Tax Planning and Understanding Your Status Part 1

Why are residence and domicile important when it comes to offshore taxation?

Find out in this two part tax planning article…

In a word (or two!) the reason residence and domicile are of importance to your tax status is because they affect the amount of tax you have to pay and in which countries you are liable for taxation on income, gains and your entire estate!

If you are both UK domiciled and UK resident for example, then naturally enough you are 100% liable for UK income tax and UK capital gains tax.  Furthermore, you are liable to these taxes on your worldwide income and capital gains.

But what do ‘residence’ and ‘domicile’ actually mean when it comes to tax planning?

Tax Planning & Understanding Your Status Part 1 - Residence

There isn’t actually any formal legally recognised definition of the word ‘residence’.  So, for offshore tax planning purposes it is important to understand what the tax authorities mean by ‘residence’ - and their definition of the word for their taxation purposes is actually based on a combination of statute and court decisions. 

Different countries around the world have slightly different terms relating to what defines the residence status of its inhabitants.  For the purposes of this article I shall concentrate on the UK as it offers a good general basis for the definition and application of the term ‘residence’.

Basically, you are deemed to be resident in the UK for taxation purposes if you spend more than 183 days in the UK in the tax year in question. 

Also, you can be deemed resident in the UK if you have spent less than the 183 days as detailed above, but you’ve spent on average over 90 days in the country every year for the past 4 years.  This ruling then takes place from the fifth year.

As these rules are not law and there is no statutory force to enforce them they are for your guidance only.

It is possible for the Inland Revenue to class someone as resident if they consistently skim the above rules by a few days; furthermore it is possible for them to class you as UK resident even if you are resident in another country as you can be resident in two countries at once!

With any such ruling any final decision would most likely come down to facts rather than what your intentions through your actions were.  Therefore if you intended to leave before your 183 days were up but were forced to remain for 185 days due to family obligations for example, the Inland Revenue would most likely rule based on the fact that you had remained over 183 days and class you as UK resident for taxation purposes.

It really is important not to take these rules lightly.

Ordinary Residence

If you take a long holiday away from the UK in a tax year for example, and you actually spend less than 183 days in the country as a result, you will fall into the non-resident category.  However, you can still be classed as ordinary resident in this situation, and be subject to full normal UK taxation.

How?  Again, there are no laws on this one, but if the tax man can prove that the UK is your ‘normal place of residence’ and it is not your intention to remain permanently overseas then despite the fact that you are non-resident for the tax year in question you will still be ordinary resident and liable for UK taxation in full - including full UK capital gains tax on worldwide gains.

This situation can also affect you if you move overseas but continue to own a property in the UK and visit it regularly even if the visits fall within the 90 day average rule.  Again, it all comes down to intentions and facts.  The Inland Revenue could rule that it is not your intention to remain permanently overseas and the fact that you retain this property and regularly return to UK could class you as ordinarily resident in their eyes.

If you do take up permanent residence abroad but are still being classed as UK ordinary resident for certain reasons, this situation will change after three consecutive tax years anyway as this is when the Inland Revenue accept ‘permanent’ to mean permanent!