UK: The Benefits Of Establishing Residence In The UK For Non-Domiciled Individuals

Consider the tax position of a UK-domiciled individual who is resident in the UK throughout a fiscal year, (in the UK the fiscal year is the period from 6 April to 5 April in the following year). Such an individual is liable to income tax on his worldwide income, to capital gains tax on disposals of worldwide assets, and to inheritance tax on all chargeable transfers of assets, UK and foreign. In other words, the combination of UK residence and domicile brings unlimited fiscal liability on the subject.

If, instead, the individual is resident but non-domiciled in the UK, then the following tax consequences ensue:

• he will normally only be liable to income tax on his foreign earnings, whether from investment or employment, to the extent that they are remitted to the UK;
• he will be liable to capital gains tax on assets situated in the UK, but on foreign assets only to the extent that the proceeds are remitted to the UK;
• inheritance tax will only be levied on UK assets, and not on foreign assets.

This article is directed towards the foreign individual who wishes to benefit from the advantageous tax treatment above as well as perhaps from the extensive network of double tax treaties entered into by the UK. Such a person may previously have spent little or no time in the UK. He will wish to depart from a foreign tax net either by renouncing his existing resident status in favour of the UK, or alternatively, by retaining his existing resident status and becoming resident also in the UK, thus bringing into effect the provisions of the relevant double tax treaty in order to assert his UK residence. An individual renouncing his existing resident status in favour of the UK should be careful not to establish a UK domicile, and this is considered below.

The following criteria will provide some certainty for anyone seeking to establish the minimum requirements for UK tax residence, for tax planning cannot be implemented in the absence of certainty.

The term "residence" is not defined in the Taxes Acts and the UK Inland Revenue have built up tests to ascertain whether or not an individual is UK resident, and also to determine the commencement and termination of such residence. An individual is considered to be resident in the UK if he satisfies either one of the following tests:

1. if he is physically present in the UK for 183 days or more in any fiscal year, either in one continuous period or a series of shorter periods which together total 183 days; or
2. if he makes regular visits to the UK, so that these visits become habitual and substantial. Visits to the UK are regarded as becoming habitual after four successive years unless any intent to make them habitual is evidenced earlier, and an average visit of three months per year is regarded as substantial.

For the purposes of the 183-day test, a count is made of the number of days spent in the UK; it does not matter if the individual comes and goes several times during the year or if he is there for one stay of 183 days or ore. The days of arrival in and departure from the UK are normally ignored.

For the three month test, a person would normally be regarded as being resident in the UK from the beginning of the fifth year. However, a person is treated as resident from 6 April of the first year if it is clear when he first comes to the UK that he intends making such visits, or from 6 April of the tax year in which he decides that he will make such visits, where this decision is made before the start of the fifth tax year. Though the Revenue booklet (IR20) refers to an average visit of three months per year, it is the view of the author that substantial presence should be established in each of the first four years.

A person is strictly deemed to be resident or non-resident for a complete tax year. For example, an individual who arrives in the UK on June 30th with the intention of taking up permanent residence will be considered resident from 6 April in that year, provided that he spends 183 days there in that tax year. Alternatively, a statement of residence (Form P86) may be filed with the Inland Revenue in order to establish residence from the actual date of arrival. The Inland Revenue are prepared to split the tax year in the case of an individual who intends to live there permanently or to stay for at least two years, and this will be desirable where such a person has disposed of a foreign asset prior to taking up residence in the UK.

Furthermore, a person who comes to the UK to take up employment which is expected to last for at least two years will be regarded as resident from the date of his arrival. An individual arriving in the UK to take up employment for a period expected to last less than two years - especially if he only lives in temporary furnished accommodation - will normally only be regarded as resident in the UK in any tax year in which he spends 183 days or more in the UK, and then from 6 April in that year. It should be noted that the residence status of an accompanying spouse should be determined according to the factual circumstances of the spouse, and not the partner.

It is certainly the case that the duty of establishing residence is more onerous now than in previous years. Indeed, it used to be the case that residence was established by any physical presence in the UK, however short, during a fiscal year in which an individual maintained and used (or could reasonably have used) a place of abode in the UK. Thus a foreign individual could become resident in the UK merely by acquiring accommodation available for his use and visiting the UK only occasionally during the tax year. The law was changed in 1993, and this rule no longer applies.

Furthermore, the parameters of the "habitual and substantial" test have been restricted. The ruling that an American, who spent most of his time in the US but rented a house in Scotland (during the shooting season) for a period of about two months over three years, was resident in the UK for those years, bears the flavour of the current test but is clearly a less stringent test. (Perhaps it is no coincidence that the taxpayer lost the case.)

A further concept to bear in mind is that of ordinary residence, although this does not bear any additional tax consequences for non-domiciled persons resident in the UK.

Once again, the term has no special or technical meaning for the purpose of the Taxes Acts. In the Revenue’s view, it is considered as being broadly equivalent to habitual residence and thus, if an individual is resident in the UK year after year, it follows that he is also ordinarily resident in the UK. Three years is the period considered by the Revenue to show ordinary residence.

As the concept denotes a pattern of residence it is possible to be ordinarily resident in a tax year, even though the individual has not resided in the UK: this will occur where an individual who is normally resident in the UK goes abroad for a complete fiscal year. As a consequence of a non-domiciled individual acquiring ordinary resident status, it will not be possible to avoid a charge to capital gains tax on the disposal of an asset by becoming non-resident in the year of disposal, (though the charge arising on the disposal of a foreign asset may be avoided by keeping the proceeds of the sale outside of the UK).

