Britons, offshore and lightly taxed, but that may change

Guernsey — The panoramic view of the English Channel and Guernsey’s craggy western shore from the financier Guy Hands’ new $10 million home is splendid. No less so is the vista from his soon-to-be-completed rooftop office on the eastern side of this small English-speaking island just off the coast of France’s Normandy region.

 But Hands, London’s most renowned private equity financier, has not abandoned the land of his birth just for the seaside splendor.

 What has mainly drawn him to Guernsey, a British Crown dependency that is not part of the United Kingdom, is its welcoming tax regime — 20 percent on income and, crucially for those in the business of buying and selling assets, zero on capital gains.

 The question is, will it last?

 With his appetite for big deals and the limelight that surrounds them, Hands, 49, came to symbolize the boom years in the city of London — much as Stephen A. Schwarzman, the chairman of the Blackstone Group, epitomized Wall Street’s own era of excess.

 He is by no means the first rich Briton to take advantage of a loophole that allows individuals to become nonresidents for tax purposes but keep their passports as long as they do not spend more than 90 days a year on British soil.

 But the time-worn trick of moving one’s main residence to the Channel Islands, Monaco or the Cayman Islands, to name just a few, while maintaining business, social and cultural ties in Britain is not as simple as it used to be. That is because British authorities have started to crack down on the practice.

 The increased scrutiny comes at a time of heightened sensitivity to tax avoidance worldwide. While moving to a tax haven is still rare among the rich, it represents the tip of the iceberg of the far more common practice of moving substantial sums of money abroad, often without reporting it to authorities.

 The numbers are vast and hard to pin down, but according to the Organization for Economic Cooperation and Development, wealthy individuals from around the world hold about $6 trillion offshore, resulting in billions of dollars in lost tax revenue every year.

 The Swiss bank UBS’s practice of designing complex schemes to insulate the offshore earnings of its American clients has been the subject of an investigation by United States authorities. And the prospect of higher tax rates in the United States has raised further questions about how wealthy Americans will respond to being asked to pay more to the government.

 To the surprise of many, a British court ruled last autumn that Robert Gaines-Cooper, a retired businessman who has lived in the Seychelles Islands in the Indian Ocean since 1975, was still a resident of Britain and owed taxes on his income for much of the time he was living abroad.

 Even though Gaines-Cooper’s lawyers argued that he had spent fewer than 90 days a year in Britain, the court cited instead his regular visits to the races at Royal Ascot, the fleet of Rolls Royces he kept in England and that his son and wife lived in the country.

 That decision, while still subject to a final appeal, sent a collective shiver through the tax-exile community.

 “Mr. Hands will certainly have some questions to answer,” said Peter Vaines, a tax lawyer who represents Gaines-Cooper. “The tax man will say, ‘We don’t think you have really left.’ I am sure of it. His advisers will have a lot of work to do.”

 Hands, who has an estimated net worth of 200 million pounds ($336 million), declined to comment. But his lawyers hope to make the case that the funds of his company, Terra Firma Capital Partners, are administered in Guernsey and all the main investment decisions are made here, and that Hands has also publicly vowed not to set foot again in Britain for the immediate future.

 If so, that should establish beyond a doubt that he is a resident of Guernsey, which is dependent on Britain for defense although it has its own powers to tax and spend.

 Others are not so sure. Tax experts point out that his wife, who owns their stately home in the Kent countryside southeast of London, runs a hotel business that is based in Britain. Three of his four children still attend British schools, and the majority of Terra Firma’s employees, about 60, are based in its London office.

 “My opinion is that he is free-riding,” said Richard Murphy, the founder of the Tax Justice Network, an industry watchdog, as well as an adviser to the British government on tax evasion techniques. “Guy Hands wants to make money out of the U.K. economy and the structures and guarantees we provide, but he does not want to pay for it.”

 The recent increase in Britain’s top income tax rate to 50 percent has prompted a storm of criticism in financial circles, along with some threats to decamp.

 “Any further tax increases would make me get out, too,” said Jon Moulton, a private equity executive who has a house in Guernsey but has yet to change his residence status. “I lived here in the ’70s, when taxes were 90 percent. It was murderous.”

 Hands made his move to Guernsey in March while still coping with the disastrous aftereffects of his debt-laden purchase of the music company EMI and before the tax increase was announced.

 But, Moulton said, Hands has frequently expressed his frustration at the capriciousness of the British tax system — with the April decision no doubt coming as the final straw.

 Despite the inflated rhetoric, few have taken that step.

 Peter Hargreaves, the co-founder of Hargreaves Lansdown, a financial services firm based in Bristol, is infuriated by the upward slope of the tax rate.

 “At some point, people will stop paying so much in tax to this lazy, squandering, overmanned part of society,” he said. But, for the time being, he will not be one. “I am a very patriotic person,” he added. “I have a lot here in the U.K.”

 Here on the island, real estate agents and tax lawyers report a flush of recent inquiries, and there is a substantial community of tax exiles among the 60,000 residents — though few as prominent as Hands.

 With its old stone cottages peeking out over quaint harbors and its hyperdeveloped financial expertise (the island says it has $1 trillion in deposits), Guernsey is part Martha’s Vineyard, part Singapore — a discreet tax enclave just 35 minutes by air from Gatwick Airport in London.

 And while Guernsey received a clean bill of health as a relatively open, well-regulated entity from Group of 20 leaders earlier this year, tax watchdogs say the island attracts billions of dollars that are avoiding taxes.

 It’s an accusation that Guernsey officials vigorously deny.

 “We are a low-tax jurisdiction, not a tax haven,” said Lyndon Trott, the ebullient former foreign currency trader who runs Guernsey as chief minister.

 Trott views Hands’ decision to base himself here as an endorsement of the Guernsey model: relaxed simplicity and financial sophistication.

 “I think it is this lack of ostentation that appeals to people like Guy Hands,” he said, as he took a break from a game of beach soccer just down the road from Hands’ house.

 Guernsey certainly lacks Monaco-style flash. The nightclubs are few and a speed limit of 55 kilometers an hour keeps the Porsches and Bentleys that clog the narrow roads on a tight tether.

 Trott says that rising taxes in Britain have been good for business, but he concedes that the global downturn has hurt, leading Guernsey to forecast its first deficit in more than 30 years.

 “If we raise our taxes to just 23 percent, the deficit would disappear,” he said a bit wistfully. “But the island wouldn’t accept that — the tax rate is sacrosanct.”

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