Whether you have chosen to move to the UK and intend to stay or have decided to move out of the UK overseas, your residence and domicile status are critical in understanding your tax position.
The residence and domicile rules have changed considerably over recent years and so it is now more important than ever to seek advice to understand how they affect you.
Whilst an individual’s residence position can have a direct impact on their domicile position under the new rules, generally speaking residence is reviewed on an annual basis and impacts the Income Tax and Capital Gains Tax payable.
From April 2013, the statutory residence test was introduced to measure whether an individual was resident in the UK or not. The previous rules simply looked at the number of days spent in the UK. The rules introduced in 2013 now consider ‘ties’ to the UK and overseas.
- If your situation is straight forward and you are in the UK for over 183 days a year with your home here, you will likely be UK resident.
- Where you are in the UK fewer than 16 days or work overseas and spend fewer than 91 days in the UK, with less than 30 working, you will likely be automatically non-UK resident.
- However, if you are not automatically UK resident or non-UK resident, the sufficient ties tests will apply. These tests look at a combination of how many days are spent in the UK together with ties such as family, accommodation and businesses in the UK.
With residency, there are three categories in which you could fall:
- Non-UK resident: only pay UK tax on UK income, not foreign income.
- UK resident and UK domiciled: pay UK tax on all income whether it’s UK or abroad.
- UK resident but not UK domiciled; might not have to pay UK tax on foreign income and gains.
If you fall within category 2, you will be taxed on the arising basis; on all income as it arises.
If you fall within category 3, you will need to consider the amount of foreign income and gains and what if any, is remitted to the UK to determine your position.
Domicile is something far more permanent than residence, this is the place a person calls home. It is inherited at birth; domicile of origin, and after the age of 16 this can be changed.
In addition to this, there is also the concept of deemed domicile. Prior to 6 April 2017, if you were resident but not domiciled in the UK under common law, the rules meant that you were only liable to pay UK tax on income and gains that arose in the UK and could use the remittance basis.
However, from 6 April 2017 new deemed domicile rules came into force which mean if you are not domiciled in the UK under English common law, you are now treated as domiciled in the UK for all tax purposes if you:
- have been UK resident for 15 out of the last 20 years
- were born in the UK, the UK is your domicile of origin; you were resident in the UK for 2017 to 2018 and later years (formerly domiciled rules)
If you meet the new deemed domicile rules you will no longer be able to claim the remittance basis and you will be assessed on your worldwide income and gains on the arising basis.
The deemed domicile rules also impact Inheritance Tax. There were previous deemed domicile rules for Inheritance Tax only and you only had to be UK resident for 17 out of the last 20 years.
If you are neither UK domiciled or deemed domiciled then you will only be subject to UK Inheritance Tax on your UK situ assets. From 6 April 2017, this also includes the value of shares in an overseas company that owns UK residential property, which previously used to be sheltered from Inheritance Tax.
What is the impact on overseas trusts?
The new deemed domicile rules also have a big impact on overseas trusts. Where an individual is not UK domiciled under common law or the new deemed domicile laws, a trust set up with excluded property, i.e. overseas assets, is outside of the UK Inheritance Tax regime. Therefore for many, the deemed domicile rules may prevent future planning with overseas trusts from falling outside of the Inheritance Tax estate. If you are looking to undertake planning then you would need to do so before they become deemed domiciled and seek advice to understand these detailed rules.
For Income Tax and Capital Gains Tax a trust is generally dictated by the residence position of the beneficiaries and trustees. The Inheritance Tax position is that of the settlor. Measures can be taken to protect such trusts so that only Income Tax and Capital Gains Tax are payable on the settlor should they receive a distribution and there are conditions on ensuring this protection is not lost.
Non-resident landlords and indirectly held UK property
It is also worth noting that from April 2015 non-resident individuals became subject to UK Capital Gains Tax on the sale of a residential property situated in the UK. Previously, as long as the individual was not UK resident in the UK for 5 years after the sale of any UK asset, they were not subject to Capital Gains Tax.
This change was to promote fairness compared with UK landlords. The rules do provide the option of rebasing the cost of the property to the market value at April 2015, which means any property purchased some time ago would benefit from an uplifted based cost.
The Capital Gains Tax rates for selling residential property is 18% and 28% as opposed to 10% and 20% for all other assets.
The rules were further extended and from April 2019 this legislation includes commercial property and indirect disposals of UK property such as the sale of shares in a company that owns UK property. Again similar rebasing rules apply to the cost of commercial property and base cost of shares as at April 2019.
There may be occasions were rebasing is less beneficial than the standard capital gain calculation, i.e. if there is a loss, and therefore an election can be made.
Disposals must also be reported within 30 days of the conveyancing even if a UK Self Assessment tax return is already completed, and in April 2020, this measure will be extended to UK resident landlords also.
Changes in April 2020 also extend to non-resident corporate landlords. Non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present.
A non-resident company that has a period of account that straddles 5 April 2020 will be required to submit two tax returns, one under Income Tax for profits arising up until 5 April 2020, and one under Corporation Tax in respect of profits arising from 6 April 2020.
Should I stay or should I go?
If you are looking to leave the UK, return to the UK, spend longer in the UK, spend periods of time abroad or work overseas, you will need to understand how the rules impact you.
The tax team at Ellacotts have many years experience in advising clients on their Residence and Domicile status and we would be happy to support you in understanding yours. Contact Ann Bibby on firstname.lastname@example.org or 01295 250401 for more information.