When Financial Planning in Dubai, this Insurance Broker in Dubai says every ex-pat Brit MUST read this, even if it is heavy going.
In 2011, the UK Government consulted on the proposed introduction of a statutory residence test. Following a period of delay for further consideration, a response to the consultation, together with some additional consultation questions and draft legislation, was published in summer 2012. A summary of responses to the second consultation was produced by the Government in December 2012, together with amended draft legislation. Draft HMRC guidance, intended to explain how the new rules should be interpreted, was published shortly afterwards. The statutory residence test and other changes discussed in this note will take effect from 6 April 2013.
The proposed statutory residence test The existing rules for determining whether an individual is or is not resident in the UK for tax purposes consist of a mixture of case law (some dating back to the 19th century), HMRC guidance of questionable assistance and a few broad statutory provisions. As such, it can be difficult to advise with confidence as to whether someone is UK resident. Therefore, the introduction of a statutory residence test is to be welcomed.
The proposed test combines a test of presence in and connections with the UK. It will apply only to individuals and will cover income tax, capital gains tax and, where relevant, inheritance tax and corporation tax. It will supersede all existing legislation, case law and guidance for tax years following its introduction. The updated residence test as it is set out in the draft legislation, is divided into three parts, as follows:
• the automatic overseas tests, the satisfaction of one of which for a tax year means the individual is automatically non-UK resident for that year. If none of these tests applies to an individual;
• the automatic residence test, divided into three automatic UK tests, the satisfaction of one of which for a tax year means that the individual is automatically UK resident for that year. If neither automatic test applies to an individual;
• the sufficient ties test will determine the position. This test compares the number of days during a tax year spent by an individual in the UK with the number of ‘ties’ the individual has with the UK during that year. These ‘UK ties’ relate to family, work,
accommodation, days spent in the UK in earlier tax years (90-day tie) and days spent in the UK in the relevant tax year compared with other countries (country tie).
There are specific tests which apply to determine an individual’s residence status in a tax year during which he dies. These are not covered in this note. Nor are the additional rules in the draft legislation for international transport workers.
The tests in detail:
The automatic overseas tests, the existence of any one of which will make an individual non-resident in a tax year, are as follows:
• the individual was resident in the UK for one or more of the previous three tax years and spends fewer than 16 days in the UK in the current tax year; or
• the individual was resident in the UK for none of the previous three tax years and spends fewer than 46 days in the UK in the current tax year; or
• the individual works full-time overseas (the full time working abroad condition
(FTWA)) for the relevant tax year with no ‘significant breaks from overseas work’ of 31 days or more during that year and spends fewer than 91 days in the UK in the tax year. During the tax year, no more than 30 days should involve over three hours’ work
in the UK.
The automatic residence test is met for a particular year if an individual meets at least one of the automatic UK tests and none of the automatic overseas tests in that year. The automatic UK tests are as follows:
• the individual spends at least 183 days in the UK in the relevant tax year (the old statutory test); or
• there is a consecutive 91 day period (or longer), at least partly in the tax year, when the individual has a home in the UK and no home overseas (other than one at which they are present on fewer than 30 days in the relevant tax year) and he/she is present at the UK home on at least 30 days in the tax year; or
• the individual works full-time in the UK for a period of 365 days (at least part of which is in the tax year) with no ‘significant breaks from UK work’ of 31 days or more, and more than 75% of the total number of days in the tax year involving over 3 hours’ work are days when this is done in the UK. If, for any tax year, an individual satisfies a condition in both the automatic overseas test and the automatic residence test, the former will prevail and the individual will be non-resident in that tax year.
