An individual's residence and domiciled status are important factors in determining their UK income tax liability. There are two main bases on which UK tax residents can be taxed - the arising and remittance basis. 

The arising basis means individuals are taxed on their worldwide income and gains. In contrast, the remittance basis allows non-domiciled residents to be taxed only on the income and gains they bring into the UK. Each basis has pros and cons, and an individual's circumstances will determine which is more suitable for them. Understanding the rules around residence, domicile, and the two tax bases is key.

Residence status in the UK

UK tax residence status is determined by whether you meet one of three automatic UK tests or if the HMRC decides you are resident under the sufficient ties test. The tests are:

Automatic UK tests:

  • If you spent 183 or more days in the UK in the tax year 
  • If your only home was in the UK - you must have owned, rented, or lived in it for at least 91 days and spent at least 30 days there in the tax year.
  • If you work full-time in the UK (averaging at least 35 hours a week)

Sufficient ties test:

This test will be applied if you do not meet any automatic residence tests. It considers your ties to the UK, including factors like time spent in the UK, family location, accommodation, work, etc. 

  • If you are a UK resident, you normally pay UK income tax on your worldwide income and gains.
  • Domicile Status

In addition to UK residence, an individual's domicile status also affects how they pay UK income tax. Domicile usually refers to the country which an individual considers their permanent home. Most people have the same domicile their entire life. You inherit the domicile of your father when you are born. 

There are three types of UK domicile status:

UK Domiciled: If you have a UK domicile of origin or have acquired a UK domicile of choice.

Deemed UK Domiciled: If you were a UK resident in at least 15 of the last 20 tax years, you would be deemed UK-domiciled for income tax. 

Non-UK Domiciled: If you are a UK resident but do not have a UK domicile under the above two categories. 

UK Domiciled Individuals 

If you are UK-domiciled, you cannot use the remittance basis and pay tax on the arising basis. This means you are taxed on your worldwide income and gains.

Non-UK Domiciled Individuals

  • If you are non-UK domiciled but a UK tax resident, you can choose to pay tax on either:
  • Arising basis – taxed on worldwide income. 
  • Remittance basis – only taxed on funds brought into the UK.
  • It would be best if you made this election each tax year. 
  • The Arising Basis

UK-domiciled residents must use the arising basis. Non-doms can also elect to use it voluntarily. You pay UK tax on foreign income and capital gains each tax year.

Types of income taxed on the Arising Basis

  • Employment income 
  • Rental income on UK and overseas property
  • Dividends, interest, royalties  
  • Income from a business or partnership  
  • Capital gains on worldwide assets

Advantages of the Arising Basis

1. Simplicity – It is easier to calculate taxes when all income is taxed in one country. Avoid complex remittance basis rules.

2. Offset losses - arising basis allows you to offset worldwide losses against UK income and capital gains. 

3. Inheritance tax - voluntary arising basis election gives non-doms access to full inheritance tax exemptions after being UK resident for 7 of the previous nine tax years.

4. No remittance basis charge – no additional £30,000 or £60,000 annual charge if non-UK domiciled.

Disadvantages 

1. Higher tax liability – increased UK tax on worldwide income and gains, which may have been lightly taxed abroad.

2. Repatriation of funds – global income must be repatriated to the UK to pay taxes. Trigger tax charges abroad. 

3. Reporting complexity – full reporting of worldwide income to HMRC annually.

4. Lost flexibility – cannot benefit from remittance basis, which may allow income and gains to escape UK taxation.

When the Arising Basis Works Best

The arising basis suits those who:

  • Have primarily UK-based income 
  • Own UK assets that do not generate foreign income
  • Have income that bears substantial foreign tax
  • Are you living long-term in the UK
  • Using the arising basis simplifies tax affairs for such UK-centric non-doms.
  • The Remittance Basis 

If non-UK domiciled, you could use the remittance basis and only pay UK tax on funds remitted here. Income and gains not remitted to the UK remain outside the scope of UK taxation.

Types of income taxed

On a remittance basis, you pay UK tax on any money you bring into the UK, including any credit card bills that you have spent in the UK. You do not pay UK tax on foreign income or gains not remitted. To reduce your tax liability, it is advisable to seek the advice of a tax consultant and look for investments that are considered clean capital.

'Remitted' Funds: Funds are considered remitted and taxable in the UK if they are brought into or enjoyed in the UK, such as:

  • Transferring overseas income into a UK bank account
  • Spending overseas income whilst physically in the UK
  • Paying for UK goods or services using overseas income
  • Having overseas income directly paid to UK expenses 

Advantages

1. Deferral - delays UK tax payments until funds remitted

2. Avoid UK tax - income that remains overseas may escape UK tax entirely 

3. Plan remittances - carefully plan the timing of remittances to the UK

4. Maintain offshore investment flexibility - easier to continue investing globally whilst resident in the UK

Disadvantages

1. Complex reporting - detailed records needed on remitted and non-remitted funds  

2. Restrictions - cannot offset overseas losses or capital losses against UK gains. No foreign tax credit relief is available. 

3. Remittance basis charge - additional £30,000 or £60,000 if over the long-term resident threshold 

4. No inheritance tax break – IHT relief requires arising basis for non-doms

When the Remittance Basis works best  

The remittance basis benefits those who:

  • Have significant overseas assets or entrepreneurial investments 
  • Are investing privately offshore 
  • Spend significant time working or living outside the UK
  • Have limited UK financial ties or assets  
  • It maintains international investment flexibility and defers UK taxation for globally mobile non-doms.

Long-term UK residents

Additional remittance basis rules affect non-dom individuals who have been UK tax residents for 7 out of the last nine tax years. They can remain on the remittance basis but must pay:

£30,000 remittance basis charge if resident for at least 7 of the previous nine tax years   

£60,000 charge once resident for 12 of the preceding 14 tax years.

This could still compare favourably against arising basis for significant overseas income. But inheritance tax benefits now only apply to those using the arising basis.

Making the right election: As seen above, being a non-domiciled UK resident with overseas income or gains allows some tax flexibility - whether to be taxed on the arising or remittance basis each year. 

There are good reasons to elect for both bases depending on individual situations and income sources over time. Careful handling is needed, though, around the tax implications of transferring funds to and from the UK.

Residence and domicile are fundamental concepts that shape individual UK tax exposure and planning. Non-doms benefit from choosing whether to remit or declare worldwide income and gains annually. However, UK-centric individuals, and those staying long-term, should consider the simplicity and tax advantages of being UK-domiciled and assessed on the arising basis.