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Few subjects are more confusing for British expats than the subject of “domicile and residency” Whilst it may be tempting to ignore these terms, they have a huge impact on your financial plan as a British person living abroad – especially regarding your tax liability.
Below, our Murcia financial planners here at Scottsdale offer a short guide to discerning the main differences between domicile and residency. We include some ideas about how to navigate the rules confidently in light of your unique financial goals and situation as an expat.
If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
Domicile and residency explained
Most British people will never need to worry about these two concepts since they spend their whole lives in the UK. However, for those spending significant time abroad – e.g. for work or retirement – domicile and residency are very influential in determining expats’ relationships with their host countries and the UK.
In simple terms, residency is a legal concept which helps governments figure out where a person lives (i.e. where their “home” is established). This is largely determined by the amount of time the individual is located in a specific country within a given timeframe.
In the UK, for instance, an individual is usually deemed a “UK resident” if they spend at least 183 days in the UK in a tax year. This can create confusion since the UK tax year runs from April to April, yet other countries (e.g. Spain) base their tax years on the calendar year.
In Spain, an individual is typically regarded as a Spanish tax resident if they have been in Spanish territory for at least 183 days within a calendar year.
Domicile, by contrast, is less about your current “home” (which might change) and more to do with determining your “homeland”. The concept tries to articulate where an individual’s “roots” are. For instance, a migrant to the UK can become a UK resident if they spend at least 183 days in the country within a tax year (April to April). However, their domicile will likely be from somewhere outside of the UK, such as Spain.
Why are these terms important?
Your residency status can be vital in determining your rights when living in a foreign country as an expat. For instance, it may affect your right to vote in local elections and your access to state-funded healthcare.
Residency is important when establishing your tax liability, especially in the more immediate term (e.g. income taxes). If you are still considered a British resident for tax purposes, even if you recently moved to Spain, then your salary may only be subject to UK income tax.
However, if you become a Spanish tax resident then you might need to pay Spanish income tax instead. The UK’s double taxation treaty with Spain should prevent you from getting taxed twice on the same income.
Domicile is also highly influential in determining which taxes you pay. For instance, a “typical Brit” (UK resident and UK domiciled) will pay UK tax on their worldwide income and gains – regardless of whether these were generated at home or abroad.
By contrast, a UK resident who is also non-domiciled (e.g. a recent migrant to the UK) will pay UK tax on their income and gains sourced in the UK – for instance, that from a local employer. However, this person can choose whether to pay UK tax on income and gains generated from overseas – e.g. dividends from a company they still own in their home country.
For British expats living in Spain and other countries, it is highly unlikely that your domicile will change. This is important to know, especially since some expats assume that, by relocating, they have shed their liability to UK taxes (e.g. inheritance tax) – which is not usually correct!
How do I navigate residency and domicile?
As mentioned, changing your domicile as a British national is very difficult and requires a lengthy, complex process to try and prove that you have “severed all ties” with the UK (i.e. you intend to live abroad and never return).
Changing your residency, however, is much easier and can happen without an expat realising if they are not careful – e.g. by spending over 183 days in Spain in a single calendar year. This can lead to unexpected tax bills if you are not careful, so it is important to plan ahead.
Due to the complexities involved in different jurisdictions (it is possible to be tax resident in multiple countries at the same time!), we recommend seeking professional advice to ensure that you meet the requirements of the UK and your host country in a tax-efficient way.
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407