Statutory residence test and overseas workday relief provisions. Comments on draft legislation and guidance published on 11 December 2012

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1 Statutory residence test and overseas workday relief provisions Comments on draft legislation and guidance published on 11 December 2012 STEP is the worldwide professional association for practitioners dealing with family inheritance and succession planning. STEP helps to improve public understanding of the issues families face in this area and promotes education and high professional standards among its members. STEP has 18,000 members across 80 jurisdictions from a broad range of professional backgrounds, including lawyers, accountants, trust specialists and other practitioners. In the UK STEP has over 6,500 members and it supports an extensive regional network providing training and professional development. We welcome the opportunity to comment on the draft legislation issued on 11 December 2012 and the draft guidance on the statutory residence test. We have highlighted our main points of concern in paragraph 1 of this paper then set out more detailed comments in the order in which the provisions appear in the draft legislation and added our comments on the response document published on 11 December 2012 and the draft guidance published on 18 December 2012 at appropriate points. It is unfortunate that the provisions on statutory residence now run to some 55 pages and have become so complicated. However, we still feel that the introduction of a statutory residence test, even in this form, will be an improvement on the current position. We leave it to other representative bodies whose members are more closely involved with such matters, to comment on the provisions as they apply to international transport workers. A number of the examples in the guidance contain two different sets of facts which could arguably give rise to the stated outcome but it is not made clear which of the factors is the deciding one. For the guidance to be helpful, taxpayers must be able to look at examples in the guidance and be able to tell straightaway what the deciding factor in each scenario is. 1. Our main areas of concern are: 1.1 The second automatic residence test we feel that the interaction of the 91 day periods with 30 day periods in this test is difficult to follow and is likely to lead to confusion. As drafted the test could lead to UK residence being too easily established in some cases with a presence in the UK of as little as only 30 days required which we do not feel is appropriate in relation to an automatic UK residence test (see paragraph 2 below).

2 1.2 What is meant by a home there are still areas of uncertainty which need further consideration given the fundamental nature of this concept (see paragraph 8 below). 1.3 Available accommodation there is still uncertainty regarding when accommodation with friends and family will be available and how a taxpayer can prove the nature of an offer of a place to stay. The rules may inadvertently catch short stays in hotels (see paragraph 12 below). 2. Second automatic UK residence test paragraph 8. Whilst we accept the idea that there should be some minimum period of presence in a home in order for this to count and that those with a UK home which they use on a regular basis and who spend a lot of time in the UK should be automatically UK resident, we feel that the second automatic residence test is currently very unsatisfactory. It could give rise to individuals being treated as UK resident even though they may have been in the UK for as little as 30 days in the tax year. This test as currently drafted should not form part of the basis of an automatic residence test. Under the current version an individual is automatically UK resident under the second automatic residence test if: (a) (b) (c) the individual has a home in the UK for a period of more than 90 days; the individual is present in that UK home (while it is his home) on at least 30 separate days (whether individual or consecutive and no matter for how short a time on each day) in the relevant tax year; and while the individual has that home, there is at least one period of 91 consecutive days throughout which the individual either (1) has no home overseas Condition A; and/or (2) has one or more homes overseas but does not spend at least 30 separate days (whether individual or consecutive and no matter for how short a time on each day) in any of those homes in the relevant tax year Condition B, (d) at least one day of at least one of those 91 day periods falls within the tax year. In relation to (a) there appears to be no requirement that any of these 90 days are in the relevant tax year so it is not clear at first sight when this period should run. We do not feel that presence in a UK home for a period which can be as short as 30 days should give rise to the application of an automatic residence test particularly as split year treatment under cases 4 or 5 may not be available.

