Working Together in Prosperity

“I know you think you understand what I said but what you don’t understand is that what I said is not what I really meant”. That quotation is attributed to Richard Nixon who was of course the ultimate spin doctor and who even managed to spin and recreate his own image from crook to statesman.

The UK domicile laws seem to be subject to almost as many twists and turns as the most ingenious thriller or the most devious politician.

As a short recap of previous notes on domicile, for anyone who was born in the UK or whose father or grandfather was born in the UK, or who has lived seventeen out of the last twenty years in the UK (no matter what their nationality or place of birth) it is very probable that they have UK Domicile. This is very different from nationality and different again from resident for tax purposes. UK considers everyone to have a “domicile of origin”, a “domicile of dependency”, or a “domicile of choice”. The latter can sometimes be achieved by severing almost all links with the UK and demonstrating a clear intention to live the rest of one’s life outside of the UK (apart for occasional visits).

 In addition if a UK domiciled individual manages to change their domicile to a new “domicile of choice” but later returns to the UK to live then the domicile of origin is considered by the revenue to have been revived automatically.  Thus for UK domiciled individuals living, as they expect, permanently overseas, for example in Cyprus, it may be possible to obtain a domicile of choice in another country.  This can never be assumed however and every case will be examined by the Revenue they will not give an opinion on this and will only make a ruling when forced to by the occurrence of a “chargeable event”.

Assuming this change of domicile has been agreed by the UK Inland Revenue one might feel justified that al one’s troubles were over in regards to Inheritance Tax planning  (apart of course from any UK “in situ” assets). This may unfortunately not be the case if there is a later return to the UK.

A recent ruling by the Revenue Commissioners in the UK has however provided a very interesting ruling on a particular situation. This involved a British born couple, Mr & Mrs Johnson, (UK Domicile of Origin) who spent most of their lives working outside of the UK. Although they returned often to the UK they did not break the tax residency rules and eventually retired to Spain where they purchased property and became involved in the local community. Using the chargeable event ruling route they obtained from the Revenue confirmation that they were considered to have obtained a Domicile of Choice in Spain.

Mrs Johnson became ill and was aided by here husband until 1996 when he died, at that time she returned to the UK to stay with a relative, this was however intended to be a temporary move until her health improved. Sadly this did not happen and eventually she bought the house next door to her relative in order to have a degree of independence whilst still having the help she needed. She also started renovation work on the house. Unfortunately during that time Mrs Johnson’s health deteriorated further and she died in August 2002.

At that time the Inland Revenue raised an assessment for IHT on the contention that she had returned to the UK and therefore her Domicile of Origin, UK, had been revived.    The executors challenged the ruling and in April of this year the case went to court when the court ruled in favour of the executors.

That ruling was based on these facts:-

1. When the Johnsons moved to Spain they bought property there and became very involved with local life and culture even to the extent that they lived deliberately in a very “Spanish” as apposed to Expat region.
2. It had been accepted that they had acquired a Domicile of Choice in Spain, although the shedding of their Domicile of Origin had only occurred when they retired to Spain –in spite of the fact that they had already spent more than 30 years living and working outside of the UK. 
3. This did not change when Mrs Johnson returned to the UK as she did not sell the property in Spain, she left all her personal property there and returned as often as her health permitted. What is more never abandoned her intention to return there if her health recovered.
4. A Domicile of Choice can only be lost if it can be shown that the individual had abandoned that choice.

The Revenue argued that Mrs Johnson had abandoned that choice by buying property in the UK, the Commissioners accepted, however, that she had intended to sell the UK property and return to Spain when her health permitted. They also accepted that there could not have been an intention to remain permanently in the UK if residence in the UK was not freely chosen, i.e. that she had done so for health reasons and not to make a permanent home.

More than anything what this has shown is that there is never a black and white answer where domicile is in question and we all need to be very aware of the pitfalls. The use of a gift into trust as a way to get a ruling on domicile from HMRC  is a simple and inexpensive option if it is dome properly.

Ross Pays is the Chairman of The FAA based in Cyprus. FAA offer advice on wills, tax registration services, home, health and car insurance and tax planning, including Inheritance Tax Planning, together with full accounting services.

Visit Ross Pays website at www.rosspays.com, Telephone 00 357 25 82 58 76, Fax 00 357 25 33 35 93 or e-mail ross@rosspays.com
Initial consultations are free and no obligation and fee quotations will be provided in advance for all services.