DOMICILE & TAX STATUS
Changing your UK Residency & Domicile Status
If you are a UK resident and are considering a move or have just made a move to live in the Cayman Islands (whether to work for an employer, your own business, to mitigate UK tax or simply to retire) then knowing your tax status in relation to HM Revenue and Customs (HMRC) and your UK tax obligations will be very important. Removing yourself from the scope of UK taxation in the short to medium term may be harder than you think and will depend on many factors including the location of your assets, your family, your domicile and your tax residence.
The following is a general overview on how to become a non-resident of the UK, how to change your domicile (and some difficulties which may arise) and also how you might be taxed as a non-UK resident. Please note that the process and tax analysis can be quite complicated, and is often specific to an individual’s own circumstances, and if you want formal (or informal) advice on this or any other aspect of UK taxation, Paul Hotchkiss, of Hotchkiss Associates Limited, can help.
HMRC have recently updated their guidance regarding residence and domicile (HMRC 6) and due to recent case law, if you fall firmly within the scope of the guidance and your circumstances are similar, then you can seemingly rely on it. It should be noted, however, that it is ONLY guidance and therefore your residence and domicile status can always be open to interpretation.
Becoming a non-resident of the UK
By way of Employment overseas
If you have a full-time employment contract with a Caymanian employer that states that you will be working the normal hours one would expect for the job you perform (typically least 37 hours per week) then you will be considered a non-resident for income tax purposes (only) from the day after you leave the UK. However, in general you must be absent from the UK and your contract must span at least one complete UK tax year and during your absence return visits should be kept to under 91 days per year. In this instance if your spouse chooses to remain in the UK, or if you retain assets in the UK, it should not jeopardise your own non-resident status. Indeed your spouse can join you at a later date and her residence status will follow that of the employed spouse.
You will need to file a P85 form with HMRC which explains that you have left the UK, your reasons for leaving and from this form they will work out the date that your UK residence ceased.
Setting up your own business in Cayman
If you currently operate a business in the UK and are thinking of moving to Cayman to run the same or a similar business the tax analysis is a lot more complex. Not only will you have to think about how you operate the business from Cayman but you will also need to consider how you exit the business from the UK: you may trigger tax liabilities in the UK during the process of relocating your business. In addition, even if, for example, you successfully move your business to a Caymanian company, if your business requires you to spend time in the UK or it trades in the UK, you may find your business profits remain within the scope of UK tax anyway, unless you properly structure it. In view of this, careful planning surrounding your business and your own circumstances will be required to make sure you get it right.
Documents required to prove residency has ceased
You are not required to submit these documents to HMRC but you should keep them on hand in case HMRC seek evidence that you have ceased to be non-UK resident or challenge your status: they are more likely to do this if you are working for yourself (or your own Caymanian company) than if you are working for a third party employer. The documentation you should keep include:
Ø A copy of your employment contract
Ø A copy of your P85
Ø A diary to provide evidence that you are working full time overseas and where you have spent your time.
Ø A copy of your Caymanian work permit
HMRC may continue to send you annual self-assessment forms for a number of years after you have left the UK.
By retiring overseas
If you are retiring to Cayman it is very important that there is evidence that you have made a ‘distinct break’ from the UK. This basically means you ‘up sticks’ and move your entire life from the UK to Cayman: all too often individuals get their timing wrong, they never quite leave the UK effectively or they drift back. In these circumstances, as recent UK case law demonstrates, HMRC may rule that they have never left the UK in the first instance. It is for this reason that, for some time after your departure, HMRC are likely to adopt a ‘wait and see’ approach and will often send you annual self-assessment forms to fill in so that they can determine your tax status. If you are ever investigated then keeping documents proving this (see below) will be key evidence which you may need to successfully prove you have made a distinct break from the UK. It is unfortunate that so many people think they have left when they have not, and they may be very disappointed to learn they have UK tax liabilities, which can often surface many years later.
If you do return to the UK periodically, it is important to be able to explain why you went back. For example, if you used to live in Bristol and you spend three months in Bristol throughout the year after you say you have left then HMRC may successfully argue that you never properly severed ties: they will take the view that you are only temporarily outside the UK and therefore UK resident.
Incidentally if you are planning to leave the UK it is advisable to leave at the end of a tax year and if you have to return, then return at the beginning of a tax year. Though do not leave it too late: A few people have been caught out by planning to leave on 5 April only for their flight to be cancelled or delayed!
Leaving to avoid UK tax
It cannot be denied that many people leave the UK to avoid UK capital gains tax or income tax. There is nothing wrong with this provided they do things properly. However, not unreasonably HMRC will take a greater interest in such individuals to make sure they are genuinely non-UK resident. In these circumstances your evidence needs to be in good order and retained for many years.
