UK: Tax Residence and Leaving the UK

Last Updated: 25 January 2011
Article by Nick Osler

1. TAX RESIDENCE

1.1. Introduction

An individual's residence status has a significant impact on their UK income tax and capital gains tax (CGT) liability. In basic terms non-UK residents are only subject to income tax on UK source income (and even here special rules can apply) and are outside the scope of CGT (though there are specific anti-avoidance provisions to target individuals who are non-UK resident for less than five complete tax years). For inheritance tax (IHT) it is domicile rather than residence which is the key concept.

An individual resident in the UK under UK law may also be resident in another territory (dual resident). Where that other territory has a double tax treaty with the UK there will generally be a tie-breaker clause determining which territory should, for the purposes of the treaty, be regarded as the individual's territory of residence. Where residence falls to the foreign territory the treaty articles may exempt foreign income and gains from UK taxation, provided an appropriate claim is made. In each case the precise terms of the relevant treaty would need to be considered.

Note that references throughout this document to the HMRC guidance on residence, referred to as HMRC6, are to the version first published on 29 December 2010.

1.2. Special Rule for Members of the UK Parliament and House of Lords

With effect from tax year 2010/11 onwards special deeming rules (found within the Constitutional Reform and Governance Act 2010) applies such that Members of the House of Commons and most Members of the House of Lords are treated as resident, ordinarily resident and domiciled in the UK for income tax, capital gains tax and inheritance tax purposes for the whole of the relevant years. Broadly, the deeming provision applies for the whole of each tax year during which at any time the individual is a Member of either House (regardless of whether or not they are on a leave of absence). There is a special transitional provision for 2010/11 such that membership of the House of Commons in the Parliament prior to the dissolution is ignored. In addition there are special transitional provisions with respect to members of the House of Lords.

The legislation does not apply to the Lords Spiritual or Peers who are disqualified from sitting or voting as a result of becoming a Member of the European Parliament of a Judge.

1.3. The Definition of Residence: Statute and Common Law

Whilst there are provisions which, if applicable, can deem a person to be UK resident or non-UK resident for tax purposes, there is no definition of residence in UK tax legislation.

The one clear statutory rule on residence is the 183 day rule. However, this rule only establishes an override such that if the individual is present in the UK for 183 days or more in a tax year he or she will be treated as UK resident for tax purposes (regardless of whether the individual is actually resident under general principles). It is important to remember that in establishing the number of days for the purposes of this test there is no disregard for exceptional circumstances.

In addition to the clear 183 day deeming rules the legislation deems an individual to be UK resident when determining liability for tax, for any tax year during the whole or part of which the individual remains outside the UK for the purpose only of occasional residence abroad. The specific conditions are that the individual:

  • has left the UK at a time when he or she is both UK resident and ordinarily UK resident; and
  • has left for the purposes only of occasional residence abroad.

It is this provision taken in conjunction with the case law in the area that has led to the current emphasis on the need for an individual who is both UK resident and ordinarily UK resident to make a distinct break from the UK in order to shed UK residence status (see chapter 2).

The need to evidence a distinct break from the UK through the severing of UK ties cannot apply in the same way to an individual who has only been in the UK for a temporary purpose and with no intention of establishing residence in the UK. Such an individual would not be ordinarily resident in the UK and would only be taxed as if he or she were UK resident if the 183 UK days of presence in a tax year were breached. For individuals who are only caught by the 183 day test the key issue will be to be able to demonstrate the day on which the temporary purpose ceased and they left the UK. It is suggested that after departure the individual should remain outside the UK at least until the end of the tax year and in the following tax year any visits to the UK should be kept to a minimum (that is significantly lower than 91 days).

1.4. Day Counting

Whilst day count is only definitive in residence cases where the individual has been UK resident in excess of 182 days it is always an important factor. As such the definition of a day of UK presence is important.

For tax years prior to 6 April 2008 there is no statutory definition of a day of UK presence and the accepted rule is that days of arrival and departure are discounted (though this might be challenged by HMRC where an individual made repeated visits to the UK in the tax year).

For tax years from 2008/09 onwards, there is a statutory definition of a day of UK presence. A day counts as one of UK presence where the individual is in the UK at the end of that day (meaning the individual is present in the UK at midnight). However, a day will not be counted where the transit exemption applies.

By extra-statutory-concession, provided the statutory 183 day test is not breached, a day can be disregarded where a visit has been extended as a result of exceptional circumstances beyond the individual's control (such as illness). It is strongly recommended that individuals do not rely on this concession and if at all possible ensure that their aggregate number of days (including days here as a result of exceptional circumstances) of UK presence is comfortably less than 91.

