Relocating to the UK promises the start of many exciting new experiences. However, there are strict and complex rules around domicile and residence status that can significantly affect your tax position in the UK, so it’s important to plan ahead so that you fully understand what your financial liabilities are likely to be once you have moved to Britain.
How does UK residency affect my tax liability?
The tax you are liable to pay when living in the UK will primarily depend on whether you’re classed as a UK tax resident. This is because your residence status affects whether you need to pay tax in the UK both on any income received in the UK ‘and’ on any foreign income.
Non-residents will only pay tax on their UK income, but will not be liable to pay tax on their foreign income. In contrast, UK residents will normally have to pay tax to the UK’s tax authority, known as the HMRC, on all their income, whether it’s from the UK or abroad. UK residents also have to pay tax on their UK and foreign gains, whereas non-residents only have to pay capital gains tax on UK property or land.
What is the difference between domicile and residency?
“Domicile” and “residency” are two different concepts, with completely different meanings. Whilst not strictly a tax-specific concept, “domicile” does have a number of tax consequences.
Domicile is essentially where you have, or consider to have, your permanent home, whereas residency is, for taxation purposes, where you spend your time. This means you can be domiciled in a different country from the one in which you are ordinarily resident.
Whilst “domicile” and “residency” are phrases often used interchangeably, a distinction must be drawn when it comes to working out when and where you should pay tax. You can be UK tax resident, even if you’re not domiciled in the UK. However, there are special tax rules for UK residents who are domiciled overseas. UK residents whose permanent home, or domicile, is outside the UK may only be liable to tax on any foreign income and gains brought into the UK.
How do I work out my residence status?
Whether you’ll be treated as UK tax resident, and therefore liable to pay tax on all UK and foreign income and gains, usually depends on how many days you spend in the UK during the relevant tax year (6 April to 5 April). However, each tax year is looked at separately by HMRC, so you may be UK resident in one year but not the next.
You’ll be automatically classed as resident in the UK for tax purposes if either:
- you spend 183 days or more within the UK in the relevant tax year
- your only home was in the UK, where you must have owned, rented or lived in that home for a minimum of 91 days, and have spent at least 30 days there in the tax year
- you work full-time in the UK over a period of 365 days.
Conversely, you’ll be automatically treated as non-UK resident if either:
- you spend less than 16 days within the UK during the relevant tax year, if you were resident in the UK for one or more of the 3 prior tax years
- you spend fewer than 46 days within the UK in the tax year, if you’ve not been classed as UK resident for the 3 prior tax years
- you work full-time overseas, and spend fewer than 91 days within the UK, of which no more than 30 days were spent working for 3 hours or more.
If you don’t meet any of the automatic UK or automatic overseas tests, you will instead need to apply what’s known as the “sufficient ties test” to work out if you are UK tax resident. This is assessed by examining the number of connections you have in the UK — such as family, accommodation or work ties — together with the amount of time spent in the UK for the tax year in question. Broadly speaking, the more UK ties you have, the fewer days you can spend in the UK before you will become UK resident for the purposes of tax.
Reference should be made to HMRC’s guidance on the Statutory Residence Test that came into effect in 2013, although expert advice should always be sought if you need help confirming your residence status, especially if your circumstances change during the course of the tax year. For example, if you move in or out of the UK, the tax year may be split into 2 parts: a non-resident and a resident part. This means you only pay tax to HMRC on foreign income and gains based on the time you were living in the UK. This is referred to as “split-year treatment”.
It’s also important to bear in mind that you don’t stop being resident in the UK simply because you become resident elsewhere. This is because you can be resident in more than one country at the same time, known as being “dual resident”. If you’re resident in the UK and in another country, you may be liable to tax in both countries. This is known as “double taxation”, although you may be eligible to claim double taxation relief.
How do I work out my domicile status?
Being “domiciled” is a legal concept that describes the country in which you officially have as your permanent home or that you have a substantial connection with. Being domiciled in the UK therefore means that the UK is where you permanently live or are associated with. Being domiciled outside the UK means your permanent home is overseas.
When you’re born, you’re automatically assigned a “domicile of origin”. This is usually acquired from your father, provided your parents were married at the time, and based on where he considered his permanent home to be. Your domicile of origin will very often be the country in which you were born, although if your father was not domiciled there at the time of your birth, then your domicile of origin will instead be your father’s country of domicile.
