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The UK Tax System: An Introduction by Malcolm James

Malcolm James, author of ‘The UK Tax System: An Introduction’ outlines the concept of domicile, including deemed domicile for inheritance tax purposes.Domicile is a term of general law and an individual’s place of domicile will be in the country which he considers to be his permanent home. This implies a much greater degree of permanence than being ordinarily resident and it is quite possible for a taxpayer born in, say, Australia to be a long‐term resident of the UK, but to remain domiciled in Australia.

Strictly, an individual is not domiciled in the UK, but in one of its constituent countries, England and Wales, Scotland or Northern Ireland. In a federal state an individual is domiciled in a particular state, province or canton.

At birth an individual acquires a domicile of origin. This is not necessarily the country in which he is born, but will be the country of domicile of his father if his parents are married or the country of domicile of his mother if they are not. From the age of 16, it is possible to acquire a domicile of choice. Apart from the situation where an individual is born and brought up in the UK, but has a domicile of origin in, for example, France due to having a French father, it is extremely difficult to abandon a domicile of origin. It is necessary to show that he has abandoned all ties with his country of origin and now considers his country of residence to be his new permanent home. To do this it is advisable, for example:

• to sell all property in his country of origin and purchase property in the country of residence;

• to transfer all investments to his country of residence;

• to run a business in the country of residence;

• to move family to country of residence or marry a person already domiciled there;

• to give up membership of clubs and societies in the country of origin;

• to state a desire to be buried in the country of residence and possibly to acquire a burial plot;

• to take out citizenship of the country of residence.

Any action taken to obtain electoral rights in the UK or another country is ignored for the purpose of determining domicile.

In IRC v Bullock (1976) (51 TC 522) it was decided that a taxpayer who had been born in Nova Scotia, Canada in 1910 and who had come to the UK in 1932 and married an English wife had not acquired an English domicile of choice, since he had hoped to persuade his wife to live in Canada after his retirement, and in 1966 executed a will which appointed a Nova Scotia corporation as executor and declared his domicile to be Nova Scotia. The court held that in order to acquire an English domicile of choice, he had to intend to reside in England for the rest of his life until and unless something happened which was not indefinite or vague. In Plummer v IRC (1988)(BTC 543) the taxpayer’s family moved to Guernsey, but the taxpayer remained in the UK to complete her education. It was held that she had not acquired a domicile of choice in Guernsey since she had not lived there on a permanent basis. In Surveyor v IRC (2002) (STC (SCD) 501), a taxpayer had been born in the UK and had acquired a UK domicile of origin from his father. He worked in Hong Kong from 1986 to 1991, returning to the UK for holidays, and married a UK national who had been resident in Hong Kong since 1984. In 1991 he was made a partner in his firm and was offered the chance to return to the UK, which he refused, stating that he saw Hong Kong as his home and had no intention of returning to the UK and since the early 1990s he only visited the UK on occasional business trips. He had purchased a small flat in Hong Kong, but this was sold in 1994 because it was too small for his family, but he continued to live in rented accommodation there. On the handover to China in 1997 he obtained permanent resident status, satisfying the criteria of seven years’ continuous employment there and certain financial and academic or business qualifications.

In 1999 he built a holiday home in Thailand and from 2000 to 2002 worked for his employer in Singapore, returning to Hong Kong regularly. He thereafter returned to Hong Kong and purchased an apartment with a Hong Kong mortgage. In 1999 he created a Jersey settlement with non‐UK assets, which would have been excluded property for the purpose of inheritance tax, if he were held to be domiciled outside the UK. HMRC contended that he was still domiciled in the UK, but, on appeal the Special Commissioner found that he had acquired a domicile of choice in Hong Kong, holding that the decision to abandon a domicile had to be unequivocal and the standard of proof was the balance of probabilities. The acquisition of a domicile of choice could not be based on slight indications or casual words and there had to be convincing evidence of the taxpayer’s intention.

In this case the taxpayer had provided sufficient evidence of his intention to remain in Hong Kong to establish a domicile of choice. In contrast in F and another v IRC (2000) STC (SCD) 1) it was held that obtaining a British passport and a certificate of naturalisation was not sufficient evidence of the establishment of a domicile of choice. If a domicile of choice had been established this had to be inferred from whether an individual had made a voluntary choice to reside in a country and remain there indefinitely. In this case, F was an Iranian who was on an exit bar list in Iran, but who had expressed a desire to return there in the future. He had therefore not abandoned his domicile of origin in Iran. Once acquired, a domicile of choice is less adhesive and if it lapses the domicile of origin is revived. In Civil Engineer v IRC (2002) (STC (SCD) 72) an individual returned to England after spending 29 years in Hong Kong. During that time he had set up two trusts and argued that he had established a domicile of choice in Hong Kong. The Special Commissioners found no evidence to support his case and ruled that returning to England with no intention to return to Hong Kong immediately revived his domicile of origin.

Until 1 January 1974 a married woman acquired the domicile of her husband on marriage, but for marriages after that date the domiciles of a husband and wife are determined independently.

Inheritance Tax – Deemed Domicile

For the purpose of inheritance tax only a taxpayer can be deemed to be domiciled in the UK, even he is not domiciled here under general law. A taxpayer is deemed to be domiciled in the UK if he:

• has been resident in the UK for at least 17 of the previous 20 tax years; or

• has been domiciled in the UK at any time in the previous three years. If a taxpayer were to emigrate, severing all ties with the UK, he would remain domiciled in the UK for the purpose of inheritance tax for three years after the date of departure notwithstanding the position in general law. (IHTA 1984 s.267(1))

In the UK, non‐domiciliaries enjoy preferential treatment in certain areas of tax. Therefore, depending on the tax regime in the country of origin, it will often be more beneficial to retain the domicile of origin. Because of the advantages of not being domiciled in the UK, HM Revenue & Customs will strenuously resist any claim by a taxpayer with a domicile of origin in the UK to have abandoned this domicile. Where an individual with a foreign domicile comes to the UK, HMRC will wish to treat him as having acquired a domicile of choice in the UK, if possible.

Example

Christine has a domicile of origin in France, but came to live in the UK in 1990. She does not own a property in either country and works in the UK, but also has an employment contract with a French organisation and periodically returns to France for periods of two to three weeks. In this case it is clear that Christine has not acquired a domicile of choice in the UK. If in a number of years’ time, her circumstances change so, for example, she married and had a family in the UK and gave up her employment in France, it is far more likely that HMRC would attempt to argue that she has acquired a domicile of choice in the UK.

October 2005

Malcolm James

The above article is adapted from ‘The UK Tax System: An Introduction’ published by Spiramus Press Ltd. To order The UK Tax System: An Introduction
click here

About the author

Malcolm James is a Senior Lecturer in Accounting and Taxation at the University of Wales Institute, Cardiff and has lectured widely on the subject of taxation on both professional and undergraduate courses. He has also lectured for the Chartered Institute of Taxation and written a number of articles for their journal Tax Adviser. He also contributes regularly to CCH and Lexis Nexis tax publications. Before becoming a lecturer he worked for several large firms of accountants and also in industry.