Strictly, the statutory definition only has effect with respect to the statutory provision that an individual is taxed as if they were UK resident if they have spent over 182 days in the UK in the tax year in question. However, HMRC have stated that it will generally use this statutory definition of a day of presence in the UK when it applies the '91 day averaging' test. The so called '91 days averaging' test is not a statutory test but was extracted by HMRC from historic case law and set down within Inland Revenue IR20 as a test to determine whether an individual who made repeated visits to the UK over a number of tax years was UK resident. The current version of HMRC 6 makes it clear that (in the same way as it did prior to the introduction of the statutory definition of a day of UK presence) HMRC considers that for the purposes of the non-statutory averaging test it can argue that all days of UK presence should be counted in situations where a taxpayer makes numerous short visits to the UK in a tax year. The relevant text within HMRC6 is found at 2.2.1 and is as follows:

'This is the general practice, but it will not necessarily be appropriate in all cases. If you spend very significant amounts of the year travelling internationally, you should keep a record both of the days you were present in the UK and of those days where you are here at midnight. Both will be factors when looking at the pattern and purpose of your visits.'

It should be noted that where this non statutory test is met it does not mean that HMRC will accept an individual is not UK resident. On the contrary, where an individual has been successful in establishing non-residence, breaching the 91 day test could lead to an HMRC challenge on the basis that UK residence has been resumed.

When applying this test to individuals who came to the UK prior to 6 April 2008 one determines the number of days of UK presence in the relevant period by using the statutory day count definition for tax years 2008/09 onwards and the non-statutory practice for relevant tax years before then .

The test is somewhat different depending on whether an individual is leaving or arriving into the UK. In very broad terms, in the context of leaving the UK the test is a rolling average over the shorter of:

  • the four year period to the end of the tax year for which one is determining the residence status of the individual; and
  • the period since arrival into the UK and the end of the tax year for which one is determining the residence status of the individual.

Where the averaging results in a figure of 91 or higher HMRC would contend that the individual was UK resident in the tax year. A relevant double tax treaty may, however, limit the impact of a finding of UK residence as the tie-breaker may give treaty residence to the other jurisdiction which depending on the provisions of the treaty may restrict the UK's taxing rights on non UK source income and chargeable gains realised on non UK situs property. It should be noted though that the treaty override only applies with respect to income and gains covered by the treaty and the individual remains UK resident under UK tax law.

1.5. Showing that an Individual has Left the UK

In very basic terms the most important primary action for any individual (whether or not he or she is ordinarily resident in the UK at the time of departure) to demonstrate in order to establish that he or she has broken their UK residence is that he or she has actually left the UK. As such if they are leaving (whether this be by plane, boat or train) the individual should do so via a one way ticket and at a minimum any visits to the UK from the date of departure until the end of the first tax year of non-residence should, as well as not breaching the 91 day averaging test, be neither regular nor prolonged. For example, HMRC can be expected to challenge a leaving date where the individual claims to have left the UK on 17 March 2010 and returns for a six week visit on 1 May 2011.

As discussed in chapter 2, where the individual was ordinarily resident in the UK prior to departure, even where it is anticipated that the non-resident period will be permanent (that is, there are no plans for a return to the UK) it would be good advice, in addition to taking the necessary other actions to sever UK ties, to suggest that the individual stays outside of the UK for an entire tax year (though note that HMRC accept this is not necessary where the individual leaves the UK for a full time contract of employment abroad – see chapter 3).

1.6. Special Categories

Special rules can apply when determining both residence and the liability to UK tax for certain individuals such as members of the armed forces, diplomats and employees of the European Union. Specialist advice should be taken.

When determining the liability to UK tax special rules apply for entertainers and sportspeople and also to students. It is common to find specific clauses in treaties dealing with both categories and it is important that the provisions of the relevant treaty are considered.

Seafarers who remain UK resident may while they are working as seafarers wholly or partly outside the UK be entitled to seafarer's earnings deduction which can reduce their UK tax liability. There have been a couple of recent cases looking at the definition of seafarer for the purposes of this deduction. If it could be in point specialist advice should be taken.

2. LEAVING THE UK - PRACTICAL STEPS TO SHOW THERE HAS BEEN A "DISTINCT BREAK"

2.1. Overview

An individual, who is both resident and ordinarily resident in the UK at the time of departure, will not be treated for tax purposes as non-UK resident where he or she remains outside of the UK for the purposes only of occasional residence abroad. In practical terms this means that, because of the fact that his or her residence in the UK has been of a non-temporary nature, an individual who has become ordinarily resident in the UK has to break the connection with the UK by being resident overseas for a settled purpose (that is a purpose which is not temporary in nature). It is from this requirement that the "distinct break" concept has been drawn, the logic being that in order to show the individual has left the UK for more than occasional residence abroad there must be a distinct break

The phrase "distinct break" was originally used in a 1932 case where the taxpayer left the UK on 24 April 1926, having been UK resident and ordinarily resident, to enter into a three year apprenticeship with a financial firm in New York (he was to learn the business with a view to becoming the European representative). The departure to take up the apprenticeship, coupled with his having established a permanent base in New York, meant that from 1926/27 to 1928/29 he was seen as neither UK resident not ordinarily UK resident even though he returned to the UK - living in hotel rooms as he had no available UK accommodation - for significant periods (52 days in 1926/27; 175 days in 1927/28; and 181 days in 1928/29).

2.2. What is Sufficient to Constitute a Distinct Break?

The "distinct break" test is one of fact. For HMRC to be successful in a challenge to a non-UK residence claim on the grounds that there has not been a distinct break from the UK:

  • the individual would have had to have been ordinarily resident in the UK at the time of departure; and
  • the facts must support an argument that there has not been a distinct break (such that it can be said that the residence abroad is merely temporary).