The sufficient ties test acts as a tiebreaker where neither the automatic overseas test nor the automatic residence test is met. It looks at four or five relevant UK ties and compares them with the number of days that the individual spends in the UK in a tax year. The ties are as follows:
• Family tie – the individual’s spouse or civil partner (unless they are separated), or someone with whom they are living as such, or a minor child of the individual, is resident in the UK in the relevant tax year. There is no family tie if the individual sees
the minor child in the UK on fewer than 61 days in the relevant tax year (or in the part of the year before the child turns 18, if relevant). A minor child who is only resident in the UK in a relevant tax year due to being in full-time education here will, for these purposes, be treated as not being so resident if he/she spends fewer than 21 days in the tax year in the UK outside term-time (term-time having been confirmed to include half term breaks);
• Accommodation tie – the individual has a place to live available to him/her during a tax year for a continuous period of at least 91 days (not counting any gaps during this period of fewer than 16 days), and spends at least one night at that place in the year. A ‘place to live’ is defined as a home in the UK, a holiday home, temporary retreat or ‘something similar’, or accommodation otherwise available to the individual where he/she can live when in the UK. A stay of at least 16 nights in the year, rather than one, is required if the accommodation is the home of a ‘close relative’ (a parent, grandparent, sibling, adult child or grandchild of the individual, whether by blood, half blood, marriage or civil partnership);
• Work tie – the individual works in the UK for at least 40 days in a tax year, on each of which he/she does more than three hours’ work;
• 90-day tie – the individual spent more than 90 days (applying the ‘midnight test’ discussed later) in the UK in either or both of the previous two tax years; or
• Country tie (only relevant to an individual who was resident in the UK for one or more of the preceding three tax years) – an individual has a country tie for a tax year if the number of days he/she spends in the UK in that tax year (in which he or she
satisfies the midnight test) is not fewer than the number spent in any other single country in that tax year. For an individual who was resident in the UK for none of the three tax years preceding the relevant tax year, the test will work as follows using the first four of the above five ties:
• 46 to 90 days in the UK – only resident if all four ties apply;
• 91 to 120 days in the UK – only resident if at least three ties apply; or
• 121 to 182 days in the UK – only resident if at least two ties apply. For an individual who was resident for one or more of the three tax years preceding the relevant tax year, the test will work as follows using the five ties above:
• 16 to 45 days in the UK – only resident if at least four ties apply;
• 46 to 90 days in the UK – only resident if at least three ties apply;
• 91 to 120 days in the UK – only resident if at least two ties apply; or
• 121 to 182 days in the UK – only resident if at least one tie applies.
Changes to the original proposals
A number of changes have been made to the rules since the initial draft legislation appeared in summer 2012, following the subsequent consultation. These include
increases to a number of the original day counts. For the purposes of the FTWA condition, for example, the number of permissible working days in the UK has been increased from 20 to 30. For the purposes of the test of full-time work in the UK, on the other hand, the qualifying period has been raised from 276 days to 365 days, partly to align it more closely with the requirements for the FTWA condition. The automatic residence test relating to a home in the UK has been amended so that there is now a minimum presence requirement of at least 30 days, which applies to both UK and overseas homes for this purpose. Previously, the draft test would only have applied to an individual who had no overseas home at all at some point in a tax year during which they had one or more UK homes. The new test, on the other hand, may be satisfied by someone who continues to have both UK and overseas homes, provided they are present on at least 30 days in a tax year at a UK home, and on no more than 29 days in the same tax year at any of their overseas homes, looked at individually. The definition of ‘home’ has been expanded to confirm, amongst other
things, that it will not include a holiday home or temporary retreat (or similar), and there is no longer any reference in the draft legislation to a ‘weekend home’.
However, there is no indication as to the meaning of the terms which are included. As a result, the meaning of ‘home’ remains unclear, as does the meaning of a ‘place to live’ for the purposes of the accommodation tie. Both are left to a large extent to be determined by the individual with the assistance of HMRC guidance. The draft legislation confirms that ‘work’ will include periods of training and travelling. ‘Full-time work’ is defined as an average of 35 hours a week across a period, but periods of annual or parenting leave or of sickness can be deducted. However, weekends and public holidays cannot be so deducted. The maximum permissible gap between different employments remains at 15 days.
Definition of a day of presence in the UK
For the purposes of the statutory residence test, the definition of a day of presence in the UK will be the same as that which applies under the existing rules, (that is, one on which an individual is in the UK at the end of the day (the so called ‘midnight test’)). A day spent in transit, where the individual arrives in the UK as a passenger, departs on the next day and does not engage in any activity substantially unrelated to their passage through the UK, will not count as a day of presence in the UK. However, the Government are concerned that the midnight test could be abused by individuals who spend large numbers of days in the UK without being present at midnight. Accordingly, they are introducing a rule which will apply to certain individuals who, on more than 30 days in a tax year, are present in the UK at some point but not at midnight. In such cases, all days in excess of the 30 day threshold on which the individual is present in the UK at some point in the day will be included as days of presence for the purposes of the day count. This so-called ‘deeming rule’ will only apply to an individual who has at least three UK ties for a tax year and has been resident in the UK for at least one of the three tax years preceding the relevant tax
year. The rule will not apply for the purposes of the FTWA condition, nor to determine if an individual satisfies the 90-day tie or country tie. The draft legislation also includes provision for exceptional circumstances, where an individual spends a day in the UK for reasons beyond their control, such as national or local emergencies, (e.g. war, civil unrest or natural disasters) or sudden or life-threatening illness or injury. This provision will be restricted to 60 days in any tax year.
