UK: The New Statutory Test For Individual Tax Residence: A Brief Guide

Last Updated: 31 July 2013
Article by Helen Ratcliffe

The new statutory test for tax residence in the UK (referred to as the SRT) has taken a long time coming. It has been the subject of a lengthy consultation process over the last few years and has morphed through a number of variants on the way. This year's Finance Act contained the final form of the new test which came into force on 6 April 2013.

The SRT is a significant improvement over the old residence test which had evolved from a combination of case law and Revenue practice, but it is far from perfect and may leave some individuals, particularly those with an international highly mobile lifestyle, still in some uncertainty.

The SRT applies not only for income tax and capital gains tax purposes, but also for inheritance tax purposes (where extended UK tax residence creates a deemed UK domicile).

Although the SRT replaces all existing legislation, case law and guidance from the tax year 2013/14 onwards, the old rules will generally continue to apply to determine residence in relation to tax years up to 2012/13. This may be particularly important for non-UK domiciled individuals who have been living in or visiting the UK for an extended period of time prior to the tax year 2013/14.

A transitional rule is included to allow an individual to elect to apply the SRT to one or more of the tax years before 2013/14 but only for the more limited purposes of ascertaining whether or not certain elements of the new test are met.

THE NUTS AND BOLTS OF THE NEW TEST THE BASIC RULE

An individual will definitely be resident in the UK for a tax year if:

  • the automatic residence test is met for that year; or
  • the sufficient ties test is met for that year. If neither of those tests is met for that year, then the individual is not resident in the UK for that year. There are two elements to the automatic residence test. It will be met if an individual satisfies at least:
  • one of the automatic UK tests; and
  • none of the automatic overseas tests.

So effectively the automatic overseas test takes priority. If an individual satisfies any one of the automatic overseas tests then even if they also satisfy one or more of the automatic UK tests they cannot be resident under the automatic residence test.

There are separate tests for determining residence in the year of death of an individual which are not covered in this note.

THE AUTO MATIC OVERSEAS TESTS : CONCLUSIVELY NON-UK RESIDENT

Essentially the rules mean that it is easier for an individual to remain non-UK resident if they have not been resident in the UK in any of the last three tax years than it is to become non-UK resident if they have been resident in the UK in one or more of the last three tax years.

An individual will definitely not be resident in the UK for a tax year under the SRT if they satisfy one of the automatic overseas tests:

  • they have been resident in the UK in one or more of the last three tax years and are present in the UK for fewer than 16 days in the tax year; or
  • they have not been resident in the UK in any of the last three tax years and are present in the UK for fewer than 46 days in the tax year; or
  • they work sufficient hours overseas.

In order to meet the working sufficient hours overseas test an individual must be present in the UK for less than 91 days in the tax year, the number of days on which they do more than three hours' work in the UK must be less than 31 and there must be no significant breaks from the overseas work (on a change of employer, for example).

THE AUTO MATIC UK TESTS : CONCLUSIVELY UK RESIDENT

An individual will definitely be resident in the UK for a tax year if they satisfy any one of the automatic UK tests (and none of the automatic overseas tests) as follows:

  • they are present in the UK for 183 days or more in the tax year;
  • they have a 'home' in the UK during all or part of the tax year and certain conditions are met; or
  • they work sufficient hours in the UK.

The second and third tests require further comment.

'Home in the UK'

This automatic UK test will be met where an individual has:

  • a home in the UK for a period of at least 91 consecutive days and in a tax year there are at least 30 separate days on which they are present in that UK home for at least some of the time (no matter how short a time); and
  • either (1) has no home overseas or (2) has one or more homes overseas and in the tax year there are fewer than 30 separate days when they are present in any overseas home for at least some of the time (again no matter how short a time).

Being present in a home does not involve staying overnight at the property. Stopping by simply to collect the post or to check the boiler is working would count as presence in the UK or overseas home for the purposes of the test.

