Tax is never far from the headlines in an average year, but it has demanded particular attention in 2009, writes Hakan Hillerstrom. The worldwide recession has reduced the income of all the world's economies as tax receipts from business profits, personal income, wealth tax and VAT have fallen away. Many governments have reacted by aggressively reducing interest rates and making sure that central banks pump money into the system to get the banking system to work again. However, taxpayers will pay dearly for the loans that governments have taken out over many years to come as taxes are increased to balance the books.
In the past few months President Obama has begun to enforce his campaign pledge to crack down on tax evasion, the UK decided to hit top earners with a 50% interest rate and UBS chose to hand over the details of an undisclosed number of its wealthy American clients – who it believes have committed tax fraud – to the US authorities in order to avoid being prosecuted.
Conscientious wealthy families and their family offices have been reassessing their tax arrangements in light of this hiatus of activity to ensure that the new rules, wherever they live or have interests, have been factored in. However, while most commentators have focused on the pure monetary implications, it is important to remember that tax planning is much more than a simple financial calculation; indeed, putting family considerations into the decision-making process can have some surprising results.
There are several choices for families to make when faced with increased taxes:
- Mitigation of tax increases by reducing income and increasing capital gains
- Mitigation of taxes through the creation of a company or insurance vehicle either onshore or offshore
- Mitigation of inheritance tax through use of family partnerships
- Mitigation of taxes by physically moving to another country
For many people, the first thing that comes to mind is to physically move to another country. For tax purposes this may be an easy decision, but there are other more important considerations to take into account on the personal and family side. Consider the following:
Does the strategy achieve the family's desired objectives?
The family wants to reduce taxes but also wants to live in a place that suits it.
What is the risk of failure from a technical perspective?
Make sure that the strategy put forward is well proven and there is very low risk that it can be called into question by the tax authorities from the country to which the family is moving. Always get a second opinion from another professional advisor to verify that it is viable.
What actions will the family be required to take in the country it is moving from?
Many governments insist that no substantial ties are left in the country from which the family is moving. This could be property, income from work, board memberships or shareholdings in private companies. You must therefore make sure that nothing ties thwe family as tax residents to the country from which it is moving.
What restrictions will there be on return visits to the family's home country?
Most countries have restrictions of how many days families can visit their "old" country. Consequently, you must follow the rules to the letter and check whether the date of arrival and departure counts as visiting dates (ie, recent changes in the UK). The authorities have many ways of tracking people down through mobile telephone and credit cards records so one cannot cheat the system.
What length of time will the family be non-resident in its home country?
In certain countries 3-5 years is sufficient before a person can return home again but in others you need to be away as long as 10 years to be really counted as having moved. Again, ensure you get the right advice.
Which countries can I move to?
Check that there are no difficulties with regard to nationality and be aware that some countries require a visa. Some countries also have restrictions for certain types of foreigners to buy property and restrictions on work permits.
Which countries are most suitable?
This question is not only related to personal preferences (see chart below) but families should also consider countries which have double tax agreements with the country being moved to. This is to avoid that tax is not, under any circumstances, paid twice.
In most families, each individual has his/her personal priorities so it is extremely important that each family member has his/her own say in this decision. Let's assume that a family is considering four potential countries to move to. To facilitate the choice the following personal priorities should be considered: tax climate; language; business environment; leisure facilities; international access; health services; education; number of days of physical presence required; crime rate; shops; cost of property; cost of living; expatriate community; climate.
The next step would be for the husband and wife to put their priorities in the order of their personal importance and preferences.
Let's assume a family wants to move from the UK to Switzerland, either Zurich or Geneva. Do family members speak any German or French? If not, it will be harder to integrate into the local community. On the other hand, the family is pleasantly surprised by the good educational options offered and the positive climate change, including the proximity of wonderful skiing facilities during the winter. On top of this, a pleasant bonus of paying no capital gains tax.
In order for a family to assess which location would be most favourable to them, a suggestion would be to create their own personal country scorecard. In this scorecard you would use a weighting system with 5 being the most important and 1 the least important. Every family member should be closely involved and the locations that come out as being the most feasible for your family should be visited before making a final decision to permanently move there.
The more time you spend on the planning and carefully considering all your options, the better the outcome will be and the risk of failure will diminish. Whatever tax level governments try to impose on us will not stop people from moving to other locations and tax alone does not that determine where a given person or a family wants to move to.