Are foreign domicile of choice residents being punished?

What makes you a UK resident? Many would think this is pretty straightforward, but, as Emma Chamberlain of Pump Court Tax Chambers noted in her presentation to the STEP Autumn Tax Conference recently, it can be the cause of much hand-wringing among private client advisors.

Why? Well the rule states that you must live in the UK for 15 years out of 20 to qualify. Many clients will need reminding that this does not mean you can leave after 16 years and no longer be a resident. In fact, it will take clients six tax years abroad to lose their domiciliation.

During those years they will therefore be classed as a resident for inheritance, and other tax purposes. For example, if a trust is set up, assets are sold or any other gains are made they will be taxed as if the client was always a resident – if they return within six years.

Clients’ choices are clear – stay away for six years, or do not make any gains during that time and move back, if they want to avoid accruing tax for that period.

Even more punitive are rules for former UK residents who claim a foreign domicile of choice. Chamberlain noted that these rules seemed to have been introduced to catch ex-pats living in Hong Kong, born in the UK and formerly domiciled there; they now wish to domicile themselves in Hong Kong, but retain UK property or UK links.

If they return to the UK for any reason temporarily they will be taxed on an arising basis and receive no income tax or capital gains tax protection or any protection on foreign income or offshore trusts.

Both situations are relevant to advisors, and particularly trustees to be aware of. If a Trustee is advising the settlor on their moves and domicile they must make sure these deadlines and time constraints are adhered to. Trustees must be aware of settlor domicile as they are liable for 10 year charges which will be affected by being subject to UK tax.