• Split-year treatment – HMRC’s existing concession, enabling a tax year to be split into periods of residence and non-residence when individuals leave the UK or arrive here during a tax year, is to be replaced by statutory rules. Following comments made during the consultation, HMRC have made a number of changes to the categories of individuals who may benefit from this treatment. In very broad terms, the rules will now apply to an individual who falls within one of the following five situations or “cases”:
• Case 1: will apply to an individual who loses UK residence by virtue of starting work full-time overseas;
• Case 2: will apply to an accompanying spouse or civil partner of an individual within Case 1, or a person with whom such an individual lives as a spouse or civil partner;
• Case 3: will apply to an individual who leaves the UK to live abroad;
• Case 4: will apply to an individual who comes to live or work fulltime in the UK;
• Case 5: will apply to an individual who starts to have a home in the UK on a day in the relevant tax year, having had no UK home during the relevant tax year prior to that day, and continues to do so for the rest of that tax year and the whole of the next. All of the situations above will be subject to a number of different conditions, including rules relating to their residence status in preceding or subsequent tax years.
Split-year treatment in the context of the statutory residence test will only apply to individuals in their capacity as such. It will not apply to individuals acting as personal representatives. It will apply in a limited way to an individual acting as trustee of a settlement if such an individual becomes or ceases to be a trustee during a tax year and the period for which he or she is a trustee falls within the overseas part of the tax
year. This is because the trustee’s residence status at a particular time may affect the residence status of the settlement.
Anti-avoidance – to prevent short periods of non-residence (whether actual or under the terms of a double tax arrangement (‘Treaty non-residence’)) being used to avoid a liability to UK income tax, certain types of income accruing during a period of non-residence of fewer than five tax years to an individual who has been UK resident (actually and for Treaty purposes) for four or more of the previous seven tax years will, for tax purposes, be deemed instead to
accrue to the individual in the year in which he/she returns to the UK (or ceases to be Treaty non-resident). This rule will cover distributions from close companies, lump sum benefits from employer-financed retirement benefit schemes and chargeable
event gains from life assurance contracts. This is in addition to the types of income and gains which are covered by existing rules for temporary non-residents, such as
chargeable gains, income withdrawals under certain foreign pensions and under registered pension schemes, and remittances of relevant foreign income.
Transitional rules – Individuals who need to know their residence status in one or more of the tax years prior to the introduction of the test in 2013/14 (a ‘pre- commencement tax year’) for the purpose of determining their residence in one of the three tax years following its introduction may apply the new rules to relevant pre-commencement tax years. A formal election will be required for this, which will be irrevocable and which must be made by the first anniversary of the end of the relevant future year. Where it is necessary for the purposes of assessing an individual’s liability to tax in a future tax year to determine whether a pre-commencement tax year was a split year, the extra-statutory concession which would have been relevant to the individual’s circumstances in that pre-commencement tax year is to be applied to make that determination. In relation to periods of temporary non-residence, where the tax year of departure was one prior to 2013/14, the existing temporary non-residence
provisions will apply. In applying the existing temporary non-residence rules, however, the question of whether an individual is or is not resident in the UK in 2013/14 or a subsequent tax year, is to be determined in accordance with the new rules.
• Automatic residence test: UK home – under the amended automatic UK test for those with one or more homes in the UK, there is no longer to be a requirement for an individual to have no overseas home for any period. Instead (subject to an overall 91 day qualifying period which may straddle two tax years), the requirement is to be present at a UK home on at least 30 days in a tax year, whilst being present at any of his or her overseas homes, looked at individually, on no more than 29 days in the same tax year. Individuals with homes in the UK and other jurisdictions should ensure they keep a careful record of the number of days in a tax year they are present for any period of time at any of their homes, both in the UK and overseas.
