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New measures to tackle offshore tax evasion make it more important than ever for expatriates to take care with their tax planning.

The UK tax office has reaped the rewards of its latest measures to tackle tax fraud. The past tax year netted HM Revenue & Customs (HMRC) £29 billion from tax evasion investigations, helping boost its overall revenue by 7%. 

HMRC puts part of this success down to using their “full powers” to uncover secret offshore accounts. Over £2 billion was collected by “cracking down on people who think they can hide money offshore” they said, adding, “there are no safe havens”.

For expatriates – who are likely to have financial interests overseas and cross-border tax obligations – this heightened scrutiny is an extra incentive to get your tax planning right

The new cross-country transparency

One of HMRC’s methods for uncovering global tax evasion was co-operation from overseas tax authorities. Over five years it has nearly doubled its requests to foreign governments for information on offshore accounts – totalling 1,096 in 2016.  

International data sharing is about to get easier with the new ‘automatic exchange of information’ regime. Last year, over 50 countries – including Portugal, Spain, France, Cyprus and Malta – started collecting information on their taxpayers’ assets and income. By September, this data will automatically flow between these countries, enabling local tax offices to verify whether taxpayers have made accurate declarations on their tax returns. In 2018, another 50 countries, including Switzerland and Monaco, will do the same. 

They will have access to contact details and information about accounts and investment income earned over the year, such as interest, dividends, income from certain insurance contracts and annuities. Account balances are also reported, as are gross proceeds from the sale of financial assets.  

So if you live in Portugal, Spain, France, CyprusMalta and have assets elsewhere – whether they are investments in the Isle of Man, Swiss bank accounts or just UK property or pension funds – your local tax authorities will know about them. Even if they have no reason to question your tax situation, they will automatically receive information on your overseas accounts, structures, trusts and investments.

Should you be worried?

These measures are designed to catch out those who are deliberately committing tax fraud or incorrectly declaring themselves and their income and assets. There should be little to worry about if your tax planning is in order and you are declaring your finances correctly.  

However, if you live in one place and have assets or receive income elsewhere, it may be hard to determine what you should be declaring and where tax is due. 

  • If you are tax resident in Portugal: you are liable to Portuguese tax on your worldwide income and some capital gains. This includes most income that is also taxed elsewhere. Although expatriates with ‘non-habitual resident’ status may not be charged Portuguese tax on certain income and gains, these still need to be reported here. 
  • If you are tax resident in Spain: you are liable to Spanish tax on your worldwide income, gains and wealth. This includes most income that is also taxed elsewhere. In Spain the tax authorities will compare information with Modelo 720 declarations – where all residents have to report their non-Spanish assets – with severe penalties for discrepancies or failure to comply. 
  • If you are tax resident in France: you are liable to French tax on your worldwide income, gains and wealth. This includes most income that is also taxed elsewhere. 
  • If you are tax resident in Cyprus: you are liable to Cypriot tax on your worldwide income. This includes most income that is also taxed elsewhere.
  • If you are tax resident in Malta: generally, you are liable for Maltese tax on your worldwide income and gains. This includes most income that is also taxed elsewhere. Malta offers various residency programmes to foreign nationals, which may exempt you from tax on income not arising in or not remitted to Malta. You need to be clear on what your tax obligations are depending on your residency status.

In any case, cross-border taxation is complex; getting it wrong may be easier than you think and could result in costly fines and even prosecution. Take extra care to make sure your tax planning is above board and legitimately protects your wealth and income.

Careful tax planning

The first thing you need to do is make sure your arrangements are fully compliant in the country where you live and anywhere else you have income, assets or heirs. 

Second, your tax planning should suit your particular aims and circumstances, and work beneficially in both your country of residence and the UK. A mistake many British expatriates make, for example, is assuming ISAs remain tax-efficient – once you are no longer UK resident, they lose their tax-free status and the interest is usually taxable overseas. On the other hand, tax-efficient investment wrappers offered through a bond that is tax-compliant where you live could legitimately reduce tax on savings and investments. While some structures can seem similar, however, their tax benefits can vary significantly so explore your options. 

Finally, make sure you declare your finances and taxes correctly in each country. Some British expatriates wrongly believe that if income is taxable in the UK – like rental income, pensions and ISAs – they do not have to declare it in their host country. Even if you declare income and pay tax in the UK, you may still need to report it in your country of residence. It is your responsibility to regularly check you have declared all your tax liabilities and bring your tax affairs up to date if necessary. If you have not been following the rules correctly, you should rectify your position as soon as possible.  

With today’s scrutiny of tax evasion, it is more important than ever to take care with your financial planning. While living in Europe can be very tax-efficient for expatriates, you need specialist, up-to-date knowledge of local, UK and international tax regimes to achieve the best results. An adviser with cross-border expertise can help you enjoy favourable tax treatment while offering peace of mind that you are meeting your tax obligations, where you live and in the UK.

Any questions? Ask our financial advisers for help

All information in this article is based on Blevins Franks’ understanding of legislation and taxation practice at the time of writing; this may change in the future. It should not be construed as providing personalised taxation, investment or pension advice. You should take advice for your circumstances.