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  1. Law
September 1, 2007

Thanks a Million

By Spear's

Rich people like living in Switzerland because the Swiss don’t give them a hard time about tax. The UK should do the same, says Caroline Garnham.

In his Pre-Budget Report on 9th October, the Chancellor of the Exchequer, Alistair Darling, introduced an annual ‘levy’ of £30,000 on all non-UK domiciliaries who have lived in the UK for seven years or more. This followed hard on the heels of Shadow Chancellor George Osborne’s suggestion a week earlier that an annual levy of £25,000 should be raised from all non-UK domiciliaries. But Darling’s proposal goes further.

He wants to remove many of the ways in which non-domiciliaries converted taxable income into non taxable capital which they could bring into the UK tax-free, such as source ceasing. He is also tightening up the rules on residence to include days of arrival and days of departure in the 90-day rule for determining residence in the UK. Now, many frequent visitors to the UK, who need to be here on business, may find themselves tax resident in the UK, and have their business elsewhere.

The reaction of most of my clients is mixed. Most would not object to paying £30,000 ‘to buy the right to the reliefs and exemptions’. Others, however, are more cynical. One client with significant wealth said, ‘Why pick on £30,000, why not £50,000 or £75,000? No government should be selling the right to reliefs. This is not a tax, it’s a fee.’

In my column in the summer edition of WMS, I proposed that tax should be paid on all monies remitted to the UK, whether income or capital. The Chancellor may have gone some way towards achieving this by removing many of the ways in which income can be converted into non-taxable capital, but then why charge a levy on top? Surely, this is not a tax but a fee.

Switzerland is a country that not only welcomes wealthy individuals coming to live within its borders, but also understands the ultra-high-net-worth family and how it thinks. Charging non-UK domiciliaries on what it costs them to live in the UK is more closely aligned to the Swiss system for taxing foreigners who live in their country.

In Switzerland (in certain circumstances), foreigners negotiate a fixed income tax, called a ‘lump-sum’ income taxation, rather than the usual Swiss income and net-wealth taxes. This tax is calculated at both cantonal and federal level on an assumed income based on living expenses in Switzerland, which must not be below a certain threshold. In most cantons this threshold is equivalent to five times the cost of the taxpayer’s Swiss accommodation, either as rent paid or, if the property is owned, as a deemed annual rental value.

In this way the Swiss government taxes the family’s lifestyle in Switzerland, while the family is able to choose indirectly what taxes it wishes to pay according to the lifestyle its members wish to enjoy in Switzerland.

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Generally, it is only necessary for a taxpayer to disclose the agreed living expenses, together with any Swiss income and any foreign income for which treaty relief is claimed. Depending upon canton, it may be possible to choose between ordinary and lump-sum taxation each year. This is of great advantage to wealthy families for whom it is important, bearing in mind the country from which they emigrated, that details of their wealth outside Switzerland should not be known or declared.

If an ultra-high-net-worth family wishes to preserve its wealth for future generations, it can now do so in Switzerland through a trust structure that does not attract the tax disadvantages introduced by the UK Labour government last year.

On 20th December 2006, the Swiss Parliament approved the Swiss Federal Council’s Bill in favour of ratifying the Hague Convention on the Mutual Recognition of Trusts. The same Bill also introduces new legal provisions into Swiss law to deal with international conflict issues – jurisdiction, applicable law, recognition and debt enforcement – relating to trusts.

In most continental European countries succession law is a matter of public policy and any attempt to leave your estate other than as dictated by the laws of the country can be overturned. Switzerland, however, recognises that not all families wish to be obliged to distribute their assets to the next generation in fixed shares. Some wish to create a dynasty.

The Swiss Private International Law Act of 18th December 1987 (SPILA) provides for the possibility of a ‘professio iuris’, where the testator chooses the law to govern his succession. In Switzerland, heirs can also enter into a formal inheritance agreement called a ‘pacte successorale’, which can include renunciation of your inheritance without providing any compensation.

Both the Labour and Conservative parties have made it clear that neither understand the needs and motivations of the ultra-high-net-worth family. Both would be wise to learn the lessons learned in Switzerland, for fear of losing many of these families to that country.

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