Strachan completed his SA tax returns from 2011-12 to 2015-16 on the basis that he was a UK resident, domiciled in Massachusetts. HMRC did not agree and asked for a tax payment of around £420,000 ($527,000, €491,000).

The tribunal, heard in April, focused on Strachan’s domicile of origin, domicile of choice and whether he had been “careless” with some tax returns, resulting in the loss of tax.

The decision, released on 5 July, allowed his appeal against the assessments for 2011-2012 and 2012-2013. However, his appeal relating to the tax years 2013-14 through to 2015-16 was dismissed because he was domiciled in England during those years.

While it was found that Strachan was deemed to have been careless in completing the SA returns, the judge said that: “HMRC have not met their burden of proving that his carelessness caused the loss of tax.”

The total amount payable by Strachan was reduced to £321,333.14.

The domicile of the father

Gerry Brown, trust and estate-planning expert at QB Partners, said: “Strachan claimed on the remittance basis (a tax treatment that can be applied to those resident but not domiciled in the UK and who have foreign income) and paid the remittance-basis charge in respect of non-UK income and capital gains. HMRC disagreed with this analysis and the matter was eventually referred to the tax tribunal for a decision.

“In any domicile review, the starting point is to consider the domicile of the individual’s father as this will determine the individual’s domicile of origin.

“Strachan’s father, Charles, was born in Scotland in 1906. Charles’ parents were also born in Scotland and spent their lives there. In 1927 Charles qualified as a doctor and moved to England to become a general surgeon at Batley Hospital, West Yorkshire. In the mid-1930s he became a GP in Oldham, Greater Manchester.

“Charles married in 1939 and had three children, all born in Oldham. Strachan was born in 1943. Charles retired to Wilmslow, Cheshire and continued to live there until his death in 1991. His probate certificate records that he was domiciled in England and Wales at the date of his death. He left an English will. He did not own any property in Scotland. The tribunal concluded that Ian had an English domicile of origin.

“Having been born in Oldham, Strachan attended primary school in England, before going to Fettes College in Edinburgh at age 13. He later studied at Christ’s College, Cambridge. He then obtained a place on a Masters degree course at Princeton and later completed a PhD at Harvard. On graduation Strachan married his first wife, the daughter of the then governor of Pennsylvania.

“He got a job with Exxon and worked in New York, Japan and Thailand, living in rented accommodation. During this time he had become a US citizen. By signing the certificate of naturalisation, he confirmed that he intended to “reside permanently in the United States”. He subsequently obtained a US passport.

“In 1983, Strachan was left money by his aunt and used this to buy a property in London, which he let to tenants. He was divorced in 1987. Shortly thereafter he met, and subsequently married his second wife, Margaret. The couple then moved to London where he worked as chief financial officer for Rio Tinto Zinc (RTZ). A few months later they bought a house in London funded by the sale of his London investment property and his wife’s New York apartment. Shortly after the purchase the house was refurbished and in 2010-11 the couple spent £875,000 on a substantial renovation of the property.

“Strachan worked for RTZ until 1996 when he moved to BTR which later became Invensys. From about 2000 he retired from full-time employment but took on a number of part-time positions, serving on the boards of various public companies. These directorships all came to an end by 2015.

“His wife’s family have had a long-standing connection with Manchester in Massachusetts, with many of her relatives owning property there. From 1987 to 2006, Strachan spent an average of six days a year in Manchester, staying with his wife’s grandmother. In May 2006, Strachan and his wife purchased a property in Manchester for almost $3m.

“In July 2020, Strachan was diagnosed with Alzheimer’s disease. The couple left London in December 2021, having sold their London house and, in March 2022, he moved into an apartment with assisted living facilities in Lexington, Massachusetts.”

The relevant law

Brown added: “The tribunal judge reviewed the relevant law which states that: ‘Domicile of choice is a conclusion or inference which the law derives from the fact of a man fixing voluntarily his sole or chief residence in a particular place, with an intention of continuing to reside there for an unlimited time. This is a description of the circumstances which create or constitute a domicile, and not a definition of the term…’”

“The judge said that the courts had repeatedly endorsed the principle that a domicile of choice is only established if a person both voluntarily fixes their sole or chief residence in a particular place, and does so with an intention of continuing to reside there for an unlimited time. A person is not required to show that he has the intention of continuing to reside for an unlimited time in his domicile of origin, in order for that domicile to be retained.

