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Home truths

In my last two columns, I talked briefly about the forthcoming consultation on the taxation of offshore funds and the review of domicile. I also added a little more detail on the fundamentals of domicile – just to remind you of where we currently are and where the opportunities for planning lie.

If there is to be any change in the taxation of non-UK domiciliaries, then the smart money appears to be on the introduction of a statutory test of domicile more akin to a kind of long-term residence.

It may also be that some of the favourable tax treatment that goes with non-domicile status, most notably the remittance basis for income and capital gains, may also be made less attractive. Who knows?

It must not be forgotten that the Treasury, in announcing the review of domicile, also stated that the complicated rules of residence might also be reviewed. Given the confusion that generally reigns in respect of the concepts of residence and ordinary residence, some may say that this is not before time.

But let us now turn to the possible statutory deeming test for domicile. As I said previously, we already have a precedent for this in the shape of the deemed domicile rule for inheritance tax. These provisions are very important to bear in mind for current long-term resident non-UK domiciliaries.

Currently, the deeming rules do not apply for income tax and capital gains tax purposes. As inheritance tax is a tax that self-evidently does not apply to many on a day-to-day basis, it is very easy for non-UK domiciliaries (under the general law of domicile) to let deemed domicile status for IHT creep up on them. Once domicile status is triggered, deemed or otherwise, some tax planning opportunities can have disappeared for ever.

Let us look at the principle of deemed domicile, especially as this may form some kind of model for any new rules to be applied for all personal taxes.

As stated above, it is important to appreciate that the concept of deemed domicile is relevant for inheritance tax only. S267 IHTA 1984 provides that, in certain circumstances, a person not domiciled in the UK as a matter of general law is deemed to be domiciled in the UK. There are two rules – under the first, a person who has ceased to be domiciled in the UK as a matter of general law may still be deemed as domiciled in the UK and, under the second, a person may be deemed as domiciled in the UK notwithstanding the fact that he has never been domiciled in the UK.

Under S267(1)(a) IHTA 1984, a person who was domiciled in the UK on or after December 10, 1974 as a matter of general law remains a UK domiciliary for three years after he ceased to be so domiciled under the general law. Thus, if Mr Moneybags, a UK domiciliary, left the UK on December 31, 1986, to live permanently in Italy, he will retain UK domicile until January 1, 1990.

Under section 267(1)(b) IHTA 1984, a person is deemed to be a UK domiciliary on a given date if:

•He was resident in the UK on or after December 10, 1974, and

•He has been resident in the UK in not less than 17 years of the 20 years of assessment ending with the year in which that date falls.

The effect of this provision is both to treat persons who have never been domiciled in the UK as UK domiciliaries, provided that they have been resident in the UK for a sufficiently long period, and to treat as still domiciled in the UK those who have ceased to be domiciled in the UK as a matter of general law, provided that they have been resident in the UK for a sufficiently long period.

It is important to note that, under section 267(1)(b), a person may be deemed to be domiciled in the UK for more than three years after he ceases to be domiciled here as a matter of general law.

The residence test does not require that the taxpayer must have been resident for a complete period of 17 years. This is because the legislation is concerned with a person who is resident in a tax year and such residence may be acquired if the individual concerned comes to the UK at the very end of the tax year (say, on April 1) with the intention of remaining indefinitely in the UK. In such a case, the individual will be resident in the UK for that tax year, which will count as the first year of residence for the purpose of the 17-year test.

Similarly, were he to leave the UK soon after the commencement of a tax year, then he may be treated as resident in the UK in that final tax year. Accordingly, in an extreme case, an individual could arrive in the UK on April 1 in one year, remain for the next 15 years and leave on April 10 in year 17 and be caught by the 17-year test even though he was only physically resident in the UK for a little over 15 years.

It is important to bear in mind that it is necessary to apply both the three-year rule and the 17-year rule to a UK domiciliary emigrating from this country if he has been a long-standing resident here. Assume that X, who has been domiciled and resident all his life in the UK, emigrated to Monaco on December 31, 1985. Under the three-year rule, he will retain his UK domicile until January 1, 1989. It might be tempting to suggest that he can then establish an excluded property settlement after leaving or even after December 31, 1988. However, this would be incorrect because, under the 17-year rule, he will retain his UK domicile until April 6, 1989.

Next week, I will give a checklist of actions that should be taken if an individual wishes to substantiate that he is no longer UK-domiciled.


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