Posted on: 13 May, 14
A guide to the differences between residence and domicile for tax purposes
Domicile and residence can each have a significant impact on how much UK tax you must pay, or indeed if you must pay UK tax at all. Both terms are used for tax purposes and have little to do with citizenship or nationality.
Residence is determined by a number of factors including how many days you spend in the UK, where you work and where you have homes. A person may be resident for tax purposes in more than one country, in which case their status may be determined by tax treaties between the two countries.
Residence is particularly relevant for income tax. The general rule is that a UK resident is liable to pay UK tax on all income and gains from anywhere in the world. A nonresident is only liable to pay UK tax on UK sources of investment income and gains, but only on UK earnings to the extent that the work was carried out in the UK. This general rule is subject to many exceptions and detailed provisions.
Residence can also be relevant in determining whether an employee is entitled to claim tax relief for certain travelling expenses.
A new statutory residence test was introduced from 6 April 2013. Under this test, you first consider whether you are automatically non-resident by following these tests in this order:
If none of the three tests is passed, you then consider whether the person is automatically resident by following these tests in this order:
If none of these six tests determine residence, you use the sufficient ties test.
There are four ‘ties’:
There is also a fifth tie for individuals who have been UK resident in any of the three previous tax years:
Generally, the more days a taxpayer spends in the UK, the fewer ties must be met to be non-resident. This is also affected by whether the taxpayer arrived or left the UK during the tax year, and whether they were UK resident in any of the three previous years.
territorial waters at midnight at the end of that day. There are some exceptions to this, such as if a person’s departure from the UK is delayed because of illness or an unexpected political development.
A taxpayer is usually UK resident or non-resident for a whole tax year. There is an exception known as the split year treatment where a taxpayer may be regarded as UK resident for part of a tax year and non-resident for the rest. In order to qualify the taxpayer must satisfy one of the split year rule cases.
The date of change of residence status may be:
It is not the date of arrival or departure so it is important to check the exact rules in each situation.
Domicile is the country you regard as your natural home. You can only have one domicile at any time. Your domicile can be of origin, choice or dependency. The most common type is domicile of origin. This is the country that was your father’s domicile and where you either live or intend to return to at some point in the future.
Domicile is particularly relevant for inheritance tax. A British domiciled person is liable to pay inheritance tax on their entire estate wherever it is in the world. A ‘non-dom’ - somebody who is not domiciled in Britain - is liable to pay inheritance tax only on their UK property. There is also a £325,000 limit on the amount a non-dom spouse can inherit free of inheritance tax.
Domicile is also relevant for calculating income tax and capital gains tax on a UK resident non-dom’s overseas income and gains. Unless they choose to pay tax on all overseas income and gains as they arise, they must elect for the remittance basis and usually pay an annual charge of either £30,000 or £50,000 depending on how long they have been resident in the UK. This may be mitigated if they remit income to the UK for commercial investment in a UK business.
If you decide to move to Spain to live there permanently, factors that will help establish whether you now have a Spanish domicile could include:
This is a very broad summary of detailed and complex regulations, which are supported by detailed guidance. Contact us so that we can advise you on your specific situation.
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