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CGT and the Main Residence Election

Hello – I’m Paul Soper and this is the November 2011 edition in the series of Podcasts focussing on recent developments in Direct Taxation in the UK intended primarily for practitioners – especially small practitioners.  But if you are a reasonably financially literate taxpayer or an accounting student you might enjoy it too – if enjoy is the right word!

You can read the text of this podcast at my website http://www.Taxationpodcasts all one word.com.

In the last couple of years there have been lots of Tribunal cases concerning the Capital Gains Tax main residence exemption – often being claimed by speculators or buy-to-let landlords trying to claim this enormously valuable exemption on rather shaky grounds.

For taxpayers generally the house they live in if owned or rented on a longer lease is the most costly investment asset they will buy in their lifetime and in most cases on disposal it will be completely exempt from CGT – but larger properties may be partly liable and, if let, there is a second valuable exemption that can be claimed as well.

This is the first of two podcasts where I am going to focus on aspects of this incredibly important exemption, first of all focussing on these recent cases by buy-to-let owners and speculators.  In the second podcast, next month, I’m going to look at a valuable election which anyone who acquires a second or subsequent home should think about making.

How does the basic exemption work?  Note it is not the property which is exempt, it is that part of the gain that relates to a period of exempt occupation which is exempted.

If they did not occupy it as their residence for the whole of the period of ownership the gain exempt is found by time-apportionment of the total gain, although certain periods are exempt in any event, or exempt by concession.  The most significant of these is the last three years of ownership in any event.

If a taxpayer owned a house for 10 years, and for the last five years had let the property, having moved into another larger house, this means that 8 years in total will be exempt out of the 10 years of ownership, five of actual residence plus the last three years, and so 80% of the gain will fall out of account under this relief.

Unfortunately the legislation, which is found in the Taxation of Chargeable Gains Act, dating back to 1992 is far from clear.  When CGT was first created in 1965 there were many defects in the structure of the act and when it was consolidated in 1992 no one tried to correct the problems that poor drafting can bring.  The Act talks about disposals, without defining what a disposal is, by a vendor, without defining who a vendor is, giving rise to a gain, well at least we know how to calculate that (maybe not) and allowing exemptions for businesses (without defining a business) and residences – you’ve guessed it, without defining what residence is.  The legislators thought that all of these terms were so obvious that they did not need a technical definition but over the years case after case exposes the problems that a lack of clear definition can bring.

The basic exemption for the family home is contained in section 222 of the Act, headed “Relief on disposal of private residence” and is actually in two parts.  It exempts “a gain accruing to an individual so far as attributable to the disposal of, or of an interest in

a) a dwelling house or part of a dwelling house which is, or has at any time in his period of ownership been, his only or main residence, or (which here means and/or)

b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area – this is defined as being an area, inclusive of the site of the dwelling house, of half a hectare, roughly 1.2 acres.

It is two separate reliefs which means that if the house is sold first, the grounds are retained and then sold later the house will be exempt but on disposal the grounds will then be chargeable.

However if the land is sold at the same time as the house, or the grounds are sold first, then the gain will be exempt.  It is important to get this in the right order.

It is possible for an area larger than half a hectare to qualify if ‘the area required for the reasonable enjoyment of the dwelling house’, having regard to it’s size and character, is greater than half a hectare.

A Mr and Mrs Henke sold two houses with individual grounds of 0.54 acres each out of a total area of 2.66 acres – the land sold could not be required for the enjoyment of the property as they were able to sell it!  They had also owned the land for some years before erecting their own house and this could not be exempt until that first house on the plot had been built.

If you are building or acquiring a property the revenue will, by concession, also exempt a period of up to 12 months when the newly acquired property was unavailable because of building works or alterations being carried on.

Mr Longson tried to claim an area of 18.68 acres  on the grounds that he owned horses and rode them on the land.  Given the size of the house the revenue had been prepared to grant relief on 2.61 acres – this was upheld by both the Special Commissioners and the High Court where Judge Evans-Lombe observed “it is not objectively required, ie necessary, to keep horses at a house in order to enjoy it as a residence.”

There is also a relief, referred to as a letting exemption, where the gain arises in respect of property which has been the taxpayer’s only or main residence at any time during the period of ownership and the dwelling house, or any part of it is or has been at any time wholly or partly let as residential accommodation.  This was a measure introduced in the 1970’s originally to encourage people to let empty property and empty rooms that they owned.  The relief is limited to the smallest of three figures – these are – the amount that is exempt as a residence gain, the amount of the gain which relates to the letting, and a maximum of £40,000.  For a husband and wife this means a maximum of £80,000 if the house is jointly owned, as it often will be!

In our earlier example, a property owned for 10 years was 80% exempt but the remaining 20% of the gain will be subject to this further £40,000 exemption.  So it is no surprise that ‘buy-to-let” landlords are attracted to the idea of claiming that they had, at some time, resided in the property as their main residence, in order to benefit from the exemption for the last three years and the further £40,000 of letting exemption.

But what is a residence?

How long do you have to live in a property for it to be considered to be a residence?

Can a buy-to-let landlord also get the main residence exemptions?

And what happens if you have more than one residence?

A residence is, according to the dictionary – a person’s home; the place where someone lives – by itself this suggests at least some degree of permanence, and of course the concept of residence is also encountered in a taxation sense when considering whether a person is resident in the UK – and from those cases there is also the suggestion that it is not just where one sleeps, but where one’s home is.

