Introduction to tax residence and domicile

Please note: Inter-state taxation is a broad and complex subject and the information given here is simply a general overview of the rules.

The UK and the rest of the world

While nationality and citizenship are important concepts in legal matters, they have little place within our taxation system.  From a geographical point of view the UK tax system has at its foundation three concepts;

  1. Residency
  2. Ordinary Residency
  3. Domicile

Domicile

Exposure to UK Inheritance Tax (IHT) is dictated by a person’s domicile. Domicile is usually acquired at birth and, whilst it can be changed by a person’s actions, it is a long-term status and is difficult to alter.  In one sentence, UK domiciled individuals pay IHT on their worldwide assets whilst non-UK domiciled individuals pay IHT only on UK assets.

Domicile only really impacts on income or Capital Gains Tax (CGT) through the ‘remittance basis’ system, a regime whereby UK resident, but non domiciled, individuals can opt to remove their overseas income sources from UK tax to the extent that such income is not physically brought into the UK. This is an incredibly complex part of our tax code, and should not be entered into lightly.

Residence and ordinary residence

The concept of ordinary residence will not be looked at here, its impact lying more in the subtlety of UK tax than in the broad principles. Residence, unlike domicile, is a much shorter-term status and can comparatively easily be changed on a regular (year-to-year) basis.

In principle it might be said that a UK resident individual’s worldwide income and gains are subject to UK Income Tax (IT) and CGT, whilst a non UK resident individual is subject to IT only on UK source income and is outside of the scope of UK CGT[i].

However, there are far more exceptions to this general rule for IT and CGT purposes than for IHT purposes, and reference to the double tax treaties between the UK and the other country of residence will almost always be the starting point in determining exposure to UK tax in a particular set of circumstances.

With residence, more so than with domicile, double tax relief will frequently be in point.

Where am I resident/domiciled?

Given the fundamental importance of these concepts to exposure to UK tax it would be reasonable to think that they might be defined somewhere in the current UK tax law[ii], but this is not the case.

With domicile typically only tested (or challenged) in the event of a taxable event, like the death of the taxpayer, uncertainty over exposure to tax is the norm.

Residency may be tested more frequently, being shown on an individual’s self assessment tax return each year, but as a status which can change from year to year, people are still forced to undertake transactions without having absolute certainty as to whether or not UK tax will apply.

What can be done?

Some might think that awaiting the promised Statutory Residence Test will bring certainty to a particular transaction they intend to undertake while others might be happy to take a balance of indicators view. But what no-one can afford to do is dabble in overseas matters without securing an understanding of the tax rules surrounding them.

The next step

If you have any concerns about your residency status, exposure to UK tax or would like more details about our taxation services, please contact a member of our team.

Disclaimer – This article from UHY Hacker Young Letchworth is for general guidance only and you should seek independent professional advice. UHY Hacker Young disclaim all liability for any errors or omissions and any indirect or consequential loss or damage to yourselves arising out of any subsequent actions you may take after reading this article.

[i] For CGT purposes a defined period of time must be spent as non UK resident for any exemption to apply

[ii]http://www.taxjournal.com/tj/articles/uk-tax-code-shorter-and-probably-simpler-it-seems-says-ots-39741