Residence and domicile

For most people living in the UK, the question of what income and gains should be included on their tax return is an easily answered question because they are both UK tax resident and UK-domiciled. Anyone resident and domiciled in the UK needs to report their worldwide income and capital gains on their return.

However, what happens if you are either UK resident but non-UK domiciled or non-UK resident but UK-domiciled? In these circumstances, different rules apply.

Becoming UK tax resident

Your UK tax residence status is determined by the statutory residence test, which consists of four components:

• how much time you have spent in the UK in a tax year?
• automatic overseas test
• automatic UK test
• sufficient ties test

Put simply, you will be considered a non-UK resident for tax purposes if you meet the automatic overseas test.

You will, however, be considered a UK resident if you have spent more than 183 days in the UK in a given tax year or you do not meet the automatic overseas test and you meet either the automatic UK tests or the sufficient ties test.

Double taxation treaties

As you can be a tax resident in more than one country at a time, you can find yourself subject to tax on the same income and gains in more than one country.

Sometimes when this occurs, you will not have to report the income or gains on the tax returns in both countries as most nations have tax treaties in place to set out which country should tax you on any particular source of income.

However, when tax is paid in both countries, the UK will normally allow you to credit the foreign tax paid on that income against the tax due in the UK on the same income. You cannot get a tax refund through this credit though.

Non-domiciled taxpayers

A non-dom taxpayer is a UK resident whose domicile, is outside of the UK.

An individual may have more than one tax residence, but you can only have one domicile at any given time.

Every individual has a domicile, which is automatically acquired at birth, normally from your father. This is your domicile of origin. It is not necessarily the country you were born in or the country that you live in.

The domicile of origin of a child under 16 follows that of their father. Therefore, children under 16 may acquire a different domicile of dependence after their birth.

Your domicile can further be changed to a domicile of choice once you are over 16, but a change in domicile can be difficult to prove and substantiate to HMRC.

Your domicile is broadly defined as the country you consider to be your permanent home, but working out which country you are domiciled in can be complicated with many factors to consider.

As it is up to you to determine your own domicile status and with significant amounts of tax often at stake, talk to us for help determining your position.

To further muddy the waters, from 6 April 2017, changes to UK tax legislation means that when you have been UK tax resident for 15 out of the previous 20 tax years, you are deemed to be domiciled for UK income tax, capital gains tax and inheritance tax purposes.

For some long standing non-doms it is therefore important they review their position now and plan for the impact this can have.

Why is domicile important?

Domicile determines your liability for income tax, capital gains tax and inheritance tax in the UK.

Most non-doms resident in the UK are wealthy individuals and the tax at stake is sizeable.

The attraction of non-dom status is that you may not need to pay UK tax on any income or gains that arise outside of the UK.

As a non-dom taxpayer, you can choose to be taxed on either the arising basis or the remittance basis.

Under the arising basis, you are taxed like a UK resident and domiciled taxpayer, on worldwide income and gains.

Under the remittance basis, you are only taxed on your UK source income and gains.

Any income or gains arising outside of the UK is not taxed in the UK unless you choose to bring that money into the UK, enabling non-doms to shelter foreign wealth outside of the remit of HMRC by electing to be taxed on the remittance basis.

Using the remittance basis comes at a price for long-term non-dom residents, with those who have lived in the UK for seven out of the last nine tax years having to pay £30,000 a year to maintain this status.

This increases the longer you remain in the UK, as those living in the UK for 12 of the last 14 tax years must pay £60,000 a year.

However, for many this is still significantly less than the UK tax they would pay otherwise and this tax levy alone earned the Treasury £315 million in 2016/17.

The deemed-domicile tax rules meant that those who stayed in the UK for 17 out of the last 20 tax years and previously claimed the remittance basis, are in danger of losing this tax break and paying tax on their worldwide income and gains instead.

UK-domiciled, non-UK residents

Millions of UK nationals live or work abroad in 2019, and many of those own residential properties in the UK which they rent out.

Any profits that arise from letting out these properties is subject to UK income tax, regardless of their tax residence status.

Withholding tax is usually deducted by letting agents or tenants to cover any potential tax due to HMRC, but this is often the incorrect amount.

If this applies to you now or in the future, you can elect to be a non-resident landlord with HMRC.

Where such an election is made, rents may be received without deducting withholding tax on the condition that the income is reported through a UK self-assessment tax return.

For further information on Residence or Domicile status, please contact Helen Spalding on 023 8046 1234.