Book Review: Matthew Hutton

Taxation of Foreign Domiciliaries by James Kessler

(1^st Edition, Key Haven Publications Plc, 2001)

To begin with the conclusion, this book is a "must" for the bookshelf of every practitioner advising non-United Kingdom domiciliaries on their exposure to United Kingdom taxation. The book runs to 494 pages, costs £125, is well set out and is delightfully easy to read.

While this is a new book, the introduction confirms that it is the successor to Tax Planning for the Foreign Domiciliary written jointly by James Kessler and Peter Vaines: the occasional phrase betrays this ancestry (such as the reference to "our view" on page 70 as against the "my view" on page 374).

Twenty six chapters, broken clearly down into sections and sub-sections, deal with the concepts of domicile and residence, before moving on to income tax (including the anti-avoidance provisions concerning settlements and transfers of assets abroad), capital gains tax and inheritance tax. The final chapters consider the increasingly common situation of mixed domicile marriages, that "hardly perennial" the family home, deceased estates, identifying the settlor and situs of assets. All in all a very comprehensive coverage.

In fulfilment of the old Chinese curse, the book has been written in interesting times. We were made aware, certainly in 2001 (if not before) that the Inland Revenue were reviewing in particular the priority as between the excluded property rule and the reservation of benefit principle (and changed example 2 at the CTO Advanced Instruction Manual section D8, which had evidenced the traditional view that excluded property settlements "outflank" the reservation of benefit rule). This reconsideration is reflected on page 362 of the book. To those fearing legislative reversal of this useful interpretation, this year’s Budget speech said only that there would be a review of the rules relating to domicile and residence (i.e. not just domicile). At the date of writing this review, little has happened. There has been no formal consultation paper and merely a meeting convened with interested parties. The outcome therefore remains to be seen, in relation to not only excluded property settlements but also perhaps the special treatment given to non-United Kingdom domiciliaries under the United Kingdom tax system (if not also more far reaching reform relating to residence). James Kessler, writing in September 2001, concludes on page 18 in relation to domicile that "[it] seems more likely than not that, apart from tinkering changes, the present regime will continue for the foreseeable future". Even with the water that has passed under the bridge since then, it would be nice to think that that view still remained good – although that might be unduly optimistic.

It is trite to observe that the United Kingdom remains one of the most attractive tax havens for the foreign domiciliary. As the introduction to the book observes, "…with care and foresight and the adoption of an appropriate tax planning strategy, direct taxation in the United Kingdom may be largely avoided; or at least a UK resident foreign domiciled individual need pay no more tax than if he were not resident". The title of the book properly indicates that it is about taxation: tax planning, however, is never far behind. In relation to each of the relevant taxes, there is detailed description of the relevant legislation together with the decided cases and Inland Revenue concessions, coupled with discussion and incisive analysis. Frequent reference is made to the Inland Revenue manuals with dissection of the Inland Revenue’s views, together with, on a number of occasions where the author disagrees with those views, an opinion as to whether or not it is worth challenging the Inland Revenue in court (almost invariably not!).

There are a few places where the reviewer might have wished for more detailed discussion, for example:

The question of the source of interest, at section 4.14.2 on pages 65-67, does conclude with a reference to two other works. However, apart from quoting the well known and to this reviewer’s mind not very helpful Revenue Interpretation 58, the author does not discuss the possible permutations of the four Revenue indicia for establishing source arising out of the case of Westminster Bank Executor and Trustee Company (Channel Islands) Ltd v The National Bank of Greece SA, as well as considering other factors which may be relevant. The reviewer has heard it said for example that provision in the loan agreement reserving exclusive jurisdiction to the courts of a country outside the United Kingdom (even if ultimately any judgement might have to be enforced in the United Kingdom) is accepted by the Inland Revenue as a relevant factor.

It would be useful to have a cross reference to any such discussion at section 23.6 on page 405, where there could be some mention of the possibility of the borrower having to withhold income tax from interest payments if the loan has a United Kingdom source.

The subject of remittances receives exhaustive treatment, although there is no reference to the recent professional indemnity case of Grimm v Newman ²at for example 5.25 on page 109. This decision (subject to appeal) has caused something of a stir among professional advisers in suggesting that reliance on Carter v Sharon ³where a gift had been perfected outside the United Kingdom and the subject matter of the gift brought into this country by the donee may somehow not save the day. It appears however, from comments recently made by the Inland Revenue that what they say in their manual⁴, based on Carter v Sharon, remains good and is unaffected by Grimm v Newman.

Chapter 23 on the family home runs to just six and a half pages. This is a subject of particular interest to many practitioners (and their clients). Although the traditional ownership structures are described and briefly reviewed, there could usefully be more extensive treatment. The October 2001 House of Lords decision in R. v Allen [2002]⁵ is duly reported, with discussion what constitutes being a "shadow director". It would have been useful to have some detailed suggestions as to what might be done with an existing structure where the occupier is likely to be a shadow director. It is surprising that at section 23.7, Other planning possibilities, on page 405 the simple expedient of insurance against inheritance tax liabilities, at least where the problem exists for a finite term, is not mentioned.

