DOMICILE (Hansard, 14 July 1983)

§ Mr. Straw

This clause raises a rather more substantive question than the previous three clauses. It proposes to exempt from charge to capital transfer tax certain people who were domiciled in the United Kingdom but who, since 1974, have at some stage become 1056 domiciled in the Channel Islands or the Isle of Man. I am sorry to see the right hon. Member for Guildford (Mr. Howell) leaving the Chamber as I wish to quote some remarks that he made in 1975. I hope that he will remain for a few more minutes.

It is well known that most countries determine which legal system should apply for the purpose of taxation by reference to an individual's nationality, but in Britain and some Commonwealth countries it is not nationality but domicile that determines the relationship between the individual and a country's tax regime. Although domicile has been a useful concept in matrimonial law, it is complicated and often imprecise. Because of its complexity and imprecision, it has been plain that those who have drafted tax legislation have found it inadequate. Time and again they have had to add definitions to domicile and add qualifications to residence to bring people into charge. That is certainly the case in company taxation.

In 1975 the Labour Government brought forward proposals for capital transfer tax. They recognised that simply to leave the test of chargeability to domic:le would be inadequate and that there would be many loopholes. They proposed in what became section 45 of the Finance Act 1975 that people, even if they were not domiciled in the country at the time of the charge, would be subject to charge of capital transfer tax if one of three tests was fulfilled: first, that they had within three years preceding the charge been domiciled in this country and then moved either to the Isle of Man or the Channel Islands; secondly, that within 17 of the preceding 20 years they had been domiciled in countries other than the Isle of Man or the Channel Islands; and thirdly, that they had been domiciled in this country before 10 December 1974 but subsequent to that date had moved to the Channel Islands or the Isle of Man.

6.30 pm

When this was discussed in Committee in February 1965 many Conservative hon. Members, who were then in opposition, became highly exercised about this issue. The right hon. and learned Member for Dover (Mr. Rees), the present Chief Secretary, suggested that if the clause were passed civilisation would virtually come to an end. He said: This provision not only affects those who give up English domicile to assume domicile there but also imperils to a degree the well being—even the economy, and perhaps the political status — of those, until now, favoured islands." — [Official Report, Standing Committee A, 13 February 1975; c. 1649.] Some of his hon. Friends went in for similar examples of exaggerated overblown hyperbole. Despite the opposition of Back Benchers, the right hon. member for Guildford, who led Conservative Members of the Committee on that occasion, listened carefully to the persuasive words of Joel Barnett, the then Chief Secretary, and suggested to his hon. Friends that they should not press the matter to a Division. He said: The need for Chief Secretaries of whatever Government to seek means of trying to secure the revenue and avoid tax avoidance is something that any responsible party or Government must recognise."—[Official Report, Standing Committee A, 13 February 1975; c. 1684.] Those words from 1975 remain as true today.

Joel Barnett explained why those who are domiciled in this country and had then moved to the islands were treated differently from those who had moved to anywhere else. He said: 1057 The first is their geographical proximity. It has been a relatively simple matter in the past for a person to establish legal domicile in the Channel Islands— and thus lose his United Kingdom domicile — by acquiring the appurtenances of a domicile in the Islands—a house, for example—without in reality severing his connections with the United Kingdom."— [Official Report, Standing Committee A, 13 February 1975; c. 1655–6.] The second reason was that the Channel Islands were within the area where controls operated. We recognise that exchange controls have been abolished since October 1979 so that argument does not apply, and will not apply, until exchange controls are introduced by this Government because they are forced to, or by the next Labour Government because we think it desirable.

But Joel Barnett's main point still stands. It is in practice far easier to move one's domicile to the Channel Islands while still maintaining a major connection with this country than it is to move to the Cayman Islands or to other tax havens. Given that fact, and given that the right hon. Member for Guildford acknowledged the need to prevent tax avoidance and evasion by people moving to the Channel Islands, we were shocked to see that the Government propose in clause 12 to abandon altogether section 45(1)(c) of the Finance Act 1975.

