UK taxman chases expats to the grave and beyond

PUBLISHED : Sunday, 16 January, 1994, 12:00am
UPDATED : Sunday, 16 January, 1994, 12:00am

YOU arrived in Hong Kong from your home in Britain in the early 70s and have been living and working here ever since.

Certainly, you intend to live here for a good many years to come.

The above definition no doubt fits many hundreds if not thousands of expatriates reading Money Matters this morning.

Not having filled in British tax forms or, indeed, having paid British tax for nearly 30 years might lead you to believe that you no longer have anything to do with the nation's tax system.

Wrong! The chances are that you have retained your British domicile status and, whereas at the moment this may not have any effect on your taxation in Britain, upon your death the authorities there will attempt to tax your estate on its worldwide assets.

This taxation bites quickly and deeply.

The tax is applicable worldwide, wherever your assets may be: Hong Kong, Britain, tax havens, or anywhere else.

The first GBP150,000 (HK$1,730,400) of your assets are free of tax; everything else is taxed at 40 per cent.

Below is a typical example of a client who may well be in this situation: Property in Hong Kong net after bank loan: HK$3.5 million Property in Britain net after bank loan: $1.75 million Company life insurance: $1.65 million Personal life insurance: $1 million Shares in stock markets around the world: $1.5 million Cars, furniture, antiques, etc: $700,000 Unit trusts, bonds, savings plans, etc: $900,000 Cash deposit: $500,000 Total: $11.5 million or GBP1 million.

Inheritance tax for this client would be GBP380,000 - an enormous one-third going to a country you have not lived in for most of your working life.

The effect on your dependants could be devastating.

In a situation such as the above, you might have to give up your Hong Kong property.

What practical advice can Money Matters offer to handle such a potentially devastating position? Clearly, the first point is to determine whether you are British domiciled.

Domicile is a basic legal concept applying not only to tax but to other branches of the law such as marriage, legitimacy, adoption etc.

Whereas the country one is resident in can be changed, and perhaps even one's nationality, a person's domicile connects him or her with a particular country's legal system for life.

This can only be changed if there is a radical and permanent (or at worst likely to be permanent) change in the country with which he or she is connected.

The basic rule is that a person is domiciled in the country that he or she considers to be his or her homeland.

It is frequently described as the place where a person intends to die.

Consequently, your place of domicile does not have to be the country with which you have your closest personal association - hence the example above.

A person has a domicile of origin which is normally the domicile of his father at the time of the person's birth.

The above can be altered to the domicile of choice.

The factors that are assessed when considering whether there has been a change of domicile include the country to which that person holds a passport, his or her family, and whether he or she has made a will and burial arrangements.

Other deciding factors comprise ownership of bank accounts, credit cards, property, personal insurance, club membership, and a driving licence.

Clearly, domicile is largely a question of intention and it is up to you, the potential taxpayer, to disprove the Revenue's claim.

However, a major problem is that domicile is primarily concerned with inheritance tax, which is only payable on death, so you will be not around to argue your case.

The rule of domicile has two other potential implications other than inheritance tax.

Firstly, if a non-domiciled person is resident in Britain, then that person is liable to pay British tax on his or her income on a remittance basis only.

This differs to British domiciled residents, who are liable to British tax on their worldwide income wherever it may arise.

Therefore, the tax planning opportunities are extremely attractive for a couple, of whom one is British-domiciled and the other non-British domiciled (Chinese, Filipino, Thai, for example), who are returning to live in Britain.

Secondly, however, the same couple will have a serious inheritance tax problem upon the death of the British-domiciled partner.

This is because only GBP55,000 can be transferred to the remaining partner free of inheritance tax.

There is no inheritance tax between spouses who are both British domiciled.

Until recently, it was thought the whole area was about to be radically changed following a Law Commission report in 1987.

However, presumably due to pressure or lobbying from non-domiciled British residents (of whom there are many), it was announced out of the blue last year that the recommendations were being shelved.

While some may be extremely happy about the change of heart, to others it is a huge disappointment.

The change would have reduced the ''adhesive'' nature of one's domicile of origin, making it easier for long-term expatriates in Hong Kong to get away permanently and totally from the British tax net.

However, following the government's reversal we are now forced to refer back to the old definition, which is incredibly nebulous.

Clearly the question of domicile can influence the financial well-being of you and your dependants considerably.

Yet again the best counsel is to seek professional advice on an individual basis from your financial adviser. If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.