“They reviewed the evidence and concluded that, in the relevant years, Strachan’s chief residence was in London. He spent the greater part of each year in London, and only some 10 weeks a year in Massachusetts. He gave his London address as his home address on official documents, including his IRS return, his wills, his power of attorney and his living will. “The couple kept their most valuable possessions in their London house, including paintings valued at over £637,000.

“The judge refused to comment on Ian’s domicile for periods after he moved in 2021 to Massachusetts but it seems reasonable to conclude that he would have then acquired a domicile of choice there.”

An HMRC spokesperson said: “We note the tribunal’s decision and are considering the next steps.”

Anantrai Maneklal Shah (AMS) was born in 1929 in Karachi. At the time of his birth, Karachi was in British India but since the Partition of India in 1947 it has been within Pakistan. AMS’s father was born in the province of Gujarat in British India (now part of modern India) and moved to Karachi when he was a child. AMS’s mother was born in Karachi.

Although AMS was born in Karachi, his family had, for some years before, been living in what is now Tanzania. AMS was educated in Karachi, living there with a family member. In 1946 he began a university course in Karachi, which after Partition, was completed in Gujarat. He then returned to Tanzania. In 1954 he moved to the UK to study pharmacy and on graduation returned to Tanzania.

When Tanzania became independent from the UK in 1961, AMS was offered and acquired British citizenship. It was asserted that he was required to give up his Indian citizenship in doing so, as India does not permit dual citizenship, but there was no evidence of AMS having specifically acquired Indian citizenship after Partition.

In 1972, by now married with children, he moved to Mumbai, but after a year moved to the UK. AMS worked as a pharmacist from his arrival in the UK. He bought a pharmacy business in 1975 and acquired the freehold of the shop in 1981. He sold the business in 1994 and then worked as a locum pharmacist until at least 1997. The freehold of the shop was sold some time after the business was sold.

His daughter, who lived with her parents, died in December 2009 and his wife died in January 2010. He spent two months in intensive care in the spring of 2010, as a result of pneumonia. He later had both knees replaced, a pacemaker fitted and also had cataract operations.

He sold his house (acquired in 1974) in December 2010 and then, following a short stay with his son, moved into a rented flat in London to be near to his son and his family. In 2012, AMS moved into a flat in London which had been purchased by his son as an investment. In the same year he invested funds in a non-UK company which made investments in UK commercial property.

In 2014. he made two wills, one under UK law for his UK assets and one under Indian law for non-UK assets. On 8 July 2014, he was also registered as an Overseas Citizen of India. He died on 7 June 2016.

When investigated, HMRC agreed that his domicile of origin was not in the UK; and it didn’t need to determine whether it was in India or Pakistan. But HMRC contended that, sometime after 1973, AMS had acquired a UK domicile of choice and his executors argued that he was domiciled in India.

Location of domicile

Gerry Brown, trust and estate-planning expert at QB Partners, said: “A domicile of choice arises where an individual is resident within a territory subject to a distinctive legal system and intends to reside there indefinitely.

“HMRC submitted that his actions were inconsistent with suggestions that AMS intended to move permanently to India. He had only visited India twice during the 43 years that he lived in the UK and in view of his age, state of health and family connections in the UK in particular, it was not realistic to infer that he planned to move away from close family and the country in which he was settled, to a part of India that he did not know and where he had no family.

“His executor argued that he still intended to return to India when he was well enough to do so and had arranged accommodation in India.

“It was obvious that AMS was deemed domiciled in the UK, in view of his long period of UK residence. However, if it could be established that he was domiciled in India he might have been able to take advantage of the UK-India capital taxes treaty, which can, in certain circumstances, override the UK-deemed domicile rules and exempt certain non-UK assets from UK IHT.

“It is clear from this case that anyone arguing that they are not UK domiciled should create and maintain evidence in support of that contention.”

