Posted by Nick Day on 08 May 2013
How does the UK Statutory Residence Test (SRT) impact you?
From 6 April 2013 there are a new set of rules that will determine your UK tax residence status, which in turn will decide how your income and capital gains are taxed in the UK.
The old rules (click here for a link) were a recipe for confusion and error, governed by common law cases and an assortment of HM Revenue & Customs (HMRC) guides, practices, customs and extra-statutory concessions, although many of the principles that were used under the old rules are enshrined in the new law.
The new law seeks to provide clarity and this has largely been achieved, but the rules are detailed and need to be examined carefully, especially if you are not either “automatically non-resident” or “automatically resident” under the first two parts of the test (click here for more detail on these tests).
The third part of the new test deals with those whose status cannot automatically be determined and works by referring to a Sufficient Ties Test, whereby the number of connections to and level of days spent in the UK in a tax year are combined to decide status. The Sufficient Ties Test is slightly different for “Arrivers” coming to the UK than for “Leavers” departing the UK. Leavers (i.e. those who have been UK tax resident previously) could find it difficult to establish non-residence, as HMRC have always believed that there is an “adhesive” element to long term UK tax resident status and have shaped the rules for Leavers accordingly.
The Sufficient Ties taken into consideration under the third part of the test are:
- Family Tie – whether spouse/civil partner/common-law partner and/or minor children live in the UK. There are certain exceptions for minor children who are in the UK for full-time education.
- Accommodation Tie – whether there is a place to live in the UK (which can be rented and/or a holiday home) that is available for 91 days or more in the tax year, and where at least one night is spent there. However, it is possible to spend up to 15 nights per tax year in the accommodation of a close relative without falling foul of the rules).
- Substantive Work Tie – whether 40 or more days in the tax year are spent working in the UK. A day counts towards this test when more than 3 hours of work are carried out in the UK.
- 90 days Tie – whether more than 90 days are spent in the UK in either of the two previous tax years.
- Country Tie – whether more days are spent in the UK in the tax year than any other single country (this tie only applies to “Leavers”).
Once the number of ties has been established, the following table is referred to in order establish whether or not UK tax residence is in point for a given tax year:
|Days spent in the UK||“Arrivers” – those not UK tax resident in the previous 3 UK tax years||“Leavers” – those UK tax resident for at least 1 of the previous 3 tax years|
|Fewer than 16 days||Always non-resident||Always non-resident|
|16 – 45 days||Always non-resident||Resident if individual has at least 4 ties|
|46 – 90 days||Resident if individual has at least 4 ties||Resident if individual has at least 3 ties|
|91 – 120 days||Resident if individual has at least 3 ties||Resident if individual has at least 2 ties|
|121 – 182 days||Resident if individual has at least 2 ties||Resident if individual has at least 1 tie|
|183 days or more||Always resident||Always resident|
UK Statutory Residence Test Issues
There are a number of issues to consider arising from the new rules. Among these are:
- The concept of “Ordinary Residence” has been abolished. This will impact on the foreign service relief exemption that has in the past been applied to termination payments made to employees who have foreign work records, and also on the ability of a UK domiciled individual who has been non-resident to claim “Overseas Work Days Relief” on returning to the UK for a temporary work assignment.
- The rules for dividing tax years in to “split parts” of residence and non-residence for years of arrival in and departure from the UK have changed. Also, the old rules embedded in the minds of many need to be discarded in certain respects – for example, someone who comes to the UK part-way through a tax year may not become tax resident from the date they arrive as the old rules dictated, but perhaps from an earlier date such as when a property is bought or a lease agreement starts to apply.
- The temporary non-residence anti-avoidance rules that applied for UK capital gains tax purposes are extended so that certain income (such as close company distributions and life insurance contract gains) arising during a period of temporary non-residence will become taxable on the individual’s return to the UK. The rules will apply when someone departs the UK and becomes non-resident, has been UK tax resident for at least four of the previous seven tax years, and becomes UK tax resident again within five years.
- The new rules refer to concepts such as family, home and accommodation, which will all need reviewed carefully to ensure the definitions are understood and do not lead to perceived “loopholes”.
- It is possible to elect to refer to the new Statutory Residence Test rules for one or more of the previous three tax years, but only to determine tax residence status to apply in 2013/14 or a later UK tax year. For years up to and including 2012/13, the old rules will determine UK tax residence status.
- “Days” spent in the UK will, as under the old rules, be counted by reference to midnights spent in the UK (although there are some anti-avoidance rules for certain individuals making a high number of return trips to the UK and who are often not present at midnight).
- A “work day” for elements of the SRT will be where more than three hours are worked in the UK. This will lead to challenges in terms of record keeping and proving to HMRC whether a day spent in the UK should count as a work day. It will be crucial to ensure that work diaries, telephone, blackberry and computer records are consistent with claims being made. As under the old rules, the importance of keeping accurate travel records such as flight tickets will be paramount.
This is a massively important change to the UK’s tax laws and if you are in any doubt we would urge you to review your status as soon as possible. Non-residence can reduce or eliminate your UK tax liabilities but the new rules are complex and could lead to pitfalls for the unwary. Our team has over 30 years of experience advising on UK tax residence/domicile issues. Click here for further details of the services we offer to “Expats”.
Please click here for a further detailed summary of the changes to the UK tax residence rules.
Contact Tax Innovations
This article is for broad guidance purposes only and is no substitute for a proper review based on individual circumstances. If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org.
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