Disconnecting your UK life for tax purposes
How much does a UK taxpayer have to disconnect from their previous UK life to become non-resident for tax purposes?
Escaping the net of residence and domicile to avoid the payment of income tax and capital gains tax is not new but in every case the facts will be long and detailed to decide whether this particular tax payer was still subject to UK taxation or not. In Glyn v HMRC  UK FTT 219, Mr Glyn had long run a family business with his brother. Following his retirement he received a very large dividend from the holding company. The sole issue in question was whether Mr Glyn had ceased to be resident in the UK for the tax year in which he received the dividend.
Mr Glyn had won his appeal against HMRC’s original assessment for income tax. HMRC appealed, and the Upper tribunal remitted the case back to the FTT to be re-heard but without new oral evidence. The question to be decided was whether Mr Glyn made a ‘distinct break’ from UK such that he was non-resident.
Mr Glyn was a British citizen who was born in 1949. He was tax resident in the UK at all times prior to the tax year 2005/6. He had been married to his wife, Sarah, for many years and had two adult children, aged 24 and 29 in early 2005. The children had both left home, living in accommodation provided by Mr Glyn. From 1993 onwards Mr Glyn and his wife had lived in a substantial house in St John’s Wood in London, which both they and their children regarded as the family home.
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Mr Glyn had for many years been involved with the family property investment business started by his grandfather. Following his father’s death in 1971, Mr Glyn became involved with the business and became a director of the companies. He ran the business with his brother. By the time Mr Glyn was living in St John’s Wood, he spent the whole working week at the business’s office, usually commuting to the office on foot.
Although he ran the business with his brother, Mr Glyn was responsible for supervising all of the internal book keeping, accounting and legal matters. It was acknowledged that his brother, Mr Stuart Glyn, was uncomfortable working on such matters.
By the end of 2003, Mr Glyn had decided he wanted to retire and the brothers decided to sell the properties held in the business and he began to actively consider emigration at this time. Although the focus was first on France, where Mr Glyn already had an apartment in Cannes, by 2004 his focus had moved to Monaco.
Mr Glyn retired from the business with effect from 1 April 2005. He and Mrs Glyn took up residence in Monaco on 5 April 2005. On 4 May 2005 the holding company paid a dividend of £29,242,000 to Mr Glyn (dividend later reduced to approximately £24 million when additional company liability to HMRC determined).
In R (Gaines-Cooper) v HMRC  STC 2249 — Lord Wilson stated:
“It is … clear that, whether in order to become non-resident in the UK or whether at any rate to avoid being deemed by the statutory provision still to be resident in the UK, the ordinary law requires the UK resident to effect a distinct break in the pattern of his life in the UK [emphasis added]. The requirement of a distinct break mandates a multifactorial inquiry.”
When Mr Glyn retired he had made a radical change in his lifestyle, began a life of leisure based in Monaco. It was clear that he had a settled way of life there, walking, spending time with his wife, socialising and managing his private share portfolio. Mr Glyn had acquired a three-year lease of a three-bedroomed a flat in Monaco, later moving to a larger apartment in 2007. He had arranged the connection of phone and computer lines before his arrival in April 2005, opened bank accounts, obtained a driving licence (having surrendered his UK one) and a residency permit, and acquired cars there.
In the UK Mr Glyn continued to maintain his London home, probably worth some £4-5 million. Included employing a housekeeper, maintaining phone lines and his Sky subscription for the property. He owned two cars in London, one bought just a few months before he set up residence in Monaco. He always spent fewer days in the UK than were allowed under any interpretation of the day count, but visited the UK every month (frequently twice in a month) during his five years of residence in Monaco. He often arranged to arrive in London on a very early flight and leave on a late one, so not staying overnight.
The Tribunal held a taxpayer’s non-residence does not require a severance of ties in the UK but a substantial loosening of them
“that there was at least to some extent a tax motive for staying out of the UK does not of itself affect the position. The question remains whether, as a factual matter, Mr Glyn made a distinct break in the pattern of his life in the UK.”
The Tribunal concluded that the evidence of Mr Glyn’s intentions and motivations as at 5 April 2005 was not itself sufficient to determine one way or the other whether he had made a distinct break in the pattern of his life in the UK. It held it was therefore necessary to examine Mr Glyn’s pattern of life before and after the move and therefore took into account all time spent in the UK including parts of days spent in the UK.
“whatever Mr Glyn’s feelings…during the period of claimed non-residence, as a factual matter, it is clear that [the London property] continued to be used as a home by the Glyns when in London in any natural sense of the term.”
