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Domicile and Residence
In the UK whether someone pays income or capital gains tax depends on whether they are resident in the UK in the tax year the income or gain arises, whereas the rules surrounding Inheritance tax are governed by the domicile of the deceased person. It is possible to be resident but not domiciled in the UK and vice versa! It is also possible to be subject to inheritance taxes in other countries at the same time as being liable for them to the UK authorities.
The approachable, practical team at JMW can guide you through the maze of rules to help you ensure that you are paying the right taxes in the right countries but not paying too much. We can also help you simplify your affairs so as to minimise the headache of administration as well as making sure that your assets are organised in such a way as to minimise tax both here and abroad.
We work alongside your existing advisers or can recommend advisers that we regularly work within jurisdictions from India, California, and Dubai to Spain, France, and most of the EU.
If you are confused as to how the rules of domicile and residence affect the taxes you pay then contact JMW’s experienced team on 0345 872 6666 or complete our online enquiry form to talk through how the rules apply to your situation.
What is Domicile?
At a basic level, domicile is the country that you have your permanent home. You will only ever have one domicile at any given time and you acquire this at birth. This does not necessarily mean that the country you are born in is your domicile. Instead, for legitimate children, it is usually determined by the father’s or the mother’s for illegitimate children. For example, if you were born in the UK and your father/mother was domiciled in France, you would acquire a French domicile.
Your domicile will remain with you until the age of 16, where it will then be determined either by choice (i.e. the country you choose to settle in permanently) or by legal dependence (i.e. marriage). To change your domicile, the following will be taken into account by the relevant authorities:
- The reason you wish to live in the country
- Whether you have permanent residence or own property
- Your business interests
- Your social interests
- Your will
What is Residence?
Generally speaking, your residence is the country where you live regularly. Unlike domicile, you can have more than one country of residence; this is known as dual residence. To be a resident of the UK, there is a Statutory Residence Test (SRT) and it primarily determined by the amount of time you spend in the UK during a tax year.
The Difference Between Domicile and Residence
In the UK, the type of tax you pay differs depending on your domicile and residence. Your domicile determines the Inheritance Tax (IHT) you pay, while your residence in the UK and income or financial gain earned during the tax year determines the payment of Income Tax or Capital Gains Tax.
Paying Inheritance Tax
If you are domiciled in the UK, you will pay UK IHT. However, if you are not domiciled in the UK, IHT will need to be paid if at the date of your death:
- You were domiciled in the UK within the three years immediately before your death
- You were resident in the UK for Income Tax purposes for 15 out of 20 years prior to your death
Whether or not you are domiciled in the UK, it will impact the assets in which IHT applies. If you are domiciled in the UK, IHT applies to your worldwide assets, while those who are not domiciled in the UK, IHT applies only to assets within the UK.
Should you pass on assets to a non-UK domiciled spouse or civil partner, they will be limited to the Nil Rate Band when paying IHT.
Paying Income Tax and Capital Gains Tax
When you are a UK resident, all your worldwide income and gains will be taxable according to taxation laws in the UK. This means that even if your income and gains from another country have been taxed in that country, they will still be taxable in the UK. However, there is relief available for paying foreign tax.
If you have dual residence and the UK has a double taxation agreement (DTA) with the other country, you will need to determine the country in which you will pay tax.
Why Choose JMW?
The approachable and practical team at JMW can guide you through the maze of rules to help you ensure that you are paying the right taxes in the right countries and not paying too much. We can also help you simplify your affairs to reduce the headache of administration as well as make sure that your assets are organised in a way to minimise tax both here and abroad.
Our services include:
- Providing advice for UK and non-UK domiciled individuals and residents
- Helping individuals establish their domicile or residential status
- Advising on the payment of IHT, Income Tax and Capital Gains Tax
- Setting up, restructuring and winding up offshore trusts and company structures
We are able to work alongside your existing advisers or can recommend advisers in many jurisdictions across the world, including Europe, India, United Arab Emirates and the USA.