Watson’s return to UK
Dr Watson returned from India
after seeing service in the second Anglo-Afgan war where he was wounded and
then suffering enteric fever landed at Tilbury docks on 5 January 1881. No
longer able to stay in India, his domicile of choice, Watson rents rooms at
221b Baker Street with a Sherlock Holmes. Dr Watson has various houses in India
which is the custom there and he enjoys substantial dividends from Peninsular
& Oriental Steam Navigation Company shares. The shares are quoted in
London. Dr Watson has the ultimate intention of returning permanently to India,
his domicile of choice, but has remained in the UK because of his illness and
subsequent adventures with Holmes. He receives a strange letter on 26 April
1897 whilst at 221b Baker Street from Her Majesty’s Revenue and Customs (Queen
Victoria) suggesting he is now to be categorised as ‘deemed domicile’. He
passes the letter to Sherlock Holmes who states ‘Watson, I am minded to ignore
this strange letter but something perturbs me about it!’
The Crime
Holmes deduces that if Dr
Watson is considered ‘deemed domicile’ in the UK despite his claim for domicile
of choice in India this would mean his Indian assets and Peninsular shares will
be taxed on his death at 40%. Similarly if he returns to India and dies within
3 years of leaving the UK he will also be taxed on the value of those assets at
the date of his demise. The clues Holmes has turned up are that Watson returned
to the UK on 5 January 1881 and was classed as resident for income tax purposes
from that date i.e. tax year 1880/81. This income tax treatment also affects
inheritance tax too as the income tax residence rules impact on inheritance
tax. So even though Watson arrived at Tilbury Docks on 5 January 1881 towards
the end of the tax year i.e. 5 April 1881 he was classed as resident for income
tax and also inheritance tax for the whole of the year 1880/81. As the years
passed Watson did not know this until the strange letter was received on 26
April 1897 from Her Majesty’s Revenue and Customs (Queen Victoria) suggesting
he is now likely to be categorised as ‘deemed domicile’. What perplexes Holmes
is that the letter mentions Watson’s residence in UK as being 17 years out of
the last 20 years of assessment. However, Watson arrived in the UK on 5 January
1881 and it is now 26 April 1897 some 16 years 4 months later not 17 years!
The clues
So how is it Dr Watson can be
classed as deemed domicile in the UK when the legislation says 17 out of the last
20 years? Holmes researches the legislation:
267 Persons
treated as domiciled in United Kingdom.
(1) A
person not domiciled in the United Kingdom at any time (in this section
referred to as “the relevant time”) shall be treated for the purposes of this
Act as domiciled in the United Kingdom (and not elsewhere) at the relevant time
if—
(a) he was
domiciled in the United Kingdom within the three years immediately preceding
the relevant time, or
(b) he was
resident in the United Kingdom in not less than seventeen of the twenty years
of assessment ending with the year of assessment in which the relevant time
falls.
(2) Subsection
(1) above shall not apply for the purposes of section 6(2) or (3) or 48(4)
above and shall not affect the interpretation of any such provision as is
mentioned in section 158(6) above.
Holmes deduces that the words
‘years of assessment’ means tax years i.e. 6 April to the following 5 April and
not actual years spent in the UK which in Watson’s case is some 16 years 4
months. Hence, the deemed domicile and attaching tax consequences. Also, the
word resident means that when Dr Watson joined Holmes at 221b Baker Street in
January 1881 it was his intention to settle in London having signed a sub-lease
to lodge with Holmes. This fact means that Watson was resident for income tax
purposes from his date of arrival and thereby subject to inheritance domicile tax
by implication for the whole of the 1880/81 tax year although he had been in
India for most of the year. Holmes wonders if he has missed any salient points?
The conclusions
‘Deemed domicile’ in the UK
for inheritance tax purposes can apply inheritance tax to anyone’s worldwide
assets if they are resident in the UK for seventeen out of the last twenty tax
years. Leaving the UK after 22 April in the tax year April may mean that UK
residence applies for that year although this depends on certain connecting
factors but in Dr Watson’s case his circumstances may preclude this as he has
the maximum number of connecting factors meaning his ‘arriver’ status at
Tilbury Docks and ‘leaver’ status at departure from UK at the end of his residence
there is limited to less than 46 and 16 days respectively. Even if Watson was
to return to India straight away then for income tax purposes he would be
classed under the new residence rules as a ‘leaver’ and just 16 days in the UK
would make him resident for income tax because of his connecting factors. Consequently
he would be treated as resident for inheritance tax too! Holmes muses that had
the boat bringing Dr Watson been delayed in Cape Town for six weeks due to
storms, a common occurrence at that time, and his arrival had been on 26 February
1881 his first year of residence would have been 1881/82 and not 1880/81 because
he had less than 46 days in the UK. Therefore Dr Watson’s continued presence
and personal connections in the UK since his arrival do point to him being
‘deemed domicile’ from 26 April 1897.
Clueless?
Holmes admits defeat and
contacts his trusty old tax accountant Jon Golding and recounts Dr Watson’s
situation to him. Golding mentions to Holmes that under s 267(2) above the UK’s
deemed domicile rule is ignored where there is an overriding Double Tax Treaty
relevant to estate taxes. This would preclude UK estate duty/inheritance tax
being applied on Dr Watson’s overseas assets at the time of his death as long
as he is domiciled in a country that has such an agreement. However, Watson’s
Peninsular & Oriental Steam Navigation Company shares would still be taxed
in the UK. Golding finds a rare edition of Article III of the UK/India 1956 (SI
1956 No 998) treaty on his bookshelf which says:
‘Duty shall not be imposed in
Great Britain on the death of a person who was not domiciled at the time of his
death in any part of Great Britain but was domiciled in some part of India on
any property situate outside Great Britain…’
Golding also states that India
repealed its Estate duty law and therefore no assets would be subject to estate
taxes in India on Dr Watson’s death if he was to be domiciled there by choice.
As an aside Golding mentions that
there are also such treaties with Italy, Pakistan and France. The UK/Italian
Treaty of 1966 (SI 1968 No 304) also similarly states if the deceased was
domiciled in Italy then such property not located in the UK will be exempt from
UK inheritance tax. Holmes leaves his accountant’s office with this bit of useful
information for future cases.
The accountant’s conclusion of
this case is that should Dr Watson should return for to India immediately or in
the future and resurrect his Indian domicile and then treaty relief would
preclude the application of the deemed domicile rule. Holmes decides that Dr
Watson’s services to him are more important than the
potential saving in tax and says nothing!
Apologies to Sir Arthur Conan
Doyle.
Jon Golding ATT TEP former tax
author is UK Tax and Trusts adviser with PI Ltd, Kuala Lumpur. Contact jongoldingtax@gmail.com Tel: +6012 287 1550
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