Domicile and Residency - Two words with different meanings when it comes to tax

Domicile and residency – terms regularly misunderstood and misplaced. But from a tax perspective, it is important to understand the difference since the impact can be significant.

Under common law, an individual can only be domiciled in one place, which is regarded as their natural home country.  For global citizens moving around, it is worthwhile remembering that giving up domicile can be challenging to say the least.

And for those who are UK Domicile, there can be widespread consequences, which mainly means the inclusion of worldwide assets for Inheritance Tax computation upon death. 

This is a typical misconception for global citizens and their families, who may have lived overseas for a large portion of their lives.  Time away from your home country does not automatically mean that you are no longer domicile. To make things easier to understand, there are generally two key tests that would determine a change in domicile.

Firstly, an individual must demonstrate that they physically live in the country and can remain in that country regardless. 

Secondly, it is the intention to live in that country on a permanent and indefinite basis and have no intention to live elsewhere.

Where individuals are married to someone who does not share the same domicile, the problem deepens. 

When trying to lose one’s domicile, be mindful that you need to ‘cut all ties' with your original country of domicile to have any chance of changing.  

Expats tend to have a special bond with their former countries which can be their downfall.  Having a property that you rent, or being a member of a social club, or even an old library card can connect you. Even something simple like arranging for your funeral to be back in the UK, a golf membership, or football season tickets could keep you UK domiciled. 

Another common misconception is that changing one’s passport will preclude you from domicile; but this is merely a travel document and has no impact on domicile nor residency. 

Residency is based on your physical location and changes depending on where and how long you are resident. It can constantly change but domicile is likely to remain static. 

Most importantly, once you are familiar with these two terms it is then important to understand how this affects you, your family, and your business in terms of taxation during and after your life.

Discover our holistic approach to understanding your domicile and residency status, as well as all the consequent planning to go with it.