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One thing that can be clearly seen amid all the arguments over the status of Lord Ashcroft is that neither the press nor the politicians really understand the difference between someone being resident in the UK or being domiciled in the UK. But we shouldn’t really blame them as the subject has long been one which the courts have spend vast amounts or time and money trying to define.

It is rather painful to listen to the claim and counterclaim of so many ill-informed people even allowing for the fact that the statements are being made as part of a very nasty political dogfight.

So leaving the politics aside for the moment here is my attempt at a simple guide to residence and domicile. Not easy because it is a very complex subject.

It needs to be understood that residence and domicile status can have significant implications in terms of an individual’s liability to UK tax and that the various terms have different implications for persons leaving the UK or arriving in the UK. So someone born in the UK but leaving to live and work elsewhere has a different set of circumstances to consider than someone born outside the UK but travelling there to live and work.

Lets look at each of these in turn.

Residence

For UK tax purposes an individual is generally considered UK resident if they are present in the UK for 183 days or more during a tax year – April 6th until the following April 5th. The 183 days can be a single continuous period, or be spread over a number of visits during the tax year. However, by HMRC (Her Majesty’s Revenue & Customs) concession it is possible in certain circumstances to split a tax year so as to be resident in the UK for part of a tax year and non-resident for the rest. Typically this would be in a situation where someone was leaving the UK part way through a tax year with no intention of returning.

Ordinary Residence

Someone can be resident without being ordinarily resident, and vice versa. An individual who comes to the UK regularly will be treated as ordinarily resident if their visits average 91 days or more a year over four or more tax years. The date from which the individual is treated as ordinarily resident depends upon that person’s intentions from the outset. For instance, if there is an intention to visit the UK regularly for at least four tax years, they may be treated as ordinarily resident from the time of arrival in the UK.

Domicile

Domicile involves complex issues of law. An individual can be resident in more than one country at the same time, but can only have one domicile at a time. However that domicile may be a “domicile of origin” or a “domicile of dependency” or a “domicile of choice” or in some circumstances a “deemed domicile”.

A domicile of origin is acquired at birth, normally from one’s father. Therefore someone born in the UK whose father was also born in the UK will be UK domiciled. However someone born in the UK whose father had, at the time of birth, a domicile elsewhere – lets say France – would be French domiciled. You can see that with the huge number of immigrants resident of the UK, both from Commonwealth countries and EU member states, a lot of children born in the UK may not be UK domiciled.

Irrespective of the above, the domicile of someone under the age of 16 (a “minor”) can change. For example their father may take steps to change their own domicile and the child’s domicile will follow automatically. Alternatively the child may be adopted or fostered and they would automatically take the domicile status of the person on whom he or she is legally dependant (a ‘domicile of dependency’).

From the age of 16 anyone can acquire a “domicile of choice”. In general this would involve leaving their current country of domicile to settle in another country, and requires strong proof of having moved to the other country permanently or indefinitely. Living in another country is not conclusive evidence of an intention to change domicile as can be seen in the recent case of Robert Gaines-Cooper who despite living in the Seychelles for 40 years or more has recently had his claim to be non domiciled in the UK turned down by the Appeal Courts.

The term “deemed domicile” refers to a situation where HMRC will claim that irrespective of the individuals own thoughts about where they are or were (if they are dead) domiciled, they HMRC claim otherwise. At this point courts may well get involved.

Why is residence and domicile status important?

In UK tax terms the liability to income tax and capital gains tax (CGT) generally depends on whether an individual is resident, ordinarily resident and domiciled in the UK. An individual is broadly liable to income tax on worldwide income if UK resident, or on UK income if non-UK resident. Also a non-dom would not be liable to pay UK Inheritance Tax (40%) on any non-UK assets.

So let’s say a French national is living and working in London where he or she is resident for tax purposes but is domiciled in France. They are a “non dom”. In this circumstance they would pay UK income tax on their earnings and CGT on UK based gains. They would not pay tax on income or gains made outside the UK. So if our French friend had income in France – perhaps from savings or investments or from renting out their property – they would pay no tax on these earnings to HMRC but would, we presume, pay any tax due to the French authorities. However if they bring any of their French income into the UK they would have to declare this on their tax return and be liable to UK tax, but if they can show they have already paid French tax on the same income they would get credit for that and would need to pay no more. Even the tax authorities accept it would be unfair to tax someone twice on the same income.

Similarly someone born with a UK domicile but who has now acquired another, lets say a French domicile, but who is resident in the UK only pays UK tax on their UK income not on their worldwide income.

