How having a UK home could be a problem
As previously reported, the UK is introducing a statutory residence test (‘SRT’) for UK tax purposes. The new SRT is due to come into force with the enactment of this year’s Finance Bill. Normally this is in July, although the new rules will actually operate from 6 April 2013. Whilst the SRT has been welcomed, the new draft rules are not straightforward.
There is a potential ‘sting’ in the SRT for anyone with a UK home. Initially it seemed that having a home in the UK would be just one of the ‘connecting factors’ that would limit the number of days a person can spend here without being tax resident.
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However, it is easy to overlook that having a UK home is one of the tests that guarantee an individual is UK tax resident, for the whole tax year, without having to look at the number of days spent here.
How the SRT works
Part A of the SRT contains tests that guarantee the individual is not UK tax resident for the whole tax year. Part B contains tests that guarantee the individual is UK tax resident for the whole tax year. Part C contains the connecting factors and number of days test, for people who do not fall into Part A or Part B.
So in other words, you don’t need to look at the number of connecting factors and number of days spent in the UK, if the individual is treated as UK tax resident under Part B: you only look at Part C if neither Part A nor Part B applies.
Automatic UK tax residence
This means we need to look at Part B closely. There are three different ways an individual can be treated as UK tax resident under Part B.
The first option is simple. You are UK tax resident if you spend more than 182 days in the UK in a tax year. That matches the current rule that 183 days or more in the UK makes you resident for the entire tax year.
The second option says you are UK tax resident if you work full time in the UK. Again that is probably no real surprise.
It’s the last section of the automatic residence test, in Part B, that could trip people up. This says you are UK tax resident if:
a) You have a UK home for more than 90 days in the tax year;
b) You are present in that home for at least 30 days in the tax year; and
c) Either you have no overseas home or, if you do, you spend fewer than 30 days per tax year in that overseas home.
There are a number of crucial points here. First, there is no actual definition of what constitutes a UK home. Clearly HMRC think we should all know a UK home when we see one. What seems clear is that you do not have to own the property for it to be counted as a UK home. Renting a property will be enough to give you a UK home. There is also nothing in the SRT to say the property has to be in your name. So potentially occupying a home owned by an offshore company or trust might be sufficient to mean you have a UK home for these purposes.
Second, you do not have to spend 30 consecutive days in the UK home. So spending any 30 days during the tax year will be enough. 30 days out of 365 is not very much at all. Put it this way, spending less than one-tenth of the tax year in your UK home could mean you are UK tax resident for the whole tax year.
It also doesn’t seem to matter whether you spend the night in your UK home. The test is whether you ‘are present’, not whether you are present there at midnight. Arguably, popping into your property to pick up your post or do your laundry would be enough to pass the ‘presence test’.
The importance of an overseas home
So this leads to the third part: do you have a property overseas? If you don’t have any home outside the UK, then you will be UK tax resident if you were present for 30 days in your UK home (and owned or rented it for more than 90 days). There are no exceptions to this.
If you do have an offshore home, the next question is how much time did you spend there. Did you spend more than 30 days in your offshore home in the tax year? If you did not, then again you are UK tax resident (assuming you’ve spent more than 30 days in your UK home etc). Earlier drafts of the SRT were unclear as to the period of time you had to spend in your foreign home. The most recent draft and guidance notes state that it is any 30 days in the tax year.
There are clearly traps here for the unwary. What if you have more than one overseas home? Splitting your time between different non-UK homes could be a problem, unless you ensure you spend at least the requisite 30 days in one of the properties. Travelling extensively, long holidays etc. will need careful planning.
The new rules may well be changed again before they come into force. If they are enacted as currently drafted, taxpayers should think carefully before getting a UK home. It would seem sensible not to buy or rent until the last moment. Care will be needed not to be ‘present’ at the property until the individual is ready to be tax resident here. Long trips before arriving in the UK may cause problems. Another possibility would be to have multiple UK homes, so you never spend more than 29 days in each, but that would be rather expensive!