For the vast majority of taxpayers it is self-evident where they reside and, indeed, may have resided for many, many years.  This is recognised in the legislation which, in addition to the last three years of ownership also permits a further absence or absences from the home, the residence, of up to three years for any reason, permits an absence of up to four years where the individual works in an office or employment elsewhere in the UK or is self employed elsewhere in the UK which reasonably requires him or her to be absent from their residence to be able to perform the duties, and also permits any period of absence where a person has an office or employment outside the UK – note self employment is not a reason for this absence.

Now the word to stress here is absence, and absence implies return.  If a person leaves their residence to work elsewhere in the United Kingdom, but sells the property without having returned to live in it they would not normally be able to take advantage of these further exempt periods.  By concession, however, where the duties of employment prevented a person from returning to occupy the property before sale the relief can still be given.  Unfortunately this does not permit the taxpayer to build up a property empire as the legislation also states that these periods of absence only qualify if you have no other place of residence which could qualify as a main residence.

So – if called to work elsewhere in the UK and you stay in hotels, boarding houses, or rented accommodation that you do not own or have a longer leasehold interest in, the further reliefs can be claimed.  But if it is cheaper to buy a house than rent whilst you are away then these further periods of absence cannot qualify.

In a recent case a Mr Moore and his partner, a Miss Archer, bought a property in December 1999, originally intending to live it, she took a dislike to the property and sold her interest in the property to him and he then sold it in 2004.  On the evidence presented to the tribunal it never became his residence even though allegedly he had stayed in the property whilst carrying out improvements.

A taxpayer called Springthorpe acquired a house, renovated it and claimed to live in it whilst this was being done, but then moved into another house with his new partner and let the former property to students.  Again there was no real evidence that he occupied the property as his residence at this time, his post was addressed to his partner’s property, the utility bills during this period averaged £1.90 per week and although an estate agent confirmed that he had been sleeping in the property – “remember the state of your bedroom… covered in pieces of stripped wallpaper… I commented that in the morning you must look like a paper mache man – there wasn’t an item of clothing or bed-linen unaffected by the mess.”

The Revenue obtained information that during this period no council tax had been paid as the local authority regarded it as uninhabitable.  The Tribunal accepted that Springthorpe stayed overnight in the property but that there was no evidence that it had become his residence.

So – how long do you need to live in a property for it to be regarded as your residence? –

Since 1998 the leading case on this topic is Goodwin v Curtis where a man, in the process of selling another property which was accepted as having been his main residence as part of his marriage breaking down had moved into a farmhouse that he had recently acquired from a company he controlled and which he had already placed on the market.  He moved into it and stayed there for 32 days, a little under 5 weeks – the commissioners rejected this and found that he had not intended to occupy it as his permanent residence and this was upheld, on appeal, by the Court of Appeal.  So living in a property for five weeks is probably not enough.

Mr Favell, in a 2010 case, had intended to acquire a house for his son, although did not transfer it to his son until some four years had elapsed when a gain arose on disposal.  Favell claimed that he had lived in the property for a period of 11 months when separated from his partner.  The revenue were able to show that throughout this period it was his son who was shown in Council Tax records as the occupant and had claimed a 25% reduction as the sole occupant, meanwhile housing benefit had been paid to Favell at his partner’s residence and also to a person who was a tenant in the property sold at the time that Favell claimed he lived it.  There was no evidence that he had moved to the property although the Tribunal ruled that had there been evidence of residence the period of 11 months would have been sufficient to make it a main residence.  So – five weeks is not enough but 11 months certainly is.

In another case at this time a Mr Metcalfe owned three properties, claimed that he moved into one in November 2002, although it was furnished he did not install a phone, did not have a TV license as the TV there ‘did not work’, he sold it four months later, and during that period the only outgoing was for electricity of £39.09 – almost all of it a standing charge. The tribunal ruled the evidence fell short of establishing that it had been his residence and there was no indication of permanence.  Note that the legislation does not, itself, require a degree of permanence, but this factor is regarded, by the courts, as implicit in the concept of residence.

In the most recent case, reported a couple of months ago, a Mr Lowrie had bought a property intending to construct two houses on the site, having obtained planning permission in early 2003.  He bought the property in May 2003, installed his household goods there in June 2003, but lost interest in the property because of his sister’s death in Wales.  The property was advertised for sale with vacant possession in December 2003 and sold on 20 January 2004.  On his own admission he spent most of his time with his sister’s family in Wales.  The revenue quoted the following from the judgment in Curtis v Goodwin that I referred to previously – “the principle is that in order to qualify for the relief a taxpayer must provide evidence that his residence at a property showed some degree of permanence, some degree of continuity or some expectation of continuity.”

Can you occupy a property as a residence without living in it?  Occupy is a legal term which is concerned with rights over property to enter into it.  A Ms Bradley claimed that a house her father gifted to her in 1998 in Preston, Lancashire,was occupied by her as a residence even though she never stayed in it as she went to university in Leeds, Yorkshire, the other side of the Pennines.  After qualifying she took a job as a Newly Qualified Teacher in the Leeds area and then sold the house in Preston.  It had been occupied during term-time, by students.  She had never stayed in it, even when it was vacant during vacations. Ownership, by itself, is not sufficient to establish a property as a residence.

