Many investors, and expats more generally, are confused by domicile and residency.
This might seem like such a boring topic, but it can affect capital gains and inheritance taxes.
This article will explain the differences between residency and domicile and answer some frequently asked questions (FAQs).
The article will also discuss new issues for “digital nomads” and tackle how you can invest in a tax-advantageous manner as an expat.
Is domicile important?
It is. It can determine taxes from your income tax to inheritance and capital gains taxes.
It can also affect inheritance tax planning.
What does domicile mean?
The country you are domiciled in is the place where you have your permanent home, or have a big connection with.
When you are born, you are usually assigned to your parent’s domicile. If your parents were not married, you are typically given the same domicile as your mother, although this depends on each situation.
Even when you move abroad, your domicile doesn’t usually change, unless you take specific action to change it.
What is deemed domicile?
For British expats who emigrate, there is such a thing as a deemed domicile. This can impact your inheritance taxes when you die.
Deemed domicile means that even if you are not domiciled in the UK according to HMRC law, you can be treated as domiciled in the UK at the time of transfer in two situations.
Namely, you were domiciled in the UK within 3 years immediately before the transfer or you were tax resident in the UK in at least 17 of the last 20 tax years, before making the transfer.
How about non-doms in the UK?
There are about 4-5m non-UK domiciles living in the UK, which can bring tax benefits.
However, in recent times, the UK Government has made significant changes to non-com status, after a populist backlash.
The number of wealthy UK residents who pay no UK tax on their offshore earnings has hit record lows.
There are many reasons for this, including political worries around Brexit, and the relatively new “non-dom” levy.
This is charged at 30,000-60,000GBP a year, in return for no tax on overseas income.
What is residency?
Your tax residency is the country you are supposed to pay tax to. It is a misconnection that if you spend less than 183 days a tax year, you are automatically considered tax non-resident.
Many tax authorities, like HRMC in the UK, have residency tests like the one below, available online;
It is always important to remember that rules about residency, including what defines ties, can always change.
So how would you summarize residency vs domicile?
Domicile means a legal residency where a person intends to make it their permanent home.
Residency is a more temporary thing in many cases. People can move with their expat job every 2-3 years, and change their residency in the process, without changing their domicile.
What is the difference between ordinary and multiple residencies?
To be an “ordinary resident”, the country has to be your ordinary home. You spend the majority of your time here and don’t take long trips home.
As an example, let’s say you are a British person living in the UK, but you take 2 holidays per year. You are an ordinary resident of the UK.
It is possible to be resident in two countries or more, although it can lead to tax issues.
Can people legally reduce their taxes by changing their residency?
Yes. If you get a job offer in Saudi Arabia, Kuwait or a country with 0% income tax, you are of course not taxed on your income unless you are American.
Americans are taxed on overseas income, even if they haven’t lived in the US for years.
There are also contactless countries that only tax locally sourced income. Singapore, Hong Kong, Malaysia and around 40 other countries fall into this category.
How about for digital nomads?
Many young nomads have this ideal life, where they are working on the beach from their laptop, moving from country to country.
Indeed, that is possible, and becoming easier, but that doesn’t mean you don’t have to be careful with your tax residency.
It is a misconception that you can just move from country to country, never spending more than 90 days a year in that place, and that means you automatically pay 0% tax worldwide.
Many people think that the “183-day rule” is simple. In fact, due to the rise of digital workers, many courts are asking expats to prove their residency.
There was a ruling in Australia, where an expat had to pay more tax, as he couldn’t prove where he paid his taxes, as he didn’t have a tax identification number (TIN) due the frequency of his movements.
Going forward, it will be safer for nomads to have at least one tax base, so you can answer the question “where do you pay your taxes” if it comes up.
I have personally seen a few nomads I know, have 2-3 years of “tax-free income”, only to be stung by an unexpected tax bill.
Can you buy a residency if you are a digital nomad or entrepreneur?
Countless countries do have residency programs, where you can get residency in return for making real estate and other investments, as outlined in the article at the bottom.
Some of these programs also offer citizenship, as well as residency.
Can this affect bank accounts and investments?
Yes, it can. Almost all financial institutions now, ask for TINs when opening up banks and brokerage accounts, although some will accept your old TIN if you have just moved to a new country.
What tends to be the most tax-advantageous investments for expats and nomads then?
For Americans, it can depend on several factors, as outlined in more detail here.
For British and many other expats, tax-efficient portfolio bonds have numerous tax benefits.
How can you lower your risks of unexpected tax bills?
In general, having expat banking and investments lowers your risks of tax bills.
The reason is simple. If you are from country A and live in country B, but keep your investments in country C, there are clear demarcations there.
In other words, if you are a British person living in Thailand, but your investments are held in Singapore or British Overseas Territory, you are keeping fewer ties to back home compared to if you send back substantial amounts of money every month.
In comparison, if you send money home to the UK every month, have 3 properties and 2 investment accounts held in onshore UK and so on, you are keeping a lot of ties to your home country.
Are changes likely in the future?
The last 5 years have been a period of change, with FATCA, CRS and various new laws coming into play.
There is no reason to believe the next 10 years will be any different, which is why it is important to work with somebody who is on top of changes.
What are your contact details?
My email address is firstname.lastname@example.org.
For people interested in second residencies, the following article might be interesting;