Gabelle Tax Analysis: Statutory Residence Test – rules as at 1 January 2013

Statutory Residence Test

This document summarises the rules for the UK Statutory Residence Test (SRT) to be introduced from 6 April 2013. It is based on draft legislation and guidance published as at 1 January 2013 (and further changes are possible before this becomes law). There will be three tests to determine whether an individual is resident in the UK:

  • The ‘automatic overseas test’
  • The ‘automatic residence test’
  • The ‘Sufficient Ties test’.

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 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.
  • He works overseas full  time and:
    • Works in the UK for no more than 30 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 does not meet the Automatic Overseas Test, he will be automatically treated as resident in the UK if he meets any of the following conditions.

  • He spends at least 183 days in the UK in the tax year.
  • His only or main home is in the UK (as defined by the legislation). The home must be available to be used for at least 91 days and must actually be used (even if for a short time) for at least 30 separate days.
  • He works full time in the UK for a period of at least 365 days, subject to certain conditions.

The Sufficient Ties Test

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

The ties are:

  • Family Tie: 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. Time spent with a minor child will be ignored if an individual sees his child in person for fewer than 61 days in the tax year concerned.
  • Accommodation Tie: the individual has accessible accommodation in the UK. An individual has accessible accommodation if he has a place to live in the UK which is available for him to use for a continuous period of at least 91 days in a tax year and he spends at least one night there. There is an exception for the homes of a close relative provided that the individual spends less than 16 nights there during the tax year.
  • Work Tie: the individual has a work tie if he works substantively in the UK (employed or self-employed) but does not work full time. An individual works substantively in the UK if he does more than three hours of work a day for an aggregate of at least 40 days in the tax year.
  • 90 Day Tie: the individual spent 90 days or more in the UK in either of the two previous tax years.
  • Country Tie: the individual spends more days in the UK in the tax year than in any other single country. This criteria only applies 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 ties or more

91-120 days

Resident if individual has 3 ties or more

121-182 days

Resident if individual has 2 ties 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 ties or more

46-90 days

Resident if individual has 3 ties or more

91-120 days

Resident if individual has 2 ties or more

121-182 days

Resident if individual has 1 tie or more

183 days or more

Always resident

Split Year Treatment

There are five circumstances in which an individual may be able to claim split year treatment. The first three relate to individuals leaving the UK. The last two relate to individuals arriving to the UK.

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

  • Becomes non-UK resident by starting full-time work overseas (leaving).
  • Becomes non-UK resident because his partner has started full-time work overseas (leaving).
  • Leaves the UK, ceases to have a home in the UK and becomes resident in another country (leaving).
  • Comes to live or work full time in the UK (arriving).
  • Comes to the UK and starts to have a home in the UK (arriving).

Ordinary Residence

The concept of ordinary residence will be abolished. However, ‘overseas work day relief’ will be available to non-domiciled individuals who come to work in the UK from 6 April 2013. The relief will apply to the year of arrival and the subsequent two years. This is a welcome change as the availability of relief no longer depends on whether an individual intends to stay in the UK for more than three years or have a UK home. 

Anti-avoidance Legislation for Temporary Non-residents

Certain income arising during a temporary non-resident period 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.

Other income earned or arising during such a period will not be taxable irrespective of the date of return.

What does 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 who 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 for further advice and assistance.

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.