Introduction
As most readers will know, UK taxation is sensitive to the residence status of all taxpayers and, in the case of individuals, their domicile status.
When it comes to domicile, of course, we see undoubted pressure as to whether such benefits should persist.
It is fair to say that the benefits have been eroded significantly over recent years. However, it is understood that the Labour party intends to go further should it win power and has vowed abolish the benefits.
However, for now, the internationally mobile and non-doms continue to enjoy a privileged tax position.
As such, and in these straitened financial times, it is perhaps no surprise that HMRC us robustly testing the limits of such statuses.
This can perhaps be seen in a handful of recent cases.
Strachan v HMRC
In the recent case of Strachan, the FTT found that the taxpayer:
- had an English and Welsh domicile of origin; and
- that domicile of origin had not been displaced by a Massachusetts domicile of choice while living in London despite his having a home there and his intention to see out his days in Massachusetts
The taxpayer had left the UK and moved to the USA in the mid 1960’s. There, he met and married his first wife. He subsequently lived in a number of different countries and US states and became a US citizen.
In 1987, during his second marriage (to another American) he moved to England. However, they did retain property in Connecticut, US.
However, the FTT found that given he never had a strong connection to that state and it’s only significance being that it was his wife’s former home. He never acquired a domicile of choice in that state.
Following their retirement, the couple stayed in London despite owning a home in Massachusetts. The taxpayer’s wife had many relations in the state and they spent many holidays there.
The taxpayer argued that despite his move back to the UK he had always been keen to return to the US where his daughter lived. He argued that his move to the UK being only temporary.
The FTT found that where a person has two homes, a domicile of choice can only be established in a jurisdiction if the person has his ‘chief’ or ‘principal’ home in that jurisdiction. This is established after applying a multi-factorial test.
It determined that his US home was used almost exclusively for holidays, and he had more ties of both work and leisure in the UK. As such, for the relevant periods, the UK was his ‘chief’ home.
This did not change to Massachusetts until he was sadly diagnosed with Alzheimer’s in 2020.
As such, his English and Welsh domicile of origin had not been displaced until his move to Massachusetts much later in life.
In addition, the FTT also found that the taxpayer was careless for not seeking advice on his domicile position before submitting his tax returns (he only obtained advice later in 2018, although that advice was that he had a domicile of choice outside the UK).
However, this was a pyrrhic victory for HMRC as it was also held that it was down to HMRC to prove that the loss of tax was ‘brought about’ by the carelessness.
As HMRC was not able to show that had the taxpayer taken earlier advice, the loss of tax would have been avoided, it did not meet that burden.
Shah v HMRC
In a separate case, the FTT’s recent decision in Shah provides a useful reminder of the courts approach in determining an individual’s domicile status under general law.
It perhaps also serves as a warning to taxpayers who seek to maintain they are non-dom despite living in the UK for long periods of time with an intangible intention to leave the UK at some point in the future.
The case primarily was concerned with IHT and whether Mr Shah’s estate was subject to UK IHT. As such, the appeal was brought by Mr Shah’s estate.
Mr Shah was born in Karachi in 1929 and it was not in dispute that he had a non-UK domicile of origin.
Although Mr Shah came to the UK to study for a few years in the 1950s, he then left to live in India and Tanzania. He did not return to the UK until 1973, at the age of 44, with his wife and children.
Mr Shah was a pharmacist and, over the following decades, built a business which he sold in 1994. He died in the UK in 2016 after a period of poor health.
The Estate argued that Mr Shah had been non-UK domiciled at the time of his death. This was on the basis that he intended to return to India. As such, it was argued by the Estate that he had failed to acquire a domicile of choice in England and Wales.
A number of factors were examined by the Tribunal, including:
- the frequency of Mr Shah’s trips to India;
- his family connections in both India and the UK;
- his Indian social and religious connections in the UK; his citizenship status (Mr Shah had taken the opportunity to acquire British citizenship in 1961 and relinquished his Indian citizenship at that time, although he acquired overseas citizenship status from India in 2014); and
- the steps he had taken to return to India.
There was little documentary or other evidence in support of Mr Shah’s domicile position. He had prepared a “DOM1” form in 2012 indicating his intention to leave the UK once he had “sorted [his] personal affairs and [his] health allows”. However, that DOM1 was not submitted to HMRC.
In addition, the Tribunal heard witness evidence from relevant family members.
In considering the evidence, the Tribunal found that Mr Shah had not shown an intention to return to India.
As such he was domiciled in England and Wales at the time of his death. This was by virtue of him having formed a domicile of choice in the UK at some point from 1973 onwards.
Indeed, it was noted that, despite there being potential trigger events to leave the UK – including the sale of his business, the deaths of his daughter and wife, and the sale of the family home – he not taken any steps to return to India.
It is therefore important that a person should be able to demonstrate a tangible trigger for leaving the UK. It should not be a vague or nebulous intention.
HMRC v A Taxpayer
As mentioned in the introduction, it is not only domicile status that can lead to potential UK tax benefits. In addition, a non-UK resident will also enjoy more benign UK tax treatment.
As such, many will consider looking to take steps to be non-UK resident which might result in ensuring visits to the UK are kept within certain limits.
Of course, this might be relatively straightforward with the right discipline in most cases.
However, when ‘exceptional’ events occur, even the best laid plans might go awry.
Fortunately, the legislation already allows for days to be excluded from the UK day count where there are “exceptional circumstances”, i.e. a situation which is completely out of the ordinary, that prevents departure from the UK. This allowance permits up to a maximum of 60 days in any one tax year and will depend on the facts each individual case.
But what is exceptional?
This was precisely what was considered in HMRC v A Taxpayer.
Here, the Upper Tribunal overturned an FTT decision and held that a taxpayer who exceeded the permitted days in the UK by 5 days was UK resident.
The fact that these days were to care for:
- her ill twin; and
- her twin’s minor children
in an emergency did not constitute exceptional circumstances.
Perhaps surprisingly, it was held that moral obligations are not exceptional but part of normal family life.
The taxpayer had moved to Ireland on 4 April 2015. In 2015/16, she had received dividends totalling around £3m. The significance of this was that, if she was UK resident, then this would have been subject to income tax. If not, she would escape tax under basic principles.
To be considered non-resident, she needed to spend 45 or fewer days in the UK. However, in fact, she had spent 50 days in the UK.
However, she argued that 5 of these days should be discounted, as she had visited the UK in December and February of that year to support her twin, who was experiencing serious ill health (as a result of alcoholism) and to help care for the twin’s children.
The FTT has previously found that she was non-UK resident as this qualified as exceptional circumstances. It was accepted that she was the only person who could assist her twin sister at the time and was therefore under a moral obligation to come.
The UT took a different view.
The UT noted that this was no different from the distress in families with alcoholism more generally. It was held that moral obligations are not themselves exceptional circumstances.
As such, she was UK resident for the relevant year and subject to a sizeable income tax liability.
Conclusion
These cases illustrate that HMRC will look to ensure that the internationally mobile taxpayers are kept honest when it comes to their residence and / or domicile status.
As easy revenue wins such as marketed tax avoidance evaporate, HMRC will need to work harder for its income. It seems to me that patrolling the jurisdictional permitter of the UK tax system is financially and politically a fertile hunting ground.
So, although the UK tax system might legislatively be a local shop for local people, expect HMRC to have a wider definition of “local people” than Edward and Tubbs!
If you have any queries about this article, or tax matters generally, then please get in touch.