Enter Your E-mail

Jonathan Schwarz, author of 'Booth & Schwarz: Residence, Domicile and UK Taxation, looks at the concept of deemed domicile for Inheritance Tax purposes.

Introduction

In introducing the Capital Transfer Tax (which has now been renamed ‘Inheritance Tax’), the Finance Act 1975 s 45 provided that, under any of three sets of circumstances a person who was not domiciled in the UK under the common law rules described in this chapter was nevertheless to be treated as domiciled in the UK for most purposes of the tax. The provision relating to one of those three sets of circumstances was repealed by Finance (No 2) Act 1983 s 12 and the provisions describing the remaining two sets of circumstances have now been substantially re-enacted as the Inheritance Tax Act 1984 s 267(1)(a) and (b).

Domiciled in the UK in the Last Three Years

Section 267(1)(a) and (3) provides that a person not domiciled in the UK at the time of a transfer of value, etc., (‘the relevant time’) is to be treated as domiciled in the UK at that time if he was domiciled in the UK on or after 10 December 1974 and within the three years immediately preceding the relevant time.

In the absence of statutory definition to the contrary, ‘year’ means a period of 12 calendar months consisting of 365 days or 366 days in a leap year. (IRC v Hobhouse [1956] 1 WLR 1393)

The effect of this provision is to postpone (for Inheritance Tax purposes only) a person’s acquisition of a domicile in some country outside the UK to a date three years after the date on which, according to common law rules, the acquisition of the new domicile actually took place. Thus, any transfer of value made by the person within the three years immediately following his acquisition of an overseas domicile will remain potentially subject to Inheritance Tax regardless of the situs of the asset.

This rule has no rational basis and is transparently directed at keeping within the Inheritance Tax net for a period of time anyone who leaves the UK permanently. Superficially, it parallels a Revenue practice regarding the residence status of a person who leaves the UK for permanent residence abroad, i.e., that a decision on that person’s claim to have become non-resident and not ordinarily resident in the UK will be postponed for three years and that during those three years the person’s tax liabilities will be calculated on the basis that he remains a UK resident; but, in the case of residence, a decision at the end of three years that the person had become non-resident on his departure is then applied retrospectively to the date of departure and all assessments are revised accordingly. There is, however, nothing similarly provisional about the three year postponement of non-domiciled status.

Domicile and Long Term UK Residence

Unlike IHTA 1984 s 267(1)(a), IHTA 1984 s 267(1)(b) is a rational piece of legislation which is designed to place a non-domiciled person who has lived in the UK for a long number of years on an equal footing with the UK domiciled taxpayer. (See Official Report, Standing Committee A, 13 February 1975, cols 1645–1646). It (and s 267(3)) provides that a person not domiciled in the UK at the time a transfer of value, etc., takes place (‘the relevant time’) is to be treated as domiciled in the UK at that time if he was resident in the UK on or after 10 December 1974 and in not less than 17 of the 20 years of assessment ending with the year of assessment in which the relevant time falls. It should be noted, however, that, for the purposes of this provision:

‘… the question of whether a person was resident in the UK in any year of assessment shall be determined as for the purposes of Income Tax.’ (IHTA 1984 s 267(4))

A person will thus be likely to acquire residence status if his presence in the UK is of sufficiently long duration during a tax year for a territorial link to be established (183 days or more in the opinion of HMRC) or if the pattern of his visits to the UK in years prior to and subsequent to the tax year in question, though not in themselves of significant length, nevertheless establishes a similar territorial link (an average of three or more months a year over a period of four or more tax years in the Revenue’s view) or if visits to the UK which would otherwise be insignificant are given by ties such as nationality, family and business a significance sufficient to establish the kind of territorial link which residence status connotes.

The provision itself has two effects. The first is to bring persons who have never been domiciled in the UK into the Inheritance Tax net. The second (and often overlooked) effect is, unless the change of domicile takes place on 6 April, to keep a person who has been, but is no longer, domiciled in the UK within the Inheritance Tax net for up to almost a year longer than s 267(1)(a) will keep him there.

MPs and Peers have UK Domicile

Members of the House of Commons (Members of Parliament) and House of Lords (Peers) are deemed resident, ordinarily resident and domiciled in the UK for the purposes of Income Tax, Inheritance Tax and Capital Gains Tax, by reason of the Constitutional Reform and Governance Act 2010 s 41(1) to (3).

The above is an extract from 'Booth & Schwarz: Residence, Domicile and UK Taxation' by Jonathan Schwarz, and is published with the kind permission of Bloomsbury Professional.