What if you own more than one residence at the same time? (Fanfare) – our own dear Queen has some nine different residences which she, or members of her household occupy, at the same time, from Buckingham Palace and Windsor Castle through to Holyroodhouse in Edinburgh, Balmoral in Aberdeen, and Sandringham in Norfolk where the Royal Family spend each Xmas.

If you have more than one residence there are two ways of exempting them – either claim that you live in job-related living accommodation which is a residence provided to you by your employer, in which case another house can be owned and exempted so long as you merely intend at some future time to occupy it.  Ms Bradley had also tried to claim this but her accommodation as an NQT was not provided by her employer and so the house in Preston could not be exempt under this provision.

In my next podcast in December I am going to look in greater detail at this valuable election where taxpayers do own more than one property which is often overlooked but which may be incredibly valuable if used in the right way.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  The full text of the podcast can be read at my site taxationpodcasts.com.

For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper, all one word, at mac dot com.

Until next month…

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Residence – Gaines-Cooper and a Statutory Test

Some years ago I produced a couple of podcasts, the first on Residence and Non Residence and the second on Domicile.  They were prompted by the case of Robert Gaines Cooper, an international business man who claimed to have become non-resident in the 1970’s and to have taken domicile in the Seychelles.  This was on the advice of his parents who were both tax inspectors!

Gaines Cooper’s case has just reached the Supreme Court so it is time to look at it again.

The dispute which involves Gaines Cooper is a very protracted one and is a precursor to allegations by the revenue that he had established settlements in which he, or his wife, retained an interest and that he had transferred assets abroad whilst retaining the right to the benefit of the assets transferred.

Where are we now – four years on from the first case?  It was considered that his residence status was a simple fact on which a ruling of the Special Commissioners, who heard that appeal, would be binding unless it could be shown to be absurd following the ruling in Edwards v Bairstow so that no reasonable body of commissioners could have arrived at that decision.

His domicile status was a question of law and further appeal was made, first to the High Court, who found that there were more than 20 different connections which he still enjoyed with the UK so that they considered him to have UK domicile in 2004 and by extrapolation backwards in time to 1992/93, the first year under appeal.  Gaines-Cooper claimed he had taken Seychelles domicile in 1976 and had not subsequently altered it.  Domicile is concerned with allegiance and a taxpayer can only have one domicile in English Law at any point in time – had Gaines Cooper not been domiciled he would only have been liable, even if resident in the UK, on sums brought to the UK under the remittance basis.  Remember from 2008 onwards it is now quite costly to use the remittance basis as those who are not domiciled but have been resident for 7 out of the past 9 tax years must pay £30,000pa for the privilege, and from next April may have to pay £50,000pa if resident for more than 12 out of the previous 14 years.

Gaines Cooper did take an appeal on his domicile to the Court of Appeal but they felt that his counsel was simply rearguing the same issues that had been raised in front of the High Court and dismissed his appeal and refused him the right to appeal to the House of Lords.

In the meantime Gaines Cooper had sought a judicial review of the residence issue and if he could show that he was not resident he would not be caught by the anti-avoidance provisions.  To obtain a judicial review it is necessary to show that there is a matter of public interest, not merely private interest, concerning maladministration or the legitimate expectation that government departments must act fairly.

The High Court initially rejected this application, but he was successful in a later application to the Court of Appeal who then joined his application with another from two other taxpayers, a Mr Davies and a Mr James who were Swansea-based property developers who moved to Belgium (probably to seek to avoid CGT) and began to work full-time for a Belgian company which they established.  Unlike Gaines Cooper they had never appealed to the Commissioners and had no binding determination of fact against them, they had sought their judicial review directly from a determination by the revenue.  Their initial application to the High Court had also been unsuccessful.

Although the reviews were heard at the same time the factual reviews are, or rather were, different, Gaines Cooper claiming that he had left the UK to take up permanent residence abroad; Davies and James originally arguing that they left the UK to take up full time employment overseas – however both claim that the revenue had not properly applied the booklet IR20 which summarises the revenue’s approach to the issue of residence and that the revenue had in fact altered their attitude so that although all of the claimants say that they followed the guidance in the booklet they were denied the tax treatment they sought.

However Davies and James had a further problem, because although they claimed they left the UK to take up duties of a full time employment overseas they now accept as a question of fact that they left the UK to go on holiday in Italy and it was only after the beginning of the tax year that they took up the duties of the employment and so were not employed for a full tax year overseas in that tax year in which the gains arose. This means that their arguments now resemble Gaines Cooper’s rather more, that they had left the UK, like him, to permanently reside for a period overseas.

The Court of Appeal had ruled that taxpayers, and the revenue, could indeed rely on IR20 (subsequently replaced by a revenue document HMRC6 to which one hopes the same comments apply?) but accepted the revenue’s argument that they had not changed their approach to the issue but simply had stopped accepting claims for non-residence on the face of it and had looked at the claims more closely.

The Taxpayers now seek a ruling in their favour from the Supreme Court, however they were only able to convince one judge of the validity of their claim, the other four found for the revenue and in doing so emphasised some very important points for those who seek to leave the UK and become non-resident.

To cease being resident in the UK requires a taxpayer to leave, but the Court of Appeal decided that this meant something slightly different if you were leaving the UK to take up employment – there it simply implies that you get on a plane and go, but that a person seeking, like Gaines Cooper, to permanently cease residence must have a sufficiently distinct break in the pattern of his life to show that he has left the UK, the same word but a very different meaning.  Lord Manse who found for the claimants noted that IR20 did not emphasise this distinction, did not explicitly state that a taxpayer should have this distinct break, and was, in his opinion, therefore misleading – “the primary issue in each appeal is how on a fair reading IR20 would have been reasonably understood by those to whom it was directed.”  However the view of the other four judges was not in the taxpayer’s favour.

