UK: Finance Bill 2013 - Statutory Definition Of Tax Residence

In his March 2011 Budget statement the Chancellor of the Exchequer announced consultation on the introduction of a statutory definition of tax residence with a view to legislation taking effect from 6 April 2012. This legislation was deferred in late 2011 and there has been further consultation throughout 2012.

Revised draft legislation was first published in December 2012 and has been included in the Finance Bill 2013. The rules are expected to take effect from 6 April 2013.

Residence is a fundamental concept as it defines the scope of an individual's UK tax liability. There is currently no full legal definition of tax residence, meaning that the rules are unclear, complicated and seen as subjective. This creates uncertainty for individuals regarding their residence status and that uncertainty is a deterrent to businesses and individuals considering investing in the UK. The intention behind the consultation was to ensure that clear objective tests are used to give certainty in the vast majority of cases.

Revised Statutory Residence Test (SRT)

The revised SRT is designed to provide simple, transparent and objective legislation to determine residence, taking into account the amount of time the individual spends in the UK and, in some cases, the connections that they have with the UK. There is a distinction between leavers (those who were resident in one or more of the previous three tax years) and arrivers (those who were not UK resident in all of the previous three tax years).

The test is designed such that it is harder for leavers to relinquish residence than it is for new arrivers to acquire it, following the principle that residence should have an adhesive nature.

The revised SRT consists of three parts.

Automatic Overseas Test

This test aims to provide certainty to taxpayers as to their non-residence status without the need to take into account any connections they have with the UK. This conclusively determines that an individual is non-resident in the UK for a tax year if they meet any of the following conditions, namely they:

• were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 46 days in the current tax year; or
• were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 16 days in the current tax year; or
• leave the UK to carry out full-time work abroad (employment or self-employment), provided they are present in the UK for fewer than 91 days in the tax year and fewer than 31 days are spent working in the UK in the tax year. On average they must spend at least 35 hours a week working overseas. Any day in which more than three hours of work are undertaken in the UK will count as a UK work day. Note that time spent travelling in the UK, as well as training in the UK, count for hours worked where employer-funded or the costs are tax deductible.

Further automatic overseas tests apply for the year of death. The deceased will not be UK resident for the tax year in which their death occurs, provided they spent fewer than 46 days in the UK during that tax year, and they were resident in the UK for tax purposes for neither of the two preceding tax years, or alternatively they were not resident in the UK for tax purposes in the preceding tax year, and the tax year before that was a split year.

Automatic UK Test

Many individuals spend the majority of their time in the UK or have their home and family life here. This test conclusively determines residence if the individual meets any of the following conditions, namely they:

• are present in the UK for at least 183 days in a tax year; or
• have a home in the UK for more than 90 days, they spend at least 30 separate days (even for a short time) in that home in the tax year and, while the individual has that UK home, there is a period of 91 consecutive days throughout which they do not have an overseas home or, if they have one or more overseas homes, they spend fewer than 30 separate days in each of them in the tax year. This condition has been modified so that one does not need to consider whether a place qualifies as a 'home' unless 30 separate days or more have been spent there in the tax year; or
• work full-time work in the UK for a period of 365 days and during that period there have been no significant breaks where for 31 days or more there are no days when more than three hours work are done in the UK. In addition during the tax year more than 75% of the total days for which more than three hours work are done are days when more than three hours of work are done in the UK.

The above three tests can apply to deceased individuals. Additionally, there is a fourth automatic UK test for the year of death where the deceased individual was UK resident in each of the three preceding tax years by virtue of meeting one of the automatic UK residence tests, and (assuming they were not resident in the UK for the tax year of death and the preceding year would not have been a split year) they had a home in the UK when they died.

HMRC has published detailed guidance on how it will interpret these provisions at www.hmrc.gov.uk/budget-updates/11Dec12/stat-res-test-note.pdf

Sufficient UK Ties Test: other ties and day counting

This will generally apply to individuals whose circumstances are more complex. The more UK ties that an individual has the less time they can spend in the UK if they are to remain non-resident. The following ties are taken into account:

• UK resident family;
• accessible accommodation in the UK;
• substantive work in the UK (employment or self-employment);
• UK presence in the previous tax years (spending more than 90 days in the UK in either of the previous two tax years);
• more time in the UK than in any other single country (this tie is not applicable to arrivers).

