Angela South, managing director of Magna Wealth Management which trades overseas as Expat Pensions, said the case involving a couple named Rumbelow should serve as a warning to those who “think” they live abroad and hence have no UK tax to pay.
“In essence, a Manchester tribunal ruled that a Cheshire couple who moved to Portugal more than ten years ago are still classified as UK residents.”
The ruling has left property developer Stephen Rumbelow and his wife Pauline with a £600,000 tax bill. The couple first moved to Belgium in April 2001, living in an unfurnished flat, before moving to live in a property in Portugal.
Ms South said:
“The Rumbelows problems started when HMRC refused to accept that the couple were resident abroad in the tax years 2001-2005 and hit them with retrospective tax demands. The long running dispute pre-dates the new UK residency test which HMRC brought in from April this year and HMRC zeroed in on whether the UK farmhouse they owned remained a family home.”
The couple had argued that they only returned since 2001 as visitors to see family and friends, and had never exceeded the 90 days threshold which was at that time applied by HMRC for overseas residence. But Judge Cannan said that despite their protestations that they had made their permanent home abroad, Yew Tree Farm, their property in Northwich, Cheshire, had “remained, essentially, a family home”.
Angela South said:
“The tribunal accepted that there had been some ‘loosening’ of the couple’s social and family bonds with Northwich, but it was not ‘substantial’ enough to make them non-UK residents.”
The order to pay £600,000 was based on disputed income tax and capital gains tax from 2001-2005 for both Mr and Mrs Rumbelow.
Ms South said:
“Many in the expat field will be aware of the Gaines-Cooper case and clearly HMRC had followed this precedent when pursuing Mr and Mrs Rumbelow.”
Robert Gaines-Cooper, a wealthy entrepreneur who moved to the Seychelles in 1976, eventually, after a number of appeals, lost his case in 2011 when the Supreme Court ruled that he was still technically a UK resident.
Ms South added:
“The Gaines-Cooper case serves to highlight the challenges that expatriate Britons can face when attempting to sever their tax obligations to the UK.”
Earlier this year the Government published its first comprehensive legal definition of residency.
“It is absolutely vital that if someone is living abroad, contemplating moving abroad, or in doubt as to where they should pay their taxes, and whether this discharges their responsibility totally – then they should take professional advice from advisers with knowledge and experience in this field. It is not an area for the enthusiastic amateur, and ‘golf club terrace’ advice from a chum on the Costas is unlikely to afford you any protection if the taxman comes knocking. More and more tax authorities across more and more jurisdictions are now cooperating and sharing information on who pays their taxes, how much and where. There are very few hiding places now that are not under the HMRC spotlight, so expats should be warned,”
said Ms South.
Angela South, managing director of Magna Wealth Management Ltd, said that those with private pensions should make sure they keep their paperwork up to date to avoid confusion over who should benefit when they die.
“Many people think if they have made a Will and kept it up to date, then this is sufficient, but it is equally important to make it clear who should benefit from their pension funds when they die.”
Her remarks follow a report from the Association of Member Nominated Trustees (AMNT) which said there had been a recent rise in disputes over payments.
“The problem usually occurs where someone has belonged to a company where benefits are linked to their salaries.” she said.
In this instance, the individual paying in should be asked to fill in an “expression of wish” form. This indicates who should receive the pension benefits if they were to die.
Ms South said:
“Of course, many people fill in the ‘expression of wish’ form when they join a scheme, and it never occurs to them to update it in later years. As we all know, family circumstances may change over years. It is important that you keep your ‘expression of wish’ form updated and also have a current Will to reduce the likelihood that decisions will be challenged.”
It is the pension scheme trustees who decide who should receive the benefits, but where the saver’s intentions were not clear, disputes can arise over who should be recognised as the beneficiaries.
A pension member had signed the form in January 2000 stating he wanted death benefits paid to his two adult daughters. However, in May 2001 he married his second wife.
“He died in April 2006 and had neither updated his preferences nor left a Will. The trustees followed the paperwork that existed and decided to pay the death benefit to his daughters, in accordance with the last and only existing ‘expression of wish’ form available to them.” said Ms South.
His second wife challenged the decision and took her case to the Pensions Ombudsman which agreed with her. It found that the trustees did not do enough to find out how financially dependent the second wife was on her husband’s pension, nor whether his daughters were financially dependent on him.
Ms South said:
“In this instance, the Pension Ombudsman ordered the pension scheme trustees to review their decision.”
Barry Parr, co-chairman of the AMNT, said complex family arrangements made it increasingly difficult for trustees to make decisions, for example where pension savers remarry and fail to update their wishes – and there are children involved in one or both of their relationships.
Trustees must take members’ wishes into account, but they do not have to follow them if they decide another solution is more appropriate, or in cases where the scheme rules do not permit those wishes to be carried out.
Ms South warned:
“If your situation is not straightforward, and you want to exclude someone from receiving death benefits, you should give very explicit reasons why you wish to do so. This should be backed up by your Will and you should take appropriate legal advice to ensure that your wishes are ultimately carried out as you intended.”
The new rules came into effect on January 1, 2013.
Non-Spanish residents with offshore holdings must provide details of their non-Spanish assets between January 1, and March 31, 2013. The new rules were only published at the end of October so many advisers and their clients have had little time to prepare.
Quoting from International Adviser’s article on January 2nd, (see http://www.international-adviser.com/news/tax—regulation/expats-in-spain-warned-to-declare-offshore)
Under the new rules, failure to declare any amount worth more than €50,000 in any single asset class, or to report on any offshore entities which name the individual in question as a beneficiary, would result in a combination of a tax and fine that could not only empty out the offshore account completely, but could leave the individual owing the Spanish tax authority - La Hacienda – even more.
For example, an expat living in Spain who was discovered to have €300,000 in an undeclared offshore account would see this nest egg taxed at the top rate of 52%. But the fine for having failed to declare this would be 150% of the 52%, meaning that he would not only lose all of his savings, but he would owe the tax authority an additional €90,000, according to Vince De Stefano, managing director of Totus, which specialises in looking after expats in Spain. In addition to the name and address of the financial institution holding their accounts, Spanish taxpayers with offshore accounts will be asked for all their relevant account numbers; the dates that their accounts were opened, closed or changed in any way; their account balances as of 31 Dec; and the average account balance in all the relevant accounts in the final quarter of the year.
Individuals are considered resident in Spain for tax purposes if they spend more than 183 days in Spain in one calendar year (or live on a boat within 12 nautical miles of Spanish land during that time); if Spain is “the centre of [their] economic activities”; and/or if their spouse and/or their dependant minor children live there, regardless of how many days the individual in question actually spends in the country. The new rules come into force just a month after a tax amnesty ended. Under that scheme, Spanish taxpayers with undeclared taxable assets were given the opportunity to declare them in return for having to pay no more than a flat 10% levy.
Expat Pensions’ Managing Director Angela South said:
“The final details are yet to be published and we expect to see them in next few weeks. These assets must be declared in their next tax return, or face punitive levels of fines. Our core advice stands – you should consult your tax consultant and financial adviser to make sure you do not fall foul of these new rules.”