They found that the ordinary law, founded on past cases, requires such a break and IR20 should be interpreted in the light of this requirement even though it may not be expressly stated in the booklet.  They also felt that the taxpayers had failed to establish that there had been a change in the way in which the revenue approached the issue, despite taking evidence from leading accountancy firms which pointed towards a change having taken place.

The judgement now makes it clear that where a taxpayer relies on having left the UK there must be a distinct break – something which has been identified quite separately in other cases such as the airline pilots Sheppard and Grace but this is, of course, a binding ruling of the Supreme Court.

The old ‘belt and braces approach’ was to suggest that a taxpayer leaves the UK for at least one complete tax year, does not set foot in the UK at any time and, like Dave Clark the drummer, in his case in 1986 [Reed v Clark], relocates his home outside the UK.  It may be extreme but it should give a greater degree of certainty.

It is probably not a surprise that the revenue now want to introduce a statutory test of residence – remarkable as it may seem the word residence is nowhere defined in statute, hence the very many cases on the subject and, of course, the uncertainty that stems from this.  The revenue would like, it seems, to have an intelligent agent, in computer speak, on their website so that any taxpayer could input their circumstances and have, because it is founded in statute, an authoritative statement of residence status.  The current proposals which were put out to consultation in the summer of 2011 will probably become law from April 2012.  If they do they will sweep away all previous cases in this area and establish statutory certainty, or so it is hoped.

The legislation seeks to identify three classes into which a taxpayer may fall.  The First Class (Class A) are those taxpayers who are conclusively non-resident.  The Second Class (Class B) are those who are conclusively resident.  Where a person satisfies conditions in both classes non-residence takes priority over residence.  There will then be a Third Class (Class C) where they do not fit into either of the first two categories.  Here the revenue approach will be to identify ‘connection factors’ and to look at the number of days spent in the UK.

Let’s look at the First Class – Taxpayers who satisfy any one or more of these conditions will conclusively NOT be resident in the UK.

So Either:

* A person who is not resident in all three preceding years and is present for less than 45 days in the current year.

* Or a person who is resident in one or more of the previous 3 years but present for less than 10 days in the current year.

* Or a person who left the UK for full-time work abroad if they spend less than 90 days in the UK and do not spend more than 20 days working in the UK.

This suggests that visitors can only come for up to 45 days without fear of being classed as resident whereas they could come up to 182 days under the current approach.  Exceeding the 45 day limit will place them in the third class where the number of connection factors will become relevant.

However the 10 day rule for a person who had been resident is helpful as it suggests that it is no longer necessary to take the belt and braces don’t set foot at all approach.

Note also that each year can be taken in isolation rather than over a four year period as applied at present using the 90 day average rule.

The Second Class are those who are, like most of us, conclusively resident in the UK

So – Either

* Present in the UK for more than 182 days in a tax year – no change there…

* Or only has one home and that home is in the UK, or has a number of homes all of which are in the UK

* Or works full-time in the UK for more than 9 months with no more than 25% of the duties outside the UK.

The home condition takes in people like sea farers who leave the UK for several years at a time but who remain technically resident in the UK – at present they would be resident but this could now change…

Clearly you could have a situation where a person has a home in the UK but spends less than 10 days in the UK, satisfying a condition in each Class – this is when non-residence takes priority over residence.

The condition concerning full-time work refers to a period of 9 months which could straddle two different tax years, conceivably the taxpayer might spend 4 months in one year and 5 in the next, at present they would not be resident in either, now they might be resident in both – however…

Where a person arrives in or leaves the UK that year will be subject to statutory split year treatment to prevent it operating unfairly.

Where a taxpayer does not satisfy any of the conditions in the first class, Class A, or the second class, Class B, they fall into the third class – Class C and now it is necessary to identify connection factors.

These are applied in a slightly different way depending on whether you are arriving in the UK or leaving the UK.

For people arriving the connection factors are:

* Having a family resident in the UK

* Accessible accommodation where use is made of it

* Substantive, but not full-time work, employment or self-employment, in the UK

* Presence in the UK for more than 90 days in either of the two preceding years.

For people leaving the UK these factors are also identified together with a fifth:

* Spending more time in the UK than in other countries

Then having determined how many factors apply in a particular case we count the number of days spent in the UK – hence – if arriving in the UK

* Less than 45 days – not resident

* At least 45 days but Less than 90 days – resident if all four of the factors are satisfied

* At least 90 days but Less than 120 days – resident if 3 or more factors are satisfied

* At least 120 days but Less than 183 days – resident if two or more factors are satisfied.

* And of course 183 days or more you are resident anyway.

If you are leaving the UK all five factors come into play:

* Less than 10 days – non-resident of course

* Up to 44 days – resident if you satisfy four or all five factors

* Up to 89 days – resident if you satisfy three or more factors

* Up to 119 days – resident if you satisfy two or more factors and finally

* Up to 182 days – resident if you satisfy one or more factors.

Whilst this should provide greater certainty taxpayers who are not in the first two Classes may find it difficult to manage the permutations of connections and days.

