New adviser obligations for clients with offshore assets

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HM Revenue & Customs (HMRC) has introduced new rules that require advisers to contact clients with offshore assets. The new rules came into force on 30 September 2016 as HMRC wants to encourage people to come forward voluntarily to disclose taxable income and gains from offshore assets.

HMRC will be finding out new information about the affairs of UK residents with offshore assets. People who make a disclosure voluntarily, will be treated more favourably, than those who HMRC themselves discover to have avoided paying tax.

This is based on our understanding of the International Tax Compliance (Client Notification) Regulations 2016 and associated HMRC guidance as at 1 January 2017.  It’s a summary of the contents of these regulations and the guidance, and isn’t exhaustive. Advisers should read the regulations and the guidance material in full to make sure that they fully understand their obligations, and may also want to seek appropriate advice.

All our traditional offshore bonds and off-platform guaranteed products (with the exception of our Aegon Secure Trustee Investment plan) are affected.

What new rules have been introduced so that HMRC will find out about clients with offshore assets?

The first arrangement that caused widespread exchange of tax information was between Foreign Account Tax Compliance Act. This is an arrangement under which providers give information on their customers with US connections to their own tax authority and their tax authority passes this to the US tax authorities. This signalled the start of a move towards world-wide exchange of tax information, leading ultimately to much wider information exchange under Common Reporting Standard (CRS). Under CRS, 101 jurisdictions will be exchanging information, with some starting in 2017 and the rest following in 2018.

This is about exchange of information – why do I have to consider these new obligations?

As HMRC are encouraging people to come forward voluntarily, they’ve taken steps to make sure that people with offshore assets know about CRS and understand their obligations. The new obligations on UK advisers are part of this. HMRC generally don’t have the power to make offshore providers contact investors, and perhaps because of this they’re requiring certain UK advisers to contact relevant clients.

To ensure this happens, they published the International Tax Compliance (Client Notification) Regulations 2016(Opens new window), and these came into force on 30 September 2016.

How can I tell if I'm one of the advisers affected by these regulations?

You’ll be covered by the regulations if you’re a ‘specified relevant person’. This definition includes a person who provided offshore advice or services in the course of their business. There’s also a definition of ‘offshore advice or services’. This includes advice in relation to financial accounts in participating jurisdictions.

Our view is that advisers advising on offshore bonds and plans from cross border insurers are included within this definition. However if you're in any doubt about your own position, you should contact your compliance manager.

You can find out more information on the HMRC website under the Specified relevant persons(Opens new window) section.

I’m within the regulations – what do I have to do?

You’ll have to identify your specified clients and then send them a communication.

Who are my specified clients?

There are two ways of identifying clients – the specific approach and the general approach.

Under the specific approach, you identify individuals that you’ve advised about offshore financial accounts. Under the general approach, you identify all individuals you’ve advised whether about offshore financial accounts or not.

The general approach may result in a bigger mailing, but could be helpful where it’s easier to do a general mailshot than to target this only to clients with offshore assets. In either case, you may exclude clients where:

  • you reasonably believe that they weren’t UK tax resident in 2015-16 and won’t become tax resident in 2016-17; or
  • on 30 September 2016 you had no reasonable expectation that you’d provide them with any further advice, or
  • you’re preparing a tax return for this person reflecting the offshore advice.

Once I’ve identified my clients, what do I send them?

Once you’ve identified the clients you want to communicate with, the requirement is to send them what’s known as a client exchange of tax information notification. You have to send this as a paper mailing unless you wholly or mainly communicated by email with the client when you were advising them and reasonably believe that an email will come to their attention.

What you have to send is set out in the regulations and is in two parts.

  1. You have to send a one page document that’s been produced by HMRC. You can find this here.
  2. You also have to include a covering letter in your usual branding with the client’s name and including the statement:

“From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information  about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency. This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid. If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.”

When HMRC refer to the factsheet here, they mean the one pager that we’ve referred to in part one.

When do I have to send the client exchange of tax information notification?

The requirement is to send this by 31 August 2017.

What if I don’t comply?

The regulations include penalties for non-compliance. These are £3,000 for a failure to identify clients or send the notification and £300 for any other failure. Have a look here for further information(Opens new window).

Surely Aegon Ireland will be sending my clients these notifications?

We’re not covered by these regulations. This is because we’re an Irish company. In any case, even if we did also have to send these notifications to our policyholders, that wouldn’t remove the requirement for advisers to send them as well.

So how is Aegon Ireland affected by these exchange of information agreements?

Our obligation under the exchange of information agreements is to provide information to our own tax authority. We started providing information to Irish Revenue (IR) about policyholders and other people connected to our policies with US connections in 2015 and will start providing information to IR under CRS in 2017. Once we provide information to IR, they’ll be exchanging it with other jurisdictions, including the UK.

How does Aegon Ireland know where policyholders are tax resident?

We’ve an obligation to capture information about both new and existing policies. You may be aware that we’ve been gathering information about the tax status of policyholders and people connected with our policies (‘Controlling Persons’) since the start of 2016.

How does this fit in with Aegon Ireland’s tax reporting obligations to HMRC?

We already have an obligation to send certain information to HMRC and this obligation will continue once CRS is fully in force. There are important differences between the information we provide and this means that HMRC will discover much more information under CRS. The main differences are as follows:

  • Under our direct UK tax reporting obligations we only report to HMRC on policyholders. Under CRS we’ll be reporting on controlling persons as well. This makes a big difference for policies held by trusts in particular, where we’ll report in respect of the trustees as policyholders, but also on the settlor(s) and on beneficiaries.
  • Under our direct UK tax reporting obligations we don’t report on company-held policies. Under CRS we’ll report not only on the company but also on its controlling persons.
  • Under our direct UK reporting obligations, where we don’t know the tax residence of our policyholders we only provide information to HMRC about policies where one or more of the policyholders has a UK address. Under CRS we’ve an obligation to find out where policyholders and controlling persons are tax resident and HMRC will find out via IR about all UK resident individuals irrespective of where they live.
  • Under our direct UK reporting obligations, we only send HMRC information about policies in two circumstances.
    • Where a chargeable event gain of more than half of the UK’s basic rate band has arisen.
    • When a policyholder with a guaranteed lifetime income policy starts to take income.

We don't notify HMRC about smaller changes, and in addition we don’t tell them about ongoing taxable guaranteed income from our 5 for Life and Aegon Secure Lifetime Income plans.

Under CRS we’ll be providing information to IR about year-end policy balances as well as any amounts taken from policies.

What reassurance can I give my clients?

Your clients could have a tax liability when certain things happen on their Aegon Ireland product. Where the product is held by an individual or a trust the relevant events are:

  • Bond products
    • Some or all of the policies making up their bond are cashed in.
    • The last life assured dies.
    • Certain assignments.
    • Withdrawals from all policies exceed the cumulative 5% tax deferred withdrawal allowance.
  • Guaranteed lifetime income products
    • Some or all of the policies making up their plan are cashed in.
    • The client dies.
    • Yearly income exceeds the available exempt capital content.

When we receive notification of any of these events, your client can be reassured that we'll issue then with either a charge event certificate or with  a yearly tax certificate, as appropriate. This means that as long as they act promptly on information that we send them to make sure that they or any other taxable person in respect of the plan has disclosed taxable amounts to HMRC, their UK tax affairs should be up-to-date.