UK expats should be counting the days they spend out of the country, but there is more to tax planning than staying away.
Counting the days back home on the range
I arrived back in Dubai just a few days ago, but my heart is still in Montana, on the range, where cowboys do what cowboys have to do ? wear brightly coloured check shirts and walk in an extremely unnatural way. I developed the cowboy gait pretty quickly, not because I am a natural horseman, but because I had accidentally been given a female saddle. It gave new meaning to the expression "hot to trot". (did you know that Western saddles are gender-oriented? No, neither did I. But I can assure you, it makes sense). It took me three days in the UK, including walking my daughter up the aisle on her wedding day, before I stopped attracting attention from bemused onlookers.
But what of financial planning you may well ask? One of the reasons I spent so much time in the US this summer was to avoid clocking up days in the UK, thus ensuring that I would maintain my UK non-residency status and all the tax benefits that go with it. But it seems from recent court cases that counting days and keeping below the allowable limits may not be enough to satisfy Her Majesty's Revenue & Customs (HMRC).
Tax planning for UK expatriates hinges around domicile and residency. In UK law, domicile is what you are born with and relates to your place of origin, especially the nationality of your parents. It is very hard to change your domicile. It can be done, for example, by emigrating and severing all ties with your homeland, but it is not easy. Continuing to own a house in the UK, maintaining golf club membership or even visiting your dentist can all be instrumental in determining your domicile. One famous film star (Richard Burton, I believe) lost his case to be classified as a Swiss domicile when he asked, in his will, to be buried in Wales. Why would anyone want to be buried in Wales, unless it holds some special, heartfelt meaning that derives from place of origin? Despite years of yoghurt and emmental cheese, and a growing passion for army knives and cuckoo clocks, his heart was still in Wales.
The reason that domicile is so important in tax planning is that UK domicile implies that you are liable to UK inheritance tax no matter where you are currently living. This means that most UK expatriates living and working in the UAE continue to be treated as UK domiciles and therefore remain liable to UK inheritance tax on their worldwide assets. Residency is mainly about where you are currently living and working. Most expatriates living and working in the UAE will be judged to be UK non-residents provided they abide by the 91-day rule and, as confirmed by a recent court cases, if their lifestyle does not continue to be UK-centric.
UK non-residency is extremely important to expatriates in the UAE because without it, you become liable to UK income tax. In a recent high-profile court case, a wealthy businessman, Robert Gaines-Cooper, lost his ongoing battle with the HMRC to be declared a UK non-resident. He had, in fact, abided by the 91-day rule but had fallen foul of other considerations in relation to lifestyle. The court decided that throughout the period in which he had claimed to be non-resident, England had remained the "centre of gravity of his life and interests". He was declared to have been a UK resident in that period and was, therefore, liable to UK income tax on his worldwide earnings. The facts of the case are interesting.
In 1975, Mr Gaines-Cooper bought a house in the Seychelles. He also invested in and operated a plastics manufacturing business there. This allowed him to be granted, in 1976, a Seychelles residency permit. He retained a house and farmland in England, but these were held through an offshore company. Since 1976, he had not physically been present in the UK for more than 91 days in any one year and thus believed himself to be a UK non-resident for tax purposes.
In 1993, he married a woman from the Seychelles. The marriage took place in England and, subsequently, in 1994, his wife applied for naturalisation as a British subject. Their son was born in England in 1998 and went to school there until 2005. The court refused to accept his claim for non-residency because, in its judgement, Mr Gaines-Cooper had lifestyle ties with the UK. In the new HMRC booklet on residency and domicile (HMRC6), the introductory paragraphs state that residency is determined by the facts of each particular case; it is not simply a question of the number of days spent in the UK.
While this is true, you are still required to abide by the 91-day rule. This is necessary but not, by itself, sufficient in the determination of UK non-resident status. For those of you who are still counting, please be aware that the definition of a day in the UK was changed on April 6, 2008. Prior to that date, the day of entry and the day of departure were not considered as days in the UK. After that date, a day in the UK is a day in which you are there at midnight.
So as long as I stop making a habit of parading down Winchester high street in my leather chaps and ask to be buried in Jackson Hole, Wyoming, I should be OK. Bill Davey is a financial adviser at Mondial-Dubai. If you have any questions on this article or any other financial matter, you can contact him at firstname.lastname@example.org