What does ‘domicile’ and ‘residence’ mean in UK tax law?

Aug 24, 2021 | Personal finances

HMRC, the UK tax authority, uses the terms ‘resident’, ‘non-resident’ and ‘domicile’ to describe people living within the country.

Each has a specific meaning in law so checking which applies to you is vital to ensure you’re meeting your tax obligations.

So, what do these terms mean in practice?

Domicile and residence 

It’ll be helpful if we start by looking at what domicile and residence mean under UK law.

In short, your domicile is the country that a person considers to be their permanent home. That’s usually the country they or their parents originally came from, but it can be changed if you leave that country and settle in another.

To do that, though, you will have to provide strong evidence that you intend to live in your new location permanently or indefinitely and have lived in the UK for the last 15 out of 20 tax years.

Residence, on the other hand, is usually determined by how long you’ve been in the UK. If you’ve stayed for 183 or more days in the year, you’re considered to be a UK resident.

If you haven’t been in the UK for at least 183 days, you might still be able to claim residence with the statutory residence test.

We’ll be going into that in more detail in our next blog, so watch out for that. In the meantime, it’s worth reading the official government guidance on the test.

Tax implications: domiciled residents

It’s important to know your domicile and residence status because it could have an impact on your UK tax liability and your entitlement to income tax allowances and exemptions. 

UK residents who are also domiciled here are normally taxed on what’s called the ‘arising basis of taxation’. This means that all your worldwide income and capital gains will be taxable in the UK, even if those foriegn incomes and gains have already been taxed in another country.

You must declare all your foreign income and capital gains on your tax return, but don’t worry too much if you plan on continuing working abroad after settling in the UK: relief can be claimed if you’re taxed twice.

The arising basis can be complex if you have foreign income as you’ll have to declare your worldwide income using a self-assessment tax return. 

But remember: you’ll benefit from the personal allowance for income tax and the annual exempt amount for capital gains tax.

Non-domiciled UK residents 

On the flipside, UK residents whose permanent home isn’t the UK can choose whether they use the arising basis of taxation or the remittance basis.

With the remittance basis, you will be liable to pay tax in the normal way on your income and gains sourced in the UK.

The difference is that you’re only liable to UK tax on money made from overseas income and gains that you bring (or ‘remit’) into the country.

To recap, under the arising basis of taxation, you would have to pay tax on any income and gains when they arise, whether you bring it into the UK or not.

If you’re making less than £2,000 from overseas sources, the remittance basis applies automatically.

Be aware that if you make more than that and want to claim to use the remittance basis you need to pay a charge of at least £30,000. 

That means unless you have very high levels of foreign income and gains, it is unlikely that claiming the remittance basis will be worthwhile.

Get in touch with us to discuss which tax basis would be best for you.