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The concept of non-domicile? By Simon Sweetman

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8th Mar 2007
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Some of our rituals are unchanging and predictable as the seasons. There will be those who, as we approach the Budget, will warn darkly that the Treasury might amend the highly favourable income tax rules which apply in the UK for those not domiciled here : the rules that allow them to omit from their UK tax returns income of non-UK origin as long as it is not remitted to the UK. In fact, this is not likely. Those rules have been under threat of amendment since about 1948, and they are (theoretically) under review again and have been since 2003. This has become a game in which the same ritual cries are raised on all sides.

It is perhaps unnecessary to explain that the common law concept of domicile is a notion much older than that of fiscal residence, and that it is a notion based firmly on the patriarchal family (even though a wife no longer loses her original domicile on marriage). Its main attraction is that it is very hard to break with one's domicile of origin, and that as much of the evidence for a continuing domicile depends on the taxpayer's long term plans, it is even harder for a tax authority to argue about it, especially with a taxpayer who is still alive (once he is dead, of course, his freedom of action is a trifle limited and his intentions cease to matter).

One might also mention that most tax authorities see no need for such a concept and are happy to work with concepts of residence and non-residence which are very much the same the world over. Yet in this country – for historical rather than logical reasons – the taxpayer who is resident but not UK domiciled enjoys an advantage when it comes to the taxation of income arising outwith the UK, being taxed on that income only as it is remitted to the UK rather than as it arises. In most cases of course this will mean that they have the added benefit that because they are UK resident it is not taxed anywhere else either, except where it arises, and that for obvious reason is likely to be a low tax jurisdiction.

It may be said in passing that there is some logic in the use of domicile in Inheritance Tax, which by its nature tends to have to take a longer view than residence or even ordinary residence – but because it matters, IHT has a provision for deemed domicile.

Grant Thornton last year produced a survey in which they claimed that 54 billionaires resident in the UK paid only £14.7 million on their total income (and most of that, apparently, was paid by James Dyson). The basis of this information was less than clear, and after a minor flurry any fuss died down again. Now, though, we have a report from the Tax Justice Network which suggests that in fact the laws on non-domiciliaries breach the 2003 Race Relations Act, which says there is illegal discrimination if a public authority provides a service so that a person of one national origin has a social advantage over a person of another national origin, unless there is a legitimate objective to justify different treatment.

There may be 7 million people presently in the UK who are not domiciled here. Many of them are here for the short term, with about a third likely to move on again with three or four years because they are working or studying here for a limited period. Many of the others will be unmoved by the tax advantages because they are not in a financial position to take advantage of them. About 77,000 actually use their tax returns to claim that they are not of UK domicile. They are not poor people.

What we have now is a more favourable regime for those not of UK origin (because if you were born in the UK or your parents were born in the UK and you now live in the UK the chance of your having acquired and kept some other domicile is exceedingly small) and it is argued that this is actually in breach of the Race Relations Act. The Treasury of course dismisses this argument, but does not so far appear to have addressed it in terms of indirect discrimination, which is of course the point at issue.

Now of course this is exactly what tax havens do : they provide a favourable tax regime for non-residents in order to encourage inward investment (which may simply be the occupation of a large house and the spending of some money) while taxing their (much poorer) residents more heavily. The argument for keeping the domicile rules is indeed that they encourage inward investment, and that this is more likely if the owners of the investing entities can have favourable tax treatment in the UK. This might have washed in 1948, but given today's communications it is unlikely that whoever makes the decisions at a Japanese car company or a Spanish bank or even Electricite de France is going to give any thought to the UK income tax regime and how it might affect a handful of managers. It has been argued that the rules help to attract foreign players to the Premiership (where one suspects there are some rather flakey arrangements in place) : from the English point of view we might prefer to tax English born players extra heavily so some of them go and get some experience of football somewhere else !

What this clearly does encourage is tax residence in the UK by very rich individuals, be they Russians or Arabs or American entertainment stars. So the argument is that they spend their money here and that is good for all of us. Well, is it ? The main effect seems to be a situation in which top end house prices in London have risen in an extraordinary way, and that this has displaced the merely extremely rich...and so on, so that they end by driving up everyone's house prices. It's probably good for the most expensive independent schools and the most expensive lawyers and tax advisers, and for wine merchants and night clubs and casino owners. And there will be some rock bottom personal service jobs as well if you don't mind (or can't afford to mind) having mobile phones thrown at you.

