Tax Domicile – HMRC Upping the Ante?

With an increasingly peripatetic workforce, more and more people are finding that the issue of their fiscal residence has a significant effect on their tax position.

The response to this in the UK has been that tax legislation surrounding residence has been tightened up considerably over the years in order to bring more people into the UK tax net. It would also be fair to say that HM Revenue and Customs (HMRC) have become more argumentative regarding tax matters than used to be the case, even vigorously pursuing several cases which had very weak legal bases.

There are signs that HMRC’s next area of focus may well be Inheritance Tax (IHT), for which a person’s domicile is the key concept. Domicile is not the same as residence, which can be temporary: it is more akin to ‘where you belong permanently’. Domicile is a largely subjective concept and, accordingly, the factors that determine it are many and often complex.

A recent case regarding domicile illustrates that HMRC do not regard themselves as bound by informal decisions made in the past, no matter how unfair that may seem.

It involved a UK citizen who has worked in several locations across the globe. In 2002, his tax advisers asked HMRC for a ruling on his place of domicile as by then he had lived abroad for many years. He contended that he had acquired a foreign ‘domicile of choice’ some years previously. This request was made in the context of a transfer of funds which would have created a relatively small IHT liability were he to be UK domiciled. He was in fact resident again in the UK when the transfer took place, but had the intention to return to Hong Kong.

HMRC accepted that no IHT was due, which he took to mean that HMRC accepted that he had acquired a foreign domicile.

In the event, he never returned to Hong Kong but remained in the UK. More recently, his tax affairs led HMRC to look again at his domicile and, having raised an enquiry into his 2014 tax return, they then proceeded to ask him questions relating to events as far back as 1981.

HMRC contend that their acceptance that no IHT was due on the transfer was pragmatic, rather than an acceptance of his assertion that he had acquired a foreign domicile of choice.

Thus far the argument has only reached the First-tier Tribunal, which ruled that HMRC did have the right to require information to ascertain whether the man had acquired a foreign domicile of choice prior to 2002 and also whether that domicile had been lost subsequently.

The decision is likely to be appealed, so cannot be taken as definitive.

The lesson to be learned is that if HMRC make a decision, nothing more should be implied into it than what is specifically agreed. In this case, HMRC never said that they agreed that the man had lost his domicile of origin, just that they accepted no tax was payable.

Secondly, it is best to retain records. One can only imagine how much paperwork a person whose job took them to the other side of the earth and back would have retained as evidence of what they did more than three decades ago.