UK: New rules on residence and domicile


£30,000 remittance basis charge may apply to individuals who are not ordinarily resident and / or not domiciled in the UK.

The Finance Act 2008 introduced great changes to the UK taxation of individuals who are resident but not ordinarily resident in the UK and / or not domiciled in the UK.  This article explains how the changes affect the UK taxation of participants in employee share plans.

Who do the new rules affect?

The new rules are aimed at individuals who are resident but not ordinarily resident in the UK or who are not domiciled in the UK, particularly high net worth and high earning individuals.

Background – residence and domicile

The UK recognises different types of residence status and the rules governing these are extremely complex.

However, a very broad-brush description is as follows for an individual who comes to the UK for the first time with no definite intentions about how long he or she will stay and is living in short-term rented accommodation:

  • If physically present in the UK for less than 183 days in a tax year, he or she may be non-resident (NR) in the UK until 183 days have been spent in the UK; then
  • If physically present in the UK for 183 days or more in a tax year, but less than three full tax years, he or she may be resident but not ordinarily resident (RNOR) in the UK from the 183rd day of arrival; or
  • If physically present in the UK for 91 days or more on average each tax year, he or she may be resident but not ordinarily resident (RNOR) in the UK from the beginning of the fifth tax year; and finally
  • If physically present in the UK for three full tax years or more, he or she is likely to be resident and ordinarily resident (ROR) in the UK from the start of the fourth tax year of arrival.

The concept of domicile is also very complicated but for the purposes of this article it means an individual’s permanent home, so, for example, an individual who was born outside the UK may be domiciled outside the UK – this cannot, however, be taken as a general rule.  The country in which a person is domiciled can be different from his or her country of residence or nationality.  There is a special type of deemed domicile for inheritance tax purposes which may be different from an individual’s domicile for other tax purposes.

It is always necessary to examine the facts and circumstances of each individual’s case in order to establish residence or domicile status.

HM Revenue & Customs (HMRC) booklet IR20 explains the liability to tax in the UK for residents and non-residents and domiciled and non-domiciled individuals.  This was updated in July 2008 to reflect the changes under the Finance Act 2008 but it is only interim guidance on the changes while HMRC work on a more detailed update of the booklet to explain the changes more fully.  This is expected to be issued later this year.  In the meantime, the interim version can be found here:

Changes to the calculation of days of physical presence in the UK

Under the new rules, if an individual is present in the UK at the end of the day (i.e. midnight), that day will count as a day of UK presence for tax purposes regardless of the reason for being in the UK.

There is a limited exception for transit passengers, provided that anyone arriving in the UK as a passenger departs from the UK on the next day and that the individual does not engage to any substantial extent in activities that do not relate to travel during the time between arrival and departure.

Remittance basis

Need to claim to benefit if unremitted income and gains > £2,000

UK residents who are not UK domiciled or who are not ordinarily resident in the UK can use the remittance basis of taxation, that is, any income and capital gains arising overseas are only taxed in the UK when that income or gain is remitted to the UK.

To do this, the individual must make a claim on his or her Self Assessment tax return.

A claim applies to the particular tax year for which it is made, so it is not a permanent decision. There is a catch in that if an individual chooses not to claim the remittance basis for a particular year and during that year remits income from a previous year when the remittance basis applied, he will be taxed on those remittances.

There is an exception to the general rule: the remittance basis remains automatic for individuals with unremitted income and gains in a tax year of less than £2,000.

£30,000 charge

Individuals entitled to claim the remittance basis who have been UK resident for at least 7 out of the last 9 tax years (including years prior to 2008/09) preceding the relevant tax year will be liable to pay an annual "remittance basis charge" of £30,000 in order to claim the remittance basis.

This charge is in addition to tax on remittances made, but money remitted to the UK to pay the £30,000 charge will not be taxable.

This annual charge will be a tax rather than a levy, which means that it can be taken into account for double taxation relief purposes.

The £30,000 only applies to individuals who have unremitted foreign income and gains in excess of £2,000 a year.

HMRC have also published a helpful flowchart on whether an individual has to pay the remittance basis charge:

Loss of individual allowances

Individuals claiming the remittance basis lose their entitlement to income tax personal allowances (in May 2008 this was set at £6,035 for individuals aged under 65 in tax year 2008/09) and to the capital gains annual exemption (£9,600 for individuals in tax year 2008/09).

Again, there is an exception for individuals with unremitted income and gains in a tax year of less than £2,000, who continue to benefit from personal and annual allowances.


If income or capital gains are brought into the UK in some way, they are generally treated as remitted to the UK.  The scope of remittances has been extended so that, in particular, the following now constitute remittances to the UK:

  • assets which have been purchased with unremitted income or gains are brought in to the UK and then sold (or otherwise turned into cash in the UK);
  • money, property or services derived from unremitted income or gains brought into the UK; and
  • the payment of interest out of offshore income on loans made outside the UK which is advanced into the UK, for example a loan to fund the purchase of UK located assets, such as houses.

There are exemptions for personal effects, assets costing less than £1,000, assets brought to the UK for short-term repair and artwork brought to the UK for public display or for educational purposes.

Effect on employee shares and options

The taxation of employment-related securities is particularly complicated, in part because share-based awards generally have a life span of several years, so it is not unusual for the residence status of employees, and therefore their basis of taxation, to change during the life of the award.

The reform of the taxation of individuals who may claim the remittance basis has meant that overall, employees who are NOR but within the charge to UK tax at the time awards are made, will in general have to pay more tax.

HMRC has confirmed that the intention is to change the law only for securities and options granted after 5 April 2008.


Under the new rules, optionholders who are RNOR in the UK at the time the option was granted will be taxed on the spread at exercise.

Restricted securities

The more flexible treatment on restricted securities available to ordinarily resident employees will also be available to RNOR employees, which in many cases allows the employee and employer to jointly elect for certain types of treatment, although again it will probably mean that RNOR employees will pay more tax in most circumstances.

UK securities will always be within the UK

Most importantly, if the employment-related securities are issued by a UK company, taxable amounts will always be treated as remitted, so apportionment will not apply. This is because the securities are by definition already within the UK when issued.

Non-UK securities: apportionment between UK and non-UK duties

Under the new rules as they apply to securities issued by non-UK companies, it will be possible to apportion potentially taxable unremitted income from securities and options between UK and non-UK duties for NOR taxpayers who:

  • have both UK and non-UK duties under the relevant employment; and
  • elect for the remittance basis of taxation under the new regime.

This means that:

  • the portion of any relevant amount relating to UK duties would be taxable whether or nor remitted; and
  • the remainder would not be taxable unless remitted.

The Finance Act 2008 explains that the calculation of the amount relating to UK duties is based "on a daily basis over the relevant period", but leaves scope for HMRC to change the result in various circumstances provided the final apportionment is "just and reasonable".