How Your Domicile Affects the Tax You Pay
Tax can be a highly confusing area for British expats, and many are unwittingly making mistakes which could come back to bite them later.
Possibly the biggest mistake people make is thinking that they are no longer subject to UK taxes because they now live abroad.
Legally, there is a difference between where you live and where your home is. This can have a big impact on whether you need to pay UK taxes or not.
This difference is expressed through the ideas of “residency” and “domicile”. Understanding how these two concepts work and relate to each other is crucial if you are going to preserve and grow your wealth as a British expat.
Residency
This is the more straightforward concept of the two, although it is not always easy to understand. In simple terms, you are deemed “resident in the UK” by HMRC if you have spent a certain number of days within the UK during the current tax year.
To recap, the tax year runs from the 6 April and ends on the following 5 April. Since 2013, a Statutory Residency Test has been used by the UK government to determine your residency for tax purposes.
Generally speaking, you are deemed resident in the UK if you have been in the country for more than 182 days during the tax year. If you were there fewer than 183 days, then you may not be.
However, it is quite complicated to navigate the Statutory Residency Test on your own. Usually, it is best to seek professional advice from a qualified tax adviser to find out for certain.
Why is your residency important? Because if you are deemed “UK resident”, your worldwide income will almost certainly be subject to UK taxes.
So, if you are currently living abroad as a British expat and you are deemed UK resident, then the income you earn in that country might be liable to UK tax. That includes wages, interest earned from investments, pension income, rental income and capital gains.
However, if you are deemed “non-UK resident” then your UK income will likely be subject to UK tax, but not your overseas income. So, suppose you work overseas for a foreign company but gain an income from a rental property in the UK. The latter would probably be subject to UK taxes but the former likely would not be.
Domicile
As if that wasn’t complicated enough! Domicile adds a whole other layer of complexity.
Your domicile is where HMRC deems your permanent home to be. By default, British people are domiciled in the UK. That’s because when you are born you receive your parents’ domicile. This is known as your “domicile of origin.”
If your parents were unmarried when they had you, then usually you are given your mother’s domicile (although not always). You always keep your domicile of origin, until and unless you acquire a new one.
Getting a new domicile is very difficult, however. You need to take quite deliberate action to change it, and you need to meet a very specific set of criteria. Most British expats living overseas still have their British domicile of origin, even though they currently live abroad and even though they might be deemed non-UK resident.
Why is your domicile important? Again, because it has a huge impact on your tax status under UK law. Suppose, for instance, that you move abroad and after five years you die, leaving a UK property to your children. Since you will likely be deemed UK-domiciled (even though you are deemed non-UK resident), your estate could face a 40% UK inheritance tax bill.
This is where you need to be very careful as a British expat. Many people live overseas believing they are not UK-domiciled, perhaps because they have lived abroad for years or even decades. As a result, many expats do not anticipate a large inheritance tax bill on their UK estate when they die. This is a very costly mistake to make and you need to make sure you do not sleepwalk into it, potentially costing your family dearly.
Remember, if you are UK-domiciled then it is not just your UK property and assets which could face UK inheritance tax. Your entire worldwide estate would also be subject to it.
How do I Change my Domicile?
This is a very big decision and HMRC will not make it easy for you. Understandably so, as they are not likely to want to lose the tax they could potentially otherwise make on your estate!
In short, to change your UK domicile of origin to your current country of residence you will need to sever your ties with the UK. That does not mean handing in your UK passport or citizenship necessarily, but it does usually involve the following:
You need to be over the age of 16
You need to leave the UK and settle elsewhere, presenting clear evidence that you intend to never settle back in the UK.
Getting Advice
As mentioned above, deeming your residency for tax purposes is hard enough but attaining a new domicile is even more difficult.
Due to the serious financial consequences of failing to understand your residency and domicile, we highly recommend that you speak with an UK-based international tax specialist.
This will help you firmly establish where you are for tax purposes, and plan effectively for the future. Both your family and future self with thank you for it!
The information is provided in good faith without any warranty and is intended for informational purposes only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. For further details see our Regulatory Statement.