A person's residence status can have a significant bearing on their liability to UK taxation, especially if they have overseas income. Generally, people that are resident in the UK are taxed on their overseas income, whereas non-residents are not.
Previously, people who left the UK to work full-time overseas always had certainty regarding their residence status, but other leavers had to rely on the habitual and substantial test. It was previously believed that non-residence status could be established by restricting UK visits to less than 91 days per tax year averaged over four consecutive years. However, following recent tax cases involving Lyle Grace and Robert Gaines-Cooper, HMRC only considered this test to be relevant once a 'distinct break' had been made from the UK. Although both Grace and Gaines-Cooper stayed in the UK for less than 91 days each year, factors such as the continuing ownership of property in the UK meant that neither of them had made a distinct break - and were therefore both treated as still resident here.
Such uncertainty led to the Government introducing a statutory definition of residence. It was originally intended that the changes would take effect from 6 April 2012, but due to the complexity of the issues involved the implementation date was put back until 6 April 2013. This article outlines the new rules.
Residence is a complex area of legislation, and the detailed guidance note issued by HMRC in May 2013 runs to some 101 pages. It is therefore only possible to provide a summary of the more important aspects
Automatically not resident in the UK
There are some situations where a person will automatically be treated as not resident in the UK for a particular tax year. These are where:
- A person stays in the UK for fewer than 16 days during the tax year.
- A person stays in the UK for fewer than 46 days during the tax year, provided they have not been resident for any of the previous three tax years. Although actual residence status for tax years prior to 2013-14 must be determined according to the old, less certain rules, for the purpose of this test a person can elect to determine their residency status for years prior to 2013-14 according to the statutory test basis.
- A person carries out full-time work overseas (defined as working an average of more than 35 hours per week either on an employed or self-employed basis) during the tax year without any significant breaks. Visits to the UK must be fewer than 91 days during the year, and no more than 30 days can be spent working in the UK. A working day is defined as any day where more than three hours of work are carried out.
Automatically resident in the UK
Subject to not meeting any of the automatic non-resident tests, the following people will automatically be treated as resident in the UK for a particular tax year:
- A person that stays in the UK for 183 days or more during the tax year.
- A person whose only home is in the UK. The actual conditions for this test are quite complex, but it is necessary to have the UK home for a period of at least 90 days, and a person must live in that home for at least 30 days during the tax year.
- A person that carries out full-time work in the UK (as defined above). The actual conditions are again quite complex, but it is necessary to work for a period of at least 365 days with no significant break (although only part of this period need be in the tax year).
Sufficient UK ties test
If none of the automatic residence tests apply, then a person's residence status for a particular tax year is determined according to the sufficient UK ties test. There are five potential UK ties:
- Having a spouse, civil partner or minor children resident in the UK.
- Having accommodation in the UK that is made use of during the tax year. The definition of what counts as accommodation is quite detailed, but it generally does not include owning a property that is let out, short visits with relatives, and stays in hotels.
- Doing substantive work in the UK. This is defined as working for 40 or more days during the tax year (a working day is as per previously defined).
- Spending more than 90 days in the UK during either of the two previous tax years.
- Spending more time in the UK during the tax year than in any other single country.
How the UK ties test is applied depends on whether a person has been resident in the UK for any of the previous three tax years (again, a person can elect to have their residency status determined on a statutory test basis for this purpose). A person who has been resident during any of the previous three tax years will typically be someone that is leaving the UK, and for them all five of the UK ties are relevant. A person who has not been resident will typically be someone that is arriving in the UK, and for them only the first four UK ties are relevant (they can ignore the country tie).
Residency for a particular tax year is determined by looking at the number of days a person has spent in the UK and the number of UK ties they have - the more days spent in the UK, the less UK ties needed before a person is treated as resident:
|Days in UK||Previously resident||Not previously resident|
|Less than 16||Automatically not resident||Automatically not resident|
|16 to 45||Resident if 4 UK ties (or more)||Automatically not resident|
|46 to 90||Resident if 3 UK ties (or more)||Resident if 4 UK ties|
|91 to 120||Resident if 2 UK ties (or more)||Resident if 3 UK ties (or more)|
|121 to 182||Resident if 1 UK tie (or more)||Resident if 2 UK ties (or more)|
|183 or more||Automatically resident||Automatically resident|
It is therefore more difficult for a person leaving the UK to become non-resident than it is for a person arriving in the UK to remain non-resident.
