Page 1 Leavers, Arrivers and Day Trippers - the Statutory Residence Test for internationally mobile individuals Alexandra Hollingshead October 2012 Benjamin Franklin might have thought of tax as one of life s certainties, and yet the concept of tax residence for UK purposes has long been both uncertain and unclear. In recognition of this, the Government has proposed that tax residence should be assessed according to new legislation the Statutory Residence Test, or SRT. This test will come into force on 6 April 2013, having been the subject of a prolonged period of consultation. Key points to note about the SRT: In the great majority of cases, HMRC believe that the SRT will not affect an individual s residence status they anticipate negligible or no impact upon the Exchequer It will provide greater certainty for both advisers and individuals An individual s intention and purpose are not relevant residence is no longer a subjective concept A distinct break in an individual s lifestyle is no longer required in order to lose UK residence If an individual seeks to become UK resident, he or she must take care to spend enough days in the UK Internationally mobile individuals will need to consider their residence position each year In respect of some elements of the proposed legislation such as anti-avoidance provisions and aspects of day-counting the consultation is still open. The SRT is split into three parts: 1) Automatic Residence Test An individual will be tax resident for a year if he or she: is present in the UK for 183 days or more in a tax year; or has only one home, which is in the UK (or has two or more homes and all are in the UK); or carries out full-time work in the UK (NB: the definition of full-time work is the subject of further consultation). 2) Automatic Overseas Test An individual will not be tax resident for a year if he or she: was not UK resident in any of the previous three tax years and is present in the UK for fewer than 46 days in the relevant year; or was 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 relevant tax year; or leaves the UK to carry out full-time work abroad, provided he or she is present in the UK for fewer than 91 days in the tax year and fewer than 21 days (or 26 - this is subject to further consultation) are spent working in the UK in the tax year. The majority of people will fall within either of these two tests and will have no need to consider the Sufficient Ties Test (described below). However, there will be some people with complex circumstances who satisfy none of the criteria in the first two tests. In these circumstances, they will be assessed under a third test, the Sufficient Ties Test.
Page 2 3) Sufficient Ties Test This test combines a mixture of day-counting (i.e. keeping a record of days spent in the UK) and the application of UK ties (also referred to as connection factors ). Put simply, the more UK ties a person has, the fewer days he or she can spend in the UK without becoming UK resident. The Sufficient Ties Test divides people into: Arrivers (those who were not resident in any of the three previous tax years); and Leavers (those who were resident in one or more of the three tax years immediately preceding the relevant year). The Government s stated intention is that it should be more difficult to become non-resident when leaving the UK after a period of residence than to become resident when arriving in the UK the test is designed so that UK residence has an adhesive quality. Those who fall into this test will need to keep an eye on their UK ties each year. Arrivers: Individuals not resident in all of the previous three tax years Impact of connection factors on residence Days spent in UK Always non-resident Resident if individual has 4 factors Resident if individual has 3 factors or more Resident if individual has 2 factors or more Always resident Fewer than 46 days 46-90 days 91-120 days 121-182 days 183 days or more Leavers: Individuals resident in one or more of the previous three tax years Impact of Connection factors on residence Days spent in UK Always non-resident Resident if individual has 4 factors or more Resident if individual has 3 factors or more Resident if individual has 2 factors or more Resident if individual has 1 factor or more Always resident Fewer than 16 days 16 45 days 46 90 days 91 120 days 121-182 days 183 days or more The UK ties are: Family the individual s spouse/civil partner/common law equivalent or minor children are resident in the UK. If a person has a minor child who is resident in the UK, that child will not represent a family tie provided the person sees that child in the UK for fewer than 61 days; and a child in full-time education in the UK will not be treated as UK resident (and so will not be a family tie) if, outside term-time, that child spends fewer than 21 days in the UK.
