Splitting the tax year for taxpayers
To give advice to taxpayers who are arriving to live in the UK, or who are emigrating, you must understand the split year rules for the statutory residence test (SRT), as Andy Keates explains.
I listened into two HMRC Talking Points webinars, recordings of which should shortly be available here. They were both well-attended, with over 800 tax agents listening in, many of whom provided questions. Some of those questions the presenters felt unable to answer, either because they were too specific to individual clients, or because they fell outside the scope of the webinars; in all other cases they tried to be as helpful as they could.
The SRT, which applies to tax years from 2013/2014 onward, is very different from the old rules on residence: there is a strict order in which things need to be done. Before even considering the split year rules, a taxpayer needs to follow the rules as set out in FA 2013, Sch 45 (see leaflet RDR3) to establish whether she is UK resident for a given tax year. Only if she is shown to be resident can the split year rules come into effect.
The split year treatment is no longer optional (as it was before 6 April 2013), and it doesn’t have to be claimed. If any of the eight “cases” set out in RDR3 chapter 5, apply, the tax year will be split between a UK part and an overseas part, and income and gains arising within the two parts will be treated accordingly.
The eight cases which need to be examined are set out in the table below.
|Case||Taxpayer’s circumstance:||Date when the split commences:|
|1||Starts full-time employment overseas.||First day of the period when the overseas work criteria are satisfied.|
|2||Is the partner of someone who has started full-time employment overseas||Later of the taxpayer’s departure or the partner’s case 1 split date.|
|3||Ceases to have a home in the UK.||First day on which the taxpayer has no UK home.|
|4||Starts to have their only home in the UK.||Day after the taxpayer ceases to have any homes other than one in the UK.|
|5||Starts full-time work in the UK.||First day of the period when UK work criteria are satisfied.|
|6||Ceases full-time work overseas.||Last day on which the taxpayer worked for more than 3 hours overseas.|
|7||Is the partner of someone who has ceased full-time employment overseas.||Later of the taxpayer’s arrival or the partner’s case 6 split date.|
|8||Starts to have a home in the UK (even if it’s not their sole home)||Date on which the taxpayer began to have a UK home.|
Each case has its own set of criteria which must be compared with the taxpayer’s circumstances: if all criteria are met, then the case will apply. Each case also generates a date for the split to commence. If more than one case applies to the taxpayer, there are priority rules which establish which of these potential split dates actually applies.
Basic residence pattern
For cases 1 to 3 to apply, the taxpayer must be UK resident (as determined by the SRT) in the tax year under consideration (the “relevant year”) and the prior year. She must be non-resident in the following tax year.
For cases 4 to 8 to apply, the taxpayer must be UK resident in the relevant year and non-resident in the prior year.
For the purposes of cases 1 and 6, the mandatory year of non-residence must be due to passing the third automatic overseas test (RDR3 para 1.7); for all the other cases it is enough simply to be non-resident. Also for case 6, the taxpayer must have been UK resident for at least one of the four tax years preceding that prior year.
Additional specific case criteria
Case 1 – there is a period, starting on a day when the taxpayer works at least 3 hours overseas and ending on 5 April, for which the overseas work criteria (see RDR3, para 5.11) are satisfied.
Case 2 – the taxpayer moves overseas to live with a partner who left for full-time work overseas either in the relevant year or the prior year. From the date the split commences (see table), the taxpayer must have no UK home (or must spend less time in a UK home than in a non-UK home), and in any event cannot spend 90 days pro-rata in the UK.
Case 3 – the taxpayer started the tax year with one or more homes in the UK and at some date in the year ceases to have any UK home. From then until 5 April, she must spend no more than 16 days in the UK and must, by the end of six months, have acquired sufficient links with an overseas country.
Case 4 – the taxpayer did not have their only home in the UK at the start of the relevant year, but from some date within the year their only home is in the UK; between the start of the tax year and that date, they must not have had sufficient UK ties (RDR3 para 1.42).
Case 5 – during the year, the taxpayer works at least 3 hours in the UK on a day which is the start of a period of at least 365 days during which the UK work criteria (RDR3 para 1.36) are met. Before that day, she had insufficient UK ties.
Case 6 – between 6 April and a day within the tax year, the taxpayer satisfied the overseas work criteria.
Case 7 – the taxpayer comes to the UK to live with a partner who met the conditions for case 6 in either the relevant year or the prior year. Prior to the split date (see table) the taxpayer had no home in the UK (or spent less time in a UK home than in a non-UK home) and spent fewer than 90 days pro-rata in the UK.
Case 8 – on 6 April the taxpayer had no home in the UK, but from a date in the year she had a home in the UK. She continues to have a home in the UK for the remainder of the relevant year and the entirety of the following year. Before acquiring the UK home, she had insufficient UK ties.
Commencement date for split
The Table shows for each case the date which will potentially be the first day of the overseas part of the tax year (cases 1 to 3) or the UK part of the split year (cases 4 to 8).
If more than one of cases 1 to 3 apply, the order of priority for determining which date is the start of the overseas part of the year is numerically: from case 1 to 3. If both case 5 and case 6 apply, whichever split date is earlier will apply. Equally, if both cases 5 and 7 apply, the earlier of the two split dates will be used. If neither case 6 nor case 7 apply, the earliest date of any cases which do apply will be used.
What is a home?
Other than straightforward clarifications of the above, most questions from attendees were focused on the issue of what constitutes a “home” for the purposes of cases 2, 3, 4 and 8. Understandably, HMRC’s staff members were reluctant to go into too much detail on what was strictly speaking outside the scope of the webinars, but the attendees’ attention was drawn to Annex A of RDR3.
The presenters stressed that, as with so many terms which have no statutory definition, the required test is one of reasonableness (what would the “man on the Clapham omnibus” think of as a home?). It was pointed out that the system is one of self-assessment: the taxpayer and his agent form their own opinion, and it is for HMRC to either accept this or open an enquiry.
We were also reminded that, for many of the tests within SRT, what matters is how much time is spent in any place which might be considered a home – if someone is spending the vast majority of her time in one place, it is probably a home.