Chapter 5 - Residence and Domicile

Question 1

Residence: status in any one tax year - What is domicile?

Answer 1

• Domicile: country an individual regards as permanent home

- Statutory residence tests introduced from 6 April 2013

Question 2

Automatically Not Resident in the UK

Answer 2

• In the UK fewer than 16 days in tax year
• Not resident for any of previous 3 tax years and in UK for fewer than 46 days in current tax year
• Left the UK to carry out full time work abroad, provided in the UK for fewer than 91 days in tax year, and fewer than 31 days in tax year are spent working in the UK

Question 3

Automatically Resident in the UK

Answer 3

Statutory test of residence. Test contains of three parts described

• In the UK for 183 days or more in tax year
• Only home is in the UK
• Carrying out full time work in the UK

Question 4

Sufficient Ties Test

Answer 4

• If automatic rules don’t apply
• Residence determined by sufficient ties test (5 points);
  o Spouse, civil partner or minor children resident in UK
  o Accommodation in UK made use of during year
  o Doing 40 or more days’ work in the UK during tax year
  o Spending more than 90 days in UK during each of previous two years
  o Spending more time in the UK than in any other single country
• A person who has been UK resident for previous 3 years is usually someone leaving the UK - for them all 5 of the UK ties are relevant
• A person who has not been resident will usually be someone arriving in the UK – for them only first 4 are relevant
• Residency is determined by number of days spent in UK against how many UK ties they have
• It is more difficult for someone leaving the UK to become non-resident than it is for someone arriving in the UK to stay a non-resident

Days in the UK Previously Resident Not Previously Resident
16 days to 45 Resident if four UK ties (or more) Automatically not resident
46 to 90 Resident if three UK ties (or more) Resident if four UK ties
91 to 120. Resident if two UK ties (or more) Resident if three UK ties
121 days to 182 Resident if one UK ties (or more) Resident if two UK ties

Question 5

Deeming Rule

Answer 5

• Applies where person:
  o Has three or more ties to the UK in tax year
  o Has been present in the UK on more than 30 days without being present at midnight
• qualifying days
  o Has been UK resident in one or more of previous three tax years
  o If all three conditions met, then deeming rule means that after first 30 qualifying
  days all subsequent days within the tax year are treated as days of presence

Question 6

Domicile

Answer 6

• Country that is natural home
• More permanent concept than residence
• Not possible to have dual domicile under UK law
• Domicile of Origin
  o Child takes father’s domicile in England and Wales/or mother’s if illegitimate
  o Child’s domicile follows parents until age 16
  o Wife’s domicile is independent of husbands

-Domicile of Choice
o Acquiring new domicile by moving to new country
o With intention of permanently living there
o Actions considered in determining domicile of choice: living there, expressed
intention to stay, buying a house in new country and disposing of property in domicile of origin, getting a job or establishing a business in new country, acquiring citizenship

• Deemed UK domiciled if resident in UK for 15 out of the last 20 tax years
• If born in UK, with UK domicile of origin, and return to UK and become UK resident
  having previously become domiciled in another country will be deemed domicile for Income tax and CGT straight away
  o Only deemed domicile for IHT under above rule if also been resident in UK at least
  1 out of previous 2 tax years
  o UK domicile - liable to IHT on worldwide assets
  o Non-UK domicile - liable to IHT on UK property only
  o UK domicile is kept for 3 years after emigrating and acquiring a domicile of choice
  o UK deemed domicile under 15 / 20 tax year rule kept for 6 tax years after leave UK for
  both income tax and CGT, 4 tax years for IHT
  o Individuals domiciled outside the UK who have a UK-domiciled spouse/civil partner
  can elect to be treated as UK domiciled for IHT purposes

Question 7

Liability to Tax of UK Domiciles

Answer 7

UK Resident

• Income tax on worldwide earned and investment income (whether or not brought into UK) 100% of income from foreign pensions is taxable
• CGT charged on worldwide gains (but, if become deemed domicile under 15/20 tax year rule and previously paid annual tax charge for any year prior to April 2017 can rebase overseas assets to market value on 5 April 2017)
• IHT charged on gifts of assets worldwide

