Residence vs Domicile
Residence vs domicile, how it’s categorised and what it means for you.
Residence Vs Domicile
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 & Domicile
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:
- UK resident and UK domicile
- UK resident and non-UK domicile
- Non-UK resident and UK domicile
- Non-UK resident and non-UK domicile
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.
What Exactly Is Residency?
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:
- They are present less than 16 days a year in the UK.
- They have been classed as a non-UK resident in any of the last 3 tax years and are present in the UK for less than 46 days in the current tax year.
- They work overseas permanently and spend fewer than 91 days a year in the UK of which less than 31 are spent working less than 3 hours a day.
Someone is Automatically a UK Resident if they meet any of the following criteria:
- They spend more than 183 days a year in any 1 tax year in the UK.
- If someone has a home in the UK for at least 91 days in a tax year of which they live for more than 30 days in a tax year. If someone has an overseas home during the same 91-day period they must be present for fewer than 30 days in the same tax year.
- Someone who works full time in the UK.
Sufficient Ties Test
What Exactly is Domicile?
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.
Domicile of Origin
This is acquired at birth and is usually that of the fathers if the parents are married, and the mothers if not.
Domicile of Choice
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:
- Physically living in the new country
- Expressing an intent to stay forever
- Acquiring citizenship or nationality on top of permanent residency
- Becoming employed or starting a business
- Getting on the electoral roll
- Making a valid will and burial arrangements
- Having friends and family in there.
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.
Deemed Domicile
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 – Domicile
Non-Dom is the term given to anyone that the UK consider to be not domicile in the UK.How Can I Check My Domicile?
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.The Remittance Basis
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:
- Personal belongings
- Assets costing less than £1,000
- Any asset brought into the UK for repair
- Any assets present in the UK for less than 275 days
- Works of art brought in for public display
- Any income and gains that are subsequently invested into a qualifying company within 45 days.
Split Year Treatment
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.What Does This All Mean for My Tax Liability?
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:UK Resident and UK Domicile
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.
UK Resident and Non-UK Domicile
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.
Non-UK Resident and UK Domicile
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.
Non-UK Resident and Non-UK Domicile
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.
IHT Spousal Exemption for Non – Domicile Spouses
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.
Overseas Tax Planning
- Each individual is responsible for determining their own residence and domicile and calculating their UK tax liability via self-assessment. Make sure you fill in the supplementary non-residence pages if you believe you are non-domicile, non-resident or qualify for split year treatment.
- Double taxation reliefs apply between countries which can be available to individuals. Double taxation treaties (DTA’s) prevent individuals from paying a full rate of tax in their country of residence and the country where their asset is based or IHT liability falls. The UK has many DTA’s in place that will either mean the UK retains taxing rights or passes them over to another country. UK residents can also claim relief on overseas income or gains that are taxable in both the UK and the country of origin.
Ideas for anyone Emigrating
- If you have a choice, chose to pay tax in the jurisdiction with the lowest tax.
- Would it be better to sell your UK assets and replace them with overseas ones?
- If you are expected to stay overseas for more than 5 years (temporary none resident rules) disposing of assets that have lost money and holding assets that have made money could mean significantly lower CGT.
- British citizens should make sure they claim their personal allowance on any UK income and annual exemption on gains
- Inform HMRC of your new tax status on their P85.
- Open offshore bank accounts. Any interest (savings income) arising in UK banks is subject to income tax.
- If emigration is permanent review your UK pensions and explore whether a QROPS would be more beneficial.
Ideas for anyone Immigrating
- As long not a temporary non-resident, look to sell any assets with a gain to wipe out any future UK CTG liability.
- Wrap any liquid assets in an offshore bond to defer future tax.
- Non – domiciles should explore excluded property trusts.
- Explore onshore options to invest and save i.e., UK pensions, ISA’s and onshore bonds.
Summary
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.
Book your 30-minute discovery meeting with Mark, where he will cover topics such as:
- How the Offshore Financial services sector operates and how it could be holding you back.
- Ways you can increase your current and future cash flow using advanced cash flow modelling techniques.
- A comprehensive review of your current investment, tax and protection strategies.
- A full review of your current fee schedule.
- How the standard asset allocation promoted by most advisers may hinder your progress to becoming wealthy.
- Why would using me as your financial coach mean access to the best professionals for your specific needs?
- Why being a part of Marks Network' will give you access to opportunities outside of your standard financial planning remit.
Speak With The Expat Wealth Adviser Team
Want to find out more? Get in touch to talk to us about your current situation or to arrange a meeting.