This brings us to the fundamental problem as to just how profound a change an individual, who on his or her departure is ordinarily UK resident, must make to avoid a challenge to his or her non-UK resident status. It could be contended that the following is sufficient to demonstrate a permanent break from the UK:

  • leaving the UK with an intention to settle in another territory permanently;
  • not returning to the UK in the year of departure; and
  • in subsequent years ensuring one's UK day count is comfortably under 91 days.

The issue is that the subjective nature of the test means that the taxpayer can only be certain of successfully upholding his or her claim to be non-UK resident if on the facts no other conclusion would be reasonable.

Even where a specialist who has considered all the facts believes that the better view is that the individual is non resident, if it would not be totally unreasonable for a different conclusion to be reached then it is conceivable that HMRC could win the case before the First Tier Tribunal. Unless there was manifest unreasonableness or an error of law that decision could not be appealed. The result of all this is that there is significant uncertainty in this area of shedding UK residence.

Case law indicates that some factors (such as the presence of a UK employment or where the individual's immediate family is based) may be given more weight than others. Only presence in the UK in excess of 182 days will be so significant that, regardless of other factors, the only possible conclusion is that the individual should be treated as being UK resident for income tax and capital gains tax purposes.

Where achieving non-UK resident status is important it is suggested that the individual takes a cautious approach and goes as far as possible to demonstrate that ties with the UK have been cut. The suggestions in this chapter proceed on that basis with a view to establishing a fact pattern such that the non-UK residence claim would be so strong on the facts that no HMRC challenge should be successful as there are no facts which could support a claim that the individual was anything other than non-UK resident. It would not be necessary to have taken all the steps set down in this chapter to be successful in a non-UK residence claim. The "distinct break" test is one of fact and so each individual's circumstances will be reviewed as a whole.

It should be noted that HMRC accept currently that where an individual meets the full-time working abroad conditions (see chapter 3) this in itself is sufficient to demonstrate that there has been a distinct break without any additional severing of ties.

2.3. Where the Period of Non Residence Only Extends to One Tax Year

An individual who has not been physically present in the UK during any point of the tax year will be taken generally to be UK resident where:

  • the absence is only of a temporary nature;
  • he or she has not established their residence in any place other than the UK and can be said to have retained links to the UK.

The nineteenth century case of Rogers v Inland Revenue (1879)1 TC 225 is HMRC's authority for this argument. In this case Mr Rogers (a ship's captain) was not physically present in the UK during the tax year as he was on a long voyage but his family and residence were in the UK. It was decided that he was UK resident in the tax year even though he had not set foot in the UK as he had not established a residence anywhere else, had retained his residence and ties to the UK and had only left for a temporary purpose. Similar logic applies where an individual is not present in the UK for a tax year as a result of an extended period of travelling. In these cases the courts do not acknowledge that a "distinct break" has been made, such that absence from the UK is anything more than temporary, as the taxpayer seeking to claim non residence has not established him or herself in any other territory.

Case law (Reed v Clark 58 TC 528) shows that it is possible to establish a "distinct break" where the period of UK absence spans only 13 months (provided the period covers an entire UK tax year). The decision that the individual was non resident was predicated on the specific facts in that case. These were that the individual:

  • left the UK before the start of a tax year with a settled intention not to return to the UK for at least one whole tax year;
  • took steps to ensure he did not have a residence available in the UK;
  • had a settled intention (which he subsequently fulfilled) to take up residence in a specific territory and an established purpose for doing so;
  • did not return to the UK for a whole tax year (that is no return visits to the UK whatsoever during the whole of the first tax year outside the UK).

To establish non residence where (1) the non UK residence period will only be short-term (such as when the non residence period will only just exceed one complete tax year) and (2) the conditions with respect to the working full time abroad route are not met it will be necessary to ensure one's case is on all fours with that of Mr Clark.

2.4. Where the Period of Non-Residence will Extend to More Than One Tax Year

Taking a very cautious approach where the objective is to establish non UK residence conclusively for more than one tax year it is suggested that an individual:

  • establishes residence in another territory for a settled purpose;
  • physically remains outside the UK for the period from departure to at least the end of the first whole tax year after departure;
  • in subsequent tax years keeps his or her UK days well below 91; and
  • fundamentally re-organises his or her affairs so as to show a severing of ties with the UK.

Such a profound re-organisation of their personal affairs may be challenging for an individual both in emotional and/or practical terms. However, it may be that this is felt to be an appropriate price to pay. It is certainly possible (as evidenced by case law) to be successful in a non residence claim where there has been a demonstrably break from the UK but it is not as pronounced as suggested. However, the problem is that this may leave room for doubt and in a residence case where there is doubt there is the possibility of a successful HMRC challenge.

2.5. Good Record Keeping

Good record keeping is essential to show that an individual has become non-resident. In basic terms it is not enough to cut ties with the UK and build ties in the new territory the individual must be able to evidence that this has been done. In all cases the individual should keep details of contacts made in the new territory in relation to the move there e.g. immigration departments, local authorities etc. Details as to how the individual acquired their residence or rented a property should also be kept. Indeed it may make sense for the professional advisers to keep copies of all such documentation as backup.

