The Treasury has launched its consultation on a new statutory test of tax residency in the UK. Tax residence is an essential prerequisite for determining an individual's tax liability however the Government has agreed that the current system lacks certainty and efficiency, that also deters investment in the UK. Some however consider that the current system has a degree of permissiveness that could be lost in the changes.
The new rules are intended to be introduced with effect from 6 April 2012.
Overview
For the purposes of the new test three classes of taxpayer are defined:
- ' Arrivers' - these are individuals who have not been resident in all of the previous three tax years;
- ' Leavers' - these are individuals who have been resident in one of or more of the previous three tax years; and
- ' Full time workers abroad' - individuals who leave the UK to work abroad for at least a tax year, with a 35 hour working week and spending less than 20 days working in the UK (a working day being at least three hours' work!).
Each group will have its own set of rules and 'safe-harbours' that are clear guidelines confirming when individuals will not be regarded as UK resident.
Safe Harbours
The rules remain based on a day count and continue to use the "presence at midnight" test as to whether an individual was present in the UK on a particular day. For each class of individual there is then a safe harbour day count, within which an individual will not be treated as resident.
- Arrivers Fewer than 45 days in the UK
- Leavers Fewer than 10 days in the UK
- Full time workers abroad Fewer than 90 days in the UK (up to 20 working days)
To establish residency in the UK there are two conclusive factors that will show this:
- Being resident in the UK for 183 days or more in one tax year; and
- Having your only home (or homes) in the UK.
Residency Factors
Between these safe harbours, there is a sliding day count scale for 'Arrivers' and 'Leavers' that sets out when individuals falling with those categories will be treated as resident. Currently, all the facts of an individual's life are relevant, but the proposal defines only five factors that are relevant:
1. Whether your family is UK resident
In this context, family means your spouse, civil partner (also including unmarried partners), but not if separated (by court order, or where there is likely permanence). It also includes minor children, unless they are only in the UK to go to school and spend less than 60 days of the holidays in the UK.
2. Whether you have 'substantial' employment in the UK
This means working in the UK for more than 40 days in a tax year (where a day is three hours' work or more). Note, this is a different test to the full time work abroad test.
3. Whether you have 'accessible' accommodation in the UK
The test here is regarding accessibility and not ownership. It covers accommodation that can be used by you as a residence, even if it is owned (and occupied) by someone else.
4. Whether you have been resident for more than 90 days in the previous two years
5. Whether you spend more days in a single other country than you do in the UK
This is only relevant for Leavers.
The Residency Tests
To avoid needing to obtain specialist advice, individuals should be able to then use the sliding scale set out for 'Arrivers' and 'Leavers', dictating when they will be resident based on their day counts and the number of factors that they meet.
Arrivers: Days in the UK Test
- Fewer than 45 days always non-resident
- 45 - 89 days Resident if individual has 4 factors (otherwise not resident)
- 90 - 119 days Resident if individual has 3 factors or more (otherwise not resident)
- 120 - 182 days Resident if individual has 2 factors or more (otherwise not resident)
- 183 days or more always resident
Leavers: Days in the UK Test
- Fewer than 10 always non-resident
- 10 - 44 days Resident if individual has 4 factors (otherwise not resident)
- 45 - 89 days Resident if individual has 3 factors or more (otherwise not resident)
- 90 - 119 days Resident if individual has 2 factors or more (otherwise not resident)
- 120 - 182 days Resident if individual has 1 factor or more (otherwise not resident)
- 183 days or more always resident
Anti-Avoidance Rules
There is also a proposal to extend the temporary non-resident rules. These currently cover tax capital gains and offshore income gains made by an individual who is non-resident for less than five tax years on their return (where such an individual was resident in the UK in four out of the seven years before leaving). It is proposed that they should be extended to some types of investment income; dividends from close companies are mentioned, while bank interest and dividends from listed companies are excluded. It would seem likely that profits from insurance policies may also be caught by this rule when enacted.
Ordinary Residence
The new definition of ordinary residence is proposed much more narrowly and will apply so that if an individual is resident, they will be ordinarily resident unless they have been non-resident for the previous five tax years and their only 'home' is outside the UK.
Non-ordinarily resident status will only be available for up to two tax years. The consultation also considers whether this status should be restricted just to nondomicilaries or just for the purpose of overseas workday relief.
Summary
The proposed individual factors and day counts are in themselves, straightforward. However their application may give rise to some anomalous situations.
For example:
X, who has a home in the UK, does not work for a living and who spends 110 days in the UK a year, will not be considered resident as he satisfies only two factors.
If X wishes to maintain his non-resident status meets Y, who is a UK resident, they fall in love and they want to live together, X would have to immediately reduce his days in the UK to less than 90 as he will satisfy a third factor.
Likewise, a single person will always have one less factor than a family, allowing them more time in the UK.
Non-resident families who have children at school in the UK would fall foul of the 60 day test if they took their holidays in the UK. However, the eighteenth birthday of their youngest child would mean that one factor will fall away.
It is hoped that the consultation period will allow time to iron out any potential practical difficulties and clarity, coherence and fairness.
While the consultation is in process, the information in this article should not be relied upon. We shall endeavour to update readers as to when and how the proposed changes are implemented.
If you would like further advice and assistance on this matter then please contact head of Private Client on 020 7611 4848to arrange a consultation.
