Lose UK tax residency and be a non-dom: why it’s a pipedream

A guide to domicile and residence, inspired by an ITContracting.com reader seeking less taxing climes.

Most pre-Budget speculation isn’t helpful, writes Kevin Austin, director of overseas contracting advisory Access Financial.

But if the direction of travel matters, an ITContracting.com reader who wants to lose his UK tax residency, and gain non-dom status, will very much welcome an FT article from Monday.

‘Reeves ready to tone down tax raid on rich non-doms’

The Financial Times reported on September 27th that, ahead of Autumn Budget 2024 on October 30th, the chancellor is “ready to tone down” Labour’s long-threatened “tax raid” on non-doms.

For those affected, the Pink’un’s gist is that Rachel Reeves “won’t press on” (as an unnamed official told the newspaper), with the tax raid no matter what.

In other words, Reeves reportedly won’t go ahead with toughening former chancellor Jeremy Hunt’s plan to end the tax perk of non-dom status for UK tax residents whose permanent homes are overseas, if the numbers for the Treasury don’t stack up.

I say above, “for those affected” advisedly and with intention.

That’s because the ITContracting.com reader who says he wants to lose UK tax residency and gain non-dom status, is conflating two quite separate issues.

Tax residency isn’t domicile status

The first point that he and, in fairness, many others hoping to become unshackled from HMRC fail to appreciate, is the importance of differentiating between tax residency and domicile status.

HMRC’s definition of “UK tax residence” is complex.

But generally “UK tax residence” hinges on:

• how many days you spend in the UK during a tax year (April 6th to the following April 5th), and;
• various ties you might have to the UK.

When are you automatically considered a UK tax resident?

You can find the official definition here, specifically in “section 3” entitled “Am I UK resident for tax purposes?” But to save you looking, I will paraphrase the key parts that determine if you are a UK tax resident:

• If you spend 183 or more days in the UK in the tax year, you are automatically considered UK tax resident.
• If your only home is in the UK for at least 91 consecutive days, and you are present in that home for at least 30 days in the tax year, you are automatically a UK tax resident.
• If you work full-time in the UK for 365 days with no significant breaks, and at least one day falls in the tax year, you are automatically a UK tax resident.

Conversely, should you — or our dear reader of ITContracting.com — meet specific criteria relating to residency, and work overseas, then non-UK residency is considered automatic.

What if I don’t meet the automatic tests?

If you don’t meet any automatic tests, HMRC will assess your ties to the UK (e.g., family, accommodation, work) to determine your residence status.

My caveat, here, is that the above is a much-simplified summary.

By contrast, HMRC’s guidance on UK tax residence is extensive and complex. So if these matters matter to you, and you appear to be affected, I recommend that you consult HMRC’s official documents. One relevant collection of HMRC documents is here.

My additional recommendation is that you strongly consider seeking professional advice if you’re at all unsure about your residence status.

Keep in mind, that your UK tax residence status affects your liability to UK income tax, capital gains tax, and inheritance tax.

Domicile status: explainer

Now, let’s turn to domicile status.

HMRC considers an individual UK-domiciled if:

1. They have their permanent home in the UK, which is usually the country their father considered his permanent home when they were born (‘domicile of origin’).
2. They have made the UK their permanent home and have no intention of leaving (‘domicile of choice’), which involves a significant change in lifestyle and a clear intention to remain indefinitely in the UK.

HMRC considers an individual non-UK domiciled if their permanent home is outside the UK, and they do not intend to make the UK their permanent home.

Domicile versus Residence

Domicile is different from residence.

You can be a UK resident for tax purposes but still be non-UK domiciled.

Domicile status affects how you are taxed on worldwide income and gains.

UK-domiciled individuals are taxed on their worldwide income and gains. Non-UK domiciled individuals are generally and currently only taxed on UK income and gains, and foreign income and gains remitted to the UK. They may also be eligible for the remittance basis of taxation.

The 15-year, 17-year, and four-year rules…

For income tax and capital gains tax purposes, these ‘non-doms’ become domiciled after being UK residents for 15 out of the previous 20 tax years.

For inheritance tax (IHT) purposes, non-doms become deemed domiciled after being UK residents for 17 out of the last 20 years.