If your parents weren’t married when you were born, your domicile of origin will come from your mother. Your domicile of origin will then remain the same, unless and until you acquire a new domicile. This could be because the domicile of the person on whom you are legally dependent changes, in which case you’ll automatically acquire the same domicile. This is known as “domicile of dependence”.
At the age of 16, you can also acquire a “domicile of choice” by permanently settling in another country, with the intention of not returning to your home country. However, even if you move away from the country of your domicile of origin, you will continue to be domiciled there until you’ve acquired a domicile of choice. Unlike residence status, you can only have one domicile, where your existing domicile will continue until you acquire a new one.
However, your domicile of origin isn’t easy to displace, where moving to another country will not, of itself, automatically result in a change of domicile. This means that it’s unlikely that your domicile will change simply by living in the UK. Much will depend on the strength of any links in the UK and whether you have lost or weakened any links with your domicile of origin based on, for example, your business, social and family commitments. However, if you’ve moved to the UK with the intention of making this your permanent home, then this will have the effect of changing your domicile of origin and making you domiciled in the UK.
As with residency, working out your domicile status isn’t necessarily straight forward, especially if you’ve lived in several different countries. For those claiming non-domicile status, evidence is crucial, where expert advice should be sought if you think you may be UK tax resident but not UK domiciled. As there may be certain tax advantages to being non-UK domiciled, HMRC might want to examine your background, lifestyle and your intentions over the course of your lifetime. You should also bear in mind that special rules apply to women married before 1974, with different treatment for those who meet the deemed domicile rules.
Women married before 1974
As a women married before 1974, you will be classed as having automatically acquired your husband’s domicile, and will retain this domicile until you legally acquire a new domicile. If you married on or after 1 January 1974, your domicile doesn’t automatically follow your husband’s, but rather your domicile is decided in the same way as anyone else able to have an independent domicile, although your marriage may be a relevant factor.
Deemed domicile rules
From 6 April 2017 new deemed domicile rules came into force. This means that if you’re not domiciled in the UK under English common law, you’ll still be treated as UK domiciled for tax purposes if you meet one of two conditions: Condition A or Condition B. Under Condition A, you’ll be deemed UK domiciled if you were born in the UK, your domicile of origin was in the UK and you’re now resident in the UK. Under Condition B, you’ll be deemed UK domiciled if you have been UK resident for at least 15 of the 20 years before the relevant tax year.
What are the effects of being non-UK domiciled?
For income and capital gains tax purposes, whether or not you are UK domiciled may affect what tax you pay to HMRC on any foreign income and gains during the relevant tax year. Your domicile status may also be relevant in the context of inheritance tax.
If you are UK resident, you’ll normally be taxed on the arising basis. This means that you’re liable to pay UK tax on your worldwide income and gains, wherever those arise or accrue. However, if you are UK resident but not domiciled in the UK, you may be able to claim the remittance basis on any foreign income and gains, provided you’re not “deemed domiciled”.
The remittance basis is an alternative tax treatment that means you only pay tax to HMRC on the income or gains you bring, or remit, to the UK, although you’ll usually lose any tax-free allowances. As a long-term UK resident, you may also be liable to pay a hefty annual charge of either £30,000 or £60,000, depending on how long you’ve lived in the UK.
Alternatively, you can declare all of your foreign income and gains to HMRC by way of self-assessment, whilst claiming back any tax relief. In many instances, relief is given in the UK for tax already paid on foreign income, either under the provisions of any relevant Double Taxation Agreement with the country in question or via unilateral relief. This means that even though you may be taxed on your foreign income by both the UK and by the country where your income arises, you can often claim tax relief to get some or all of this tax back.
In respect of foreign gains, you’ll usually pay tax in the country where you are treated as being resident and be exempt from tax in the country where you make the gain, so you’ll not usually need to make a claim for relief. However, declaring foreign income and gains, and claiming double-taxation relief where applicable, can be complicated, so expert advice should always be sought, especially for those with residency in both the UK and elsewhere.
Equally, claiming tax on the remittance basis when bringing income or gains into the UK can be complex, so advice should be secured from a tax professional. Your advisor can help you to determine both your residence and domicile status, providing clear advice as to how this affects your liability to tax in the UK and the best way of declaring any income and gains for the relevant tax year in question, and any future years.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.