Can You Pass the New UK Residence Test?
BY IAIN YULE
There have been significant and sweeping changes to the ways UK residence is determined which affect the tax affairs of British expats. Be prepared!
The UK government has published detail of the long-awaited statutory residence test first announced in June 2011. In response to concerns raised during the period of consultation the taxman has made some changes to provide more certainty about the way the new residence test operates in practice.
The new statutory residence test applies from 6 April 2013. The basic structure of the residence test in the draft legislation holds good, say accountants Saffery Champness, and in effect there are three residence tests:
• Automatically non-UK resident;
• Automatically UK resident;
• Sufficient ties and day count.
Automatically Non-UK Resident
An individual cannot be UK resident if they:
• Spend less than 16 days in the UK;
• Were not UK resident in the prior three tax years, and spend less than 46 days in the UK; or
• Have left the UK for full-time work abroad.
The definition of full-time work was the subject of the recent consultation and the definition has been amended as a result of the representations made. ‘Full-time’ means, on average, more than 35 hours a week over the tax year. The draft legislation confirms that an individual will be able to spend no more than 30 working days in the UK (this has increased from the 20 days previously proposed). A working day for these purposes comprises three or more hours. Considerable and detailed record keeping will therefore be required. There is no provision for part-time workers.
Automatically UK Resident
An individual will automatically be UK resident during a tax year if they:
• Spend at least 183 days in the UK; or have their only home in the UK for more than 90 days, but only if the home is actually occupied for at least 30 days;
• Are in full-time work in the UK for a continuous 12-month period (this has increased from the nine months previously proposed).
The days are to be counted by reference to the UK tax year, i.e. 6 April to 5 April.
Sufficient Ties and Day Count
Where an individual meets neither the automatic non-UK residence nor the automatic UK residence test, they must consider the ‘sufficient ties test’ in conjunction with the number of days spent in the UK. The number of connecting factors or ties combined with UK days to be resident is set out in the information table The ‘Sufficient Ties Test’ and Day Count.
The Ties to be Considered
Family tie: An individual’s spouse or civil partner (or someone with whom they are living as such), or a minor child, is resident in the UK. Under the current proposals, a minor child who is only resident in the UK on the basis they are in full-time education in the UK will not be considered a connecting factor provided they spend fewer than 21 days in the UK outside term time. Following consultation, HMRC has confirmed that a half-term holiday will count as term time for these purposes.
Accommodation tie: An individual has ‘available accommodation’ for a continuous period of at least 91 days in the tax year, ignoring any gaps of fewer than 16 days. A place to live is to be widely defined and will include a home in the UK, holiday home, temporary retreat or ‘something similar’.
HMRC will publish guidance to outline how it will apply the accommodation tie in practice. For example, accommodation will not be treated as being available unless the individual could stay there for at least a three-month period. However, this could include the use of a hotel if the same hotel is always used.
Work tie: An individual spends at least 40 days working in the UK, where a working day is defined as three hours.
90-day tie: An individual spent more than 90 days in the UK, in at least one of the previous two tax years.
Country tie (leavers only): If the UK is the country where the greatest number of days has been spent.
The Midnight Rule
For day counting purposes, days spent in the UK at midnight are counted. However an anti-avoidance provision will apply to individuals who manipulate this rule to attempt to qualify for non-resident status, despite spending considerable time in the UK and having substantial ties.
Exceptional Circumstances
It is recognised that days spent in the UK as a result of exceptional circumstances are not to be counted, up to a maximum of 60 days. The exclusion of exceptional days was previously available by concession. HMRC has confirmed that it will produce guidance to explain how it will apply these provisions in practice.
Transitional Rule
A transitional rule allows individuals to use the statutory residence test in years prior to 2013/14, but only for the purposes of applying the statutory residence test in 2013/14, 2014/15 and 2015/16. The transitional rule cannot change an individual’s actual residence status prior to 6 April 2013.