At present if a person leaves the UK and returns within 5 years a liability to CGT arises on the disposal during that period of assets owned when leaving the UK.  It is proposed to extend this to certain sources of investment income, particularly dividends from close companies – companies small enough to be manipulated to obtain a tax advantage – however this will not apply to earnings from employment or self employment.  Surely there is a simple way round this – pay remuneration from the close company rather than a dividend?

The consultation suggested that as only a very small number of people use the remittance basis it may not be necessary to retain a concept of ordinary residence, and this clearly needs further exploration.

You should note that the Gaines Cooper case and the proposals for a statutory residence test do not affect the issue of domicile even though 23 years ago the Law Commission suggested that the UK concept of domicile was so out of date it needed urgent reform.

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.

 For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper@mac.com

Residence and Non-residence – Click Here

Hi – I’m Paul Soper and this is one a series of Podcasts focussing on recent developments in Direct Taxation in the U K intended primarily for practitioners – especially small practitioners.  But you know if you are a reasonably financially literate taxpayer should enjoy it too – if enjoy is the right word!

[This was the second podcast and dealt with the issue of residence in the light of the Gaines-Cooper case – which has just reached the Supreme Court.  In this transcript of the podcast my comments in red update the case in preparation for a later podcast which will look at the Supreme Court Ruling in greater detail and the proposed Statutory Residence test. The podcast has been scripted and will be released very soon.]

The recent case concerning Mr Robert Gaines-Cooper has focussed attention on the quite common ploy of seeking to reduce UK liabilities by ceasing to be resident, ordinarily resident and domiciled in the UK.  It also suggests that a new interpretation of one the fundamental principles of residence is about to emerge [although the revenue would deny this as we shall see – but then changed the law anyway].  This podcast is going to look at the consequences of this case for residence and ordinary residence, the next podcast is going to look at the concept of domicile.

Lets remind ourselves of the concepts that apply here and how they can affect liability to tax – Residence is usually considered in the light of two tests,

• the 183-day test – if you are present in the UK for the greater part of a tax year you are resident

• but where taxpayers tried to avoid the 183 day test by limiting their visits to the UK the courts evolved a second test – the 90 or 91-day test as it is variously called, designed to treat taxpayers as being resident if they spend regular substantial periods in the UK in consecutive tax years – this means maintaining an average of more than 90 days in the UK over any 4 year period

Before 1993 there was a third test – now redundant but perhaps with some relevance still – maintaining a place of abode in the UK and spending as little as 24 hours in the UK.  A Belgian multi-millionaire in the case in the 1930s of De Lowenstein v Sallis spent 36 hours in Southampton because of bad weather whilst crossing the Atlantic by ocean liner and also owned a hunting lodge in the Yorkshire moors – enough to make him resident.

A fourth consideration – rarely mentioned these days – is technical residence – originating in cases concerning master mariners who set off to circumnavigate the globe, taking more than a year, but leaving their families behind.  One modern case which considered this concept concerned the entertainer Dave Clark – he of the Dave Clark 5 – he wanted to avoid a liability on $500,000 worth of song rights he’d sold and so moved to California from 1 April 1977 to 30 April 1978 – not setting foot in the UK.  The House of Lords indicated that technical residence might have applied but didn’t in Dave Clark’s case because he moved his home to California.  I bet he was feeling – [Glad All Over – groan!]

So what difference does it make? – From an income tax perspective a person who is not resident in the UK would normally be liable to tax only on sources of income which originate in the UK, whereas a person who is UK resident is liable on their global sources of income.

There is also a concept of ordinary residence – the place where a person habitually resides – this could be considered over a number of years unless someone intends to permanently change their residence status in which case ordinary residence will change as well.  Where a person is ordinarily resident in the UK they remain liable to CGT even though they may not be resident and so no longer liable to tax on overseas income.  You need to watch out for a rule which says that even if you leave the UK and become not ordinarily resident – so avoiding a CGT liability, if you return back to UK within 5 years the assets you owned at the date of ceasing to be resident remain chargeable to CGT.

Robert Gaines-Cooper is a multi-millionaire with business interests spread across the globe.  By his own reckoning he has established some 100 or so businesses in different parts of the world building on the initial success he had in the late 50’s and early 60’s importing juke boxes into the UK.  From here he got involved in a company called MAM, an early music industry conglomerate, becoming one of their directors.  In 1973 he visited the Seychelles for the first time (seagulls sound effect) and fell in love with the place.  He applied for and obtained residence status there in 1976 and on the advice of his parents, who were both tax inspectors, registered himself as not being UK resident.

The Seychelles government wanted new industries and Gaines-Cooper established a plastics factory there, although later nationalised, it was subsequently returned back to him and today manufactures plastic surgical masks.

He purchased an estate in the Seychelles ( seagulls again!) and planted a Coco de Mer tree in the garden of the property

His first wife was Indonesian but following their divorce he married a senior employee of his business empire, a girl born in the Seychelles whom he had known for many years.  She is younger than him and in 1998 they had a son.  He may have fallen in love with the Seychelles but she is, it seems, in love with England, she lives here, has permanent residence status and has applied for British Nationality, their son is on the list to be educated at Eton and Gaines-Cooper has paid his fees in advance.

The case is, in fact, only a preliminary hearing in front of the Commissioners to establish whether Gaines-Cooper is, as the revenue allege, resident, ordinarily resident and domiciled in the UK for the years from 1992/93 onwards.  The main action, not yet commenced, will then focus on his potential liability under two anti-avoidance provisions – s739 – the provisions that apply where a taxpayer transfers assets abroad and s660A (now s617 ITTOIA) where as a settlor of a trust you retain an interest in it, either personally or through your spouse or civil partner.