So let’s have a proper reply from the Treasury to what the Tax Justice Network says, and see where that takes us.

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Replies (13)

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By mikewhit
16th Mar 2007 09:43

Ooops dups
Should there have been a Misinformation Part 3 rather than two Misinformation Part 2 s ?

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By Paul Soper
16th Mar 2007 11:10

Misinformation part 3
I'm sorry Richard - allegiance, the legal concepts of animus manendi et factum, stated intention of mind and fact, necessary to establish a domicile of choice has nothing to do with national origin. And to say that domicile in the UK is only a tax issue shows a lack of understanding that there is a different legal system with different laws of inheritance some 400 miles north of London where domicile is critically important to determine whether courts of England and Wales or the Scottish courts have jurisdiction over an estate.

You may feel that the concept of a remittances basis that is enjoyed by non-domiciliaries is out of place in a modern and just tax system and I would agree with you whole-heartedly, - as I hope I made clear in the previous postings we are hardly is internationally distinguished company in using it - but you don't solve that problem by a campaign against a legal concept that you seem incapable of understanding - you attack the very concept of a remittances basis itself.

Might I suggest that you look at the reports produced some 20 years ago by the Law Commissions of England and Wales and Scotland. This analysed the significance of domicile and the desirability of its reform, which I would also support from a legal perspective but pointed out that the taxation consequences of the law of domicile were very small when compared with its significance in the general structure of the system of laws in our two (legally separate) nations.

Can I point out that the remittances basis can also be used by a person who IS domiciled in the UK if they are not-ordinarily resident here. Please don't waste your time on a Quixotic campaign against the wrong windmill - it is the remittance basis that is the problem not the concept of domicile.

By the way the duplication of part 2's was caused it seems by a broadband problem that I've had since Virgin Media acquired Blueyonder.

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By Paul Soper
12th Mar 2007 15:42

Misinformation Part 2

Is the UK alone? Every country that bases its law on common law uses the concept of domicile - in America domicile is determined for each state, just as in the UK we have a distinction between E&W and Scottish Domicile.

As a breach of the race discrimination laws? What piffle! It has nothing to do with nationality as established, nothing to do with religion, and certainly nothing to do with ethnicity either. Publicity seeking misinformnation of this type is, in my opinion, pernicious as it diverts attention away from genuine concerns to the merely spurious.

That the UK is almost alone in using a remittances basis, which permits us to be a tax haven, is undeniable and an honour, if that is the right word, we share with Guernsey and Cyprus I believe - but that is not caused by domicile. Should it be ended - a political decision given the balance of payments that these people bring with them I imagine. Having said that if it were only Mohamed Fayed that is affected I have no doubt it would be terminated immediately!

The Law Commission in E&W that considered reform of domicile in 1987 emphasised the fact that the significance of domicile in law and international law goes far beyond aspects of taxation.

Just as a puff, if anyone wants a consideration of the Gaines-Cooper case on domicile they could visit my podcast site - Taxation Podcasts - in a few days (its in production at the moment) where it will join podcasts on the significance of Gaines-Cooper for residence and the New CIS scheme, both available for immediate download. Budget podcasts to follow next week - http://web.mac.com/paulsoper - or via the Apple iTunes store.

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By redsq01
12th Mar 2007 12:28

Domicile
Yes and what happens when this money goes to the independent school - does it disappear into thin air. No teachers, groundsmen, get paid and what do they do with it - er..they probably spend it on goods and services and unfortunately for the UK they get taxed to high heaven which as we know is akin to throwing money down the drain !!

btw it is preposterous to suggest that UK high prices are inflated by half a dozen oligarchs buying Kensington and Chelsea. It's caused by fiscal lassitude of unparalled proportions

The solution is lower taxes for all !!!

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By AnonymousUser
12th Mar 2007 14:50

Domicile
just a couple of comments.

