Whether you have chosen to move to the UK and intend to stay or have decided to move out of the UK overseas, residence and domicile are critical in understanding your tax position.

The tax landscape over recent years has changed considerably when determining an individual’s residence and domicile status. It is now more important than ever to have a full grasp of the rules and understand their application to each client’s circumstances.

Residence

Whilst an individual’s residence position can have a direct impact on their domicile position under the new rules, generally speaking residence is reviewed on an annual basis and impacts the income tax and capital gains tax payable.

From April 2013 the statutory residence test was introduced to measure whether an individual was resident in the UK or not. The previous rules simply looked at the number of days spent in the UK. The rules introduced in 2013 now consider ‘ties’ to the UK and overseas. If an individual’s situation is straight forward and they are in the UK for over 183 days a year with their home here, they will likely be UK resident. Where they are in the UK fewer than 16 days or work overseas and spend fewer than 91 days in the UK, with less than 30 working, they will likely be automatically non-UK resident. However, if an individual is not automatically UK resident or non-UK resident, the sufficient ties tests will apply. These tests look at a combination of how many days are spent in the UK together with ties such as family, accommodation and businesses in the UK.

With residency, there are three categories in which an individual could fall:

1. Non-UK resident: only pay UK tax on UK income, not foreign income.
2. UK resident and UK domiciled: pay UK tax on all income whether it’s UK or abroad.
3. UK resident but not UK domiciled; might not have to pay UK tax on foreign income and gains.

If an individual falls within category 2, they are taxed on the arising basis; on all income as it arises. However category 3 individuals will need to consider the amount of foreign income and gains and what if any, is remitted to the UK to determine their position.

Domicile

Domicile is something far more permanent than residence, this is the place a person calls home. It is inherited at birth; domicile of origin, and after the age of 16 this can be changed.

In addition to this, there is also the concept of deemed domicile. Prior to 6th April 2017, if an individual was resident but not domiciled in the UK under common law, the rules meant that they were only liable to pay UK tax on income and gains that arose in the UK and could use the remittance basis.

However, from 6 April 2017 new deemed domicile rules came into force which mean if an individual is not domiciled in the UK under English common law, they are now treated as domiciled in the UK for all tax purposes if they:

• have been UK resident for 15 out of the last 20 years

• were born in the UK, the UK was their domicile of origin; were resident in the UK for 2017 to
2018 and later years (formerly domiciled rules)

If the new deemed domicile rules are met the remittance basis can no longer be claimed and an individual will be assessed on their worldwide income and gains on the arising basis. The deemed domicile rules also impact Inheritance Tax. There were previous deemed domicile rules for Inheritance Tax only and these applied if an individual was UK resident for 17 out of the last 20 years.

If an individual is neither UK domiciled or deemed domiciled then they will only be subject to UK Inheritance Tax on their UK situ assets. From 6 April 2017, this also includes the value of shares in an overseas company that owns UK residential property, which previously used to be sheltered from Inheritance Tax.

What is the impact on overseas trusts?

The new deemed domicile rules also have a big impact on overseas trusts. Where an individual is not UK domiciled under common law or the new deemed domicile laws, a trust set up with excluded property i.e. overseas assets, is outside of the UK Inheritance Tax regime. Therefore for many, the deemed domicile rules may prevent future planning with overseas trusts from falling outside of the Inheritance tax estate. Those looking to undertake planning would need to do so before they become deemed domiciled and seek advice to understand these detailed rules.

For income tax and capital gains tax a trust is generally dictated by the residence position of the beneficiaries and trustees. The Inheritance tax position is that of the settlor. Measures can be taken to protect such trusts so that only income tax and capital gains tax are payable on the settlor should they receive a distribution and there are conditions on ensuring this protection is not lost.

Non-resident landlords and indirectly held UK property

It is also worth noting that from April 2015 non-resident individuals became subject to UK capital gains tax on the sale of a residential property situated in the UK. Previously, as long as the individual was not UK resident in the UK for 5 years after the sale of any UK asset, they were not subject to capital gains tax.

This change was to promote fairness compared with UK landlords. The rules do provide the option of rebasing the cost of the property to the market value at April 2015, which means any property purchased some time ago would benefit from an uplifted based cost.

The capital gains tax rates for selling residential property is 18% and 28% as opposed to 10% and 20% for all other assets.

The rules were further extended and from April 2019 this legislation includes commercial property and indirect disposals of UK property such as the sale of shares in a company that owns UK property. Again similar rebasing rules apply to the cost of commercial property and base cost of shares as at April 2019.

There may be occasions were rebasing is less beneficial than the standard capital gain calculation, i.e. if there is a loss, and therefore an election can be made.

Disposals must also be reported within 30 days of the conveyancing even if a UK self-assessment tax return is already completed, and in April 2020, this measure will be extended to UK resident landlords also.

Changes in April 2020 also extend to non-Resident corporate landlords. Non-UK Resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present.

A non-resident company that has a period of account that straddles 5 April 2020 will be required to submit two tax returns, one under income tax for profits arising up until 5 April 2020 and one under corporation tax in respect of profits arising from 6 April 2020.

Should I stay or should I go?

If your clients are looking to leave the UK, return to the UK, spend longer in the UK, spend periods of time abroad or work overseas, they will need to understand how the rules impact them.

The extension of changes to existing rules require far more discussion with clients, importantly to understand the full intention of their plans, and where they call their home.

This blog provides an overview of a significant area of tax and the detail should be reviewed and understood, when advising clients.

The tax team at Ellacotts have a wealth of experience in supporting clients with understanding their Residence and Domicile status and would be happy to support any clients who may need advice in this area.

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