The terms of Residence, Ordinary Residence and Domicile are complex but crucial for individuals considering Qualifying Recognised Overseas Pension Schemes (QROPS).
This note aims to give a brief overview of the various terms and their importance from a taxation perspective.
We’ll start with some important definitions:
- Residence - the category in any one tax year
- Ordinary Residence - category on a regular basis
- Domicile - the country of permanent home.
UK Residence
Your UK resident status is determined each tax year from 6th April to 5th April. You are definitely resident if you spend 183 days or more in the UK. Days of arrival and departure are normally disregarded. HMRC are aware this may distort the time you actually spend in the UK. Therefore in extreme circumstances will allow nights spent in the UK. So a person arriving one day and leaving the next would count as one day in the UK. Check before committing to this arrangement with your tax professional.
The 183 days do not have to be consecutive.
Ordinary Residence
The test for ordinary residence is whether visits to the UK are in a regular pattern over several years.
The ruling is confirmed after one year provided that visits to the UK have been more than 90 days. Or vice versa you are not Ordinarily Resident if you spend less than 91 days in the UK.
Otherwise you remain ordinarily resident for three years unless you do not visit the UK at all in one tax year. After three years the situation is reviewed and enforced retrospectively if required by HMRC.
Habitual and Substantial Test
Residency can also be determined if you make habitual and substantial visits to the UK.
- Habitual - continuing over four consecutive tax year.
- Substantial - if visits average 91 days a tax year or more. The average being taken over a maximum of four tax years
Domicile
Residence can be determined by a set of rules but Domicile is a legal term.
Domicile can be explained as the country the individual would consider home and where they would expect to return after a period abroad. It is therefore a more permanent concept than residence.
In some countries Domicile can mean the right of residence which is not the meaning in the UK.
An individual can acquire a Domicile of Choice so long as a move abroad has the intention of permanency. There are no set rules but physically residing permanently there is one of the most common.
HMRC will balance the ties with Domicile of origin with Domicile of choice and make a judgement.
You are generally Domicile in the UK if you have been resident for tax purposes for at least 17 out of the previous 20 years. Tax residence is determined by the above rules.
Deemed Domicile for Inheritance Tax
Whilst the purpose of this note is with regard to QROPS the effect of Domicile has great implications for Inheritance tax.
QROPS are an exempt transfer so not liable to UK Inheritance Tax.
Not Resident and Not Ordinarily Resident
If you are UK Domicile and go abroad for sufficient time:
- Earned Income - There is no income tax on employment income outside of the UK. Earnings in the UK remain taxable unless incidental to employment abroad.
- Investment Income - There is no UK liability to overseas income and no tax is deducted at source from UK bank and Building Society deposit accounts provided you supply a non residency certificate.
- UK investment income - is taxable but a non resident's UK tax liability cannot be more than the tax due on the non resident's income if investment income were excluded and no personal allowance given.
- Pension Income - The UK state Pension and other Pension income are taxable (important; see notes on Double Taxation Agreement).
- Income from UK property is taxable.
Double Taxation Relief
Where a liability to tax on income and or gains is from one country and the individual is resident for tax purposes in another there may be a liability under each country's tax legislation. The UK has negotiated double tax treaties with many countries around the world to help avoid this problem.
(For Non UK Residents) Exemptions may exist where non residents receive relief from UK tax on the following types of income:
- Pensions (other than government pensions)
- Royalties
- Dividends
- Interest
Individuals must be liable to tax in the country concerned before qualifying for relief from the UK tax.
Non Resident and Pensions
Individual advice must be taken regarding taxation of Pensions abroad. Whilst in its simplest form of receiving a Pension Income (such as Income Drawdown) from the UK, the Pension Company will remit the income to you Gross with no tax deducted.
Do not treat this Gross payment as an exemption from tax. The paying agent or Pension company will report that information and information about the income payment to its own tax authority, who will pass it on to the tax authority of the country or territory in which the individual is resident.
Many European and other countries have different rules for taxing Pensions which can reduce your tax liability significantly. You do need to structure your income correctly in order to benefit from lower taxation.
As already seen there are significant further advantages via QROPS which will deliver a highly flexible and tax efficient retirement plan compared with a UK scheme.
Important Notice
Gerard Associates Ltd. Financial Advisory Services does not provide this information as advice and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.
It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.
This has been prepared based on our understanding of current legislation and tax practice as at the date above. The information is specific to QROPS and does not cover all the aspects of domicile and residency with regard to other tax implications and liabilities. This information is subject to change, and may result in income tax consequences different from those detailed below.
We cannot accept responsibility for its interpretation or any future changes to law.
Any advice and recommendations will be given in writing.
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