Tax Planning for the Foreign Domiciliary (2nd Edn.)

Review by Jonathan S Schwarz

The United Kingdom has long been a centre of international finance, trade and business. It has also attracted wealthy foreigners to live as well as visit for extended periods and has served as a haven for refugees.

The system of taxing individuals who are resident but not domiciled in the UK has become one of the central features that make London the financial and business centre that it is. The current rules have developed over a long period of time and, like most areas of tax law, show inconsistencies and anomalies resulting from a patchwork of legislation and judicial decisions. For example, the authors observe that the question as to what constitutes a remittance to the UK is not identical in relation to all sources of foreign income.

Several other countries adopt similar remittance systems for non-domiciled residents. The closest is the Republic of Ireland. Its rules parallel the UK in many respects.

The book comprises twelve chapters. The first chapters are largely introductory dealing with concepts of domicile and residence, income tax in this context, the meaning of foreign income and an explanation of the remittance basis and the special results relating to employment income.

A full chapter is devoted to income tax anti-avoidance provisions affecting offshore trusts. These comprise principally the rules relating to settlements generally and the specific anti-avoidance provisions relating to transfer of assets abroad under Taxes Act 1988 section 739 and the receipt of benefits by non-transferors under section 740. These two provisions are not restricted in their application to trusts. Section 739 in particular has ben the subject of much litigation over the years. Both are the most important weapons in the arsenal of the Inland Revenue in the context of offshore income and individuals ordinarily resident in the UK. Section 739 has been the subject of two important appeals to the House of Lords recently.

Neither case involved a non-domiciled individual. In the Willoughby case, however, the transferor was not UK resident at the time of the transfer. The Court of Appeal decided that the section did not apply to non-resident transferor as had been stated in Parliament in the 1930's when the legislation was introduced. As a result of the decision an amendment in the 1997 Finance Act brings non-resident transferors into the ambit of these provisions.

The book examines several common circumstances that might involve non-domiciled individuals including the foreign settlor, the immigrant settlor and the foreign domiciled settlor in receipt of benefits in and outside the UK. The authors offer a number of planning points in the context of these difficult provisions. The House of Lords decision in the McGuckian case which allows a broad view of the substance rather than the form of transactions may result in the technical analysis of transactions to only be a firs step in considering their susceptibility to these provisions.

The second part is devoted to capital gains tax in the context of the remittance system and capital gains tax in relation to trusts.

The final four chapters deal with domicile and inheritance tax including the territorial exemption, reservation of benefits and inheritance tax planning in the context of non-domiciled individuals.

The authors have brought the key elements of this subject together in a well organised and systematic way. It is true to its title and provides a number of planning ideas for non-domiciled individuals. A number of practical problems that frequently confront such individuals are thoughtfully analysed and explained. Such as how to deal with mixed funds comprising both income and tax free capital. Similar issues in relation to remittance of parts of a gain are helpfully analysed.

Over the years moves have been initiated form time to time to either eliminate or reduce the benefits of the regime for foreign domiciliaries. In each case legislative proposals have been withdrawn recognising the benefits of the system to the UK economy as a whole. The most recent proposals to significantly narrow the scope of the system were initiated by the previous Conservative government. Proposals to restrict the system by the Labour government will acknowledge the role that these rules play in maintaining the competitive edge of the UK as a world trading and financial centre.

FT World Tax Report

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