Module 2: Residence of Individuals

Transcription

1 Module 2: Residence of Individuals Module guidelines This module covers: y the Statutory Residence Test y a brief introduction to the previous residence rules case law, statutory rules and guidance y split year treatment y the temporary non-residence rules y ordinary residence y treaty residence. 1. Introduction This Module covers residence for individuals. The residence status of trusts is dealt with in Module 3 and corporate residence is addressed in Module 4. It is fundamental for an adviser to know the residence status of his client. This is because the client s residence will directly affect his liability to capital gains tax (CGT) and income tax. Further, it has implications for the taxation of offshore trusts and companies in which a client is involved, and may indirectly affect liability to inheritance tax (IHT) as well as some non-tax matters, e.g. jurisdiction for issue of proceedings. Clients will need to self-assess their residence status there is no HMRC clearance process. In many circumstances their residence status will be obvious but sometimes it won t. For tax years 2013/14 and onwards an individual s residence will be determined by reference to a Statutory Residence Test ( SRT ). The Test also now includes specific statutory rules to determine residence when an individual either arrives in or leaves the UK during the tax year ( split year treatment ). The rules concerning temporary non-residence have also been extended and rewritten. However, for the tax year 2012/13 and prior, the definition of residence was very uncertain and unsatisfactory as it was determined by reference to statute, case law and guidance. These old rules will still be relevant for a few years to come, not least because a client s residence status under the new regime may depend on whether or not he was previously resident. This module includes a brief introduction to these rules and full details can be found at Appendix II. 1

2 STEP Advanced Certificate in UK Tax for International Clients To complicate matters further until 6 April 2013 there was an additional concept of ordinary residence, which could affect an individual s liability to income tax and CGT, which is discussed briefly in section 6 below with full details at Appendix III. 2. The statutory residence test (SRT) The SRT came into effect from 6 April 2013 and consists of three parts 1. The tests rely on various definitions (text in italics below except for days ) which are discussed further in section 2.4. The practical application of the new test, including potential areas of difficulty and record keeping requirements, is discussed in section 2.6 below and a case study in section 2.7 provides an example of how the SRT might be applied in practice. 2.1 The Automatic Overseas Test An individual will be non-uk resident for a tax year if he or she: y is not UK resident in all of the previous three tax years and is present in the UK for fewer than 46 days in the current tax year; or y is UK resident in one or more of the previous three tax years and is present in the UK for fewer than 16 days in the current tax year; or y works sufficient hours overseas (broadly full time) with no significant breaks provided he is present in the UK for fewer than 91 days in the tax year and spends fewer than 31 working days in the UK in the tax year. (N.B This test does not apply to people with relevant jobs on board vehicles, aircrafts, ships); or y dies in a tax year in which he had spent less than 46 days in the UK and he was not resident in the UK for either of the two previous tax years (with provisions for how to apply when split year rules applied to a previous year.) 2.2 The Automatic UK Tests The automatic overseas test takes priority over the automatic UK tests. Therefore, if an individual is not automatically resident overseas in accordance with any of the criteria set out in 2.1 above, an individual will be UK resident for the tax year if he or she: y is present in the UK for 183 days or more in a tax year, or y has a home in the UK which is available to him for at least one period of 91 consecutive days (and of which at least 30 days fall in that tax year) and in which 2 1. Clause 218 and Schedule 45 to Finance Act 2013.

