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UK residence

UK residence is used to determine whether income and capital gains are subject to UK tax. There is a statutory residence test (SRT) for individuals which will determine if someone is UK resident for a particular tax year.

Typically someone will either be UK resident or non-resident for the complete tax year. However, the split year treatment can apply for example, if someone arrives or leaves the UK permanently during the tax year.

An individual will always be UK resident if they spend 183 days or more in the UK in the relevant tax year. The SRT rules are complex but give certainty in relation to someone’s UK tax status. In addition to the number days spent in the UK they also include a number of factors which connect an individual to the UK.

HMRC guidance on SRT can be found here.

Dual residence

It is possible to be resident for tax purposes in more than one country at the same time. This is known as dual residence.

Someone who is resident in the UK and another country may consequently be liable to tax on worldwide income in both countries. However double taxation agreements may prevent you from being taxed twice on the same income.

Double taxation agreements (DTAs)

The UK has DTAs with many countries to prevent dual taxation on the same income and gains. DTAs specify which country has taxing rights over an individual, and, if they both have such rights, which one takes priority.

The agreements may set down different rules for different types of income. They may also agree to exempt some income or gains from tax or allow a set-off of tax paid in one country against tax due in the other.

Domicile

Domicile describes the country that you consider to be your home or the country where you have your permanent home. It is not the same as nationality, citizenship or residence.

Domiciled is important as it determines whether tax is applied to worldwide or just UK income and assets.

Types of domicile

Individuals acquire a domicile of origin at birth. This is normally the domicile of their father and not necessarily the country of their own birth. They will maintain this domicile until they are entitled to a domicile of choice, which cannot be before age 16.

If, however, their father changes his domicile in the meantime, the individual automatically acquires the same domicile (known as a domicile of dependency) in place of their domicile of origin.

An individual can change their UK domicile status and adopt a domicile of choice. To do so, they must leave the UK and settle in another country. Strong evidence will be required of an intention to live there permanently or indefinitely. Living in another country for a long time, although an important factor, is not enough in itself to prove a new domicile.

Deemed domicile

Someone will be deemed domiciled in the UK for all taxes once they have been resident in the UK for  at least 15 of the 20 tax years immediately before the relevant tax year.

Income and capital gains

An individuals’ residence and domicile position impacts on how tax in the UK is applied. The table summarises the UK tax position;

UK resident and UK domiciled individuals are taxed on the arising basis. Individuals who are UK resident but not UK domiciled may have a choice between being taxed on the arising or remittance basis.

Arising basis

UK Resident and domiciled individuals are taxed on what is known as the ‘arising basis’. Arising basis of taxation means UK tax is assessed on all worldwide income as it arises and on gains as they accrue.

An individual will retain their personal allowance for income tax and annual exempt amount for capital gains.

Remittance basis

Individuals who are UK Resident and not UK domicile can chose how to be taxed on their foreign income and gains.

One option is to be taxed in the UK on worldwide income and gains each tax year under the ‘arising basis’.

The other option is known as the ‘remittance basis’ of taxation. This only applies to UK residents who are not UK domiciled.  Where the remittance basis is chosen, only UK income and gains will be subject to tax. 

All foreign income and gains are free of UK tax provided it's not brought back into the UK. This comes at a cost because there may be a remittance charge to pay to continue not being taxed in the UK on foreign income and gains.

From 6 April 2017 the remittance basis charge is:

• no charge for periods of UK residence up to 7 years
• £30,000 for non-domiciled individuals who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year
• £60,000 for non-domiciled individuals who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year

Individuals that elect for the remittance basis will lose their UK personal allowance and will be unable to claim the CGT annual exempt amount.

The rules are complex. HMRC guidance on the remittance basis can be found here.

Temporary non-residence

There is anti-avoidance legislation to prevent someone becoming non-UK resident for a short period, realising a gain which would not be subject to UK CGT, and then returning to the UK. An individual who becomes non-UK resident will still be liable to UK CGT if:

• the asset disposed of was owned before the person departed from the UK, and
• the person was UK resident for any part of at least four out of seven years before leaving the UK, and
• the individual becomes UK resident before five complete tax years have elapsed since the date of departure.

These rules do not apply to assets that are bought and sold whilst not UK resident. So investments bought after UK residence ceased, and sold whilst non-resident, will not be taxed on return to the UK after a period of temporary non residence. Similar temporary non-residence rules also apply to income which has an irregular nature. This is to prevent chargeable gains from investment bonds and pension income withdrawn using pension freedoms from being taken during a period of short term non-residence to escape UK tax. These forms of income would also be taxable upon return to the UK within five tax years.

Residential property and non-residents

Non-resident capital gains tax (NRCGT) applies to gains arising on the disposal of UK residential property by non-UK resident individuals.

Only gains accruing after 5 April 2015 are chargeable. Where property was owned before this date the acquisition cost is rebased to the market value at 5 April 2015.

Alternatively, taxpayers have the option either to time apportion the gain over the period of ownership or compute the gain or loss over the whole ownership period if that is beneficial.

Inheritance tax

Domicile status directly impacts the scope of UK IHT on your worldwide assets. In broad terms, the following applies relevant to your domicile position.

Gifts to a non-domiciled spouse

When a UK domiciled (or deemed domiciled) individual makes a gift to their non-UK domiciled spouse or civil partner, the IHT spouse/civil partner exemption is limited.

Alternatively, the non-UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes. This election allows them to use an unlimited spouse exemption.

Limited spouse exemption

The limited exemption is a lifetime cumulative amount, equal to the standard IHT nil rate band.

Unlike PETs and CLTs which fallout of the cumulative total for IHT after seven years, gifts to a non-dom spouse will continue to use up the exemption whenever they were made. Gifts which exceed the lifetime exemption will be PETs.

The limited spouse exemption does not apply if:

• both the transferor and their spouse or civil partner is domiciled outside the UK. In this situation, each would only be subject to IHT on their UK based assets and the spouse/civil partner exemption would be unlimited in respect of the transfer of any UK assets, or
• the transferor is domiciled outside the UK but the spouse or civil partner is domiciled in the UK. Again, the transferor in this situation would only be subject to IHT on their UK based assets, for which they would have an unlimited spouse/civil partner exemption.

Domicile election

A non-UK domiciled spouse/civil partner can make an election to be treated as UK domiciled. This would entitle them to the full unlimited spousal exemption. However, the cost to the non-UK domiciled spouse would be that the election would bring their overseas assets into the UK IHT net.  It's also possible for the non-UK domiciled spouse to make the election in the two years after the death of the UK domiciled spouse.