Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about the domicile status and tax implications for a Pakistan-domiciled woman who recently returned to the UK.
‘I have a client who acquired a domicile of dependence in Pakistan in 1971 when she married. She has lived outside the UK until recently.
She remains domiciled in Pakistan as a national. I am unsure as to whether that domicile fell away when she returned to the UK. I have searched far and wide and, to my puzzlement and frustration, I cannot seem to find a definite answer.
I believe the deemed domicile rules for inheritance tax [IHT], income tax and capital gains tax [CGT] need to be reviewed separately as my client could be deemed domiciled for one and not the other.
If readers could point me in the right direction, that would be very much appreciated.’ Query 20,293 – Worldly.
Terry Jordan’s reply: What is the client’s domicile of origin?
‘Domicile is a concept of private international law, different from citizenship and nationality, and connects a person with a particular territory for various non-tax purposes including validity of marriage, succession, and the ability to start certain legal proceedings in the English courts.
Worldly has omitted one rather important piece of information: his client’s domicile of origin. As below, it would be particularly relevant if she was born in the UK with a UK domicile of origin (strictly a person is domiciled in England and Wales or Scotland or Northern Ireland). We are told that she acquired a domicile of dependence in Pakistan when she married in 1971 taking her husband’s then domicile on marriage.
What Lord Denning, when Master of the Rolls, described in the Formosa case (1962 EWCA Civ J 0725-2) as ‘the last barbarous relic of a wife’s servitude’ was abolished with effect from 1 January 1974 by section 1 of the Domicile and Matrimonial Proceedings Act 1973. Section 2 provided that a married woman who at the time had a domicile of dependence by marriage is treated as retaining that domicile unless and until it is changed by acquisition or revival of another domicile.
In CIR v Duchess of Portland [1982] STC 149 (an income tax case), the taxpayer did not lose her UK residence at any time after 1973, and thus failed to establish that she had acquired a domicile of choice in Québec.
Until 6 April 2017 the deemed domicile provisions applied only for IHT (and the income tax charge on pre-owned assets-POAT) purposes and an individual was treated as domiciled within the UK if tax resident here for 17 out of 20 years of assessment. From that date an individual is deemed domiciled for all tax purposes if resident for 15 out of 20 tax years.
‘Returners’ (individuals born in the UK with a UK domicile of origin) are deemed domiciled under IHTA 1984, s 267 (1) (aa) if UK resident in a relevant tax year having been resident in either of the preceding two tax years. In that respect the rules differ slightly between income and capital gains tax on the one hand and inheritance tax on the other.
If Worldly’s client is not a ‘returner’ it will be necessary to establish her domicile at general law.
If she is domiciled in Pakistan under that country’s law and under ours the effect of the treaty with Pakistan which predates the abolition of death duties there in 1979 may be to disapply the deemed domicile provisions in respect of non-UK situs assets passing on death under a non-UK disposition (eg her will).
As Dymond’s capital taxes says at 31.1401 ‘Until the agreement is terminated, therefore, Pakistan may have some attractions as a tax haven for moribund millionaires.’
Having married in 1971, I presume the client is at least now in her 70s. In the Shah case (TC8842) Mr Shah who was in his late 80s when he died was held to have acquired a domicile of choice within the UK.’
The full article is also available on the Taxation website.
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