Split Year Treatment
The residency test is expressed in tax years, i.e. an individual is either resident or is not resident in a tax year. However, in the year of departure or arrival, the proposed legislation provides that, in certain situations, it will be possible to split a tax year between periods of residence and non-residence. This relief was previously available by concession.
Temporary Non-Residence
HMRC has introduced targeted anti-avoidance rules to prevent people from using short periods of non-residence to receive income free of UK tax. Temporary non-residence rules already apply to capital gains, remittances of foreign income and pension scheme withdrawals. These rules will be extended to:
• Dividends and other income from closely controlled companies (but only where the income is derived from profits which arose before departure);
• Lump sum benefits from employer-financed retirement benefits schemes (EFRBS);
• Chargeable event gains on life assurance contracts.
Where an individual has been UK resident in four or more of the previous seven years and becomes resident again within five years of departure, such income will be subject to tax.
Ordinary Residence and Overseas Workday Relief
The concept of ordinary residence has been abolished as part of the new statutory residence test. Under the current legislation, individuals who are not ordinarily resident in the UK are able to claim the remittance basis of taxation and employees who are not ordinarily resident in the UK are able to claim overseas workday relief (OWR) if some of their duties of employment are carried out overseas.
Under the new rules, OWR will be available for the year of arrival and the two subsequent years in the UK. It will be restricted to non-domiciled individuals who have not been resident in the UK in the previous three tax years prior to coming to work in the UK.
What Action Should be Taken Now?
It is important to keep a record of days spent in and out of the UK and review your UK residence position in the current year. While the statutory residence test comes into effect on 6 April 2013, an individual who has historically been non-UK resident and would like to maintain their non-UK residence should consider whether they would continue to be non-resident under the new rules. Of particular concern is the definition of full-time work abroad.
Anyone who is concerned about their UK residence status should seek advice.
The ‘Sufficient Ties Test’ and Day Count
Where you meet neither the automatic non-UK residence nor the automatic UK residence test, you must consider the ‘sufficient ties test’ in conjunction with the number of days spent in the UK.
| Days spent in the UK | ‘Arriver’ - if you were non-UK resident in all the prior three years | ‘Leaver’ - if you were UK resident in at least one of the prior three years |
|
|
|
|
| Fewer than 16 | Always non-UK resident | Always non-UK resident |
| 16 to 45 | Always non-UK resident | 4 ties = UK resident |
| 46 to 90 | 4 ties = UK resident | 3 ties = UK resident |
| 91 to 120 | 3 ties = UK resident | 2 ties = UK resident |
| 121 to 182 | 2 ties = UK resident | 1 tie = UK resident |
| 183 or more | Always UK resident | Always UK resident |
Source: Saffery Champness
Expats Urged to Check Status
The millions of Britons who divide their time between homes in the UK and overseas need to clarify their tax residence status ‘sooner rather than later’, say financial advisers.
The comments come as the new statutory residence test comes into force on 6 April. Kevin White of advisers deVere said, “The statutory residence test aims to remove any grey areas when determining someone’s residence status for tax purposes in the UK. Existing rules, to a large extent, depend on cases decided by the courts.
“Currently, anyone who is in the UK for 183 days or more in any one tax year, or more than 90 days on average per tax year over four years, will be classified as a UK resident, and someone who spends no time in the UK is unlikely to be resident.
“However, the new SRT, which will be divided into three parts – including tests to discover if an individual is ‘automatically non-resident’ or ‘automatically resident’ - will also analyse an individual’s connections with and number of ties to the UK. These include family, property, work and social connections.”
He added: “Although certain aspects of the new legislation require further clarity, we welcome the modernised system of deciding someone’s tax residency, as it will clearly and quickly define who is able to take financial advantage of their expat status and who is able to benefit from the other opportunities that tax-efficient financial planning provides.
“We’re urging British expats who spend part of the tax year in the UK and part of it overseas to make sure they are familiar with the new rules and to seek advice on the issue of tax residency sooner rather than later.”
