Residence and Domicile

Question 1

What is the three-part statutory test of residence to determine someone’s residency status?

Answer 1

1. The automatic overseas test
2. The automatic residence test.
3. The sufficient ties test.

The tests are applied in order. At the end of each test, if there isn’t a definitive answer as to whether someone is resident or not, we move on to the next test.

Question 2

Definition of Residence?

Answer 2

‘Residence’ is defined as an individual’s status in any one tax year, so from 6 April one year to 5 April the next.

Question 3

What is the automatic overseas test and how may sub tests are there?

Answer 3

Tests to see if there is anything about the individual that absolutely makes them ‘non-resident’.

If an individual meets any one of the 3 tests they will automatically be regarded as being non-UK resident.

Test A, B, C

Question 4

What is The automatic overseas test, test A

Answer 4

Test A

An individual was resident in the UK for one or more of the previous three tax years, but

spends fewer than 16 days in the UK in the relevant tax year, e.g.

Question 5

What is The automatic overseas test, test B

Answer 5

Test B

An individual was not resident in the UK for any of the three preceding tax years of the relevant year, but

spends fewer than 46 days in the UK in the relevant tax year,

Question 6

What is The automatic overseas test, test C

Answer 6

Test C

An individual works full-time overseas throughout the relevant tax year without any ‘significant breaks’, but

is in the UK for fewer than 91 days in the relevant tax year, and

fewer than 31 days in the relevant tax year are spent working (defined as more than 3 hours a day) in the UK,

Question 7

Outline the circumstances in which Oscar would be treated as automatically non-resident in the UK if he moves to France.

Answer 7

• Spends fewer than 16 days in the UK in the tax year
• and was UK resident for one or more of the previous three tax years.
• Spends fewer than 46 days in the UK in the tax year
• and was not UK resident for any of the three previous tax years.
• Is working full time overseas
• spending fewer than 91 days in the UK
• and less than 31 days working in the UK.

Question 8

What is the automatic residence test and how many tests are there?

Answer 8

Tests to see if there is anything about the individual that absolutely makes them ‘resident’.

3

Question 9

What is the automatic residence test, test 1?

Answer 9

They spend 183 days or more in the UK in the relevant tax year.

If so, they are resident.

Question 10

What is the automatic residence test, test 2?

Answer 10

They have a home in the UK.

They will meet this test if there is at least one period of 91 consecutive days (of which at least 30 days fall within the tax year) when they have a home in the UK in which they spend a sufficient amount of time and either they:

Have no overseas home; or

Have an overseas home in which they spend no more than a permitted amount of time

Question 11

What is the automatic residence test, test 3?

Answer 11

They work full time in the UK for any period of 365 days, with no significant break from UK work.

Only part of this 365-day stretch needs to fall in the tax year in question.

Question 12

What is the sufficient ties test and what is meant in respect of an arriver or leaver?

Answer 12

Sets out five potential ties to the UK which are considered, together with the number of days spent in the UK, to determine a residency status.

If the individual was non-UK resident for any of the preceding 3 tax years, they need to consider the first four ties only (as they are considered an ‘arriver’).

If the individual was resident in the UK for one or more of the preceding 3 tax years, they will also need to consider the fifth (as they are considered a ‘leaver’).

Question 13

What are the five connecting ties?

Answer 13

Family - Having a spouse, civil partner or minor children in the UK.

Accommodation - having accommodation in the UK which is available for continuous period of at least 91 days and at least one night is spent there.

Substantive work in the UK - Working 40 days or more in the UK.

UK Presence in last two tax years - spending more than 90 days in either of the previous 2 tax years.

More days spent in the UK in a tax year, than any other country - This applies to LEAVERS only and is designed to catch leavers who do not take up residence in any other country following a period of UK residence.

Question 14

What is an individual’s domicile?

Answer 14

A person’s domicile is decided under general law, which means it is interpreted according to previous rulings of the courts.

Question 15

.What are the four types of domicile?

Answer 15

Domicile or Origin

Domicile of Dependence.

Domicile of Choice.

Deemed Domicile.

Question 16

What are the IHT implications for those deemed domicile in the UK and outside of the UK?

Answer 16

Those domiciled in the UK are liable to IHT on their worldwide property.

Those non-UK domiciled are only liable to UK IHT on their property situated in the UK.

Question 17

When are individuals deemed domicile?

Answer 17

In general, individuals are deemed UK domicile for IHT purposes if they have been resident in the UK for at least 15 out of the last 20 tax years.

Individuals who have emigrated from the UK will keep their UK domicile for at least 5 years.

It will probably be longer than this in reality, as the 5-year period only starts when a new domicile of choice is acquired and, as we have seen, that is not necessarily easy to do quickly!

Question 18

How much can a non-dom spouse offset against their estate for IHT?

Answer 18

£325,000

Question 19

Explain how Sophia could elect to be treated as domiciled in the UK for Inheritance Tax purposes and the financial impact of this.

Answer 19

• She would need to make the election to HM Revenue & Customs.
• It would take effect from the date of making it,
• but can be backdated by up to seven years or the date of their marriage, if later.
• She could also make the election after Jonah’s death, provided it is within two years.
• Once the election is made, the spouse exemption will be unlimited and the estate passes to her free of IHT.
• She can also benefit from the transferrable nil rate band.
• Her worldwide assets would become liable to IHT.
• In her case, this may increase their overall liability to IHT.
• Once made, the election cannot be revoked.

