The LDF allows those with undeclared income or gains to come forward and regularise their affairs while receiving generous and beneficial terms. It is expected that HMRC will deal harshly with those who had an opportunity to come forward but chose not to.
In order to obtain the full beneficial terms of the LDF, an offshore asset must have been held at 1 September 2009. However, even if an offshore asset is not held at all, the LDF can still be accessed as long as the taxpayer is not being criminally investigated or under Code of Practice 9 investigation for suspected tax fraud.
I am currently undertaking an LDF for individuals who collectively invested in UK rental properties over many years. Some of the taxable rental profits have knowingly been undeclared, but other matters have been undeclared because of the misconception that any capital gain made on disposal of a property can be rolled over into the cost of the new property.
There are no offshore assets at all. In these circumstances, the individuals cannot benefit from the full terms of the LDF but still have access to HMRC’s bespoke service and the guarantee of no prosecution for their deliberate under-declaration of tax on the rental profits. In this respect, prosecution may not always be contemplated but HMRC has been increasing such activity so the risk cannot be ignored. HMRC’s bespoke service also includes access to a named person who can engage openly and is also an experienced investigator hence pragmatic ‘grown up’ dialogue is the norm.
While cases of deliberately undeclared income and gains certainly exist, there are numerous other scenarios where the LDF can work beneficially.
Trusts are complicated and tax issues are easily overlooked, especially if the trustees are located outside the UK and unfamiliar with the minutiae of UK tax rules. The relevant rules have changed periodically over the years and it is not overly surprising that matters are overlooked, for example the periodic IHT charges every 10 years which can be significant as they are based on up to 6% of the entire trust’s assets. However, under the LDF, the look-back period is restricted to 6 April 1999 whereas under normal rules HMRC has an unlimited look-back period for IHT which can clearly lead to a very significant liability for 10-year charges for older structures. Under the LDF, the trustees can also elect to use the CRO/SCR, assuming the August 2014 restrictions do not apply. This means that a simplified calculation is undertaken under which tax is calculated on all income and gains at a flat rate of 40% – 50%. That amount is then deemed to cover all taxes arising including IHT which means that the 10-year charges legitimately disappear entirely.
Over the years I have encountered numerous examples of mistakes made by remittance-basis taxpayers:
• Mixing up overseas funds so that income, capital and capital gains or losses are all included in the same account.
• A taxpayer who was careful to use one credit card exclusively overseas only to pay the entire bill to the bank’s UK processing centre.
• Taxpayers have also misinterpreted the 2008 changes so that income from prior years was remitted based on the misunderstanding that no tax liability arises as they are no longer on the remittance basis.
For numerous wealthy, remittance-basis taxpayers their overseas assets have for many years been of no relevance to HMRC. It is therefore possible that those structures have not been carefully reviewed from a UK tax perspective and not been given any close attention. Despite being a simple concept, the remittance-basis is complex.
It is therefore not surprising that mistakes have been made over the years and HMRC knows this. The LDF can be used to tidy matters up and to gain certainty going forward.
I have experienced cases where the offshore assets of the deceased were not known at all to the executors (even if close family members) at the time the IHT returns were completed, hence those assets were omitted.
Similarly I have experienced family members not reporting their relatives’ offshore assets through misguided fear of what action might be taken if those past tax misdemeanours were revealed. Again the LDF can help; liabilities pre-1999 are forgiven.
Little is known about the new limited disclosure facility recently announced by HMRC. But we do know that it will be nowhere near as beneficial as the LDF. It will not include the guarantee of no prosecution, or the CRO/SCR and penalties will be set at a minimum of 30%.