Residence & Domicile
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Residence and Domcile
When a client looking at his personal tax situation and in particular where he or she is considering working abroad or migrating, it is best to go back to some basic principles and consider the two concepts of residency and domicile.
Residency is essentially where you reside. The tax authorities widen this concept further by establishing the concept of tax residency i.e. if you reside in a country over certain periods, and you comply with certain criteria, then you will become what is known as ordinarily resident. In the UK the current rules are 183 days in any one year or 90 days on average over four years (in both cases you are deemed resident from arrival). These rules are subject to review and we are expecting further details in 2012.
One key thing to remember is that it is possible to be tax resident in more than one country at the same time. Ideally this situation should be avoided if possible. But should this occur it would be necessary to establish if the double taxation can be avoided by means of a dual tax treaty. If a dual tax treaty does not exist then depending on the circumstances it is possible to be taxed twice for the same transaction. This is why it is essential to take specialist tax advice and where possible cease residency on one country when becoming resident in another.
The second factor to take into account is domicile. In simple terms there are two types of domicile that would be applicable to most clients, namely domicile of origin and a domicile of choice (there is also a domicile of dependency). If I deal with domicile of choice first, this is where you have “chosen” to live and stay. Your domicile of origin is where you were born. In some ways your domicile of origin is a default setting, in that if your current residency and domicile is lost or is unclear at any point the authorities in some countries can argue you are domiciled there in case of doubt as you were born there. Again it is vitally important to ensure that, even if you have lived abroad for many years, that your domicile of choice is not in question.
As you can see residency and domicile are complicated matters that need careful consideration. Why is this important in the UK? Well there is essentially four types of residency and domicile combinations and these can be taxed in different ways, the four combinations are:
UK resident and domiciled – a person who is UK resident and domiciled would be taxed on their world wide income and gains in the UK.
UK resident and non-domiciled (or “Non dom”) tax status - A UK resident and non domiciled individual is currently a person with a domicile outside of the UK who currently resides over 183 days or 90days (calculated over a period of four years) in the UK. Non doms are taxed on UK earnings and gains (UK property and land owned directly whilst in the UK would also be subject to Inheritance Tax) but may choose to be exempted from tax on their non-UK interests provided any income or gains are not “remitted” to them in the UK, if they do not take this option they will be taxed on an arising basis on all of their income and gains.
This option is called the “remittance basis”. Since 2008 a Non dom opting to take up the remittance basis would after seven years pay a remittance basis charge (RBC) of £30k to maintain the privilege of the remittance basis. It is important to note that for new entrants to the UK there is no remittance basis Charge for their first seven years but by taking this option they will lose instead lose their UK personal allowances around £2k p.a.).
The RBC now increases to £50k after 12years residence. After 17 years (in 20) a UK domicile is attained. UK land and property is subject to IHT if owned directly but by having say a company outside the UK (say the IOM owning a property or land) this can be avoided as the asset is no longer UK situs (which land title always is) but instead the shares of a company outside of the UK.
Non UK resident and non domiciled – such a person would not pay tax in the UK except where they have worked in the UK for over 60 days (the 60 day test) in any one year and any UK property they own personally would be subject to IHT (see above) but not CGT.
Resident but not ordinarily resident – this is a rare special category that applies to people who are not in the UK for more than 90 days over four years or 183 days - say 180 days in one year. They would not be taxed on their overseas earnings unless they are brought into the UK.
We would be happy to talk to you about your situation and we work with a number of international tax specialists that assist in identifying the most appropriate solution for you.