Residence and domicile can be confusing subjects for the expat. Here we explain how they work in regard to UK taxation.

Residence

The rules on achieving non-resident status are really quite clear cut for someone who is working abroad. In a nutshell, you must meet the following conditions:

(a) You must be engaged in continuous full-time overseas employment for a minimum period of one complete UK tax year, and

(b) You must live abroad and maintain a settled domestic existence there, having ceased to live and base yourself in the UK, and

(c) You must spend less than 183 days in the UK during any complete tax year of non-resident status, and

(d) You must spend less than 91 days in the UK on average per tax year since departure, on a rolling basis of up to four years.

A 'day' for these purposes is counted whenever you spend a midnight of physical presence in the UK. This is unless your sole reason for being in the UK is to transit between two other countries.

The availability of UK accommodation is not taken into account for someone who works abroad, however it is important to show that you have moved abroad and that you live there, rather than simply continuing to live in the UK and commuting to and from your overseas assignment on a regular basis.

You nominate a claim for non-resident status by submitting form P85, though in most cases a tax return for the year is also required.

Once non-resident, which generally applies from the day after your nominated date of departure from the UK, you become exempt from UK tax on all non-UK source income, including your employment earnings. You retain a charge to UK tax on income arising from within the UK (bank interest, share dividends, pensions, rental income, trading income etc).

If your absence from the UK lasts for less than five complete tax years, you remain fully within the grips of UK capital gains tax. If your absence from the UK lasts for at least five complete tax years, you become exempt from CGT.

Domicile

In general terms, domicile means a person’s natural homeland. Whereas residence status is determined by UK tax legislation and HMRC practice, domicile is much more fundamental, being a concept of general law.

No-one can be without a domicile, even if stateless, and no-one can have more than one country of domicile at any one time. Domicile falls into two categories:

Domicile of origin is determined by law at birth. A legitimate child takes his or her father’s domicile as their own domicile of origin; an illegitimate child takes the mother’s domicile. Domicile or origin is for life and never changes. It may, however, be superseded by a domicile of choice.

Domicile of choice can come about if a person adopts some other country as their homeland. Precisely what one has to do to establish a domicile of choice is not set down in law. The major criterion will be the making of a home in a new country, with the intention of remaining there permanently or indefinitely. Other factors may include taking up citizenship, making a will, voting and educating one’s children there.

As a result of these rules, it is possible for a British expatriate to work outside the UK continuously for 20 years or more and still be regarded as UK domiciled. Much depends on whether the expatriate moves about the world or settles in one place.

For many, this will come as an unpleasant surprise, as although you may escape liability on overseas income and, eventually, on capital gains, full exposure to inheritance tax continues.

Source:

The Fry Group