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Why are residence and domicile important?
Some migrants to the UK, or international students who study in the UK, may pay less tax in the UK than those who have lived in the UK all of their lives. This is due to their residence and domicile status. Here we explain why these two concepts are important.
Your tax residence status and domicile status affect the extent to which you are liable to tax in the UK. Tax residence is a short-term concept and is determined for each tax year in isolation, reflecting where you reside. Domicile is more long-term and refers to where you consider you have your permanent home over the course of your life. You can retain a domicile overseas even if you live in the UK for several years. It is relatively unusual to change your domicile, though in some cases you may be deemed UK domiciled.
However, regardless of your residence or domicile status, income which arises in the UK is generally taxable in the UK. Your residence and domicile statuses are therefore important for determining the extent to which any foreign (that is, non-UK) income is taxed in the UK.
If you are resident and domiciled in the UK, then you are taxable in the UK on your worldwide income and gains. Most people who were born in the UK and have lived in the UK most or all of their lives will be resident and domiciled in the UK.
However, most migrants who come to the UK to live here for at least six months but do not intend to remain here permanently or otherwise retain ties to their home country will usually become resident here but retain a non-UK domicile. Alternatively, if you only come to the UK for a short period, or do not spend very much time in the UK, then you may not become resident here at all.
If you do not become tax resident in the UK, your foreign income and gains do not become in scope of UK tax. If you are resident but not domiciled in the UK, there are special rules (known as ‘the remittance basis’) which might apply to your foreign income and gains. These might mean you do not have to pay any UK tax, or otherwise a reduced amount, on your foreign income and gains. Note that your domicile status is normally only relevant if you are resident here; if you are non-resident then your foreign income and gains are out of scope of UK tax and the remittance basis is not applicable.
As a general rule, a non-resident individual is also not liable to capital gains tax in the UK (even on assets situated in the UK unless they are used in a trade here) – however this is subject to a number of exceptions.
Even if you are liable to UK tax on your foreign income and gains, if you have also paid tax on them in another country, double taxation agreements can help ensure you do not pay tax twice. Double taxation agreements can also help you when your UK income is taxable in your home country, if you remain tax resident there. Where there is no double taxation agreement, you may still be eligible for some relief under UK domestic law.
In addition, it is important to know whether or not you are UK resident, as this may affect your entitlement to UK income tax and capital gains tax allowances and exemptions. If you are entitled to the UK personal allowance, note that this is not apportioned where you are only in the UK for part of the tax year. Therefore, for the tax year of arrival and the tax year of departure, where you are generally only taxable in the UK for part of the year, you may be entitled to a tax refund if you have not received the benefit of the full personal allowance in the taxes which have been deducted from employment income.
For migrants who are entitled to the personal allowance and do not have any foreign income and gains, the UK tax system is generally much the same as for those who have lived in the UK all their life.
You can find more information on the concepts of residence and domicile in HMRC’s Residence, Domicile and Remittance basis booklet (RDR1) available on GOV.UK.