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A home from home

Maybe not the most prominent areas of change to “the way we live now” to come out of the Budget (with apologies to Mr Trollope) but perhaps having a significant impact on the lives of those affected are those concerning:

The consultation on the taxation of offshore funds.

The review of the rules on domicile and residence.

Over the coming weeks, I will be looking in detail at the offshore funds consultation (for which we have already a pretty well focused consultation document to consider) but for now I would like to consider the issue of domicile and residence.

It was announced in Treasury press notice HMT1 and in chapter five of the Treasury&#39s Budget 2002 report that: “The Government is reviewing the residence and domicile rules as they affect the tax liabilities of individuals. The Government believes that modernisation of these rules needs to be based on clear principles – the rules should be fair, clear, easy to operate and support the competitiveness of the British economy. As this is a complex area, all those affected should have the opportunity to contribute to the discussion. The Government will report on this issue in time for the pre-Budget report.”

It is not yet clear whether this announcement signals that there will be a formal consultation document, a discussion paper or even firm proposals. But what does seem clear is that the Government has accepted that the residence and domicile rules are too complex and need to be reviewed.

There is, however, plenty of scope for action in this area to attack (or at least change) some fundamentally important strategies such as the remittance basis for capital gains tax and income tax, as well as inheritance tax rules such as the non-situs and excluded property provisions. In this context, it is worth remembering that, under the current rules, any gains made under offshore investment bonds by non-UK domiciliaries do not qualify for the remittance basis as they constitute Case VI Schedule D income.

One could not rule out a revised residence and long-term residence rule with a statutory definition of domicile for particular tax purposes. Some feel that greater certainty on these key issues would be more in tune with the understandable certainty required by individuals under the self-assessment regime.

If any change does emerge, the introduction of a statutory definition of domicile is thought by many to be the most likely outcome as stated above. The deemed domicile rules for inheritance tax may give us a pointer in this respect.

So as to prepare you for the consultation, so to speak, I thought it might be worth reminding you of the fundamentals of domicile under the general law first. So here goes.

Under the general law, there are three main types of domicile – domicile of origin, domicile of dependence and domicile of choice. Of these three, the most commonly encountered are domicile of origin and domicile of choice.

An individual&#39s domicile is relevant to determine liability to income tax, capital gains tax and inheritance tax.

Domicile of origin

A domicile of origin is the domicile acquired by a person at birth. It is usually the same as that of his or her father but if an individual is, say, illegitimate, they will take his or her mother&#39s domicile. Thus, at present, a person could have a domicile of origin in a country with which he or she has very little connection, perhaps even a country in which the individual has never set foot.

An individual never loses his or her domicile of origin. It can be superseded by a domicile of choice or dependence. However, if either of these fall away, the domicile of origin, in effect, revives.

Domicile of choice

This is the domicile acquired by a person over the age of 16 (or who is under that age but married) who goes to live in a foreign country. He or she must be physically present in that country and must have a fixed and settled intention to live there permanently. To establish a new domicile of choice in place of their existing domicile (of choice, origin or dependence), an individual must demonstrate that:

•He or she has deliberately and voluntarily ceased to reside in one country (the country of former domicile) as a matter of fact.

•He or she has a final and deliberate intention never to reside there again in the future.

•He or she has a fixed and settled intention to live permanently in the new country.

However, it is extremely difficult for a person to dislodge his or her domicile of origin because of two further rules. The first is that the standard of proof required to establish a domicile of choice is very high and is similar to the standard required in criminal law, namely, “beyond reasonable doubt”.

The second is that, if an individual does establish a domicile of choice in another country, and that domicile of choice is abandoned for any reason, his or her domicile of origin automatically revives to fill the gap. The domicile of origin then remains their domicile until they have a fixed and settled intention to acquire another domicile of choice.

There have been a number of cases on this issue and, next week, I will go on to examine the significance of the case of Anderson (Executor of Muriel S Anderson)

IR Commissioners, where the issue arose as to whether the Inland Revenue had proven the acquisition of a domicile of choice in England at the time of Anderson&#39s death.

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