We take a look at what it means to be UK tax resident or domiciled and how this may affect your tax payments.
If you’ve immigrated to the UK, or you’re an international citizen with ties to the UK, your tax situation might not be clear cut. Understanding UK tax residency rules is essential for determining when and how you owe tax and for wealth planning going forward.
Are you UK tax resident?
The UK has a residence-based tax system, which means that if you are considered tax resident in the UK, you will usually have to pay HMRC tax on all of your worldwide income.
To determine whether you are tax resident in the UK, a statutory residence test (SRT) was introduced in 2013.
The statutory residence test is made up of three tests that must be taken in turn.
Automatic overseas test
The first part of the SRT is the automatic overseas tests. To pass the automatic overseas test, all three must apply:
- You worked full-time overseas
- You spent less than 91 days in the UK
- You worked in the UK for fewer than 31 days in total
Qualifying under this part means that you are automatically non-UK resident for the relevant tax year.
Automatic UK resident test
If the automatic overseas test criteria do not apply, it is necessary to check the automatic UK resident criteria. These include measuring how many days you spend in the UK, whether you live in the UK and whether you work full-time in the UK.
The criteria used to measure if you’re automatically a UK resident in the relevant tax year are:
- You spent 183 days or more in the UK in the tax year
- You had a home in the UK for all or part of the tax year and the following all apply:
- You had that home for at least 91 consecutive days
- At least 30 of those 91 days fell in the tax year in question and you were present in the home for at least 30 days at any time during the year
- You either had no overseas home or you were present in your overseas home for fewer than 30 days in the tax year
- All the following apply:
- You work full-time in the UK for any period of 365 days, which fall in the tax year
- In that 365-day period, more than 75% of the total number of workdays (days when you do more than three hours of work), are days when you do that work in the UK
- You spent at least one such workday (in the 365-day period and in the tax year) in the UK
Sufficient ties test
If you are neither automatically non-resident nor automatically resident, it is necessary to consider the third part of the test, which is known as the sufficient ties test. Under this test, an individual's status depends on the number of ties that they have to the UK.
The number of ties will affect the number of days you can spend in the UK before being considered a UK tax resident.
The tests and number of days vary slightly depending on whether you have been resident in the UK in any of the three preceding tax years and are classified as a “leaver”, or are new to the UK and therefore an “arriver”.
The relevant ties to the UK for an arriver are:
- A family (spouse and minor children) who are resident in the UK
- Having available accommodation in the UK
- Working in the UK for at least 40 days
- Spending more than 90 days (that is, at least 91 days) in the UK in either of the preceding two tax years
Are you UK domiciled?
The meaning of domicile is generally the country a person considers their permanent home. is only possible to have one country of domicile at any given time.
If you are a UK resident with a domicile abroad, there are special tax rules for you, which mean you may not have to pay UK tax on foreign income.
As domicile depends on the facts of an individual’s life, each case is unique.
There are three categories of domicile:
Domicile of origin
- Acquired at birth by reference to parents. The father’s domicile is acquired unless the parents were not married or the father died during pregnancy, in which case the mother’s is used.
- Foundling – an abandoned child whose parents are unknown has a domicile where it is found.
- Adopted children acquire from adoptive parents.
Domicile of dependence
- Individuals who lack mental capacity – They will not be able to acquire a domicile of choice, but will retain the domicile that existed on the date the incapacity began
- The domicile of a minor child under 16 years of age follows that of their father (or mother, as above). If their father’s domicile of origin is displaced with a domicile of choice (see below) before the child is 16, the child’s domicile changes to that of their father’s and remains so (unless the child acquires a domicile of choice elsewhere once they are an adult).
- Prior to 1 January 1974 on marriage a woman acquired the domicile of her husband as a domicile of dependency. This rule was abolished in the Domicile and Matrimonial Proceedings Act 1973, so women now keep their domicile on marriage. For those who married before 1 January 1974, from that date their domicile of dependency will become a domicile of choice.
Domicile of choice
This can be the most difficult to demonstrate and simplistically is based on two key elements:
- Physical presence in the territory concerned; and
- Intention to remain there permanently or indefinitely.
A number of factors are taken into account in determining this status.
From 6 April 2017, an individual who is non-UK domiciled may be treated as “deemed” domiciled in the UK for tax purposes if they meet either of the following conditions:
- Was born in the UK
- Has a UK domicile of origin
- Was resident in the UK in 2017/18, or later years
The individual has been a UK resident for at least 15 of the 20 tax years immediately before the relevant tax year in which the calculation is taking place.
Tax if you’re non-domiciled
You will not have to pay tax to HMRC on your foreign income or gains if they amount to less than £2,000 in the tax year and they’re not brought into the UK.
As a UK resident non-domicile individual with more than £2,000 in foreign income or gains, there is the option of being taxed on two basis, the arising basis and remittance basis.
Claiming the remittance basis means you only pay HMRC for the foreign income and gains you bring into the UK, but in exchange you may lose your tax-free allowances and pay an annual charge if you’ve been resident in the UK over a certain period of time. If you find yourself in this situation, it’s best to speak to a cross-border wealth adviser who can assist you with tax planning so you don’t fall foul of HMRC or pay unnecessary tax.
If you meet the deemed domicile rules, you will not be able to claim the remittance basis of taxation and will be assessed on your worldwide income and gains on the arising basis instead.
|UK domicile: Tax planning opportunities|
|Tax planning is essential before becoming UK domiciled. There are some planning techniques that a non-domicile may consider, depending on their circumstances and it is recommended that specialist advice is sought. For individuals planning to move to the UK, careful tax planning pre-arrival can significantly reduce their exposure to UK tax.|
Tax treaties, also known as Double Taxation Agreements (DTAs) help to prevent an individual being taxed by two countries on the same income, gains or assets. This can happen if a person is domiciled in another country when they die. If the country where the person was living charges Inheritance Tax (IHT) on the same property or gift the UK is taxing, they might be able to avoid or reclaim the tax through this double taxation agreement.
The UK has a number of bilateral tax treaties in place with various countries for taxes on estates, gifts and inheritances, including South Africa. These treaties may contain deeming provisions in respect of domicile which will override domestic legislation.
If a transfer is liable to IHT and also to a similar tax imposed by another country with which the UK does not have an agreement, they may be able to get relief under Unilateral Relief provisions. This relief may be due when either there is no agreement with the country concerned, or the income arises in a country with which there is an agreement, but the agreement does not cover the category of income or foreign tax involved. In these circumstances, HMRC gives credit against the tax charged by another country on assets sited in that country.
Summary of the tax positions for individuals based on their residence and domicile
|Status||Income and capital gains||Inheritance tax|
|UK resident / UK domicile||Arising basis on worldwide income and capital gains||On worldwide assets|
|Non-UK resident / UK domicile||Arising basis on any UK income and capital gains||On worldwide assets|
|UK resident / non-UK domicile||Choice between arising and remittance bases||On any UK situs assets|
|Non-UK resident / non-UK domicile||Arising basis on any UK income and capital gains||On any UK situs assets|
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