Question 20

What planning option exists to protect overseas assets if a non-dom wishes to elect to become UK domiciled.

Answer 20

Excluded property trust.

It is an offshore discretionary trust that would hold the non-UK assets and protect them against UK IHT on death. It still works, even if after it has been set up the individual becomes domiciled or deemed domiciled in the UK.

It sits outside of the relevant property regime, so it does not count as a chargeable transfer and doesn’t have any periodic or exit charges.

The settlor can also include themselves and their family as beneficiaries without any gift with reservation rule implications.

Question 21

There are two main bases of being assessed for UK, what are these?

Answer 21

Arising basis:

UK income and CGT on all incomes and gains, wherever it comes from.

Remittance basis:

UK income and CGT on all incomes and gains, from the UK, but for non-UK income and gains, they’re only taxed if you bring them to the UK.

think…..eric tracey and NZ.

Where an individual is non-domiciled but UK tax resident, they pay income tax and CGT on their UK income and gains. For any non-UK income or gains in excess of £2,000, individuals can choose whether to operate under the arising basis or elect for remittance basis.

Question 22

What does choosing arising basis afford you?

Answer 22

The arising basis is where tax is paid as it would be for any UK domiciled and resident individual on their worldwide income and gains, with the benefit of being able to use all the normal personal allowances and exemptions.

Question 23

For which individuals is the remittance basis now not an automatic option for, and what are the conditions if they select remittance basis?

Answer 23

1. Adults who have been resident in the UK for at least 7 of the previous 9 tax years.
   To continue being able to pay tax via the remittance basis, the individual needs to pay an annual tax charge of £30,000
2. Adults who have been resident in the UK for at least 12 out of the previous 14 tax years.
   Tax charge is £60,000
3. Adults who have been resident in the UK for at least 15 out of the previous 20 tax years.
   will be treated as deemed domicile (as we saw earlier) and they will also not be eligible for treatment under the remittance basis.

Question 24

Outline the impact of no longer claiming the remittance basis on one’s ongoing tax affairs.

Answer 24

• As a result she will be taxed on worldwide income and gains on the arising basis.
• Her worldwide assets will be subject to UK IHT in the event of her death.
• The full spouse exemption for IHT will be available.
• Double taxation agreement may provide credit to ensure tax is not paid twice.

Question 25

Sylvain, Larry’s eldest grandchild, was born and is domiciled in France. He has been resident in the UK since April 2009 and he has no plans to return to France, although he retains some investments there which he inherited from his late father.

Explain Sylvain’s domicile status in the tax year 2024/2025 and the effect this will have on his UK IHT position.

Answer 25

• Sylvain will become deemed UK domiciled;
• as he will have been resident in the UK for 15 out of 20 tax years.
• he will be subject to UK IHT;
• on his worldwide assets.

Question 26

Explain the IHT benefits if Sylvain transfers his French investments into an Excluded Property Trust before the tax year 2024/2025.

Answer 26

• If Sylvain transfers his French assets into an EPT before he becomes deemed UK domiciled.
• The trust assets will not be liable to UK IHT on Sylvain’s death;
• even after he becomes deemed UK domiciled.
• The transfer of assets into the EPT will not be a transfer of value for IHT purposes.
• There will be no periodic or exit charges.
• Sylvain can be included as a beneficiary without gift with reservation implications.

Question 27

Astrid has always been domiciled in Norway and has been a UK resident since 2008. Astrid has claimed the remittance basis of taxation since she arrived in the UK.

Explain why Astrid will no longer be able to claim the remittance basis of taxation in subsequent years and, outline the impact of this change on her ongoing tax affairs.

Answer 27

• She has now been resident in the UK for at least 15 out of the last 20 tax years.
• She will now be deemed domiciled in the UK.
• As a result she will be taxed on worldwide income and gains on the arising basis.
• Her worldwide assets will be subject to UK IHT in the event of her death.
• The full spouse exemption for IHT will be available.
• Double taxation agreement may provide credit to ensure tax is not paid twice.

Question 28

Astrid and Ian have been advised that they should contact HM Revenue & Customs and nominate one of their properties as their main residence.

Explain briefly why Astrid and Ian must make this nomination.

Answer 28

Married couples/civil partners can only have one main residence for the purposes of Private Residence Relief.

Question 29

State the factors they should take into account when selecting which of the properties to nominate.

Answer 29

• Where they are going to live at retirement.
• Whether domicile will change?
• The gain or loss each property is likely to make between the date of their marriage and the point at which a property might be sold.
• Their willingness to place property into joint names for sale.
• Any CGT exempt amounts available/any registered losses available to bring forward.
• Their respective tax positions.

Question 30

Outline the conditions that must be met for the nomination to be successful.

Answer 30

• A written nomination to HMRC must be made, signed by them both.
• It must be made within two years of their marriage/by 6 February 2025

Question 31

In the event that they do not make a nomination, identify eight factors HM Revenue & Customs will take into account in determining which property they will regard as the couple’s main residence.

Answer 31

• Where do they spend the majority of their time?
• Where are they registered to vote?
• Where are their places of work?
• How is each residence furnished?
• Which address is used for correspondence with banks/credit cards etc?
• Where are they registered with a doctor/dentist?
• Where are their cars registered/insured?
• Which address is the main residence for Council Tax?