2.5.1. Keeping Track of Days in the UK and Elsewhere

An individual seeking to establish non-residence should keep an accurate record of:

  • days in the UK (with the reason for the visits);
  • days spent in the territory where the individual considers himself or herself to be resident;
  • days spent in other territories.

In addition to accurately recording his or her movements the individual should where possible acquire and retain supporting documentation such as travel tickets, records of bookings (even if this is just an e-mail confirmation) and boarding passes.

HMRC can obtain access to the records kept by all UK airfields, check mobile phone records and review credit/cash card transactions for presence in the UK. Accordingly, an individual must be scrupulous in their record keeping as even an innocent mistake would give an unfavourable impression should HMRC challenge an individual's residence status.

2.5.2. Keeping Paperwork in Order

Close attention should be paid to the completion of all necessary forms with respect to leaving the UK and arriving in the new territory.

With respect to tax the appropriate forms must be completed and submitted in a timely fashion to both HMRC and the tax authorities in the new territory.

2.6. The Practicalities of Severing UK Ties

If an individual did everything listed below it is felt that this would demonstrate clearly that a distinct break from the UK has taken place (that is there could be no possible basis for any challenge). However, it would not be necessary to have taken all the steps set down below to be successful in claiming that sufficient ties with the UK have been severed to enable the individual to claim that they have left the UK for more than just a temporary purpose and so can be seen as non-resident. As already mentioned (see 2.2), the issue is that with the subjective nature of the current UK law on residence one would want to do as much as possible to avoid any risk of a successful HMRC challenge. Specialist advice should always be taken where an individual is considering becoming non-UK resident and if there are some UK ties which cannot be severed the seriousness of retaining these ties can be evaluated when considering the overall situation such as the UK ties which will be severed and the ties with the new territory which will be built up.

2.6.1. Visits to the UK

The individual should avoid (except in exceptional circumstances) returning to the UK in the tax year of departure. Visits after the tax year of departure should be kept to a minimum, particularly in the first tax year after departure, so as to show a firm intention to break with the UK. The individual should not routinely come to the UK to visit close family and friends. Rather the individual should arrange to see family and friends preferably at the individual's new home or an alternative location outside the UK which is mutually convenient.

Key annual events such as birthdays, Christmas and New Year should not be celebrated in the UK. Furthermore, the individual should not visit the UK each year to attend specific sporting events (such as Ascot).

2.6.2. Immediate Family (Meaning Spouse/Civil Partner and Dependent Children)

Where possible all immediate family members should leave with the individual.

2.6.3. UK Employment

Whilst not necessarily being conclusive, the presence of a UK employment is seen by the Courts as very strong evidence of ties to the UK, such that an individual cannot be said to be in the UK for a temporary purpose. However, in itself that does not mean that the individual must be UK resident. Each case is judged on its own facts and the recent Court of Appeal judgment in Revenue and Customs Commissioners v Grace made it clear that presence in the UK to perform employment duties was not in itself "a trump card which of itself concludes the issue in favour of residence" To avoid significant risk the individual should, however, not have a UK contract of employment or need to return to the UK regularly for employment or self-employment purposes. The individual should also, before he or she leaves the UK, consider submitting the necessary forms to Company's House to resign from their position as office holder (director or company secretary) of any UK resident companies they may be involved with.

2.6.4. UK Accommodation

It is recommended that an individual does not have any UK accommodation available for use on an ongoing basis after having left the UK. Accommodation should either be sold or rented out.

Where UK property is to be let out by a non-resident the provisions of the non resident landlords' scheme must be complied with. The compliance aspects may be something that Smith & Williamson can assist with.

2.6.5. Property in the New Territory

It is not necessary to purchase a property (and sometimes local rules/conditions will make it impossible to do so) but where the property is leased it is recommended that the lease be for a minimum period of four years (this is a marker that the individual intends to stay outside the UK for at least three years).

To establish that it is a permanent home rather than a temporary one, the property (or where the individual acquired more than one property in the territory the principal property) used in the new territory should be similar in nature (and furnished to the same standard) to that which the individual had owned in the UK. Furniture and other personal effects should be moved to the new territory and insured locally.

It should be clear that the principal property in the new territory is the main residence of the individual with all personal and business contacts being notified including lawyers, accountants, insurance companies (life, medical, house, contents), subscriptions etc.

Practically an individual may want to go into temporary accommodation on first arriving in a new territory as he or she may wish to spend some time determining the right location. Provided subsequent actions show that the initial temporary accommodation is a mere stepping stone to permanent accommodation in the territory and all the other steps have been taken to show that the departure from the UK was indefinite this should not be an issue.

2.6.6. Personal Possessions

The individual's personal effects, including such items as birth certificates or passports, stamp collections, jewellery, heirlooms, etc should be taken to the new territory together with any assets which are currently deposited in UK banks or with other safe deposit organisations in the UK.