Evidence that will likely be examined by HMRC includes:
> The number of visits back to the UK and the purpose of each visit
> Where you stayed when returning for visits
> The retention of property which is available for your use
> Is the property rented?
> The location of your family
> The location of valuables, personal effects and documents
> The type of residence you have in Cayman and whether you own it and the terms of your lease
> Where your children are educated
> The timing of your leaving the UK
This list is not exhaustive and other factors will also be relevant such as registering with a doctor, dentist, obtaining a driving licence in Cayman (similarly deregistering with these people in the UK) and informing your mortgage company or your life insurance supplier that you have left the UK.
Requirements for proving your move is permanent
> At the time of leaving the UK your intention must be that you will live abroad permanently or indefinitely: you may be required to prove this.
> Your spouse and minor children should also cease UK residence.
> A main residence should be purchased in Cayman and your UK residence sold or rented on a long term basis. Incidentally the Cayman residence should be commensurate with your status and wealth and should have the look and feel of a main residence.
> You should not break the ’91-day’ rule.
Notes on the 91-day rule
Provided you have made a distinct break from the UK or you take up a contract of employment in Cayman, if you spend more than 91 days in the UK per year averaged over 4 consecutive years, HMRC may treat you as UK resident thereafter (or before this time if it is your intention that you will spend more than 91 days per year in the future). Even if you spend close to 91 days each year in your first 4 years abroad then it is likely that HMRC will look at your residence position closely and may assume you have never left. Please note that days of travel to and from the UK are only counted as relevant days for the purposes of this ‘test’ if you are in the UK at midnight of the relevant day. (You should be aware that if you spend more than 183 days in the UK in any tax year you will be treated as UK resident in that tax year.) There are special rules regarding transit days, ie days spent in the UK when you are merely passing through the UK that you should be aware of, especially if you are using a UK airport as a hub to travel around the world as part of your business.
Will you still be liable to UK tax as a non-UK resident?
You will only be liable to UK income tax on UK sourced income and your liability will depend on the nature of the income you receive. In some instances your UK tax liability will be the same as if you were UK resident. Where appropriate very simple and acceptable tax planning can be undertaken to minimise your current and future UK tax obligations.
In some instances you may wish to dispose of your UK assets or change how you own them eg if you have a UK pension scheme you can look to transfer your UK pension to a qualifying recognised overseas pension scheme.
Domicile
It is important to note that even if you have become a non-resident of the UK that it is your domicile status which will determine whether you are liable to UK Inheritance Tax (IHT) or not. Many individuals assume that because they are non-UK resident that they are also non-UK domiciled and hence outside the scope of UK inheritance tax: this is certainly not the case! If you wish to avoid UK IHT on your worldwide assets then you must change your domicile. If you are non-UK domiciled you will only be liable to IHT on assets located in the UK.
There is no specific form to fill out to explain that your domicile has changed; however, in your annual tax return there is a section which asks you to talk about your domicile. In addition HMRC, do provide some limited guidance on the subject in their publication HMRC 6. Care does need to be taken because domicile can be a fickle thing and can change over time as your circumstances change.
Important factors about your domicile status
> You cannot be without a domicile and can only have one domicile at a time
> Your domicile is usually where your permanent home is
> Your existing domicile will continue until a new one is acquired
> Domicile is distinct from your nationality or residence
> A wide range of evidence has to be examined in evaluating your intentions to established whether you have changed your domicile
There are four types of domicile:
Domicile of origin
You will have acquired a domicile of origin at birth and you will generally be regarded as having adopted your father’s domicile (unless your parents were not married at the time of your birth, in which case you would adopt your mother’s domicile). A domicile of origin will continue throughout life until a domicile of choice is acquired.
Once you have acquired a new domicile of choice, your domicile of origin, although displaced, does not disappear, and will come back into operation when your domicile of choice is voluntarily abandoned. If, for example, you manage to successfully acquire a domicile of choice in Cayman and then you return to live permanently in the UK (or indeed elsewhere permanently), your UK domicile of origin would revert.
Domicile of dependence
The domicile of a minor or a mentally disordered person normally follows that of the person on who they are legally dependent (eg their father). An individual first becomes capable of having an independent domicile when they become 16 or marry under that age.
At the age of 16, an individual has the ability to change their domicile of dependence by choice but if no such intention is demonstrated, their domicile of dependency persists.
Domicile of choice
If you have become a Caymanian resident and wish to start the process of removing yourself from the scope of IHT then you must acquire a domicile of choice i.e. a Caymanian domicile. The concept of domicile in Cayman is identical to that in the UK and there have been non-tax cases taken through the courts in Cayman which look to UK case law regarding domicile.
