New HMRC approach to non dom enquiries

HMRC will usually only enquire into your domicile status where it is directly relevant in terms of an immediate UK tax liability. If you're UK resident the main occasions this will apply will be if you are non UK domiciled and are claiming the remittance basis. If you're non UK resident the main impact of domicile is on your inheritance tax ('IHT') position. If you're non domiciled it's only your UK estate that is subject to UK IHT. By contrast as a UK domiciliary your UK and overseas estate is liable to IHT. During your lifetime this is likely to only be an issue where you transfer property to a trust (as this is one of the few occasions when IHT is payable during your lifetime). In this case your IHT/domicile position will be crucial if you are planning to transfer overseas assets in excess of your remaining nil rate band. Previous HMRC Guidance The previous HMRC guidance on this stated: 'Where an individual who is not domiciled in the UK settles non-UK assets into a non-UK resident trust then assets in that trust will not be subject to Inheritance Tax. Following the release of the new HMRC guidance on domicile most settlors should now be able to decide for themselves whether or not they are UK domiciled.' 'An individual setting up a non-resident trust who, having taken account of the new HMRC guidance, considers they are non-UK domiciled is not obliged to submit an Inheritance Tax account to HMRC. If the settlor is non-UK domiciled then no Inheritance Tax is due. But if an Inheritance Tax account is submitted in these circumstances, HMRC will continue its existing practice and only open an enquiry into that return if the amounts of Inheritance Tax at stake make such an enquiry cost effective to carry out. At present that limit is £10,000.' However HMRC have issued new guidance as from 24 August 2010. Essentially they are looking to adopt a wider risk-based approach to ensure that resources are deployed in the most cost effective way. Revised guidance The revised guidance applies to transfers made after the issue of the Revenue & Customs Brief (ie 24 August 2010). In future HMRC will consider opening an enquiry where domicile could be an issue only where there is a significant risk of loss of UK tax. This is based on HMRC's strong "risk evaluation" principles whereby everything is based on risk. The significance of the risk will be assessed by HMRC using a wide range of factors. The factors will depend very much on the individual case but will include, for example: •a review of the information available to HMRC about the individual on HMRC databases •whether there is a significant amount of tax (all taxes and duties not just Inheritance Tax) at risk Unlike in the previous guidance HMRC does not consider it appropriate to state an amount of tax that would be considered significant, as the amount of tax at stake is only one factor. They will however also take into account the potential costs involved in pursuing an enquiry, and also those of potential litigation should the enquiry not result in agreement between HMRC and the individual; clearly such costs can be substantial. They do state that: "...Individuals should also bear in mind that enquiries into domicile involve a detailed inquiry into all of the relevant facts and HMRC is likely to require considerable personal information and extensive documentary evidence about the taxpayer and the taxpayer's close family..." You would expect that as a result of this change the £10,000 minimum tax loss will in practice be substantially increased, particularly when you have to take account the potential costs of litigation etc. This will be a double edged sword. On the one hand it may result in less HMRC enquiries in this area (usually a good thing!). On the other hand many non resident, non doms use a transfer to a trust to establish their non dom status with HMRC. This change will make it more difficult to know whether they will agree to consider their domicile status.