UK tax authorities increase pressure on Swiss account holders via inheritance tax threat

UK tax authorities have increased the pressure on UK resident holders of undisclosed Swiss bank accounts, by amending the UK/Swiss tax agreement to require banks to freeze 40% of assets in cases where they learn the account holder has died, then potentially transfer those funds to authorities as an inheritance tax charge.

This is expected to come into effect during 2013.

Under a deal struck with Bern last August, the UK will already be requiring Swiss banks and certain other financial bodies to make a one-off lump sum charge on the amount in undisclosed accounts of between 21% and 41%, which deals with any historic undisclosed liabilities relating to those funds.

There are opt-outs for non-UK domiciled account holders.

The banks will also be required to harvest UK tax on income and gains due on an ongoing basis.

In return for doing this, the banks do not need to disclose identities of the account holders.

However, in an ‘upping of the ante’ to the account holders, the UK tax agency HMRC has also added the IHT stipulation, made at the UK rate of 40%, in a protocol to its original agreement with Bern.

James Badcock (pictured), partner in Geneva with UK-headquartered firm Collyer Bristow LLP, explains that the personal representatives of deceased account holders, often family members or professional advisers, will have three options when the holder dies, to deal with this.

Most straightforward, they can accept the 40% charge, without the benefit of possible exemptions and reliefs such as the £325,000 ‘nil rate band’, nor of the spouse exemption afforded to UK taxpayers.

Or they can seek a certificate from a professional such as lawyer stating the professional believes the account holder was non-UK domiciled for inheritance tax purposes and present this to the bank and the assets will be unfrozen.

It appears the professional will need to provide their opinion as to whether the deceased is ‘non-dom’, which is not required for the certification process under the EU Savings Tax or the other provisions of the UK/Swiss agreement.

Or they can permit the bank to disclose the existence of the account, and by implication also the account holder, to the UK tax authorities and again the assets will be unfrozen. This will hold no fear for compliant taxpayers, and the administration of the deceased’s estate can then be dealt with in the usual way.

Badcock notes the IHT development effectively puts a yet-higher price on retaining anonymity for the account holder’s family.

Badcock also envisages disadvantages where account holders were planning to accept the lump sum – preferring Swiss banks to collect and remit sums anonymously – but whose heirs may want to reveal the account, given the threat of 40% IHT on their entire Swiss-based savings.

If they disclose at that point, Badcock says, then HMRC “might wonder why they did not disclose to them previously, and instead took the lump sum route.” HMRC could then potentially use its wide-ranging powers to obtain information to delve further, which would be painful whether or not all of the account holder’s tax liabilities have been met, Badcock says.

If, alternatively, they still wish to remain anonymous and are UK domiciled, Badcock says the only alternative will be to take the 40% IHT hit, which may or may not otherwise be due.



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