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Understanding the Difference Between Your Domicile and Tax Residence Status

Understanding the Difference Between Your Domicile and Tax Residence Status

Mike Wakeford

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Find out here, what the difference is between your domicile and tax residence status. 

What is Domicile?

Domicile is a historical legal concept that is relevant to far more than an individual’s tax position.  For example, it can also have implications for the validity of marriages and the rights of succession to property.  A person is domiciled in the country in which they are most closely connected, such as where they officially have their permanent home, or ultimately intend to return to, even if they live somewhere else for a long period of time.  

A person must always have a domicile but they will only ever have one at any given time.  When a person is born, if their parents are married when they are born, they are automatically assigned the same domicile as their father.  If a person’s parents were not married, their domicile will usually be that of their mother, but this can vary depending on an individual’s circumstances.

The domicile that is assigned to a person when they are born is known as a domicile of origin. Because a person is domiciled in the place that they regard as their permanent home, it is quite feasible for there to be people who have lived in the UK for a long time who have their domicile elsewhere. Similarly, there will be British people living abroad for long periods who will retain their British domicile if they intend to return here at some point in the future.

It is possible, but not easy, to acquire a domicile of choice, if the country where you live and consider your permanent home, does not correspond to your domicile of origin. This involves having to sever all ties with the ‘old’ country, according to case law.

It is quite different to residence for tax purposes, which is based on where someone is living during a particular tax year.

What is the difference between your residency tax status and Domicile Status?

Domicile is a long-term status, but residency is looked at on a year-by-year basis.

Since 2013 the UK has had a Statutory Residence Test to determine whether someone is resident here, or not, for tax purposes. If you are unsure of your residency status, you can take our statutory residence test here.

Why is Your Domicile Important for tax purposes?

Domicile is important when it comes to determining your tax liabilities in three main areas.  These are: Your domicile helps to determine how your individual estate will be passed on in the event of your death, and it is of particular importance if you own property or financial assets in foreign jurisdictions. 

Non UK Domiciles (non-doms) Living in the UK

Individuals who are resident in the UK, but are not domiciled here have to pay income tax and capital gains tax, in the same way as those who are domiciled here, on all income and capital gains arising in the UK. It is only on overseas income and capital gains that are not brought into the UK where any tax advantage can be claimed. 

Non-domiciled individuals can claim what is known as the remittance basis, which seeks to only tax any overseas income and capital gains in the UK which are brought here. In, comparison UK domiciled individuals are taxed on all worldwide income and capital gains, regardless of whether the money is brought to the UK.

It is estimated that there are around five million non-doms living in the UK.  For the vast majority of these people, there is no tax benefit to them claiming non-domiciled status on their tax return, and there are three main reasons for this:
  • they do not have any income from abroad, or;
  • they do have income from abroad but it is not sufficiently large for there to be any benefit to them by claiming it
  • they have an income or capital gains from abroad but bring all of that income or gains into the UK, meaning it becomes subject to tax here
Because of this, it is only the very wealthy who are likely to see any benefit from claiming non-domiciled status.

In 2008, changes were made so that in order to continue claiming the benefit of the remittance basis of taxation for income tax and capital gains tax, an individual had to pay a fixed tax charge depending on how long they have lived here.  Since then, the amounts have increased and are now set at £30,000 for someone who has been living here for at least 7 of the previous 9 tax years and £60,000 for someone who has been living here for at least 12 of the previous 14 tax years.

Someone claiming the remittance basis of taxation is also unable to claim the standard UK personal allowance of £12,570 and the capital gains tax annual exemption of £12,300.

This meant a lot of people who had previously been claiming the remittance basis decided to stop claiming it because their actual UK tax liability on their foreign income not remitted to the UK was less than the fixed charge it cost to maintain the remittance basis.
 
From 6th April 2017, the tax rules affecting those who hold non-UK domiciled status in the UK were changed further.  Since that date, anyone who has been UK tax resident for at least 15 of the previous 20 tax years, is deemed to be UK domiciled for all UK taxes, although in many cases they will legally remain actually domiciled elsewhere.

This means they are subject to UK tax on their worldwide income and capital gains, as well as having their worldwide assets falling within the scope of the UK inheritance tax and can no longer take advantage of the remittance basis to exclude their foreign income from UK tax.  Before the 2017 changes were made, someone could claim the remittance basis indefinitely for income tax and capital gains tax purposes, and only became liable to inheritance tax when they had been resident for 17 of the previous 20 tax years.

In a further tightening of the rules,  those who are born in the UK with a UK domicile of origin, but who have  acquired a domicile of choice elsewhere, will now be automatically UK deemed-domiciled if and when they return to the UK, even if their return is not intended to be permanent.

Contact our tax specialists

Your domicile and residency status often go together, but certain taxation purposes can make the situation more complex. We suggest speaking with a tax adviser at Moore if you need more information on your personal residency or domicile status. 

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