Presented by
Robert W Maas, FCA, FIIT, FTII
of Blackstone Franks LLP

The basic concepts

1. There are 3 basic concepts

Residence
Ordinary residence
Domicile.

2. Income tax depends mainly on residence

- with privileges if the taxpayer is not ordinarily resident
or domiciled in the UK.

3. Capital gains tax depends on residence and ordinary residence

- with privileges if the taxpayer is not domiciled in the UK.

4. Inheritance tax depends on domicile

- or deemed domicile.

5. Residence is a matter of arithmetic. A person is UK resident if he is present in the UK for either

a) over 182 days in a tax year, or
b) more than 90 days on average over a 4-year period (or if shorter the period of absence).

6. Ordinary residence is a mixture of arithmetic and intention

- it is where the person normally lives
- the Revenue will normally regard a person who comes to the UK as ordinarily resident here from the start of the first tax year after
a) the date he comes to the UK if he intends to live here for 3 years or more, or if later
b) the date he acquires accommodation in the UK (or leases it for 3 years or more), or if later
c) he has been here for three complete tax years (four if he is a student or not living here full time)
- they will normally regard a person who emigrates as ceasing to be ordinarily resident here if
a) he leaves with the intention of staying overseas for at least 3 complete tax years, or
b) he in fact is non-UK resident for 3 complete tax years.

7. It is possible to be resident in more than one country at the same time

- it is also possible to be resident nowhere
- it is easier to prove residence in a specific country than residence nowhere.

8. Ordinary residence is a peculiarly British concept

- most other countries do not have a corresponding status.

9. Domicile is wholly a question of intention

- and being able to prove it
- but it is for the person who alleges a change of domicile to prove it (on the balance of probabilities) i.e. if someone is non-UK domiciled when he comes to the UK it is for the Revenue to prove he has become UK domiciled not for the taxpayer to prove that he has not
- the Revenue do not take domicile cases while the taxpayer is alive
- unless he is alleging the change of domicile
- domicile is not a tax concept; it is a legal concept that is important to family law
- because of this it is
a) not possible for someone to be domiciled in two places at the same time nor to be domiciled nowhere
b) it is very difficult to show a change of domicile.

10. Broadly speaking a person is domiciled in the country where he has his permanent home (IR 20)

- it is distinct from nationality
- often described as the place where you intend to die
- which is why some people buy a grave plot overseas
- or as the country that a person regards as his homeland.

11. Types of domicile

Domicile of origin
Domicile of choice
Domicile of dependency
Married women
- married before 1 January 1974
- married after 1 January 1974.

12. A person becomes domiciled in a country by

a) going there,
b) with the intention of living there permanently or indefinitely.

13. Length of time in the UK is irrelevant

- a person with a non-UK domicile of origin can live here 50 or 60 years without becoming UK domiciled
- even if he is born here!

14. The territoriality principle

- the UK cannot tax a person unless he has a relevant connection with the UK or the income arises in the UK
- so if a person is not UK resident in a tax year it is irrelevant that he may remit funds to the UK in that year.

Emigration

15. Why is the taxpayer emigrating?

a) because he wants to retire/live in another country
b) because he wants to avoid a specific tax liability.

16. To avoid income tax a person need only to be non-UK resident for the tax year in which the income arises

- and the income needs to be of a type that the UK does not tax on non-residents
- broadly speaking all we tax is
a) earnings from a trade, profession or vocation carried on in the UK
b) earnings from an employment exercised in the UK
c) rental income
d) at the savings rate (or the rate applicable to trusts) only, income from which tax is deducted at source
- which means we do not tax
a) UK dividends
b) UK bank interest
c) earnings from an employment to the extent that the earnings relate to non-UK work
- even if the employer is UK resident
- but watch the PAYE rules.
d) earnings from self-employment where the business is managed and controlled outside the UK and the work is done outside the UK
- in practice we do not usually seek to tax earnings for UK work either.

17. To avoid capital gains tax a person needs to be both non-resident and non-ordinarily resident

a) for the tax year in which the gain is realised, and
b) if the gain arises on an asset held during a prior period of UK residence for five tax years between ceasing to be UK resident and becoming UK resident again.

18. What are the options?

a) to go overseas for one complete tax year
b) to go overseas for three complete tax years
c) to go overseas for five complete tax years.

19. The one-year drop-out

- will avoid income tax on employment income
- will only avoid income tax on self-employment income (and section 739/740 income) if either
a) the taxpayer ceases to be ordinarily resident in the UK
- by working full-time under a contract of employment spanning a complete tax year (IR 20, para 2.2)
under the Reed v Clark principle or
b) the taxpayer is protected by a double tax agreement
- but these don't refer to ordinary residence
- why should the overseas country claim residence?
- will it avoid CGT by using a double tax agreement?

20. The three-year drop out

- will avoid income tax
- will avoid capital gains tax on assets acquired after the person leaves the UK and sold while overseas
- consider bed and breakfasting assets held at the time of leaving the UK.

21. The five-year drop out

- safe
- but is the client prepared to do it?
- the extra costs of living overseas can be high.

22. When should you complete the form P85?

- it is not a statutory form.

23. Some other issues

a) emigration triggers a cessation for Case I and II of Schedule D.
b) visits back to the UK should be kept to a minimum
- especially in the first couple of years
- or if you are relying on one-year full time employment
- keep days available for an emergency
c) visits back are not permitted under the Reed v Clark route
d) take care not to breach the 182-day rule
e) what is full-time employment?
f) How do the Revenue know when a taxpayer visits the UK?
- credit card statements
- landing cards??
- bad luck
g) should you let your UK property?
h) available accommodation
i) the Revenue ignore days of arrival and departure
but Wilkie v CIR (32 TC 495) says add up the hours and divide by 24
j) can you rely on a Revenue concession if you are trying to avoid tax?
k) It is best to buy a house in the new country or take a lease that will extend beyond the 3-year period
l) CGT crystallises on contract
- take care not to enter into an oral contract before you leave the UK
- an option may be best
m) a non-UK resident is taxable on gains on UK assets used or formerly used in a UK trade
- but only if the trade is still carried on in the UK at the time of disposal
- can you take the asset out of the trade in anticipation of emigration?
n) might educating your children overseas be an opportunity to wind up overseas trusts?

