Do you know your residence from your domicile?
Written by Carl Turner on June 26, 2014.
There is much confusion amongst expats about the difference between residence and domicile. Given that your country of residence and country of domicile can have serious repercussions regarding your status for income tax, capital gains tax (CGT) and inheritance tax, it is pretty important to get to grips with it. Where you reside and where you are domiciled will be key to your ongoing financial planning, and also to your estate planning.
Residence is your legal status in any one tax year. If you are deemed to be resident in the UK, you will be liable for UK income tax and CGT. If you move from one country to another, your residence status changes, so the very fact of becoming an expat will change your country of residence, although for some people who travel regularly in and out of the UK, the issue becomes more complicated.
Since 6th April 2013 HM Revenue and Customs has introduced a Statutory Residence Test to make it easier to determine your country of residence. The questions asked include how many days you spend in the UK over the year, where you have a home and your family ties. In most cases, the test will give a clear cut answer as to whether or not you are resident in the UK for tax purposes.
Domicile is less simple. Your country of domicile is deemed to be your permanent home and it is pretty difficult to change your country of domicile. If you emigrate to a new country with the intention of permanently living there then that could be considered a change of domicile, although it is possible to live abroad for many years without acquiring domicile in your adopted home. It is worth noting that where you consider to be your permanent home may not be where HMRC deems to be your permanent home and if a disagreement arises, the onus is on you to prove that you are domiciled outside the UK.
In fact, many UK expatriates mistakenly think that they are not domiciled in the UK. As a result, they do not realise that their assets will be subject to UK inheritance tax (IHT) on their death. Given that this is charged at a rate of 40% for any assets which are valued at over the £325,000 IHT threshold, and that assets passed to a spouse are exempted from IHT only if both spouses share the same domicile status, you can start to see why the issues of residence and domicile are extremely important.
HMRC have attempted to simplify the issue of domicility recently to minimise the number of court cases arising from disputes between individuals and HMRC. If you were resident in the UK for 17 out of the previous 20 years before your death, you will be deemed domiciled in the UK for IHT purposes regardless of where you lived and paid taxes on your death. However, for many expats, this remains a complicated issue which is why it is imperative to take professional advice regarding domicile. A mistaken assumption could cost you, or your heirs, dearly.