In April 2013, the Government introduced a statutory definition of residence. In this article, David Harrowven gives an overview of rules under the 2015 UK Finance Act
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A person’s residence status can have a significant bearing on their liability to UK taxation, especially if they have overseas income. Generally, people who are resident in the UK are taxed on their overseas income, whereas non-residents are not.
Until 2012-13, people leaving the UK, other than for full-time work, had to rely on the habitual and substantial test when it came to establishing non-residence status. It was originally believed that the test could be met by restricting UK visits, but the outcome of two high profile tax cases meant that HMRC could ignore the test unless a ‘distinct break’ had been made from the UK. Therefore, factors such as continuing ownership of UK property made it impossible to establish non-residence status.
Such uncertainty led to the Government introducing a statutory definition of residence from 6 April 2013, and this article outlines these rules. Residence is a complex area of legislation, and the most recent guidance note issued by HMRC in December 2013 runs to some 105 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 who 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 91 days, and the person must live in that home for at least 30 days during the tax year.
- A person who 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 which 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 for years prior to 2013-14 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 who 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 who 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:
Swipe to view table
|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 2015, Joanne purchased a property in Spain, and during 2015-16 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 2015-16, a total of 80 days were spent in the UK, of which 35 were for work.
Joanne cannot be automatically treated as non-resident because 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 2015-16 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 2017-18 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 a 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 2015-16, 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 2015-16.
Split year treatment
A person is normally either resident or not resident for a particular tax year. However, the tax year will 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 2015 to take up full-time employment.
For 2015-16, Joanne will be treated as non-resident from 6 April to 31 October 2015 and resident from 1 November 2015 to 5 April 2016.
Someone leaving the UK might wish to retain their UK property, or may have no choice when it comes to returning to the UK for work. But knowing the number of UK ties, a person will know how many days they can safely stay in the UK during a particular tax year in order to establish and then maintain non-residence status. However, the number of days that a person can spend in the UK can change. For example, it might be possible to stay up to 120 days for the current tax year, but this length of stay will trigger the 90-day UK tie. Fewer days in the UK will then permitted for the next two tax years.
Alternatively, someone may need to be in the UK for a set number of days each tax year, and in this case that person will now if they have to reduce their number of UK ties – for example, by selling their UK home.
It is also possible to plan for days working in the UK given the three-hour definition of a working day. For example, the number of working days could be kept to a minimum if work is condensed into full days rather than a person working half-days of just over three hours each. Or it might be possible to avoid a working day altogether by keeping the amount of work done for a particular day to below the three-hour limit.
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, there is an anti-avoidance rule similar to that which previously applied to chargeable gains. 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 rates of 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 to re-establish UK residency.
The statutory residence test has brought more certainty to this area of tax, although the application of the UK ties is not always 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 averaging between tax years - each year has to be considered entirely separately. 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, a person has 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 is necessary to keep detailed records, not just of days in the UK, but also the number of hours spent working.