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Domicile Disputes: Actions speak louder than words

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HMRC continues to challenge taxpayers’ domicile status successfully. Recent case law demonstrates the increasing scepticism with which the First Tier Tribunal approaches uncorroborated declarations of intention, and the factors it will take into account when determining the value of witness evidence, including the fallibility of memory and the witness’ relationship to the taxpayer. Procedural points also continue to play a pivotal role in domicile disputes. Taxpayers who intend to rely on a non-UK common-law domicile should collate substantial objective evidence of their domicile status, or will face unanticipated tax liabilities if HMRC’s challenge is successful.

Domicile continues to attract significant HMRC scrutiny

The concept of common-law domicile is of central importance to tax and succession for individuals with UK connections. It affects, among other things, their entitlement to claim the remittance basis, their exposure to IHT, the tax treatment of trusts, and even succession to their estates.  

Briefly, an individual’s common-law domicile is determined in one of three ways:

  • domicile of origin: acquired at birth, usually on the basis of one’s father’s domicile;
  • domicile of dependency: acquired by a dependent person during their minority, from the person on whom they are dependent (again, usually from one’s father); and
  • domicile of choice: acquired by a taxpayer making their residence in a new jurisdiction and forming a settled intention to remain there permanently or indefinitely.

Note that common-law domicile is separate from deemed domicile, a statutory concept which, broadly speaking, denies many of the tax advantages of being non-UK domiciled to those who have been UK resident in at least fifteen out of twenty consecutive tax years.  

For a number of years now, HMRC has been approaching taxpayers’ claims to be non-UK domiciled with ever-increasing scrutiny and perhaps even cynicism. This has continued even following the changes to the rules in 2017 introducing the concept of deemed domicile for income tax and CGT purposes. Taxpayers who consider themselves non-UK domiciled would be well-advised to ensure that their actions and decisions accord with their proposed domicile status and to collate objective evidence of this so far as possible. 

Recent case law 

As a common law concept, domicile is defined and understood by reference to a large volume of case law. Three judgments of the First-tier Tribunal (FTT) handed down in 2023 give further guidance about how domicile disputes will play out in court.  In particular, these judgments shed new light on the critical importance of objective evidence of a taxpayer’s intentions at the relevant time and, conversely, the scepticism with which uncorroborated or subjective statements of the taxpayer’s intention – either by the taxpayer themselves or by third parties – will be regarded. Given that domicile is often ‘tested’ after a taxpayer’s death, two of these judgments are particularly useful because they concern the domicile of living individuals, one of whom provided oral evidence at his appeal.

Witness recollections are fallible, fluid and malleable

In Strachan v HMRC [2023] UKFTT 617 (TC), HMRC challenged the taxpayer’s claim to be domiciled in Massachusetts, USA and issued discovery assessments for the tax years 2011-12 to 2014-15 (as well as a closure notice following an enquiry into his tax return for 2015-16).  In short, the FTT found that Mr Strachan had never acquired a domicile of choice in Massachusetts and was domiciled in England and Wales in the relevant years.

Mr Strachan did not give witness evidence in person due to poor health, and the FTT took issue with the proposal in his wife’s first witness statement that she would give evidence “in his place”. The FTT did not agree that it would be possible for Mrs Strachan to “stand in the shoes” of Mr Strachan, given the importance of certain decisions taken personally by Mr Strachan throughout his life to his domicile status. However, since Mr Strachan was unable to appear, Mrs Strachan’s evidence nonetheless bore significant weight.  

The FTT noted the important statements of Leggat J in Gestmin v Credit Suisse [2013] EWHC 3560 (Comm), which included that witnesses are not aware of the extent to which their own and other people’s memories are unreliable, fluid and malleable; and that memories of past beliefs can be revised to be more consistent with current beliefs when those memories take on new significance. In the context of civil litigation, Leggat J described witnesses as “subject to powerful biases” and noted that their evidence is generally collated into a witness statement after they have reconsidered the events in light of the new dispute, by lawyers who are wholly aware of the significance of what the statement includes or excludes. The FTT placed particular emphasis on the following conclusions of Leggat J:

In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts… Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.

