Guernsey: It’s Not Just 20%!

Originally published in the Guernsey Wealth Management Supplement from Taxation Magazine, June 2010

Mark Watson, Tax Director at PricewaterhousCoopers and leader of the tax practice in Guernsey, compares and contrasts personal tax rates in Guernsey, Jersey, and the Isle of Man.

Current and feared future changes to UK tax have seen an increasing number of High Net Wealth (HNW) individuals look to relocate to the Crown Dependencies of Guernsey, Isle of Man and Jersey ('the Islands'), as well as other more tax-favourable territories around the world. At first glance the maximum personal tax rate for individuals of 20% in all three jurisdictions looks attractive; however the 20% rate can be dramatically reduced if tax caps, or in the case of Jersey the high value residency rules, are satisfied. The lack of capital gains taxes and inheritance taxes enhances the overall attractiveness of the Islands.

Tax is of course, not the only factor to be taken into account by HNW individuals looking to leave the UK. Considerations such as schooling, housing and the way of life also have a major role to play before a decision can be made. It is unusual to complete such an analysis and not conclude that at least one of the Islands stacks up as a very attractive proposition. In this article, though, I will provide you with the facts on the more technical key considerations around tax, housing and work permits.

Key Points

• Housing and work permit rules must be considered along with tax.
• Tax caps can make a significant difference to ultimate liability.
• Advance tax planning can considerably improve the position.
• Tax may be the trigger, but is unlikely to determine the ultimate destination.

Housing and Work Permits

A review of the tax regime needs to be complemented by looking at the housing and work permit rules. All of the Islands have implemented legislation to control population growth. The laws impact through housing licences or work permits. A summary of the rules for each Island is provided below.

Guernsey

Guernsey has two housing markets, the Local Market and the Open Market. Local Market housing is available to residents born on the island and to employees of companies where a skill shortage has been identified in the island. A company bringing an employee to Guernsey will obtain a licence for the employee for a specified number of years. These licences are issued by the Department of Housing and require completion of an application process. Open Market housing is available to everyone. On the purchase of an Open Market house, an individual is able to obtain a licence to reside on the Island for as long as they own the house.

Jersey

Jersey has a special regime applying to HNW individuals who wish to move to the island. Th is is called the 'high value residency regime' and an individual's circumstances are measured against the following criteria:

• contribution to tax revenues, with a minimum expected tax contribution of £100,000;
• business/social background of the applicant; and
• the ability of the applicant to purchase or rent a property worth in excess of £1m.

There are also some circumstances under which anyone can purchase a house without needing to undergo the application process.

Isle of Man

The Isle of Man requires newcomers to the island, who come for work purposes, to have a work permit before commencing work, but does not have separate housing markets.

Who is Resident?

For the purposes of this article, the assumption is that an individual will become 'principally resident' in Guernsey, 'resident and ordinarily resident' in Jersey, or 'resident' in the Isle of Man. Residency is determined by set criteria which differ between islands. The residence rules for each island are summarised below:

Guernsey

Guernsey operates a system of day counting in order to determine whether someone is tax resident. There are three categories of residence: resident only, solely resident and principally resident. A person becomes principally resident if they spend over 182 days in Guernsey; OR 91 days in Guernsey in a tax year when over the preceding four years they have spent a cumulative total of 730 days in Guernsey.

Jersey

An individual is resident in Jersey for tax purposes if they:

• have available accommodation in the island and stay there at any point during the tax year:
• are physically present in the Island for at least six months in a tax year; or
• are physically present in Jersey on average three months or more per year over any four year period.

In calculating residence for tax purposes, days of arrival are included but days of departure are ignored. An individual is ordinarily resident in Jersey if they are habitually resident in the Island.

Isle of Man

The Isle of Man treats a person as resident when they have 'a view or intent of establishing residence' from the date of their arrival. However residence will be deemed should a person spend six months in the Isle of Man in one tax year. The Isle of Man will also operate the practice of treating a person as resident if they spend an average of 90 days per year in the Isle of Man over a four year period.

