The shifting moral ground on the subject of tax avoidance is an endless fascination to me. So when I was debunking the idea of a wealth tax in a recent post, and expounding the virtues of inheritance tax in covering the same ground, I was led to think about where on the abusive / artificial / aggressive / centre ground / behaviour encouraged by the tax system continuum the standard piece of inheritance tax planning for non-domiciles lay. And it’s a damn good question.
A touch of basic revision first. Every taxpayer is born with a domicile of origin (usually father’s domicile at date of birth), which until taxpayer reaches adulthood is a domicile of dependency, meaning that it changes if and when father’s does. If father is unknown (a friend of mine used to say his mother described his father as ‘some soldiers’ – I think he was joking) then it is mother’s domicile that matters in this respect. At age 18 (or on marriage if earlier) a taxpayer acquires a domicile in his or her own right.
A domicile of origin is quite difficult to change. It requires a cutting of ties (family, social , financial, residential etc.) with the domicile of origin and the acquisition of equivalent ties with one, and one only, new country or state, which becomes the domicile of choice. A domicile of choice, on the other hand, is easy to lose simply by cutting the relevant ties; if no new domicile of choice is acquired, the domicile of origin re-asserts itself even if the taxpayer has nothing to do with the old place any more.
The classic proofs of domicile used to be making a will in the desired jurisdiction (still a good one) and buying a grave plot there, although quite how the modern fashion for cremation has affected that one I am not sure; buying a grave plot as part of a tax planning exercise sounds a little macabre to me.
So if one’s father had a non-UK domicile, and managed to retain it, one has a decent shot at establishing non-UK domicile oneself. I refer to UK domicile, but actually one is domiciled in England and Wales, Scotland or Northern Ireland. In the US, one is domiciled in an individual state. In the balmy innocent days before the introduction of the remittance basis charge ( see below) I spent many a happy hour obtaining HMRC domicile rulings for taxpayers on a no win no fee basis, achieving a number of against-the-odds successes and never in fact having a refusal from HMRC, which is either down to spectacular debating skills or good choice of cases.
Non UK-domicile brings with it a number of significant tax advantages. One of these was that a taxpayer’s non-UK income and gains were only taxed here on the remittance basis, i.e. if the taxpayer was careless enough to bring them here. This was bonanza time for offshore banks, as it meant that taxpayers needed income accounts, capital accounts and capital gains accounts to separate their non-UK funds, to demonstrate that they were bringing only capital to the UK when they made remittances.
During the latter stages of the previous Government the press noticed this, and got all upset about it. This resulted in what I still think is the most objectionable pieces of tax legislation that has ever besmirched the UK statute book, and also resulted in me becoming convinced that if George Osborne was the answer, someone had asked the wrong question. For he it was, never let it be forgotten, who suggested that non-domiciles who had been resident in the UK for at least 7 years should have to pay a flat rate annual tax charge for the right to use the remittance basis. Even more shockingly, Alastair Darling also thought this was a good idea, and promptly stole and implemented it.
Now you are probably thinking that I reckon this is so objectionable because it deprived me of a lucrative source of income from obtaining domicile rulings. Well no actually, I reckon it is objectionable because it does not discriminate between taxpayers with vastly different levels of income; indeed, to put in a slightly more controversial, but I think fair, way, it allows wealthy non-domiciles to buy their way out of the UK tax system. And what, in principle, is the difference between that and what Jimmy Carr did with his Channel Islands trust?
The other major tax advantage of non-UK domicile is an inheritance tax advantage, and it is a massive one. Its relevance to the particular moral issue I am debating is that it is also hard-wired into the brain of every UK taxation practitioner that it is one of the things that every non-domiciled taxpayer does, and thus runs the risk of by-passing our moral sensors in the current climate of anti-avoidance.
For inheritance tax purposes, domicile works in the same way as for income tax, except that any taxpayer who has been resident in the UK for 17 of the past 20 years becomes deemed domiciled for inheritance tax. Thus, apart from ensuring that client does not cut their ties with the domicile of origin, or at least has ties with an alternative candidate for domicile of choice, the tax adviser will, at some point in the client’s first 16 years of residence in the UK advise him or her to set up an offshore trust, usually in a tax haven such as the Channel Islands or Isle of Man.
