Mark McLaughlin CTA (Fellow) ATT TEP considers why determining domicile status is seemingly getting more difficult.
Determining a person's domicile can be a difficult task. It very much depends on the facts, with circumstances varying in each case.
Many taxpayers and advisers would welcome the facility to agree a person's domicile status with HM Revenue & Customs (HMRC) in advance of submitting tax returns. Unfortunately, HMRC seems increasingly reluctant to do so. For example, it was once possible to submit an application for an HMRC ruling on an individual’s domicile status on form DOM1 (‘Income and Chargeable Gains—Domicile’) in advance of filing the tax return, on the basis that the matter of domicile was ‘immediately relevant’ to a UK tax liability. Unfortunately, HMRC subsequently announced (in HMRC Brief 17/09) the complete withdrawal of form DOM1.
Where an individual submitted form DOM1 (or P86) to HMRC and obtained an initial view about their domicile status, HMRC said that it would be ‘unusual’ for them to open an enquiry on domicile status in the few years after that, unless new information came to light or there had been a change in circumstances. Unfortunately, taxpayers must now self-assess their residence and domicile status, without the benefit of a DOM1 ruling from HMRC in advance.
For Inheritance Tax (IHT) purposes, HMRC also indicated in HMRC Brief 17/09 that if an IHT account was submitted by someone setting up the trust on the basis of not being domiciled in the UK, they would only open an enquiry into the return if the IHT at stake made it cost effective for them to do so. The initial IHT limit set was £10,000. However, this monetary threshold has now been withdrawn. HMRC indicate (in HMRC Brief 34/10) that they will consider opening an enquiry where domicile could be an issue, or making an IHT determination, where there is a significant risk of loss of UK tax.
But what actually constitutes ‘signficant’? According to HMRC, it depends. They state: "HMRC does not consider it appropriate to state an amount of tax that would be considered significant, as the amount of tax at stake is only one factor." The costs of pursuing an enquiry and possible subsequent litigation will apparently also be taken into account. The issue seems to be one of resources, but unfortunately this effectively means that there is no level playing field; the wealthy individual claiming non-domicile status would appear to be more at risk of a domicile enquiry than someone with modest means. In any event, it should be borne in mind that there is a special rule on domicile for IHT purposes. A person will be deemed domiciled in the UK in the following circumstances (IHT 1984 s 267):
- he was so domiciled within the last three years; or
- he was resident in the UK for 17 out of the last 20 years of assessment ending with the year of assessment in which the relevant time falls (this is sometimes referred to as the ‘17/20 rule’).
Taxpayers and advisers will invariably seek guidance from HMRC6 ('Residence, Domicile and Remittance Basis') when attempting to establish domicile status, or at least HMRC's approach. However, the information, flowcharts and examples are unlikely to be of much assistance in any but the most straightforward of cases.
In the context of domicile status enquiries, HMRC warns in HMRC6 ('Residence, Domicile and the Remittance Basis'):
"By its very nature, this sort of enquiry...will be an in-depth examination of your background, lifestyle and intentions over the course of your lifetime. An enquiry of this sort will extend to areas of your life, and that of your family, that you might not normally think are relevant to your UK tax affairs."
HMRC's Residence, Domicile and Remittance Basis (RDRB) Manual includes a section on enquiries into domicile status. The guidance states that it is unlikely that an adult's domicile will change unless "profound and extensive changes" are made to the individual's lifestyle, habits and intentions. The burden of proving a change of domicile rests with the party who asserts the change. HMRC do not consider that an individual's country of residence is decisive, although it becomes stronger evidence of domicile the longer the period of residence.
The RDRB Manual provides an interesting insight into HMRC's approach in domicile enquiries. For example, it includes an extensive list of information and documents that HMRC could request during a domicile enquiry (RDRB23080). The overall impression given by the guidance is that domicile enquiries are likely to be detailed and lengthy in many cases.
However, some comfort can perhaps be derived from HMRC Brief 34/10, which states:
"Where HMRC does open an Inheritance Tax enquiry...[it] may stop the enquiry at any stage if it considers the continuation of the enquiry is not cost-effective. The outcome of such an enquiry may be that HMRC does not consider it appropriate to make a determination of the Inheritance Tax."
The Government is considering a statutory test for determining an individual's residence status. However, domicile is a matter of general (not tax) law, so it seems that uncertainty about domicile status is likely to continue.
The above article is reproduced from Practice Update (November/December 2010), a tax Newsletter produced by Mark McLaughlin Associates Limited. To download current and past copies, visit: Practice Update.