If you have lived abroad or are planning to work or move abroad for a significant period of time, or you have moved to the UK from overseas, then you may have already heard residence and domicile used fairly interchangeably. Despite having two very distinct legal definitions, the two have become muddled and many are confused by what each one really means. Whether your country or state is your domicile or your residence can have a significant impact on what and how much tax you are responsible for paying, amongst other things. It’s therefore important to make sure you understand the difference between the two and seek the necessary clarification for your circumstances.
First, let’s define domicile and get an understanding of what this means in regards to your legal tax responsibilities.
The definition of domicile
Domicile is defined as your permanent home, the place you have a substantial connection with and where you intend to live indefinitely. You may live elsewhere throughout the year or over a period of your lifetime, but your domicile is the place that you intend to return to and will make your home indefinitely. Domicile is distinct from nationality and residence and you can only have one domicile at a time.
Understanding domicile further
When you are born, for UK tax purposes, you are automatically assigned the domicile of your parents, known as your domicile of origin. If your parents aren’t married then you are usually assigned the domicile of your mother, but this will depend on your individual circumstances. This will then remain your domicile, even if you spend time working or living abroad later in life, unless you take the steps required to permanently change it. Read on for more on changing your domicile.
For many, a domicile of origin is easy to determine. My parents had lived in England all their life, I was born and raised in England and therefore have a domicile of origin in England. If I go to live in France for two years but intend to return to England I continue to have the same domicile.
The importance of your domicile
Your domicile is important as it can determine what and how much tax you pay in three main areas:
- Income Tax
- Capital Gains Tax
- Inheritance Tax
For example, those who are not domiciled in the UK can claim a basis of tax called the “remittance basis” and exclude all their non-UK overseas income and gains from UK tax provided they do not remit them to the UK – a potentially significant benefit.
In the US, a number of US states have different residence tests depending on whether you are domiciled in that state or not. For example, someone not domiciled in New York could spend up to 183 days in the State and not trigger residence whereas a New York domiciled individual might have to spend fewer than 31 days. If you have a Massachusetts domicile you are considered a tax resident of the state, even if you don’t currently live there.
Your domicile will also help determine how your estate and assets are passed on when you die and how much will subsequently be taxed. It is also particularly important if you own property or other financial assets abroad.
It is therefore vital that you understand where your domicile is, if it is abroad and what the tax requirements are for that specific jurisdiction, especially if you have other financial assets elsewhere. Without the right understanding or advice, you may end up not paying the right tax or even paying more tax than necessary. With good management, you can ensure that you determine your domicile based on your facts and circumstances and plan accordingly for your tax responsibilities.
Changing your domicile
When you turn 16, you can take the necessary steps to change your domicile. The requirements for doing this will vary depending on the domicile you to change from and the one you are changing to. You will need to meet a range of criteria and provide strong evidence for each, with each case judged on an individual basis considering the circumstances and evidence provided. As an example, you will probably be required to achieve the following as a very basic minimum requirement:
- Move and settle in the country or state you want to be domiciled in.
- Provide strong evidence that you plan on living in your new location permanently and indefinitely.
The burden of proof in domicile audits is generally upon the party trying to prove the change in domicile.
So if you are domiciled in England and argue your domicile has changed to Bermuda, the burden of proving the change to HMRC is upon you. However, if you have a domicile of origin in Illinois, USA but now live in London, HMRC have the burden of proving you have made a domicile of choice in England.
Some expats may also become ‘deemed domiciled’. This is when HMRC treats you as a UK domicile even if you are not domiciled under general law for income tax, capital gains tax and inheritance tax.
This will usually only happen once you have been a UK resident for 15 of the preceding 20 tax years. Similar rules can also apply if you were born in the UK with a UK domicile of origin and take up UK residence.
Non-domicile tax residents
A non-dom is an expat living in a different country to their domicile or domicile of origin. Non-doms in the UK still have resident UK tax responsibilities, they may still be subject to worldwide UK tax, however there are potential tax advantages they have by being non-dom including the “remittance basis”, excluding overseas income and gains, and advantageous trust planning for income tax, capital gains tax and inheritance tax.
Again, if you are a non-dom living in the UK, it’s important to know exactly what your tax responsibilities are both here and in your domicile as well as any other countries you may be a resident or have financial assets.
Now, let’s take a look at what your residence is and how this may also impact what and how much tax you pay amongst other legal responsibilities.
The definition of residence
If you live or are present in a country for 183 days or more per a tax year then, more often than not, you are considered a resident of that country for tax purposes.
Under the UK test it can take as few as 17 days to trigger residence or as many as 183 days and in the US federal test it can take as few as 31or as many as 183 days.
You can have multiple residences at any one time but will still always have just one domicile.
We often simultaneously see clients resident in both the UK, the US for Federal tax purposes and one of the US states. There is still only one domicile.
Understanding residence further
There are a variety of reasons why you may have multiple residences. You may take time to work abroad for a year or decide to buy a holiday home and live in another country or state for half of each year. You may also spend significant time in two or more countries for work each year. If you meet that state or country’s residence test you will be resident there.
Each country will have different rules and regulations regarding tax responsibilities and residency status. How you have spent your time in each country including whether you are working, have financial assets and so on will also influence what your tax responsibilities are. You will need to carefully calculate the number of days spent working and living in each country and seek the specific regulations for each country to be sure you pay the right tax.
As well as potentially not being aware of your tax responsibilities, there is also the danger of paying tax twice and making unnecessary tax payments if the circumstances are poorly managed.
Knowing the difference between residence and domicile
A simple way to understand the difference between domicile and residence is to look at an example that often causes confusion. If you live in one country but decide to buy a property and live for half of the year in another, which one takes precedence? You may spend years living entirely equally in both places and register to vote and register for a car in one while filing taxes and making a will in another.
From a domicile perspective, despite living equally in both, the original country you lived in will most likely remain your domicile while the second you move to will be a residence. This will remain the case until you take the necessary steps in your new residence to make it your permanent domicile and abandon your former domicile. This will usually involve living there for a more significant period of time along with other criteria.
There is also an issue in this case of two residences, and potential double taxation. Provided the two locations of residence have an income tax treaty, there is likely to be a residence tie breaker determining which country has the primary right to tax.
Your domicile and your residence both have varying and significant legal implications including income tax, asset income, probate wills and much more. It’s vital you know what your responsibilities are. If you have multiple residences, you can also plan and manage your circumstances so you avoid paying more tax than necessary and even save money in the long term. Of course, understanding the regulations and requirements in each country can be extremely confusing and time-consuming.
With years of experience in expat tax and special expertise in UK and US expat tax requirements, we can offer advice and help you expertly manage your domicile and residence tax responsibilities. We’ll work with you on a personal level to understand your current working and living situation, identify your domicile and any other residences, and plan accordingly for your current and any future needs you may have.
Contact us today on +44 (0) 207 183 2251 to start your friendly consultation.