Book Review: John Carrell and Martin Kelly

James Kessler’s Taxation of Foreign Domiciliaries has fast become the bible of those giving tax advice to foreign clients living in the UK. It is very much a handbook for practitioners in this field, but it is written in a pleasantly concise style. The author is incisive in his analysis of the law and dissection of the views expressed in the Inland Revenue Manuals. In our own firm, possession of Kessler is keenly fought over: one copy is never enough.

The first edition of Taxation of Foreign Domiciliaries appeared in 2001 as a successor to a much smaller book – Tax Planning for the Foreign Domiciliary – written jointly with Peter Vaines. The recently published second edition examines the law and practice as it stood at 16 July 2003.

The author examines the concepts of residence and domicile, before moving on to income tax (including the provisions on settlements and transfers of assets abroad), capital gains tax and finally inheritance tax planning. There are new chapters on residence of trustees, life policies, offshore funds, the inheritance tax consequences of transfers between trusts, and the duties of disclosure to the Revenue.

The hot topic in this field is undoubtedly the possible reforms to the residence and domicile rules, and the author begins with a discussion of the Government’s recent "background paper". In the light of the huge amount of comment and speculation which has been generated on the form of any future changes (and in particular the excellent STEP submissions), it is disappointing that the author confines himself to saying that it is "impossible to know" what will happen next.

One can perhaps understand the author’s reluctance to speculate on this issue in a practitioner’s text – any predictions may swiftly become dated. However, if the reforms do come to pass (and many commentators think that change is inevitable), the author would no doubt feel it necessary to produce a third edition dealing with the changes. It would have been to interesting to know what the author (who is perhaps the leading authority in this area) thinks may be in the pipeline.

The chapter on reform ends by setting out a "worst case scenario" – where practically all tax advantages of being domiciled outside the UK are abolished, and gives some interesting (though somewhat brief) ideas for pre-emptive planning.

The author has greatly expanded his chapter on residence. He points out that the case law is an unhelpful guide to the meaning of residence and says that "In this hopeless uncertainty Revenue practice rides to the rescue like the US cavalry". While the layout (and occasionally the content) of IR20 is confusing, the author provides helpful headings for each of the main categories of individuals leaving the UK and arriving in the UK.

For example, emigrants are divided into those a) going to work abroad, b) leaving the UK indefinitely (3 years plus) and c) taking "the Reed v Clark year out route". The last of the categories, which is of interest to UK domiciliaries as well as foreign domiciliaries, is discussed in detail with useful references to the Inland Revenue Manual.

The excellent chapter on the Schedule D remittance basis is a central feature of the book. The analysis here is well-reasoned and comprehensive, though one surprising omission is the lack of discussion of the mechanics of the tax charge when income is remitted. For example, it is not immediately obvious from section 65 of ICTA that income arising in one tax year and remitted in another is taxable in the year of remittance (rather than the year in which it arose). It is necessary to look at section 585 (relief for delayed remittances) to reach a firm conclusion on this point.

Two other minor gripes about this chapter. Firstly, the author retains the lengthy and technical analysis of sections 1, 1A and 1B of ICTA (rates of tax), with large chunks of the legislation quoted in full. The chapter would have read much better if this part had been condensed, with footnotes pointing the interested reader in the right direction.

Secondly, when discussing the lack of any practical distinction between Case IV and V, the author could perhaps have updated his comment that "No doubt the tax law simplification project will tidy this up in due course". The draft of the re-written legislation was published some time ago – the new Act (due in 2005) will indeed abolish this historical anomaly.

The reworking of the chapter on the remittance basis for employment income, in the light of ITEPA, is very welcome. The author includes a helpful table summarising the scope of each of the charging sections and where they can be found in the new Act.

It is interesting that the author does not comment at length on the recent decision of the Court of Appeal in Grimm v Newman, the first major decision on remittances in decades. Whether or not this reflects the author’s views on the importance of the case (or lack thereof) is not clear.

It could be said that Grimm v Newman simply involves the application of the long-established principle in Carter v Sharon, and that the force of the dicta is weakened by the lack of any Inland Revenue involvement in the proceedings. However, some of the comments of the Lord Justices are very interesting (particularly Carnwath LJ on remittances in specie) and the author could perhaps have made more of them.

The chapters on sections 739 and 740 of ICTA (transfers of assets abroad) are extremely impressive, and should be required reading for any practitioner advising in this area (whether in the context of foreign domiciliaries or not). The expanded chapter on the "motive defence" is of particular interest, although more for the author’s views on the practical application of the defence than the academic commentary on the meaning of "avoidance".

The new chapter on life policies plunges straight into the legislation without first giving an outline the chargeable events regime. But it rightly points out that making investments through life policies is a trap for UK resident foreign domiciliaries because policy gains are taxed on the arising basis rather than the remittance basis.

The chapter on ownership structures for the family home has also been enlarged. The main focus is on the benefit-in-kind provisions and the "shadow director" issue, an area where the author has particular expertise following his appearances in R v Dimsey & Allen. The layout of the chapter is not entirely user-friendly, but virtually every planning idea on this issue can be gleaned from this gem of a chapter which really does repay careful study.

The second edition has followed relatively quickly on the heels of the first, but it is a genuine rewrite with fresh insights into much of the subject matter (quite apart from the new chapters). It is an excellent book which is well worth buying, even though a third edition may be on its way before too long if the "reforms" see the light of day.