What is the LDF?
The Liechtenstein Disclosure Facility ("LDF") is a new disclosure facility being offered by the UK revenue authorities, HM Revenue & Customs ("HMRC"), which allows those with undeclared funds and a connection with Liechtenstein (either currently or a new connection created before 2015) to regularise any unpaid taxes on those funds in the UK on very beneficial terms (although some of the benefits only apply to liabilities arising before 6 April 2009).
The benefits
The key benefits are:
- The period of enquiry starts in April 1999 (normally one has go back 20 years, and there is no limitation period for inheritance tax);
- The penalty is generally limited to 10% of the tax due unless certain circumstances apply (otherwise penalties on unpaid tax can now be as high as 200% of the tax due), and interest is payable on the unpaid tax at specified rates which change intermittently;
- There will be no criminal prosecution (which is otherwise a risk, although prosecutions are rare in practice) and no public "naming and shaming";
- In order to calculate the outstanding tax liability, it is possible to use a composite rate of tax of 40% which is applied to all income and gains etc. arising between April 1999 and April 2009, rather than having to work out the actual tax due on a year by year basis during this period- this is useful if several different taxes are in point;
- It is possible to discuss and agree in advance with HMRC on a no-names basis the terms of any LDF disclosure, including an individual's residence and/or domicile status, agreed estimates where records are unavailable, etc;
- There is no requirement to repatriate the assets, and they can then be used freely in the UK by current and future generations (subject to complying with future tax obligations).
The disadvantages
The downsides include:
- A declaration of worldwide assets at April 2009 is in theory required, although it should be possible to limit this with HMRC's prior agreement;
- HMRC may use the information to check future returns by an individual;
- A full and complete disclosure is required of all undisclosed assets – the taxpayer may not pick and choose what is declared;
- Tax planning will be required to minimise future tax exposure;
- There is a cost implication to creating a connection with Liechtenstein if one does not already exist, although this should not be significant.
Summary
For most people with an undisclosed tax liability, in our view the LDF offers an excellent (and unprecedented) opportunity to regularise tax affairs on beneficial terms, before HMRC uses its widened information-gathering powers, both domestically and internationally, to track down tax defaulters.
An early disclosure should ensure that as many as possible of the beneficial terms of the LDF apply. For example, the LDF cannot be used after certain investigations have been started by HMRC, so an early registration is usually advisable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
