A Guide to Residence and Domicile for UK Tax Purposes
8th January 2023
‘Residence’ and ‘domicile’ are key concepts that will determine the extent of your UK tax liability. Although the terms are often used interchangeably in everyday life, they are not the same from a UK tax law perspective where crucial differences exist. It is therefore important to know your domicile and residence status.
What is Residence?
‘Residence’ in the UK is governed by the Statutory Residence Test (‘SRT’). If you are UK resident under the SRT your worldwide income and gains* will be taxable in the UK.
If you are UK resident your income will be subject to UK income tax regardless of whether it arose in the UK or elsewhere in the world. Likewise, any gain will be assessed for capital gains, regardless of whether the gain arose from a sale of a property in the UK or elsewhere in the world.
By contrast non-residents will only need to pay UK income tax on income arising in the UK and, broadly speaking, will only need to pay capital gains on the disposal of land and real estate located in the UK.
The SRT is comprised of three tests: the automatic non-UK test, the automatic UK test and the sufficient ties test. Because tax is calculated on a year-by-year basis, it is possible to be considered UK resident for only part of the year (split year treatment).
Due to the way the SRT is worded it is possible, in some cases, to spend very few days in the UK and still be considered UK tax resident.
Automatic overseas tests
You are considered non-UK resident if any of the following apply –
- You were resident in the UK for one or more of the three previous tax years and spend fewer than 16 days in the UK in the tax year.
- You were UK resident for none of the three previous tax years and spend fewer than 46 days in the UK in the tax year.
- You work sufficient hours overseas, with no significant breaks and visit the UK for fewer than 91 days with fewer than 31 days spent working.
Automatic UK tests
You are considered UK resident if any of the following apply –
- You spend 183 days or more in the UK.
- You have a home in the UK, which is available to you for at least 91 days, and you are there for at least 30 of those days. If you also have an overseas home, then you will have spent fewer than 30 days in it.
- You work sufficient hours in the UK, with no significant breaks.
Sufficient ties test
If your residence cannot by ascertained by either of the automatic tests above, then the sufficient ties test will need to be reviewed. Broadly speaking the more ‘ties’ that you have to the UK the fewer days you can spend in the UK before being considered resident.
The ties are:
- The family test – do you have any family in the UK?
- The work test – do you work in the UK for at least 40 days a year?
- The accommodation test – do you have UK accommodation accessible to you?
- The 90 days test – were you in the UK for more than 91 days in either of the previous two tax years?
- The country test – This is only relevant to those leaving the UK. Did you spend more days in the UK than in any other single country?
To give an example, a person who was resident in the UK in anyone of the last 3 years and has 4 or more ties to the UK, can only spend a maximum of 45 days in the UK before being considered resident.
By contrast a person who only has 1 tie can spend 182 days in the UK before being considered resident.
Dominic is a British ex-pat who has lived and worked in Belgium for 10 years. He often travels to the UK to visit friends and family. He only has 1 tie (his 8-year-old daughter lives in the UK with her mother) This year he has spent 100 days in the UK.
Dominic is not automatically resident or non-resident under the automatic tests. Therefore, we look to the sufficient ties test. Given that Dominic only has one tie he can spend up to 182 days in the UK. As he has only spent 100 days, Dominic is non-UK resident.
As a non-resident, with no income and gains arising in the UK, Dominic doesn’t need to pay any UK income or capital gains tax as he is not liable to UK tax on his foreign income or gains.
What is Domicile?
Domicile is a difficult concept to describe succinctly. It is in essence where you consider your permanent home to be, but there are exceptions to this.
Domicile is important because if you are domiciled in the UK, HMRC will wish to assess your worldwide assets for UK inheritance tax on your death.
If you are non-UK domiciled then HMRC will, broadly speaking, only assess your assets within the UK for inheritance tax.
In broad terms each of us has a domicile of origin. This is where our father (if our parents were married at the time of our birth) or mother (if our parents were not married at the time of our birth) considered their permanent home to be.
Our domicile of origin can be displaced if we move to a new country with the intention to permanently remain in the new country for the rest of our lives. This new domicile is known as a domicile of choice. It can be very hard to prove intention, and it will usually be necessary to sever links with your former country in order to acquire a domicile of choice.
You can also become ‘deemed’ domiciled in the UK for tax purposes. This will happen when you have lived in the UK for at least 15 out of the last 20 years or were domiciled in the UK in the past and then return to the UK.
Erika lives in Germany. She moved to Germany 10 years ago but thinks she may return to the UK one day. Erika owns homes in both Germany and the UK, hasn’t learnt German and hasn’t integrated into the local community. She has a domicile of origin of England.
If Erika were to die whilst living in Germany, it is very likely that HMRC will treat Erika as being UK domiciled, even though she hasn’t lived in the UK or been UK tax resident for many years. This means that HMRC will assess Erika’s German assets when calculating the amount of UK inheritance tax payable on her death.
Cross-Border Specialist Advice
For UK tax purposes, your residence is relevant for income tax and capital gains tax purposes whereas your domicile is relevant for inheritance tax purposes. It is possible to be UK resident but non-UK domiciled, and non-UK resident but UK domiciled.
PLU can introduce you to one of the leading law firms in the UK, they can offer specialised international and cross-border advice to clients (based both in the UK and overseas).
Their team consists of experienced and multi-lingual solicitors and legal professionals who can advise on a wide range of topics including domicile, succession, UK inheritance tax, UK capital gains tax and double taxation treaties. They can assist individuals who are internationally mobile to ascertain their residence and domicile so that they can plan appropriately.
*Subject to any relevant double taxation treaty and those who can elect to be taxed on the remittance basis.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research, nor is it intended as an offer or solicitation for the purchase or sale of any financial product. This information is subject to change. You should seek advice from a professional financial adviser before embarking on any financial planning activity.