1. Scope of this article
This article is part of our series covering a number of core concepts relevant to the application of UK tax to individuals and wealth-owning structures which have an international connection.
It provides an introduction to the concepts of residence and domicile in English law, summarising what they are, why they are important and how they are tested. The main opposition party in the UK (Labour) has publicly committed to reforming the treatment of non-UK domiciled individuals if it wins the next election and so it is important to bear in mind that there could be significant changes in the near future.
2. What are residence and domicile?
In some jurisdictions these terms effectively mean the same thing but in English law they are two separate concepts. They are also distinct from a person’s immigration status or nationality and should not be confused with similar concepts in other jurisdictions (such as the French law of “Domicil”).
At the highest level, they can be thought of as follows:
- The concept of “residence” (by which we really mean “tax residence”) tests where a person is physically living at a particular time; whereas
- The concept of “domicile” is a more holistic test of which jurisdiction a person is most closely connected to and can be heavily influenced by where the person intends to live out the end of their life.
Both of those statements hide a wealth of nuance and complexity. However, they do get across a key difference between the two concepts, which is that “residence” is usually a snapshot test, focussed on a particular tax year, whilst “domicile” often takes account of a person’s entire life, including what they might do in the future.
A person can be resident in multiple countries at once but can, as a matter of English law, only ever have a single domicile at any one time.
The key implications of each are set out in section 3 below. The concept of “deemed domicile” is then explained in section 4 and the tests for determining where a person is resident and/or domiciled are summarised in sections 5 and 6.
3. Why do they matter?
A person’s “residence” and “domicile” are the two most important factors in determining their exposure to UK taxation and domicile can also have a significant impact in other areas, such as which country’s laws might dictate who inherits their wealth on death.
Income tax and capital gains tax
As far as UK income tax and capitals gains tax are concerned, residence is the first point to consider:
- UK resident individuals can be subject to income tax and capital gains tax on their worldwide income and gains.
- In contrast, non-UK resident individuals have limited, if any, exposure to income tax and capital gains tax (which are usually only payable on remuneration related to work carried out in the UK or very specific types of UK source income and gains, such as UK rental income).
Domicile then needs to be considered as a secondary question for anyone who is UK resident:
- A person who is both UK resident and UK domiciled (or deemed domiciled – see below) is subject to income tax and capital gains tax on their worldwide income and gains. This is called the “arising basis” of taxation.
- A person who is UK resident but non-UK domiciled (and not deemed domiciled – see below) may be able to choose between the “arising basis” or something called the “remittance basis”. A person using the remittance basis is only subject to UK income tax and capital gains tax on (a) UK source income and gains and (b) non-UK source income and gains which are brought into or otherwise used in the UK.
In other words, being non-UK domiciled in and of itself is not usually enough to confer any income tax or capital gains tax benefits. However, it can permit access to the remittance basis which can in turn allow an individual to live in the UK without paying income tax or capital gains tax on their non-UK source income and gains. For those with significant income or wealth outside of the UK, it can be enormously beneficial.
For some non-UK domiciled individuals the remittance basis applies automatically but most need to make a decision each tax year as to whether to claim it or not. Not all do so, partly because it also has some drawbacks. For example, after a person has been resident in the UK for a certain period they must pay a fee to claim the remittance basis (usually £30,000 per year after they have been UK resident for 7 tax years and £60,000 per year after they have been UK resident for 12 tax years). Claiming it also results in the loss of the personal allowance and can increase the rate of tax on certain types of dividend.
References in the media to “non-doms” (short for “non-UK domiciled individuals”) are often actually references to the sub-section of non-UK domiciled people who make use of the remittance basis.
Inheritance tax
Whereas residence is the primary connecting factor for income tax and capital gains tax, in relation to inheritance tax domicile takes precedence and residence is largely irrelevant (other than as regards “deemed domicile”, see below).
Essentially:
- If a person is domiciled or deemed domiciled in the UK then their worldwide assets are potentially exposed to inheritance tax; whereas
- If a person is neither domiciled nor deemed domiciled in the UK then the starting point is that only their UK situated assets are exposed to inheritance tax.
Note that inheritance tax can apply not just when someone dies, but also to trusts and to certain lifetime gifts.
Trusts
This article focuses on individuals but it is worth stressing that the taxation of a trust can be heavily influenced by the domicile status of the settlor(s) (both when the trust is established and throughout the operation of the trust).
This is especially true of trusts established by non-UK domiciled settlors which can benefit from significant UK tax reliefs.
