The new statutory residence test, applying from 6 April 2013, contains provisions allowing the tax year to be spilt into 'overseas' and 'UK' parts. Specified items such as capital gains realised and foreign income received in the overseas part are not taxable in the UK.
Determining whether an individual coming to live in the UK qualifies for split year treatment is not for the faint hearted. In most cases, where the treatment is allowed, it is also necessary to look at conditions applying in the year before and after arrival. All the relevant split-year cases must be checked, as more than one may apply.
Consider an individual returning to live in the UK after working in Dubai for four years. Logic would suggest that the year would be split on the day they left Dubai. However, this will almost never be the relevant date.
In very broad terms the tests for 'arrivers' look at the day:
- the overseas job finished (but not if they have been non-UK resident for the previous five tax years)
- they ceased to have a 'home' overseas, but did have a 'home' in the UK
- they started to have a 'home' in the UK
- they started full-time work in the UK.
If an individual leaves their job and home in Dubai, returns to their UK home and starts work the next day, the year is likely to be split from the day they left their job in Dubai.
If the person went on holiday for a month after leaving Dubai, the date of leaving their Dubai job would still be the determining factor.
However, if they spent six tax years working abroad, the date of leaving the Dubai job is ignored and other tests come into play. So, for example, if the last three months in Dubai were spent in a hotel and the client had a UK home, the year could be split from when they left their Dubai home for the hotel.
Why is this important? The expatriate may want to sell the assets acquired while overseas as they have very large gains. Without checking the split-year rules in detail, the gains may not be tax-free as hoped, even if sold before arriving in the UK.
For non-UK domiciled individuals, this year's Budget included a welcome change to correct an inadvertent error in the legislation, the effect of which was to wrongly charge gains arising in the overseas part of the year and remitted in the UK part of the year.
The split year is unlikely to apply at all to retired taxpayers if they already have homes in the UK and overseas when they come to live in the UK. However, if they first acquire a UK home in the tax year of arrival, the year will be split.
Given the prescriptive nature of the legislation, detailed professional advice should always be taken.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.