Navigating Tax Residency: Dual Residency, DTAs & Non-Residency Benefits

The Changing World and Tax Residency Challenges

The world has long changed, and private clients—whether they have retired or are still working—have mobile lives. This requires careful navigation of the implications and opportunities of spending significant time in more than one jurisdiction.

Given the high rates of income tax in the UK and the abolishment of the non-dom remittance basis rules from 6 April 2025, it will often be beneficial to be treated as not UK tax resident.  However this is not always achievable.

Commonly, we see clients with a presence in both the UK and another jurisdiction. This presence is often sufficient to make them tax resident in both countries under domestic rules. As such, it is necessary to consider which country has the primary taxing rights over the income and gains of a "dual resident" of the UK and the other country i.e. it is necessary to determine the treaty resident country and the treaty non-resident country.

Double Tax Agreements (DTA) and Their Importance

The purpose of a treaty is to dictate which country has the taxing rights over different income or gains. This is often dependent on the individual’s tax residency status and/or where the income is earned.

The principles outlined here rely on there being a Double Tax Agreement (DTA) in place between the UK and the other country. The UK has an extensive network of DTAs agreed—more than 130, in fact. Those DTAs include most of the world’s leading economies, with the notable exception of Brazil. 

Although some might be surprised, we do have a DTA in place with the UAE and also Saudi Arabia. This presents a good opportunity for some expats who are looking to relocate to the Middle East.

DTAs take precedence over domestic rules, making them a very valuable tax planning tool. They should not be hugely affected by changes in the domestic tax system.

Why Treaty Non-Residency Can Be Beneficial

If DTAs did not provide a mechanism to determine the treaty resident status of a dual resident taxpayer the residency conflict would create a double tax risk for the individual.  Once the treaty residency status is determined the rest of the DTA articles which determine the taxing rights for income and capital gains can all be applied.

For example the Employment Article of a DTA will usually ensure that employment income is only taxed in the country of treaty residence, unless certain conditions apply,  such as the employer being based in the second country.  

For example, consider a taxpayer who moves to a treaty country but continues to have UK employment and commutes to the UK for a third the working week. If they are treaty resident in the other country, it would be reasonable to restrict the UK taxing rights to 1/3 of the taxpayer’s earnings i.e. UK workdays. The earnings would remain taxable in full in the other country, with a suitable adjustment made to account for the UK tax position to avoid double taxation—i.e., relief is given for the UK tax paid.

This approach mitigates UK tax exposure and reduces the overall effective tax rate for the individual if they pay lower taxes in their home country.

Similarly, a retired person could be a dual resident of the UK and a treaty country. If they are treaty resident in the other country and have no UK source income, even if they are UK resident, they can potentially avoid having any UK tax exposure by making an appropriate treaty relief claim.

How to Determine Tax Treaty Residence

Some DTAs have subtle differences, but for the rest of this article, we will consider the residency tie-breaker clause applied in most cases. We also assume in these discussions that being a treaty non-resident of the UK is preferable. However, this is not always the case, and the principles discussed can be switched, if a different outcome is preferred.

If an individual leaves the UK for another treaty country but does not do quite enough to lose UK tax residency status, it may still be possible to claim treaty residency in the other country. This would mean that while they are a dual resident, the UK will treat them as a non-resident for tax purposes.

Knowing your own or a client’s treaty residence position is absolutely essential to any planning and structuring you may undertake.

The Tax Residency Tie-Breaker Clause

All DTAs contain a tax residency tie-breaker clause that determines an individual’s country of tax residence for this purpose. Through the application of a series of "tie-breaker" tests, the treaty determines an individual’s treaty residence position.

In order, those tests are:

• Permanent home
  
  
• Personal and economic relations
  
  
• Habitual abode
  
  
• Nationality or domicile

As soon as treaty residence is determined under one test, there is no need to consider the subsequent tests. For example, if an individual has a permanent home available only in the UK or only in the other treaty country, they will be treaty resident in that country. The later ties can be ignored even if they indicate a different outcome.

If an individual has a permanent home in both countries, we must then look at where their personal and economic relations are closest—also known as the “centre of vital interests” test. If this cannot be identified, the next step is to consider where they have a "habitual abode" in one but not the other country.

If the individual has a habitual abode in both countries (or neither), they will be treaty resident in the jurisdiction where they are a "national." If the individual is a national of both states, their treaty residence position will have to be determined by mutual agreement between the UK and the other country’s tax authorities.

It is preferable to satisfy treaty residence at the earliest hurdle possible. If treaty residence can be determined with reference to the permanent home test, this will often prove to be the most robust treaty residence position.

What Constitutes a Permanent Home?

Whether an individual has a permanent home in the UK will depend on where they stay when they visit the UK.

The OECD Model Tax Treaty defines the concept of a permanent home as follows:

^{“As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously...”}

Common advice we provide to clients seeking to ensure they are not treaty resident in the UK is to have a permanent home in the other country and only stay in hotels when visiting the UK. This avoids having a UK home. However, often it isn’t viable or desirable to avoid having a home in the UK.

What If There’s a Permanent Home in Both Countries?

We then need to consider where the individual has their “centre of vital interests.” This is a subjective test that requires a review of all connections the individual has to both jurisdictions—whether personal (friends, family, social interests, healthcare) or economic (investments, work, banking).

It is worth noting that UK tax authorities place a strong emphasis on whether an individual’s family also lives in the country in which they are claiming to be treaty resident. This often results in this tie-breaker clause being indeterminable, meaning we must consider habitual abode.

Determining Habitual Abode

To determine what constitutes a "habitual abode," OECD commentary states:

^{“In the first situation, the case where the individual has a permanent home available to him in both States, the fact of having an habitual abode in one State rather than in the other appears therefore as the circumstance which, in case of doubt as to where the individual has his centre of vital interests, tips the balance towards the State where he stays more frequently. For this purpose, regard must be had to stays made by the individual not only at the permanent home in the State in question but also at any other place in the same State.”}

In considering an individual’s habitual abode, the DTT does not specify any length of time over which the comparison must be made, but OECD commentary makes it clear that it must be over a sufficient length of time for it to be possible to determine whether the residence in each of the two states is habitual.

The UK however tests a 4-year period and it is therefore important a client establishes a routine of spending more time in the other country than the UK if relying on this test.

In the event it is still not possible to determine the tax treaty residence under any of the above rules, the individual will be treaty resident in the country of which they are a national. Anyone else whose status is still not clear will need to seek agreement between the UK and the other country’s tax authorities on the matter.

Declaring Treaty Resident Status

If an individual is expected to be dual resident in the UK and somewhere else where they consider they are treaty resident, it will be necessary for them to complete a UK tax return and treaty relief claim setting out the treaty residence position and how they have reached their conclusion. This will need to be supported by a Certificate of Residency from the second country which makes reference to the DTA.

We anticipate that this type of situation will become more common with the abolition of non-dom tax status in the UK, as expats consider other opportunities to mitigate their tax exposure.  If treaty residence tax planning is relevant to your circumstances you should contact us for tax advice.