Ideally all furniture from the individual's former private residences in the UK should be transferred to the new territory, (and documentation of their removal should be kept). If properties are to be let then some furniture may remain for use by the tenants, but "pride of place" possessions should all be transferred to the residence in the new territory.

Any car that the individual owns in the UK should either be taken to the new territory or sold prior to emigrating. If necessary the individual should hire a car when visiting the UK. Where a car is taken to the new territory its registration and licence plate number should be changed so that it is registered with the authorities in the new territory.

Where the individual has a hobby or passion such as shooting, flying or vintage motor vehicles the individual should not return habitually to the UK to pursue that hobby or keep prized possessions in the UK. The activities should be pursued in the new territory and, where practical, the prized possessions transported there.

2.6.7. Mobile Telephone and E-Mail Contracts

Any UK contracts should be cancelled and a contract entered into with a mobile phone company and e-mail provider operating in the new territory.

2.6.8. Establishing a Home in the New Territory and Integrating into the Local Community

The individual should spend more time in the new territory then anywhere else. Bank accounts should be opened in the new territory and consideration given to acquiring local credit cards and store cards.

Obvious signs of integration into the community they have joined would be the family joining local clubs and societies and generally becoming involved in local cultural, charitable and/or sporting activities. Consideration should be given to cancelling or at least reducing significantly membership of UK centric clubs and societies. Where there is a desire to remain a member of a particular club in the UK it might be possible to change the membership category to that of a non-UK resident/international member.

Ideally any children of school age would be educated in the new territory.

Where members of the family can drive consideration should be given to purchasing a car in the new territory and obtaining driving licences in the new territory. As mentioned previously, car licence plate numbers should also be changed to those of the territory when the individual is settling.

2.6.9. Electoral Roll

On leaving the UK the individual should ensure that he or she is removed from the UK electoral roll. Where possible he or she should be included in the electoral roll of the new territory. Where there is a qualification period any formalities to begin the process of registration should be complied with.

2.6.10. Medical Cover

Registration with UK doctors and dentists should be cancelled. A claim of non-residence when coupled with repeated visits to the UK for NHS medical and dental treatment can be expected to attract an HMRC challenge. Indeed any use of UK services by the individual or dependants or claims to social security benefits whilst non-UK residence is claimed can be expected to lead to HMRC scrutiny and a potential challenge to the claim to be non-UK resident. Of course there would be no issue with an individual who chooses to spend his or her retirement abroad receiving the UK state pension they are entitled to.

As a practical point where an individual is to establish residence in an EU member state they should not apply for a European Health Insurance card (EHIC) from the UK as these are only available to UK residents making temporary visits abroad. Rather, appropriate long-term medical cover should be arranged. It will be necessary for the family to register with a doctor and dentist in the new territory.

2.6.11. UK Bank Accounts And Credit Cards

Whilst it may be convenient to maintain a UK bank account, by preference all UK bank accounts should be closed. As a practical point it is recommended that all standing orders and direct debit payments are reviewed prior to the account closing to ensure alternative offshore arrangements are put in place for those that are to continue. UK credit cards and UK store cards should be cancelled.

2.6.12. UK Investments

Retaining some UK investments will not undermine a claim to be non-resident, provided it can be shown that the reasons for continuing to hold the investments are not inconsistent with an intention to live permanently elsewhere. One would, however, advise against having a portfolio that only contained UK investments. In theory, given the portfolio is just for investment purposes, there should be no risk but in practice a UK-centric portfolio could give the impression that UK ties have not been broken as thoroughly as one would wish.

2.6.13. Wills

An individual should make a Will under the law of the territory where they settle with the intention that their assets should be dealt with in that country by an executor based there. Where the individual has a UK domicile or has retained property within the UK it is appropriate that the individual should still have a Will in accordance with English law (or the law of Scotland if appropriate) as this will ease any probate situation. The succession laws of more than one territory will have to be considered and so specialist advice should be taken.

3. LEAVING THE UK: WORKING FULL TIME ABROAD ROUTE

3.1. Overview

Leaving the UK, before the start of a tax year, to work full time abroad under a contract of foreign employment (or to become self-employed abroad) is sufficient, in the eyes of HMRC, to establish a distinct break provided days of physical presence in the UK are kept within the limits specified. HMRC accept that where an individual qualifies for the "working abroad route" an accompanying spouse will also be deemed to be non-UK resident if the day count tests are not breached.

HMRC's current view as expressed in section 8.5 of HMRC6 is that individuals will become non-UK resident and not ordinarily resident from the day after the day of their departure from the UK, as long as:

  • they are leaving to work full time abroad under a contract of employment (or to become self-employed abroad) for at least a whole tax year;
  • they have actually physically left the UK to begin their employment/self-employment abroad and not, for example, to have a holiday until they begin their employment/self-employment;
  • they will be absent from the UK for at least a whole tax year; and
  • visits to the UK after individuals have left to begin their overseas employment/self-employment will:
    • total less than 183 days in any tax year, and
    • average less than 91 days a tax year. (This average is taken over the period of absence up to a maximum of four years – see 8.5 of HMRC6). Any days spent in the UK because of exceptional circumstances beyond the individual's control are not normally counted for this purpose.