Despite calls from the professional bodies there is still no proper definition of what will constitute a 'home' for these purposes. However there is now a provision in the legislation that a place used as nothing more than a holiday home or 'temporary retreat' does not count as a home for these purposes.

'Working sufficient hours in the UK'

The third automatic UK test is that an individual works more than a certain number of hours in the UK as assessed over a period of 365 days all or part of which falls within the tax year. Broadly an individual will meet the test where 75% of the total number of days in the 365 day period on which they do more than three hours' work are days worked in the UK.

The legislation provides a series of steps for establishing for any given period, whether an individual works sufficient hours in the UK with special provisions for dealing with periods of leave or other absence and gaps between employments. These rules are complex and concerns have been raised about the method of calculation, in particular in the case of entrepreneurs and others who do not have a regular 35 hour week working pattern.

WHAT IS A 'DAY ' FOR THE TAX RESIDENCE TEST ?

A day counts as a day spent in the UK if an individual is present in the UK at the end of a day. So if an individual is in the UK at midnight at the end of the day, the day will count except in two situations.

One is a transit exemption for days when an individual arrives as a passenger in transit and departs the following day without engaging in any activity (in particular business) that is 'substantially unrelated' to their passage through the UK.

The other exception is a disregard for days spent in the UK (up to a maximum of 60 days in any tax year) owing to exceptional circumstances such as national or local emergencies for example war, civil unrest or natural disasters. Sudden or life threatening illness or injury are also regarded as exceptional circumstances and whilst the legislation does not specify who this might cover, HMRC guidance suggests that in addition to the individual it will cover illness or injury of their spouse, civil partner or dependant child.

If an individual is not present in the UK at the end of a day, that day will generally not count as a day spent by them in the UK. There is however an antiavoidance rule which applies to those who have strong ties to the UK and who are present in the UK on more than 30 days in a tax year but are not present precisely at midnight. Its purpose is to stop individuals with strong UK ties timing their arrival and departure times to 'gain' extra days.

Unhelpfully there are different tests for what 'day' means for the purposes of counting days spent in the UK and days spent working in the UK. Rather than the midnight test, a working day is one on which the individual does three or more hours' of work. That may be a straightforward fixed period, but a key issue identified during the consultation process has been what constitutes 'work' for the purposes of a working day.

Obviously time spent in the UK working on papers, answering emails or taking calls will count as work. However it is now clear that time spent in the UK on work-related travel will also generally be classed as work from the time the individual disembarks in the UK to the time they get back on board.

Individuals who are internationally mobile will need to maintain detailed daily records of where they worked, and for how long, including taking account of the new rules about travelling time, and about working when travelling.

DAY COUNTING AND THE SUFFICIENT TIES TEST

The automatic residence test will not provide an answer for a high proportion of international individuals with more complex affairs. These individuals will have to consider whether the alternative sufficient ties test is met for the particular tax year. Whether an individual has sufficient UK ties for a tax year will depend on two things: whether or not they were resident in the UK for any of the previous three tax years, and the number of days that they spend in the UK in the tax year.

WHAT CONSTITUTES A 'UK TIE'?

The UK ties are:

  • a family tie: UK resident family (ie a spouse, civil partner or 'common law equivalent' resident in the UK and/or minor children resident in the UK where certain conditions are fulfilled).
  • an accommodation tie: 'accessible' accommodation in the UK where use is made of it during the tax year (subject to exclusions for some types of accommodation).
  • a work tie: substantive UK employment including self-employment, (ie if working in the UK for 40 or more days in the tax year but not working in the UK full time).
  • a 90 day tie: spending more than 90 days in the UK in either of the previous two tax years; and
  • a country tie: this applies to those who have been UK resident in one or more of the previous three tax years, and who in the tax year under consideration spend more days in the UK than in any other single country.