Stamp duty (see also below) could do with fuller treatment, especially following the Finance Act 2001, s.119 charge of ad valorem duty on the gift of a property situated in the United Kingdom to an offshore company with which the householder is connected. Presumably the view is taken that at least for the time being the device of "resting on contract" will be sufficient (assuming that, following Finance Act 2002, s.115, the value does not exceed £10,000,000). However, that device is likely to become obsolete following the Finance Act 2003, if the proposals in the 2002 Consultative Document are to be enacted. It would also be helpful if, on top of the observation at the foot of page 383 that "there is generally no ad valorem stamp duty on gifts", it were noted that a gift of land subject to a liability may attract such duty under Stamp Act 1891, s.57.

There is discussion at section 3.11 on pages 47 to 50 on the way in which disposals can be advanced or (on emigration) deferred by the use of contracts, with or without simple or cross options. Reference is made to sections in the chargeable gains manual which warns of arrangements which the Revenue would regard as "devices" in the context of Extra-statutory Concession D2.

Section 5.14 on page 95 argues that schedule D income remitted to the United Kingdom after the taxpayer’s death but in the tax year of death does not trigger a tax charge. By contrast, the same is not true with employment income, whether remittance occurs during or after the year of death. ⁶It would be helpful if the issue were clarified in chapter 13 in relation to capital gains tax.

Remittances from a mixed fund of capital and foreign income

There is an interesting discussion on pages 116-118 of the decision in Scottish Provident Institution v Allen⁷, concluding with the Revenue view in the Inspectors Manual at IM 1566 and a critique of the Revenue view as follows: "This over-simplifies the law as expounded in SPI v Allen. There is no rule that the remittance of a mixed fund is bound to be treated as income. Suppose the taxpayer remits a substantial amount, exceeding the income, and applies it to an investment in the UK, or on capital expenditure here, such as the purchase of a house. It is considered that the "substance" of the matter, applying Lord Robertson’s approach, is that the remittance is one of capital. The position is even stronger if the taxpayer first uses an amount equal to the income of a mixed account on expenditure abroad of an income nature".

There is, on pages 172-177 a very interesting discussion (with practical application) of the way in which the settlement provisions of Income and Corporation Taxes Act 1988, s.660 (and the transfer of assets abroad provisions of section 739) apply in a variety of different scenarios.

On pages 294-299 there is an exhaustive treatment of the concept of "home" for purposes of the OECD⁸ model convention in the context of Taxation of Chargeable Gains Act 1992, s.10A. This is a point of considerable interest to United Kingdom domiciliaries seeking to mitigate chargeable gains on spending less than five consecutive tax years out of the United Kingdom in reliance on an applicable double tax treaty.

In the chapter on the family home it might be useful if there were further discussion of Statement of Practice SP 10/79, simply referred to as representing Revenue views (at section 23.3 on page 400). While widely thought not to reflect the law on the meaning of interest in possession (and it is interesting that in Eversden & another v IRC⁹ case the Revenue appear not to have attempted an argument based on SP 10/79 (the book could benefit from some description and critique of the statement. The book suggests, under the heading ‘Direct ownership by discretionary trust’ that "[the] practical solution may be to arrange a lease of the property to the beneficiary at a nominal rent". Certainly, this structure escapes the ambit of SP 10/79 on its terms. While this usually has a capital gains tax downside in restricting the protection of the main residence relief for trustees in Taxation of Chargeable Gains Act 1992, s.225 to all but the tiny value of the lease, this will not in practice matter where the owner of the property is resident outside the United Kingdom as, in the case in point.

Discussion of the anti-avoidance provisions of Taxation of Chargeable Gains Act 1992, s.86 and s.87 on pages 308-315 might be thought to be unduly brief. On the other hand, as observed at the foot of page 308, the problems raised by those sections mainly affect individuals domiciled in the United Kingdom, so the discussion in this book is an outline only. Interested readers are referred to another publication.

That chapter, 14 on Capital Gains Tax and Trusts, concludes with an intriguing question as to the taxation analysis for United Kingdom resident trustees of a settlement made by a person who was at settlement and continues to be foreign domiciled, but who is resident in the United Kingdom and has an interest in the trust (as defined by section 77): does the remittance basis applies if the trustees dispose of assets situated outside the United Kingdom? The Revenue’s manual at CG34911 says that the remittance basis does not apply, on the grounds that the chargeable gain treated as arising to the settlor under section 77 does not accrue by reason of the disposal of assets situated outside the United Kingdom, within the meaning of section 12, but as a consequence of the operation of the statutory provision. James Kessler’s opinion, while conceding that the Revenue view is not unarguable, is that the remittance basis does apply because section 12 does not expressly provide that the disposal must be by the individual. In this case the gain does accrue "from" the asset (albeit indirectly, or in conjunction with section 77). However, the author concedes that, to establish this view, litigation at least at the level of the High Court is likely to be required. Finally, the analysis would not apply if the settlor were to die in the same year of assessment. This is because the gains would be chargeable in full on the trustees.