54 Billionaires probably but is that UK wealth?
7m tax payers and only 77k use Non Dom, that's only about 1%.

If you tried taxing these people on their world wide wealth they may not want to live in the UK . Dont forget they are taxed on money they make here or remit anyway. So arguably they are paying UK tax on UK income?

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Richard Murphy
By Richard Murphy
12th Mar 2007 15:07

The Tax Justice Network report on domicile
I wrote the TJN report referred to in this article. It's available on my blog at http://www.taxresearch.org.uk/Blog/2007/03/02/the-uks-domicile-laws-are-illegal/

Richard Murohy

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By Paul Soper
12th Mar 2007 15:41

Misinformation? part 1
Just a couple of comments:

"What we have now is a more favourable regime for those not of UK origin (because if you were born in the UK or your parents were born in the UK and you now live in the UK the chance of your having acquired and kept some other domicile is exceedingly small) and it is argued that this is actually in breach of the Race Relations Act."

Domicile is nothing to with where you are born, unless you are abandoned in a railway left luggage office like Ernest Worthing. You acquire you domicile of origin from your father at the moment of birth if you are legitimate and from your mother if you are not. You may take your nationality from where you are born but not your domicile.

Earlier cases on domicile concerning refugees considered that they would be so grateful to be taken in by the mother country that they would inevitably acquire a domicile of choice in the UK displacing their domicile of origin - see the Clore v CIR case - but more recently - see F v F and family division case on probate - and Agulian v Cyganick last year, a case concerning a Greek Cypriot by origin against whose estate a claim was being made by his mistress the courts have inclined to the opinion that a refugee - whether by circumstance of discrimination, economic choice or politics would retain their domicile of origin unless there was proof of acceptance of a domicile of choice. The recent case of Gaines-Cooper v HMRC shows how difficult it can be to lose one's domicile of origin.

The IHT treatment emphasising the significance of domicile is not because of length of time, but the simple fact that domicile determines the jurisdiction of the courts over one's estate at the date of death. Domiciled in E&W and all property globally is chargeable just as the UK courts have jurisdiction over the disposition of global property. Not domiciled in the UK, only UK property is chargeable just as the courts only have jurisdiction over UK property.

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By Jon Stow
12th Mar 2007 16:35

Politics and envy?
Simon, you seem to have strayed a little from your normal useful commentaries on taxation issues.

This article has little to do with taxation, but rather with the idea that "someone is getting away with something". One might as well complain because the chairman of Tesco gets paid more than the average roadsweeper or of course the average tax practitioner. It is not comparing like with like. Why do we have to have a tax system which taxes certain wealthy foreigners on the same basis as residents with long familial ties to the countries of the UK just because other jurisdictions have such tax systems? It is like saying there should be one standard European sausage (mind you, that's probably on the agenda).

The concept of domicile in the context of taxation is not an anachronism; it is a useful tool in the armoury of fiscal management and attraction of investment. It is not something which can usefully be used for tax avoidance for the very rich who have made their lives in UK even anymore with the use of settlements.

The domicile issue is rather less discriminatory then the Treasury's and Mr. Livingstone's attitudes to 4X4 vehicles (no, I do not have one) and makes about as much sense in the context of matters which are important. There are always one issue campaigners but I think we have to judge issues on their merits rather than on the loudness of the shouting of their proponents.

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Richard Murphy
By Richard Murphy
14th Mar 2007 13:56

Interesting comments
Paul Soper is clearly a domicile expert. Presumably he has much invested in the issue. And he's right: domicile is not just a tax issue and nor is it solely a UK issue. But it is solely a tax issue in the UK. He's also right. It has nothing to do with nationality religion, and ethnicity either. And domicile is to do with allegiance and rights and duties.

The trouble is then he goes horribly wrong. That is what notional origin is. So I'm afraid he is guilty of misinformation here. And if anything is pernicious it's the law he clearly seeks to defend.

No doubt that defence is self-interested. My attack is not. I simply want a level playing field for all in the UK. How can you justify anything else without discriminating? When the discrimination is clearly on national origin, how can you do it without breaking the law?

As for the other comments, my question is simple. please prove your claims. I do not dispute people bring value to the UK economy when they come here. I welcome that. But, they don't need tax incentive to do so. The UK's good enough without them.