The ties are linked with the day count as follows:

Arrivers

Leavers

An individual has a UK resident family in the tax year if either the individual's spouse, civil partner or common law equivalent is resident in the UK or the individual has UK resident children under 18 with whom he spends time for 61 or more days in the UK. A child will not be resident for these purposes if their time in the UK is spent at an educational establishment and they spend no more than 20 days outside term time in the UK. Term time has now been defined to include half terms and other breaks within the school term.

An individual will have accessible UK accommodation if:

• the individual has a place to live in the UK;
• it is available to be used by them for a continuous period of at least 91 days in a tax year; and
• the individual spends at least one night in that place during the tax year.

All accommodation will be treated in the same way regardless of the form of tenure or occupancy, including all types of employer provided accommodation. If the individual's spouse, partner or minor child has accommodation in the UK it is only treated as available to the individual if they actually spend one night there in the tax year.

There will be an exemption for occupancy of property held by specified other relatives unless the individual spends more than 15 nights there during the tax year. In addition HMRC has said that accommodation will not be treated as 'available' unless an individual would really be able to stay there for 91 days and so an 'open invite' to stay should not count.

Where there is a gap of fewer than 16 days between periods in the tax year in which a particular place is available to the individual, that place will continue to be treated as if it were available to the individual during the gap. Hence hotel accommodation that is frequently used on a regular basis where there is not a gap between visits of more than 16 days over a 91 day period can give rise to an accommodation tie.

An individual will perform substantive work in the UK if they work in the UK for at least 40 days at some time in the tax year. Again a work day is where the individual does three hours or more of work in the UK.

Split Years

New rules will replace current extra-statutory concessions to treat a tax year as being split into periods of residence and non-residence if a person:

• loses UK residence by virtue of working full-time abroad, or as a result of their partner working full-time abroad;
• establishes their normal home in a country outside the UK within 6 months of departure and does not come back to the UK for more than 15 days in that tax year;
• becomes resident in the UK by virtue of their only home being in the UK;
• becomes resident by starting full-time working in the UK, or as a result of their partner working full-time in the UK; acquires a UK home during the year and remains UK resident the following year.

Note that a tax year will not be treated as split where an individual's residence status changes due to a variation in the number of ties under the Sufficient UK Ties Test.

Whilst foreign income and any capital gains arising in that part of the year prior to the individual becoming UK resident will not be taxed, capital distributions from offshore trusts will be taxed on a pro-rata basis by reference to the non-resident and resident periods. Hence part of a capital distribution received prior to arriving in the UK may be taxable under the split year rules.

Exceptional Circumstances

Up to 60 days may be spent in the UK in a tax year as a result of national or local emergencies such as war, civil unrest or natural disasters or sudden or life-threatening illness or injury. This will apply for all day counting tests including the 183 day test for automatic UK residence which represents a relaxation of the current position. Exceptional circumstances would not seem to include strikes, fog delays and other transport issues although HMRC guidance is awaited.

Anti-avoidance Provisions

There are anti-avoidance provisions similar to the one currently applicable to CGT. These will counteract the risk of individuals creating artificial short periods of non-residence during which they receive a large amount of income which previously accrued during periods of UK residence free of UK tax, then bringing the income back into the UK tax- free. In particular, this is designed to counter distributions from closely controlled companies and chargeable event gains.

There will also be provisions targeted at individuals who have been UK resident in one or more of the three previous tax years, have at least three ties for the current tax year and they spend more than 30 days present in the UK at some point in the day but not at midnight. Where this is the case any such days in excess of 30 spent present in the UK but not at midnight will be added to the other days used in the Sufficient Ties Test to determine residence.

Transitional Rules

There is a transitional rule which applies only for those parts of the Tests where the individual needs to know what their residence status was in one or more of the three years prior to the introduction of the Tests. Taxpayers will be able to elect that the new rules will apply to earlier years solely in order for them to determine their residence in future years under the SRT.

Abolition of Ordinary Residence

The concept of ordinary residence for tax purposes will be abolished. However Overseas Workday Relief (OWR) will be put on a statutory footing and apply only to non-UK domiciled individuals after 6 April 2013. The new rules have been widened to include those arriving in the UK who had not been UK resident in the three previous tax years even if they intend to stay longer than three years. OWR will apply to the tax year of arrival and the following two tax years where the overseas earnings are not remitted to the UK.

Conclusion

Consultation resulted in tweaks to the SRT and clarification on a number of points. However the rules are still complex and will require a great deal of record keeping from the individual to support their residence status in many situations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.