• Pure presence test – certain individuals who do not meet the automatic overseas test may nevertheless be able to maintain their tax status as non-UK residents purely
on the basis of day-counting. The requirements are as follows:
• the individual does not meet the automatic residence test by virtue of visiting a UK home on more than 30 days and no overseas home on more than 29 days in a tax year; • the individual was resident in the UK for none of the preceding three tax years;
• he or she spends or has spent fewer than 91 days in the UK in every tax year (including 2011/12 and 2012/13 for those arriving in 2013/14). However, such individuals must bear in mind that an average of 90 days in the UK over a number of years will no longer be relevant. Each year’s day count will stand alone.
• Deeming rule – individuals who fall within the parameters of the deeming rule in relation to days of presence in the UK should keep careful records of any days on which they are present in the UK at some time, but not at the end of the day, in order to ensure they do not exceed the 30-day threshold or, if they do, that any additional days of presence in the UK they accrue under this rule are not sufficient to affect their residence status. This will be of significance primarily to individuals who make a large number of short visits to the UK during a tax year, perhaps arriving and leaving
within a single day or staying for maybe two or three days on each occasion.
• Transitional rule – the first of the proposed transitional rules mentioned above will apply to two of the three automatic overseas tests and for the purposes of determining the number of UK ties relevant to him or her in the sufficient ties test and whether he or she meets the 90-day tie. If these aspects are relevant to an individual, his/her residence status in the tax years 2010/11, 2011/12 and/or 2012/13 may affect his/her status in 2013/14, 2014/15 and/or 2015/16. In these circumstances, the proposed
transitional rule will enable an individual to apply the new residence test to one or more of the tax years preceding the introduction of the test in 2013/14 if he/she elects irrevocably to do so. Individuals should review their residence status for these tax years and whether it may be advantageous for them to consider such an election for one or more of the relevant tax years, bearing in mind that it still may be possible in
marginal cases to make changes to the factors affecting their residence status for 2012/13.
The concept of ordinary residence is different from residence and is primarily relevant to an individual’s liability to tax in two situations. Individuals who are not ordinarily resident may claim or otherwise be entitled to the remittance basis of taxation for:
• foreign investment income; and/or
• overseas workday relief (OWR) in relation to income from foreign employment duties paid by a UK employer which is, accordingly, UK source income.
The original residence consultation made a number of alternative proposals in relation to ordinary residence. These included the scrapping of the concept of ordinary residence other than in relation to OWR and that, in relation to OWR, it might be restricted to non-domiciled individuals. It was announced at Budget 2012 that ordinary residence will be scrapped other than for OWR. Following the outcome of
the 2012 consultation, OWR will now be placed on a statutory footing and will be
restricted to non-domiciled individuals who have been resident outside the UK in
all of the three tax years prior to coming to the UK to work. It will be available for the
tax year of arrival and the two complete tax years following.
Transitional provisions are being introduced to ensure that individuals who currently benefit from a particular tax treatment due to being not ordinarily resident in the UK continue to do so as long as they would under existing rules. This will be for a maximum of two complete tax years following commencement of the new rules. The transitional rules will apply to specific provisions including OWR, the remittance basis and the transfer of assets abroad legislation.
When the original proposals were published, the proposed residence test seemed likely to introduce a welcome degree of certainty, provided a number of areas of uncertainty were clarified. For one thing, the need to make a ‘definite break’ in order to leave the UK is not a feature of the test and this should have made it significantly easier to determine an individual’s residence status. Unfortunately, whilst there has been some welcome loosening of some of the time limits for days which can be spent in the UK whilst remaining non-resident, both in relation to working and generally, in other areas the proposed test has become tighter and more complex.
The addition of the deeming rule for individuals who spend significant time in the UK without being present at midnight is an example of this. As discussed above, the changes made to the second automatic UK test in relation to an individual’s homes are also significant, and may require detailed record-keeping, even by individuals who
do not otherwise have strong connections to the UK. These additional new rules and the fact that definitions of vital terms such as ‘work’ and ‘home’ are still very unclear
and, in some cases, left largely to HMRC guidance, are serving to make the new
test harder to explain and to apply to an individual’s circumstances. This was not
what was anticipated when the proposals were first announced. That said, the option to elect for the new rules to apply to a determination of residence status in pre-2013/14 tax years where this is relevant to tax status in subsequent years continues to be positive. As suggested above, for these purposes and those of the 90-day tie, individuals should review their residence status now for this and earlier tax years. If you would like further information please contact: Greg Pogonowski at