3 Module 2: Residence of Individuals Notes he is present on at least 30 days in the tax year and throughout that 91 day period he either has no home overseas or if he does, he is present at his overseas home (or each of his overseas homes if more than one) for fewer than 30 days in that tax year; or y works sufficient hours (broadly full time) with no significant breaks in the UK for at least 12 months and at least one day of that period falls in the tax year and the individual has a working day in the UK in that tax year and more than 75% of the individual s working days in the 365 day period are UK working days. (N.B This test does not apply to people with relevant jobs on board vehicles, aircrafts, ships); or y dies in a tax year and he has been resident in the UK for each of the previous three tax years by virtue of satisfying the automatic UK residence tests provided that when he died his home was in the UK, or if he had more than one home at least one was in the UK and he did not spend more than 30 days at the overseas home or every day (no matter how short a time) at that overseas home on each day of the tax year up to and including the date of death. There are also provisions regarding how to apply this test when split year rules applied to a previous year. 2.3 The Sufficient Ties Test If residence cannot be determined by either of the above tests, then the ties which an individual has with the UK will need to be considered. The more ties an individual has with the UK, the less time they can spend here without being UK resident. There are five different ties: y Family: an individual s spouse/civil partner; partner with whom they are living as husband and wife or civil partners; or minor child/children (natural or adopted but not unadopted stepchildren) are UK resident PROVIDED that if a minor child is UK resident, the individual sees the child in the UK on more than 60 days during the tax year. A child in full time education in the UK will only be UK resident for the purposes of counting as a family tie for their parent if they are under 18 and spend more than 21 days in the UK outside term-time. y Work: an individual works in the UK for at least 40 days in a tax year and includes self employment y Accommodation: an individual has a place to live in the UK which is available for a continuous period of at least 91 days (discounting any periods of unavailability of 15 days or less) in the tax year 3

4 STEP Advanced Certificate in UK Tax for International Clients and where he spends at least one night in that year or at least 16 nights if accommodation is the home of a close relative (defined as parent, grandparent, sibling, adult child, grandchild) y 90 days: an individual spends 90 days or more in the UK in either of the previous two tax years. y Country tie: an individual spends more days in the UK in that tax year than in any other single country. This tie is only relevant to leavers (see below). The precise amount of days an individual can spend in the UK each year under the sufficient ties test is slightly different for individuals who have not been previously resident in the UK for any of the preceding three tax years (described below for convenience as arrivers ) and those who have (described below as leavers.) Arrivers If an individual was not resident in all of the three tax years preceding the year under consideration, they will need to determine which, if any, of the family, work, accommodation or 90 day ties they have with the UK. The number of ties an individual has with the UK is then compared with the days they have spent in the UK to determine their residence status as follows: Days spent in UK Impact of ties on UK residence status Fewer than 46 days Always non-resident days Resident if all four ties apply (otherwise not resident) days Resident if three ties or more apply (otherwise not resident) days Resident if two ties or more apply (otherwise not resident) 183 days or more Always resident Leavers If an individual was resident in one or more of the three tax years immediately preceding the tax year under consideration, all five ties will be relevant. They will need to determine which, if any, of the family, work, accommodation, 90 day or country ties they have with the UK. 4

5 Module 2: Residence of Individuals Notes The number of ties an individual has with the UK is then compared with the days they have spent in the UK to determine their residence status as follows: Days spent in UK Impact of ties on UK residence status Fewer than 16 days Always non-resident days Resident if the individual has four ties or more (otherwise not resident) days Resident if the individual has three ties or more (otherwise not resident) days Resident if the individual has two ties or more (otherwise not resident) days Resident if the individual has one tie or more (otherwise not resident) 183 days or more Always resident 2.4 Definitions Many of the definitions used are extremely complex and specific to the legislation. HMRC have issued guidance to help taxpayers apply the new rules and in particular to assist in the interpretation of the various terms used ( RDR3 ). 2 Some of the key definitions are: days a day in which a person is present at midnight unless he is in transit except that up to 60 days spent in the UK due to exceptional circumstances beyond the individual s control can be disregarded. In addition there is a targeted anti-avoidance rule aimed at preventing previous UK residents with a significant number of UK ties from spending a significant number of days in the UK, without being present at midnight, so that the days would not ordinarily be counted. Therefore where an individual has been resident in the UK for 1 or more of the previous 3 tax years, has at least 3 ties with the UK and on more than 30 days in the tax year is present in the UK at some point but not at midnight, all such days in excess of 30 days will count as days resident in the UK. RDR3 contains examples of both exceptional circumstances and in transit. 2. HMRC Guidance Note RDR3: SRT 20 December

