HMRC have issued a new guidance note, HMRC Brief 34/2010, dealing with the circumstances in which they will consider an individual’s domicile for inheritance tax (IHT) purposes. The previous guidance note in Brief 17/2009 is withdrawn.
Anybody wanting confirmation from HMRC regarding their domicile has an uphill struggle. We are in an era of self-assessment, and it is up to taxpayers to decide whether or not they are domiciled in the UK if this is relevant to their tax liabilities − and they had better get it right because otherwise a liability will bite them should HMRC ever decide to challenge the position.
For a client of means who is living abroad with a foreign domiciled spouse, this is a really serious issue. A husband with a foreign domiciled wife will be very anxious indeed for some certainty regarding his domicile. If he has acquired a foreign domicile, his wife will benefit from the full spouse exemption in the event of his death. However, if he has remained UK domiciled, there will be practically no spouse exemption, and the whole of his estate would be liable to inheritance tax even if it passes to his spouse. No husband would want to leave his widow in such a situation − with the possibility of HMRC claiming 40% of his worldwide estate and leaving her to argue that he was not domiciled at the time of his death. Not really the sort of burden one would want to place on the shoulders of a recently bereaved widow − which makes it essential to clarify the position during his lifetime.
If a transaction is undertaken which would be chargeable to inheritance tax if the client is UK domiciled, then HMRC will usually need to determine the domicile of the taxpayer and therefore whether the tax is payable. However, they will only now do so where there is a significant risk of loss of UK tax. They do not reveal what is “significant” (the £10,000 previously referred to in Brief 17/2009 no longer applies), but they will take into account potential costs of litigation. For this reason they may stop an enquiry if they think it is not cost effective, and this may be on the basis that they will not pursue the collection of any potential tax.
HMRC are consumed by their desire to have a full picture of the taxpayers’ affairs (no doubt encouraged by the famous words in Drevon v Drevon: “There is no act or circumstance in a man’s life however trivial it may be in itself, which ought to be left out of consideration”), and their enquiries into a taxpayer’s affairs can be unbelievably intrusive.
I may not be alone in my concern about HMRC discontinuing their enquiries if they are not cost effective. One can of course understand the principle, but it does not seem right for HMRC to say that although tax of (say) £15,000 may be payable, they will not go to the trouble to collect it if it’s going to be too difficult − no doubt because the taxpayer believes it is not due and can put up a good fight. I do not see the distinction between that and a self-employed trader who makes a claim for some deductible expense which would save him a similar amount of tax. We all know that he will be pursued with all vigour and there will be no question of HMRC saying that they will not bother about it.