This is a question that many tax advisors are frequently asked and understanding the differences between the two concepts and knowing your resulting tax obligations is of paramount importance. Careful planning to determine your residency status and a review of your domicile could potentially mitigate unexpected tax liability.
Whilst your domicile status is important from an income tax and capital gains tax (CGT) perspective, it is particularly important in estate planning and considering whether there is any exposure to inheritance tax (IHT).
Domicile is a concept of common law which is specific to the UK. Its primary definition is that of ‘the permanent home’ with the emphasis being on ‘permanent’. Critical to the concept is that an individual may have only one domicile at any given time which is not always the case when residency is considered.
There are three types of domicile:
- Domicile of origin. This is automatically acquired by the operation of law at birth and is deemed to mirror that of the father. However, in the case of the father being deceased or the parent’s unmarried, the domicile of the mother is adopted. This domicile is often thought to follow the country of birth but this is not always the case.
- Domicile of dependency. This is also acquired by operation of law and only applies to minors (under the age of 16) and individuals of unsound mind. The domicile will follow that of the person on whom they are legally dependent.
- Domicile of choice. This is acquired by a deliberate act and will displace a domicile of origin or dependency. It is, however, difficult to successfully achieve and is not governed by a formal application but does involve a clear two-part process:
An individual must be present in the new country, and the individual must have the intention of remaining there indefinitely.
With effect from 6 April 2017, HMRC introduced some new rules in respect of a person’s domicile status:
For IHT purposes, where a UK domiciled individual leaves the UK and becomes domiciled overseas, they continue to be UK domiciled for the three years following their departure. In addition to this, and for all UK tax purposes, individuals who have been UK residents for 15 out of the last 20 years will acquire a deemed UK domicile.
Domicile and residency are often confused and outside the UK the concepts mean much the same thing.
The residence of an individual is basically where they happen or choose to live and is determined by the statutory residence test (SRT) of which there are three elements:
The automatic overseas test
The automatic UK test
The sufficient ties test
The rules are far from straightforward but working through the tests in a methodical manner will allow the residence status of an individual to be determined for UK tax purposes. It is possible for an individual to be a tax resident in two countries for the same tax year and at this point, a series of tie-breaker tests will be applied and the tax treaty that the UK has with the other country will need to be considered.
The scope of this article does not cover the residency rules in detail but seeks to highlight the difference between the two concepts.
If you would like to discuss your tax residency status and reporting obligations or would like a review of your domicile status with a focus on estate planning, please do not hesitate to get in touch with our expert tax team.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.