Avoiding Taxes or Income, Wealth and Capital Gains

Domicile & Residence in more Detail

□ BRITISH & IRISH DOMICILED & RESIDENT INDIVIDUALS: A person both domiciled and resident in either Britain or Ireland is liable to pay tax on their world-wide income and generally will be in a similar situation to those resident in other western European countries. It should, however, be noted that it is possible for a British person to move to Ireland or visa versa and enjoy very similar benefits to those outlined. Nevertheless, the British/Irish Double Taxation Treaty should be considered carefully, as it has many unique terms and conditions. In particular, a British or Irish person resident in Ireland or Britain* will generally only derive financial benefits from those assets/investments located outside of the British Isles.
* I.E. NOT IN THEIR COUNTRY OF DOMICILE.

□ BRITISH & IRISH RESIDENT BUT NON-DOMICILED INDIVIDUALS: In Britain and Ireland there are basically three types of domicile: a domicile of origin, a domicile of choice and a domicile of dependency.  In synopsis, the first would normally relate to the country in which one's father was born, though it can exist where one considers oneself ethically British, the second is when one takes permanent steps to acquire a new and permanent nationality severing all ties with the old (see Sir Charles Clore (No.2), 1984, STC 609), and the third relates to foreign women who married British domiciled men before 1974, in which case domicile would be automatically ascribed (see S.1 (2) of the Domestic & Matrimonial Proceedings Act, 1973). After 1974, women became subject to the normal rules appertaining to domicile. From the point of view of the foreign resident of Britain, the most important fact to remember is that British domicile is very difficult to obtain. In fact, it is quite possible to spend the majority of one's life in the United Kingdom and never become domiciled, provided even the most tenuous of links are maintained with another jurisdiction (see IRC v. Bullock 1976 STC 409). In Ireland the position is very similar to the UK save that domicile can more easily be lost. In fact, it is possible to have been born in Ireland, hold an Irish passport, and yet still be deemed non-domiciled provided the return to Ireland is not permanent and there is a clear intention to return to the country of long-term residence (see IDA 'Guide to Taxes and Tax Relief’s in Ireland1 P.8). The exact position in respect of individual taxes is as follows.

INCOME TAX: A non-domiciled resident will normally only be subject to income tax on those returns generated through activities and investments in the UK or in respect to certain remittances from abroad (see S. 65(5)(a) Taxes Act, 1988). Obviously, to ensure that offshore assets and investments do not become liable to UK taxes, it is important that the non-domiciled resident does not play an active part in the generation of new wealth. The reason for this is that if he is actively 'managing and controlling' his assets as a resident of Britain, there is in effect a British business in operation, subject to normal British taxes. Notwithstanding the above, with the correct advice, a non-domiciled resident can prevent all non-remitted income from becoming subject to British income tax. In fact, if proof can be adduced that those sums remitted to Britain derive from capital that existed before taking up residence, there will be no British tax consequences (see Kneen v. Martin 1935 1 KB 499).  The logic behind this somewhat semantic view is that any capital that existed before coming to Britain could not have been subject to British tax. However, any interest earned on such capital after the decision to reside should be taxed on the same basis as anyone else provided of course, the capital is actually remitted. Therefore, it is very important to be able to distinguish between capital and interest. Normally, tax consultants will suggest that different bank accounts are set-up outside of the United Kingdom for capital and interest possibly with an audit to confirm the original amount of capital before the move to Britain. It should also be noted that issuing loans from abroad, as a method of circumventing the capital and interest in question, would generally not be accepted by the British Inland Revenue (see Harmel v. Wright 1974 1WLR325).

CAPITAL GAINS TAX (CGT): Any capital gain realised by a non-domiciled resident of Britain and remitted to Britain from abroad, will be subject to indigenous capital taxes (see S.I2 Taxation of Chargeable Gains Act, 1992). Note, by definition, a capital gain will occur on disposition of any assets, which were held by the non-domiciled individual after 'ordinary residence' was established in the United Kingdom. In other words, any change to the pre-residence capital will immediately convert it into a capital gain or loss. Of course, if there is a loss no capital gains taxes can apply. However, if there has been a gain this will be fully subject to UK taxes on a remittance basis. To avoid such problems, it is highly advisable that a non-domiciled person's pre-residence capital is in exactly the same format, as it existed before British residence. The most common error made in these circumstances is to not ensure that the amount of capital needed to meet future living expenses is not maintained in Sterling. If this is not the case, then any changes from the applicable foreign currency to sterling will immediately convert the original pre-UK capital, into new capital with either a gain or loss.

 

INHERITANCE TAX (IHT): The principles outlined above also apply to inherited wealth, in that UK tax consequences will only occur on the remittance of such amounts back to the UK. However, it should be noted that unlike either income tax or capital gains tax, UK domicile could be inferred, for tax reasons only, if the otherwise foreign resident has been resident in Britain for 17 out of the previous 20 years.
♦ Note, in respect to the CGT and IHT tax consequences, the position is basically similar in Ireland.

□ INVESTMENTS IN BRITAIN OR IRELAND: At first glance, it would seem that a non-domiciled resident of either country could not expect to achieve any tax benefits from investments made directly in the country in question. However, again with the correct advice it may be possible to legally circumvent capital gains tax on local 'real1 or 'personal' property investments. For example, under S.I3 of the Taxation of Chargeable Gains Act, 1992, it is stated that non-resident companies are not subject to British capital gains tax, unless such gains have resulted in Britain through a branch or agency (in Ireland see the Capital Gains Act, 1975). Therefore, accepting that a non-domiciled resident is only taxed on a remittance basis and that a non-resident company can make investments in Britain, it is possible, remembering that shares in a foreign company are deemed 'movable' property, to purchase a building in Britain and avoid all capital tax consequences by selling the shares in the investment non-resident company and not the building directly. Further, such an investment structure will also legally circumvent, for property investments, the need to pay the British or Irish stamp duties of 1% and 9% (the 9% Irish stamp duty applying to most middle class homes) respectively. It is generally recommended, because of the 'boomerang’ effect, that respectable non-stigmatised non-resident company jurisdictions be employed.