S739 applies where a person who is ordinarily resident in the UK transfers assets abroad so that the income is received by a person who is not-resident or not domiciled in the UK so placing it beyond the territorial reach of the UK tax authorities.  It was introduced as a reaction to a case where the Vestey family had placed their wealth in a trust which made the governor of the Cayman Islands their principal beneficiary.  He received the income and every year made gifts, which were not assessable as income, back to the family.  The House of Lords held that it was not a sham.

Both s739 and s660A create a self-assessment obligation to return the income under the self-assessment regime where they apply.

Gaines-Cooper, like a lot of taxpayers seeks to rely here on the revenue’s booklet IR20.  Residence and ordinary residence is not defined in statute – it is derived from dozens and dozens of cases over the years from 1873 onwards, and a significant number of these cases date back to the 20’s and 30’s following the introduction of higher rates of tax, at that time called Super Tax.

IR20 seeks to establish a consensus of the law as it applied to residents and non-residents and as a guide for the revenue, practitioners and taxpayers alike is normally referred to by the Commissioners as a reasonable statement of the legal position.

However in attempting to rely upon it there are problems – it was last updated in 1999 so is now some 8 years out of date. [Since this podcast was written the revenue created a new resource called HMRC6 to replace IR20 and may introduce a statutory definition of residence from April 2012 onwards]  It also indicates that it is no more than general guidance and stresses that  “a concession will not be given in any case where an attempt is made to use it for tax avoidance”

As with many taxpayers in a similar situation Gaines-Cooper is relying on the so-called 91 day rule to show that he is not resident in the UK and in doing so he relies on a concession in IR20 which says that in counting these days, those of arrival and departure may be ignored.

Reasonable enough in the 1920’s perhaps when travelling would take the better part of a day or more – but in the 21st century?  Gaines-Cooper would claim that if he comes to the UK on a Tuesday and leaves on the Wednesday that by this principle he has spent no time in the UK at all.  The revenue argue that it is more realistic to look at the nights spent in the UK.  The commissioners said “we are of the view that the revenue’s figures are to be preferred”.  In fact he spent more time in the UK, even on his own count, than he spent in the Seychelles where he claimed to reside, although much time was spent in other parts of the world too.

Gaines-Cooper admits that he was resident in 1992/93, the first year under appeal, because of the place of abode rule that we talked about earlier, which was then abolished.

The Commissioners accept, in accordance with the Lysaght case of 1928, that residence means “to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place.”  A person can reside in two places simultaneously – in fact that is what Double Tax Agreements are for – and if one of those places is the UK he is chargeable here.  There is a difference they said, between the case where a British Subject has established residence in the UK and then has absences from it, and the case where a person has never been resident in the UK at all.  The presence of Mr Gaines-Cooper was not for a temporary purpose and they found him to be resident from 1993/94 onwards – he had never ‘left’ the UK.

Turning to ordinary residence, Gaines-Cooper claimed that he could not be ordinarily resident in a year when he was not resident in the UK, but as they found that he was resident, and in accordance with precedent, ordinary residence means residence in a place with a degree of continuity as part of normal and everyday life,  the commissioners said “…his residence here was continuous in the sense that it continued from year to year… it was ordinary and a part of his everyday life bearing in mind that his everyday life was far from ordinary. He would still be ordinarily resident in the UK even if there was an occasional year when he was not resident here”.

It’s a pity that the case failed to examine the notes to SA109, the supplementary pages to the self-assessment return to be completed by a person who claims not to be resident, or not to be ordinarily resident, or not to be domiciled in the UK, where not being domiciled makes a difference to one’s income tax or CGT liability. In a series of questions designed to help a taxpayer self-determine their status,  Q7 asks if the taxpayer is resident in a particular year, if the answer is “no” it states that the person is NOT ordinarily resident!  It is contradicted by later tables in the same document that indicate that it is possible not to be resident but to remain ordinarily resident.  No-one has yet sought to establish whether the revenue might be bound by the conclusion drawn from the answer to this question.  [When the tax return was redesigned in 2009 this controversial question was quietly dropped in favour of an approach which simply describes what is thought to be meant by residence and ordinary residence]

Now does this case undermine the 91-day rule as set out in IR20?  Immediately after the case a number of commentators thought that it did – and the comments of commissioners indicating that they preferred the revenue approach of counting nights spent in the UK seems to point in that direction.

However revenue and customs have subsequently issued a statement in the wake of this case which indicates that in their opinion the commissioners found that Gaines-Cooper had never left the UK in the first place.  They say that the 91 day rule is relevant to two sorts of taxpayer described in the booklet in Chapter 2 – leaving the UK and Chapter 3 – temporary visits to the UK.  They will continue to apply the 91 day rule as set out in IR20, including ignoring days of arrival and departure, but it will be necessary before that to determine, given the facts of a case, whether a taxpayer has left the UK.  [Since the podacst was written the law has now changed and ‘day-counting’ IS now based on nights spent in the UK unless the taxpayer is simply in transit from one part of the world to another]

Before 1993 it was considered essential, for all purposes other than employment income, that if a taxpayer wanted to secure non-resident status they should spend at least one complete tax year outside the UK, relocating their residence as well, and not setting foot in the UK at all.