The trust will have exclusively non-UK resident trustees, and the taxpayer and his family will be able to benefit from it. It will hold all of the taxpayer’s non-UK assets, and if you are feeling ambitious, it might hold some of his or her UK assets as well. Property in a trust set up while the settlor (i.e. creator) is non-domiciled is excluded property for inheritance tax purposes, and remains so even when the settlor subsequently becomes UK domiciled or deemed domiciled. That means it is not treated as part of the settlor’s estate for inheritance tax purposes. Good trick, eh?
But where there’s a good tax trick, in my view there’s now a requirement to consider the moral aspect; is this abusive, artificial or aggressive tax planning? The critical questions being, does it fly in the face of the clear intention of the tax legislation to achieve a perverse result, and does it involve actions that are only commercial because of the tax saving they produce? This is a reasonable summary of what the proposed General Anti-Abuse Rule defines as abusive tax planning. It is also helpful for completeness to consider in this respect the definition of ‘reasonable tax planning’, which is “a reasonable exercise of choices of conduct afforded by the provisions of the (Taxes) Acts”.
It is fair to say that this type of planning has been around for a long time, and has never been a closely-guarded secret, so if HMRC and the government wanted to block it they have had ample opportunity. So it cannot be said that it flies in the face of the clear intention of the legislation; indeed the UK tax system has traditionally treated non-domiciles very favourably, which one assumes is for the purpose of attracting them to live here (particularly the very rich ones), and one might therefore be reasonably entitled to regard the continuing availability of this opportunity as conscious action rather than oversight on the part of the legislature.
But before I sigh too deep a sigh of moral relief, how about ‘actions that are only commercial because of the tax saving they produce’? Rather more worried about that one. Offshore trusts are hideously expensive to set up and administer; there is nothing remotely commercial about setting up an offshore trust, except the inheritance tax saving it produces for a non-domicile. Think we might have to hold up our hands to that one.
So one apiece and going into extra time (this is not how the GAAR will work, but bear with me) with “a reasonable exercise of choices of conduct afforded by the provisions of the (Taxes) Acts”. I think I am quite comfortable with that one; the tax implications of a non-domicile setting up an offshore trust are clearly outlined in the Taxes Acts, and on that basis I think it is a reasonable choice of conduct for a taxpayer. So yippee, we’ve won the moral argument 2-1, so that’s OK then.
Or is it? Morality, like beauty, can be in the eye of the beholder. People used to legally have slaves and send children up chimneys and down mines, and married women used to be regarded in law as incapacitated persons, on the basis that their legal rights rested with their husbands. Appalling from a modern perspective, but often unexceptionable at the time to the majority. Is it enough for the taxation practitioner to say that planning is a bit morally suspect but on balance OK?
I intend to take my lead in this respect from the General Anti-Avoidance Rule, which I consider to be a fair arbiter of what is abusive and what is acceptable. I like the concept of ‘the centre ground of tax planning’ outlined in the consultation document on the GAAR, because I think that’s what I inhabit (don’t we all, I hear you chuckle sceptically). Offshore trust planning for non-domiciles would not fall foul of the GAAR, despite being a course of action only undertaken for tax purposes, because it meets the test of being reasonable tax planning, and I am comfortable with that.
But the moral aspect needs thinking about, because I could write you a strictly factual newspaper article that could make this type of planning sound as abusive as you like, and could potentially inflame public opinion in much the same way as the Jimmy Carr case. The Times had a go at doing precisely that with Sir Chris Hoy, for doing something that no taxation practitioner would bat an eyelid at, and that no reasonable person would object to if it was properly explained to them.
The interesting thing about the GAAR is that it sets out to establish an absolute standard of reasonable tax planning, with no intention that this should vary over time, except of course insofar as tax legislation varies. If I have a concern about this well-intentioned and long-overdue piece of legislation, it is whether that absolute standard is maintainable in the face of changing public, and indeed expert, opinion on what is acceptable tax planning and what is not. There is, as they say, only one way to find out …….