A tie will be taken into account if it occurs at any point in the tax year. As a general rule there is no split year treatment if a tie is gained or lost during the tax year. Therefore in order for a particular tie not to be counted in a tax year it would need to have been 'lost' before the start of that tax year (ie before 6 April). The only option for those with significant ties to the UK who do not wish to be resident here for a tax year will be to restrict the number of days on which they are present in the UK according to the number of ties they have. The way in which the UK ties are combined with days spent in the UK to determine an individual's residence status in the tax year is set out in the box below.

CHILDREN AS A UK TIE

A child will not be treated as being resident in the UK for these purposes if their residence is mainly caused by time spent at a UK educational establishment and the child spends no more than 20 days in the UK outside term time. Helpfully it has been agreed that half-term and exeat breaks will count as being within term time for these purposes.

A child under 18 who is resident in the UK will only count as a connection factor for the parent if, for all or part of at least 60 days during the tax year, the parent, whilst in the UK, spends time with them (one to one, or with others present), or lives with them.

Not resident in any of the last three tax years The term 'child' includes both natural and adopted children but does not include stepchildren (unless they have been adopted).

UK ACCOMMODATION AS A TIE

An individual will have UK accommodation if they have a place to live in the UK which is available to be used by them for a continuous period of at least 91 days in a tax year and they spend at least one night in that place during the tax year. There is however an exception for stays of less than 16 nights in the home of a close relative (other than the individual's spouse, partner or minor children).

SPLIT YEAR TREATMENT

The former concessionary 'split year' treatment has now been placed on a statutory footing as part of the SRT. A tax year can be split into periods of residence and non residence for those arriving in the UK or returning after a period of time abroad and also for those leaving the UK, provided certain conditions are met. As already noted, however, split year treatment does not apply when deciding whether or not there is a 'UK tie'.

ORDINARY RESIDENCE

The common law concept of 'ordinary residence' is now removed for most situations. A transitional rule has been introduced for the two tax years following the commencement of the new rules. This provision will be of particular importance for some UK resident and domiciled individuals who, though UK resident, were not ordinarily resident, and so were eligible for the remittance basis on non-UK source income.

HMRC 'S TAX RESIDENCE INDICATOR

HMRC have developed an online Tax Residence Indicator for individuals to use to help them determine their tax residence by answering a series of questions. Except in the most straightforward of cases this is unlikely to provide a conclusive answer. Its results depend on the user's correct use of terms such as 'home' and 'work'. As mentioned above, this is where the difficulties of the new test lie.

A STEP IN THE RIGHT DIRECTION

The SRT will provide greater certainty than there has been in the past and that is a step in the right direction. However, the rules are complex and those with internationally mobile lifestyles and stronger links to the UK will need to ensure that a change in their lifestyle (perhaps one that they would never normally consider to be a tax matter) does not inadvertently add an additional UK tie which makes them resident in the UK.

It can readily be seen from this summary of the rules that many individuals will now need to keep accurate records of their trips to and from the UK and, for those spending any time working in the UK, extremely detailed records of what they did or did not do during their visit from the time they stepped off the train or plane to the moment they stepped back on again.

WHAT SHOULD I BE DOING NOW ?

The key message for anyone concerned about their tax residence is that they need advice on their particular circumstances, to ensure that their residence has not changed as a result of the introduction of the SRT. For most people the answer will not have changed: indeed they may be able to arrive at that answer more simply than previously, and with greater certainty. There are, however, some cases where the position could have worsened and in these cases it will be important to review whether there are factors in an individual's lifestyle that can be changed to secure the desired result.

It is important that this review is done as early as possible. The test depends partly on the number of 'ties' with the UK that the individual has. Some ties – for example certain kinds of accommodation in the UK, or a UK resident family – are fixed for the whole tax year according to the position on 6 April in that year, but an individual may still be able to adjust the number of days they spend in the UK to achieve the desired residence outcome. In future years, they may be able to reduce the number of ties before the tax year starts and so be able to spend more days in the UK.

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.

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