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Speaker
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Transcript
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Tim Williams, Director
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[Music] Hello and welcome back to Death and Taxes, a private wealth podcast from Burges Salmon. My name is Tim Williams and I'm delighted to be joined today by my colleagues from our Tax and Trusts team, Helen MacLeod.
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Helen MacLeod, Senior Associate
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Hi Tim, good to speak to you.
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Edward Hayes, Director
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A pleasure to be here Tim.
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Tim
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We're expecting 2024 to be an interesting year in the world of private wealth, not least because we have an election looming and the main parties are beginning to set out their visions of how the UK's tax regime should change. Once we've got more detail on that you can expect several podcasts exploring what's been proposed and what it might mean in practice, but in the meantime thought it would be helpful to summarize how some key aspects of UK tax law work at the moment, so that any changes can be understood in the right context. [Music]
So, on today's podcast we're going to talk about two key concepts in UK tax law, residence and domicile, now these are both concepts that come up quite a lot in the UK tax code and they're also something that gets quite a lot of press coverage. They're likely to be a hot topic coming into the election, which is why we're talking about it now, but the both quite confusing terms. Residence means lots of different things and it particularly means lots of different things in different legal jurisdictions and domicile is the same. So we thought today it would be helpful to talk through what residents and domicile are, from a UK perspective, and why they matter, and how you work out whether you or your clients are UK res or dom. So, shall we start with residents because that might be slightly more straightforward to explain. Helen, do you want to go first?
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Helen
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Sure, as you say it is the more simple one to get your head around. The rule of thumb is that you are tax resident where you, sort of, physically live in any given year. There are various ways to assess that and we'll come on to those later but that that's a quite useful starting point. It's important to note that it's different from your immigration status and it's different from your citizenship, they can be, you know, completely separate jurisdictions from your tax residency. For people who are highly mobile, which is not that uncommon nowadays, your tax resident status can change year on-year, depending on where you spend more time in any given year and your tax residence informs your tax position and checks status in the year in question.
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Tim
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Great, so a sort of year-by-year test really of where you are tax resident. So Ed, what about domicile? Is that the same, or is it something completely different?
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Ed
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Completely different I would say, so domicile, there are various different things that domicile can mean, but in UK law it's really important to understand that it's not the same as residence. Unlike some other jurisdictions where domicile literally means residence. So whereas residence is more where are you physically living now? The way I summarize domicile to a lot of clients, is where do you intend to end up living at the end of your days, where are you going to be? Because for most people, we'll come on to the test in more detail, but for most people if they're going to stay in the place they're already living they're going to be domicile there. Whereas if they're going to move somewhere else they might their domicile might not be where they're currently living and it's really important for clients to get their head around this fact, that domicile again, it's not the same as nationality, it's not the same as immigration status, and because it's this more nebulous concept it's a bit harder for clients, I think, to be absolutely certain of where they're domiciled. You'll find the advice we give it's often a little bit more caveated on that, but it's particularly important to take advice because it's so easy to get it wrong.
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Tim
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So let's stick with, come back to the easier one, again, why does residence matter for our clients? Why do we care where we're resident?
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Helen
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Because it informs what tax you have to pay each year essentially, so for UK residents the general rule is that subject to any specific reliefs you'll be subject to income tax on worldwide income regardless of where it arises and capital gains tax on gains arising anywhere in the world as well. So it's very, very broad whereas for non-UK residents, you're only subject to UK income tax and capital gains tax on income and gains arising on, sort of, very specific categories of income and gains.
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Tim
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So thanks Helen. So Ed, what about domicile? What, why does that matter?