The impact of domicile in other areas
In the context of estate planning work, a person’s residence status is usually only directly relevant to their tax position.
In contrast, domicile is important to tax but also to a number of other areas as well.
In particular, whenever more than one jurisdiction’s laws could apply, domicile can be the key factor in determining which takes precedence. Succession law is a good example of this. UK law allows for “testamentary freedom” (i.e. a person is generally allowed to leave their wealth to whomever they like) whereas many other jurisdictions have an element of “forced heirship” (i.e. a person only has full discretion over a part of their estate, with the law obliging them to leave other parts to certain people).
It is often the laws of the place where a person is domiciled which govern succession to a person’s “moveable” assets (i.e. everything other than real estate) in the UK, even if they make a UK Will. Whilst there can be ways around this (in some circumstances it is possible to elect for UK law to apply), it is always something that should be considered carefully in estate planning.
4. Deemed domicile
“Deemed domicile” is something of a crossover between residence and domicile. It can only ever be relevant if a person is not actually domiciled in the UK.
There are a number of ways in which a person can become deemed domiciled but two of the most important are:
- The “long-stayer” rule: which is satisfied if the individual has been UK resident for 15 out of the previous 20 tax years; or
- The “returner” rule: which is satisfied if the individual becomes UK resident after living elsewhere and having been born in the UK with a UK domicile of origin (see below for what a domicile of origin is).
If a person is deemed domiciled they are (with some caveats) treated as though they are UK domiciled for tax purposes. The deemed domicile rules for inheritance tax are slightly different to the deemed domicile rules for income tax and capital gains tax and so it is possible to be deemed domiciled for some taxes but not others.
In practice, for many non-UK domiciled individuals the effect of the deemed domicile rules is that they will lose the key tax advantages of being non-UK domiciled (such as the ability to claim the remittance basis and the reduced exposure to inheritance tax) after 15 years of residence.
Anyone who is deemed domiciled must also take great care when establishing, funding or adding value to trusts as doing so can result in significant UK tax exposure.
However, a person’s actual domicile can remain important even after they have become deemed domiciled. In particular:
- actual domicile still impacts the taxation of trusts established prior to the settlor becoming deemed domiciled; and
- deemed domicile is only relevant for taxation, it has no bearing on the impact of a person’s domicile status in other areas (such as in determining which jurisdiction’s law might govern succession to the individual’s estate).
5. Testing residency
The residency tests
Tax residency is determined on a tax year by tax year basis (i.e. for each period running 6 April – 5 April) and is governed by the statutory residence test (‘SRT’) which has been in effect since 6 April 2013. Before then, different rules applied.
The SRT is really a collection of three different categories of tests rather than a single test:
- First there are the “automatic overseas tests”: if any one of these is satisfied then the individual will not be UK tax resident and none of the other tests need to be considered. If none of these are satisfied then one moves on to:
- The “automatic UK tests”: if any one of these is satisfied then the individual will be UK tax resident. If none of these are satisfied either then one moves on to:
- The “sufficient ties test”: which determines residency by looking at a combination of a person’s “ties” to the UK and the number of midnights they spend in the UK in a given tax year. The fewer ties a person has to the UK, the more midnights they can spend here in a tax year without becoming UK tax resident.
Because of the way in which these tests work, it is often possible to have a good idea as to whether someone will be UK resident at the beginning of a tax year but they and their advisers will only be certain at the end of the tax year (i.e. when they can look back and confirm which tests have or have not been satisfied).
The tests of the SRT are summarised in our flow chart here. Some of the key points to bear in mind are:
- A person will not be UK tax resident if:
- They spend 15 midnights or fewer in the UK in the tax year (regardless of whether they have been UK resident before); or
- They spend 45 midnights or fewer in the UK in the tax year (only applicable if they have not been UK resident in any of the three preceding tax years);
- Unless there are exceptional circumstances (or certain other reliefs apply) a person will always be UK resident if they spend 183 midnights or more in the UK in the tax year;
- For anything in between, they will need to consider a range of factors to determine their position.
Split year treatment
When someone arrives in, or leaves, the UK they may also be able to “split” the relevant tax year. This effectively allows them to divide their tax year into “UK” and “overseas” parts, with significantly reduced tax exposure in the overseas part. It is often particularly relevant if someone is acquiring or disposing of a home in the UK and/or if they are beginning or ending full-time work in the UK but can be complex to apply in practice.
