A recent case, Lynette Dawn Yates v. HMRC [2012] UKFTT 568(TTC), gives a reminder to those who have left the UK that they may still be regarded as UK resident for UK tax purposes, despite living abroad, if they have not sufficiently severed their ties to the UK.

Facts of the case

A brief summary is as follows:-

  • Ms Yates lived in the UK with her husband.
  • In 2000 she moved to Southern Spain for health reasons – she suffered from Gaucher disease and it was hoped that a warm, dry climate would help.
  • Mr Yates stayed in the family home in the UK and Ms Yates made frequent, sometimes lengthy, visits to the UK to see him, such as at Christmas. She also visited her parents when they fell ill. Taking the visits into account, Ms Yates still spent over 183 days in each tax year in Spain for all but one of the tax years in question.
  • In October 2003, Mr Yates transferred shares in his property investment company to Ms Yates and she sold them a few days later, realising a capital gain in doing so. She realised further capital gains on the shares in 2004, 2005 and 2006.
  • Non-UK residents are not subject to capital gains tax ("CGT"). Ms Yates did not consequently expect to suffer any CGT charge.
  • Ms Yates returned to the UK in 2008.
  • H M Revenue & Customs ("HMRC") assessed Ms Yates to CGT on the sale of the shares in 2003, 2004, 2005 and 2006. She disputed the assessment.
  • The First Tier Tribunal has now ruled that Ms Yates remained UK resident and ordinarily resident for UK tax purposes whilst she was living in Spain during 2000-2008. She also qualified as a UK resident under the UK-Spain double tax treaty.

What is the law in respect of UK residence?

At present, there is no statutory definition of "residence" for UK tax purposes. Instead, we have a collection of principles established by case law, some relevant legislative provisions and guidance from HMRC. This means that there is no clear test but, from what we have, the factors that point towards a person remaining UK resident for tax purposes when they have left the UK are:-

  • They have left the UK to take up occasional residence abroad only
  • The UK remains their usual or settled abode
  • They have not made a distinct break from the UK Note that if a person is in the UK for over 183 days in a tax year, they will automatically be treated as UK resident by HMRC and the above factors are irrelevant.

Why was Ms Yates found to be UK resident?

The court considered each of the factors above and decided, in particular, that the quality of Ms Yates' absence from the UK was not such that she had made a distinct break from the UK. Instead, she retained significant ties to the UK:-

  • Her husband and close family remained in the UK
  • She made frequent visits to the UK and retained UK social connections
  • She stayed on the electoral roll in the UK
  • She used the family home in the UK as a correspondence address
  • She retained UK bank accounts and credit cards
  • She continued receiving disability living allowance
  • She remained registered with a UK dentist and doctor and came to the UK for doctors' appointments
  • She left some personal belongings in the family home
  • She had not created a Spanish based social life that rivalled her UK social life and connections (evidence was taken from her telephone bills showing frequent calls to the UK)

Whilst a complete severance of family and social ties is not necessary, and often not possible, a substantial loosening is required. Ms Yates had not done this.

Significance of the case for clients

This case is especially relevant for clients who have second homes abroad and seek to spend over six months of the year there, as well as for clients who live abroad full time but still visit the UK. It is important to be able to demonstrate that you have properly "left" the UK if you are in either of these scenarios. If your spouse remains in the UK, this case shows that it may be particularly difficult to persuade a court that you have set up a settled home abroad and are genuinely tax-resident there. Clients could usefully compare the list of Ms Yates' connecting factors above with their own circumstances and make as many practical adjustments as they can. Wedlake Bell's offshore and international team would be pleased to advise you further.

The future

Legislation is currently being drafted for a new statutory residence test that will apply from 6 April 2013. The new test looks at days of presence in the UK as well as UK connecting factors. Once the test comes into force, it should be easier for clients to assess whether they are UK resident. If you would like further details of the draft statutory residence test, please ask a member of our offshore and international team.

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.