The Economic Secretary may argue that to have a cutoff date of 10 December 1974 for ever and a day is anachronistic because time moves on. We accept that point but the sensible way forward would have been to provide a moving cut-off date—for this year it could be 1974, for next year it could be 1975 and so on. We do not accept the case for abandoning altogether this important safeguard against tax evasion. Despite the flowery words of the Chief Secretary, who I am glad to see has come into the Chamber on cue, and his powerful opposition to section 45(1)(c) of the Finance Act 1975—I reminded the Committee a moment ago that the right hon. and learned Gentleman said that civilisation would virtually come to an end if the clause were passed, and it would affect the economy and even the political status of the Channel Islands and Isle of Man—the Government have not seen fit to change the clause. I assume that they too have seen merit in maintaining it.

We do not believe that it should be changed. We should like to know a good deal more about the so called "small loss of revenue" that the Financial Secretary suggested was at risk when he spoke on Second Reading on 6 July. Above all, we should like to know why when they have retained the clause for the past four years and when they know that there are risks of major tax avoidance and evasion from people who in reality live in this country but move their domicile to the Channel Islands, they have thought fit to abandon this safeguard.

§ Mr. John Moore

I should like to respond briefly to the gentle way in which the hon. Member for Blackburn (Mr. Straw) covered this historical debate. It is pleasant to do so with my right hon. and learned Friend the Chief Secretary beside me. I will never be able to match either his wisdom or the poetic way that he manages to express his thoughts. So I shall not go back to 1975 to reiterate what he said.

The hon. Member for Blackburn legitimately reminded us of the importance of domicile. The Government propose a modest change in domicile and I shall of course deal with the point raised about tax loss liability.

1058 Domicile is an important concept for capital transfer tax purposes. Someone who is domiciled here is liable to the tax on transfers of his assets wherever they are situated; someone who is domiciled abroad is liable only on property in the United Kingdom. Domicile can therefore have a major effect on capital transfer tax liabilities.

The test of domicile is, under general law, essentially a subjective one. Broadly it depends on where a person's permanent home is. This in turn depends very much on intention as well as on facts and evidence about intention and is often difficult to establish authoritatively. However, liability to taxation can scarcely be left to a taxpayer's unsupported assertion; and when a dispute about domicile comes to appeal it can take a long time to settle. It is equally difficult to demonstrate that someone of foreign origin has become domiciled here in the face of assertions that he ultimately intends to return to his country of origin, even though he has spent the greater part of his life here, and to maintain that someone who was originally domiciled here has not acquired a foreign domicile, even though he emigrated very recently in the face of claims that he has severed all links with this country and intends to reside permanently abroad.

The hon. Member for Blackburn rightly drew our attention to section 45 of the Finance Act 1975 and the discussions surrounding it. It set out a series of objectives tests for determining domicile for capital transfer tax purposes—the "deemed domicile" rules—in addition to the general law.

These rules cover three situations. The first provides, in effect, that a domicile in the United Kingdom cannot be lost for tax purposes until three years after it has been lost under general law. The second provides that someone who has been resident here for income tax purposes for 17 out of the past 20 years of assessment is to be treated as domiciled here, whatever his domicile under general law. The third—to which we are addressing ourselves in this clause—provides that someone who has been domiciled here and acquires a domicile in the Channel Islands or the Isle of Man, both known as the offshore islands, is treated as remaining domiciled here without limit of time.

It is only the third situation to which we are particularly addressing ourselves in relation to the clause; that is, that someone who has been domiciled here and who acquires a domicile in the Channel Islands or the Isle of Man— both known as the "offshore islands" — is treated as remaining domiciled here without limit of time. The hon. Gentleman reminded us of the debate and gave an accurate description of part of the essential argument at the time.

The original justification for the rule applying to emigrants to the offshore islands was that they were thought to provide particularly convenient bases for those who wished to maintain some contact with the mainland. Moreover, at the time when the rule was introduced the islands were within the exchange control area. It was thus easier to shift property there than elsewhere abroad. The rule has been strongly resented in the islands as being discriminatory. The removal of exchange control restrictions has deprived one of the main arguments in support of the special rule of its force.

It is estimated that the cost of abolishing the special rule for the offshore islands would be £1 million in 1983–84 and £2 million in a full year—not vast sums but noticeable ones. Essentially, therefore, the clause seeks to abolish the exception to the general law to bring the treatment of those 1059 becoming domiciled in the Channel Islands or the Isle of Man into line with that of those becoming domiciled elsewhere outside the United Kingdom. I hope, on the basis of that explanation—though I appreciate that the hon. Gentleman does not accept the tenet of the clause—that he will not press the matter to a Division.