24. Emigration to try to avoid IHT

- you can't be sure you have succeeded
- a domicile of choice is easily lost; in which case the domicile of origin revives
- take care what you tell your friends
- and your solicitor
- and your bank manager
- consider putting UK assets into an offshore company or a nominee so that you do not need probate.

25. Steps to consider

- sell UK house
- renting it out suggests a prospect of returning at some stage
- make a will in the overseas country
- it is far better than a grave plot
- buy a house in the overseas country
- renting suggests a lack of permanence
- take the nationality of the new country
- and give up British nationality even if the new country allows dual nationality
- join clubs and social organisations in the new country
- and resign from those in the UK
- sell or reduce UK investments
- do not take out subscriptions to English newspapers/magazines
- maintain a bank account in the overseas country
- exercise any right to vote in the new country
- and preferably don't vote in UK elections.

Immigration

26. Is the person intending to come to the UK for less than three tax years?

- he is unlikely to become ordinarily resident
- so will be taxable on a remittance basis on overseas income
- salary will be apportioned between UK and non-UK work
- will probably be outside the scope of UK CGT (CGTA 1992, s 9(3) & (4)).

27. Will he be here for more than three years so he will become ordinarily resident in the UK?

- does he have a non-UK domicile?
- need to retain it
- beware P86
- take care with Dom 1
- can you crystallise continuing income while he is non-UK resident?
- can you rely on the split year concessions A11 and D2?
- bed and breakfast assets to uplift CGT base cost
- but will this crystallise CGT in the overseas country
- the creation of a trust for one's own benefit will do.

28. The remittance basis

- must segregate income/gains from capital overseas
- before they are mixed into a single account
- can the taxpayer's overseas bank cope?
- the sale proceeds of an asset is itself a mixed fund
- consider identifying
a) assets sold at a loss
b) assets sold at a comparatively small gain
c) assets sold at a large loss
- the Revenue treat remittances from a mixed fund
- as income as far as possible
- then as a mixture of capital and capital gains
- credit cards
- the law is unclear
- income/capital gains arising before the taxpayer comes to the UK can be regarded as capital
- can gift to spouse and let her remit
- Grimm v Newman (2002 STC 1388)
- make sure gift can be shown to have been made overseas
- offshore company/trust can remit money to UK
- but watch Harmel v Wright (49 TC 149)
- but income can lose its identity if the source ceases
- the source rules no longer apply to salaries.

29. Overseas trusts

- every non domiciled individual should have one
- no tax on capital gains if settlor and beneficiary are both non-UK domiciled
- even on UK assets.

30. Buying a house in the UK

- borrow from a non-UK bank
- who should own it?
a) Own it personally and accept there will be UK IHT at some stage (assuming the house is worth more than £25,000).

b) Own the house personally and take out term life cover for the value of the house - or, for those who are clever/mean, up to the excess of the value of the house over £25,000. For a person who is genuinely likely to be living in the UK for a few years only and could manage with a 5 to 10 year term insurance, that is probably the best bet.

c) Have the house owned by an offshore company which in turn is owned by an overseas trust and make sure there is a resolution of the trustees that says that they will procure that the beneficiary can reside in the house rent free. The problem with the house being owned by an overseas company is that there is a benefit in kind risk. The Revenue will contend that the occupant of the house is a shadow director of the overseas company and therefore taxable on a benefit in relation to the occupation of the house. That is obviously a question of fact. If the occupant makes all the decisions in relation to the house he is very vulnerable to attack. Documentation is very important in these circumstances. For example, if he is given a formal lease at a peppercorn rent and the lease imposes on him an obligation to keep the house in good repair to a very high standard and provides that he can carry out improvements but only at his own cost and with the consent of the landlord, then it may well be that all of the decisions that he has to make in relation to the house are decisions that he needs to make as occupier. It should not be difficult to ensure that the lease is clearly granted by the overseas directors. I think it would be difficult for the Revenue to show that a person is a shadow director of a company if no decisions actually have to be made in relation to the company after he goes into occupation of the house. Full documentation is absolutely essential. This probably ought to include a letter from you expressing the opinion that you do not believe that the individual is a shadow director of the company on the basis of what you have been told and in the circumstances do not believe he has a liability to UK tax in relation to the occupation of the property. It would then be hard for the Revenue to seek penalties should they attack the situation at some stage (obviously you need to take care in what you write, so that it is clear you are expressing an opinion on what you have been told and taking no more responsibility than that).

d) Own it personally but acquire it with an interest free loan from an offshore trust secured by a charge on the property. A mortgage is deducted from the asset on which it is secured for IHT purposes. However, there is an anti-avoidance provision that prohibits the deduction of a debt if it consisted of either:

i) property derived from the deceased
ii) consideration given by a person who was at any time entitled to any property derived from the deceased.
(FA 1996, s103)
Also a charge given for no consideration would not give rise to a deduction. This means that a loan from the occupant himself or from a trust or settlement created by the occupant may not work. It also of course means that whilst a person could take out a 100% mortgage to eliminate the initial value of the property for IHT purposes it is hard to cover the future growth in value.

e) Own it personally but put it in the name of a non-UK nominee.

31. Dual employment strategy

- does it still work?
- Can the jobs really be split?

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November 2003