3 As currently drafted it is extremely difficult to follow how the 91 consecutive day periods and the 30 day period in (c) relate to each other particularly where there may be more than one 91 day period in the tax year. For example Joan has homes in both the UK and Brazil during the whole tax year but does not meet the automatic overseas tests for some reason. She leaves Brazil (where she has stayed in her home since 6 April) on 15 July and goes to France for a two week stay. She arrives in the UK on 1 August and stays for the whole of August in her UK house. She then goes to the US for a 2 week holiday and returns to Brazil on 16 September. She therefore has a UK home for more than 90 days and is present in it on at least 30 days during the tax year. It is not clear whether the 30 days of presence in the non-uk house have to occur in the 91 day period being considered. There appear to be two ways in which one can interpret the test in para 8(1) (c) and Condition B and this is a very unsatisfactory situation for taxpayers. Option 1: There is a 91 day period (2 July to 30 September) during which Joan has a Brazilian home and she is present in that home for fewer than 30 separate days (14 days in July; 15 days in September = 29) she is therefore UK resident under this automatic test after a presence in the UK of only 31 days and despite having spent the bulk of the tax year in Brazil. Option 2: Joan has been present in her Brazilian home for more than 29 days in total during the tax year and so she is not UK resident under the second automatic residence test because paragraph 8(3)(b) refers to being in the overseas home for fewer than 30 days in year X. However, it is not clear on this interpretation what relevance the 91 day period has. If this test is to be retained could the drafting of this test be made clearer please? By way of a second example, assume that Jane has a home in Brazil, and one in the UK in which she only spends the month of August (so more than 30 days). She spends the rest of the tax year in Brazil but on 1 April sells her Brazilian home but does not immediately purchase another. She goes on a cruise for 3 months, returning to Brazil in mid-july to complete on the purchase of a new Brazilian home. It would appear that she would be resident in the UK under the second automatic UK residence test in the year of sale as she had a home here, spent more than 30 days there and during the year concerned, for 4 days, there was a period (being part of one exceeding 91 days in total), in which she had no Brazilian home. This example highlights how harsh this test could be in unexpected circumstances and how difficult it will be to explain it to taxpayers.

4 Both these examples indicate the level of record keeping that is likely to be required by visitors to the UK who purchase homes here even if they do not spend much time in those UK homes. They also show that right until the end of a particular tax year individuals will not be able to establish whether or not they are resident in the UK under this test. One aim of the move to a statutory residence test is to allow individuals to have certainty regarding their residence status and as currently drafted the second automatic residence test does not achieve this. We are also concerned that there may be individuals who are prevented from being present in an overseas home due to political unrest or natural disaster, who may be inadvertently caught by this test even though they may not have spent much time in the UK and this seems inappropriate. Could guidance be given regarding the records taxpayers will need to keep in order to establish presence for short periods in homes either in the UK or abroad? In paragraph 16 of the guidance, the reference in the third bullet point should be to more than 29 days not 30 (paragraph 8(3)(b) states fewer than 30 separate days). 3. Third automatic UK residence test paragraph 9. We welcome the extension of the number of days which have to be worked full time in the UK to 365 and the addition of the reference to parenting leave in paragraph 9(2)(b). We continue to feel that a work day should be longer than three hours of work. In example 5 of the guidance on page 8 it would be helpful if some further details were given of Henri s workdays in so that it is absolutely clear why he satisfies the third automatic residence test. 4. Fourth automatic UK residence test paragraph 10. We cannot see why it is necessary to make the rules more onerous in relation to someone who dies during the tax year than in relation to others. There is no requirement to have spent any time at all in the UK in the year of death. 5. Third automatic overseas test paragraph 14. We welcome the increase in the number of days that can be worked in the UK but still feel that minimum number of hours per day required for a work day should be more than 3. The definition of full time work is complex as example 13 on page 15 of the guidance demonstrates. The taxpayer wants to know from the outset that their planned working pattern overseas is such that they will be non-resident. The guidance implies that that this can only be confirmed with hindsight and detailed record keeping. 6. Days spent paragraph 21. In paragraph 21(4)(a) exceptional circumstances can only be relevant if these prevent the taxpayer from leaving the UK. However, in relation to war and civil unrest abroad, the circumstances may not actually prevent the taxpayer from leaving the UK but rather from travelling to their destination. It would be preferable if the provision took this into account. We note from the guidance Annex B paragraph B9 that illness of or injury to, a spouse, civil partner or dependent child can give rise to

