A potentially explosive tax precedent was set in the UK courts last week, which could see wealthy UK citizens living overseas being forced to cut their ties permanently to their home country.
The UK's highest appeals court has ruled that wealthy businessman Robert Gaines-Cooper never lost his UK residency, despite living and claiming residency in the Seychelles for the last 34 years.
Although visiting the UK only infrequently in that time, the judges ruled that England has remained “the centre of gravity of his life and interests”, and Gaines-Cooper may have to pay back tax bills dated from 1993.
The UK-born citizen has been fighting the case for a number of years. He felt his status as a non-resident was clear, as he had been living in the Seychelles since he bought a house there in 1976. He has only returned to the UK for an average of less than 91 days a year since then.
The ruling by the Court of Appeal is an interpretation of tax law which states UK residents must 'break' ties with the country if they are to be eligible for non-residency. The judges noted Gaines-Cooper's wife and son still lived in an estate in the country, his son attended an English school, and his personal legal documents were drawn up under English law.
The judges said this showed he had never made a “clear or clean break” with his life in the UK, and so despite living abroad had never truly 'left' England.
The Court of Appeal judges said they had “some sympathy” for Gaines-Cooper, but ultimately decided Her Majesty's Revenue & Customs, which implements tax law, was right to turn down his status as a non-resident.
The businessman may now have to pay up to £30m in backdated tax.
Traditionally, overseas residents have maintained non-residency status having left the country permanently by visiting the UK for no more than 91 days in a single year.
The interpretation of the law is that if a UK citizen is out of the UK for 274 days, the citizen won't pay tax to the UK on any overseas earnings, unless it is brought into the country.
This is crucial for non-domiciled residents in the UK who retain ties with the UK for personal or business reasons, but want their overseas earnings to be sheltered from UK tax.
Non-doms have been a political pawn in the election campaigns of both major British parties this year. As politicians look for ways to score easy wins and claw back tax, in their political manifestos they have targeted rich residents who enjoy staying in the UK but pay little tax.
The reason Gaines-Cooper's case is a significant ruling falls to how the judges interpreted the businessman's lifestyle. It was decided that it is more important how much of a citizen's life remains in the UK, rather than how many days the person is 'physically present' in the country.
Simply put, property and schooling is more important in determining a citizen than counting to 91 days.
If the court’s verdict is applied to overseas residents in places like Monaco, the Cayman Islands and the Seychelles, some may have to provide clear evidence they have made a “clean break” from the UK. Six million UK citizens live abroad.
The court decided the 91 days threshold is not an argument to claim non-resident status, but is only relevant when ascertaining the status of a returning citizen. The judge said the 91 day rule is 'important only to establish whether non-resident status, once acquired, has been lost'.
It's clear Her Majesty's Revenue & Customs are in fighting spirit on this one. HMRC said it has had enough of the "grey area" being exploited, and intends to constrict the opportunity for overseas residents to play the system.
The reality is many UK residents move out of the country and into low tax jurisdictions but never cut ties with the country, for legitimate reasons. Most wouldn't expect that they should have to sell up and take their entire lives with them.
Some return weekly or monthly to see family or friends, some own properties and some use English law to draw up documents.
With HMRC tightening its legislation, overseas residents that visit the UK for 'life and interests' such as these will have to tread more carefully now the precedent has been set.
Some may have to make drastic lifestyle changes to ensure the taxman won't try and argue UK residency.
Even UK citizens who don't return regularly, or at all, may be in trouble. As well as property or family, HMRC will assess bank accounts, business interests and even mobile phone records to prove the person hasn't broken ties with the UK.
When a citizen like Gaines-Cooper -- who has not lived in the country for over 34 years -- can still be considered a UK resident for tax purposes, it prompts an uphill battle for those with less of a claim to discarding UK status in order to benefit from lower tax.
This case has set the bar at which all others will be judged. It's going to be a lot harder to shake off UK residency status in the future. As HMRC tightens the rules, merely staying out of the country will no longer be acceptable.
In truth, it never was definitive as a test for non-residency, but it was straightforward. Many felt it a legitimate benchmark in assessing cases. The new ruling challenges the water-tight alibi of this 91-day threshold.
Until there's a clearer definition for a UK resident, concerns will only grow amongst expatriates on what is and isn't allowed. The need for a “clear break” is written in the tax code, and it can now be argued more easily by the tax man, with less defence if the citizen keeps a home or family in the UK.
Where once a grey area worked in favour of wealthy citizens moving overseas, the difficulty in pinning down non-dom status may now work against legitimate claims.
Perhaps if there was a statutory residency test that overseas visitors could take to ensure they met the requirements before they moved back it would clear up concerns.
UK citizens who have left the country but still visit family could have a definitive verdict on their status. This would alleviate anxiety on behalf of the visitor, who may fear a simple visit home could prompt a tax bill.
Until a test is in place though, be wary. If you are living in the Cayman Islands and visiting the UK to see family and friends, just make sure the UK is not the 'centre of gravity' of your life.
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