The following actions must be taken:
a) First, you must actively sever ties with your country of origin (e.g. UK);
b) Second, begin to actively acquire a new domicile of choice. Certain actions are indicative of the adoption of a new domicile of choice, e.g. making a will under the laws of Cayman, acquiring a family home in the Cayman Islands, integrating into Caymanian society, you, your friends and family knowing that Cayman is your home. These are only indicative steps to take and here is regretfully no definitive checklist which, if you tick all the boxes, will guarantee your position.
A domicile of choice is notoriously difficult to acquire and HMRC definitely take a ‘wait and see’ approach. In broad terms two key factors are required to acquire a domicile of choice in Cayman:
a) The intention to reside solely on a permanent or an indefinite basis in Cayman; and
b) Being physically present as an inhabitant in Cayman.
HMRC can request you to present strong evidence to show your intention to live in Cayman either permanently or indefinitely: the burden of proof is on you (or more likely your executors). It should be noted that simply living in Cayman for a long period of time, although an important factor, is not in itself enough to prove that a new domicile of choice has been acquired.
Proof of Domicile Change
It is important for your actions to show your true intentions. Therefore below is a list of suggestions on how to prove you want to change your domicile.
> Join clubs and social organisations in Cayman and resign from clubs and social groups in the UK. If you have demonstrated that you have an active social life in your new country, it is more likely to be considered your home.
> Try to build up a new social circle in Cayman and become part of the local community.
> Purchase a home in Cayman.
> It would be advisable to sell all private residences in the UK. The retention of a residence in the UK suggests an intention to live here at least some of the time. If you retain a property in the UK (or any other jurisdiction for that matter), your Cayman property should be of at least the same size and standing and preferably more substantial.
> Exercise any right to vote in Cayman. Do not vote or register to vote in the UK.
Apply to become a Cayman citizen.
> Close UK bank accounts (where practical).
> Open and maintain a bank account, credit cards etc in Cayman.
> Ideally, sell UK investments. If this is not possible or feasible, try to reduce them to a smaller percentage of the overall portfolio.
> Acquire new investments in Cayman. It will suggest a link to the new country.
> Do not retain directorships of UK companies. As far as possible reduce business interests in the UK.
> Whilst not imperative, we recommend that you make a will under the laws of Cayman. This suggests that your assets will be primarily in Cayman on death, your trusted executor will be there together with your personal records. It is also often recommended to are buried in Cayman although this should not be considered a strong argument in isolation.
> The evidence of friends, neighbours, business contacts, etc. can be critical. You should conduct yourself in such a way that would support the fact that your move to Cayman was permanent.
You should retain all evidence to support your change of domicile.
Whilst this may seem like a checklist the simple question you should ask is: where is my home and if the answer is Cayman and nowhere else you are well on your way to becoming non-UK domiciled. IT should be borne in mind that if HMRC examine your domicile status then they will look into every aspect of your life in detail. The times they are likely to examine your domicile status is in the event of your death or if you establish a trust.
Domicile Change Issues
● You do not have permanent residency in Cayman
Due to the nature of Cayman’s immigration laws and the fact that the vast majority of workers will be subject to the seven year roll-over policy, it could be difficult and in some instances impossible for individuals to maintain that they are in Cayman permanently or indefinitely. However, there is case law to support the fact that the mere fact that a work permit may be rescinded in the future might not always be an issue. Ideally, you would want to achieve the relative comfort of permanent residency status in Cayman.
● You have lived in Cayman for years and then move
It is important to note that you could live in Cayman for 20 years and then decide to move to, say, Cuba. If this occurred, then as soon as you step on the plane to fly to Cuba, i.e. move, your domicile of origin in the UK would revert. So it is important to recognise that once you have acquired a domicile of choice in Cayman, any move to live elsewhere could undo that domicile of choice immediately.
● You have several homes
You may live in Cayman but have properties elsewhere (e.g. US and France) and spend time in Cayman, the US and France. HMRC may try and argue that you cannot decide where you intend to live on a permanent basis and therefore that you retain your domicile of origin in the UK.
● Deemed domicile
For IHT purposes the HMRC delays changing your domicile until at least three years have passed from the date that you left the UK. This is particularly important if you wish to create a trust. If you create a trust within this period then you will still be deemed domiciled in the UK and any assets transferred to the trust will be subject to IHT at a current rate of 20% of the value of the assets put into the trust. Many people are caught out by this rule and inadvertently trigger IHT charges when they could easily have been avoided by getting the timing of the creation of the trust right. It needs to be borne in mind that the three year period starts to run from the day you acquire the new domicile of choice in Cayman and this may not coincide with the day you become resident in Cayman.
If formal (or informal) advice is required on this subject please contact Paul Hotchkiss on 011 44 1624 872140, email: paul@hotchkiss.im or visit the Hotchkiss Associates Limited’s website at www.hotchkiss.im. Paul Hotchkiss is a former tax partner in KPMG and specialises in UK tax advice and planning for expatriates, tax investigations and the taxation of offshore trusts, companies and funds.