6 STEP Advanced Certificate in UK Tax for International Clients sufficient hours an average of 35 hours a week measured over the course of a year (365 day period not a tax year or a calendar year) calculated in accordance with a very detailed formula. This term is relevant for both the work related automatic overseas and automatic UK residence tests and also applies to the self employed. significant break an unbroken period of 31 days or more without either an overseas work day (if applying the automatic overseas test) or a UK work day (if applying the automatic UK residence test) or any days on which the individual was on annual, sick or parenting leave. 6 working day work home accommodation a day on which more than three hours is spent working is done wherever it is physically carried out and includes time spent travelling and on work related training. Travelling to or from the UK is assumed to be done overseas from the point that the individual boards or disembarks an airplane/ship or train in the UK. a place that a reasonable onlooker with knowledge of the material facts would regard as a person s home. There is deliberately no exhaustive definition although RDR3 gives examples of what HMRC will and will not regard as a home and the evidence it will require. The individual does not need to own a home -rented property or property owned by a friend/relative could count as long as it has the requisite degree of permanence. this is deliberately a much broader definition than home and includes a home, a holiday home or temporary retreat or accommodation provided by a friend, family member or employer which is available to that individual when he is in the UK and can be a building, vehicle, vessel or structure and need not be owned by the individual but just available to him. Accommodation owned by the individual but wholly let on a commercial basis would not be available and a casual offer from a friend to stay with them whenever they were in the UK would not

7 Module 2: Residence of Individuals Notes count unless the offer genuinely extended to a stay of three months or more and he did spend at least one night. relevant jobs on board vehicles, aircrafts, ships will broadly includes airline pilots, cabin crew, ferry staff, fisherman and lorry drivers anyone whose job involves driving/piloting or performing services on board an aircraft, ship or vehicle which involves making six or more cross-border trips in a tax year. These individuals can never be automatically UK or overseas residence with reference to either of the sufficient hours worked overseas or in the UK tests and there are special rules for determining UK working days under the sufficient ties work tie test. 2.5 Transitional Provisions There are limited transitional provisions, which will apply when determining residence status for any of the tax years , or Some of the SRT tests depend upon the individual s residence status in the previous three tax years, which would normally be assessed under the rules which applied in that particular tax year. However, individuals may instead make an irrevocable election to HMRC, either on their self assessment tax return or in a letter before the first anniversary of the end of the tax year in question, that their residence status for any of those previous years be determined by applying the SRT. The election does not alter the individual s actual residence status. 2.6 Practical application, problem areas and record keeping The SRT is intended, in contrast to the previous rules, to be clear, objective and simple to use. To that end HMRC have provided an on-line residence tool which is designed to help taxpayers work out their residence status under the SRT. HMRC has confirmed that the outcome will be binding on HMRC, where the user has interpreted the rules correctly and entered the correct data. This is the crux of the difficulty with the SRT. When a client s affairs are straightforward it should be easy to determine their status using the new rules, but as soon as a client s status depends on the interpretation of a particular concept, then it will not be so straightforward to apply and the outcome may not be certain. Particular problem areas are: y Both the automatic working sufficient hours either in the UK or overseas tests. The final version of these 7

8 STEP Advanced Certificate in UK Tax for International Clients tests involves the application of an extremely complex formula. Where an individual is employed full time with no gaps, then it will be easy to conclude whether the relevant test has been met, without having to apply the precise formula, but if the individual is self employed, has changed jobs during the year or their working arrangements are flexible (as they often are for international executives) then this may be unavoidable. y It may be relatively easy for an individual to inadvertently become automatically UK resident by virtue of having their only or main home in the UK, particularly in years in which their circumstances are in flux. For instance, because they are selling an overseas property, relocating from one overseas country to another or are just taking a year off. Individuals with homes in various different overseas locations as well as in the UK may also be caught. RDR3 contains examples of circumstances when UK residence may result. y The definition of accommodation is very wide and uncertain to the extent that any client with somewhere regular to stay when they are in the UK, may have a UK accommodation tie. y Similarly the definition of work is very wide (more than just 3 hours a day including travel and training) so it would be possible for a client to have a work tie, even when they do not regard themselves as doing much work in the UK. 8 The SRT is easier to apply with hindsight to the previous tax year (when day counts and times spent at respective homes and work carried out in the UK etc are known) than it is to a current tax year or future tax years. However, practitioners will routinely need to advise clients on residence on an on-going basis and on how best to ensure that they are UK resident or non-uk resident as the case may be in any tax year. During the course of the tax year, it may become clear that a particular client is not going to be either automatically UK or overseas resident and so that their residence status will fall to be determined by the sufficient ties test. However, it may not be clear which ties that individual will have with the UK at the end of the year. Therefore, when advising such clients on the amount of time they can spend in the UK in any one year without becoming UK resident, practically it may be safest to advise limiting their visits to the number of days which would be allowable assuming the worst case scenario of potential applicable ties do apply (i.e. accommodation tie, if they regularly visit the same place in the UK and work tie, if they do carry out some work here). If this is not feasible or likely then special attention should be paid to ensuring that as few of these ties as possible apply.

