How to Use Your Domicile to Save on Taxes in the UK

James
Sep 9
4 min read

Tax domicile is a legal concept that determines how individuals are taxed based on their permanent connection to a country. In the UK, this status plays a crucial role in regulating the taxation of income and assets, particularly for inheritance tax purposes. The term “domicile” may be unfamiliar to many, but it’s essential for anyone exploring tax optimisation in the UK.

When someone is described as having a UK domicile, it means they are legally tied to the UK by birth, choice, or long-term commitment. Contrary to common belief, domicile is not simply a matter of permanent residence. Many immigrants living in the UK for 10–15 years retain the domicile of their country of origin. Additionally, UK tax law has introduced the concept of deemed domicile for long-term residents, which can complicate matters for those unfamiliar with British tax regulations.

This article explains the concept of domicile, its types, and how it can be used to save on taxes. Whilst it won’t make you an expert in tax planning overnight, it will provide a clear understanding of domicile and its tax implications. For tailored advice, consult a qualified tax specialist.

What Is Domicile by Birth?

In most cases, domicile of origin (or birth) applies to individuals whose father was domiciled in the UK at the time of their birth. The key factor is the father’s domicile, not the individual’s place of birth or residence. For example:

A person born abroad to a UK-domiciled father retains a UK domicile, even if they live and pay taxes in another country.
Their foreign assets may still be subject to UK inheritance tax (up to 40%) on their death, regardless of their tax residency elsewhere.

Domicile reflects a deeper connection to the UK than tax residency, immigration status, or citizenship:

Tax residency depends on time spent in the UK and specific ties (e.g., work or family), as determined by the Statutory Residence Test.
Immigration status (e.g., a residence permit or biometric residence card) grants legal permission to stay in the UK but does not affect domicile.
Citizenship indicates nationality but does not automatically confer UK domicile. Many naturalised UK citizens retain their original country’s domicile.

Key Characteristics of Domicile

A person can have only one domicile at a time, unlike citizenship, which can be multiple.
Everyone has a domicile; there are no “domicile-less” individuals.
Domicile is typically determined by permanent residence unless actively changed.
Domicile remains unchanged until the individual intentionally adopts a new domicile.
Domicile is distinct from nationality, citizenship, or immigration status, though these may influence it.

Under UK law, naturalised immigrants typically retain the domicile of their country of origin unless they actively choose a UK domicile (known as domicile of choice). To acquire a UK domicile, they must demonstrate a clear intention to remain in the UK permanently and sever significant ties with their original country.

Why Is Knowing Your Domicile and Tax Status Important?

Domicile is not just an archaic legal term from English common law—it significantly impacts taxation:

UK-domiciled tax residents pay tax on their worldwide income and are subject to inheritance tax (IHT) on their global assets, including gifts made in the seven years before death.
Non-UK-domiciled tax residents can benefit from the remittance basis, where foreign income and gains are taxed only if brought into the UK. This allows significant tax savings if foreign assets are managed carefully.
Deemed domicile: After residing in the UK for 15 of the past 20 tax years, non-UK-domiciled individuals are treated as UK-domiciled for IHT purposes, losing some remittance basis benefits.

Understanding your domicile and tax status allows you to plan your finances strategically. For example, before becoming a UK tax resident, you can convert foreign assets (e.g., property) into cash to create clean capital, which is exempt from UK tax when remitted. This can help avoid taxes like capital gains tax or IHT on foreign assets.

Obligations of UK Tax Residents

All individuals with UK-sourced income must pay taxes, regardless of tax residency. However, UK tax residents have additional obligations:

They must declare and pay tax on all income (UK and worldwide) for the entire tax year (6 April to 5 April).
Exceptions apply to employees living solely on UK salary income, who may not need to file a tax return if tax is deducted via PAYE (Pay As You Earn).

Tax returns must be filed by HMRC deadlines (typically 31 January for online submissions following the tax year). Late filing can result in penalties. Income tax is calculated on a progressive scale:

For the 2025/26 tax year, the personal allowance (tax-free income) is estimated at £12,570 (subject to confirmation).
Income tax rates range from 20% to 45%, depending on income levels.
Individuals with annual income above £125,140 lose the personal allowance entirely.

These rules apply consistently across England, Wales, and Scotland, though Scotland has slightly different income tax bands.

How Do Non-Domiciled Residents Save on Taxes?

Non-UK-domiciled tax residents can use the remittance basis to avoid tax on foreign income and gains unless they are brought into the UK. However:

The remittance basis may require an annual Remittance Basis Charge (e.g., £30,000 or £60,000) for long-term residents (7+ or 12+ years in the UK).
After 15 years of UK residency, individuals become deemed domiciled, losing access to the remittance basis for IHT and taxing worldwide assets.
To maximise savings:
Sell foreign assets (e.g., property) before becoming a UK tax resident to create clean capital.
Keep foreign income and gains in offshore accounts to avoid remittance.
Plan asset transfers to minimise IHT exposure, especially if approaching deemed domicile status.

How to Determine Your Tax Status in the UK

Determining your tax residency status is critical for planning. The UK’s Statutory Residence Test (SRT) evaluates factors such as:

Time spent in the UK (e.g., 183+ days automatically makes you a tax resident).
Ties to the UK, including family, accommodation, work, and prior stays (e.g., the “90-day rule” for previous tax years).

You can complete the SRT on HMRC website in about 10 minutes using a calendar and calculator. More importantly, understanding when you will become a tax resident allows you to prepare your assets in advance. For example, selling foreign property before tax residency can increase your tax-free clean capital.

For expert guidance on navigating UK tax residency and domicile rules, contact our team at Foundry Accounting. We specialise in helping immigrants optimise their tax position and meet HMRC deadlines.