5 exceptional circumstances could this be included in the legislation rather than leaving taxpayers to have to rely on the guidance? Example B1 on page 47 of the guidance highlights the harshness of the 60 day limit in situations where very serious medical problems are at issue and we would ask that the limit be extended in such cases as long as the individual leaves the UK as soon as possible after being discharged from hospital. 7. Anti-avoidance paragraph 22. We do not accept that there is a real need for an anti-avoidance rule and feel it will add unnecessary complexity. 8. Home paragraph 24. Although the provisions regarding what constitutes a home have been improved, we still feel that in order to make the statutory residence test operate properly, a statutory definition of home should be used. The requirement that the building, vehicle, vessel or structure have a sufficient degree of permanence or stability, and whether this has been established in light of all the circumstances of the case, will give rise to a great deal of uncertainty and is likely to give rise to litigation. 8.1 In paragraph 24(3) it is not clear in relation to holiday homes, retreats etc. what uses periodically means. What would be the position in relation to individuals who have moved abroad but have retained a property which was previously their main home and use that from time to time for holidays? 8.2 Paragraph A4 on page 38 of the guidance appears to introduce a reasonable onlooker test, which is not set out in the legislation, without further explanation. 8.3 Could further details be added to paragraph A13 regarding what will constitute a property being temporarily unavailable particularly in relation to large renovation projects in existing homes which may take many months to complete and during which the property may be uninhabitable? The statement in paragraph A13 seems to treat these differently from properties bought in a state of disrepair (see paragraph A16). 9. Work paragraph 25. We welcome the confirmation given in paragraph 45 on page 13 of the guidance that periods of garden leave count as time spent working but would ask that this is included in the legislation. 10. Location of work paragraph 26(3). We consider that the wording of paragraph 26 is an improvement on the previous draft although, we continue to be concerned that it may have an adverse effect on the attractiveness of London hubs for business travel. It also puts people who cannot fly directly to a regional centre at a disadvantage. This is highlighted by examples 15 and 16 of the guidance (pages 16 and 17). 11. Family tie paragraph 31(6). We welcome the clarification that half term breaks are to be considered to form part of term times.

6 12. Accommodation tie paragraph 32. In relation to the accommodation tie and staying with close relatives, we are concerned that the requirement for the property to be available for a continuous period of 91 days and the limitation of accommodation to the home of a close relative, will not be sufficient to avoid there being an accommodation tie in most cases Paragraph 3.56 of the response document published on 11 December 2012 states that accommodation will not be available unless the individual would really be able to stay there for at least a three month period. A casual offer by a friend indicating that someone is welcome to stay with them at any time will not create an accommodation tie unless the offer would genuinely extend for a stay of at least three months. However, offers of a place to stay are usually made orally and in many cases relatives and friends may make offers of a place to stay for as long as necessary without really expecting it to be taken up for a long period. What evidence will taxpayers be required to keep and produce in order to establish or disprove the existence and nature of the agreement? 12.2 Example A11 indicates that the cousin with whom Peter stayed was prepared to put Peter up for several months at a time should he need it. However, the wording used in A12 is not so clear and the facts in that example could give rise to a casual offer Example A13 it would be helpful if the example could make clear whether the property is still available to Simone during any period when he brother is using it or not as this could affect the outcome The statement made at paragraph A38 on page 46 of the guidance in relation to rooms booked at hotels for at least 91 days continuously is misleading in that paragraph 32(2) of the draft legislation provides that gaps of fewer than 16 days between periods are disregarded for this purpose. Paragraph 3.58 of the response document mentions very frequent and regular stays at the same hotel over a long period being capable of being an accommodation tie. The only hotel example i.e. A14 on page 44 of the guidance relates to staying in the same hotel for around 12 weeks in a four month period which would fall within this category. However, whilst it may be obvious that booking a room at the same hotel for 91 continuously might give rise to an accommodation tie, it is may not be so obvious that booking a room at the same hotel for 7 separate night days may suffice (i.e. 7 one night stays in the same hotel with a 15 day gap between each one night stay would cause an accommodation tie). We would ask that further consideration be given to hotel accommodation. 13. Country Tie paragraph 35. The definition of country still refers to state or territory. It is still not clear what the situation will be regarding time spent in different US states or cantons in Switzerland for example and whether these periods need to be treated separately. Could this be clarified please as taxpayers with homes in or who spend time in federations need to know how to apply the tests.