9 Module 2: Residence of Individuals Notes Detailed and accurate record keeping is essential, especially where the client s residence status is not straightforward. HMRC has included in its guidance a list of records which may be required (in addition to evidence of day count) and this is reproduced as Appendix 1. Broadly all clients will need to keep detailed records of days spent in the UK and maybe also (depending on their precise circumstances) of whether or not they do three or more hours work in the UK and if so how often, any gaps in employment, days spent both in UK homes and overseas homes, whether or not they have used available accommodation in the UK and the relative numbers of days spent in this country compared to another. This is not, however, an exhaustive list. 2.7 Case Study This case study demonstrates how the SRT may be applied in practice. For the purposes of this case study only, split year treatment and the potential tax consequences of the subject s residence status (if any) are not considered. Obviously in practice you would need to examine a client s circumstances as a whole: George is English and has never lived anywhere else. However, three years ago he bought a holiday home in Spain and has started to spend a significant amount of time there each year. He is self employed and works from home, wherever he happens to be. George is aware that his partial move to Spain may have affected whether or not he is resident in the UK and that this may affect how he pays tax in the UK. However, he worked out using the HMRC s online tool that he was definitely UK resident for both the first two years because he spent more than 6 months (i.e. more than 183 days) in the UK. It is now October and George is gathering together his paperwork to fill in his self assessment forms in respect of the third tax year, since buying the Spanish property. George is not sure whether he was still UK resident last year or not because he spent less than 6 months in the UK and therefore seeks advice from his accountant. George spent 4 months (120 days) in England and the rest of the year in Spain. He spent some of his time in the UK working and he retained his UK property (as his adult daughter still lives there) and stayed there whenever he was in the UK. He is advised that he is not automatically resident overseas because he was UK resident in all previous tax years and was present in the UK for more than 16 days. Equally he is not automatically resident overseas by virtue of working 9

10 STEP Advanced Certificate in UK Tax for International Clients sufficient hours overseas because he was present in the UK for more than 90 days (and therefore there is no need to consider these criteria any further). He has homes in both the UK and Spain (and his accountant was satisfied that both had a sufficient degree of permanence to be a home) but as he spent more than 30 days in his Spanish home in that tax year, he is not automatically UK resident. Although George has not kept accurate records of when he worked in the UK and for how long, he is confident that he did the majority of his work from Spain and definitely did not spend more than 75% of his total working days working in the UK. The accountant advises that George subsequently needs to examine what ties he had with the UK. He is a leaver (because he was resident in the previous tax year) and so all five ties must be considered. He had an accommodation tie (because he retained and used his house in the UK) and probably had a work tie as he did work for more than 40 days in the UK, although he can t remember if these were full days or half days of less than 3 hours. He is advised in the absence of any evidence to assume that these days were full days and so to conclude that he did have a work tie. He had a 90 day tie. He does not have a family tie because he is divorced, not living with anyone and his only child is an adult; there is no one else who needs to be considered for the family tie test. He also does not have a country tie, as he spent more time in Spain than the UK. He therefore had three ties and would have been UK resident if he spent 46 days or more in the UK. As he spent 120 days, George remained UK resident. The accountant advises George to keep accurate records of when and for how long he spends working in the UK for the following tax year. 3. The previous regime statute, case law and guidance There was no statutory definition of residence to assist in determining a client s residence status for the tax years 2012/13 and prior. Instead, there were a few statutory rules that dealt with residence in specific circumstances but for the most part residence was determined by case law and its interpretation though HMRC guidance. Appendix II sets out general principles gleaned from statute, guidance and case law as well as explaining their practical application. 10

