If you’re based outside the UK or are moving to the country to begin a new chapter of your life, you need to understand your tax position, which is affected by your ‘residence’ and ‘domicile’ statuses.
You’d be forgiven for not knowing the difference right away or how they might change the way you pay tax, but it’s incredibly important to understand.
So, let’s go through domicile and residence, and explore how they might change your tax position with HMRC.
Residence and tax implications
Residence refers to where an individual spends the majority of their time.
If you’re a UK resident, you need to report and pay UK income tax on your foreign income, such as wages, investment returns and rental income. If your income is taxed more than once, you may be able to claim tax relief.
For non-residents, UK taxes only apply to their UK-sourced income and gains.
Working out your residence
Determining your residency can be complex. Generally speaking, though, if you spend 183 days or more in the UK during a particular tax year (6 April to the following 5 April), you’re a UK resident for that year.
However, you may be deemed as resident or non-resident based on the statutory residence test, which is split into two tests: ‘automatic overseas’ and ‘automatic UK’. These take other factors into consideration, such as your residence in previous tax years and whether you work full-time overseas to determine whether you’re resident or not.
There’s also the sufficient ties test, which is useful if you’re moving to the UK as it reduces the number of days you need to spend in the UK by the numbers of ties — family, accommodation and work, for example — you have.
Domicile and tax implications
While residence refers to where you spend most of your time or the ties you have to the country, domicile is about the country HMRC considers to be your permanent home. You acquire a domicile of origin at birth, which is usually the same as your father’s domicile. (If your parents were not married when you were born, your domicile is the same as your mother’s instead.)
To understand how your domicile affects your tax status, you need to factor in your residence. Domiciled in the UK and a UK resident? You pay UK income tax on all foreign income. Domiciled in the UK and non-resident? UK tax only applies to your UK income.
However, if you’re not domiciled in the UK but are a UK resident, your tax obligations change dramatically, as you can choose whether you pay taxes on your foreign income on the ‘arising basis of taxation’ or the ‘remittance basis’.
Under the arising basis, you pay UK tax on your foreign income whether or not you bring it into the country. Under the remittance basis, you’ll only have to pay UK tax if you bring it into the UK.
If you make less than £2,000 from overseas sources, the remittance basis applies automatically. However, if you earn more than that and want to use the remittance basis, you need to pay a charge of at least £30,000.
Changing your domicile
It’s fairly rare to change your domicile, but you can do so in some cases by demonstrating that you have left your country of origin and settled in the UK. You will also need to provide strong evidence that you intend to live there permanently.
For former Brits domiciled elsewhere, be aware that if you become a UK tax resident again in the future, you will be treated as though your domicile of choice had not been acquired.
Talk to us if you need extra support working out your tax obligations.