Liability to UK income tax and capital gains tax is dependent, very significantly, on the residence status of the individual. The term ‘residence’ appears many times in UK tax legislation but until now this has never been properly defined in that legislation.
Instead, the determination of an individual’s residence status can depend on a whole range of factors, particularly how long they spend in the UK in a tax year. For almost 200 years the courts have been establishing a range of other factors which can affect the position. Some recent high profile cases have highlighted just how difficult it can be to become not resident and how even short periods of time in the UK can be decisive. This makes tax planning very difficult and uncertain for individuals planning to leave the UK permanently or even just for periods of work outside the country.
New statutory proposals
Things are now about to change. A consultation process is underway which will lead to the introduction of a ‘Statutory Residence Test’ (SRT) to determine residence from 6 April 2012. The legislation is likely to be in next year’s Finance Bill but since it could affect plans being made now, we wanted to let you know the basic changes as they relate to individuals planning to leave the UK. We must stress however, that these rules may still change.
One step at a time
The SRT will consist of a series of tests that need to be considered in sequence. If residence status can be determined by the first set of tests then there is no need to proceed to any further tests.
Satisfying any condition in the first set of tests (Part A) will lead to the conclusion that an individual is not resident in the UK for a relevant tax year. However, only one of these conditions can potentially be satisfied by an existing UK resident. This is where an individual is leaving to take up full time employment or self-employment outside the UK.
Full time work overseas
To initially qualify as not resident under this condition all of the following criteria must be met:
· the work must cover at least one complete UK tax year
· the work must amount to at least 35 hours per week
· when working full time outside the UK, any working days (defined as at least 3 hours) in the UK must not exceed a total of 20 and
· the individual must not spend more than 90 days in the UK in any relevant tax year.
A day counts as a day of presence if you are in the UK at midnight.
The significant difference in this new rule, compared to current practice, concerns the time spent in the UK. Currently return visits to the UK are allowed provided they do not exceed 90 days per year on average during the period of employment abroad. The new limit is an absolute and so time back in the UK for whatever purpose must be carefully monitored.
What if Part A does not apply?
If Part A cannot be satisfied then Part B has to be considered. This determines that you are conclusively UK resident if any one of its three conditions is met:
· either you spend more than 183 days in the UK (this reflects the current situation) or
· you work full time in the UK whether employed or self-employed or
· your only home(s) is/are in this country.
What if the tests so far are not conclusive?
If a conclusion has not been reached on either of the two previous tests, it is necessary to move to Part C. Here a distinction is made between ‘arrivers’ and ‘leavers’.
The process in Part C is to look at a combination of the time an individual spends in the UK in a tax year and the factors that connect them to the UK. In simple terms, the greater the number of connecting factors which apply, then the smaller the number of days permitted in the UK before residence is triggered.
How Part C works for leavers
A ‘leaver’ is an individual who has been resident in the UK for at least one of the three previous tax years and the combination of factors and days is as follows:
Days in UK
Number of factors
Always not resident
10 - 44
4 factors to be resident
45 - 89
3 factors to be resident
90 - 119
2 factors to be resident
120 - 182
1 factor to be resident
183 or more
The proposed factors can be summarised as follows:
· where spouse and children under 18 are resident in the UK (there are special rules where the children are only at school in the UK)
· there is accessible residential accommodation in the UK which is actually used in the year
· you undertake substantive employment or self-employment in the UK covering at least 40 working days
· there are at least 90 days of presence in the UK in either of the two preceding years
· you spend more time in the UK than in any other single country.
Clearly the presence of these factors can change from year to year and it will always be important to plan time in the UK with great care. There could be particular implications if you plan to work outside the UK but leave your family here. For example, if you spend more than 90 days in the UK (and so cannot satisfy the Part A test) you will be treated as resident here if your spouse and family are here and you have accessible accommodation because those will constitute the two factors needed to trigger residence.
What should you do now?
If you have plans to make a move away from the UK either for work purposes or retirement or any other purpose then you need to take into account these proposed changes which we will be happy to discuss with you.