Although Mrs Strachan was described as giving detailed and frank evidence, the FTT noted her understandable loyalty to Mr Strachan and agreed with HMRC’s counsel that she was aware of the “targets she is aiming for” in terms of the factors relevant to a determination of Mr Strachan’s domicile. Mrs Strachan seemed aware of the legal test for acquiring a domicile of choice and the FTT noted that she used specific expressions often key to determinations of domicile: for example, she stated repeatedly that their property in Massachusetts was Mr Strachan’s “permanent home”. While there was no suggestion that Mrs Strachan had been dishonest or obstructive, the FTT concluded that her evidence was inevitably tainted by her underlying intentions. HMRC guidance at RDRM22320 states explicitly that tax mitigation motivations are directly relevant to statements of intended ‘permanence’ in the context of a taxpayer acquiring a domicile of choice.

Interestingly, however, the FTT found that the assessments for the first two years (2011-12 and 2012-13) were out of time and so allowed the appeals for those years. In brief, for these assessments to be valid, HMRC was required to demonstrate that the loss of tax was brought about by Mr Strachan’s carelessness (or that of a person acting on his behalf) under s 36(1) Taxes Management Act 1970 (under the extended assessment time limits in the requirement to correct legislation in Finance (No2) Act 2017, Schedule 18). The FTT found that Mr Strachan was careless by virtue of failing to take professional advice on his domicile status since 1987. However, HMRC was not able to discharge the burden (which was on it) of proving that the loss of tax was “brought about” by that carelessness: broadly because a reasonably competent adviser might have advised the taxpayer that he was non-UK domiciled. This is another illustration of the importance of considering procedural points in this (or indeed any) kind of dispute, particularly where the burden is on HMRC to show that the assessment was validly issued.

Actions are a more reliable indicator of intention than oral evidence

In Coller v HMRC [2023] UKFTT 212 (TC) the FTT considered the domicile of the appellant, Mr Coller, by reference both to his life and to the domiciles of both his parents (Mr Coller’s mother’s domicile being relevant to his domicile of origin because his father died during Mr Coller’s minority).  The facts of this case are complex but, in brief, Mr Coller’s father had fled Austria to escape Nazi persecution and his mother was born and raised in Ireland. Mr Coller then relied on his status as non-UK domiciled by virtue of his parentage in order to claim the remittance basis of taxation.  HMRC alleged on the contrary that even if Mr Coller’s parents had remained non-UK domiciled throughout Mr Coller’s minority, he had thereafter formed a domicile of choice in England and Wales and was therefore not entitled to claim the remittance basis.

Like Strachan, this judgment leans heavily on the conclusions of Leggat J in Gestin in respect of the fallibility of memory and the importance of corroborating documentary evidence when considering subjective records or recollections of taxpayers’ intentions. When tested against the objective facts of Mr Coller’s settled life in England, which included substantial property interests, his business operations, social and cultural connections, and ongoing philanthropic activities, the FTT found that Mr Coller’s oral evidence that he did not intend to remain in England permanently or indefinitely carried little weight. The judgment goes as far as to say that “we do not accept, at face value, [Mr Coller’s] bald assertions regarding his intentions”.  

Further evidence of the FTT’s attitude to witness evidence provided on behalf of a taxpayer claiming to be non-UK domiciled comes from its treatment of evidence provided by Mr Coller’s mother. She died after preparing her witness statement but before the hearing, and so there was no opportunity for her to be examined on her evidence. While the FTT did attribute some evidential weight to her witness statement (despite HMRC’s contention that it should be given little weight), it also noted that the witness statement “is likely to contain unconscious bias in favour of the appellant’s observations”.  

Little weight is attached to declarations of subjective intention

In Shah v HMRC [2023] UKFTT 00539 (TC), the executor of the late Mr Shah brought an appeal against HMRC’s decision that Mr Shah had been domiciled in England and Wales at the time of his death. All parties accepted that Mr Shah had a non-UK domicile of origin, but Mr Shah’s executor contended that he had not acquired a domicile of choice in England and Wales between moving to the UK permanently in 1973 and his death in 2016.

