The lure of Liechtenstein

THE EXTENSION of an offshore tax amnesty with Liechtenstein shows that the tiny European principality has become the favoured banking destination for British tax evaders who want to go straight.

Earlier this week the UK government extended an innovative offshore tax amnesty with Liechtenstein by one year.

Under the Liechtenstein Disclosure Facility, Britons with banks accounts in Liechtenstein can settle tax liabilities on favourable terms. The deal allows Britons who come clean about money owed to pay a 10% penalty on undeclared tax liabilities - significantly lower than normal penalties.

The Liechtenstein facility was due to end to end in March 2015, but in response to strong demand it will now run until 5 April 2016.

The agreement seems to suit the UK taxman as well as taxpayers. It's cheap to run and easy to administer; most of the administration is done by tax advisors. HM Revenue and Customs (HMRC) hopes the agreement will produce around £3bn.

Tax advisors say the extension of the agreement between the governments will boost demand for the Liechtenstein facility after a lull that occurred after the UK said it was negotiating a deal with Switzerland in October 2010. Some investors didn't use the Liechtenstein facility in the hope of securing more generous terms from the Swiss deal, which allowed them to keep their anonymity if they paid withholding taxes and a one-off levy.

For taxpayers with overseas assets the Liechtenstein facility is usually a better option than the Swiss deal, tax advisors reckon.

An analysis of the two deals by PwC last year found that average total liabilities under Liechtenstein agreement were around 10% of overseas account balances in 2009-10. Those with assets in Switzerland will find their assets taxed at either 19% or 34% depending on how long the bank account has been in operation.

In order to use the Liechtenstein facility Britons have to show became a "meaningful connection" to the principality. In November, HMRC tightened the qualifying criteria for using the Liechtenstein facility, requiring Britons to pay more money into a Liechtenstein bank account and keep it open for longer.