The recent squabble over the tax status of Akshata Murty, the wife of the Chancellor of the Exchequer Rishi Sunak, resulted in the question ‘did the Chancellor “benefit” from her foreign domicile?’.
It is a common tax planning technique for a husband and wife to arrange their affairs to pay the least amount of tax. And it is increasingly common for one spouse to have a foreign domicile and therefore it is a reasonable question to ask whether ‘mixed domicile’ marriages give tax planning opportunities (and pitfalls)?
As a foreign domiciliary tax resident in the UK Murty can elect to pay UK tax either on her worldwide income or gains, or on the remittance basis. If she elects for the remittance basis, she pays tax on UK sources of income and gains and on foreign sources of income and gains, but only to the extent that they are remitted to the UK.
Unremitted foreign income and gains can escape direct UK taxes indefinitely, but they can still suffer significant local withholding taxes. Claiming the remittance basis comes at a price, as personal allowances are lost, tax rates can be higher, and once a taxpayer has been UK resident in seven out of the last nine tax years the taxpayer has to pay a kind of parking fee, the remittance basis charge of £30,000 (increasing to £50,000 after 12 tax years of residence).
Once a taxpayer has been UK resident in 15 out of the last 20 tax years the remittance basis cannot be claimed at all. However, many tax advantages can still be preserved by establishing an offshore ‘protected’ trust structure prior to this point.
What constitutes a remittance to the UK is widely defined and includes the use or enjoyment of the money in the UK. It includes the payment for services enjoyed in the UK and even bringing an item to the UK which was bought using foreign income and gains (with some limited exemptions) constitutes a remittance.
Further, Finance Act 2007 extended the definition of who can make a remittance to include ‘relevant persons’. A husband and wife are relevant persons to each other, for example, if Murty made a payment of foreign income and gains to Sunak, and he then remitted that payment to the UK to pay for goods or services, then that would create a tax bill for Murty.
Thus, it is difficult for a foreign domiciliary to benefit their spouse in the UK directly without tax consequences. However, it is not difficult for a mixed domicile couple to have an arrangement between them, so that the UK domiciled spouse pays for UK expenditure and the foreign domiciled spouse pays for foreign expenditure, and thereby limit the UK taxes they collectively pay.
Transfer of assets
Nevertheless, it is possible for a UK resident taxpayer to benefit their foreign domiciled spouse in certain circumstances.
As UK tax legislation allows for the gift or transfer of assets between spouses at ‘no gain, no loss’ for capital gains tax, and it can be an exempt transfer (with some limitations, see below) for inheritance tax. This statutory relief allows married couples to balance their ownership of assets to make the most use of personal allowances, marginal rates of taxation, and the statutory limits to pensions and savings schemes.
However, transferring assets between mixed domicile spouses, or indeed where one spouse is not tax resident in the UK, can provide even greater tax planning opportunities, where the recipient can claim the remittance basis, or is not subject to UK tax at all.
For example, Sir Philip Green’s wife, Tina, a tax resident of Monaco, is alleged to have received substantial dividends from the Arcadia group without paying further UK tax on the receipt. However, some inter-spouse transfers may be subject to a successful challenge by HMRC as the relief for inter-spouse transfers does not apply where the gift is wholly or substantially a right to income.
This was tested most recently in the Arctic Systems case, where HMRC challenged an arrangement where Mr Jones had transferred shares in his business to Mrs Jones, and HMRC intended to tax Mr Jones on Mrs Jones’ income under the settlements legislation (Jones v Garnett (HM Inspector of Taxes). 2007 UKHL 35).
However, HMRC lost this case, on the grounds that the ordinary shares gifted were not a right to income and therefore the relief should not be limited.
It should be noted that after the taxpayer’s victory the government announced the intention to change the law, but this has yet to happen.
Exempt transfers
Arrangements could also be challenged where HMRC consider the transfer from one spouse to the other to be a sham, ie, ownership did not really change although the paperwork suggests otherwise.
A gift or transfer between spouses is normally an exempt transfer for the purposes of UK inheritance tax, however, there is one exemption where the transferring spouse has a UK domicile and the recipient spouse has a foreign domicile.
In this case the exempt amount is limited to the nil rate band which is just £325,000. This can be a nasty shock if the transfer happens on death, as the balance could be subject to inheritance tax at 40%, but this can be avoided if the foreign domiciled spouse elects to be treated as UK domiciled (for inheritance tax only), but this may have greater long-term implications.
Nevertheless, lifetime gifts to a foreign domiciled recipient can become exempt from inheritance tax providing the donor survives seven years.
In summary, taking advantage of a spouse’s domicile status can provide significant tax savings with careful planning. However, the foundations to any such tax planning will depend on the validity of the claim for foreign domicile.