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Ed
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So domicile again, it's subtly but importantly different, so if we take income tax and capital gains tax, which Helen has just mentioned, your primary test is where are you resident? But actually it is an important secondary test as to where you are domiciled, because if you are UK resident but not UK domiciled and not deemed domiciled, which we will come on to later, then you can actually be taxed on a different basis and that's called the remittance basis and when you see in the papers or in the media references to non-doms or the non-dom regime what they really mean usually is this remittance basis, which is this idea that you can be living in the UK and be UK resident, but you're only actually subject to UK income tax and capital gains tax on incoming gains arising within the UK and you're only going to be subject to income tax and capital gains tax on income gains outside the UK, if you choose to bring them into the UK. So it's very useful for people who have significant wealth outside the jurisdiction and they can potentially shield that from UK tax. The other area of tax law that's really really critical is inheritance tax, because domicile is actually the primary linking factor there, it's the primary determinant of how much inheritance tax exposure you have in the UK and someone who's UK domiciled or deemed domiciled, starting point is that their worldwide estate, anything they own anywhere in the world, is within the scope of UK inheritance tax. Whereas, if you're non-UK domiciled then actually the starting point is only things you have in the UK are subject to UK inheritance tax. But I think it's an easy mistake to think that, right, so residence is the thing that primarily connects your tax and domicile is kind of the secondary test that has some other tax implications and that's it. Domicile also has a number of really important implications in non-tax context and some of the most obvious are succession law, so domicile is often what English law uses to determine which jurisdictions law applies in a particular case. So take a simple example of a Will, if I've got a client who's living in the UK at the time, they want an English Will, but they're domiciled in France, they could choose in their Will to give everything to the their children, but actually the succession law that applies in France might say, well you have to give a certain percentage to your spouse, and so that English will may not be fully effective. So it's critical to understand your domicile because it's going to have an impact not only on your tax exposure but potentially lots of other aspects of your, kind of, legal status.
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Tim
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Okay thanks Ed. I mean with now that we've run through the sort of bit of why they matter and what the key concepts are, it would be helpful now to talk about how you work out whether or not you're UK resident and whether or not your UK domiciles. So should we take residents first?
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Ed
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Yes and I'll jump in immediately because residents is easier to explain than domiciles so I'll leave the hard bit to Helen. So as things stand at the moment in UK law there's something called the statutory residence test and this is actually quite a big Improvement on what previously used to happen because UK residence used to be something quite hard to determine with certainty, in many situations, and it's only since the 2013/14 year we've had this statuary residence test, which is, imagine it as a flowchart and you apply a series of tests to work out where you end up being resident. But for most people you can think of it as: if you spend fewer than 16 days in the UK, in a particular tax year, and by days we actually mean midnights, usually, then you're almost certainly going to be you are certainly going to be non UK tax resident. If you spend more than 182 days in the UK in a tax year then you're almost certainly going to be UK tax resident, and if your day count is is somewhere in between those two you're going to have to look a bit more closely at these tests and most of the tests judge some combination of your links to the UK. Things like do you have a home here? Do you have family here? That kind of thing, and the number of days that you spend in the UK in a tax year and for most people the more links you have the fewer days you can spend here without being UK tax resident, if that make sense?
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Tim
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Perfect sense Ed, as you said, very straightforward you know, a nice statuary test definitely made it a lot easier, but it's still quite complicated to work out in those grey areas as you say.
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Ed
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So one thing for - sorry, one thing for clients when they're looking at it do always bear in mind that those early years are still, if it's a pre 2013/14 tax year, it's still the old rules that apply and that can catch people out in some respects.
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Tim
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Which is still resident for working out whether you're deemed domicile or not as we'll come on to look at later in the episode. So Helen, do you want to talk about domicile? How do we work that one through? And should we start with deemed domicile, as it connects to residents?
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Helen
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There are various ways to become deemed domiciled, but the most common one is that if someone is UK resident for 15 out of the previous 20 years they will become deemed domicile at that point. It should be noted those 15 years don't have to be consecutive, any 15 out of the previous 20 years that are relevant and from that point they will be treated for most purposes, as I said, as UK domiciled.
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Tim
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So that's deemed domicile. What about domicile more broadly how do we work out whether we're domicile rather than deemed domicile?
