This is a very brief guide to a very complex subject. Those professional advisers ‘in the know’ won’t need it, though one or two might have some observations to make. Others may find it helpful as an introduction which they can take further with their own advisers.
I shall explain below what the various terms mean. If you are ‘resident’ and ‘domiciled’ within the UK for tax purposes, then you will pay Income Tax and Capital Gains Tax on income and gains wherever in the world they arise on a tax year to tax year basis (6 April – 5 April). And any gifts of assets wherever in the world they may be located (their ‘situs’), whether during your lifetime or on death, may be subject to Inheritance Tax.
It is where someone is resident and/or domiciled outside the UK that things become more interesting. Here the Question should be asked: are there any UK tax mitigation steps which might usefully be taken?
An individual is resident in the UK if he/she at least spends 183 days or more in the UK in a tax year, as will they also be if any of two rather complex sets of rules applies (called the Automatic Residence Test and the Sufficient Ties Test).
Within overall UK tax residency, an individual may be resident in Wales, in Scotland or in Northern Ireland, rather than in England, whether for tax or for other purposes.
Someone who is not UK resident pays tax only on income which arises in the UK, whether earned or unearned.
Your domicile (which is distinct from nationality) is the country in which you have chosen to make your permanent home, under the general law. You acquire a ‘domicile of origin’ at birth (taking on usually your father’s domicile), which most people retain throughout their lives. However, you could establish an independent ‘domicile of choice’ by leaving your native land to settle permanently in the UK for example.
There is a special ‘deemed domicile’ rule which applies for UK tax purposes (only) once you have become resident in the UK for at least 15 years. For Inheritance Tax purposes only, being deemed UK domiciled ceases to apply once an individual has been non-UK resident for four consecutive tax years.
I should say also that, while we are talking about UK domicile, an individual is strictly speaking domiciled in England and Wales, in Scotland or in Northern Ireland, all of which are embraced within UK domicile.
Location of assets (situs)
The location of a house/flat or land goes without saying. Shares in a company or units in a unit trust will be located where the (principal or only) register of shareholders is kept. Other assets (‘movables’) will be located where they are physically situated from time to time, which might apply to paintings or jewellery and so on.
Income Tax/Capital Gains Tax
Before a UK resident individual begins to be treated as domiciled in the UK for tax purposes, any income or gains arising outside the UK are free from UK tax, subject to making an election for the remittance basis, unless the income or proceeds of sale are remitted to the UK, in which case they are subject to UK tax. Once a individual has been UK resident for at least seven years, a remittance basis election can be made only if a payment of either £30,000 or £60,000 each year is paid, depending on the number of years they have been UK resident.
If at the date of lifetime gift or death the individual is domiciled outside the UK and not deemed domiciled in the UK, assets situated outside the UK do not come into charge. Once deemed domicile (without also actual domicile) arises, Inheritance Tax is levied on a worldwide basis. In any event, it should be said that there will typically be relief from double taxation, typically under a Double Tax Treaty. For example, if a UK domiciliary owns a house abroad in a country which levies a 20% charge on death, that 20% will count as a credit towards the liability of up to 40% which is paid in the UK.
With someone who is not UK domiciled for UK tax purposes, a gift (whether during lifetime or on death) of property situated in the UK will come into charge (as also some interests in offshore entities holding interests in UK land).
A concluding observation on Wills
If you, as a UK domiciliary, own a house or flat abroad it is sensible to have two Wills concurrently (ensuring that neither revokes the other!). So, for example, for a house in France, you would have a French Will governing the inheritance of that property (for which French Law rules would apply) and a UK Will which expressly covers property wherever in the world it may be other than in France.
There are certain well-established steps you can take year by year or on an ongoing basis to mitigate your liability to UK taxes. Here you should take proper professional advice.