There are two main concepts for determining an individuals exposure to UK tax; residence and domicile*. Residence is based on actual time spent in the UK, whereas domicile is more about an individual’s intention to remain in the UK. This article gives a very brief and simplified interpretation of the rules and how they affect your tax liability.
*Please note that residence and domicile are not the only determining factors for paying UK tax. The source of the income would be the first consideration e.g. an individual who is not resident in the UK would still pay UK tax on a rental property based here.
A UK resident is someone who is considered to be living in the UK and as such, they are open to UK income tax. First and foremost on their UK sourced income, but potentially on their foreign income too. UK residence is determined by the Statutory Residence Test (SRT) which consists of a series of tests that will automatically make an individual a UK resident or non-resident.
The tests must be worked through in the order listed below. Once a test is met, there is no need to continue to the next. Each test has its own quirks and intricacies which make them more complicated than they first appear. This article is not an in-depth explanation, so we strongly recommend that you seek professional advice if trying to determine residence status.
UK day – a day in the UK is counted when an individual is present in the UK at midnight. If they arrive in the UK in the morning and leave before midnight, this would not be a day spent in the UK.
UK Workday – for the purposes of the SRT, a workday is counted when you perform more than 3 hours of employment duties in the UK.
1. The First Automatic UK Test – This one is simple, if an individual spends more than 183 days in the UK in the tax year, they will be a UK resident and there is no need to move onto the next test.
2. The Three Automatic Overseas Tests – if someone were to meet any of the following three tests, they will automatically be a non-resident of the UK. The main criteria for each test are:
- 1st Overseas Test – Resident for one or more of the previous three years and spend less than 16 days in the UK
- 2nd Overseas Test – Resident for none of the previous three years and spend less than 46 days in the UK
- 3rd Overseas Test – Work full-time overseas and spend less than 91 days in the UK (of which less than 31 of those are workdays). This test is tricky and has a few layers. There is a separate calculation to determine whether someone is deemed to “work full-time overseas”. The calculation is based on the number of hours worked, not days, which can make it more complex.
3. The Second and Third Automatic UK tests – if all of the above tests have been failed, these must be considered next.
- 2nd UK Test– This test is relevant for those who have a home in the UK and, during a 90-day period, spend more than 30 days there. Further to this, they must have no overseas home, or spend less than 30 days in their overseas home in the same 90-day period.
- 3rd UK Test – Work full time in the UK. Similar to the third automatic overseas test, there is a separate calculation for working out whether an individual works full-time in the UK. This test is made more complicated due to the ambiguity over the period on which this test is applied.
4. The Sufficient Ties Test – this is the final test of the SRT and is only used if none of the previous tests apply. It looks at the number of ties to the UK an individual has and the number of days they spend here during the tax year. If they have enough days and enough ties, they will be a resident. Family, accommodation and work ties are pretty self-explanatory but there are two which need a little more explanation:
- 90-day tie – this looks at whether an individual has spent 90 days in the UK in either or both of the previous 2 tax years.
- Country tie – this is only applicable if the individual was resident in the UK in one or more of the previous three tax years. The individual will have a country tie if the UK is the country in which they spend the greatest number of days.
Domicile is more of a legal concept and is not defined by statute (to a certain extent). Individuals domiciled outside of the UK have the option of claiming the remittance basis. This allows them to not report any foreign income or gains on their UK tax return, as long as it has remained outside of the UK. The remittance basis is discussed further in this article.
Everyone must have a country of domicile, but only one. Factors that are taken into consideration to determine an individual’s country of domicile are; their place of birth, the location of their family and their long-term intentions. More simply, a person’s domicile is somewhere that they would call their true home, somewhere that they plan to return to even after a long period of absence. As long as it is their intention to return, that country would be considered as their domicile. It is when those intentions change, or an individual has been in the UK for a significant number of years, that their domicile status would come under question.
Initially, we would consider the three types of domicile:
- Domicile of origin – taken from your father at birth.
- Domicile of dependence – domicile of a child under 16 will follow that of their father.
- Domicile of choice – It is possible to establish a new domicile by severing ties with an old country and permanently settling in a new country.
As an example, if someone comes to the UK under an employment contract with the intention of returning to their home country, they would not be considered as a UK domicile. However, if they cut all ties to the their home country and they plan to retire in the UK, they would become a UK domicile.
However, changing domicile is not as straightforward as it sounds. Whilst there are no formal declarations that need to be made when you do this, HMRC may question a claim made on a tax return if there has been a change of domicile. The factors they would consider are:
- The long term intentions of the individual
- Their permanent residence
- Their business interest
- Their social and family interests
- Ownership of property
- The form of any Will they may have made.
No single factor from the list above is conclusive and establishing a new domicile will be assessed using a “balance of probabilities” approach.
One final factor, which is defined by statute, is the deemed domicile rule. If an individual meets either of the following two conditions they will be deemed to be a UK domicile for UK income and inheritance tax purposes, regardless of their intentions to leave the UK:
- If they were born in the UK and the UK is their domicile of origin, then they will be deemed to be domiciled here if they are resident in any tax year from 2017-18 onwards. This is the case, even if they have acquired a domicile of choice outside of the UK.
- If they have been resident of the UK for 15 of the previous 20 tax years.
Please note that this article should not be taken as tax advice. The information provided about may not be relevant due to unknown facts and circumstances. If you have any questions on the above, please do not hesitate to contact us directly.