We often hear this phrase used on the news with reference to incredibly wealthy individuals. It’s easy to accept it’s meaning in context and not really consider what a tax haven is because we know it’s never going to apply to our lives (unless our numbers come up). But it is important to know what it means because it does have an impact on our country’s overall budget and the fairness of our taxation system.
What is a tax haven?
The UK considers particular countries to be ‘tax havens’ because they have a “low tax regime”, as the Times puts it. This means that if you are registered to pay tax in that country, rather than the UK, you are not liable to pay as much, if any, tax.
For example, Jersey residents only pay 20% income tax on earnings up to £145,000 and then only 1% on anything over that amount on their worldwide earnings. And in Monaco, there is no inheritance tax for wealth left to family members and there is no personal income tax.
Many countries operate a taxation system similar to the UK so as a tax resident there, you’d still be paying out a similar amount. Lots of countries have Double Taxation Treaties with the UK which means that you don’t pay tax on the same income in both countries. But for the small percentage of the wealthiest, the best outcome is that there is no tax to pay at all in their new home country of residence.
Why do people use tax havens?
Not only do they move to countries with little or no tax liability, people move to tax havens in order to avoid the tax that would otherwise be payable in the UK. For example, if you own a business and receive dividends, the rate of tax on this income is around 38%.
So if you are non UK resident for tax, then you do not have to pay this UK dividend tax on money earned from your British companies. If you have tax residency status in one of those tax havens we’ve previously mentioned, then you are not registered for tax in the UK.
Business owners can also avoid paying capital gains tax when they sell their business if they are non UK resident for a minimum of five years. That’s 20% of the sale figure not going to the Treasury.
Why don’t all rich people do this?
Well, they aren’t doing anything illegal and you can see the sums of money that they potentially save. But there are restrictions put on the definition of non UK resident for tax purposes. You can’t just declare yourself this, there are HMRC procedures to follow. The most difficult to manage is the limit to the number of days you can spend in the UK during any one tax year. This ranges between 182 days and only 16. If you are still running a business, or have family and friends here, this is a substantial downside.
You could just get your husband to move
If your spouse or civil partner becomes the sole owner of your British business and they move to a tax haven, then all the tax benefits apply. So you can stay and manage the business in the UK, whilst your husband maintains your home in their new country of residence.
Because they are not in a managerial position in the business, the limitations placed around how many days they can spend in the UK do not apply. You can be paid a salary from the company, stay in the UK and only pay UK income tax on that amount. You will avoid the dividend tax because they will all be paid to your spouse or civil partner living abroad.
Obviously, if your partner has full legal ownership of the business and you later divorce, it will complicate matters. Their status means that they are entitled to all the money from the dividends because they are the only shareholder and the full amount from any sale of the company. Other legal documents would need to be in place to avoid this type of situation, should the worst happen.
What’s the harm in tax havens?
Well, for the individuals using them, there is no harm at all – only benefits. They are not doing anything illegal. But for the UK, they represent a huge loss of tax money that should be coming into the Treasury; in dividend tax, inheritance tax and capital gains tax.
A Times investigation “found that 28 out of 93 British billionaires — 30 per cent — have moved to tax havens or are in the process of relocating. Almost half of the 28 have left in the past decade.”
HMRC does not record any figures to calculate how much this has cost the country in real terms.
While most of us are not in the position to be planning a move to a tax haven with out millions, we are all affected by how much the government has to spend on running our country. So the whole concept of tax havens does have an impact beyond providing a luxurious retirement for the wealthy. Perhaps loophole in our taxation rules could be tightened to make it more difficult for people to avoid paying the tax due on the money they have earned in the UK.