And if you can't prove them - then you have no argument. If we stick to the facts, how am I wrong. And there's only one fact to consider - which is why domicile is not indication of national origin. If it isn't, then what is it?

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Richard Murphy
By Richard Murphy
16th Mar 2007 16:53

Tilting at windmills
Paul appears to prefer abuse to argument. That's a shame, and no sure indication that he is confident of his ground.

So let's be clear. I have a good grasp of the domicile laws - or at least those barristers who looked at our argument seemed to think so. And I stress I have no desire to change them at all. I am simply saying their use in taxation is inappropriate. That's the campaign. It's domcile that allows a remittance basis to be used. So it's the use of domicile in tax that has to go. That achieves the desired result. I'm quite happy for it to stay for other purposes.

And I think as a matter of fact domicile is about national origin - which is why it is so hard to change. Choosing to make the Uk (or more precisly a constituent country) your domicile should be hard. It's about adopting the culture of the place, which is harder than getting a passport. And has nothing to do with tax.

So, respectfully, I think it Paul who is tilting at the wrong target by willfully misreading my arguments which are not as he portrays.

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By Paul Soper
19th Mar 2007 11:35

Abuse?

Robust perhaps, abuse - surely not. I'm sorry if you interpret reasoned criticism as abuse, but you really are barking up the wrong tree that is, to switch metaphors. I repeat - the remittances basis can also be used by those who are domiciled in the UK under certain circumstances - so the problem is not the concept of domicile is it ? It's the allowing a remittances basis in which we are practically alone in the world. However I doubt that an article which reasoned that would get the sort of press coverage that Richard's article on domicile evidently sought as it wouldn't have any easy targets to attack.

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By Paul Soper
12th Apr 2007 18:36

Michael -
You say you have severed your links and ties with the UK, and provided that you have done this thoroughly enough, and you also intend to transfer your allegiance to your new domicile then that should be sufficient to establish non-UK status. If you have sufficient wealth to warrant exploring the issue you could set up a pilot settlement abroad, with, say £310,000 in it, sufficient if you were UK domiciled to trigger a liability of £2,000 and report the transfer but claim that your are non liable on the grounds of not being domiciled. The revenue will then issue the appropriate forms to determine in their mind whether at this time they regard you as domiciled or not. From what you say it seems very doubtful that you are domiciled in the UK.

Had you been registered to vote in the UK in the previous 15 years you could register as an overseas voter but I'm not sure I'd advise anyone seeking to establish non-domiciliary status to do that.

You'll also notice that to force the revenue to rule you need to bring yourself within the charge to tax in the UK to establish that you are outside it. If, at the date of your death, you have executed a will in your new domicile and have no UK property in your personal ownership there will be no need for any probate application to be made and it is the probate application, as much as anything, which might trigger the revenue's interest in your estate after your demise. If you look at the Gaines Cooper case you'll see that he, in my mind foolishly, executed wills in the UK the second of which was to be interpreted and enforceable under UK law - hardly consistent with non-domiciliary status.

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By AnonymousUser
12th Apr 2007 12:24

No taxation without representation?
I am directly concerned with one specific aspect of the rules of domicile and tax consequences: IHT.

I have severed all links with the UK, some 24 years ago and do I believe qualify in all respects for non-domicile status. During those years, I have not paid UK income tax, but also I have foregone all social protection and other benefits of citizenship conferred by such tax payments. What small wealth I have accumulated has been at considerable risk to myself and in full accordance with the fiscal regime of the country in which I live and work.

The most significant moral and legal consequence that I have suffered during a lengthy period of expatriation has been my disenfranchisement. If my domicile is deemed to remain the UK, then I am liable for inheritance tax on my worldwide estate despite a quarter of a century of non-residence. Cynically, I view inheritance tax as a post mortem collection of all the taxes that the Treasury might consider I got away with during a lifetime overseas.

What happened to 'no taxation without representation'? If I were an American citizen for example, I could never escape my fiscal liabilities - but equally, never could I be deprived of my vote. I know that all the current attention concerning domicile is centered around billionaires using the UK as a tax haven: but this is to ignore what I think is a perfectly justifiable objection by more modestly affluent people who actually have no desire to reside (or die)(but might wish to vote)in their country of natural domicile.

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