Tax - Residence and domicile

Principal factors

An individual’s place of domicile and residence are the principal factors in determining how he or she may be taxed in the United Kingdom (UK). The situs of assets will also be relevant in respect of certain taxes.

Domicile

Broadly speaking, an individual’s domicile is where he or she has a ‘permanent home’ and intends to live permanently or indefinitely. Long-term residence may be a factor in determining domicile but is insufficient in itself.

At birth, an individual’s domicile of origin will be based on the domicile of his or her parents (primarily his or her father). A domicile of origin can be displaced by the acquisition of a domicile of dependency (if an individual’s parents acquire a new domicile while he or she is under 16 years) or, after the age of 16 years, a domicile of choice (if an individual resides in another country with the intention of residing there permanently or indefinitely). However, if an individual loses a domicile of choice in a country by leaving it, not intending to return to it, and moving to a different country without forming the intention of living there permanently or indefinitely, his or her domicile of origin will revive unless and until it is replaced by a new domicile of choice.

Strictly, an individual is not domiciled ‘in the UK’ but in one of the jurisdictions that make up the UK: England and Wales, Scotland or Northern Ireland. However, we use the shorthand ‘domiciled in the UK’ to refer to an individual who is domiciled within one of these jurisdictions.

Deemed domicile

From 6 April 2017, new deemed domicile rules came into effect that apply across inheritance tax (IHT), income tax and capital gains tax (CGT). The general rule is that a person who is not otherwise domiciled in the UK will be deemed to be domiciled in the UK if he or she has been resident for at least 15 of the 20 tax years immediately preceding the relevant tax year. If a non-UK domiciled person subsequently leaves the UK and spends at least six consecutive complete tax years outside the UK, he or she will no longer be deemed domiciled for income tax and CGT purposes. For IHT purposes, he or she would cease to be deemed domiciled if he or she is non-resident for four consecutive complete tax years, with the deemed domicile status falling away at the beginning of the fourth tax year of non-residence.

Non-UK domiciled individuals who were born in the UK with a UK domicile of origin are subject to stricter rules since 6 April 2017. Such individuals will be treated as deemed domiciled for income tax and CGT purposes on any occasion when they are tax-resident in the UK, even if they continue to have a domicile overseas for general law purposes. For IHT purposes, a non-UK domiciled person who was born in the UK will be deemed domiciled in the UK if he or she was resident in the UK for the relevant tax year and for at least one of the two tax years immediately preceding the relevant tax year. Assuming he or she has not become deemed domiciled under the general deemed domicile rules (ie, resident in the UK for 15 out of the preceding 20 tax years), such an individual will no longer be deemed UK-domiciled from his or her first tax year of non-residence.

Residence

Tax residence in the UK is based on a statutory residence test. This test combines a test of presence in and connections with the UK. It applies only to individuals and covers income tax, CGT and, where relevant, IHT and corporation tax. It supersedes all existing legislation, case law and guidance for tax years following its introduction.

The test is divided into three parts, as follows:

• the automatic overseas tests: the satisfaction of one of these for a tax year means that the individual concerned is automatically non-UK resident for that year. There are five tests (two of which relate to individuals who have died during the relevant tax year). Three of the five tests focus on the number of days spent by an individual in the UK in the relevant tax year, combined with his or her residence in preceding years, and the other two focus on work overseas, combined with days spent in the UK in that tax year, or the individual’s residence status in preceding years. If none of these tests applies to an individual, then;
• the automatic residence test must be considered: this is divided into four automatic UK tests (one of which relates to individuals who have died during the relevant tax year). The first test provides that an individual is UK-resident for any tax year in which he or she spends at least 183 days in the UK (the old statutory test). Two of the other tests focus on time spent by an individual in a home in the UK compared with any homes overseas, and one focuses on work in the UK. The satisfaction of any one of these tests for a tax year means that the individual is automatically UK-resident for that year. If neither automatic test applies to an individual, then;
• the sufficient ties test will determine the position: this test compares the number of days during a tax year spent by an individual in the UK with the number of ‘ties’ the individual has with the UK during that year. These ‘UK ties’ relate to family, work, accommodation, days spent in the UK in earlier tax years (90-day tie) and (for those who have been UK-resident for one or more of the previous three tax years) days spent in the UK in the relevant tax year compared with other countries (country tie).

There are specific tests that apply to determine the residence status of international transport workers. There is also a set of split-year rules determining how an individual’s residence for years of departure from or arrival in the UK may be determined in different situations, as well as a number of anti-avoidance and transitional provisions.

For tax years prior to 6 April 2013, there was no statutory test of residence. Instead, the concept of residence was based primarily on physical presence in the UK, so that if an individual spent 183 days or more in the UK during the tax year, or an average of 91 days or more in a tax year in the UK over four years, he or she would be tax resident in the UK (as mentioned above, the 183-day test is retained in the new statutory test). However, spending less time in the UK would not automatically have led to the conclusion that an individual was not a UK resident, as other factors linking the taxpayer to the UK were also considered, namely:

• the frequency and duration of an individual’s periods of presence in the UK;
• the purpose and pattern of his or her presence; and
• his or her connections to the UK.

Ordinary residence

The concept of ordinary residence was scrapped in the UK with effect from 6 April 2013, other than in very limited circumstances. Transitional provisions, put in place for certain individuals who already benefited from a particular tax treatment due to being not ordinarily resident in the UK, expired after tax year 2015-2016.

Remittance basis

Under the existing rules, an individual who is resident but not domiciled in the UK, or deemed to be domiciled for tax purposes, is entitled to elect to be taxed on the remittance basis in respect of his or her foreign income and capital gains. In this case, the individual is only liable to tax on foreign income and gains that are brought into, or ‘remitted’ to, the UK.

Subject to certain exemptions (including an exemption for minors) and de minimis limits, for individuals who have been resident in the UK in at least seven of the preceding nine tax years, there is an annual charge of £30,000 to claim the benefit of the remittance basis. The annual charge increases to £60,000 for individuals who have been resident in the UK in 12 of the preceding 14 tax years. Prior to 6 April 2017, there was also a £90,000 annual charge for individuals who had been resident in the UK in 17 of the preceding 20 tax years. This charge no longer applies because, with effect from 6 April 2017, an individual who has been resident in the UK for at least 15 of the preceding 20 years is deemed to be domiciled in the UK for all tax purposes and not entitled to claim the remittance basis.

In most cases, an individual who claims the remittance basis loses his or her entitlement to the personal allowance for income tax and the annual exemption for capital gains tax.

The changes enacted in Finance (No. 2) Act 2017, with effect from 6 April 2017, provided for a CGT rebasing relief for certain non-UK domiciled individuals who became deemed domiciled for the first time on 6 April 2017, and who had paid the remittance basis charge in at least one prior tax year. Where the conditions for the relief are met, personally held non-UK assets are treated as having been acquired at their market value on 6 April 2017. In general, the 2017 changes to the rules for non-UK domiciled individuals are complex and local legal advice on these provisions should always be sought.

England & Wales Guide

The England & Wales guide answers the principal questions for Private Clients relating to the law in this jurisdiction.