Changing Your Tax Status

Summary: This article will recap the facts about residence and domicile and put them into the context of tax liability. Furthermore the article will examine ways you can go about changing your tax status, the deemed domicile trap and how you can actually make the most of your status.

This article will recap the facts about residence and domicile and put them into the context of tax liability.

Furthermore the article will examine ways you can go about changing your tax status, the deemed domicile trap and how you can actually make the most of your status.

i) A UK resident, UK domiciled person who is UK ordinary resident as well will be liable to UK income, capital gains and inheritance tax on worldwide assets.
ii) A UK resident, non UK domiciled person who is UK ordinary resident as well will be liable to UK taxes on any overseas income and/or capital gains if the income and/or gains are brought into to the UK, i.e. if the income and/or gains are remitted to the UK.  This rule is called the ‘remittance basis’.
iii) The ‘remittance basis’ also applies to Irish or Commonwealth individuals for any overseas income or gains if they are UK resident but not UK ordinary resident.
iv) A non UK resident non ordinary UK resident will still be liable to UK income tax on any UK sourced income.  Such a person would avoid all capital gains tax on worldwide assets though, unless the assets are used in UK trade of course!
v) Whatever your domicile is, was or you would like it to be...for UK IHT purposes the tax man can still deem you to have been UK domiciled at death and tax your estate’s worldwide assets accordingly!

So, how can you change your status?

Changing Your Residence Status

To change your residence status to that of non-UK resident and not ordinary UK resident can be fairly simply achieved.

Generally speaking you are not classed as UK resident for the tax year in question if you’ve spent less than 183 days in the UK in the given tax year or if you’ve spent less than an average of 90 days per year in the UK over the last four years.

Dropping your ordinary residence isn’t necessarily so simple to do as you can still be ordinary resident when non-resident.  Though generally speaking this comes down to ‘intent’ and after three years of living ‘permanently’ outside of the UK the question of ordinary residence can also be dropped - if not sooner.

Changing Your Domicile Status

To change domicile a person has to establish clear intention to remain in his chosen country of current residence for life.  To do this, serious evidence has to be collated to prove this intention is genuine.  Many people have this intention and assume that the very fact they are permanently living abroad with little or no ties to the UK is sufficient evidence.  Unfortunately this is not the case and such an assumption without clear action to back up the intention can lead to serious and negative taxation implications particularly when it comes to inheritance tax planning.

Furthermore, if you are residing in another country and you consider yourself to be domiciled there and complete a ‘DOM1’ form from the UK Inland Revenue and always tick the ‘non-domicile’ box of any UK tax return that you fill in, don’t assume that the UK tax man accepts that you are no longer UK domiciled!  At best the assumption you can make is that he accepts that your current situation means that you are not liable to any income or capital gains tax and he need not enter into correspondence with you at the time.  You need more evidence than this to prove that the UK tax man has you down as non UK domiciled.

If it is your intention to change your domicile to a new domicile of choice, serious action has to be taken on your part to prove to the UK tax man that your intention is fact.

Taking up the nationality of your chosen country and changing your passport is one such significant action.  Becoming a member of social organisations in your country of choice and severing links with any social organisations in the UK is another significant action.  Consider closing your UK bank accounts, cashing in UK investments and selling UK property.  Establish a new life for yourself in your chosen country with a new circle of friends and a property...and exercise your right to vote in the new country.  Make a will that is law in the new country and sever UK ties as much as possible.  These are all actions that can prove your intention is to remain in the chosen country and to take on the domicile of the chosen country.

PLEASE NOTE - I am not recommending that you have to take these actions...The information provided is for guidance purposes only. 

And before you take any action please consider speaking to professional taxation, financial and relocation experts as the consequences of any relocation or tax status change can be far reaching emotionally, politically and financially!

If you would like more information or assistance, tell us at Shelter Offshore how we can help.

Before I continue with the IHT ‘deemed domicile trap’ I’d like to introduce a couple of publications that might be of interest to you...one is aimed at British tax payers and the other at US tax payers - the books are updated regularly and there are most certainly similar publications available for tax payers from other countries...

The Daily Telegraph Guide to Paying Less Tax

Niki Chesworth

Taxes are an inescapable fact of life, but many people overpay their tax either through apathy or because they do not realize how they can easily - and legally - avoid paying it.

This authoritative guide offers comprehensive and detailed advice on the tax system and how it works, to ensure that, at whatever level you pay tax, you are not paying more than you have to.

Written in an easy-to-follow, jargon-free style, the book covers a wide range of tax questions including: income tax - how to pay less of it; tax codes - what you need to look out for; tax on perks; savings and investments - why you do not have to pay tax on them; avoiding capital gains tax; and inheritance tax.

Click here to order a copy directly from Amazon!

The Ernst & Young Tax Guide

Peter W. Bernstein

The official IRS tax guide from America’s leading tax and accounting firm.

“… The best tax guide of the bunch ...” USA Today “… Hard to Beat ...” Money magazine The Ernst & Young Tax Guide 2004 is the most current, authoritative, and bestselling tax guide on the market. Here is the only guide that provides complete coverage of the new tax law provisions and includes essential forms for the upcoming tax season, plus the IRSs official filing instructions for these forms. Make the most of the new tax law by learning how to save on your taxes with one of Americas leading tax and accounting firms, Ernst & Young LLP.

Click here to order a copy directly from Amazon!

Clicking the links will cause a new browser window to open - if you have a pop up blocker you will need to hold down the control key and then click the link!

The IHT Deemed Domicile Trap

The general UK inheritance tax (IHT) rules are that the entire worldwide assets of an estate belonging to a UK domiciled individual can be subject to full UK inheritance tax upon the death of the said individual, and that ‘only’ the UK assets of an estate of a non-UK domiciled person can be subject to UK inheritance tax upon the death of the said individual.  Therefore you can rest assured that the UK tax man would like to be able to prove that you are UK domiciled! 

Whatever you believe your domicile to be, for IHT purposes the UK tax man can still deem you to have been UK domiciled at death if: -

a) You only changed your domicile from UK in the past three years
b) You have been resident in the UK for 17 out of the last 20 years of your life

Making the Most of Your Status

Depending on your personal circumstances of course, changing your residence or domicile status to avoid or reduce your taxation burden can be a successful undertaking.  A lot of care and planning has to be done however, and it is worth noting that many countries’ tax rates are actually higher than UK tax rates - though generally speaking UK does have plenty of hidden taxes to make up for this fact!

Care has to be taken though, when considering a change of status from the point of view of the physical geographical location you are considering moving to.  And to achieve a long term or permanent significant taxation reduction, relocation to a tax haven or a low tax jurisdiction may be required.

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