What is Domicile and Residency for Tax Purposes?

What is Domicile and Residency for Tax Purposes?

Many countries around the world use the concepts of Domicile and Residency, or similar ideas, to determine tax liability. This blog focuses on the UK system, but the principles are identical in many other countries.

Understanding the terminology and concepts is essential for determining where and how you may be liable for taxes.

Keep in mind that taxes can be a significant expense, so having a clear grasp of the rules can save you a considerable amount of money. Staying just one additional day in a country could lead to a tax obligation!

Why Does Domicile and Residency Matter?

Where you live and where you call "home" can have a significant impact on your taxes. Tax authorities look at two essential concepts:

• Residency - whether you're considered a resident for a tax year.

• Domicile - where your permanent home is (your long-term base).

These two terms often overlap, but they're not the same thing. Residency determines if you're taxed in the UK. At the same time, your Domicile can decide how much of your worldwide income and assets are taxable.

1. What Is Residency?

Your residency is worked out using the Statutory Residence Test (SRT).

You're usually a UK resident if:

• You spend 183 days or more in the UK in a tax year, or

• Your only home is in the UK, and you've spent at least 30 days there.

If you don't meet these automatic tests, HMRC looks at "ties" such as:

• Do you have a UK home?

• Do you work in the UK?

• Do close family (spouse/children) live here?

• How many days do you spend in the UK?

• Do you have a UK mobile phone contract?

Residency and Tax Liability

• If you are a Resident, you're usually taxed on your worldwide income and gains.

• If you are a Non-Resident, you're only taxed on your income (like rental income from a property).

2. What Is Domicile?

Your Domicile is about your permanent home or the country you see as your true base, not just where you live temporarily.

There are three main types of Domicile:

• Domicile of origin - usually inherited from your father at birth.

• Domicile of choice - you can acquire this by moving to another country and intending to stay there permanently.

• Domicile of dependence - applies to children under 16 and follows the parent or guardian's domicile.

Unlike residency (which can change every year), Domicile is harder to change; you must show you have left the UK permanently and intend to settle abroad.

3. How Domicile Affects Taxes

If you are a UK resident and UK domiciled, you pay UK tax on all your worldwide income and gains.

If you are a UK resident but non-domiciled, you can choose between:

• Arising basis - taxed on worldwide income and gains, OR

• Remittance basis - taxed only on UK income and on overseas income/gains brought into the UK.

If you use the remittance basis, you lose your personal allowances and annual exemptions. Long-term residents may also face a Remittance Basis Charge (£30,000+ after 7 years).

4. Deemed Domicile

Even if your official Domicile is abroad, you can become deemed domiciled in the UK if:

• You've lived in the UK for 15 of the last 20 years, or

• You were born in the UK with a UK domicile of origin and later returned.

Once deemed domiciled, you're taxed like any UK domiciled person on worldwide income and worldwide assets for Inheritance Tax.

Example

Let's imagine David, born in India, moves to the UK for work:

• He spends more than 183 days a year in the UK, making him a UK resident.

• His permanent family home remains in India, indicating an Indian Domicile.

• He earns £45,000 in the UK and £10,000 in rental income in India.

David can claim the remittance basis, meaning he pays UK tax only on his £45,000 UK income and only pays UK tax on the Indian rental income if he transfers it to the UK.

But after 15 years in the UK, David is deemed domiciled, so all worldwide income is automatically taxable in the UK.

Final Thoughts

Understanding the difference between residency and Domicile is essential for anyone who:

- Works internationally

- Owns property overseas

- Is planning long-term moves abroad

- Wants to manage inheritance and estate planning effectively

Both residency and Domicile affect your tax obligations, determining whether you pay tax only on your UK income or on your worldwide wealth.

Some remote workers who travel between countries may legally pay no tax because they are neither residents nor domiciled in any specific country, allowing them to avoid qualifying under the tax laws of different nations.

It is essential to keep accurate records in case you are challenged regarding your tax status.

Many countries operate Double Taxation Agreements to ensure that you don't pay tax in more than one country. However, some countries don't have double taxation agreements. Make sure you are aware of these rules when working in different countries.