Question: was the quality of the continued use of the house in the changed circumstances of Mr Glyn’s retirement which necessarily involved greater leisure time? Had to weigh up Mr Glyn’s on-going UK connections in the light of this changed lifestyle
Tribunal held that the on-going pattern of spending time in the UK in substantially the same way as before, combined with his on-going reduced but still substantial UK investments and business interests demonstrated that Mr Glyn had not made a sufficiently distinct break in the pattern of his life in the UK for him to have become non-UK residence.
HMRC face a problem when dealing with taxpayers who are losing capacity. In Graves v HMRC  UKFTT 164 HMRC became aware that Mr Graves had offshore investments in the Channel Islands, but had not declared any income in relation to offshore investments. HMRC made assessments in respect of these investments under s.29 Taxes Management Act 1970 (TMA) for the five years 2001/2 – 2005/6 inclusive. Mr Graves appealed the assessments, and now sought full reasons for the Tribunal’s decision.
Mr Graves was in his 80s and he harboured “an ineradicable sense of injustice about his treatment at the hands of the Inland Revenue and then HMRC”, as well as the Department of Work and Pensions and other Government bodies.
He was convinced that, far from owing HMRC significant sums of money (about which proceedings were ongoing), he was owed huge amounts by way of refund of tax on account of expenses he had incurred and other things.
He reacted to any request for information, particularly a tax return, by “scrawling hand written notes on the document and returning it. These notes never answer the questions and in some cases are scurrilous and occasionally nastily racist”.
In September 2010 HMRC wrote to Mr Graves informing him they had received information about an offshore bank account he held, and asking for information about the gross income received from it. A few months later, in January 2011, HMRC wrote to him again, setting out the income they believed he should be assessed on, including financial institutions in the Channel Islands. The letter warned Mr Graves that in the absence of further information estimated assessments would be raised. In July 2011 an assessment under s.29 TMA was raised for the tax year 2005/6. Then in March 2013 HMRC raised assessments for 2001/2 – 2005/6 inclusive.
The Tribunal noted that “Mr Graves made no meaningful or relevant submissions about the assessments”. In HMRC’s view, Mr Graves’ conduct in 2003/4 was negligent, and in 2005/6 was careless. In relation to 2004/5, HMRC could not contend Mr Graves’ conduct was deliberate so they asked the Tribunal to cancel the assessment.
HMRC submitted that whatever might be said of Mr Graves’ state of mind in 2018, there was evidence showing his knowledge and control of his financial affairs at the relevant time.
The Tribunal accepted HMRC’s submissions that Mr Graves’ conduct in relation to 2002/3 and 2004/5 was not that of a prudent person mindful of his tax obligations. It was not reasonable for him in his circumstances to keep quiet about his interest bearing accounts and the untaxed interest arising on them. Mr Graves had not shown that the figures for those two years were excessive.
The Tribunal acknowledged that:
“[HMRC] has continued to do his best to help Mr Graves, to give every benefit of the doubt that could reasonably be given…and to conduct the HMRC case mindful of Mr Graves’ state of mind and idiosyncrasies. In return [they have] received no co-operation from Mr Graves but a lot of sometimes very nasty abuse. [HMRC lawyer’s] behaviour was an outstanding example of a public servant doing his duty to the highest standard”
The case of Williams v HMRC  UKFTT 136 provides a simple reminder of the correct treatment of debts for inheritance tax (IHT) business property relief (BPR) purposes.
The deceased, Mr Campbell, had owned and ran a business and his executors claimed BPR on the part of the estate to which it related. HMRC issued a Notice revising the amount of IHT due from the estate, on the basis that the executors should have deducted rental payments outstanding on the lease of Mr Campbell’s business premises.
The executors appealed the Notice, arguing that the rental payments should not be deducted in determining the value of the business.
Mr Campbell died on 14 February 2011 – he had been the proprietor of a fine art business in London, carried on from 15 Thackeray Street in Kensington. He occupied 15 Thackeray Street under a lease dated 4 May 2007, granted for a 10-year term starting in December 2005; rent was payable quarterly in advance. Mr Campbell had paid the rent from his business bank account and recorded it as a business expense in his accounts. After his death, the remainder leasehold interest was surrendered to the landlord for a negotiated sum of just under £35,000.
The claim for BPR was for £171,790 which related to Mr Campbell’ stock in trade. It did not include (as a deduction for the business value) his liabilities under the lease. The account also contained a claim for £116,572 as a deduction against the general estate i.e. chargeable estate, which sum included the outstanding business rental payment.
The Tribunal concluded that the rental payment was a liability of the deceased’s business which should be treated as falling within the relevant provisions of s.110(b). The lease was part of Mr Campbell’s business
“While we accept that the category of payments which fall into s.110(b) cannot be all encompassing, our view is that a legal obligation to make on-going payments on a lease of business premises falls within the clear words of the statute, being a liability of Mr Campbell’s business.”
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