The parliamentary written answer on 16th January 1996 saying that the United Kingdom Government did not intend to legislate to change the current law of domicile seems to have passed almost unnoticed. However, it will be a relief for a considerable number of people and represents the end of a long, convoluted story but it is, in fact, the end.

What changes were suggested?

In 1987, the Law Commission and the Scottish Law Commission recommended changes to the law of domicile. The gist of the changes was that a person would be domiciled in the country with which he or she was most closely connected. Proof of this would be on the balance of probabilities. At present, a person's domicile of origin at birth is much harder to shed than a domicile of choice, ie one subsequently acquired. This is because there is an overriding assumption that an itinerant individual will always return to his country of origin unless he takes demonstrable steps to adopt a new country as his domicile.

So what would the changes mean in a taxation context?

The importance of domicile in the tax context arises from the significant tax advantages available to individuals who are resident in the United Kingdom but and who are still able to demonstrate that they are not domicile there, and to those individuals who have successfully established a new domicile outside the United Kingdom but are temporarily resident there. These are:

  • the remittance basis, which applies to United Kingdom residents not domiciled there in respect of income from working overseas, from overseas pensions and investments and in respect of capital gains on overseas assets. It means that this type of income or gain is taxed only if, and so far as, it is remitted to the United Kingdom;
  • the fact that inheritance tax is charged only on United Kingdom assets, not world-wide assets, for those not domiciled there (though there are special rules treating a person resident here for 17 years out of 20 as domiciled here for IHT purposes).

These make it possible for such people to pay very little tax there - even to regard the United Kingdom as a tax haven.

So what effect would the proposed new regime have had?

Very roughly speaking, people resident but not domiciled there would have found it much more difficult to resist Revenue claims that they had become domiciled there; if the United Kingdom Inland Revenue were to demonstrate that an individual had an intention to settle there indefinitely on a balance of probabilities, that would be enough. (On the other hand, it would have been easier for someone emigrating to establish that he or she had shaken off a United Kingdom domicile and acquired a foreign one).

The worry was the impact this would have on wealthy foreigners who might be said, in broad terms, to be living there, but who had never acquired a United Kingdom domicile and would be unlikely ever to do so under the existing rules. These people, it was feared, would be driven out of the United Kingdom (or deterred from going there, as the case may be) if they were to lose their tax privileges; their spending power would go with them and thus its benefits would be lost to the United Kingdom economy.

How were the proposals received?

There were a large number of objections from professional bodies, particularly on the lack of a transitional set of rules easing in the changes for those likely to be caught out on the tax side; no doubt there were concerns on the political front too, given the likelihood that many of those living there but domiciled overseas were friends of the Government. The proposed changes, for whatever reason, were dropped. Then around April last year it was rumoured the plans had been revived and that draft legislation was imminent.

This seemed plausible, particularly if you believed the Government might be seeking to steal some of the Labour Party's thunder by raising more tax from tax privileged foreigners. (Gordon Brown the Shadow Chancellor had picked out their position as one of the seventeen tax abuses he attacked in his paper on the subject issued just before the November 1994 Budget). Now, however, we are told that, although the proposed reforms are desirable, they "do not contain sufficient practical benefits to outweigh the risks of proceeding with them..." so it has been decided to drop them. One can only speculate what these risks are thought to be.

Is this the end and what of the future?

It seems on the face of it that the prospects for change are now dead certainly as far as the present Government is concerned. However, the betting is that they will not lie down or at least not for long. Certainly in the United Kingdom an incoming Labour government looks increasingly likely and therefore a new administration would bring forward the necessary reforms to rectify what it perceives to be a major injustice within the tax system. Views differ as to the likely timing surrounding any changes but a General Election in the Spring of 1997 is the guiding factor indicating that time is short.

Therefore the advantages of the remittance basis for income tax and capital gains tax and the advantages surrounding foreign assets for inheritance tax may be swept away. Those already residing in the UK will need to take professional advice on the likely effects on their position. Anyone planning to return to or enter the United Kingdom in the foreseeable future would do well to delay until there is more certainty. If in the meantime they wish to take up residence on a temporary basis within a low tax regime close to the United Kingdom then the Isle of Man has much to offer.

The contents of this article are intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

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