March 18, 2010

U.K. Ruling Could Reverberate Among Wealthy Tax Exiles

Filed under: Uncategorized — ktetaichinh @ 6:31 pm

LONDON—A U.K. court ruling against a wealthy tax exile creates uncertainty for high-net worth individuals seeking to reduce taxes by living overseas and underscores broader efforts by authorities here and in other countries to clamp down on tax breaks for the rich.

The U.K. Court of Appeal on Tuesday rejected a case by British-born millionaire Robert Gaines-Cooper, who claimed non-U.K. resident tax status. Mr. Gaines-Cooper, who owns an estate in the Seychelles and is a British citizen, argued that because he had spent less than 91 days a year on average in the U.K., as per government guidelines, he met the criteria for obtaining nonresident tax breaks.

The U.K. isn’t alone in trying to shut loopholes used by the wealthy, whether at home or abroad. U.S. President Barack Obama has called for tax increases on families with income above $250,000. Meanwhile, Berlin is pursuing wealthy Germans who hold Swiss bank accounts that shield hundreds of billions of euros, by some estimates.

The Court of Appeal said the government was justified in denying Mr. Gaines-Cooper the tax breaks because he retained significant personal ties to the U.K. According to legal filings and Mr. Gaines-Cooper’s Web site, the 72-year- old entrepreneur kept a residence in Henley-on-Thames, Oxfordshire, and returned frequently to the U.K. for business and social functions. His son was also born in the U.K. and attended an English boarding school.

A nonresident must “demonstrate a distinct break from former social and family ties within the U.K.,” the judges said in their ruling.

Peter Vaines, a London-based lawyer for Mr. Gaines-Cooper at Squire, Sanders & Dempsey said his client was disappointed with the ruling and is seeking an appeal. Mr. Gaines-Cooper “feels he’s been unfairly treated,” Mr. Vaines said.

The test for residency in the U.K.—which effectively means one can’t spend more than three months in the U.K. without forfeiting nonresident tax breaks—is tougher than some other jurisdictions. The threshold in the U.S., for instance, is about four months on average, while in some other European countries it is about six months.

“It’s had the effect, together with revised guidance, of moving the goal posts and making it much more difficult for someone who is currently a U.K. resident to become a non-U.K. resident for tax purposes,” said Andrew Tailby-Faulkes, a senior private-client partner at Ernst & Young LLP in the U.K.

Those wanting to claim nonresidence may well have to sell properties here and leave the U.K. social scene, added Mr. Tailby-Faulkes. People “will really have to think carefully about whether they can endure the disconnect with the U.K.,” he said.

Mr. Gaines-Cooper’s Web site said he had distributed jukeboxes in the U.K. before forming various businesses abroad, including a medical-equipment company in the Seychelles. He says that after he left the U.K. about 30 years ago, he bought an estate in the Seychelles, where he met his current wife.

The case also illustrates a broader shift by the government to toughen its tax stance toward wealthy individuals. In April, the government will increase the income-tax rate to 50% from the current 40% for individuals who earn more than £150,000 ($235,740) annually. That comes on top of stricter rules on tax breaks for foreigners who reside in the U.K. but claim their tax domicile elsewhere. And, last year, the government set up a new unit to scrutinize the tax affairs of the country’s top 5,000 earners—which broadly speaking captures those with a net worth of about £30 million or more.

Robert Mirsky, a managing director at Laven Partners Ltd., a London-based hedge-fund consultancy, says he has clients who are planning to or considering moving out of the U.K., because of the increase in income-tax rates, among other reasons. However, some clients are concerned about whether they will qualify for nonresident status if they retain ties to the U.K. such as children finishing school or retaining property here. People who are planning to leave are left in “limbo,” said Mr. Mirsky.


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