Page 3 Accommodation the individual has accessible accommodation in the UK and makes use of it during the tax year. If a person has a place to live in the UK which is available for a continuous period of 91 days in a tax year and spends one night during the relevant tax year in that place, this will be a UK tie. Accommodation held by a close relative will only be a UK tie if the individual spends more than 15 nights there (this is in recognition of the fact that some people will spend time in a parental home at Christmas, for example). Work - the individual does substantive work (self-employed or otherwise) in the UK, meaning 40 days or more. 90 days - the individual has spent 90 days or more in the UK in either of the previous two tax years. and, for Leavers only, Country - more time is spent by the individual in the UK than in any other single country Each of these UK ties is discussed at some length in the Government s consultation document, which can be found here Leaving on the midnight train day counting If a person is in the UK at midnight, he or she is currently deemed to have been in the UK for that day. However, the Government is considering a targeted supplementary rule whereby certain people are deemed to have spent a day in the UK even if they leave shortly before midnight and seeks comment on the point. The Government will allow individuals to exclude days spent in the UK due to circumstances beyond their control (e.g. national or local emergencies such as war, civil unrest or natural disasters; or sudden or life threatening illnesses). This is capped at 60 days per year. Transitional rules From 6 April 2013, individuals will be using the SRT to assess their residence position. In doing so, they will often have to review their residence position in the years before 2013, for example, for the Sufficient Ties Test which asks whether an individual was resident in the previous three tax years. In September last year we raised concerns about the absence of transitional provisions to deal with this. The Government has now addressed the point: between tax years 2013/14 and 2015/16, for the purpose of applying the SRT, individuals may elect to use the SRT to determine their residence position in previous tax years where relevant. Doing the splits If a person is resident for part of a tax year, under current rules he or she is deemed to be resident for the whole of that tax year. There are no statutory provisions to deal with split tax years but they can be split using extra-statutory concessions for income tax and CGT purposes. However, as with all concessions, these can be withdrawn if they are used for tax avoidance. Whether, for example, pre-immigration tax planning amounts to avoidance or not is often in the eye of the beholder. There will now be legislation to deal with split year treatment. HMRC has set out four specific cases in which split year treatment will apply. Case 1 - starting full-time work abroad - the individual must remain non-uk resident in the year following the split year - the departure date will be the date upon which the individual starts work - the number of permitted working days in the UK will be pro rated from 20 work days for a full tax year and the permitted days of UK presence will be pro rated from 90 days
Page 4 Case 2 - accompanying spouses - the accompanying spouse or partner must be accompanying an individual who falls within Case 1, above - the accompanying spouse or partner must remain non-uk resident in the year following the split year the departure date will be the later of a) when the accompanying spouse or partner leaves the UK to join the individual falling within Case 1, or b) the day on which that individual starts work from the date of departure, the accompanying spouse or partner must either a) have no home in the UK or b) if he or she has homes both in the UK and overseas, must spend the greater part of the time living in the overseas home - the number of permitted days of UK presence will be pro rated from 90 days in a full year Case 3 - leaving the UK to live abroad - the departure date will be the day on which the individual gives up his or her home in the UK - after the departure date, the individual must spend fewer than 16 days in the UK in a year - the individual must remain non-uk resident in the year following the split year - within six months of departure from the UK the individual s normal home must be overseas Case 4 - coming to live or work full-time in the UK - the individual must have been non-uk resident in the previous year the individual must be UK resident on the basis of either having his or her only home in the UK ( the only home test) or of working full time in the UK (or both may apply) NB if an individual has a number of homes all over the world they will not satisfy the only home test. In order to fall within Case 4, the individual will therefore have to be coming to the UK to work full-time before arriving in the UK, the individual must not have sufficient UK ties. This clarity on split years may be particularly useful in the context of pre-immigration planning or post-emigration planning. It is worth noting that clients with a number of homes world-wide who wish to come and live in the UK part-way through a tax year but will not be working in the UK full-time will not be able to make use of the split year provisions. A capital idea on income Until now, an individual could become non-resident for one year by working abroad full-time, and use that time to receive large, tax-free income payments. The Government wishes to introduce a new rule to bring income tax in line with existing anti-avoidance legislation in respect of capital gains. The proposed anti-avoidance rules will apply only to certain types of income receipts while an individual is a non-resident. These are: distributions from close companies (broadly, family companies and other companies with a limited number of shareholders); lump sum benefits from employer-financed retirement benefit schemes; and chargeable event gains from life assurance contracts (e.g. cashing-in single premium bonds). These receipts will be subject to income tax where: i) a person has been resident in four or more of the seven tax years before the tax year in which he or she becomes non-resident; and ii) that person becomes resident again within five tax years of leaving. There will be no double taxation treaty relief available in this context. These anti-avoidance provisions are still under consultation. The draft legislation for receipts from close companies is marked only with a heading there are no draft provisions at all, in contrast with the rest of the proposals which have
Page 5 been drafted in detail. We expect draft provisions to be published by 11 December 2012, for comment until 6 February 2013. What all this means for your clients The SRT will be in force from 6 April 2013 and internationally-mobile clients should consider their residence position in the light of it A minority of individuals will be affected by the new provisions most will fall within the Automatic Overseas Test or the Automatic Residence Test The SRT makes it harder to establish non-residence than to become resident For those who have more complex circumstances, the Sufficient Ties Test will provide greater certainty than before, although inevitably the application of the UK ties will not always be straightforward We will await with interest the results of the further consultation on i) a possible targeted supplementary rule qualifying the midnight rule for day counting; and ii) the anti-avoidance provisions. The consultation closed on 13 September 2012 and a response is expected by 11 December 2012 If you require further information on anything covered in this briefing please contact Alexandra Hollingshead (alexandra.hollingshead@farrer.co.uk; 020 3375 7000) or your usual contact at the firm on 020 3375 7000. This note is intended as a general summary of the law. It should not replace legal advice tailored to your specific circumstances. Farrer & Co LLP, September 2012