When living overseas, understanding the difference between domicile and residence is critically important.
Unfortunately, the two are often confused.
The resulting tax implications can be significant and wide-ranging.
The difference between residence and domicile
At a basic level, residence is a short term concept and is determined for each tax year in isolation, reflecting where you reside, while domicile is more long-term or permanent.
Domicile is a concept of common law which is specific to the UK. Outside of the UK, residence and domicile mean much the same thing.
In France for example, the word domicile actually refers to residence (in the English sense of the word).
Domicile
The definition of domicile is that of ‘the permanent home’ with the emphasis being on ‘permanent’.
A fundamental element of the concept is that as an individual, you may have only one domicile at any given time.
This is not always the case when residency is considered.
Domicile status is particularly important in estate planning and considering whether there is any exposure to UK inheritance tax (IHT).
Different types of domicile
Domicile of origin
This is automatically acquired at birth and typically mirrors that of the father.
However, in the case of the father being deceased or the parent’s being unmarried, the mother’s domicile is acquired.
This domicile is often the country of birth but is not always so.
Domicile of dependency
Until the age of 16, a child is considered a dependent and their domicile will change along with that of their parent’s.
Domicile of choice
This is acquired by a deliberate act and will displace a domicile of origin or dependency.
It is, putting it mildly, difficult to successfully achieve and is not governed by a formal application.
However, it does involve a clear two-part process:
- An individual must be present in the new country;
- The individual must have the intention of remaining in that country indefinitely.
With effect from 6 April 2017, HMRC introduced some additional rules with regards to an individual’s domicile status
Since then, for IHT purposes, where a UK domiciled individual leaves the UK and becomes domiciled overseas, they continue to be UK domiciled for the three years following their departure.
In addition to this, and for all UK tax purposes, individuals who have been UK residents for 15 out of the last 20 years will acquire a deemed UK domicile.
Further reading: I’m resident overseas but where am I domiciled?
Residence
Your country of residence is basically where you happen or choose to live.
It is determined by the statutory residence test (SRT) of which there are three elements:
- The automatic overseas test
- The automatic UK test
- The sufficient ties test
The rules are far from straightforward but working through the tests in a methodical manner will allow the residence status of an individual to be determined for UK tax purposes.
It is possible to be a tax resident in two countries for the same tax year and at this point, a series of tie-breaker tests will be applied and the tax treaty that the UK has with the other country will need to be considered.
Mixed domicile marriage/civil partnerships
Mixed domicile marriages or civil partnerships add to the confusion. However, they can also provide additional financial planning or wealth structuring opportunities.
Further reading: How does UK inheritance tax work when a spouse is non-domiciled?
Conclusion
As an expat it is highly unlikely that your domicile will change when you move abroad, but your tax residence is likely to change.
It is vital that you seek professional advice from a qualified tax adviser to ensure that you are not over or under-paying tax.