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Helen
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This is one where we don't have a neat little statutory test for it and so it can get quite complicated it's all based on case law and that is quite old and seems slightly odd in the modern day, but in essence everyone has to have a domicile and everyone is born with what we call a domicile of origin. That domicile of origin comes from where their parents were domiciled at the time of their birth and it's worth remembering here that that's not necessarily the country in which they were born you can be born say in Germany but not have a German domicile of origin if your parents weren't domiciled there at that time and then your domicile can change over your lifetime if it doesn't you stick with your domicile of origin throughout your life but the most common way to change a domicile is by acquiring what we call a domicile of choice. That will occur if you both move somewhere else and decide to live there and have your life there and that decision to remain there is that you - is permanent or indefinite, so it's necessary to show this intention to be in the new location permanently or indefinitely to acquire domicile of choice. The - for people who move around jurisdictions a lot, or split their time between different jurisdictions, which is you know pretty common nowadays in the sort of globalized world we live in, this is especially important to get advice on this because it's not always that easy to work out where someone is domiciled if they've acquired a domicile of choice, or may or may not have acquired a domicile of choice in any one of the jurisdictions in which they now spend a lot of time, so it's really important to get some advice on that and work out exactly what the position is.
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Ed
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Yeah, and I think it's probably worth saying isn't it, that domicile of choice is a really misleading term for some clients because it kind of, clients think, oh great I can I can choose whether or not to become UK domiciled and actually the choice that that is referring to is this decision as to whether you are going to be living somewhere permanently or indefinitely and it, that choice then determines whether or not, usually, you've acquired a domicile of choice, but the choice is not whether to become domiciles or not, that's something worth always stressing to people involved.
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Helen
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Yeah definitely.
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Tim
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You've both said it's all about your intention, I mean intention can change, but how do you show your intention to the person asking the question, i.e. HMRC?
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Ed
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And this is where we, one of the joys of this job is get to know people very well, but domicile, I think, often surprises clients about how much we need to ask about their lives to give them good advice and the reason we have to ask so much is that actually if HMRC ever review your domicile they will send you, usually, this very very long list of questions and what they're trying to get at, usually, is they're trying to work out how strongly connected you are to the UK, and although theoretically this is a purely subjective question, do you intend to live in the UK permanently or indefinitely? Because normally HMRC are getting involved because a client is saying they're not UK domicile and HMRC are trying to say they are, and HMRC will be looking for connections to the UK or, kind of, reasons you might not be leaving and might have ended up deciding you're actually going to stay here permanently, and clients will often, very understandably, see this is a really invasive review of their lives and HMRC will be asking for correspondence with friends and loved ones and utility bills and bank statements and all sorts, and HMRC do that because obviously they can't ever know for certain what a client's subjective intention is and so they try and build up a fact pattern around it and, kind of, prove an intention by the actions that a client takes, and the simplest rule of thumb, I think, for people to have in their minds if they're trying to think, right, have I, or has someone else formed an intention to remain in the UK permanently or indefinitely, the rule of thumb is: is there a particular event which is quite likely to happen and reasonably foreseeable, that will happen that will cause me to go again? So some really easy examples are, you know, I'm in the UK for my job, as and when either I change job or I retire I'm going to leave the UK. So those things are pretty certainly going to happen, one or both of them and it's a pretty easy juncture to trigger a departure. Another one we often see with clients, you know, kids of school age, who are maybe at UK schools and and they'll say, right, I'm going to be in the country whilst my kids are here and then once the kids you graduate I'm going to leave. If you don't have something like that to, kind of, hang your hat on and say, right, that's when I'm going, it doesn't mean to say you're definitely UK domicile, but it does mean that you need to think very very carefully and take some really careful advice on your position, because if you don't have that and HMRC ever did ask you're much more likely for HMRC to ultimately say, well actually we think you've kind of ended up staying here at least indefinitely even if you haven't made a conscious decision to stay here permanently.
