Lynette Chaudhary CTA highlights potential fiscal advantages for individuals becoming resident in Gibraltar, and outlines the Gibraltar residence requirements.

UK Tax Changes

The 2008 tax changes, in particular those changing how UK resident but non-UK domiciled individuals are taxed in the UK, initially led to speculation that all such individuals, upon finding their newly increased tax burden too onerous, would re-think whether they would remain living in the UK.  The subsequent relaxation of these changes has reduced such speculation, but even so it is still likely that some affected individuals will consider more than previously their available options for moving overseas.     

Do they stay in the UK, and after 7 years of residence calculate whether they will be better off paying the £30,000 charge to continue to be taxed on the remittance basis? Alternatively, do they join those resident and domiciled in the UK who are taxed on a worldwide basis?

In addition, the wider UK tax changes along with a multitude of other possible reasons, may provide the impetus for those resident and domiciled in the UK to consider a move abroad more seriously. 

A number of High Net Worth Individuals are leaving the UK and becoming resident in Gibraltar. 

Gibraltar

Gibraltar combines a Mediterranean location with British influence to provide a unique jurisdiction which offers both lifestyle and fiscal advantages. 

Background

Gibraltar is a British Crown Colony in Europe.  It is responsible for its own internal self-government in relation to domestic matters, with the UK being responsible for other matters.  Gibraltar is a member of the EU through the UK’s membership.  This means that EU nationals can live and work in Gibraltar without the need for work permits and that the EU directives on tax apply to Gibraltar. 

Contrary to popular belief, it is not an island but is instead situated at the Southern tip of the Iberian Peninsular, connected to the South coast of mainland Spain by a narrow isthmus.  It occupies an area of 3.6 square kilometres.   

The population of Gibraltar is approximately 30,000.  The official language is English and the law of Gibraltar is based on that of England and Wales. 

Gibraltar enjoys a typical Mediterranean climate, meaning that there is plenty of sunshine for those leaving the UK!  It’s also a great location to explore Spain, Morocco (which can be seen across the straits on a clear day), and other parts of mainland Europe.

Gibraltar services daily flights to and from the UK, and at weekends to and from Madrid.  Malaga airport is 1½ hours drive east from the Spanish border and Jerez airport is a similarly timed drive west from the border. 

Gibraltar, as an International Financial Services centre, has seen the financial sector of the economy grow rapidly in recent years.  With the Government's commitment to making Gibraltar an attractive base from which to do business internationally, it is anticipated that this sector will continue to flourish. 

Fiscal advantages

Gibraltar has:

• No Capital Gains Tax.
• No Inheritance Tax.
• No Wealth Tax.
• No VAT. 

It also has a special residency regime which caps the income tax liability of High Net Worth Individuals.  This is namely the “Category 2” regime. 

“Category 2” High Net Worth Individual regime

Under the Category 2 regime individuals are subject to a cap on their tax liability, with income tax payable only on the first £60,000 of taxable income which arises in or is remitted to Gibraltar. This gives rise to a maximum annual tax liability of less than £22,000 (2007/08 rates).

As taxable income does not include, for example, capital gains, gifts, or income from savings it is possible to lower the tax liability further. 

However, a minimum annual tax liability of £18,000 (2007/08 rates) is applied, which is pro-rated in the year of arrival. The Gibraltar tax year runs from 1 July to 30 June.

Under the Category 2 regime, there is:

• no requirement to disclose worldwide income;
• the opportunity to include spouse and family income on the individual’s assessment; and
• no minimum physical presence requirement in Gibraltar. 

The latter affords the individual with flexibility to travel (but obviously keeping in mind the residency rules in other jurisdictions if spending significant time there). 

Main Requirements

In order to become a Category 2 resident the following conditions exist:

• The applicant must have a minimum net wealth of £2 million (this does not need to be in liquid assets e.g. it can include the value of a main home).
• The applicant must have exclusive use of approved property in Gibraltar.  The property must be of a certain standard and appropriate to sustain the lifestyle of the individual and family. The property may be either bought or rented.
• There are restrictions applying where the applicant has previously been resident or working in Gibraltar within the preceding 5 years.
• The individual must not undertake any business activities that compete with local entities that derive their income from within Gibraltar.
• Category 2 status is awarded on the decision of the Finance Centre Director.

Example : Edward

Edward is UK resident.  He currently owns all the shares in a UK company and is hopeful of a sale of the company in the near future.  The company is considering declaring a dividend to him of £3m (net).  He also receives £50,000 p.a. gross in UK bank interest, and owns a UK property portfolio (not his Principal Private Residence) directly, currently standing at a gain of approximately £2m.  He receives £100,000 net rental profits a year from the portfolio.  Edward also has accrued UK pension rights of £2m in a UK SIPP.

If Edward became non-UK resident and resident in Gibraltar under the Category 2 regime he could:

• Under the UK’s excluded income rules for investment income, restrict UK tax on his UK dividend income and bank interest to the amount of UK tax, if any, withheld at source.  In respect of the dividend income the notional 10% tax credit fully satisfies the income tax liability.  In respect of bank interest, it is possible to file Form R105 to enable the bank to credit interest without deduction of tax at source, so there is the possibility to reduce the UK tax on this to nil.  Total tax savings on such income would be approximately £770,000 (i.e. 750,000 + 20,000). 
• Sell the UK property portfolio and shares in the UK company free of any Capital Gains Tax.  Savings on the property portfolio alone, approximating £360,000.  The level of savings on disposal of the UK company shares will depend on whether the conditions for Entrepreneurs’ Relief are satisfied.  If so, the savings would equate to the tax on the first £1m of gain at 10% and the standard rate of 18% that would be charged on any balance. UK income tax on any UK rental income stream continues in the hands of non-residents.  Ordinarily such payments to non-residents are to be paid after deduction of UK income tax, however Edward could register as a Non-Resident Landlord in order to apply to receive the rental income gross, with UK tax then being payable on the profits, on the filing of a UK Tax Return (utilising his allowances and lower rate bands). 
• Transfer his accrued UK pension rights to a Qualifying Recognised Overseas Pension Scheme (“QROPS”) without incurring any UK tax charges.  The subsequent drawing of pension benefit (as non-UK source) would then generally not be taxable in the UK, saving 40% UK tax on such income. 

In Gibraltar:

• There would be no Gibraltar tax on the bank interest (this type of income is exempt from Gibraltar tax).
• There would only be Gibraltar tax on the dividend income to the extent it is remitted to Gibraltar.  If so remitted, this taxable income would be capped at £60,000 (i.e. maximum income tax liability of approximately £22,000).  As an aside dividends from quoted companies are exempt from Gibraltar tax. 
• There would be no tax on the sale of the UK property portfolio or the UK company shares. 
• The UK rental income can be remitted to Gibraltar without any additional Gibraltar tax liability aside from the Category 2 tax above (i.e. maximum income tax liability of approximately £22,000).  Any pension income received would also not increase this tax charge. 
• Therefore Edward could remit the bank interest, dividend and the rental income (i.e. total £3.15m), receive pension income, make a capital gain of approximately £2m and only pay Gibraltar tax of approximately £22,000 per annum. 
• In time, Edward may consider acquiring a domicile of choice in Gibraltar and reviewing his Inheritance Tax position. 

In summary, Gibraltar offers a wealth of tax planning opportunities for the High Net Worth Individual.  Undertaking planning prior to any move is sensible in order to optimise the tax position. 

Article Added Friday, 15 August 2008 | 4659 Hits

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