London eye

Significant changes in UK taxation

  • Frank Lampert, Partner |

Switzerland as well as the UK are known as preferred residence locations for high net worth individuals from countries all over the world. Wealthy individuals choose Switzerland and the UK because of the high standards of living, an excellent infrastructure, but also due to attractive tax regimes.

While the UK used to offer its resident but non-domiciled persons (UK res-non-doms) taxation on the income and capital gains remitted to UK for an unlimited time, this regime is going through changes over the next 12 months – in particular, for long-term residents and UK individuals born in the UK. This makes Switzerland, especially the Swiss lump sum taxation, an attractive alternative for certain “UK res-non-doms”.

Changes in the remittance-based taxation for UK resident non-doms

According to the UK Chancellor’s announcement in the Summer Budget 2015 and updated 16 March 2016 in the Budget 2016, significant changes to UK Non-doms will take effect from 6April 2017:

  • UK res-non-doms who have been tax resident in the UK in 15 out of the last 20 tax years will be treated as if they are UK domiciled for all tax purposes – meaning they will be subject to UK tax on their worldwide income and gains on an arising basis and to UK inheritance tax on their worldwide assets;
  • an individual born in UK with a UK domicile of origin who has acquired a domicile in another country but who returns to the UK to take up residence will be treated as UK domiciled for all tax purposes as soon as he becomes UK tax resident;
  • UK residential property held by UK res-non-doms, including UK residential property indirectly held through an offshore structure, will be looked through and therefore will be subject to UK inheritance tax.

Based on these changes for some UK res-non-doms who are taxed on the remittance basis and who risk to lose this “benefit”, the alternative of moving to Switzerland under the lump-sum regime in Switzerland might be an attractive alternative solution.

Taxation of Swiss lump sum taxed individuals

Switzerland offers on a federal level and also for most cantons (with the exception of Zurich, Schaffhausen, Basel, Appenzell and Ausserrhoden) with the lump sum taxation, often referred to as forfeit taxation, a proven and stable tax regime for high net worth individuals, which is an interesting option for resident UK-res-non-doms thinking about relocation. Following the national referendum in 2014 where the Swiss population opted by a vast majority to retain this regime, the Swiss lump sum taxation now stands on a solid and sustainable basis.

The tax regime of lump sum taxation is available to resident non-Swiss nationals who do not carry out a gainful activity in Switzerland. Instead of global income and wealth, it uses the taxpayer’s lifestyle expenses (generally determined on the basis of the net paid/ rental value of property owned in Switzerland) as a surrogate tax base. Therefore, it is not necessary to report effective global earnings and assets. However, the lump sum taxation requires a minimal taxable income on Federal level of CHF 400’000 and in most cantons a minimal taxable income between CHF 400’000 – CHF 600’000 and wealth between CHF 2 – CHF 10 million. Once the tax base has been determined, it is then subject to ordinary tax rates.

The resulting yearly payable tax depends, beside the tax base agreed with the authorities, on an advanced ruling on the residency chosen in Switzerland, as tax rates vary considerably between the various Swiss cantons. In general the overall yearly tax payable in the cantons offering a lump-sum tax regime is between CHF 120’000 to CHF 160’000 (including communal, cantonal and federal tax).

Citizens from non EU/EFTA countries, such as Russia or Latin America and Asia, are subject to a higher taxable income base due to immigration regulations in Switzerland. With a residency in Switzerland, individuals then also get access to the European Schengen Visa System.

Finally, while lump-sum taxation is one aspect of the Swiss tax systems, Swiss taxpayers benefit compared to other jurisdictions from further advantages, such as a lack of capital gains tax on private assets and, in almost all cantons, no gift and inheritance tax amongst spouses and in relation to descendants.