Changes to Residence Rules
The New Tax Residence Rules
From 6 April 2013 the UK introducedlegislation which created a statutoryUK residence test for individuals to replace earlier case law and practice.
The legislation applies for domestic purposes only and so could be overruled by a double taxation agreement.
This article considers the concept of UK tax residency for individuals only. It does not cover the issue and effect of “domicile”.
What is the impact of UK tax residency?
UK tax residents are subject to UK income tax on their worldwide income and gains, whereas non-residents only pay tax on UK sources of income and in some cases gains. It also creates a number of filing requirements in the UK.
For internationally mobile persons, it is important that they have clarity about their tax residency so that they can plan their affairs with certainty.
4-step process
The legislation works by applying the statutory rules in 4 steps:-
Step 1 – an individual will be UK tax resident is they spend more than 183 days in the UK
Step 2 – if step 1 does not apply, the individual needs to consider if they meet one of three automatic overseas residence tests.
Step 3 – if steps 1 and 2 does not give an answer, consider if the individual meets one of the two remaining automatic UK residency tests.
Step 4 – if steps 1 to 3 do not produce a result, the individual needs to see if they have sufficient ties to the UK. If not, then that person will not be UK tax resident here.
Step 2 – Automatic overseas residence tests
You will be deemed automatically overseas resident if:
(i) you were in the UK for one or more of the three tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year.
(ii) You were resident in the UK for none of the three years preceding the tax year and you spent fewer than 46 days in the UK in the tax year
(iii) You work full time overseas over the tax year, without any significant breaks during the tax year from overseas work and you spend fewer than 91 days in the UK in the tax year, and you spend less than 31 days working for more than three hours a day in the UK.
Step 3 – Automatic UK residence tests
You will be deemed to be automatically UK resident if:
- There is a continuous period of 91 days in which your only home is in the UK and your spend more than 30 days in that home during a tax year
- You work full time in the UK for any period of 365 days, with no significant break from UK work and
(a) all or part of that 365 day period falls within the tax year
(b) more than 75% of the days when you do more than three hours’ work are days when you do such work in the UK
(c) at least one day in the tax year is a day you do more than three hours of work in the UK.
There is no simple definition of “home” and therefore this is one of the areas where there is a degree of subjectivity around the application of these rules.
Step 4 – Sufficient Ties to the UK
In the case of an individual who has more complex affairs and does not automatically qualify as either non-UK resident or UK resident under these tests, it will be necessary to consider the combination of days spent in the UK and any ‘sufficient ties’ they have to the UK.
There are five UK ties that must be considered:
- Family Tie(where your spouse and minor children are resident)
- Accommodation Tie (this is interpreted very broadly and does not apply merely to ownership of property)
- Substantive Work Tie(at least 40 UK workdays where more than 3 hours work takes place)
- 90 days Tie(at least 90 days spent in UK in either or both preceding years)
- Country Tie (Where you are present in the UK for the most number of nights)
The number of days needed to establish UK residency under the sufficient ties test is as follows:-
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Ties |
Maximum number of days before becoming UK tax resident |
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Resident here in any of the previous 3 years |
Non-resident here for last 3 years |
|
Four or more |
15 |
45 |
|
Three |
45 |
90 |
|
Two |
90 |
120 |
|
One |
120 |
182 |
What is a day?
A day is normally counted where a person is here at midnight. However there are some circumstances where any presence in the UK during a day counts towards the day count.
Conclusion
The new UK statutory residency test is welcome because it brings clarity to what had become an area of uncertainty following recent caselaw.
Saying that the test is complex and convoluted and persons who are considering emigrating or coming to the UK should seek advice on their tax status when planning their future personal and business affairs.
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This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.
Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk
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