Domicile and residence – what does it all mean?

On Wednesday 6 March, the Chancellor delivered the Spring Budget. As part of this, he announced that the non-domiciled tax status would be abolished from April 2025. But what does that really mean?

Residence

A taxpayer is either a UK resident or non-resident. Most of us in the UK are, of course, UK resident. The vast majority of individuals living outside the UK will be non-resident.

There are, however, some who fall within a greyer area where they spend some time in the UK but a lot of time outside the country as well.

For instance, most would agree that a foreign national coming to the UK for a two-week holiday should be classed as non-resident. But what if that holiday was actually three months, or six months? And what if their time here involved some work in the UK?

The residence status of an individual is determined by applying “statutory residence tests” and will always factually determine whether an individual should be treated as resident or non-resident.

Broadly speaking, a UK resident will pay UK tax on worldwide income, and a non-resident would pay tax only on UK income.

For example, someone living in Spain would be expected to pay UK tax on any property rental income earned from UK property. But any income arising in Spain would not be taxable here.

Conversely, a UK resident receiving dividends from Spain would often be expected to pay UK tax on those dividends.

Domicile

For some individuals who are determined to be UK residents by the statutory residence tests, they can be domiciled outside the UK, often referred to as a “non-dom”. This means that they consider their residence in the UK to be temporary and that they intend to return to their permanent home abroad.

Being domiciled outside the UK means that UK residents can use the “remittance basis” and only pay tax on (a) UK income and (b) overseas income brought in to the UK. Overseas income held abroad is therefore not subject to UK tax.

Whether you are domiciled in the UK or elsewhere will depend on a number of factors. Being born abroad and living abroad for much of your life could support a non-dom status. Planning to retire abroad having lived in the UK for 50 or 60 years would not.

One of the more high-profile instances of an individual being domiciled outside the UK is the wife of the current Prime Minister and former Chancellor.

The changes

From April 2025, the remittance basis of taxation will be abolished. In its place, there will be a new residence based system covering the first four years of residence in the UK.

Instead of the current system, anyone with a period of 10 consecutive years of non-residence will be able to benefit from full tax relief for a 4-year period of subsequent UK tax residence on income earned abroad arising during this 4-year period.

There will though be transitional rules in place for those currently using the remittance basis.

Domicile and residence tax matters can quickly become complicated, particularly with the upcoming changes. Should you require assistance in preparing your tax return then please contact your local Perrys branch.