The subject of residence and domicile has come up recently with a number of our clients.
Residence
Most people in the UK are resident and ordinarily resident for tax purposes, and so must declare and pay tax on their entire income to HMRC, regardless of where it arises. A person may become not resident temporarily, say when working abroad for at least one whole tax year (so not having to pay UK tax on their foreign income), but will remain ordinarily resident throughout. A person may also be resident but not ordinarily resident, so that for example UK tax is not due on their income arising from outside the UK, unless it is brought into the UK (i.e. remittance basis).
Legally and in practice, the rules on how to recognise what was and was not needed to qualify for one or the other status, were quite settled for many years, and helpfully explained in booklet IR20 (now replaced by HMRC6); broadly any taxpayer that had left the UK and did not return for more than 90 days each year was non-resident. Over the last few years however, there have been several high-profile and significant court judgements resulting from some cases that are still ongoing, that have created considerable uncertainty over what is and is not now acceptable or expected from the taxpayer. The most significant judgements so far have been in relation to the cases Grace v HMRC and Gains-Cooper v HMRC, although several other lesser cases have also added to the overall uncertainty and confusion.
Although ongoing, there are some ‘certainties’ that can now be identified, including:
1 - mere physical presence in a particular place does not necessarily mean residence in that place
2 - short periods of physical presence, if for example under a ‘continuous obligation’ (such as for an employment), may, added together, constitute residence
3 - a person may be resident (and ordinarily resident) in more than one country at any one time
4 - a British subject may be treated differently to a non-British subject
5 - where the taxpayer seeks to be treated as being not UK resident, the new concept of ‘distinct break’ has now been established, although what this means precisely is still not entirely clear
6 - leaving the UK for at least one whole tax year on the basis of a full time employment should confer non-resident status on the taxpayer
7 - a person arriving in the UK to work may now be considered resident and ordinarily resident straight away (rather than have three years before the latter applied as was thought previously)
Aside from point (6), these ‘certainties’ will probably leave most taxpayers with a great many more questions than answers and so it is very important to seek professional advice that takes into account the specifics of each individual case.
Domicile
These rules have by-and-large not been affected by the recent court judgements. Unlike for residency, a person can only have one domicile at a time, broadly worked out as follows (in this order):
8 - domicile of origin (father’s side)
9 - domicile of dependence (up until 16, if father’s domicile changes)
10 - domicile of choice (based on the long-term plans of the [adult] taxpayer)
11 - deemed domicile, in any case
Deemed domicile is effectively an Inheritance Tax (IHT) anti-avoidance measure that is based on two tests: the ‘three year rule’ and the ‘17 out of 20 year rule’ (for more information see the HMRC manual).
Where a person is domiciled may affect what he or she has to pay in relation to his or her estate (IHT), any capital gains they make (CGT), and on income arising outside the UK (remittance basis again).
Unfortunately for both residence and domicile, there are really very few easy answers and professional advice really must be sought, especially since the recent changes (to residency). The only really good news is that the whole subject simply isn’t relevant for the vast majority of taxpayers.
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