Mr Shah’s conduct during his lifetime did not indicate strong links to India: he gave up his Indian citizenship in 1961 and visited only twice between the early 1970s and his death, for stays of a few weeks each time. Several potential ‘trigger events’ for a return to India – such as the death of his wife, the sale of his business, his retirement, and the sale of the family home – had occurred but on each occasion, Mr Shah had remained in the UK.

In 2011 Mr Shah had prepared a DOM1 – the HMRC document formerly used to collate evidence relevant to a taxpayer’s domicile – in connection with his son’s domicile status and estate planning. The DOM1 had never been provided to HMRC and the FTT found it was unreliable and inconsistent with other evidence. As seen in other recent cases, the FTT viewed this written statement of Mr Shah’s intentions with suspicion in light of conflicting factual evidence of his conduct at the relevant times.  For example, the FTT did not agree that an open invitation to stay in one of the spare rooms in his brother-in-law’s flat in Mumbai amounted to Mr Shah having “retained accommodation” in India, and while the DOM1 referred to “periodic trips for pleasure” abroad between 2001 and 2011, in fact Mr Shah had travelled abroad only once during this period. The FTT concluded that the information on the DOM1 form appeared to reflect answers Mr Shah believed or hoped would be helpful in demonstrating his non-UK domicile, rather than genuine statements of his intentions.

Relatives and acquaintances of Mr Shah gave evidence of his intention to return to India based on conversations during his lifetime. Mr Shah was described as a person who, unfortunately, preferred verbal communication over written correspondence, and these witnesses’ recollections were categorised by the FTT as more akin to speculation than evidence.  In this context, the FTT referred to the statement by Mummery LJ in Agulian and another v Cyganik [2006] EWCA Civ 129 that “… in a case of proof of the subjective intentions of a person who has died, little weight is attached to direct or indirect evidence of statements or declarations of intention by the person concerned.” It seems clear that in the absence of objective or even any documentary evidence, witness evidence from those who undoubtedly knew Mr Shah well for many decades was not going to satisfy the FTT as to his intentions. 

Lessons for the taxpayer

Taxpayers who organise their affairs on the basis of being non-UK domiciled must carefully consider the objective evidence which they (or their executors) could adduce should their domicile be disputed by HMRC, particularly given that intentions can evolve over a taxpayer’s lifetime. In Shah, the FTT noted that the absence of a ‘Damascene moment’ when Mr Shah acquired of a domicile of choice in England and Wales was no obstacle to HMRC’s case, and a taxpayer’s conduct over many decades can be treated as a sufficient demonstration of their intentions even if, subjectively, the taxpayer did not intend it to be so.

While the preparation of a domicile statement is a worthwhile exercise in recording a taxpayer’s intentions at a certain moment – and should prompt a useful and realistic assessment of the objective evidence of any taxpayer’s domicile – it is by no means conclusive. As recent case law indicates, the First-Tier Tribunal places very little weight on subjective statements of intention where there is a dearth of objective corroboration (or, indeed, where factual evidence actively contradicts the taxpayer’s stated intentions).  

The conflict between the subjectivity of an individual’s intentions and the objectivity of evidence increasingly required by the FTT in domicile disputes should be borne in mind. Hard evidence is crucial and reference should be made to HMRC’s extensive (non-exhaustive) list at RDRM23080 of the factors and documentary evidence it would consider relevant to a domicile enquiry, which range from political activities and choice of professional advisers to medical histories and insurance policies. Even honest and forthright witness evidence from the taxpayer or those closest to them will not be sufficient without corroborating evidence – and is increasingly even being viewed with suspicion, particularly where the witness understands the law around domicile and implications which flow from establishing certain facts, as was the case in Strachan.

It is also worth noting the taxpayer’s success in Strachan for certain of the tax years on procedural grounds. The law of domicile can give rise to interesting points of this nature (see e.g. the recently-concluded Embiricos litigation among others), and these sorts of arguments should certainly not be forgotten.

In short, the trend for increased HMRC scrutiny of domicile status shows no sign of abating. Taxpayers who are unsuccessful in the face of HMRC challenge almost inevitably face significant unexpected tax liabilities, and so the stakes are high.  

This article was first published in the Tax Journal.

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