I’m sure you will think that all the above is quite reasonable. Indeed our French friend is probably paying more tax than he or she would if they were UK domiciled. What annoys people however are circumstances where UK residents who are non-doms get their income paid in countries where the tax they pay is far less than in the UK. For example the Isle of Man, where I live, has a maximum rate of tax of just 20%. Compare that to the UK where the highest rate will shortly be 50%. By the way, in Bulgaria – a member of the EU – the rate payable by both individuals and companies is just 10%.

So What’s All The Fuss About Lord Ashcroft?

Quite simply it is totally political. Lord Ashcroft (pictured above in the House of Lords) had a UK domicile of origin but now claims a domicile of choice in Belize (which used to be a British colony). He is a major funder of the British Conservative Party of which he was Treasurer and is now Vice Chairman. The Labour Party hates him because of the success he has had in funding and campaigning in marginal seats for the Conservatives many of which have been won by higher than average increase in votes.

When the then Conservative leader, William Hague, proposed Ashcroft for a Peerage thus entitling him to sit in the House of Lords, it was blocked until Ashcroft gave an undertaking that he was resident in the UK for tax purposes. In fact no-one seems to have asked about his domicile probably because they didn’t understand the difference. But Lord Ashcroft isn’t the only non-dom involved in British politics, there are a number of non-doms who provide the Labour and Liberal Democratic parties with many millions of pounds of funding and who also sit in the House of Lords. Indeed one of these, Lord Paul, has recently been made a Privy Councillor and takes part in the governance of the UK. Not only that when he, and several others, were granted Peerages, unlike Ashcroft they were not asked to make a statement about their tax status or any undertaking about their tax status. Why not? That is much more to the point that the continual baying that Ashcroft has dodged the question. Why was he the only non-dom to be asked it in the first place? One law for Tory non-doms and another for Labour and LibDem ones?

It would be simple to deal with this problem. As Conservative leader David Cameron has promised, all you need do is to bring in a law that says no-one who is not UK domiciled can sit in the House of Lords or the House of Commons. The Labour party could have brought in such a law and that would have made Lord Ashcroft have to change his domicile and thus open himself up to having to pay more tax to the UK taxman. But they didn’t do that. Why? Could it be that it would have upset their own non-dom backers and Lords? Of course it was. In actual fact the Labour party did plan to make such a change but backed off when their own supporters threatened to withdraw funding.

Mind you – everyone seems to be forgetting that there are many perfectly legal ways in which a UK domiciled and resident person can reduce their tax bill. Anyone who thinks Ashcroft or any of the other non-doms Lords are going to pay many millions extra tax will be disappointed.

Please note that the above is a simplified explanation of domicile and residence. The real problem is that currently neither term is defined in tax law and there is no straightforward statutory test that can be applied. This means that if HMRC do not accept an individual’s own view of their domicile or residence status the matter will end up in a court of law where issues such as “intention” will be examined. The following posts give more information of this whole subject.

Related Articles:

Category: Taxation

 

7 Responses to “What Is the Difference Between Residence and Domicile?”

  1. James Green says:

    It does sound that she will be taxed in France. Under French law her immovable property (land and buildings) will be subject to forced inheritance laws so her friend might not be able to inherit.

  2. Lesley Judd-Relph says:

    A close friend was a British born resident in France , with property in France and property and savings in the UK .If her family proves that she was DOMICILED in France will her UK assets then be subject to the French laws of Succession ? She died suddenly 26 Dec 2012 and the advice the family are receiving is very confusing . Her property and savings in the UK are worth far more than her property in France ,and she has left it in her will to her close friend -a bequest which will attract Inheritance Tax at 60% here in France . I would hugely appreciate a reply before the executors open the succession procedure in either country .Thankyou .

  3. James Green says:

    Hi Wendy. If a UK domiciled but non resident died in France (to take your example) then their assets in France would be subject to the appropriate French IHT rules (and the forced heirship rules). The UK would look to impose their IHT rules on the deceased persons worldwide assets. So in the example here the UK would look at imposing tax on any UK assets and any French assets. But under the Double Tax Treaty between France and the UK credit would be given against the UK IHT bill for tax already paid to the French authorities. If our French resident also had assets in one or more other countries but wasn’t resident there then these would also be subject to tax in the UK and possibly even in France. But again there is usually Double Tax Treaty relief.

  4. Wendy M says:

    A good article…but what happens on death if one lives in a foreign country? For example a British person, living in France, paying income tax in France..and who then dies in France. Which country’s IHT rules apply?

  5. Eduard G. V says:

    Very intelligible description, if only text books were like that…

  6. Luke Francis says:

    Studying for a tax exam at the moment, found this article really useful & more understandable than the text books, thanks 😉

  7. Good post and this post helped me alot in my college assignement. Thank you for your information.

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