Residency and Domicile

Why They Matter

They matter simply because they determine where you need to pay tax and also how much tax you will have to pay

RESIDENCY

An individual will always be treated as resident in the UK for a tax year if caught under either of the following rules:

• The six-month rule, i.e. the individual is present in the UK for 183 days or more during the tax year.
• The three-month average rule, where the individual is present in the UK for an average of 91 days or more per annum measures over a period of four tax years

Spain also operates the 183 day rule but not the 90 day rule. Spain’s tests include however where you have your “main residence” and then finally where your family reside.

From 6 April 2008, any day where an individual is present in the UK at midnight counts as a day spent in the UK for the purpose of the above residency tests. So, days of arrival are counted ,but days of departure are not counted.

As highlighted in the cases of Shepherd v HMRC and Robert Gaines- Cooper v HMRC where an individual has not left the UK for a settled purpose, day counting is irrelevant as HM Revenue and Customs (HMRC) are likely to view that individual as remaining UK-resident.

These rules are not set in law and act as a guideline only. Each jurisdiction will apply their own ruling depending on the individual circumstances.

Wherever you are resident determines where you pay tax, including income tax, capital gains tax and also Inheritance Tax. If you are a non UK resident you may escape UK tax on income outside the UK but will still have a liability to some UK tax on direct income (salary, business profits, state pension). There are though some schemes and allowances which can reduce this burden for non UK residents. A crucial point is that each country has its own tax allowances and reliefs and what may be heavily taxed in the UK may not be in Spain.

ORDINARILY RESIDENT

The definition of ordinarily resident is not in any UK statutory provisions. It is a vague concept relating to an individual’s potential liability to UK capital gains tax.

Even if you are non UK resident you may still be liable to CGT under the concept of Ordinary Residence.

On leaving the UK you will be classified as UK Ordinarily resident unless your move away is seen as permanent which usually means an intended move away of three years or more.

If an individual can show that they are non UK resident then income outside the UK can escape UK tax although worldwide capital gains will still be taxed in the UK.

If a person is not Ordinarily Resident then capital gains will be taxed in their new country of residence.

A major factor in deciding this is usually the right to occupy property in the UK which is already owned and also, crucially, the pattern of use.

Most other countries have not adopted this concept;

MARRIED COUPLES

The residence status of married couples is determined separately in the UK; it does not have to be the same as the spouse.

THE DATE OF NON-UK RESIDENCE

You are normally regarded as becoming non-resident the day after you leave the UK, even though this may be in the middle of a tax year. The UK tax year starts on 6 April and ends the following 5 April, whilst the Spanish tax year is the normal calendar year. Capital gains tax in the year of your departure from the UK is treated differently and will be taxed in the UK.

Capital gains tax remains due on UK assets owned at the date of departure and sold while overseas, unless you remain overseas  for five complete tax years. If you resume UK residence earlier, UK capital gains tax will be charged in the year when you resume UK residence. You do not have to wait for the sixth year before disposing of any assets; you can dispose of the asset in the first year of complete non-UK residence.

You should wait to sell your assets in the UK tax year following your departure from the UK. Where you have been non resident for five clear UK tax years, in the year of return you will be treated as non-resident and not ordinarily resident up to the day before you return to the UK. “Split year” treatment will apply for capital gains tax purposes where you have been out of the country for five years..

Domicile

The concept of domicile is crucial when it comes to both inheritance tax and overseas tax planning.
Nationality is not necessarily the same as domicile.
You are normally domiciled in the country you regard as your home – not where you happen to be temporarily living.


Domicile

Domicile is a complex concept in law but essentially there are four types of domicile acknowledged in the UK: domiciles of origin, dependency, choice and also deemed domicile


Domicile of origin

This is determined at birth and is inherited from ones father regardless of where one is actually born. This domicile remains throughout life unless one elects another domicile of choice or is considered to have done so.


Domicile of dependency

This term is now obsolete although is still applied to children under the age of 16, an donly when there is a change to the parents domicile (mothers domicile in the case of unmarried parents).


Domicile of choice

Whatever ones domicile of origin, an alternative domicile can be chosen. A domicile of choice is acquired where one resides in a particular country with the express intention of remaining there permanently


Deemed domicile

This affects those who live in the UK for a long period of time without acquiring the domicile of choice here. Once a person has lived in or out of the UK for 17 out of the last 20 years one is deemed domicile or not for IHT purposes only.

For foreign domiciliaries , their own liability to UK Inheritance Tax is limited in relation to their UK assets. Their assets in other countries will be taxed under the tax regimes of those countries and/or the country of their domicility. However, once deemed domicile is acquired, their worldwide assets become subject to UK IHT.

IHT could end up being paid twice – once in the country of domicile and in the UK. Double taxation treaties do exist although Spain and the UK reach this agreement through Unilateral Relief.

It is important to note that everyone has their tax free allowance, regardless of their domicility.  This allowance currently stands at £300,000 plus £55,000 allowance. This caters for assets being left by a UK domicile to a non UK domicile. Amounts above this are taxed at 40%.

Domicile of 1st to die	Domicile of Survivor	Marital Status	Personal Allowance £300,000	Full Spousal Exemption	£55,000 Spousal Exemption	Amount Tax-free on 1st death
UK	UK	M	Yes	Yes	No	All
UK	Non-UK	M	Yes	No	Yes	£355,000
Non-UK	UK	M	Yes	Yes	No	All
Non-UK	Non-UK	M	Yes	Yes	No	All

The crucial issue for those who live in Spain is that succession laws are different in Spain and domicility allows an individual to apply their own countries laws in relation to disposal of their assets. In the UK an individual has the right to dispose of assets on death in whichever manner he or she chooses. In Spain this is different where a pre-ordained amount or percentage must go to certain individuals.

If there is a case that you have retained domicility of the UK even though you have been non resident for a number of years then it is possible that your worldwide assets are subject to UK IHT. This concept will not only apply to the settler but will also apply to resultant beneficiaries.

back to Guides & Resources