There’s a further cut-off to bear in mind.

Deemed domicile status ceases after being non-UK resident for four complete tax years.

All change from April 6th 2025

However be aware — this is scheduled to change from April 6th 2025, when the distinction will disappear.

From this point onwards,  the basis for taxation will depend on residence alone.

What is the UK’s Statutory Residence test?

The UK’s Statutory Residence Rules (SRT) are a set of tests HMRC uses to determine an individual’s UK tax residence status.

Here’s a breakdown of the three critical components – the Automatic Overseas Tests; the Automatic UK Tests and the Sufficient Ties Test.

1. Automatic Overseas Tests

If you meet any of these tests, HMRC considers you automatically a non-UK resident (even if you meet other UK ties tests).

The tests include:

• You were a UK resident in one or more of the three previous tax years and spent at most 16 days in the UK in the current tax year.
• You were not a UK resident in the last three tax years and spent fewer than 46 days in the UK in the current year.
• You work full-time overseas (at least 35 hours a week) with no more than 30 work days in the UK.

Please note, a “work day” counts as three or more hours, and you are present for no more than 90 days in the UK annually.

2. Automatic UK Tests

Next, if you pass any of these tests, HMRC will automatically consider you a UK resident.

The tests include:

• You spend 183 or more days in the UK in the tax year.
• Your only home is in the UK for 91 consecutive days or more, and you actually use it for at least 30 days a year. (This emboldened part is one of a few conditions that snookers the ITContracting.com reader hoping to shake off UK tax residency)
• You work full-time in the UK for 365 days with no significant break of 31 days or more.

3. Sufficient Ties Test

If you don’t meet any of the automatic tests, HMRC will assess your various ties to the UK to determine your residence status.

Ties include:

• Family ties (spouse/civil partner, minor children)
• Accommodation ties (having a place to live in the UK)
• Work ties (employment or self-employment in the UK)
• Other ties (e.g. UK bank accounts, memberships in UK clubs)

Then, at this stage, the question many often ask is:

Will being a non-tax resident be tax-beneficial?

The answer depends entirely on where you plan to relocate.

Bear in mind, UK tax laws include direct and indirect taxes and social security contributions.

–         Direct taxes cover income tax, capital gains tax and IHT.

–         Indirect tax includes Value Added Tax (VAT) and customs duties such as Road Fund licences, Fuel Duty and others.

Labour has said it won’t increase income tax rates and national insurance tax rates for five years.

But there have been repeated mentions in the press (quoting government sources) of a substantial ‘black hole’ in the UK’s public finances that needs plugging.

Autumn Budget 2024 will plug the £22bn black hole

This “£22billion” black hole (according to Labour) is set to inspire the chancellor to raise taxes at Autumn Budget 2024.

There are already whispers in Whitehall of incoming increases in IHT reductions to tax-free thresholds, and bringing Capital Gains Tax in line with Income Tax. Even imposing CGT on death has been mooted!

The CGT ‘exit tax’

Ominously for our ITContracting.com reader who is looking at life outside the UK in the least taxing way possible, there’s a risk that he and many others might be jumping out of the frying pan and into the fire.

Aware that some 9,500 millionaires are set to leave the UK in 2024 (according to the Henley Private Wealth Migration report), chancellor Reeves is reportedly eyeing a so-called ‘exit tax.’

This is the new name being given to a rumoured plan from the Treasury’s boss to put an end to the current CGT rule that permits entrepreneurs and investors to pay no capital gains tax on UK shares if they leave Britain for five years.

If this ‘exit tax’ or new CGT levy comes to pass, it will mean that leaving the UK will not be cost-free, even if such a decision to exit is due to extra costs in-country.

Finally, who needs a passport anyway?

So to those individuals who have a high income and assets (potentially including the ITContracting.com reader who inspired this piece), or if you’re an individual who plans to acquire such assets, all the signs are that now is the time to shift from the UK and into a lower-tax jurisdiction.

And crucially take this step before October 30th.

With the acronym ‘HMRC’ clearly already written on the wall for people with high incomes and accumulated wealth, what really remains to be seen is how long it will be before the new UK government follows the US practice of taxation following citizenship, in which case the only way to shed tax liability will be to renounce your passport.