11 Module 2: Residence of Individuals Notes 4. Split Year Treatment Strictly speaking, individuals are taxed as UK resident for the whole tax year even if they are only resident for part of it. Therefore if an individual comes to live in the UK in say September 2013 and leaves in January 2015, he will have been resident in the UK for the tax years 2013/14 and 2014/15 and may be subject to UK income tax and CGT as a UK resident for the whole of both those tax years. Previously, by concession, there were a few circumstances where a tax year could be split into resident and non-resident periods and the criteria differed depending on whether income tax or CGT was in point. These old rules are briefly discussed at 4.2 below. However, from 6 April 2013 new statutory split year rules linked to the SRT apply for all tax purposes. The effect is that when a client either leaves or arrives in the UK part way through a year and certain conditions are met the tax year will be split into two parts: the UK part on which they will be charged to tax as a UK resident and the Overseas part in which they will, largely, be taxed as a non-resident. It should also be noted that a relevant double tax treaty might treat a year as split into separate resident and non-resident periods and where it does the statutory split year test will be overridden. 4.1 The Statutory Test A tax year will be a split year if the individual is UK resident for that year under the SRT and one of a possible eight sets of circumstances (described in the legislation as cases ) apply. The following three cases (listed in order of priority if more than one applies) cover situations where an individual leaves the UK part way through a tax year. Individuals may be eligible for split year treatment if they were UK resident the previous tax year and they leave the UK to: y start work full time overseas i.e. become automatically non-uk resident because they work sufficient hours overseas the following tax year and meet a scaled down version of that test for the remainder of the tax year of departure y accompany a partner who has started work full time overseas y live abroad and cease to have any home in the UK- i.e. at the start of the year they have one or more homes in the UK but at some point in that year they cease to have any homes in the UK and from that point spend less than 15 days in the UK in that tax year and by the 11

12 STEP Advanced Certificate in UK Tax for International Clients end of six months are either tax resident in another country, are present there every day or have their only home(s) in that country and remain non-uk resident the following year. A further five possible cases apply where an individual comes to the UK part way through a tax year. Individuals may be eligible for split year treatment if they were non-uk resident in the previous tax year and arrive in the UK to: y start to have their only home in the UK, i.e. at some point during the year their only home(s) is/are in the UK for the whole of the rest of that year and before that point they were not UK resident, in accordance with a scaled down version of the sufficient ties test y start full time work in the UK, i.e. broadly start to meet the automatic sufficient hours work in the UK test and before that point they were not UK resident, in accordance with a scaled down version of the sufficient ties test y return or relocate to the UK following a period of full time work overseas, i.e. they were automatically non-uk resident the year before because they worked sufficient hours abroad but before that they were UK resident for one or more of the four preceding tax years and in the tax year of return they met a scaled down version of the sufficient hours overseas test until their return and was UK-resident the following year (although that year can be a split year) y accompany a partner who has returned or relocated to the UK following a period of full time work overseas y start to have a home in the UK, i.e. there comes a point during the year in which they have and continue to have, until the end of the following tax year, a home in the UK and before that point they were not UK resident, in accordance with a scaled down version of the sufficient ties test. Example 2.1 Stella is resident in the UK but has homes both here and in Bermuda. On 1 January 2014 she sells her UK home and thereafter has only her home in Bermuda for the next couple of years; she does not come back to the UK at all for the rest of the tax year of her departure. Split Year Treatment would apply so that the UK part of the year runs from 6 April 2013 to 31 December 2013 and the overseas part from 1 January to 5 April

