The UK-Swiss agreement to impose withholding taxes on people wishing to retain accounts in Switzerland highlights the rising cost of bank privacy. Some people may prefer to use the Liechtenstein Disclosure Facility, lawyers say.

The agreement between Switzerland and the UK to slap withholding taxes on people who wish to retain private offshore accounts in the Alpine state demonstrates the rising price of Switzerland’s legendary bank secrecy, tax experts say. The UK's existing pact with Liechtenstein over disclosing money may also be more attractive, they argue.

Estimates suggest that the UK will raise up to £5 billion (around $8.1 billion) from the Swiss deal.

As explained by Mark Summers, a partner at Speechly Bircham in Zurich, any UK resident who does not want to disclose an account to HM Revenue & Customs, the UK tax authority, will suffer “a very high withholding rate on income and gains, 48 per cent and 27 per cent respectively, going forward”.

The cost of retaining a Swiss bank account may mean people may prefer to use the existing Liechtenstein Disclosure Facility with the UK instead, Summers said. "In our experience, most disclosures made under the LDF result in many only losing 5 per cent or less of undisclosed funds and most losing less than 10 per cent, so going forward, many will favour this route over the Swiss withholding payment in order to clean up their tax affairs where they wish to be disclosed.”

The UK-Swiss agreement, although it has to be ratified by Swiss lawmakers, follows from a similar deal inked between Germany and Switzerland a few weeks ago. And in 2009, Switzerland, after much legal wrangling, agreed to let UBS, the country’s biggest bank, transfer some client account data to the US authorities to settle a civil and criminal case against that bank.

UK residents who have taken advantage of Switzerland’s bank secrecy laws – dating back in their modern form to 1934 – have got a reasonable result, tax and legal figures say. People, who, for whatever reasons, decide not to disclose their accounts by a deadline of 31 May 2013 and meet past tax liabilities will have to take a withholding tax hit of at least 19 per cent to a maximum of 34 per cent on the amount in the account. Most analysis says the bite will be around 20 to 25 per cent.

“This is a landmark deal. Switzerland is seen as the holy grail of tax havens. If wealthy individuals are not safe in Switzerland they cannot really consider themselves safe anywhere. The days of relatively risk-free tax evasion are over. For those individuals that have undeclared assets it really is time for them to come in from the cold,” said Phil Berwick, director at McGrigors, the commercial law firm and tax investigation specialists.

“The million dollar question for the Revenue is whether taxpayers with assets in Switzerland will now come clean on undeclared assets in other offshore accounts. Given that taxpayers with Swiss accounts will remain anonymous, there’s a risk that they will adopt a ‘business as usual’ approach to their assets in other jurisdictions,” he said.

“There has been speculation that tax evaders will now move their money to Singapore – but it can’t be long before The Treasury, HMRC and other international tax authorities turn their attention to those last few bastions of banking secrecy,” added Berwick.

Non-doms

As ever, there are complexities. Summers argued that one group that may have less reason to worry is UK resident non-domiciliaries, who are to be exempted from the withholding tax or the obligation to disclose. The UK government has recently clarified its definition of domicile and residence, moves seen as encouraging more wealthy people to live in the UK.

That view is shared by Judith Ingham, head of the Zurich office of Withers, the international law firm. “The agreement is said not to apply to non-domiciled individuals which is going to limit its usefulness," she said.

Later, her colleagues pointed out that the Swiss-UK tax pact works in tandem with the Liechtenstein agreement with the UK, which may encourage some people to use the LDF instead. "Many UK taxpayers will - if they are domiciled in the UK - be eligible to make use of either facility. In our experience, many taxpayers who use the LDF have a total liability of less than 20 per cent - 25 per cent of the assets held, so in pure economic terms the LDF may be a more attractive option than anonymous regularisation under the agreement," Withers said in a briefing note.

"In addition, whilst the LDF allows for regularisation of tax payable in respect of all assets and structures, regularisation under the Agreement will be limited to Swiss bank accounts. That said, anonymous regularisation will potentially be attractive to those who place great value on their privacy or who fear implicating others by making an LDF disclosure."

High rates

The UK government said in its statement that withholding taxes will be set “very close” to the highest rates applicable in the UK. At present, the top rate of income tax is 50 per cent on annual earnings of £150,000 (around $245,596) or more, although UK finance minister George Osborne has hinted he wants to scrap the rate, if it is shown to be hitting, rather than increasing, government revenues.

Putting money into Swiss banks will, therefore, come at a stiff price. And as Summers said, the agreement leaves certain details unanswered, at least for the moment. What happens to the withholding tax rate to be set on capital gains on non-reporting mutual funds, hedge funds and structured products?

“These are normally charged at the highest marginal rate of income tax in the UK, i.e. often 50 per cent as opposed to 27 per cent. It remains to be seen whether there will still be evasion on these investments,” said Summers.

“HMRC will have the right to make a few hundred information requests per year of the Swiss regarding specific UK taxpayers - but without specifying particular banks. Fishing expeditions for information are certainly off limits. In return, Swiss private banks will obtain greater UK market access to sell financial services and products,” Summers added.

His verdict appears to be right on the money. Reports of the death of Swiss bank secrecy may have been greatly exaggerated, to borrow from Mark Twain, but stashing your wealth in the Alps just got a lot more expensive.