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Residence and domicile are arguably two topics that are the most confused in all of tax planning, maybe even financial planning. Both residence and domicile affect all main taxes and understanding them is vital to understanding your current and future tax positions, in life and in death.
Making an assumption about your residency status can have serious financial consequences for you and making an assumption about your domicile can have serious financial consequences for anyone who inherits from your estate.
Understanding whether you are UK domiciled or resident is not straightforward. This guide aims to explain the difference and how they both affect the main taxes along with some things you should be aware of.
Residence is the term used to describe someone’s tax status in any given tax year. Think about it as where you lay your hat.
Domicile is the country someone calls home or if that is nowhere, think which country calls you their own. To quote the South African Tax Revenue Service…. ‘’the country you will return to after your wanderings.”
So, in the eyes of the UK’s HMRC you can be:
All mean different things for all 3 different personal taxes: Income, Gains and Inheritance. Let’s look at both residence and domicile in more detail and then how they affect each type of personal taxation.
Residence is the term used to describe someone’s tax status in any given tax year. HMRC introduced the statutory residency test in April 2013 which allows an individual to work out their tax residence separately for each tax year.
I have heard the phrase ‘but I’m in the UK less than 90 days’ far too many times to not elaborate on this topic.
HMRC have 3 tests to help determine if someone is automatically a UK resident and 3 to help determine if some is automatically a non-UK resident. If none of the tests prove conclusive the sufficient UK ties test is used.
Someone is Automatically a Non-UK Resident if they meet any of the following criteria:
Someone is Automatically a UK Resident if they meet any of the following criteria:
If none of the above tests are conclusive HMRC will move onto the sufficient ties test which assesses someone’s ties to the UK and the number of days spent in the UK.
It all gets very complicated but basically the more ties you have the fewer days you can spend in the UK before becoming a tax resident and vice versa.
Check out the links below for some more information or reach out and we’ll be able to advise.
This is the country that a person treats as their permanent home, or lives in and has a substantial connection with. Unlike with many things to do with HMRC, the world of domicile can get very subjective.
There are several types of domicile, I have summarised the main 4 which will help HMRC to decide whether to tax your estate or not.
This is acquired at birth and is usually that of the fathers if the parents are married, and the mothers if not.
This is not as easy to acquire as you may think. HMRC look for positive action to become a citizen of your new home with the intention to stay there permanently. HMRC will take the following into account:
But what most people forget is that HMRC will also take into account your UK ties. This includes pensions, bank accounts, your passport and business interest and even burial plots. The more ties you have to the UK to more likely they are you class you as UK domicile.
Even if an individual manages to go through the rigmarole of acquiring a new domicile of choice and cutting as many ties to the UK as possible, they will still be deemed to be UK domicile by HMRC for 3 years.
Long term residents of the UK will be treated as deemed domicile for all tax purposes including IHT if they have been a resident for 15 out of the last 20 tax years
Anyone who acquired a UK domicile at birth who returns to the UK for 1 out of 2 years, will automatically revert to UK domicile even if they managed to acquire a domicile of choice outside the UK.
Non-Dom is the term given to anyone that the UK consider to be not domicile in the UK.
It used to be possible to ask HMRC for their opinion on your domicile however that’s service has now ceased. Some barristers or tax consultants will offer this service however this is only their opinion.
In the worlds of HMRC, it’s up to you to prove you’re not domicile, not their job to prove you are.
Applicable to anyone who is a UK resident but has income and gains arising outside of the UK. By opting to be taxed on a remittance basis they will only pay tax on the income and gains they remit and not their worldwide income and gains.
The downside is that the person will lose their income tax personal allowance and their capital gains tax annual exception. HMRC also impose a charge of £30,000 on individuals that have been resident of the UK for the last 7 of the 9 tax years and £60,000 on anyone that has been a UK resident for the last 15 out of 20 years.
The charge is basically a tax on foreign income and gains and is applicable every year someone makes use of the remittance basis.
This is all explained quite nicely on the UK governments website:
https://www.gov.uk/guidance/remittance-basis-changes
However, as always there are some exemptions:
This applies to someone who leaves the UK for full-time work or comes to the UK for full-time work. If someone qualifies, they will only pay UK tax on your UK income or foreign income earned whilst a UK resident and not for income earned as a non-resident.
Well, that depends on your status. Below is a breakdown of each of the above-mentioned different statuses that could be applied to you by HMRC and how they affect each of the personal taxes.
NB This is a high-level overview and strongly suggest taking advice on tax as it’s important to get it right:
Income Tax: Charged on all earned, pension and investment income whether brought back into the UK or not.
Capital Gains Tax: Liable on worldwide gains.
Inheritance Tax: Liable on worldwide assets.
Income Tax: Income arising in the UK is fully taxable. Employment income is fully liable if work is performed in the UK or the employer is UK resident or both. Investment income arising outside UK / Ireland and some earned income can be taxed on the remittance basis.
Capital Gains Tax: Liable on UK gains. Liable on overseas gains unless remittance basis used.
Inheritance Tax: Liable on UK assets, double taxation relief may apply.
Income Tax: Overseas employment and investment income along with UK gilts and dividends from UK listed companies are all not liable. Earnings from work carried out in the UK, any pension including the state pension is liable. Property rental income is liable along with other UK investment income.
Capital Gains Tax: Not liable unless temporary none resident (less than 5 tax years abroad). This is more complicated than it sounds but the basics are that anyone that leaves the UK, disposes of assets with a gain and then returns within 5 full tax years will be liable.
Inheritance Tax: Liable on worldwide assets.
Income Tax: Income arising on direct UK investments, UK property and work carried out in the UK.
Capital Gains Tax: Not liable on any asset other than UK property.
Inheritance Tax: Liable on UK assets, double taxation relief may apply.
Non-domicile spouses do not qualify for the full interspousal exemption like marriages where both parties are UK domicile. Non – doms get an allowance of £325,000 which added to the UK domicile allowance of the same £325,000 means that if there’s a mixed marriage, the surviving spouse could end up with an IHT liability.
Non – domiciles can elect to be treated as a UK domicile for IHT purposes which would mean the full spousal exemption. The election must be made within 2 years of death and can be backdated 7 years. It’s irrevocable unless the surviving spouse leaves the UK for 4 complete tax years.
The negative here is that if the surviving spouse is wealthy in their own right as if they make the irreversible election, their worldwide estate is liable should they then pass away and leave wealth to their children as an example.
As you will now gather, someone’s residence and domicile affect everything from a tax perspective. Firstly, establish your residence and domicile, if you are unsure, you should seek professional advice. Then explore all available planning opportunities to avoid giving more to the UK government than you should be.
As with anything in the finance world, finding the right professional can mean you create and retain much more of your hard-earned money and this is especially true when it comes to tax.
Working with a good financial planner and accountant can be invaluable. Well established financial planning firms will work closely with accountants or have them internally.
For an introduction to the most suitable professional in your location do not hesitate to reach out.
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