When the residence rule concerning a place of abode came to an end in 1993 it seems that many people , presumably including Gaines-Cooper, assumed that it would be sufficient to merely limit the time spent in the UK – this case clearly indicates that that is not sufficient – the complete year abroad may still be essential to establish non-residence after which the visits to the UK can recommence on a limited basis – it would certainly be very desirable.

[Gaines-Cooper subsequently tried to take a judicial review of the residence issue to the High Court.  This is because it was question of fact not one of law and so a normal appeal could not be made.  The High Court declined to hear the application but he then made an application to the Court of Appeal who agreed to hear the application together with a request for a judicial review by two taxpayers who had not previously gone through the appeal system.  As we shall see the Court of Appeal decided in favour of the revenue and the Supreme Court have confirmed this in a decision handed down on October 18th 2011.]

This podcast was presented, written and produced by Paul Soper who asserts copyright therein.  Some accompanying illustrations are taken from Revenue publications and are crown copyright.  I’m sorry I couldn’t treat you to one of the Dave Clark 5’s hits but you can access these on http://www.Daveclarkfive.com – but I warn you it is very loud!

I have been talking to Apple today about changes they are proposing to implement over the next year which includes the withdrawal of the web.me.com service which I currently use for posting podcasts online.  This has already had the effect that some of my earlier podcasts are no longer available, although, of course, they did not notify me directly.

In the near future I shall investigate making my podcasts, both current and past (where they are still relevant) available here through the single portal Taxationpodcasts.com.  As a result they will probably change to an audio alone format as the accompanying slides will still be available through iTunes, whilst that facility continues and, of course, the full text of the podcast, with all of the examples, will be found here anyway.  I shall experiment with the older podcasts first and if successful I will then make them all available in this way.  In doing so I’ll update them where necessary.


This has now been done with the second podcastand the others will follow shortly.

Watch out for further announcements very soon.

Capital Allowances – A Complication

Hi – I’m Paul Soper and this is the first of another series of Podcasts focussing on recent developments in Direct Taxation in the UK intended primarily for practitioners – especially small practitioners.  But if you are a reasonably financially literate taxpayer you might enjoy it too – if enjoy is the right word!  In the past these podcasts have been prepared on a sporadic basis but they will now become monthly – so this is the September 2011 edition.

Significant changes are being made to the Capital Allowances system from April 2012 onwards, this podcast looks at a particular problem which some taxpayers might face where action may be needed now.

It is often said that capital allowances are simply the tax equivalent of accounting depreciation, depreciation being added back and capital allowances deducted in arriving at trading profit.  However you don’t need to charge depreciation to be able to claim the allowances and many assets don’t qualify for capital allowances at all, and that list became longer with the abolition of the Industrial Buildings Allowance and the Agricultural Land and Buildings Allowances from April 2011 onwards.  In truth – Capital Allowances are and always have been an incentive to invest and should be considered as such.

Until 2008 expenditure on Plant and Machinery by businesses qualified for two types of allowance for tax purposes – a first year allowance which certain businesses could claim and a writing down allowance which enabled remaining expenditure after deduction of the first year allowance to be written off over a number of years.

Before 2008 the main rate of the writing down allowance was 25% but in that year three important changes occurred.  Firstly the main rate was reduced to 20% and then a new category of writing down allowance at the rate of 10% was created for expenditure on integral assets, like lifts and escalators, central heating and air conditioning, installed in a building.  However the special rate pool as it was called also included expenditure on the thermal insulation of commercial buildings and private motor vehicles which had a stated CO2 emission in excess of 160g/km.

Businesses could also claim an annual investment allowance of up to £50,000 for expenditure on assets of either type, with the exception of cars and leased assets.  This was of enormous benefit to smaller businesses, particularly those with expenditure within this limit who could now claim the equivalent of a First Year Allowance on practically all they spent except for private motor cars and leased assets.

The system retained the First Year Allowance as well – at a rate of 100% for certain energy and resource efficient assets, which I’ll return to later.

 From April 2010 onwards the amount of the Annual Investment Allowance was doubled to £100,000 but for any business whose accounting date was not 31 March or 5 April the allowance for expenditure before those dates was limited to the allowance that would have applied on the date of the expenditure – limiting the total that could be claimed to £50,000.

When they came to power the coalition government announced that these rates would change from April 2012 onwards, the writing down allowance of 20% being reduced to 18%, the special rate pool allowance of 10% being reduced to 8% and the annual investment allowance being reduced to £25,000.  These changes were given legal effect in Finance Act 2011 but one change has a rather nasty side effect which we have to watch carefully.

If the accounting date of a company is 31 March one merely needs to apply the correct rates to the accounting period in question, the same being true for an individual sole trader or partnership with an accounting year end of 5 April, or by concession 31 March where they can pretend that the accounting date is 5 April.

But if anyone uses an accounting date other than these there is a problem, lets look at an example.

Consider a company called Gideon Ltd which prepares accounts each year to 31 December.  On 14th April 2012 it spends £40,000 on several new machines.  For the year to 31 December 2012 it will be necessary to calculate the appropriate hybrid writing down allowance as for the first three months of the year the rates were higher than for the remainder of the year.  This calculation must be done on a daily basis and there are 366 days in this accounting year because of the leap year.

The appropriate fraction is 91/366ths for the allowances of 20% and 10%, and is 275/366ths for the later lower allowances of 18% and 8% giving hybrid allowances of 18.5% and 8.5% respectively.

