The End Of The Road For Mr Gaines-Cooper? - Inheritance Tax

Overview

After a series of court cases beginning in 2006 Mr Gaines-Cooper has had his claim to be treated as non-UK resident and non-UK ordinarily resident finally rejected by the UK's Supreme Court. Mr Gaines-Cooper had relied on HM Revenue and Custom's ("HMRC") guidance published in IR20 (replaced in 2009 by HMRC6) in order to establish non-UK residence. However, HMRC applied IR20 so as to require Mr Gaines-Cooper to establish a "distinct break" from the UK, which they said he had not achieved, even though this was not an explicit requirement of the guidance. In the litigation fought by him over the past few years Mr Gaines-Cooper has argued that HMRC should have been bound by their published guidance on these matters in IR20, that this did not require a distinct break, and that if HMRC had applied the guidance as published he should have been treated as non-UK resident.

It is possible that, despite the proposed introduction from 6 April 2012 of a statutory residence test in the UK to simplify determination of a person's UK residence status, the Gaines-Cooper decision could remain potentially relevant until 6 April 2015 (and in a minority of cases for even longer).¹ This is because, in accordance with the proposed statutory residence test as originally proposed, the test would require individuals to look back for three years to see which part of the new rules applies to them. However, we are hopeful that the Government will introduce transitional provisions into the new statutory residence test which will obviate the need to look back to the old rules.

Background

Mr Gaines-Cooper was a businessman born in 1937 with a domicile of origin within the UK. He acquired business interests in various jurisdictions, including in the UK. In 1973 he visited the Seychelles and fell in love with the place. In order to obtain a residence permit there he was required to invest locally and he opened a factory there. Throughout the period in which the HMRC were interested, from 1992/1993 to 2003/2004, Mr Gaines-Cooper was leading an "international existence" although he retained a home in the UK and spent time there. He also purchased a house in the Seychelles in 1975 and, as far as the Seychelles authorities were concerned, he was resident in the Seychelles during the tax years in question. Mr Gaines-Cooper married a Seychellois woman in 1993, although she spent substantial amounts of time in the UK.

Heard at the same as Mr Gaines-Cooper's case were the claims of Mr Davies and Mr James, two UK based businessmen who had moved to Brussels in connection with their business interests, although their families had remained in the UK.

Mr Gaines-Cooper's arguments

In brief Mr Gaines-Cooper's claim before the Supreme Court was that

HMRC's guidance in IR20 (which HMRC acknowledged was binding on it) contained a less stringent residence test than that applied by the ordinary law; in particular paragraphs 2.8 and 2.9 of IR20 indicated that one of the situations in which a person would be treated as non-UK resident would be if he went to live abroad for at least three years and kept visits to the UK within specified limits;
in connection with the above test of non-UK residence there was no requirement for the taxpayer to show a "distinct break" from the UK;
even if this interpretation of IR20 was wrong, until about 2004/5 HMRC's practice was in any event to apply the less stringent residence test (which did not require a distinct break from the UK) such that Mr Gaines-Cooper was entitled to rely on it and so be treated as non-UK resident; and
whether reliance is placed on IR20 or on HMRC practice, Mr Gaines-Cooper should have been treated as non-UK resident and non-UK ordinarily resident in the tax years in question (being 1993/4 to 2003/4)

The Supreme Court's findings

The Supreme Court has held that

IR20 may be relied upon only if it is clear on the points in issue
we must assume that IR20 is being construed by an "ordinarily sophisticated taxpayer" (whether or not one being professionally advised)
whilst IR20 should have been more clearly expressed, the ordinarily sophisticated taxpayer would realise that the particular provisions of IR20 on which Mr Gaines-Cooper relied must be construed in the light of the surrounding paragraphs. It followed that - The taxpayer was required to relinquish his "usual residence" in the UK; furthermore to determine whether this had happened would require consideration of various aspects of the taxpayer's life - the test in paragraphs 2.8 and 2.9 on which Mr Gaines-Cooper relied must be read in the context of an overall requirement, clear from other paragraphs of IR20, that -the taxpayer must have left the UK indefinitely - any property retained by the taxpayer in the UK for his use was required to be used for the purpose only of visits rather than as a residence
all of the above required a "multi-factorial" evaluation by HMRC of the taxpayer's circumstances. In short the taxpayer must be able to demonstrate a distinct break from the UK.

(It is important to remember that the Supreme Court was not concerned with the situation where a taxpayer goes abroad under a full-time employment contract but only with taxpayers going abroad "permanently or indefinitely". Going abroad under a full-time employment contract does not therefore require a "distinct break".)

The Supreme Court then went on to consider whether, if it were wrong in finding IR20 to have adequately expressed the above points, HMRC had changed its practice from about 2004/5 by requiring taxpayers for the first time to establish a "distinct break" from the UK. The point was that if HMRC had an established practice before 2004/5 of not requiring taxpayers to show a distinct break then Mr Gaines-Cooper should have been able to rely on this. On this point, however, the Supreme Court found no settled practice before 2004/5 of not requiring a distinct break. Mr Gaines-Cooper's argument therefore failed on this point as well.

Davies and James

The detail of the argument made by Mr Davies and Mr James differed from that of Mr Gaines-Cooper. They sought to rely on paragraph 2.9 of IR20 as if it were a stand-alone test. On this basis, they claimed, non-UK residence could be established by going abroad for a "settled purpose" for a period spanning one complete tax year and keeping return visits during that time within specified limits. Non-UK residence could be established in this way, they claimed, notwithstanding that they might not have effected a distinct break in the pattern of their lives to the UK. However, the Supreme Court disagreed. Paragraph 2.9 did not contain a stand-alone test but must be read in the context of the surrounding paragraphs. On this basis it was clear that a distinct break was required.

Meaning of "distinct break"

For UK taxpayers the only positive news to be gleaned from the judgement is the apparent acceptance by the court of a less stringent test than that outlined in the Court of Appeal for what amounts to "distinct break". The Supreme Court has thus found that a "distinct break" may be achieved with "a substantial loosening of social and family ties" rather a "severance" of such ties, as had been mandated by the Court of Appeal.²

Conclusion

The Supreme Court has subjected IR20 to a detailed exegesis in order to interpret it as would the "ordinarily sophisticated" taxpayer. Unfortunately the interpretation presented by the Supreme Court is not at all clear from the wording of IR20 itself but seems to be something of an elaboration of the precise wording of the guidance. This is unfortunate as it undermines confidence in HMRC guidance more generally (including HMRC6 which replaced IR20 in 2009, although HMRC6 is so heavily caveated that, except in straightforward cases, few people are likely to wish to rely on it in any event).

This final round in the UK courts of the Gaines-Cooper litigation richly illustrates why the proposed new statutory residence test is so necessary. However, this might not be the end of the road for Mr Gaines-Cooper himself; he has announced his intention to take the case to the "European courts".

Footnotes

1. For more information on the Government's proposed new statutory residence test see the Charles Russell briefing note dated 22 June 2011 entitled "UK Residence: Consultation on New Statutory Definition".

2. Paragraph 20 of the judgement

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: The End Of The Road For Mr Gaines-Cooper?