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Guide to Essential Money Tools
Tax Tools
Counting the days and holding back the years
Colin Jelly, head of tax and financial planning, Skandia, brings expats up-to-date on the UK tax authorities’ approach to ascertaining residency and domicile status.
The UK courts have been busy with some topical decisions relating to individuals’ residence, ordinary residence and domicile status for tax purposes. The Gaines-Cooper case, heard by the Special Commissioners, addressed all of these issues. The implications could have wide-reaching effects on a huge number of UK expats. The case clearly demonstrates that, if you are a UK expat, you should seek expert financial advice to ensure you steer clear of the tax pitfalls.
Revisiting the rules
The principles of residence and domicile serve many purposes, but the key one from a UK perspective is the individual’s liability to UK tax. The UK charges tax principally on:
- income arising in the UK, whether or not the person to whom it belongs is resident in the UK.
- income arising outside the UK which belongs to people resident in the UK.
- gains accruing on the disposal of assets anywhere in the world which belong to people resident or ordinarily resident in the UK.
In the Gaines-Cooper case, the number of days spent travelling to and from the UK was an issue. Whilst there may still be further legal debate surrounding this particular case, expats should make sure they are receiving advice on the rules and the implications of this latest challenge. For example, if you are someone who is planning to work abroad for even a couple of years you may choose to become non-UK resident to take advantage of more favourable income tax rules. If you make 13 trips back to the UK in a year, with each lasting five days plus one days’ travel at either end, you may think that you have only spent 65 days in the UK. But if the travelling days are included the total would in fact be 91 days, meaning that you would have broken the 90-day rule and would fall into the UK income tax regime.
In the Gaines-Cooper case, HMRC successfully argued that the individual was actually resident and ordinarily resident in the UK for tax purposes for the period between 1992/3 and 2003/4, despite that individual applying a strategy of non-residence and believing he had not breached the 90 day rule. He also believed that he was domiciled abroad and had rescinded his UK domicile of origin. The detail covered in the case went to considerable depth, including minutiae such as the fact that he had been a badge holder at Royal Ascot for 30 years, kept a number of vintage Rolls-Royce cars and held a private gun collection in the UK. The fact that his son’s private school fees in the UK were paid shortly after his son was born was also taken into account. Mr Gaines-Cooper still has leave of appeal on the decisions should he wish to challenge further, but the case could have wide implications for those who conduct business in the UK but live elsewhere.
IR20 is the HMRC guidance booklet which outlines the rules of residence, ordinary residence and domicile – and forms the basis of any advice for applying a non-UK resident strategy as relied upon by the defendant in the Gaines-Cooper case. Establishing non-resident status for a given period can be beneficial in terms of income and capital gains tax savings, depending on the length of time spent outside the UK. As a general rule, UK resident and domiciled individuals are liable to tax (income, capital gains and inheritance) on their worldwide assets.
In 1998, the Government extended the period an individual was required to be non-resident to avoid tax on realised capital gains being charged. Today the rules state that if an individual becomes non-resident and realises gains, the gains will be chargeable to UK tax should the individual return to live in the UK within five complete tax years of his departure.
On the face of it, losing residency status looks quite simple. But shaking off the shackles of domicile is not so easy. How many people who retire abroad believe their domicile has changed? In the Gaines-Cooper case, much is made of the individual’s actions and intent while living abroad. Did he maintain a residence in the UK during that period? What did he do socially and how did he modify his work structures and businesses in the UK? It is clear that all the facts were considered in assessing the defendant’s residence and domicilary status.
The complexity surrounding these issues is such that all expats should take appropriate advice to ensure they achieve their long-term financial objectives.