming it started at nil) | £250,000 |
| Total tax due | £637,000 |
With our advice, the individual made a disclosure under the LDF and used the composite rate option to limit the tax due to 40% of undeclared income, i.e. £400,000, a saving of £237,000 before interest and penalties (and NIC) are considered.
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