Is UK income tax avoidance acceptable by setting up an offshore bank account or property?
Over the years HMRC have targeted their efforts on particular trades and professions in an attempt to counter tax evasion. More recently however they have begun to target the wealthy. Following a very successful campaign on offshore banking, HMRC are now planning to counter uk income tax avoidance and tax evasion and under-declaration arising from the ownership of overseas property.
They are anticipating that this initiative will collect around £560m as a contribution to the £7bn of tax the government hopes to raise by 2014/2015 in tackling tax evasion. HMRC have formed an investigation team of 200 to carry out this work.
It is commonly presumed that a number of owners of overseas property will not have declared rents or capital gains arising from these properties. The object of this initiative is to target overseas property owners who are liable higher rates of tax in the UK. As HMRC believe that the majority of these may have deliberately chosen to evade UK tax.
The basic rule is that an owner who is UK resident for tax purposes is liable to both uk income tax and capital gains tax both rental income and profits arising from the sale of such properties.
At this stage the HMRC has not set out in detail the basis on which they believe taxpayers have not complied with their filing obligations but following the reference to “data mining” technology there is clearly more than a mere suspicion of unpaid tax.
- The main areas of concern are that:
- Owners are not paying uk income tax on rental income they receive on such properties
Declared levels of income and capital gains are not sufficient to have funded either the acquisition or ongoing maintenance costs.
This is an area of concern, as this may uncover people who based on their historical tax returns, would not normally be able to fund property investment. So this investigation may provide HMRC with an opportunity to open a can of worms with regard to the overall tax affairs of people, looking into potential tax avoidance in the past. Or if they are business owners, HMRC may investigate why they have not paid appropriate amounts of corporation tax or PAYE ?
What action should property owners take?
As always we point to taking professional advice as soon as possible to determine whether or not there is any undeclared income or gains. If there are, then these should be quantified and notified to the HMRC as soon as possible. This way if there is a penalty, the level of that penalty might be reduced for voluntary disclosure. Early payment of the tax should also be made to prevent further interest for late payment accruing.
If you have answered yes to either of the questions above then you need to make an Offshore Disclosure to HMRC. It is your legal obligation to declare any income you earn on offshore assets to HM Revenue and Customs through an offshore disclosure.
We can arrange for you to meet a specialist adviser in offshore disclosure. You would need to bring as much paperwork with you as you can so that our offshore tax experts can see what type of voluntary disclosure is the best for your situation and what approach to take. You will need to sign an HMRC authority form, called a 64-8, which allows an offshore disclosure to be made on your behalf and allows HMRC to correspond with the specialist.
Taking action at an early stage will allow you to minimise the tax and penalty payable, but also provide advice on how the property should be owned tax-efficiently for the future. This could include matters such as:
- Transferring an interest so rental income is spread.
- Electing for capital gains tax only or main residence relief to apply to the property
- Operating as a qualifying furnished holiday let (check latest regulations).
- Tax efficient ownership of the properties.
It is essential that proper records are kept of the following:
- Rents received
- Costs of acquisition and improvement
- Proceeds and costs of sale
The longer you wait to submit an offshore disclosure, the more likely it is that HMRC will open an enquiry into your tax affairs.
What do you think? Should HMRC pursue people with overseas assets – or not ?
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