Here are some of the proposed changes in the UK that are likely to have set domiciles and non-domiciles thinking: the new treatment of capital gains in trust structures of resident non-domiciled beneficiaries; reporting of such structures to HMRC; days of arrival and departure to be counted for classification of residence; capital gains tax to be charged at a flat rate of 18% without indexation or taper relief; and a charge of £30,000 a year on non-domiciles who stay beyond seven UK tax years and wish to continue to benefit from the remnants of the remittance basis.
There are a number of relocation options depending on the family’s profile. In no particular order, Spain, Monaco, Dubai and Singapore come to mind as possible destinations apart from Switzerland. However, Switzerland has a number of attractions for families that want to remain in Europe and remain well-connected to key financial hubs.
Federal power
Switzerland is a confederation made up of 26 cantons, each having considerable power and autonomy in tax matters. Each canton collects the federal taxes as well as its own cantonal and municipal taxes. Wealth, gift and inheritance taxes are cantonal and municipal, not federal taxes, and vary in application and rates between the cantons. For example, Schwyz is the only canton with no gift or inheritance taxes. Taxation in Switzerland is based on residence, i.e. residents are generally taxable on their worldwide income and wealth.
When considering Switzerland as a relocation destination we need to look at a number of issues. The first point to fathom is whether the client (and spouse) will be working in Switzerland or not as this affects their eligibility for a special tax status in Switzerland. Another key point these days is the client’s nationality, as preference is given to European Union (EU) nationals when it comes to issuing residence permits.
Lump-sum taxation
The special tax status in Switzerland is often referred to as ‘lump-sum taxation’ (or forfait or Pauschale). Lump-sum taxation is a taxation that is imposed by looking at the expenses of an individual and his or her family. In practice, the minimal tax base is often calculated by looking at the rental value of the property in which the family is going to live (purchased or rented). There may then be adjustments upwards due to the lifestyle of the family or, for example, to deflect allegations of French residence by the French tax authorities. The lump-sum taxpayer then pays tax on this deemed income no matter what his or her worldwide income. There are variations, in particular between the French and German-speaking cantons. Due to the shortage of residence permits, the deemed tax basis for non-EU nationals is likely to be higher than for EU nationals. Such lump-sum taxation agreements, which are concluded with the tax authorities of the relevant canton prior to arrival, do not cover gift and inheritance taxes.
However, in order to benefit from a lump-sum taxation agreement, the client must not carry on a lucrative activity in Switzerland. The lump-sum taxation was originally designed for high net worth retirees. While a certain amount of work is tolerated outside of Switzerland, the individual nevertheless needs to have moved his or her residence and family to Switzerland which requires some presence in the country.
Ordinary taxation
Alternatively, being an ordinary taxpayer in Switzerland may also be of interest to some who are currently resident but not domiciled in the UK if they wish to continue working on a day-to-day basis in Switzerland. There is currently no taxation on private capital gains made on investments (excluding real estate) in Switzerland although there is worldwide taxation on income and wealth. If an individual is flexible on where he or she lives, then certain cantons have low wealth and marginal income tax rates.
Trusts
The cantonal tax authorities recently issued a joint circular on the taxation of trusts with a view to harmonising the approach to the taxation of trusts by the cantons. This has had considerable success in harmonising the approach of cantons on a number of points, although on certain issues some of the cantons are not following the guidance of the circular, which does not have the force of legislation. It is still important to obtain individual tax rulings from the relevant tax authorities to have certainty for the potential taxation of the settlor and beneficiaries of a trust who are resident (or about to become a resident) in Switzerland.
Revocable discretionary trusts are treated as transparent for tax purposes so both lump-sum and ordinary taxpayers who become resident in Switzerland will need to be prepared for inheritance or estate taxes payable at their death depending on their relationship with the beneficiaries of the trust (including longstop or default beneficiaries). The analysis for irrevocable discretionary trusts will be more complex and the treatment will vary between the cantons.
Also, the income/wealth taxation of settlors/beneficiaries of irrevocable trusts settled prior to arrival in Switzerland needs to be carefully considered. If a UK resident non-domiciled individual has settled an irrevocable discretionary trust prior to arrival in Switzerland and he or she is also a beneficiary of that trust, the trust will be treated as transparent, i.e. as if it were a revocable trust. However, there are still a good number of planning possibilities available: they are just not so straightforward as in the past.
Location, location
Lifestyle is all important when choosing a place of residence and no more so than in Switzerland. While it may be possible to have a great tax deal in a particular canton, this may not fit in with the lifestyle of the family. There are three main languages spoken in Switzerland: German (Swiss version), French and Italian with English being spoken widely in the main business centres. Italian is spoken in the canton of Ticino which is close to Milan Malpensa airport in Italy. French is spoken in west and southwest Switzerland, the region being served by Geneva airport.
For clients considering a move to Switzerland, it is strongly recommended that they spend more than a couple of days in an area prior to making a decision on residence. It would also be a good idea to rent property in the first instance as vacationing in a town or village is not the same as living there.
Stephanie Jarrett is a partner at Baker & McKenzie in Geneva.