7 14. Case 2 accompanying spouse paragraph 42. It is not clear how where the spouse spends the greater part of the time is to be calculated (e.g. presence at any time during a day or presence at midnight). It would be helpful to have an example in the guidance of the position where the couple have homes both in the UK and in the overseas jurisdiction. 15. Case 3 leaving the UK to live abroad paragraph 43. Whilst this version of the provision is much better than the original draft, the requirements in paragraphs 43(8)(b) and (c) may be difficult to satisfy for internationally mobile individuals with more than one home abroad, particularly if they need to travel on business or have homes in more than one jurisdiction outside the UK. Where it is necessary to rely on paragraph 38(a) it may be difficult in such circumstances for taxpayers within certain jurisdictions to be able to establish tax residence under domestic laws within the period of 6 months. 16. Case 4 coming to live or work full time in the UK paragraph 44. The only home test in paragraph 44(6) does not fit well with the current wording of the second automatic residence test in paragraph 8. Also in Table F which relates to case 4 there does not seem to be an entry for March. 17. Case 5 paragraph 45. Example 27 does not mention how many days Salvatore spends in his UK home after it has been acquired it would be helpful to include this so that it is obvious why the second automatic test is satisfied. 18. Transfer of assets split year provisions paragraph 79. Due to the abolition of ordinary residence status individuals who come to the UK even for a short period will now be subject to the transfer of assets provisions as soon as they become UK resident (although in many cases the remittance basis may apply). We feel that it is unduly harsh to both to make that change and to deny remittance basis taxpayers relief for remittances made in the overseas part of a split tax year. 19. Section 86 TCGA paragraph 88. The split year rule in paragraph 88 seems to provide that where a UK domiciled settlor is taxable under s86 TCGA 1992, all the gains of the tax year are treated as accruing to the settlor in the UK part of a split year. Hence, there is no exemption for the trust gains triggered before the arrival in the UK of the settlor even though if the settlor had held those assets personally there would have been. 20. Section 87 TCGA paragraph 90. Similarly paragraph 90 applies s87 TCGA 1992 in a split year on a time apportioned basis so that the amount of pre-arrival (matched) distributions from offshore trusts that will be taxable on a beneficiary will vary depending on the date of his arrival in the UK. This could be very problematic for expatriates who had no intention of coming to the UK and received offshore trust distributions before arrival, especially if they arrive early in the year. The time apportionment rule is

8 somewhat arbitrary and it would be fairer to tax capital payments received after arrival in the UK that are matched to capital gains in the trust. 21. Trustees of settlement paragraphs 91 and 92. We welcome these provisions which may be of assistance where a trustee becomes UK resident during a tax year but retires during the overseas part of what is for that individual a split year. 22. Temporary non-residence paragraphs It would be helpful for taxpayers to have more detail in the guidance about the types of income and gains subject to these rules particularly in relation to distributions and releases of loans to participators. Guidance Note: Overseas Workday Relief (OWR) We welcome the decision to change the overseas work day relief provisions so that they apply for the first three years of presence in the UK without reference to intention. Submitted by STEP UK Technical Committee 6 February 2013