An employment/self employment is foreign where either:

  • all duties are performed outside the UK; or
  • the duties of the employment/self-employment are in substance performed outside the UK and the only duties performed in the UK in the year are duties which are merely incidental to the duties performed outside the UK.

3.1.1. The Individual Must Leave To Take Up The Employment

In order to meet the conditions the reason for leaving the UK must be to take up the foreign contract of employment or to work abroad for oneself in a trade, profession or vocation. This means that:

  • there must be a demonstrable commercial rationale for the overseas contract of employment or the self-employed business venture rather than it being used purely as a route to non-residence;
  • the actual work carried out must be genuinely and demonstrably full-time;
  • the reason for the individual leaving the UK must be to take up the employment (or self-employment).

Note that that in the Court of Appeal judicial review case of R (on the application of Davies and another) v HM Revenue & Customs; R (on the application of Gaines-Cooper) v HM Revenue & Customs [2010] All ER (D) 197 (Feb) the cases of Davies and James failed as neither left the UK to work full time abroad only taking up the foreign employment some months after departure from the UK.

3.1.2. Definition of Full Time Employment

Full-time employment is not defined in the legislation. It is understood that HMRC regards a normal working week as between 35 and 40 hours. It may, however, be possible to argue that an individual is working full time where their hours are below this figure if the hours they work are in line with what counts as full-time employment in the sector and territory where they are living. There is a possibility that several part-time foreign employments may be aggregated so as to count as full-time employment.

Where any non-UK residence planning seeks to rely on the foreign employment being full-time it will be vital to ensure both that the facts are such that it is clear that the foreign employment is genuine and full-time, and that ample evidence can be produced to support these contentions. Where HMRC challenges the non-residence claim it can be expected to:

  • require sight of a copy of the contract of foreign employment; and
  • look at what work the individual actually carried out for the foreign company and assess whether the duties actually performed were sufficient for the employment to have been both foreign and full time.

In the recent case of Derek William Hankinson v Revenue and Customs ComrsTC 319, HMRC challenged the non-UK residence claim on the grounds that the foreign employment was not full time. The First-Tier Tribunal judges agreed having found that, as a question of fact, the work undertaken for the UK company was of such an extent in comparison to the duties for the foreign company that the individual could not have been employed full-time abroad.

Generally, to avoid significant risk the individual should not have a UK contract of employment or need to return to the UK regularly for employment or self-employment purposes. The individual should also, before he or she leaves the UK, consider submitting the necessary forms to Companies House to resign from their position as office holder (director or company secretary) of any UK resident companies they may be involved with.

3.2. Incidental Duties

There is no statutory definition of incidental. From case law we have the following definition:

The words "merely incidental to" are upon their ordinary use apt to denote an activity (here the performance of duties) which does not serve any independent purpose but is carried out in order to further some other purpose.

It is also clear from the case law that for UK duties to be incidental they must be distinguishable from foreign duties to the extent that it must be possible to give a satisfactory answer to the question: "What exactly are the duties outside the UK to which the performance of the duties are incidental."

The commentary within HMRC6 (found at 10.6) suggests that HMRC will argue for the term "incidental duties" to be construed strictly. In the brief discussion of whether duties can be construed as merely incidental HMRC6 sets down the HMRC view as follows:

'Whether or not duties performed in the UK are merely incidental to an overseas employment will always depend on the circumstances of each particular case. Any decision has to be based on the nature of the work carried out in the UK and not simply the amount of time spent on it.

If the work you perform in the UK is the same or is of similar importance to the work that you do abroad, it will not be merely incidental. You will have to show that there is a purpose to the work you did in the UK which enabled you to do your normal work abroad and which you could only do in the UK.

Examples of work carried out in the UK as part of an overseas employment:

Incidental Work

  • time spent in the UK by an overseas sales representative of a UK company to make reports or receive fresh instructions
  • a short period of time spent training in the UK by an overseas employee, provided that no productive work is carried out in the UK by the trainee

Non-Incidental Work

  • time spent in the UK as part of the duties of a member of the crew of a ship or aircraft
  • attendance at directors' meetings in the UK by a director of the company who normally works abroad.'.

From anecdotal evidence it is understood that HMRC has been known to argue that just one or two "non incidental" meetings in the UK are sufficient to mean the employment abroad does not qualify.

3.2.1. Revisions to the Guidance on Internal Duties

The 29 December 2010 version of HMRC6 contains no significant changes in this area. However, the minutes of the Joint Expatriate Forum on Tax and NICS (October 2010) make it clear that HMRC anticipates changing the guidance, the specific comment being:

"A subgroup had been convened since the last Forum to consider issues around FTWA and explore ways of making the guidance in HMRC6 clearer. HMRC thanked those who attended the meeting and those who provided information subsequently.

The purpose of the subgroup was to make HMRC guidance clearer, align it as far as possible with established practices within HMRC and externally and ensure it did not contravene the principles established by Wilkinson. The meeting was productive and HMRC hoped that revised guidance would be provided in the near future. "

Further general comment in the minutes on the HMRC6 revision work makes it clear that the revisions to the guidance on incidental duties would happen after the general revisions (which can now be seen in the 29 December 2010 version of HMRC6). As such a revision of HMRC6 in the first part of 2011 which modifies the guidance in this area is anticipated.

