Au Revoir to Scotland? (what is a non-domicile?)

Some recent tax news from our French friends over the water prompted some thought about whether more UK residents might find some shelter from Inheritance Tax by making a permanent move to France.

President Sarkozy has announced an immediate and substantial increase in the exemptions from French “wealth” taxes on death.  These changes will be of significant use to many British ex-pats as this area has been a bit of a nightmare for many UK taxpayers in the past.

BUT…this is not an article about France.  Indeed, the article was mainly driven by my latest addition to our substantial tax library entitled “Taxation of Foreign Domiciliaries” (1240 pages) and a jolly good book (2 volumes) it seems to be too.  As I said last time, reading tax books is not “cool” but this book has loads of good stuff in it – and, fortunately, not all of it appears to be compulsory for me.

Before you switch off and/or email me to say it doesn’t affect you, let me point out that the IHT “nil band” in the UK has only increased very slightly since the early 90s by comparison to house prices – so, chances are, you may pay IHT one day (okay, your executors will write the cheque!).

Why does “Domicile” matter

There’s lots of chat in political circles about changing the special reliefs for “non-domiciled” UK tax residents.  This was something Gordon Brown promised to look at in 1994 and he has resisted change because to tamper with these rules is thought to be counter-productive to the encouragement of money and talent into the City of London (and UK more widely).

In short, people who live here (tax residents) but are “non-dom” enjoy the benefit of only being taxed on the income and gains they make in the UK – so they can “roll up” their investments offshore – and as long as they leave the money outside the UK it can, in theory escape UK tax.  Further, Inheritance Tax only applies to UK assets if you are non-dom (but I’ll come on to that subject further down).

What is “Domicile” then?

I thought a (quick) layman’s guide might be useful.  Tax “Domicle” is not the same as tax “residence” although you can be sure the American’s use the word to mean something different from us Brits.  Where you are tax resident may float about a bit but your “domicle” is something more permanent – generally when you are born you get your father’s.  So, if you were born in Dublin to an Irish father you get your domicle of origin as Eire.

Domicle can then change, sometimes because as a child it changes because your dependency changes e.g. your parents become UK domicle following a permanent and indefinite move here.

More commonly, a domicle of “choice” might arise.  In UK law your domicile only changes if you have made a complete, permanent and indefinite move.  So, for example, an immigrant from (say) India comes to the UK.  He retains a house and family interests in India and some social links as well as bank accounts.  Despite having a business and house in the UK he harbours a belief that when he retires he may return and spend most of his time back “home” (and refers to it as such).  He is Indian domicile.  Contrast this with the immigrant who has no family interests, property or ties to the “old” country and who has not returned since leaving – and has not tangible intent to return – he may adopt UK domicile.

Children of these immigrants are likely to be regarded as UK domicile by HM Revenue but event they could, with effort, demonstrate non-dom status if they have strong ties to the “old country” and a tangible reason to return in time.

The most obvious tax winning non-doms are, to my mind, in two distinct types of categories –

1. Wealthy people who have come here to work for a fixed time in senior roles e.g. American merchant bankers, and /or retire / just have UK base (Madonna?).
2. Families who arrive from other countries with little wealth but work hard to build their own wealth as immigrants to the UK, retaining ties back “home”.

Inheritance Tax and Domicile

For the wealthy, the idea of rolling up income and gains offshore as a non-dom is obvious and attractive.  However, it is IHT that often arises as a “bonus” in planning.

Generally, a non-dom will be excluded from IHT on non-UK assets.  However, they are often caught by a rule that says that if you are tax resident in 17 out of 20 years you are deemed UK domiciled. 

A little known quirk in this rule is that at introduction in 1975, certain “pre 75” double tax treaties allow an escape from the rule.

The four treaties that appear to remain are India, Pakistan, France and Italy.  Although the scope of the treaty is beyond a short bulletin this provokes some interesting thoughts….

1. What are the inheritance tax rules in these countries?
2. How do I become domiciled there?
3. Are the treaties likely to be re-written?

Of course, it may be that the Tories do win power and that George Osborne’s ideas to increase the UK threshold come to pass (along with a 25,000 per annum charge as a fixed fee if you claim non-dom but are tax resident here – a chunky hike for many of our immigrant clients with offshore savings).  However, let’s assume that never happens, what is the opportunity?

1. If you are an immigrant from one of the pre-75 treaty countries we should be looking at trying to build an evidential picture of your non-dom status if you have non-UK assets that might otherwise have IHT.  You should take local advice in your “home” country on IHT and other death charges.
2. If you have an interest in France we should be asking if you want to quit the UK to save IHT.

The main problem here for emigrants (but help for immigrants) is that the recent case of Robert Gaines-Cooper discussed domicile and re-confirmed that changes in domicile during life transcend rational tests – and that your domicile at birth will continue in many cases.

If you have an interest in this topic, I’d be delighted to hear from you. 

You might notice that this article is a bit more “technical” than usual – this is a response to some comments that I should try to take my style and turn it into something more substantive – I hope this wasn’t too dull!  I do have some thoughts on the “tax chat” at the party conferences but I think I’ll hold fire and give an impartial but cynical summary of the tax strategies of the leading parties as and when an election is called…..!.....and I promise to be equally cynical about all the proposals.

Regards

Donald

Donald.parbrook@milnecraig.co.uk

0141 887 7811

PS I read that there are rumours the usual November Pre-Budget Report will be brought forward fast into October to pave the way for a November election.   Interesting!  The fuel escalator is going to see petrol prices rise and I think it fair to anticipate another grab at the motorists in high CO2 cars – tax disc and/or new car “levy” of some sort are mentioned.  The talk is that the new CO2 weighted London Congestion Charge will push the bottom out of the high CO2 used car market too.  Finally, we know that family company dividend planning is under review and ripe for attack.  Watch this space!

***The views above are personal.  The article should not be relied upon for tax planning etc. and advice must always be taken on such individual and complicated areas***