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  • Non dom tax changes (1) – Setting the scene & what is domicile?

    17 November 2016

    Andy Wood

    Setting the scene

    Updated to reflect Finance Bill 2017 revisions

    There are many changes afoot in the tax world. Sadly, it seems that such change is the new normal. The lack of certainty being arguably the least satisfactory aspect of the system when talking to clients about investing in UK plc.

    There are two topics creating a lot of noise in the private client world at the moment. Firstly, we have commented quite a lot about the changes and challenges faced by property investors. Secondly, we have the non dom tax changes. Clearly, where a property investor is a non dom, then there may be a touch of ‘double jeopardy’.

    This series of articles is faced on the second of these non dom tax changes, with these proposals being scheduled to come in to force on 6 April 2016.

    Getting these changes right is crucial. In the context of an economy on a precipice, Brexit thrown in to the mix and other countries seemingly considering introducing their own non dom regimes then, if the Government don’t get it right, then the consequences could be significant.

    With that in mind, it was expected that these rules that, up until Monday 5 December, remained somewhere between half and two-thirds baked, would be deferred. However, this expectation was misplaced and they will come in regardless. However, we do see that the Government has listed to some of the comments from the profession and has made some significant revisions in draft Finance Bill 2017.

    Background and history

    At the dying end of the 18th century, a little man with a big ego was throwing his weight around in Europe. His name was Napoleon. William Pitt the Younger, at an impossibly young age of 24, was the prime minister of this Fair Isle. He wasn’t given an easy ride as at the same time King George III was currently losing count of his marbles.

    In 1799, young Pitt introduced for the first time an income tax in order to pay for his fight with Napoleon. It was at this same time that he also introduced a remittance basis of taxation for overseas civil servants who, in today’s terminology, might be referred to as non doms to provide them with relief from the taxes in relation to their overseas property.

    Little did young Pitt know that he was creating a political football and a fiscal tightrope.

    Political football and fiscal tightrope

    Of course, over the years we have seen a number of (in)famous political non doms. Upon being ‘outed’ some of these have attempted to turn in their membership badges.

    There are also some less well known political grandees who have benefited these rules. For example, a relatively outspoken critic of some of international tax dodgers can clearly be seen to benefit from a family trust established by a non dom family member.

    We have had tabloid headlines – from the tabloids and the broadsheets – about fat cat bankers and Russian magnates abusing the system.

    Of course, there is nothing wrong with this either legally or morally. The non dom rules are a clear creation of Parliament. The remittance basis of taxation went under a major refurbishment in 2008. Despite what our press might say, the remittance basis is not a loophole (loopholes tend to take up less pages of legislation!)

    Occasionally we get some recognition of how much non doms contribute to the UK. We are told that 115,000 non doms pay as much tax as 10 million low income workers. So any changes need to be balanced. This has been thrown in to sharper focus by the potential impact of Brexit on the City of London, where many of those 115,000 will ply their trade.

    The consultation process

    The non dom tax changes we are going to set out over the course of these articles were first announced in Summer Budget 2015 and will take effect from 6 April 2017. Since the announcements, we have seen various periods of formal consultation – and a continual process of informal consultation with stakeholders. This, by any standards, is a long period of consultation.

    We now have Finance Bill 2017 in our grubby mits. Many questions have now been answered.

    A rough guide to domicile

    Domicile of origin

    So what is domicile and, by extension, non-domicile?

    Although, atypically for a jurisdiction, domicile has an important impact on a person’s tax position in the UK it is not a pure tax construct. It is a concept of general law.

    It is therefore important to note that the proposed non dom tax changes are merely changes to the tax consequences of being non dom. They do not change the position from a general law perspective.

    Dicey, in this tome Conflicts of Laws, provides the authoritative definition of domicile of origin:

    every person receives at birth a domicile of origin…A legitimate child born during the lifetime of his father has a domicile of origin in the country in which his father was domiciled at the time of his birth’

    In sum, one inherits a domicile of origin (“DO”) at birth. To use archaic terminology, where one is ‘legitimate’, then you inherit your DO from your father. Where your mother and father are not married, then a DO is inherited from one’s mother.

    A DO is rather sticky and tenacious. There must be strong evidence that a domicile of choice (“DC”) has been acquired elsewhere for it to be overtaken.

    Domicile of choice

    One does not lose a DO. Instead, think of the DO as the foundation of a building. It will remain as it is until someone takes the trouble to build something on top of it. A domicile of choice might be built on this foundation.

    Again, Dicey provides us with the commentary:

    every independent person can acquire a domicile of choice by the combination of residence and intention of permanent and indefinite residence, but not otherwise

    As such, in order to build a DC, it is necessary to have:

    • an intention to reside permanently / indefinitely in a place; and
    • physical residence in that place.

    Where this is the case, and can be backed up by evidence, the structure will remain strong.

    However, where an element is missing then the walls will come tumbling down and you will be left with your domicile of origin.

    The case of IRC v Bullock shows how sticky a domicile of origin can be – the corollary being that a domicile of choice is not easily established. Of course, in a UK context, this is advantageous to a person residing in the UK who has a domicile of origin elsewhere. In order for his or her status to change, HMRC will need to show he has acquired a domicile of choice in the UK. In Bullock, the taxpayer’s desire to return to Nova Scotia ‘one day’, despite his wife’s objections, were deemed enough to show he did not have the intention to remain in the UK. Practically speaking, I would prefer my clients to be able to identify a tangible trigger that will make them leave the UK.

    It is particularly those coming to the UK, remaining for many decades but asserting an intention to pack up and leave at some point, that has left the Government with the present headache – regardless of whether this is an economic and / or political migraine.

    However, this is a double edged sword. One must consider the converse. What if I tried to assert I was domiciled in Spain? I have a domicile of origin in the UK (or should that be the People’s Republic of Yorkshire?) In order to develop a domicile of choice in Spain I would need to both be resident in Spain, but also show, and evidence, my intention to reside there indefinitely.  Of course, if I came back, or moved to France, then I no longer reside there and would have problems.

    That concludes our first article on the non dom tax changes. It is a leisurely stroll around the background and concepts. We are now fully locked and loaded to look at the technical detail. Grab a strong coffee!!!

    If you, or your clients, are affected by thes non dom tax changes then please get in touch.

    Articles in this series:

    Part one: Setting the scene and what is domicile?

    Part two: The income tax and CGT changes (including rebasing, mixed fund rules and Business Investment Relief)

    Part three: The Inheritance Tax (“IHT”) changes (including revisions to excluded property)

    Part four: Returning non-doms – a tax pariah?

    Part five: The changes in relation to trusts

    Part six: A summary of actions and planning ideas