New UK Residence Rules

 In Tax

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NEW UK RESIDENCE RULES

The UK Government recently announced plans to introduce a new tax residence test. A consultation paper was published, and the initial aim was to bring these new rules into effect from 6 April 2012. However, this has recently been postponed so the new rules are now due to come in from 6 April 2013. This is a summary of the current proposals.

Statutory Residence Test

At present there is no full definition of tax residence in UK tax law. This means the residence rules are vague, complicated and based on contradictory court decisions.

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A statutory residence test (SRT) has been proposed for individuals (not companies) for tax purposes. This test will take into account both the amount of time spent in the UK and other connections with the UK. It will be harder to become non-resident on leaving the UK than to become resident on coming to the UK.  Distinctions are made between:

  • Arrivers – individuals who were not UK resident in all of the previous 3 tax years; and
  • Leavers – individuals who were resident in any one or more of the previous 3 tax years.

The SRT will comprise 3 parts:

  • Part A – when the individual is always non-resident;
  • Part B – when the individual is always resident;
  • Part C – for those individuals who don’t fall within Parts A or B.

Part A (conclusive non-residence)

Individuals will be non-resident for a tax year if:

  • They are in the UK for fewer than 45 days (Arrivers) or 10 days (Leavers) in the tax year; or
  • They leave the UK for full-time work abroad: they must be in the UK for fewer than 90 days and can spend no more than 20 days working in the UK in the tax year.

Part B (conclusive residence)

Individuals will be resident for the tax year if:

  • They are in the UK for 183 days or more in a tax year; or
  • They have only one home and that home is in the UK (or they have two or more homes and these are all in the UK); or
  • They carry out full-time work in the UK.

If both Part A and Part B can apply to the same person, Part A (non-residence) takes priority.  So, for example, if the taxpayer has a UK home but spends less than 10 days in the UK in a tax year, the taxpayer will be non-resident.

Part C (other connection factors and day counting)

Where neither Part A nor Part B applies, individuals need to know how many “connection factors” they have with the UK.  The factors are:

  • Family – the individual’s spouse/civil partner (or equivalent) or minor children are resident in the UK;
  • Accommodation – the individual has accessible accommodation in the UK and makes use of it during the tax year;
  • Substantive work – the individual is employed or self-employed and works more than 40 days per year in the UK (at least 3 hours per day);
  • UK prior presence – the individual spent 90 days or more in the UK in either of the previous 2 tax years; and
  • More time in the UK than in other countries  – for Leavers only, if they spend more time in the UK than anywhere else.

Clearly there may be circumstances that count as more than one factor; for example, having a family home (with family in it) in the UK counts as two factors. Once the taxpayer has determined how many connection factors exist, you then look at the number of days spent in the UK.  Basically, the more factors there are, the less time can be spent in the UK without being tax resident.

Arrivers

Number of connection factors Maximum number of days in UK (to be non-resident)
4 factors Less than 45 days
3 factors Less than 90 days
2 factors Less than 120 days
1 or no factors Less than 183 days

Leavers

Number of connection factors Maximum number of days in UK (to be non-resident)
4 factors Less than 10 days
3 factors Less than 45 days
2 factors Less than 90 days
1 factor Less than 120 days
No factors Less than 183 days

Anti-avoidance

The SRT will include an anti-avoidance rule for certain investment income received by ‘temporary non-residents’.  This matches an existing rule for capital gains tax.  Where an individual:

  • has been UK resident in 4 out of the previous 7 tax years; and
  • becomes non-resident for 5 tax years or less;

the individual will be taxed on certain income received whilst temporarily non-resident.  In particular, this will apply to dividends paid by closely controlled companies (e.g. with 5 or fewer shareholders).

Ordinary residence

The consultation paper also seeks views on whether the separate concept of “ordinary residence” should be retained. At present, individuals who are not ordinarily resident have some UK tax advantages, particularly if they are working partially in the UK and partially overseas.  The suggestion is that individuals who are resident in the UK should automatically be treated as ordinarily resident too unless they have been non-UK resident in all of the previous 5 tax years. They can then be non-ordinarily resident in the tax year of arrival and for a maximum of the following 2 tax years.

Ordinary residence would also be automatic if the individual:

  • is resident in the UK on the basis that their home is in the UK; or
  • has more than one home and all of their homes are in the UK.

The Government’s preference is that it should only be possible for non-domiciled individuals to be not ordinarily resident but this is part of the consultation.

Transitional rules

It is not proposed to introduce any transitional rules. The current rules will apply in the tax years prior to 6 April 2013 and the new definition will not apply retrospectively.  This means advisers may need to review their clients’ resident status under both existing common law rules and under the new statutory residence test.

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