Within chapter 16 on Excluded Property for IHT, there is from pages 331-348 an exhaustive discussion of the analysis, with some critique of the Revenue’s view, of various permutations involving transfers of property between settlements and additions, whether or not by the original settlor, to existing settlements, perhaps involving changes of domicile meanwhile. The Revenue take the view that, in analysing the status of property added to a settlement for purposes of the excluded property rules, the relevant time in Inheritance Tax Act 1984, s.48(3) is the time of addition not the date of the original settlement (CTO Advanced Instruction [not as stated on page 345 "Investigation"] Manual (para G.13). The root problem is the Revenue view that each addition to an existing trust constitutes a new settlement, relying on section 43(2) of the 1984 Act. The problem, as noted by the author on page 347, is that this view "is simply incompatible with the remainder of the IHTA. If each addition to an existing trust is a new settlement it makes nonsense of the added property provisions in s.67 IHTA 1984 and all the many references to added property in the surrounding sections".

"It is suggested that the legislation should not be interpreted in the manner advanced by the Revenue. However, it may take litigation before they will amend their published stance on this issue".

At section 19.6 on pages 374-376 there is a discussion of the issue whether property in a life interest trust which is treated by Inheritance Tax Act 1984, s.49(1) as comprised in the estate of the life tenant is net of any liabilities in the trust. This is a point of current interest in the context of the lifetime loan scheme for the family home (discussed in Simon McKie’s article in this Issue). James Kessler argues that, while there is no express legislative deduction for the loan, "the property in which the interest subsists" for purposes of both section 49(1) and as slightly amended section 52(1) must be the value of the property subject to the lien which the trust fund. The difficulty, however, as argued by Simon McKie, is that, strictly, the property is the gross and not the net value. James Kessler reaches the same conclusion as Simon McKie by referring to the scheme of the act which must assume a deduction for liabilities. However, on the lifetime loan scheme at least, this remains a point which may be taken by the Inland Revenue in any litigation.

Excepted estates

Section 21.3 on page 386: the changes made in August 2002 (after publication of the book) means that the estate of a person who died domiciled outside the United Kingdom can, subject to (broadly) the value of the United Kingdom estate not exceeding £100,000, be an excepted estate. This is a tidying up rule which will be useful in practice.

There is a discussion at section 22.4 on pages 391-395 of the reservation of benefit rule on an inter-spouse gift. The exception to these rules under Finance Acts 1986, s.102(5)(a), litigated successfully by the taxpayer in Eversden, is subject to some qualification with gifts from a United Kingdom domiciled to a foreign domiciled spouse given the limitation of the exemption to £55,000. One solution here is said to be to sell assets at market value [though no mention is made of stamp duty] so avoiding a disposal by way of gift. Various permutations are discussed. This was the subject of an article by Judith Morris in Private Client Business 2002 Issue No 1.

In terms of capital gains tax planning for mixed marriages, section 22.9 on pages 395 and 396 discuss possible strategies. The primary question in any such case (whether or not the marriage is of mixed domicile) is what action it would be sensible to take to ensure that the donee spouse cannot be treated as a "conduit" for the donor spouse, so that under Furniss v Dawson principles the donor spouse is treated as the person making the disposal. The warning is given that care should be taken on implementation and that the donee spouse may need independent advice, together with "watch Furniss v Dawson!".

There is also a reference to Furniss v Dawson at section 25.14 on page 443 "Tax planning to create settlement with foreign domiciled settlor". Nowhere in the book could the reviewer see a description of the principle, perhaps so well known to the professional world as not to need elucidation. However, there is on the unnumbered page xxiii [indeed pages xxi-xxvii are unnumbered] "a Note to the Lay Reader": he or she might at least welcome such elucidation, even if heeding the warning given that while the subject may be researched in depth without recourse to professional advice, "implementation of proposals involving use of companies and trusts will require the involvement of competent professionals…". Certainly in the Table of Cases, Furniss v Dawson does not list all its appearances in the book.

Apart from the domicile and residence review mentioned above, little has transpired over the last year to affect the up-to-date value of the book. Among discussion of decided cases in chapter 1 on domicile, the author chose not to comment on the Special Commissioner’s decision in F and another (personal representatives of F deceased) v Inland Revenue Commissioners¹⁰. More recently there has been the decision in Civil Engineer v IRC¹¹ discussed on p*** of this Issue. The Finance Act 2002 changes in relation to deeds of variation will require reflection in the next edition at section 21.4 on page 387 and at section 24.7 on page 418. As will, at section 20.5 on page 383, the stamp duty reforms envisaged for 2003 by the 2002 Consultative Document.

Small internal inconsistencies

Under the Table of Abbreviations there is a lack of consistency by using, for example, "IHTA (rather than "IHTA 1984") to refer to Inheritance Tax Act 1984: sometimes it does and sometimes it does not. Similarly, sometimes the expression "Taxes Act 1988" is used rather than "ICTA 1988", having defined it. The expression "SP" is not defined in that list. Otherwise the book is mercifully free from mistakes of a typographical nature (the cross reference in footnote 4 on page 394, which should be to section 17.11, being a very rare exception).

Any very minor criticisms should not be allowed to detract from what is an excellent book: buy it!