An HMRC spokesperson said to International Adviser: “We welcome the tribunal’s decision to dismiss the appeal.”

The schemes were intended to attract sideways loss relief, so that the investors could write off their film losses against their other income. The marketing involved the issue of an information memorandum (IM) inviting investors to submit applications and subscribe for membership of one or more of three limited liability partnerships (LLPs).

The LLPs were formed as a vehicle to carry on a trade consisting of the acquisition of licences and exploitation of distribution rights to films. The schemes were promoted to potential investors on the principal basis that the investor would be entitled (as a partner of the LLP) to tax relief for trading losses the LLP was anticipated to make that they could set off against their personal income or capital gains to reduce their tax liability.

However, in 2017, HM Revenue & Customs (HMRC) ruled that the partnerships were not really trading and sideways relief was not available.

This caused the investors heavy financial losses. A group of investors sued Thornhill for professional negligence. Thornhill had been retained between 2002 and 2004 by the promoters, Scotts Atlantic Management, to provide advice on whether the schemes were trading commercially with a view to profit. His advice was that they were.

The promoters then showed that advice to potential participants in the schemes. According to the claimants, this implied that Thornhill had assumed a duty of care to them and negligently advised that relief would materialise, making him liable to pay them compensation.

Thornhill defeated the investors’ claims in the High Court in March 2022, but some of them appealed.

Appeal denied

Gerry Brown, trust and estate planning specialist at QB Partners, said: “The Court of Appeal reviewed the earlier High Court decision.

“Did Mr Thornhill owe a duty of care to the investors and if he did was that duty breached by his giving negligent advice?

“The Court of Appeal considered the documentation, which had previously been reviewed by the High Court. The ‘subscription agreement’ required the investors to give the following warranties;

“‘… he or she has only relied on the advice of, or has only consulted with, his or her own professional advisers with regard to the tax, legal, currency and other economic considerations related to subscription to the partnership;

“The subscriber hereby confirms that he or she has read and understood the terms of the IM and has taken appropriate professional advice before submitting this application and is aware of the risks attached to his or her becoming a member in the partnership. …’”

Duty of care

The Court of Appeal also rejected the argument that Thornhill owed a duty of care to potential investors.

It said: “As for Thornhill’s position, he was at all times identified as the seller’s tax adviser in the IM. The fact that he was also described as the LLP’s adviser does not alter that position. Potential investors were being invited to subscribe to membership of a partnership, but they were not yet members of it.

“Investors could not reasonably have thought that he was their adviser in any relevant sense: they did not pay him, meet him or even communicate with him. Moreover, there was nothing in the IM or other documents that suggested he was an independent expert of any kind.

“Significantly, Thornhill’s consent to potential investors receiving copies of his opinions was given in the knowledge that the commercial and regulatory context was as I have summarised. These were unregulated schemes outside the protection of FSMA and investors were therefore required by law to have independent advisers.

“Further, and of central importance, the IM was the only means through which Thornhill’s advice to Scotts could be obtained by third parties, and Thornhill only gave his consent to his tax advice being provided to prospective investors (if asked for) on the terms of the IM and other documents that expressly required those investors to take and rely on their own tax advice relating to the scheme.”

Lessons learned

Brown added: “That was enough to decide the case in Thornhill’s favour. However, the court did go on to consider his analysis of the tax position and concluded, ‘his approach overall was one which, at that time and on this basis, a reasonably competent tax silk could have taken’.

“What can advisers learn from this case? Promoters of tax avoidance schemes will take every step to limit their liabilities should things not pan out as expected.

“Having the client take additional advice will be costly but in the light of this case, necessary.”

The case (James Charles Pride as trustee of the estate of the late Geraldine Jill Pride and HMRC), was heard at a tribunal in December, with the decision published at the end of March.

Gerry Brown, trust and estate planning expert at QB Partners, warned: “Advisers with clients using this type of scheme should take specialist tax advice in the light of the HMRC ‘campaign’ against this type of planning.

“The purpose of the home loan or double trust IHT scheme was to remove the value of a house from an individual’s IHT estate whilst allowing that individual to remain living rent-free in the house for the rest of their life.