Joanne is self-employed as a painter. She has previously been resident in the UK, spending more than 250 days here each tax year. On 6 April 2013 Joanne purchased a property in Spain, and during 2013-14 she mainly lived and worked there. However, she still has a house in the UK where her husband and family live. Joanne visits the UK on a regular basis, staying in the family home. During 2013-14 a total of 80 days were spent in the UK, of which 35 were for work.
Joanne cannot be automatically treated as non-resident since even though she now works in Spain, more than 30 days were spent working in the UK. Joanne was resident in the UK during the three previous tax years, and during 2013-14 she spent between 46 and 90 days in the UK. Joanne is therefore permitted just two UK ties before she will be treated as resident. In fact, there are three UK ties - UK resident family, assessable accommodation in the UK, and staying 90 days or more in the UK during the previous tax year. However, if Joanne's lifestyle remains unchanged, the last of these connection factors will no longer apply after two years overseas. She should therefore qualify as non-resident from 2015-16 onwards.
Days in the UK
A person is normally treated as being in the UK for any day when they are here at midnight. Any days spent in the UK for exceptional circumstances beyond the individual's control, such as the illness of the individual or his or her immediate family, are usually disregarded.
However, this is subject to the deeming rule which applies where a person:
- Has three or more UK ties for the tax year.
- Has been present in the UK on more than 30 days in the tax year, without being present at midnight (these are called qualifying days).
- Has been resident in the UK for any of the previous three tax years.
If all three of these conditions are met, then after the first 30 qualifying days all subsequent qualifying days within the tax year are treated as days in the UK.
Continuing with Joanne, suppose that in addition to the 80 days spent in the UK during 2013-14 there were another 44 days where she was present in the UK without being here at midnight.
Joanne meets the three conditions for the deeming rule, so she will have to count an additional 14 days (the first 30 qualifying days are excluded). Joanne will now be treated as spending between 91 and 120 days in the UK for 2013-14.
The split year treatment
A person is normally either resident or not resident for a particular tax year. However, the tax year can be split into two parts in certain circumstances. These include where a person:
- Leaves the UK to live overseas (this must involve ceasing to have a UK home), or to carry out full-time work overseas.
- Comes to live in the UK (this must involve meeting the only UK home test) or to work full-time in the UK.
Samantha came to the UK on 1 November 2013 to take up full-time employment.
For 2013-14 Joanne will be treated as non-resident from 6 April to 31 October 2013, and resident from 1 November 2013 to 5 April 2014.
With the more certain residency rules that now apply, it would be very easy for a person to arrange a temporary period of non-residency in order to avoid a large income tax liability. Therefore, an anti-avoidance rule similar to that which previously applied to chargeable gains has been introduced. Basically, where a person is not-resident for a period of five years or less, certain income and gains arising in the period of non-residence will be chargeable in the year that the person returns to the UK.
For example, the owner of a limited company has accumulated profits within the company in order to avoid higher rate income tax. Without the anti-avoidance rule it would be possible for the owner to become non-resident for a tax year, withdraw the profits by way of dividends without any additional UK income tax liability, and then become UK resident again.
The introduction of a statutory residence test has brought more certainty to this area of tax, although the application of the UK ties will not always be straightforward - especially for wealthy taxpayers who may have several homes, numerous businesses, and with changeable work and lifestyle patterns.
Unlike the previous habitual and substantial test, there is no longer any averaging between tax years. Until 2012-13, it was possible to stay in the UK for, say, five months in one tax year, and balance this out with much shorter stays in subsequent years. With the statutory residence test, people will have to be very careful that a few extra days in the UK does not change their residence status from one year to the next. It will be necessary to keep detailed records, not just of days in the UK, but also the number of hours spent working.