13 Module 2: Residence of Individuals Notes The rules and definitions used are complex and the legislation and HMRC s guidance, which contains detailed examples, should be consulted. 4.2 Pre 2013/14 income tax split year treatment Prior to 6 April 2013 the following split year rules applied for income tax purposes: y Coming to the UK: Where an individual came to the UK permanently, or as a long-term visitor, for a period of more than two years, the tax year of arrival could be split into resident and non-resident periods. The individual was therefore only taxed as a UK resident on income that arose from the date of arrival. y Leaving the UK: Where an individual left the UK permanently or intended to remain outside the UK for three tax years, the tax year of departure could also be split into resident and non-resident periods. The individual was therefore taxed as a non-resident on income that arose after the date of departure. y Leaving the UK for full-time employment abroad: Where an individual left the UK on a full-time contract of employment part way through a tax year, HMRC treated the individual as non-resident from the day after departure. Provided the individual was engaged in full-time employment abroad for at least one full tax year, any income would not be taxable in the UK. 4.3 Pre 2013/14 CGT split year treatment Prior to 6 April 2013 the following very straightforward split year rules applied for CGT 3 : y Short-term visitors and new UK residents: If an individual left the UK when he had not been resident in the UK very long (i.e. was non-uk resident for four out of seven years before his year of departure), any gains on disposals made after the date on which he left the UK would not be subject to UK CGT in that tax year. y New UK residents: When an individual came to the UK who had not been resident in the UK in five preceding tax years, only gains on disposals that took place after the day of arrival in the UK would attract CGT that tax year. 4.4 Planning where split-year treatment applies The same planning principles apply to split year treatment afforded by the new rules as under the old rules, although the criteria that will have to be met for split year treatment 3. Extra Statutory Concession D2. 13

14 STEP Advanced Certificate in UK Tax for International Clients to apply has changed. The qualifying criteria are, however, more prescriptive and in some cases restrictive and so care should be taken to ensure split year treatment does in fact apply. Broadly it is more likely to if the client is either UK resident or non-uk resident in accordance with the automatic qualifying tests if they are relying on sufficient ties, split year treatment is less likely to be available. If a UK resident is leaving the UK and split year treatment will apply they should try to delay realising any gains and receipt of any foreign income over which they have control (e.g. certain dividends) until after they leave. Similarly if a non-resident is planning to come to the UK and the split-year basis might apply, they should consider realising any gains and income over which they have control, before they arrive. Bank accounts should be carefully segregated into pre-/post-arrival or pre-/postdeparture income so that it can easily be determined which income relates to which period of residence; similarly proceeds of sale should be kept separate where possible. Example 2.2 Steve, a British citizen and resident, moves abroad for work in September 2013 and split year treatment applies and the Overseas part of the year begins in September In March 2014 he sells some shares, realising a gain. He will not be liable for UK CGT on that gain as the shares were disposed of in the Overseas part of the year, even though he was technically resident in the whole tax year of the disposal (2013/14). 5. Temporary non-residence The temporary non-residence rules are anti-avoidance rules. In the past it was common planning for UK residents to go abroad for a year or two in order to realise a substantial gain on a particular asset. It used to be relatively straightforward to do this with no CGT liability at all arising on that gain even if the proceeds were brought to the UK. Unsurprisingly anti-avoidance measures were introduced to shut this down in Similarly it used to be possible for RNDs to avoid paying UK tax on foreign income that arose when they were UK resident, by becoming temporarily non-resident and remitting this income from abroad to the UK during their years of non residence tax free, before moving back to the UK again. This avenue was also closed, although some time later from April Finally, from 6 April 2013 the temporary non-residence rules were re-drafted to tie in with the SRT and have been further 14