Not UK Resident

• No UK income tax liability on earned income for duties outside UK
• No UK income tax on overseas investment income and gilts
• UK investment income generally taxable
• UK State Pension and other UK pension income taxable
• Income from UK property taxable
• Not normally liable to CGT unless temporary residents - except for UK residential property gains accrued post 5 April 2015 which are chargeable (PPR may apply) and gains on non-residential UK property since 6 April 2019
• IHT charged on worldwide gains

Question 8

Liability to Tax of Non-UK Domiciles

Answer 8

• Remittance Basis - taxed only on income/gains remitted to UK
• Income and gains are treated as if remitted to UK if:
  o Money or property is brought to UK for benefit of relevant person
  o The property is directly/indirectly derived from the income or gains  Exemptions include:
  o Personal effects
  o Assets costing less than £1,000
  o Assets brought back into UK for repair
  o Assets in the UK for a period of less than 275 days
• Annual Tax Charge
  o £30,000 charge for adults who have been UK resident for 7 out of last 9 years / who claim the remittance basis
  o £60,000 for individuals resident in the UK for at least 12 of the previous 14 tax years
  o Under 18’s - doesn’t apply or if unremitted gains are less than £2,000
  o If remittance basis claimed - no entitlement to personal allowance or CGT annual exempt amount
  o Charge is in respect of income and gains left outside UK and is in addition to tax
  paid on remittance

Question 9

Non-Domiciled Resident

Answer 9

• Income tax - employment income is fully taxable if duties performed in UK or employer is UK based (or both)
• CGT - automatically subject to CGT on disposal of UK assets
• Gains outside UK are taxed on remittance basis if claim made
• Where remittance basis not used - all worldwide gains liable to CGT
• IHT only on transfers of property within UK

Question 10

Non-Domiciled Non-Resident

Answer 10

• Income tax - liable on UK investment income, employment duties carried on within UK and income arising from property within UK
• CGT - not liable unless temporary non-resident (with exception of residential and non-residential UK property)
• IHT liable on gifts of assets situated within UK

Question 11

Self-Assessment

Answer 11

• Individuals responsible for determining own residence and domicile status
• Not necessary to obtain advance agreement from HMRC for non-residence or non-
  domicile status
• No return needed if overseas employment income less than £10,000

Question 12

Double Taxation Relief

Answer 12

• Most double taxation treaties lay down process for determining single residence status
• May be able to claim exemption (total or partial) from UK tax on some types of income from UK sources
• May also be able to claim exemption from CGT on disposal of assets
• CGT - double taxation treaties usually give relief by making the foreign tax a credit
  against UK tax, but if foreign tax is higher than the excess cannot be repaid

Question 13

Offshore Trusts

Answer 13

• Overseas trusts subject to UK income tax if UK resident trustee
• Overseas trust not subject to CGT
• Transfer of property into overseas trust is transfer of value and normal IHT rules apply
• Overseas trusts subject to local taxation in country of residence

Question 14

Overseas Tax Planning

Answer 14

• Leaving UK:
  o Double taxation treaties limit extent of being taxed in two countries
  o Recent cases have made it harder to establish non-residence in UK
  o Income tax - keep UK income to a minimum
  o IHT - subject to IHT unless non-UK domiciled
• Offshore investment planning:
  o Deposit accounts - move offshore
  o Gilts - interest paid gross if not UK resident
  o ISA - only subscribe whilst UK resident
  o Stocks and shares and OEIC/unit trust - no CGT if non-UK resident for 5 years
  o Held over gains - check none outstanding
  o Investment bonds - encash once received non-UK resident status
  o Letting property - rental income on UK property paid to non-residents is taxed at 20% (non-residents can receive gross)
• Moving to UK
  o UK domiciled - liable to UK tax on worldwide income on arrival
  o Non-UK domiciled - only income arising in UK definitely subject to UK tax o CGT for UK domiciles - consider realising gain before arriving in UK
  o CGT charged on gain arising since acquisition and not date arrived in UK o Non-UK domiciles - only taxed on UK gains
  o Deemed domicile after 15 tax years of residence
  o Whilst not UK domiciled transfer overseas assets into trust - ‘excluded property’/not subject to IHT even if becomes UK domiciled - usually discretionary trusts