The principle that a taxpayer’s residence in a tax jurisdiction outside of the UK should not preclude him from also being resident in the UK for tax purposes is enshrined in case law. A person seeking to establish residence in the UK may retain his resident status under domestic law in the country where he formerly resided, and where this is the case, his unlimited tax liability shall be accorded to the jurisdiction with which he is most attached under the relevant double tax treaty. It is on this point that the 1992 OECD Model Treaty, Article 4 proposes special rules.

The Article gives preference to the Contracting State in which the individual has a permanent home available to him. The home must be permanent, that is to say, the individual must have arranged to have the dwelling available to him at all times continuously, and not occasionally for the purposes of a stay of short duration. As regards the concept of home, any form of home may be taken into account (house or apartment belonging to or rented by the individual), insofar as it is available at all times continuously. Where a conflict of residence is likely to arise, it is essential that property is acquired in the UK and made available to the individual for his permanent use, and it is recommended that any such property in the country of former residence is sold as soon as is practicable.

Where it is not possible to sell the former abode, then preference is given to that State with which the individual’s personal and economic relations are closer, namely the centre of vital interests. In this connection, the individual’s family and social relations, his occupations, his political, cultural or other activities are important factual considerations. The fact that a person retains a property in the environment where he has always lived, where he has worked and where he has his family and possessions, may demonstrate that he has retained his centre of vital interests in the first State.

Where the criteria for establishing the resident status of an individual are set out in a double tax treaty one should be mindful of the scope of the treaty. It is important to appreciate that the tie-breaker clause of a treaty only applies for the purposes of determining liability to tax in respect of income covered by that treaty.

A person taking up residence in the UK should be mindful of procedure lest he should thwart the very goal that he set out to achieve. The Inland Revenue will not accord the privileged status of non-domiciled to such a person unless the relevant intentions are communicated from the outset. That intentions are paramount will become clear on a closer examination of the case law relating to domicile.

The concept of domicile is primarily a non-tax issue. The domicile of a person determines his civil status for such purposes as marriage, divorce or property ownership; it is often equated with nationality or citizenship, but it is really the country which is regarded as one’s natural home, and for most people it is their country of birth. While it is possible to be resident in more than one country, an individual may have one domicile only. If the UK Inland Revenue consider that an individual taking up residence in the UK intends to reside there indefinitely, they may consider the individual to have displaced the domicile of origin by acquiring a domicile of choice.

A person arriving in the UK is required to complete a form (Form P86) in order to establish his date of residence, his resident and ordinarily resident status and his income tax allowances and liabilities, for which he should contact his local tax office. Part C of the form poses the somewhat bald question "Do you claim to be not domiciled in the United Kingdom?" to which the individual should answer "Yes". Provided that employment is not the sole purpose of taking up residence the individual is advised to obtain a domiciliary questionnaire (Form DOM1) from his tax office, who will forward the completed form to a specialist division for a ruling. The Revenue have stated that they will consider the question of domicile only where it is relevant in computing the individual’s current tax liability, in other words, where the individual is resident for a tax year in which income arises overseas. An individual who receives a non-domiciled ruling will be sent a Form 11K on which he should set out details of his income and gains, differing from the standard annual Return in that it does not ask for details of overseas income and gains not remitted to the UK.

The concept of domicile is extended for the purposes of inheritance tax (not currently for income tax and capital gains tax) to bring within its scope any person who has been tax resident in the UK for at least seventeen out of the twenty fiscal years ending with the fiscal year in which a chargeable transfer is made. Thus, it may be advisable to plan the devolution of an estate in the early years of residence, particularly where shares in a family company may be transferred in stages.

An individual assessed on the remittance basis is liable to UK tax on the amount of overseas income that is remitted to the UK. Note that income is remitted if it is brought to the UK in any way, so that where, for example, a car is bought abroad and then imported into the UK, a constructive remittance may arise on the date of the import. It is recommended that persons not domiciled in the UK should establish three separate accounts in the country of former residence - one for income, one for capital, one for capital gains - prior to taking up residence in the UK. Income, including interest on the capital account, should be paid into the income account, and no remittance to the UK should be made from this account. Capital gains should be paid into the capital gains tax account and similarly, no remittance should be made to the UK from this account. Income may be remitted from the capital account, however, without creating a liability to tax in the UK. Where there is one account only, the Inland Revenue treats remittances as income first.

Furthermore, if the source of foreign income ceases prior to the tax year in which the remittances are made, then no UK tax will be levied and this is an area in which the concept of domicile may be used to advantage.

Where the proceeds arising on disposals of non-UK situs assets are remitted to the UK, the assessment to capital gains tax is on the lower of the actual gain and the proceeds remitted. It should also be noted that there is no charge on remittances of gains made before the individual became resident in the UK.

Considerable tax benefits may be reaped by the UK-resident non-domiciled individual, some of which have been outlined above. The favoured status is not a fait accompli on arrival, but is acquired by adherence to procedure and, in practice, may take months of negotiation with the Inland Revenue. Particular attention should be paid to the issues of dual residence and domicile of choice, and indeed, the concept of a centre of vital interests is an area in which these two interact, particularly where the matrimonial home is maintained in the country of former residence. It is for this reason that a person wishing to shelter under the generous umbrella of UK double tax treaties should always seek professional advice.