Tax and the Tax Cap

Tax Summary:

The summary of tax rates and the tax base shown in Tax Summary above applies to principally resident individuals in Guernsey; to ordinarily resident individuals in Jersey, andresident individuals in the Isle of Man.However, the effective rate of tax payable by HNWindividuals may be significantly reduced through the taxcap, or in the case of Jersey a sliding scale applicable to someindividuals. This is a significant aspect of the tax system ofthe Islands as they seek to compete with each other for High Net Worth Individuals looking to emigrate offshore.

Guernsey

The tax cap limits the tax payable by a Guernsey resident individual is £100,000 in respect of income from the following sources:

• non-Guernsey businesses;
• non-Guernsey offi ces and employments;
• ownership of non Guernsey land and buildings;
• other non Guernsey source income;
• Guernsey bank deposit interest Income; and
• Guernsey Collective Investment Schemes which have been granted exempt tax status.

Individuals who derive the majority of their income in Guernsey may elect for a tax cap of £200,000 on all income, whether arising in Guernsey or not. The two caps are mutually exclusive – individuals cannot avail themselves of both.

Jersey

Jersey does not operate a tax cap. For individuals who have been granted high value residency status, there are special rates of tax on non-Jersey source income as follows:

• the first £1m is taxed at 20%;
• income between £1m and £1.5m is taxed at 10%; and
• income over £1.5m is taxed at 1%.

In looking at the £1m limit, Jersey income is included. Most individuals in this category are able to undertake pre-residence planning, which could restrict their Jersey tax liability to £100,000.

Isle of Man

The Isle of Man operates a tax cap which limits the tax payable for Isle of Man resident individuals to £115,000 per tax year. The tax cap applies to income from all sources.

Comparison

Worked Example:

The calculation in Worked Example above assumes the following facts for a married individual who is principally resident in Guernsey, or ordinarily resident in Jersey, or resident in the Isle of Man, with the following income:

• domestic employment income of £400,000;
• domestic investment income of £175,000;
• UK investment income of £2,000,000

For the purposes of the example, double tax relief has been ignored.

Clearly, the higher an individual's income, the lower the effective rate of tax they would suffer. The Isle of Man cap applies to all income and results in a significantly lower effective tax rate for high earners. In the case of Jersey, the benefit of the lower rates of tax would only be enjoyed where an individual has over £1,000,000 of income.

The tax cap in Guernsey and the sliding scale in Jersey can provide an opportunity to engage in tax planning, particularly around optimising the balance of income received from domestic and non-domestic sources. In the Isle of Man there is the opportunity for some tax cap planning around the assessment of married couples, especially where there is a significant disparity between the respective incomes of the spouses.

Other Factors

The examples above only consider direct taxes and ignore the costs of other taxes such as social security, Value Added Tax in the Isle of Man, and Goods and Services Tax in Jersey.

Guernsey does not have a Goods and Services tax regime. Clearly if tax was the only consideration then the total tax contribution borne by an individual would need to be taken into consideration. These other taxes will have an important impact on the effective rates of tax indicated above.

Conclusion

In my experience, while tax might have been a key driver in making the initial decision to leave the UK it is also critical to understand how each jurisdiction's regime will affect a client who relocates. As demonstrated in the example above, it is essential to take advice prior to relocating to the Islands, in order to ensure that the tax position is optimised.

Other decisions such as schooling, housing and the way of life in each island form the overriding basis of the decision on where to ultimately settle. These decisions are very important as the tax benefits of relocating will only be effective if residence in the UK is broken.

In this respect, there have been a number of tax cases recently that have sought to test whether residence has actually been moved to another territory. An unhappy relocation, resulting in too many return visits and an insufficiently clear 'break' with the UK, could be fatal to effective tax planning.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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.