Determining if you are UK resident for tax purposes should be straightforward. After all, residence status has important ramifications, both for the taxpayer and for HMRC, determining whether and to what extent someone’s worldwide wealth is taxable in this country.
However, straightforward is the last word to describe the existing mixture of case law (some dating back to the 19th century), HMRC guidance and a few statutory provisions which govern the position. A proper test of residence with clear parameters is required.
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Fortunately after a period of consultation by the UK Government which began in 2011, we now have draft legislation for a proposed statutory residence test due to come into force on 6 April 2013.
The test
The proposed test will combine a test of presence in and connections with the UK. It will apply only to individuals and will cover income tax, capital gains tax and, where relevant, inheritance tax and corporation tax. It is divided into three parts:
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By GlobalData– the automatic overseas tests, satisfaction of one of which means the individual is automatically non-UK resident for a tax year. They are met by spending very few days in the UK in a tax year (16 or 46 depending on residence status in any one or more of the previous three tax years) or by working full time overseas for the relevant tax year, subject to specified conditions.
– the automatic residence test which is divided into three automatic UK tests, satisfaction of one of which means that the individual is automatically UK resident for a tax year. They are met if an individual:
0 spends at least 183 days in the UK in the relevant tax year;
0 works full time in the UK for a period of 365 days, subject to specified conditions; or
0 again subject to specified conditions, spends time on at least 30 days in a tax year in a UK home, whilst spending time on fewerthan 30 days in the same tax year at any one overseas home.
If neither automatic test applies to an individual;
– the sufficient ties test will determine the position. This test compares the number of days during a tax year spent by an individual in the UK with the number of ‘ties’ (family, work, accommodation, days spent in the UK in earlier tax years (90-day tie) and days spent in the UK compared with other countries in the relevant tax year (country tie)) which the individual has with the UK during that year.
The comparison is shown below:
| UK resident for none of previous 3 tax years | Days in UK | UK resident for one or more of previous 3 tax years |
|---|---|---|
| Always non-UK resident | <16 | Always non-UK resident |
| Always non-UK resident | 16 – 45 | UK resident if ?4 ties |
| UK resident if 4 ties | 46 – 90 | UK resident if ?3 ties |
| UK resident if ?3 ties | 91 – 120 | UK resident if ?2 ties |
| UK resident if ?2 ties | 121 – 182 | UK resident if ?1 ties |
There are additional rules for people who arrive in or leave the UK during a tax year (‘split year rules’), for those who die during a tax year, and for international transport workers.
A day of presence in the UK for the purposes of the test is broadly one in which he/she is present here at the end of the day (i.e. midnight), although there are certain exceptions to this general rule.
Planning points
Individuals with homes in the UK and abroad will need to be careful that they do not inadvertently meet the automatic UK residence test in relation to UK/overseas homes.
Whilst the draft test in its present form is subject to more than one possible interpretation, it is clear that peripatetic individuals who tend to spend small periods of time in different homes during a tax year will need to keep careful records to ensure that they do not fall foul of the relevant 30-day thresholds.
Subject to the point above, individuals who have not been UK resident in any of the last three tax years should be able to maintain their non-resident status going forward simply by ensuring they spend no more than 90 days in the UK in any tax year, effectively a pure day-counting test.
If they exceed the 90-day limit in any tax year, however, they will need to determine their residence on the basis of the test in its entirety for that and at least two subsequent tax years.
Individuals may elect for their residence status in tax years prior to 2013/14 to be determined according to the parameters of the new test, where relevant for determining their status in 2013/14 onwards.
This election will not affect an individual’s liability to UK tax for pre-2013/14 tax years.
Conclusion
The new statutory residence test is welcome, not least because it has removed the existing requirement to make a ‘definite break’ from the UK to become non-resident, and put the issue onto a more objective footing.
However, it is still not straightforward and has become less so as anti-avoidance rules and new tests, such as that for presence in UK/overseas homes, have been added during the development of the draft rules.
A lack of clear definitions for a number of key concepts, such as ‘work’ and ‘home’ is particularly disappointing. It is to be hoped that these issues will be addressed before the test comes into effect in April.
Nicole Aubin-Parvu, Lawrence Graham LLP