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Tim
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So Ed, that's really helpful, I mean so, that's what we have to tell HMRC, but when are they likely to be asking the question? When is domicile actually relevant to clients?
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Ed
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Here there are a couple of good examples and maybe Helen, if I deal with the 'on death' one and you can handle the 'in life'?
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Helen
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Yeah, I was just about say fittingly for this podcast, it's death and taxes, at the most-.
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Ed
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Absolutely, hits the nail on the head in terms of the title. So the one where it gets, where it kind of, it gets tested and you definitely get an answer as to whether HMRC agree or not, is on death, because as I said actually domicile is the key connecting factor for inheritance tax, so when you are filling out the inheritance tax forms for a deceased person you have to say whether they're domiciled or not in the UK and if you don't think they're domiciled you basically have to write a little report that explains their life history and why you think they're not domicile in the UK at the time of their death, and HMRC will review that and they'll either accept it, in which case all good, or they'll ask you lots of questions and either accept it after the questions or continue to challenge it and maybe ultimately disagree, and that is a, you're going to get an answer one way or another because it either means your inheritance tax is right or wrong. Where you don't necessarily get an answer, and I'll leave Helen to explain, is when you submit a tax return during lifetime saying your domiciled or not domiciled.
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Helen
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So yeah, there are, there are various times in life lifetime when it is relevant as Ed said, when you submit a tax return, if you're claiming certain reliefs, just because HMRC accept it for that year doesn't necessarily mean it will be, it can't be refuted again in the future. So, you know, it's a thing which needs to be thought about every year. It's also relevant when you're making a Will, as Ed said earlier, it can impact the succession law which applies. Obviously when you actually die your domicile is assessed but when you're making your Will it's also relevant to think about it then, simply when you're making gifts your domicile can impact whether they have any tax consequences and a big one is also if you're setting up trust. The taxation of trusts varies hugely depending on whether the person who established that trust was domiciled or non-domiciled at that time, it's absolutely key and so if you are thinking of setting of a trust both the long-term tax implications and also the immediate tax consequences of doing so, turn almost entirely on your domicile. So that is a really, really important point at which domicile should be considered.
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Ed
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And it's worth saying isn't it, we've kind of been using domicile and deemed domicile a little bit interchangeably in this part of the conversation, not least because it just gets very pernickety if you're constantly saying domicile and deemed domicile for certain taxes, but for anyone listening it's really important to understand that often the tax treatments that are associated with domicile are associated with domicile or deemed domicile, it's slightly different, as in, you if you are non-domiciled but you are deemed domiciled there are certain aspects of taxation where you will be treated differently someone who is just UK domiciled, but often they're the same, whereas deemed domicile has absolutely no bearing on things like the succession law that apply to your estate and that kind of thing, so the non-tax implications of domicile aren't affected by deemed domicile, but tax really strongly is and people always need to bear that in mind. Just because they've had someone check their domicile and they're confident they're not domicile in the UK doesn't mean they're completely in the clear on all these tax points.
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Helen
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Is it also worth saying at this stage, that if you're coming up to deemed domiciled status that is a really really key time to get advice because there are certain planning steps which can be taken while you remain non-deemed domiciled that will have a lasting effect even once you become deemed domiciled.
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Ed
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For now at least and, you know, we'll have future podcasts about how this area in particular might change.
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Tim
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[Music] Thanks again for listening to this episode of Death and Taxes, the private wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at BurgesSalmon.com, or on our LinkedIn page. We'll be publishing new episodes every fortnight on Tuesdays, covering topics such as the basics of inheritance tax, how the UK's immigration laws work in the Private Client context, and a special episode discussing the announcements in the spring budget. As parties publish manifestos ahead of the general election, you can also look forward to our thoughts on what their policies might mean for private clients and their advisers, so don't forget to subscribe and thank you again for listening. [Music]
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