“The basic idea is that the individual sells the house to an interest in possession trust of which the individual is the settlor and principal beneficiary. The purchase price is left outstanding as a loan owed by the trustees to the settlor (the home loan). The settlor then gives the benefit of the loan to a second trust for his/her children (the double trust). The settlor cannot benefit from the second trust and the gift of the loan is a potentially exempt transfer (PET). Assuming the settlor survives seven years from the gift it will not be taken into account in determining the IHT liability on the settlor’s death.

“The scheme designers claimed that the outstanding loan could be deducted from the value of the house (which would always remain in the settlor’s estate).

“There were many variations on this basic plan. Various factors including the introduction of stamp duty land tax (SDLT), the introduction of pre-owned asset tax (POAT) and the 2006 changes to the IHT treatment of trusts brought an end to this type of planning. It has been suggested that some 30,000 such arrangements were set up.

“HMRC remains of the view that the schemes do not work as intended and have been challenging schemes on the death of the settlor.”

Decision on the case

Commenting on the case, Brown explained: “Mrs Pride (Mrs P) was the principal beneficiary of an interest in possession (IIP) trust established in 2002. She was entitled to the income arising on the trust fund and additionally the trustees had the power to advance capital for her use and benefit. Because this was an IIP trust, the trust fund was deemed to be in P’s estate for IHT purposes. This trust was known as the property trust.

“Mrs P also established a trust, the children’s trust’, for the benefit of her children. Mrs P was not a beneficiary of this trust. In 2002, she wanted to downsize. She arranged the sale of her house to the property trustees for £800,000 ($1m, €907,000). They immediately sold it to an unconnected party. The trustees thereafter had cash of £800,000 but owed Mrs P the same amount. This cash was invested in an investment bond. Mrs P negotiated the purchase of a flat for £535,000 funded by her but owned by the property trustees. Under the terms of the trust, she was entitled to live in the flat.

“As a consequence of these transactions the trustees had assets of £1,335,000 but owed Mrs P an identical amount. The property trustees had a loan note created, and given to Mrs P, which provided that the note could be redeemed for £5,099,366 − 23 years after issue. (£5,099,336 is £1,335,000 compounded at 6% for 23 years.) The value of the loan note was capped at the value of the trust fund. Mrs P immediately transferred the loan note to the children’s trustees.

“Mrs P moved into sheltered accommodation in 2005 and later moved to a nursing home. She died in October 2016. At that time, the property trust fund was valued at £3,013,942 (the flat was valued at £650,000, the bond at £2,363,942.) This amount fell to be taken into account for the IHT calculation on Mrs P’s death.

“Her executor claimed to deduct the value of the loan note, capped at the value of the trust fund. This meant that no IHT was due in respect of the property trust. There is anti-avoidance legislation which prevents the deduction of liabilities created by the deceased. Were the trustees’ debts created by Mrs P? The executor argued that the liability was a liability of the trustees only.

“The tribunal held that as a matter of law, the property trust assets, subject to any liabilities, are beneficially held by the trust beneficiary, Mrs P. The legislation, properly interpreted, brought the property trust assets and liabilities into Mrs P’s IHT estate. The loan note was derived from her actions. The tribunal pointed out that had Mrs P not transferred the loan note to the children’s trust, her estate would have had equal and offsetting assets and liabilities.

“The value of the loan note could not be deducted in arriving at Mrs P’s IHT liability. The HMRC view (as expressed in its inheritance tax manual) is that the anti-avoidance legislation “is intended to prevent the avoidance of tax through the ‘artificial creation’ of liabilities which would normally be allowable as deductions. Broadly, the rules apply when the deceased has both borrowed money from someone and made a gift to that same person.”

Brown added: “HMRC provides the following example of the type of arrangement the legislation is designed to prevent:

• A gives land valued at £100,000 to B;
• B raises £100,000 by way of mortgage and loans this to A;
• A dies eight years later with the whole £100,000 outstanding; and
• The gift by A escapes tax as a PET made more than seven years before death while the £100,000 debt is claimed as a deduction from A’s estate.

