25 Feb Non UK Residence and Domicile Status
You may be aware that in late 2006 there was a Special Commissioners decision in favour of HM Revenue & Customs (subsequently confirmed on appeal) in the case of Robert Gaines-Cooper v HMRC which found against the taxpayer’s contentions that he was non UK resident and domiciled. Further contentions made by Mr Gaines-Cooper in Judicial Review proceedings at the Court of Appeal and The Supreme Court that HM Revenue and Customs had failed to follow its own guidelines in booklet IR20 were also finally rejected in 2011 (although it is interesting to note that IR20 was replaced on 6 April 2009 by guidance HMRC 6).
The key issues which arise out of the Gaines-Cooper case and which resulted in defeat for the taxpayer are as follows:
- The taxpayer had considerable connections with the UK in that whilst he spent much of his time overseas, his wife and child spent much of their time in the UK.
- To facilitate the above, the taxpayer owned properties in the UK which were occupied by his wife and child for much of the year.
- The taxpayer made visits to the UK to be with his family and to attend certain annual events, e.g. Ascot.
- The taxpayer retained certain club memberships and investments in the UK.
- The taxpayer attempted to rely on HM Revenue & Customs IR20 booklet guidance that he was physically present in the UK for less than 91 days per annum on average, excluding days of arrival and days of departure.
- The taxpayer had not gone abroad to take up (genuine) full time employment overseas (in respect of which special, less onerous, rules apply).
The Courts found that the principle of excluding days of arrival and days of departure was a concessional treatment by HM Revenue & Customs and that the legal position was that all time spent in the UK should be taken into account in calculating the total number of days of presence. In addition it was also found that the 91 day test was to be considered in broad terms only, such that it was correct to look at the circumstances of the taxpayer “in the round”. Using this criteria Mr Gaines-Cooper was found to be UK resident (or more correctly he was found never to have left the UK for a permanent and settled purpose overseas).
In addition to the above Mr Gaines-Cooper claimed to be non UK domiciled but having been found to be UK resident his non domicile claim was also lost (note that domicile for tax purposes is a different concept to residence and those taxpayers with a foreign domicile, i.e. homeland, are generally treated more favourably than UK domiciled taxpayers).
Following the Gaines Cooper case and changes to legislation in Finance Act 2008 HM Revenue & Customs issued guidance HMRC6 (revised and updated in February and December 2010 then again in October 2011) as to how the rules for establishing non UK residence will be operated. The following points arise:-
- For periods up to 6 April 2008 the days of an arrival and departure will normally continue to be ignored in computing the number of days spent in the UK. However, the use of the word “normally” indicates that if abuse is perceived then this concession may not be granted. From 6 April 2008 a day is counted as a day of presence in the UK for residence purposes if the individual is in the UK at the end of the day, i.e. at midnight. An exemption is made for passengers who are in transit between two places outside the UK. Any day spent in transit through the UK will not count as a day of presence provided that the individual does not take part in any activity that is unrelated to their passage through the UK. This would include such activities as attending a business meeting, visiting friends or visiting a property which they own in the UK.
- Those coming to the UK with no previous connection will establish UK residence in any one of the following three ways:-
- Arriving in the UK with a permanent intention to stay.
- Arriving in the UK without a permanent intention to stay but staying throughout any one tax year for more than 183 days.
- Arriving in the UK without a permanent intention to stay but staying on average more than 90 days usually over a period of four years but in some cases a shorter period.
- For those departing the UK wishing to establish non UK residence (except for those going abroad to take up genuine full time employment for which special, less onerous, rules apply) then there is a two stage process as follows:-
- Firstly the taxpayer must demonstrate an intention to permanently depart from the UK. In this respect it is necessary to look at the taxpayer’s presence in the UK and elsewhere “in the round” to ensure that effectively there has been a permanent departure. Being in the UK for less than 90 days (from 6 April 2008 potentially including days with a physical presence in the UK at midnight) and being abroad for the rest of the time, whilst retaining many of the connections previously enjoyed with the UK may not be sufficient. It is necessary to show a permanent severing of the residence relationship with the UK.
- Assuming point (i) has been achieved then visits to the UK on average of less than 90 days per annum (but not exceeding 183 days in any tax year) will be permitted (bearing in mind previous comments as to what may constitute a day).
With regard to domicile the position is as follows:-
- For anybody with a domicile of origin overseas then such domicile of origin will be retained unless there is a substantial and permanent change in what the taxpayer considers to be their homeland/where their heart lies/where they intend to end their days.
- Similarly for anybody with a domicile of origin in the UK this will remain (notwithstanding non residence status) unless again there is a substantial change in favour of an overseas location which the taxpayer can regard as their homeland/where their heart lies/where they will end their days.
It should be appreciated that the establishment of UK residence or non residence or UK domicile and non domicile has always been a complex area of tax law and the above comments only provide a broad guide. The Gaines-Cooper case and the changes in respect of the treatment of days of arrival and days of departure probably make it more difficult to establish non UK resident status. However, in all cases the individual circumstances will be relevant and, where appropriate, professional advice should be sought.
For those who do remain resident in the UK, the 2007 Finance Act brought welcome relief where overseas second homes are held via companies as (subject to certain conditions) any notional benefit in kind which might arise in such circumstances has been confirmed as tax exempt. The Economic and Fiscal Strategy Review which accompanied the 2007 Budget did however state that the long running “review of the residence and domicile rules as they affect the taxation of individuals is ongoing”. This review led to the introduction of the special £30,000 p.a. tax charge from 6 April 2008 for non domiciled individuals claiming the remittance basis of assessment on overseas income and gains (broadly) after seven years of residence in the UK. The papers issued with the Coalition Government’s first Budget in June 2010 stated that the taxation of non domiciled individuals was to be the subject of further review and the March 2011 Budget announced an increase in the tax charge from 6 April 2012 for non domiciled individuals claiming the remittance basis of assessment on overseas income and gains to £50,000 p.a. after twelve years of residence in the UK. Furthermore a consultation was announced in respect of a statutory definition of residency for UK tax purposes from which proposals have been published broadly based on the principles that emerged from the Gaines Cooper case. These proposals are the subject of further consultation but are likely to be introduced with effect from 6 April 2013.