3.3. No Reference to the Need to Sever Personal Ties

HMRC's current view is that provided all the conditions are met (see 3.1) an individual can achieve non-UK residence under the working abroad full time route without having to sever personal ties with the UK. Where achieving non UK residence status is important to the client out of an abundance of caution a more thorough severing of UK ties is, however, recommended (see 2.6 for practical guidance on other ties that could be severed. Where this is not possible (perhaps because there are pressing practical needs why the individual's settled domestic life must remain in the UK) it is vital that the individual arranges his or her affairs so as to be able to show clearly that all the relevant conditions set down within HMRC6 have been met. On this basis, it is hoped that any HMRC enquiry into the non-residence claim would be closed in favour of the taxpayer.

4. LEAVING THE UK: SPLIT YEAR TREATMENT

4.1. Overview

Tax legislation makes no provision currently for splitting a tax year in relation to residence. This means that an individual who is resident in the UK for any year of assessment is chargeable strictly on the basis that he or she is resident for the whole year.

There are two exceptions to the strict rule that the tax year cannot be split: (i) the provisions of a relevant double tax treaty (the exact relief will depend on the exact wording of the specific treaty); and (ii) where relief can be claimed under a relevant extra statutory concession (that is ESC A11 for income tax and ESC D2 for CGT).

It should be noted that a taxpayer is not by right entitled to a concession. There has always been a general caveat where a taxpayer seeks to rely on extra statutory concessions, HMRC guidance, statements of practice or any other such pronouncements that they should not be used by the taxpayer for tax avoidance purposes.

4.2. The Income Tax Concession – ESC A11

Where relief is granted under ESC A11 liability to income tax is computed by reference to the individual's period of UK residence in the tax year. Different rules apply when considering the year of arrival and the year of departure and also when computing the income taxable under the arising and the remittance basis.

For the concession to be available the individual must be able to demonstrate that prior to his arrival he was, or on his departure is, not ordinarily resident in the UK. The concession would not, therefore, be available where an individual who had been ordinarily resident in the UK left for intended permanent residence abroad but returned to reside in the UK before the end of the tax year following the tax year of departure.

Provided tax avoidance is not in point ESC A11 should be granted:

  • in the year of arrival where an individual comes to the UK to take up permanent residence or to stay for at least two years;
  • in the year of departure where an individual ceases to reside in the UK if he has left for permanent residence abroad, or
  • in the years of departure and return where an individual goes abroad for full time service under a contract of employment and the following conditions are met:
    • the individual's absence from the UK and the employment itself both extend over a period covering a complete tax year; and
    • any interim visits to the UK during the period do not amount to:
      • 183 days or more in any tax year; or
      • an average of 91 days or more in a tax year (the average is taken over the period of absence up to a maximum of four years).

A further concession (ESC A78) extends the same treatment to a non-working spouse or civil partner accompanying or later joining his or her spouse or civil partner who is working full-time abroad HMRC might withhold the concessions where an individual leaves the UK mid-way through the tax year and, in the period between the individual leaving the UK and the tax year end, a company in which they are a major shareholder declares and pays a significant dividend. If at all possible the dividend should be delayed until the first complete tax year of non-residence.

4.3. The CGT Tax Concession - ESC D2

Where the concession applies the individual leaving or coming to the UK is not charged to CGT on gains from disposals made after the date of departure or gains from disposals made before the date of arrival in the UK.

The concession does not apply where gains are attributed to an individual under the CGT settlor anti-avoidance provisions (TCGA 1992 s 86).

An individual leaving the UK will only be entitled to this concession provided:

  • the individual is treated on departure as not UK resident and not ordinarily UK resident; and
  • the individual was not resident and not ordinarily resident in the UK for the whole of at least four out of the seven years of assessment immediately preceding the year of assessment in which he or she left the UK (note that this is the same test as the preliminary condition for an individual to be caught by the TCGA 1992 s 10A provisions so where TCGA 1992 s 10A may be in point the individual will not be entitled to the split year concession for CGT).

An individual coming to the UK will only be entitled to the concession where the individual has not been resident or ordinarily resident in the UK at any time during the five years of assessment immediately preceding the year of assessment in which he or she arrived in the UK.

HMRC can withdraw the concession where they feel it will be used for tax avoidance. Tax avoidance is very much a matter of opinion. Where an individual is arriving in the UK mid way through a tax year a simple sale, before the individual arrived in the UK, of a chargeable asset to an unrelated third party should not mean that the concession will be withheld. Transferring assets to a trust or company in which the individual had an interest would probably result in the concession being withheld.

Wherever possible the individual should not seek to use the concessions but rather plan their affairs such that disposals occur and income receipts arise in tax years when the individual is non-resident for the entire year.

The concession does not apply to any individual in relation to gains on the disposal of assets which are situated in the UK and which, at any time between the individual's departure from the UK and the end of the year of assessment, are either:

  • used in or for the purposes of a trade, profession or vocation carried on by that individual in the UK through a branch or agency; or
  • used or held for, or acquired for use by or for the purposes of, such a branch or agency.

