The uk's Hmrc case reminds investors and clients of the residency and domicile tax rules
Advisers and their clients have been reminded of the importance of ensuring they do not fall foul of the domicile and residency rules in the UK through two cases brought by the HM Revenue and Customs (HMRC) against investors who had moved abroad. HMRC only won one of the cases.
By claiming non-domicile and not ordinarily resident status in the UK, investors can gain tax advantages over those who are both resident and domiciled in the UK.
There are six broad types of status that investors can have in relation to the UK, which are resident, non-resident, ordinarily resident, not ordinarily resident, domiciled and non-domiciled.
UK residents who are not domiciled, for example, pay tax on overseas income and gains only when they are remitted to or received in the UK. This is known as the remittance basis of taxation. The remittance basis rule also applies when a UK resident is not ordinarily resident. If assets are kept outside the UK, they are not subject to income and capital gains tax. Inheritance tax is applied to non-domiciles if they spend 17 out of 20 years in the UK.
Given these tax advantages, investors are therefore keen to show they are non-domiciled and not ordinarily resident or change their domicile and residence status.
Determining whether individuals are domiciled or resident in the UK for tax purposes can be complex. Two recent cases that went to the Special Commissioners have provided further clarity on when investors have successfully and unsuccessfully changed their domicile and resident status.
In Allen and Hately vs HMRC SpC 481, Mrs Johnson, who was born in the UK, lived abroad with her husband during his working life. They retired to Spain and acquired a domicile of choice there. After Mr Johnson's death, Mrs Johnson lived with her half-sister in England until her death five years later.
The Special Commissioners ruled that Mr and Mrs Johnson had acquired a domicile of choice in Spain and that Mrs Johnson had not reverted to her domicile of origin on returning to live in the UK. The HMRC failed to show that Mrs Johnson had decided to make her permanent home in the UK.
In Shepherd v HMRC SpC 484, Mr Shepherd, an airline pilot, failed to persuade the Special Commissioners that he had become resident in Cyprus in October 1998. The Special Commissioner stated: "Taking into consideration the regularity and length of visits by the appellant here, his ties with this country and the somewhat temporary nature of his attachments abroad, at least until 5 April 2000 he continued to be resident and ordinarily resident in the UK.
"He dwelt permanently here and this was where he had his settled or usual abode and so he was resident here. His residence here persisted despite temporary voluntary absences to fly in the course of his employment, to go to Cyprus, to go sailing or to visit Europe. His residence here also had a settled purpose and so I conclude the appellant was ordinarily resident here."
Two cases where residence and domicile was in question have been resolved, with the UK's HMRC winning one and losing the other.
In both cases the case was determined according to the habits and perceived intentions of the defendant, rather than on technicalities.
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