Temporary non-residence
Anyone who ceases to be UK resident for just a few years and then returns again should consider the “temporary non-residence” rules.
These were introduced to stop people becoming non-UK resident for just a short period to take advantage of reduced tax exposure before returning again (e.g. to dispose of an asset, or receive a dividend).
Please see our article entitled “The UK’s Temporary Non-Residence Rules” for more on this.
6. Testing domicile
As previously mentioned, domicile and residence are distinct concepts in English law. Unlike residence, there is no statutory test for domicile. Instead we must discern the tests from reported cases which makes it particularly important to take expert advice if there is any uncertainty.
When thinking about domicile it is important to remember that:
- An individual can, under English law, only have a single domicile at any one time (whereas you can be resident in multiple places at once).
- An individual must always have a domicile (whereas it is technically possibly to be resident nowhere).
- Domicile focuses on jurisdiction (not country) which is particularly relevant in federal countries such as the USA.
- Every person is born with a domicile but this can change during their lifetime. When advising on domicile, it is necessary to look back at the whole of a person’s life to determine which domicile they began with and whether that has changed since. It is also necessary to look ahead at their future intentions.
The domicile acquired at birth is known as a “domicile of origin”. This can also be thought of as a person’s “default domicile” because it will apply unless and until any other form of domicile supplants it and can even revive at a later date after being so supplanted.
A child’s domicile of origin will usually be the domicile of their father at the time of their birth if their parents are married to each other. In other cases the child may take their mother’s domicile (such as if their father has died or their parents are unmarried).
Whilst a child’s domicile of origin will often be the jurisdiction in which they were born, this is not always the case and care must be taken to consider whether the relevant parent could have been domiciled somewhere else at the time of the birth (e.g. if they had only recently arrived in the country or were living there temporarily for work purposes).
A domicile of origin cannot be changed (unless the child is adopted) but can be replaced by either a “domicile of dependency” or a “domicile of choice”.
A domicile of dependency will be acquired if the child’s relevant parent changes their own domicile whilst the child is under a certain age (usually 16). For example, if a child is born in France to parents who have always lived in France then they will almost certainly begin life with a domicile of origin in France. However, if the parents move the family to California, USA, with an intention to emigrate permanently, the parents would acquire a domicile of choice in California (see below) and this would change the child’s domicile as well. The child would acquire a domicile of dependency in California.
Prior to 1974 a married woman would also acquire a domicile of dependency if her husband’s domicile changed. Whilst this has not been the law for more than 50 years, it can still be relevant when considering the domicile of someone married before then.
Once a person has attained legal capacity (usually at the age of 16), they can no longer acquire a new domicile of dependency. Instead, they can acquire a domicile of choice. Any domicile of dependency acquired between birth and the age of legal capacity will convert into a domicile of choice at that date.
In order to acquire a domicile of choice, two key elements are required:
- The objective element: the person must move their primary home to the jurisdiction in question; and
- The subjective element: the person must intend to reside in that jurisdiction permanently or indefinitely.
The first of these is often straightforward to determine, although where an individual has multiple homes split between different jurisdictions it can require a more detailed factual investigation.
As to the second, subjective intention is inherently difficult to analyse. In practice HMRC consider a broad range of factors to try and divine intention from a person’s actions and words. Their position tends to be that, if a person’s primary home is in the UK (so they have satisfied the objective element of the test), that person will also have satisfied the subjective element unless they can point to a reasonably foreseeable (i.e. likely) and clearly defined event which will cause them to leave the UK. Simple examples would include intending to leave after retirement, or when one’s children finish school. Whilst there is some technical debate as to whether HMRC’s interpretation of the law is wholly correct on this point, it remains vitally important for any UK resident but non-UK domiciled individual to be clear as to the circumstances which would cause them to leave the UK.
Once acquired, a domicile of choice can be lost (referred to as “abandoned”) if both the objective and subjective elements of the test cease to be satisfied (i.e. a person moves their primary home from the jurisdiction and does not intend to return). In that situation the individual might either acquire a new domicile of choice somewhere else or, if they would otherwise be left without a domicile, their domicile of origin will revive.
7. How can we help?
We have extensive experience in analysing residence and domicile and advising clients on the tax and other legal implications of each.
We can provide detailed Legal Opinions to confirm a person’s status and also provide broader estate planning advice explaining how to structure one’s affairs so as to make best use of that status.
We also assist regularly with HMRC enquiries and voluntary disclosures in which residence and/or domicile play a key role.