An HMRC spokesperson told International Adviser: “We welcome the tribunal’s confirmation of our longstanding position that properties in these circumstances remain an asset of an estate on death and are subject to inheritance tax.”

An individual acquires a domicile when born, normally from his or her father. The child inherits the father’s domicile. This is known as a domicile of origin.

On attaining age 16, the individual can shed the domicile of origin and acquire what is known as a domicile of choice. Until a child reaches an age at which they may acquire their own domicile of choice, their domicile is that of the person on whom they are legally dependent and it follows any change in that person’s domicile.

A domicile of choice can be maintained indefinitely or the individual could acquire another domicile of choice. The individual could abandon the domicile of choice without acquiring a new domicile in which case the domicile of origin will revive.

The acquisition of a domicile of choice involves meeting a two part test. It can only be acquired where an individual is both:

• resident within a territory subject to a distinctive legal system, and
• intends to reside there indefinitely.

One of the leading judges of the 20th century stated: “A domicile of choice is acquired when a man fixes voluntarily his sole or chief residence in a particular place with an intention of continuing to reside there for an unlimited time.”

The first part of this test is easy to “prove”; the second incredibly difficult.

So much for the theory – how does this pan out in practice?

The First Tier Tribunal (Tax) was tasked with determining the domicile status of Jeremy Coller, a successful businessman who in 2012 had started claiming the ‘remittance basis’ in respect of his non-UK income.

Jeremy’s father John was born in Austria in 1918 and arrived in England in 1938 having fled to escape the Nazi persecution of Jews. He therefore had a domicile of origin in Austria. His wife Sylvia was born into a Jewish family in Dublin on 8 February 1930 and therefore had a domicile of origin in Ireland. During the Second World War, John served with the British Army and after the war established a business and lived in London. He met Sylvia in London in 1954 and they were married later that year. Their son Jeremy was born in London on 17 May 1958. John died in 1968 (when Jeremy was 10) and Sylvia died in London in 2022.

There were four possibilities:

• By the date of Jeremy’s birth had John acquired an English domicile of choice, such that Jeremy’s domicile of origin was England?
• Alternatively, had John acquired an English domicile of choice by the time of his death in 1968, so that Jeremy had an English domicile of dependency, which became an English domicile of choice, on his reaching majority in 1974?
• Alternatively, if John had not obtained an English domicile of choice by the time of his death, had Sylvia acquired an English domicile of choice after his death, such that Jeremy had an English domicile of dependency, which became an English domicile of choice on his reaching majority in 1974?
• In the final alternative, if Jeremy had an Austrian domicile of origin that remained unchanged during his minority and after he had turned 16, had he later acquired an English domicile of choice?

The evidence before the Tribunal consisted of witness statements from family members and friends, notes of a meeting with HM Revenue & Customs (HMRC), a biography of Sylvia and several thousand pages of ‘documentary’ evidence.

John arrived in England because he was compelled to do so to escape Nazi persecution; he renounced any connection with Austria; he turned his back on that country; he retained no ties or attachments with it; having arrived in England he served in the army following which he settled in North London where he started businesses, bought houses, married, had, and brought up three children.

He was a devoted family man to whom his wife and children were of overriding importance; he had a small circle of friends with whom he socialised; these were in the main Viennese émigrés; these were however deep friendships; between 1938 and 1958, when Jeremy was born, John had become deeply settled in North London.

John had acquired a UK domicile of choice by the time Jeremy was born and thus Jeremy had an English domicile of origin.  The Tribunal also found that Sylvia had acquired an English domicile of choice and that Jeremy was English domiciled irrespective of the domicile status of his parents.

The sheer volume of work (and costs in terms of legal and accountancy fees) involved in presenting this case is staggering. Any individual engaging with HMRC in a domicile dispute should be aware of these cost implications.

The introduction of the statutory residence test and thus effectively deemed domicile rules for income and capital gains taxes as well as inheritance tax will reduce the number of such disputes, but there will still be cases where a reference to the Tax Tribunal can’t be avoided.

This article was written for International Adviser by Gerry Brown, trust and estate planning specialist at QB Partners.