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HCR Law Events

12 April 2022

Residence – how it’s determined and how it affects your tax liabilities

Your tax residence status as an individual is currently determined by a statutory residence test (the SRT).

The SRT is complex and comprises three tests applied in a set order which can make a person either conclusively non-UK-resident (the automatic non-residence test) or conclusively UK resident (the automatic residence test). If neither of these tests is determinative, the UK ties test, which measures the number of days an individual is in the UK, and the number of their UK ties comes into play.

The following definitions are detailed, yet relevant to the tests described below:

  • full time work in the UK means 35 hours a week for 365 days (excluding holidays) with no significant breaks (at least 31 days excluding days where more than three hours are worked)
  • a working day is more than three hours a day
  • the statutory day count rules apply in determining the number or days spent in the UK, and applies to the figures in the table set out below
  • if an individual is not present in the UK at the end of the day, that day does not count as a day spent in UK (subject to the deeming rule)
  • the deeming rule is that, if a person has more than three UK ties and has been resident in the UK in any one of the previous three years, any dates of presence spent in the UK in excess of 30 will be counted.

In that case, any day of presence in the UK exceeding 30 will be treated as a day in the UK for determining the day count in the table set out below

  • continuous periods are not really continuous and gaps of up to 15 days are counted
  • there is an exclusion for exception days, i.e., days spent in the UK for reasons outside of an individual’s control, limited to 60 days.

Automatic non-residence test

An individual is automatically non-resident in the UK for the tax year if they:

  • were resident in none of the previous three years and spent fewer than 46 days in the UK tax year
  • were resident in any of the last three years and spent fewer than 16 days in the UK
  • left the UK to carry out full-time work abroad and spent fewer than 91 days in the tax year and no more than 31 working days in the UK.

Automatic residence test

An individual is automatically resident for the tax year if they:

  • spend more at least 183 days in the UK
  • have only one home, which is in the UK, and they are present there for 30 days in the tax year
  • have a home in the UK in which they are present throughout any period of 91 consecutive days (of which at least 30 days are in the tax year) and either they have no overseas home, or if they do, they spend fewer than 30 days there in the tax year
  • they carry out full-time work in the UK. (More than 75% of the total number days in a 365-day period is full-time work in the UK).

UK ties test

Where neither the automatic non-residence nor the automatic residence tests are satisfied, the UK ties test, which looks at five UK ties within the relevant tax year, is considered as followed:

  • spouse or minor children resident in the UK
  • the existence and use of a place to live in the UK (which means anywhere an individual can live and is available for continuous period of 91 days and can spend at least one night there. Accommodation may be available even the individual holds no estate or interest in it, or has no legal right to occupy it)
  • work in the UK for at least 40 days (continuously or intermittently)
  • presence in the UK for more than 90 days in either of the previous two years
  • more days were spent in the UK than any other single country (applicable to leavers only).

The importance of these UK ties depends on whether an individual is an arriver (someone not resident for the last three tax years) or leaver (someone who was resident in the UK in any of the last three tax years).

For example, a leaver is resident by reference to a combination of day count and the UK ties according to the following table:

Days spent in the UK Number of UK ties
0-15 Always non resident
16-45 At least 4 = resident
46-90 At least 3 = resident
91-120 At least 2 = resident
Over 120 At least 1 = resident

 

In summary, this all means that, regardless perhaps of moving overseas, the UK ties test can mean that individuals will be UK resident for tax purposes, for the year of their departure.

SRT split year treatment

Under the SRT, an individual is either UK resident or non-UK resident for a full tax year, at all times in that tax year. If ,during a year, the individual starts to live or work abroad, the tax year is split into two parts automatically if their circumstances meet specific criteria:

  • a UK part for which they will be charged to UK tax as a UK resident
  • an overseas part for which, for most purposes, the individual will be charged to UK tax as a non-UK resident.

An individual resident in the UK for a year is obliged to consider whether split year treatment applies to them. They must be:

  • UK resident in the tax year
  • UK resident for the previous tax year, whether or not it was a split year
  • non-UK resident for the tax year following the split year; yet
  • have one or more homes in the UK at the start of the tax year, and at some point, in the year cease to have any home in the UK for the rest of the tax year.

HMRC are more likely than not to regard individuals as failing the final element if they have retained rental property in the UK (and HMRC regard accommodation as available even when the individual holds no estate or interest in it or has no legal right to occupy it).  Where property is retained, individuals will be eligible for split year treatment and instead are more likely not to be liable to UK income tax on their worldwide earnings.

In summary, there are currently significant income tax, capital gains tax and inheritance tax advantages to being non-domiciled and/or non-resident in the UK. It seems likely that these laws may change in order that the tax advantages described become less generous, to secure greater tax revenues for the UK, though one cannot be certain. The law in the area is complex and thought should be given to seeking appropriate expert advice where significant sums are potentially involved.

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About the Author
Sarah Woodall, Head of Tax, Partner (Barrister)

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