An individual’s tax residence is of paramount importance in determining his or her tax liability. Whereas UK residents are liable to tax on some or all of their overseas income and capital gains, non-residents are not (subject to certain limited exceptions). Up until now, the question of a person’s residence has been determined by reference to certain guidance from HMRC and cases heard in the UK courts (each case turning on its own specific facts). The unsatisfactory nature of this arrangement was highlighted in the recent case of R (on the application of Davies, James and Gaines-Cooper) v HM Revenue & Customs  EWCA Civ 83. This exposed in particular the level of uncertainty regarding an individual’s ability to make and retain connections in the UK whilst still being considered non-resident for tax purposes.
The government has therefore proposed to introduce a statutory definition of tax residence, known as the statutory residence test, to determine conclusively a person’s tax residence. The recent consultation set out the government’s proposals and invited responses from interested parties.
The consultation proposed a tripartite residency test, which distinguishes between individuals who are conclusively non-resident, those who are conclusively resident, and those who do not fall neatly into either category. The three limbs of the test, which applies for the purposes of income tax, capital gains tax and inheritance tax, are set out below.
Test A: conclusive non-residence
A person will be conclusively non-resident if one of the following conditions applies to his circumstances:
- He was not resident in the UK in any of the previous three tax years, and is present in the UK for fewer than 45 days in the current tax year; or
- He was resident in the UK in one or more of the previous three tax years, and is present in the UK for fewer than 10 days in the current tax year; or
- Having left the UK to carry out full-time work abroad for at least one tax year, he is present in the UK for fewer than 90 days in the current tax year, of which no more than 20 are working days.
Note that under the proposals, there is no change to the definition of day of presence, which continues to be measured by reference to remaining in the UK at midnight.
Test B: conclusive residence
A person will be conclusively resident if one of the following conditions applies to his circumstances:
- He is present in the UK for 183 days or more in the current tax year; or
- His only home (or homes) is/are situated in the UK; or
- He is carrying out full-time work in the UK for a continuous period in excess of 9 months.
Note that Test A takes precedence, so that an individual satisfying conditions in both tests (likely to be rare in practice) is deemed to be non-resident.
Test C: Neither conclusive non-resident nor conclusive resident – other factors to consider
This part of the test sets out a number of connection factors, some or all of which need to be met in order for an individual to be deemed UK resident. These factors are as follows:
- Having a UK-resident spouse, civil partner, common law partner and/or minor children;
- Having accessible accommodation in the UK;
- Having substantive UK employment, defined as working in the UK for 40 or more days in the tax year;
- Having spent 90 or more days in the UK in either of the previous two tax years.
Individuals having been resident outside the UK for all of the previous 3 years (known as “arrivers”) will always remain non-resident if they spend fewer than 45 days in the UK, whilst those who remain for 183 days or more will always be resident. Persons spending between 45 and 89 days will only be resident if all four factors listed above are met (otherwise they remain non-resident), those who spend between 90 and 119 days will be resident if three of those factors are met, and those spending between 120 and 182 days in the UK will be resident if two or more of the factors are met.
An additional factor is added in the case of persons leaving the UK (known as “leavers”), namely spending more days in the UK in the tax year than in any other single country. The assessment criteria is also different for leavers (reflecting the general policy that UK tax residence is ‘sticky’, being more difficult to acquire than to lose). As before, those who remain for 183 days or more will always be resident. However, only those who spend fewer than 10 days in the UK in the tax year will be automatically non-resident. Where a person spends between 10 and 44 days in the UK, he will be resident only if he satisfies at least four of the five relevant factors. An individual spending between 45 and 89 days in the UK must meet three of the conditions, a stay of between 90 and 119 days requires two factors to be met, and a person staying between 120 and 182 days only needs to satisfy at least one of the factors to remain UK resident.
The consultation also proposes a review of the definition of “ordinary residence” (a slightly different concept to residence, with certain additional tax consequences). Opinions are sought on whether this concept should be abolished, except in relation to overseas workday relief, or whether it should be retained, albeit subject to statutory definition.
The consultation ran until 9 September 2011, and responses will be taken into consideration in drafting the new legislation which is intended to take effect from 6 April 2012.
The proposed new statutory residence test seeks to be easy to use, such that in many cases taxpayers are able to determine their own residence status for self assessment purposes. This is to be welcomed. The 45 day “safe harbour” for individuals who have been resident outside the UK for at least the 3 previous years is in particular welcomed, as this will hopefully enable a greater number of individuals and families to spend time in the UK without worrying about whether they may inadvertently become UK resident.
It should be noted that the new regime is not yet in force. Therefore, the “old” regime still applies until 5 April 2012. There will also perhaps be some remaining uncertainty for clients coming to the UK who do not meet any of the Test A (definitely non-resident) factors and therefore find themselves having to consider Test C. However, in overall terms, we consider that the statutory residence test represents a considerable step forward in terms of what many consider to be a long overdue overhaul of the concept of tax residence in the UK.
The new proposals are in draft form only at the moment, so it will be necessary to “watch this space” until the final form legislation is produced.
The above information is designed to provide, for guidance purposes only, a general introductory summary of the subject matters covered. It does not purport to be exhaustive, nor to provide legal advice, nor should it be used as a substitute for such advice.
© Stevens & Bolton LLP September 2011