Residence and Domicile

A guide to residence and domicile

Tax residence and domicile are vital concepts for the UK tax system. But what do they involve?

What is the importance of residence and domicile in UK taxation?

In very simple terms, a UK resident and domiciled individual is subject to UK income tax and capital gains tax on worldwide income and gains.

A non-UK resident individual is broadly subject to UK tax on UK source income albeit there are some excepted sources of investment income e.g. UK source dividends. A non-UK resident individual is also subject to UK tax on capital gains realised on the disposal of direct and indirect interests in UK land (albeit with some re-basing permitted).

UK resident but non-UK domiciled individuals have historically been able to claim the remittance basis of taxation so as not to be taxed on foreign source income and gains until and unless they are remitted (i.e. brought into) to the UK. Whilst being very beneficial in certain circumstances, this tax regime had become increasingly complex due to legislative changes and has acquired a political dimension. This regime looks set to be abolished with effect from 6 April 2025 albeit the replacement rules (giving limited tax advantages to new arrivals in the UK for a number of years) and transitional rules for those who had previously claimed the remittance basis of taxation are being refined.

Inheritance tax is currently charged solely by reference to domicile albeit the recent proposals seek to change this to a residence based system, again with effect from 6 April 2025. In brief, however, a UK domiciled individual is currently subject to UK inheritance tax on worldwide assets whilst a non-UK domiciled individual is subject to UK inheritance tax only in respect of UK situated assets e.g. UK land.

What are the rules for UK tax residence?

Until 2013, the UK’s residence tests were based on some fairly archaic principles and case law. That all changed in 2013 when a statutory residence test was introduced. This sets out a series of tests which enable a taxpayer to work out whether they are automatically UK resident, automatically non-UK resident or in the middle ground where the number of links the taxpayer has with the UK (these links are set out in statute) will determine how many days you must spend in the UK to become UK resident. One of the tests which would make an individual automatically resident in the year is where that individual spends more than 6 months of the year in the UK.

Technically, an individual is tax resident in the UK (or not) for a complete UK tax year. There are, however, a limited number of circumstances where an individual would only be treated as resident for part of the tax year. This is commonly called split year residence but there are rigid conditions to be met.

Whilst the rules are complex and there are some grey areas, the statutory residence has done a reasonable job of enabling people to work out their residence status based on some objective tests. It is, however, worthwhile remembering that whole books have been written on the subject which emphasises the complexity of the rules.

It is also worth pointing out that every country will have its own rules as regards tax residence and related concepts. As a result, it is possible to be simultaneously tax resident in more than one country. Where that occurs, a double tax treaty between the two relevant countries may assist. Such an agreement will normally have a tie breaker test to determine where the individual will be treated as tax resident for the purposes of the treaty, which then carves up taxing rights between the two territories by reference to each source of income or gains

What is the importance of domicile?

Domicile is an old legal concept which was borrowed into tax legislation and currently provides some advantages for those taxpayers who are non-UK domiciled. As explained above, this is set to change but remains the current system until 5 April 2025.

Domicile will continue to be relevant for tax purposes if only for the purposes of the transitional rules. The old legal concept will also remain and will continue to have relevance for some purposes e.g. family law and claims against the estate of a UK domiciled individual under the Inheritance (Provision for Family and Dependants) Act 1975.

What is domicile and how does it differ from residence?

In broad terms, domicile is a much longer term and “stickier” concept than residence and means that it is hard for an individual to change their place of domicile. In contrast, an individual can change their place of tax residence quite easily, essentially on a yearly basis.

An individual is born with what is termed a “domicile of origin”, normally the domicile of the individual’s father (if married). This can change if the father’s domicile changes whilst they are a minor and is then termed a “domicile of dependency”. A woman could also acquire a domicile of dependency based on her husband’s domicile if they were married before 1974. An adult would then retain their domicile of origin or dependency unless they displaced it with a “domicile of choice”. In broad terms, this requires the individual to abandon their domicile of origin and intend to settle indefinitely (i.e. permanently) in their new place of abode. As a result, there is a high bar for establishing a domicile of choice in a new place of abode.

This means that it is difficult for HMRC to establish that someone moving to the UK has established a domicile of choice in the UK and that may take many years, if ever. In reverse, it is difficult for someone with a UK domicile of origin to leave the UK and acquire a domicile of choice elsewhere. Hence, someone moving to the UK could often benefit from the tax advantages of being non-UK domiciled for many years whilst someone leaving the UK would often remain within the UK inheritance tax net for many years.

What is deemed domicile?

For tax purposes, we also have the concept of “deemed domicile”. This had been a part of the inheritance tax system for many years, with individuals being deemed domiciled in the UK once resident for 17 out of 20 tax years. From 2017, this changed to a system which applied to all main taxes i.e. inheritance tax, income tax and capital gains tax, and where an individual is deemed domiciled in the UK once resident in the UK for 15 out of the last 20 years. This effectively put a cap on how long someone could come to the UK and benefit from the tax advantages of being non-UK domiciled

What are the new proposals to replace domicile in 2025?

In very broad terms, it is proposed that domicile will cease to be the basis upon which tax is assessed in the UK and new rules will apply with effect from 6 April 2025.

The main proposal is that, broadly speaking, anyone who is resident in the UK will be subject to UK tax on their worldwide income and gains and the remittance basis of taxation will be abolished with effect from 6 April 2025. There will be transitional rules which are still to be determined.

In place of the remittance basis of taxation, the proposals include a complete exemption from UK tax on the foreign income and gains for the first four years of an individual’s residence in the UK.

In addition, it is proposed that the inheritance tax regime will cease to be based on domicile and will move to a residence-based system with effect from 6 April 2025. The current proposal is that a new arrival in the UK will become subject to UK inheritance tax on worldwide assets after 10 years of tax residence in the UK. Likewise, an individual who leaves the UK will remain within the scope of UK inheritance tax for 10 years after leaving the UK. This will benefit some and disadvantage others as compared to the current rules.

Many existing offshore trust structures will be affected by the changes and will need to be reviewed on a case by case basis. It is, however, anticipated that what are termed “protected” trusts established by non-UK domiciled individuals will lose their income tax and capital gains tax advantages and effectively become transparent for tax purposes.

It is also expected that what are termed “excluded property” trusts (which may be UK or non-UK resident) established by non-UK domiciled individuals will lose their inheritance tax advantages. This will certainly apply to new trusts established on or after 6 April 2025 but may also apply to existing excluded property trusts.

It is expected that more detail will become available after the Budget on 30 October 2024.

To speak to one of our team about residence and domicile or UK tax residence rules, call us on 01675 442430 or send us an email and we will get back to you.