Residence, Domicile and the Remittance Basis

Residency and domicile are areas of taxation which are plagued with uncertainty. This has been increasingly highlighted over recent years by the amount of case law decisions that have gone in H M Revenue & Customs’ favour.

Throughout the cases it has been shown that the ‘day-counting’ conditions under IR20 were not to be relied upon in isolation. This in part resulted in the Revenue’s publication of HMRC6, effective from 6 April 2009 onwards, which is ambiguous and provides little clarity for tax-payers or agents.

In the March Budget, George Osborne announced his plans to introduce a statutory residency test, with consultation expected to start in June this year. The consultation should iron out any uncertainties and help in ensuring that the test is simple to understand and operate.

In the meantime, advisors are left in a limbo over residency, relying on the interpretation of HMRC6 and case law decisions.

Where are we now?

In February the First Tier Tax Tribunal upheld the Grace residency decision and this highlighted the current interpretation of ‘residence’. Grace was a commercial airline pilot who worked on long haul flights in and out of the UK.  He was originally from South Africa and moved back there in 1997. Grace considered himself to be non-UK resident, however he maintained a UK home that was available for his occupation and failed to sufficiently demonstrate a ‘distinct break’ from the UK.

The term ‘distinct break’ is of paramount importance and encompasses family, property, social and business connections with the UK.  An understanding of a client’s overall lifestyle is required and all of the factors should be looked at in determining status and establishing whether sufficient ties with the UK have been severed. In addition to this, the number of days tests are still with us and sufficient records should be kept to support the number of days being spent in and out of the UK.

An individual should be keeping evidence to demonstrate their intentions. On leaving the UK an individual should be able to demonstrate the severing of ties with the UK, as well as their acquisition of ties with their new country of residence e.g. cancellation of registration with a UK doctor, combined with the equivalent registration in the new country of residence.

Knock-on Effect for Non-Domiciliaries….

The UK residence status has a knock-on effect for non-domiciliaries who are subject to the remittance rules depending on the number of years they have been resident in the UK. The current rules catch non-domiciles who have been UK resident for seven out of the last nine tax years. Furthermore the ‘deemed domicile’ rules for UK inheritance tax purposes kick-in once an individual has been resident for 17 out of 20 tax years.

Establishing the residence status of a non-domicile can have a number of tax effects, with the tax cost for non-domiciled UK residents set to change again after the 2011 Budget announced a proposed increase in the remittance basis charge from £30,000 to £50,000 for longer-term residents. These rules are set to apply from April 2012 and apply where an individual has been UK resident for 12 tax years. More advantageous changes were proposed for those wishing to invest in the UK, with a removal of the tax charge on such remittances. The exact rules are not yet known and a consultation process will begin in June, alongside the consultation for the statutory residency test.

In the meantime advisors of clients who are non-resident, non-domiciled or seeking to become non-resident, should ensure that all appropriate steps are taken by their clients to secure their status and minimise the possibility of a successful HMRC challenge. Francis Clark can carry out residency or domicile reviews to assess exposure to UK taxes, as well as advising on steps that should be taken to secure the position.