Gabelle Tax Analysis: Draft legislation for statutory residence test published

On 21 June 2012 the Government published its response to the consultation on the introduction of a Statutory Residence Test (SRT) along with draft legislation for Finance Bill 2013.  The SRT will take effect from 6 April 2013. 

(In the commentary which follows we also highlight the specific changes from the original proposals.)

There will be three tests to determine whether an individual is resident in the UK:

  • The ‘automatic overseas test’ (formerly referred to as Part A: conclusive non-residence).
  • The ‘automatic residence test’ (formerly referred to as Part B: conclusive residence).
  • The ‘Sufficient Ties test’ (formerly referred to as Part C: other connection factors and day counting).

The Automatic Overseas Test

If an individual meets any of the following conditions he will be automatically treated as not resident in the UK.

  • He was not resident in all of the previous three tax years and present in the UK for fewer than 46 days (increased from 45 days) in the current tax year.
  • He was resident in one or more of the previous three tax years and present in the UK for fewer than 16 days (increased from 10 days).
  • He works overseas full  time and:
    • Works in the UK for no more than 20 days (a work day is any day where an individual does more than three hours of work); and
    • Spends no more than 90 days in the UK.

For these purposes ‘work’ includes incidental duties such as training, reporting duties and business travel. 

The Automatic Residence Test

If an individual meets any of the following conditions he will be automatically treated as resident in the UK.

  • He spends at least 183 days in the UK in the tax year.
  • His only home is in the UK (or if he has more than one home but they are all in the UK) which is available to be used for at least 91 days. (Previous publications suggested that an individual with his only home(s) in the UK would be resident in the UK no matter how many days he was present in the UK.)  
  • He works full time in the UK.

For this purpose an individual does not need to own the property which is his home.  The consultation document states that a holiday home or weekend home will not count as the individual’s home for this purpose. 

An individual works full time in the UK if:

  • he is employed or self -employed over a period of at least nine months;
  • he works on average 35 hours or more a week; and
  • no more than 25% of his duties were carried out abroad during the period he was working. 

The Government is considering increasing the qualifying period from nine months to 12 months.

The Sufficient Ties Test

If the individual’s residence position is not determined by one of the above two tests, the ‘Sufficient Ties’ test must be considered.  This looks at the number of connections an individual has with the UK.  These connection factors are combined with day counting into a sliding scale to determine whether an individual is resident or not.  The more connections an individual has with the UK the less time he can spend here without becoming UK resident.

The connection factors are:

  • Family: the individual’s spouse or civil partner or ‘common law partner’ or minor children live in the UK.  Time spent in the UK by minor children to attend school will be ignored.
  • Accommodation: the individual has accessible accommodation in the UK and makes use of it during the tax year (subject to the exclusions for some types of accommodation).
  • Substantive work in the UK: the individual does substantive work in the UK (but does not work full time).
  • UK presence in previous year: the individual spent 90 days or more in the UK in either of the two previous tax years.
  • More time in the UK than in other countries: the individual spends more days in the UK in the tax year than in any other single country. This criteria applies only to ‘leavers’ (see below).

The rules are slightly different for ‘arrivers’ (those who were not resident in the last three years) and ‘leavers’ (those who were resident in one or more of the last three years).  Broadly speaking, it is harder to become non-resident when leaving the UK after a period of residence than it is to become resident when arriving in the UK.  

Arrivers

Days spent in the UK

Impact of connection factors on residence

Fewer than 46 days

Always non-resident

46-90 days

Resident if individual has 4 factors or more

91-120 days

Resident if individual has 3 factors or more

121-182 days

Resident if individual has 2 factors or more

183 days or more

Always resident

Leavers

Days spent in the UK

Impact of connection factors on residence

Fewer than 16 days

Always non-resident

16-45 days

Resident if individual has 4 factors or more

46-90 days

Resident if individual has 3 factors or more

91-120 days

Resident if individual has 2 factors or more

121-182 days

Resident if individual has 1 factor or more

183 days or more

Always resident

Split Year Treatment

Currently, if an individual is resident for any part of the year they are treated as resident for the whole of the year.  Statutory concession allows the tax year to be split between resident and non-resident periods in certain circumstances where an individual comes to or leaves the UK part way through the tax year.

The new rules state that split year treatment will apply where an individual:

  • becomes resident by virtue of their only home being in the UK (arriving or returning);
  • becomes resident by starting full time employment in the UK (arriving or returning);
  • establishes their only home in another country, becomes tax resident in that country and does not return to the UK in that tax year (leaving);
  • loses UK residence because he works full time abroad (leaving); or
  • returns to the UK following a period of working full time abroad (returning).

Ordinary Residence

The consultation document confirms ordinary residence will be abolished.  This will affect the following tax provisions:

Provision

Current application

Future application

General remittance basis

Available if tax resident and non-domiciled

or not ordinarily resident

 

Available only if tax resident and

non-domiciled

 

Overseas workday relief

Available if tax resident and

ordinarily resident

 

Relief will

only be available if non-domiciled

 

Transfer of Assets Abroad

Applies to individuals who are

ordinarily resident

 

Applies to individuals who are

tax resident

 

Foreign service relief for

termination payments

Applies in respect of earnings

related to UK duties for individuals who are not ordinarily resident

Will apply only in respect of earnings for overseas duties.

Capital gains tax

Applies to UK gains if individual is

tax resident or ordinarily resident

Will apply to UK gains only if

individual is tax resident

Capital gains tax and

temporary non-residence rule

Applies to individuals who are tax resident or ordinarily resident

Will apply to individuals who are tax resident

Taxable lump sums from

pension schemes (ESC A10)

Applies in respect of earnings

related to UK duties for individuals who are not ordinarily resident

Will apply only in respect of earnings for overseas duties.

Individual Savings Accounts

(ISAs)

Available to individuals who are

tax resident and ordinarily resident

Will apply to individuals who are tax resident

Anti-avoidance Legislation for Temporary Non-residents

Certain income arising during a period of temporary non-residence will become taxable on the individual’s return.  This is similar to the current rule for capital gains made by temporary non-residents.  This rule will apply where an individual:

  • has been resident in the UK for a period of at least four of the last seven tax years; and
  • becomes resident again within five years of leaving.

The rule will apply to the following types of income:

  • distributions from close companies;
  • lump sum benefits from employer financed retirement benefits schemes; and
  • chargeable event gains from life assurance contracts.

Transitional Rules

The outcome of the above tests will depend on an individual’s residence position in the previous three years.  Without any transitional provisions to apply to those earlier periods it would be difficult to determine an individual’s residence position with any degree of certainty.  Although the individual may self-certify that he was non-resident for a previous period, this would be subject to challenge by HMRC.

A transitional rules has therefore been included which will “apply only for those parts of the test where the individual needs to know what their residence status was in one or more of the three years prior to the introduction of the test for the purpose of determining their residence in future years.”

What does all this mean?

The SRT will provide a great deal of certainty to individuals in regard to their UK tax position.  This is good news for practitioners, individuals and their employers as they will be able to plan their affairs with a greater degree of certainty.

If you have any clients who may be considering leaving the UK in the next 12 months or if you have clients who are non-resident but may be caught by the temporary non-resident rules from April 2013 you should contact the Gabelle team without delay.

Paul Bramall is a Partner at Gabelle LLP. He can be contacted at paul.bramall@gabelletax.com or via TaxDesk on 0845 4900 509.

Priya Dutta is a Senior Tax Consultant at Gabelle LLP. She can be contacted at priya.dutta@gabelletax.com or via TaxDesk on 0845 4900 509.