15 Module 2: Residence of Individuals Notes extended to catch and tax the following types of income that arise during a period of non-uk residence: y relevant foreign income taxable under section 830 of ITTOIA, y pensions (withdrawals, lump sums and certain other charges), y chargeable events gains from life assurance policies, y distributions to participators in close companies, y offshore income gains. 5.1 The Details For departures after 6 April 2013 an individual will be temporarily non-resident if there are five years or less between either: y the day after the individual ceased to be solely UK resident, if split year treatment applied; or y otherwise, the end of the tax year when sole UK residence ceased and the date on which that individual resumes sole residence in the UK (i.e. broadly either the day of return if split year treatment applies, or otherwise the start of the tax year of return) 4. In practical terms an individual will need to be non-uk resident for at least five years, otherwise any income (of the types listed above) or gains realised in the period of nonresidence by the taxpayer will become taxable in the year of return. Gains on assets that were not owned pre-departure are not caught by the temporary non-residence rules in many circumstances and so can be realised during a period of non-residence without incurring a CGT charge 5. These rules are intended to prevent long-term UK residents from deliberately sheltering income and gains by moving abroad, rather than to stop short-term residents from legitimately benefiting from the normal rules. Therefore, the temporary non-residence rule does not apply if the individual has only been in the UK for a maximum of four of the seven years before his departure from the UK. Equally, the temporary non-residence rules do not apply if an individual was treaty resident only(i.e. resident in more than one country but UK resident under the terms of a double tax treaty see section 7 below for further details) because they will not have had a period of sole UK residence. 4. Part 4 of Schedule 45 to Finance Act S10AA(1) TCGA

16 STEP Advanced Certificate in UK Tax for International Clients The conditions for temporary non-residence are cast differently from those that previously applied to gains and remittances but the practical effects are not very different save that the pre-6 April 2013 rules required five full tax years of non-residence. HMRC have provided guidance on and examples of these new rules. 6 Example 2.3 David was UK resident and domiciled and owned a UK investment property. On 1 September 2013 he left the UK and became non-resident abroad. Split year treatment did not apply. His period of non-residence, therefore, began at the end of the tax year in which he was last solely UK resident, 2012/13. In October 2014 he sells his property for a profit. David returns to the UK on 5 June Split year treatment is available this time and so he has been non-resident between 6 April 2013 and 5 June As this period is less than five years he was temporarily non-resident and the gain becomes chargeable to CGT in the 2017/18 tax year, even if he retains all the proceeds outside the UK. If, however, he had delayed his return to the UK until at least 6 April 2018 no CGT would have been payable on this gain upon his return. 6. Ordinary residence The concept of ordinary residence was abolished for tax purposes from 6 April , although the relief given for certain individuals who were UK resident but not ordinarily resident is preserved in the form of Overseas Workday Relief. See Module 7, Section 2 below for further details. There are, however, some transitional provisions in the new legislation, so the concept will continue to be relevant in certain circumstances (primarily regarding overseas workday relief and transfer of assets abroad) for a few more years. A full explanation of the Ordinary residence rules is found at Appendix III. 7. Treaty residence An individual can be resident in more than one country for a particular tax year in accordance with the residence rules of the countries in question. If this happens, any available double tax treaty should be examined. If there is no treaty, unilateral relief may also be available to prevent double taxation RDR3, section Finance Act 2013 Sch Section 18(1)(b) Taxation (International and Other Provisions Act 2010).

17 Module 2: Residence of Individuals Notes If there is a treaty, it will normally include a tie-breaker clause. Under the tie-breaker clause, residence for the purposes of the double tax treaty ( treaty residence ) is given to the country with which the individual has the strongest links. 17

18 STEP Advanced Certificate in UK Tax for International Clients Further reading HMRC s Guidance Note: Statutory Residence Test (SRT) RDR3 December 2013 HMRC s Guidance Note: Residence, Domicile and the Remittance Basis (RDR1) September 2015 James Kessler, Taxation of Non-Residents and Foreign Domiciliaries , 13th edition, Chapters 4, 7 and 9A Booth & Schwarz, Residence, Domicile & UK Taxation, 18th edition 18

19 Module 2: Residence of Individuals Notes Module outcomes By the end of this module you should be able to: y apply the SRT and advise upon circumstances in which a client will be resident or non-resident y understand and apply the new split year treatment rules y understand and apply the temporary non-residence rules y understand the circumstances in which the previous residence rules and the concept of ordinary residence remain relevant y be aware of what happens where a client is dual resident and the importance of any relevant treaties. 19