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Domicile and Residence – what tax should you pay?

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Whether you’re moving abroad or returning to the UK from overseas, it’s important to correctly assess your UK tax residence position and report it to HMRC. But what factors do you need to consider when it comes to paying taxes?

To ensure that you pay tax in the correct country, it’s important to consider where you are taxed and on what income. Tax treaties and legislation are in place, but they can be very difficult to follow and so making any claims can be administratively heavy.

It is worth noting that paying tax in one country does not automatically mean you do not have to pay tax elsewhere on that income, although typically there are reliefs for double taxation or treaty rules that will apply to limit the tax. If you pay tax in the UK when you don’t need to, HMRC will only allow a taxpayer to go back four years to reclaim any overpaid tax before it is lost. The four-year rule is strict and so if you don’t make a reclaim in time you will effectively pay tax twice on your income unnecessarily, which over time can amount to significant sums.

It’s also essential to remember that you will still be liable to pay UK Inheritance Tax unless you lose your UK domicile. Domicile is broadly regarded as your permanent home and is usually obtained at birth although this can be changed by choice in certain scenarios. It is incredibly difficult to lose your UK domicile, and impossible if you still retain links to the UK.

Moving to the UK

For those coming into the UK, the same principles apply. However, for those that have a domicile outside of the UK, the rules can be more complex.

The remittance basis rules can be advantageous where an individual has income sources or assets overseas and they have no intention of bringing them to the UK. It isn’t always beneficial, but it can be worth considering under the right circumstances.

Once an individual has been a UK tax resident for seven of the nine previous tax years, there are tax charges that arise, meaning only those with significant overseas wealth may wish to make a claim.

As part of this, there are planning opportunities to consider maximising the efficiency of a claim under the remittance basis and to ensure that you don’t make mistakes which can have costly implications down the line.

Non-UK domicile

Even if you are a non-UK domiciled individual, the deemed domicile rules can apply to effectively treat you as a UK domicile for Income Tax, Capital Gains Tax and Inheritance Tax purposes.

Any non-UK domiciled individuals who have spent more than 15 consecutive years in the UK or any UK nationals who have changed their domicile but still spend time in the UK need to be aware of these rules and consider their impact on their personal circumstances.

Finally, do you have the right software to enable you to file your own tax returns? Particularly if you are reporting split year or a form of relief available under a double tax relief? HMRC offers an online facility for you to file your own tax returns, however in many cases you will need compatible software.

For further advice on UK Tax Residence, visit our Tax page.