5. LEAVING THE UK – RELEVANT ANTI-AVOIDANCE PROVISIONS

5.1. Claw-Back of Hold-Over Relief

Under UK tax law CGT holdover relief is only available where the donee is UK resident or ordinarily resident. In addition there are claw-back provisions where the donee becomes neither UK resident nor ordinarily resident within six years of the end of the tax year in which the gift (or transfer at an undervalue) was effected.

Where the donee becomes non resident before the requisite six year period has elapsed the held over gain is deemed to have accrued to the donee immediately before he or she left the UK.

Broadly, this claw-back provision may not occur where the following main conditions are met:

  • the donee becomes neither resident nor ordinarily resident in the UK by reason of his work in an employment or office all the duties of which are performed outside the UK; and
  • the asset cannot be disposed of during the period during which the individual is neither UK resident nor ordinary resident.

If these conditions are not met then a deemed gain will be taken to have accrued to the donee immediately before the transferee left the UK. If they are met then a further condition must be satisfied, being that, the period during which the individual is neither resident not ordinarily resident must be less than three years. No assessment is due whilst the main conditions are satisfied and this further condition could be satisfied.

Note that there is an argument that the UK law in this area is not compatible with EU law.

5.2. Denial of Relief Under the Exchange, Reconstruction or Amalgamation Provisions

HMRC has been successful in two reported cases in denying relief under the exchange, reconstruction or amalgamation provisions where a taxpayer sold shares for loan stock at a time when he/she was UK resident and disposed of the loan stock when he/she was non-resident. If the relief provisions applied the taxpayer would have been treated as not having made a disposal as the new asset and the old asset would be deemed to be one and the same for CGT purposes. HMRC argued successfully that the specific anti-avoidance provisions denying the relief where the exchange or reconstruction was not carried out for bona fide commercial reasons applied as there had been no commercial reason for the vendor receiving loan stock and it was purely to defer the CGT disposal into a period of non-residency and the exchange was, therefore, part of a scheme or arrangements, of which the main purpose or one of the main purposes was to avoid liability to tax. The consequence of the HMRC success was that the gain occurred before the taxpayer left the UK and was fully chargeable to CGT.

The case law suggests that there will be an issue where there are genuine commercial reasons for an exchange or reconstruction but the structuring of the transaction (such as the way consideration is received) has been affected by tax avoidance considerations.

Generally where an exchange or reconstruction is being carried out a clearance will be obtained and in this instance care should be taken to ensure the full facts are disclosed or reliance will not be able to be placed on any clearance received.

5.3. Temporary Non-UK Residence Anti-Avoidance Provisions

A temporary non-UK resident is defined as an individual who satisfies the UK residence (or ordinary UK residence) requirements for four out of the seven years of assessment immediately preceding the year of departure and is non UK resident (and not ordinarily UK resident) for less than five complete tax years.

From 6 April 2008 there are two sets of anti-avoidance provisions which apply to temporary non-UK residents:

  • the CGT provisions which (from 1 December 2009) also extend to offshore income gains – applicable to both UK and foreign domiciliaries; and
  • the relevant foreign income provisions – only applicable to foreign domiciliaries.

5.3.1. CGT Anti-Avoidance: The Temporary Non-UK Residence Provisions

The CGT provisions are long standing. The general rule is that where the individual returns to the UK within the five year period they are subject to tax, in the tax year of return, on the gains realised on any assets:

  • owned by the individual at the time of leaving the UK; and
  • disposed of in the intervening years of non-UK residence period.
  • From 1 December 2009 these rules have applied to offshore income gains.

Specialist advice should be taken where the CGT/offshore income gains anti-avoidance provisions with respect to offshore structures are in point.

These rules apply to both UK domiciliaries and foreign domiciliaries with special rules for remittance basis users.

5.3.2. Income Tax Anti-Avoidance: The Temporary Non-UK Residence Provisions

The provisions can only apply to individuals who prior to leaving the UK have been remittance basis users. The provisions are aimed at preventing individuals avoiding a UK tax charge by remitting in a temporary non-UK resident period relevant foreign income that arose when they were resident in the UK and was taxed on the remittance basis. The provisions work by deeming the individual to have remitted, in the year of return to the UK, relevant foreign income that:

  • meets the qualifying conditions; and
  • is remitted in the intervening years of non-UK residence (this means the period after the year of departure and before the year of return).

The way the income tax temporary anti-avoidance rules work is very different to the CGT rules. The income tax rules only catch relevant foreign income that arose during tax years in which the individual was both UK resident and a remittance basis user. This means that income that arises during the non residency period is not caught even if the source of the income was held when the individual was UK resident.

Relevant foreign income is within these provisions where:

  • it arose in the year of departure or any earlier tax year;
  • in the year that it arose the individual was taxed on the remittance basis, the funds have not been subject to UK tax as the result of a prior remittance and no transitional provision or ongoing exemption applies.

The commencement provisions make it clear that any funds remitted to the UK prior to 6 April 2008 are not caught by the new rules so, where the individual left the UK prior to 6 April 2008 and returns after that date, only relevant foreign income remittances made after 5 April 2008 need be considered.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.