Taxpayer establishes clean break and wins residence case before Tax Tribunal

The First-tier Tribunal (Tax Chamber) ('FTT') have decided in James Glyn v HMRC [2013] UKFTT 645 (TC) that, although Mr Glyn had retained his London house and returned to it several times during the year under appeal, he had nevertheless ceased to be UK resident for tax purposes as he had sufficiently loosened his ties with the UK to show there had been a distinct break with the UK.

Facts

Mr Glyn and his brother each owned a half share in MGroup, through which they controlled a substantial UK property investment business which, by 2005, was worth about £60m. In or about 2003 the brothers sought to shelter MGroup's capital gains by superimposing above MGroup a holding company ('Hillpride') that had significant unutilised capital losses. The FTT decided in a subsequent case involving a different taxpayer that such planning was ineffective and did not achieve its intended aim. Mr Glyn also decided to emigrate from the UK and become non-UK resident for tax purposes in 2005/06 and the following 5 years. He would retire from business in the UK, receive a dividend from MGroup while non-UK resident and give up his share of MGroup's business.

Prior to emigrating from the UK to Monaco on 5 April 2005, Mr Glyn, a British citizen and passport holder, had, since 1993, been living with his wife in a substantial residence in St John's Wood. Mr and Mrs Glyn had two grown up children who did not live with them. Mrs Glyn followed her husband soon thereafter to Monaco where they lived for 2 years in a substantial holiday apartment they had acquired. They then bought a more attractive apartment in Monaco, into which they moved. Mr Glyn retained ownership of the St John's Wood property, which was occupied by his housekeeper while he and his wife were in Monaco. In May 2005 Hillpride paid Mr Glyn a £29m dividend, which was reduced to £22m after the FTT later decided that a scheme similar to the Hillpride capital loss scheme had failed to achieve its aim. The tax at stake was about £5.5m. He returned permanently to St John's Wood in May 2010.

Mr Glyn's contentions before the FTT

Mr Glyn accepted that the desire to avoid tax on his dividend had significantly influenced his decision to become non-UK resident. He contended, however, that there were other reasons why he left the UK. In essence, he had embarked on a completely new, more relaxed post-retirement way of life in Monaco. There had therefore been a complete break from his former business life, which he had found to be 'a drudgery'. He had also loosened his UK social ties.

He spent at least 200 days a year in Monaco and made 22 UK visits in 2005/06 for non-essential purposes. Those visits had lasted on average 2 days, which was well within the terms of HMRC's IR20 guidance.[1] Although he and his wife occupied the St John's Wood property on all but one occasion during such visits to the UK, he did not feel 'at home' during those short visits. Most of these were for two or more reasons – on the one hand to celebrate birthdays, key Jewish festivals and Friday Sabbath meals, and on the other hand to meet with his professional advisers to discuss the Hillpride capital loss scheme or as stop-overs on long-haul flights to various holiday destinations. Although he helped his brother in some tasks, Mr Glyn did not perform any executive functions.

Mr Glyn retained ownership of the St John's Wood property as he knew he and his wife would one day wish to return to resume living there as their habitual abode. In the meantime, he had moved to Monaco 'permanently or indefinitely' within the meaning of that phrase as contained in IR20.

HMRC's contentions before the FTT

HMRC argued that there had not been a complete break with the UK as the St John's Wood property remained Mr Glyn's home and habitual abode. Whether or not he was under UK principles a resident of Monaco, the fact that he remained a UK resident meant he was a dual resident

HMRC submitted that the following factors supported this contention:

• he had sought to preserve his family and social ties by returning to the St John's Wood property 22 times during 2005/06;
• he had continued to participate in his UK business; and
• he and his wife each owned a Mercedes Benz car, both of which were parked at the St John's Wood property while they were in Monaco. Mrs Glyn had bought her car as late as September 2004 and Mr Glyn had a resident's parking permit for his car. When he had applied for this, he had stated that he was resident in the borough.

FTT's decision

The FTT commented that the law governing residence in relation to 2005/06 was derived from case law and sections 334 and 336, Income Taxes Act 1988.[2]

It referred to the fact that following the Supreme Court's decision in R (Gaines-Cooper) v HMRC [2011] UKSC 47, it is critical for a taxpayer to demonstrate in cases of this nature that there has been a complete break from the UK.

In the view of the FTT, on and after 5 April 2005, Mr Glyn made a distinct break from his former way of life. He commenced a quite different and intended way of life in Monaco and had demonstrated the required substantial loosening of his UK ties with family, friends and former business life. He therefore acquired a habitual abode for a settled purpose in Monaco.

The St John's Wood property did not remain his habitual abode in the UK for a settled purpose and it is clear from IR20 that his use of the property during his London visits is not fatal to his assertion that he was not resident in the UK. This property had been retained because Mr Glyn and his wife wished to live there permanently when they ultimately returned to the UK. The FTT did not accept it should be influenced by what he had said about his residence in his application for a parking permit.

Mr Glyn's visits to the UK could realistically be described as visits as they were not for a settled purpose. Several of the purposes for his visits were combined and none of them was habitual or essential.

Mr Glyn's method of computing the days he had spent in the UK (by dividing them into quarters and then aggregating those quarters) produced a fairer and more realistic result than HMRC's approach (counting as full days of UK presence all days of arrival and departure, however short the time spent in the UK). Even on HMRC's 'unrealistic' way of calculating time spent in the UK, Mr Glyn was in the UK for less than 91 days on average.

Accordingly, the FTT concluded that Mr Glyn was resident in Monaco, and not in the UK, during 2005/06.

Comment

The appeal is described in the decision as having been 'hard-fought'. This is apparent from the fact that the hearing lasted 12 days, with several witnesses giving evidence on behalf of Mr Glyn and both sides being represented by Counsel.

It is fair to say that the FTT appeared to be particularly sympathetic to Mr Glyn's case. This may be in large part because he made a good impression as a witness. His case also appears to have been particularly well prepared and presented by his counsel.

It would come as no surprise if HMRC seek to appeal this decision. Any such appeal would have to be on a point of law and HMRC can be expected to rely on Edwards v Bairstow [1956] AC 14, which allows an appellate court or tribunal to quash a decision that is based on a finding of fact or an inference from the facts which is perverse or irrational; where there was no evidence to support it; or where it was made by reference to irrelevant factors or without regard to relevant factors.

The decision offers useful guidance on the FTT's thinking in relation to how a taxpayer should seek to demonstrate there has been a distinct break with the UK where UK links are maintained. However, the introduction of the statutory residence test may reduce the impact of this decision, though it will remain important in relation to periods of residence that began prior to the introduction of those rules.

[1] The relevant guidance at the time.

[2] A statutory residence test for individuals was introduced in Finance Act 2013, with effect from 6 April 2013.