Had this been a sole trader or partnership of individuals, where the change in the rate occurs on the 6th of April, the fractions would be 96/366ths and 270/366ths giving rates of 18.52% and 8.52% respectively.  Allowances are always rounded up where necessary to two decimal places.

However the catch comes when we look at the annual investment allowance.  This was introduced in 2008 at the level of £50,000 and then doubled to £100,000 in April 2010, just before the general election.  Now it is being reduced to £25,000 from April 2012, again requiring a hybrid calculation, but this time we can choose between using a daily basis or a monthly basis – as long as our use is consistent.

So the company will be entitled to claim either 3/12ths of £100,000 plus 9/12ths of £25,000 – that’s £43,648 or on a daily basis 91/366ths of £100,000 plus 275/366ths of £25,000 – which is £43,750  – the monthly basis seems best although only by £102.

 But Gideon Ltd cannot claim the whole amount because the expenditure was incurred after the 31st of March.  The Finance Act 2011 specifies a different limit for expenditure after 31st March, or for an individual 5th April to the limit that was applied when the allowance was doubled in 2010.  This new method requires the taxpayer to treat the period after 31st March or 5th April as though it were a completely separate accounting period, in this case one which is 275 days or 9 months long.  9/12ths of £25,000 is £18,750, whereas 275/366ths is £18,785.  This means that if there is no other expenditure the daily basis should be used giving a maximum allowance which is £35 higher.

If we were looking at a taxpaying individual the fractions would be 3/12ths plus 9/12ths giving a total, as before of £43,750 or 96/366ths plus 270/366ths giving a total of £44,673 for the whole year. The daily basis seems to give a total allowance which is £922 more, but on a daily basis the amount that relates to the period from 1 April onwards is only £18,442 rather than the £18,750 available on a monthly basis, £308 less.

Of course this means that there is no hard and fast rule of thumb, in each case the calculations should be made on either a monthly or a daily basis, but you cannot pick and choose.

It also means that if you had an accounting period ending earlier in the year the limit of relief available on expenditure incurred after 31st March or 5th April would diminish – with a 30th April year end the limit on expenditure incurred after those dates would be a maximum of £2,083.

Clearly the amount of the Annual Investment Allowance available will be affected by the accounting year but also by the date on which the expenditure was incurred so this begs the question – can you change the date by reference to which the capital allowance is given?  If we look at the legislation contained in the Capital Allowances Act of 2001 we discover that the date on which capital allowances are given is not, as is commonly thought, the date on which the contract is entered into.  Nor is it the invoice date, the date on which the asset was brought into use or the date of payment, well – normally.

 It is the date on which you become legally obliged to make a payment and with the co-operation of the vendor of the machinery it may be possible to specify a date before 1st April which would allow Gideon Ltd to claim the whole £40,000.  This would apply even if Gideon Ltd still made the payment on the same date as before.  There is an anti-avoidance provision so that if payment is made more than 4 months after the obligation date the allowance is then determined by the date of payment.

 Another possibility would be to change the company’s accounting date so that it ended on 31st March – this would leave the expenditure in a later period that did not straddle 31st March and a whole £25,000 could be claimed, albeit a year later.

 So – action is needed now by any business planning to spend substantial sums on plant and machinery.  Even if you have a 31st March or 5th April year end, so the catch doesn’t apply, accelerating relief into the year to 31st March or 5th April 2012 could give you up to four times the relief that expenditure after that date will bring.

 There is one more important consideration for Gideon Ltd – is it possible that the new machinery qualifies as energy efficient by the criteria laid down by the Department of Energy and Climate Change?  This can be checked at http://www.eca.gov.uk.  If it is then quite separately from the Annual Investment Allowance system a 100% First Year Allowance will be available for the qualifying expenditure.

It is worth noting that this also applies to water efficient technologies and to cars with a CO2 emission of 110g/km or less.  However the relief for cars will come to an end, at present, from April 2013 onwards.  Do not be misled here by the website which suggests initially that the 100% allowance for certain cars ended on 31 March 2008.  The website has not been properly updated – follow the car link through to the HMRC website and you will eventually uncover the right information which is available in the revenue’s capital allowance manual at page CA23153.

This podcast taxt was presented, written and produced by Paul Soper who asserts copyright therein.  The older podcasts can be accessed from http://web.me.com/paulsoper and the new series of which this is the first from http://web.me.com/paulsoper/paulsoper as well as from Apple’s iTunes store where they are available to download for free.

For further details of podcast production, particularly if you would like me to create them for you, contact me at Paulsoper@mac.com.

Paul Soper FCCA

Paul Soper FCCA

These Podcasts are produced monthly and designed for practitioners who want to consider aspects of taxation without an overly technical approach, but also for reasonably financial literate taxpayers as well as accountancy or taxation students.

No responsibility is accepted for the ideas expressed, anyone proposing to follow any suggestions made would be advised to seek professional advice first. 

Most material is my copyright and I assert my moral rights therein unless another copyright owner is indicated – some material will be crown copyright and where necessary this will be indicated.

Podcasts themselves can be downloaded for the moment from http://web.me.com/paulsoper or the Apple iTunes store and are provided, at present, completely free.  As a result of recent issues with Apple I will be adding the audio podcast to each posting in this blog series – simply click the words in the title!

I’d really some feedback and comments, together with requests for future podcasts.  Where the substance of a podcast is altered I will try to remember to post an update here.

Paul Soper FCCA