The Statutory Residence Test – A Guide

Laura Hutchinson discusses the new rules

For the purpose of calculating income tax and capital gains tax liabilities, it is important for an individual to understand their tax residence, which at present is largely decided by case law.  Unfortunately case law can only act as guidance, as no two individuals’ circumstances will ever be the same and an individual’s affairs are not normally on ‘all fours’ with the cases.

In 2011, a consultation was launched to introduce a statutory definition of tax residence and to reform the concept of ordinary residence.  The new legislation will be implemented on 6 April 2013. 

The new rules will not affect the residence status of most people, but it is welcomed by those entering or leaving the UK, as they can plan their tax affairs with certainty.  The reaction to the new rules has been positive, however, the new test is not quite as simple and easy to understand as was expected.

We set out below a guide to the new rules.  Please also refer to our ‘Statutory Residence Flowchart‘.

The Statutory Residence Test

The test is divided into three parts – Part A, B and C.

If Parts A or B are not satisfied the individual is tested on Part C, which determines the individual’s UK residence status by taking into account the time spent in the UK and the number of connections the individual has with the UK.  The test distinguishes between two types of tax payer; “arrivers” and “leavers”.  Leavers are those who have been resident in the UK in any of the three previous tax years and arrivers are those who have not.

[box] Summary

PART A Always non-resident

  • Leaver and spends less than 16 days in the UK in the tax year and does not die in the year.
  • Arriver and spends up to 45 days in the UK in the tax year.
  • Works full time overseas for the tax year and works in the UK on less than 31 days and spends less than 91 days in the UK in the tax year. (A work day in the UK is three hours or more.) (This does not apply to international transportation workers.

PART B – Always UK resident

  • 183 days or more spent in the UK.
  • They have a home in the UK for more than 90 days and are present at their home for at least 30 days and either they have no overseas home or if they have a home overseas then they spend fewer than 30 days there.
  • They work full time in the UK for 365 days, with no significant breaks from work and more than 75% of work days are spent working in the UK.
  • An individual dies in the tax year with their main home in the UK and they were resident in the UK for the three previous tax years. [/box]

A: Conclusive Non Residence

As is expected, the rules to attain non-residence rely on a limited number of days being spent in the UK.  Where there is limited historical connection to the UK, the number of days that can be spent here (without any days being treated as non-resident) is greater than where the individual has been previously UK resident.

An individual will automatically be non-resident if they satisfy any of the following four circumstances:

  1. An individual is present in the UK for fewer than 16 days in the current tax year and does not die during the tax year; or
  2. An arriver is present in the UK for fewer than 46 days in the current tax year; or
  3. An individual works full-time overseas for the tax year with no significant breaks from overseas work, provided they are present in the UK for fewer than 91 days in the tax year and no more than 30 days are spent working in the UK (three hours a day) in the tax year; or
  4. An individual dies in the tax year and was not resident in the UK for the two previous tax years and they spent less than 46 days in the UK in the tax year.

To qualify for full time work abroad, an average working week of 35 hours or more is necessary.  The definition of a working day in the UK has been simplified to, ‘any day in which more than three hours of work is carried out’.

Part B: Conclusive Residence

An individual will be automatically resident if they satisfy any of the following conditions:

  • An individual is present in the UK for 183 days or more in a tax year; or
  • An individual has a home in the UK for more than 90 days and is present at their home for at least 30 days in the tax year and either they have no overseas home or if they have a home overseas then they spend fewer than 30 days there; or
  • Carry out full-time work in the UK for a period of 365 days with no significant breaks from work and more than 75% of the total number of days working in the tax year (three hours’ work) are days spent working in the UK; or
  • An individual dies in the tax year with their home in the UK and for the three previous tax years they were resident by satisfying at least one of the Part B conditions.

Part C: Other Connection Factors and Day Counting

Part C is less straightforward than parts A and B.  The number of connection factors impacts the number of days an individual may spend in the UK without classification as a UK resident.  The connection factors are as follows:

  • Family – An individual’s partner (spouse, civil or common law) or minor child is resident in the UK and they see their child in the UK on more than 60 days in the tax year.
  • Accommodation – an individual has a place to live in the UK (not necessarily owned by them) available for a continuous period of at least 91 days during the tax year and spends at least one night there during the tax year.
  • Work – an individual spends 40 days or more working more than three hours a day in the UK.
  • 90 day tie – an individual has spent more than 90 days in the UK in any of the previous two tax years.
  • Country tie (leavers only) – an individual spends more time in the UK than in other countries.

How day count is calculated

If an individual is in the UK at midnight at the end of a day, they are classed as present in the UK on that day except where they arrive as a passenger and leave the UK the next day, or there are exceptional circumstances (e.g. war or illness).  A distinct break from the UK will not be required under the new rules in order for the midnight rule to be applicable.  We suggest that individuals, where practical, should leave before midnight to decrease the number of days present, whilst remaining non-resident.

This relationship is outlined in the tables below, highlighting how many connection factors are required to be UK resident, compared to the number of days spent in the UK.

Days spent in the UK

Number of factors for leavers

5 factors

4 factors

3 factors

2 factors

1 factor

Fewer than 16

Always non-resident

More than 15 but fewer than 46

Resident

Non-resident

More than 45 but fewer than 91

Resident

Non-resident

More than 90 but fewer than 121

Resident

Non-resident

121 or more

Always resident

Days spent in the UK

Number of factors for arrivers

4 factors

3 factors

2 factors

1 factor

Fewer than 46

Always non-resident

More than 45 but fewer than 91

Resident

Non-resident

More than 90 but fewer than 121

Resident

Non-resident

More than 120 but fewer than 183

Resident

Non-resident

183 or more

Always resident

 

Split year treatmnent

This effectively splits the tax year into periods of residence and non-residence.  An individual’s tax liabilities are calculated on income during their actual residence in the UK during that tax year.

A ‘split year’ can apply by concession if an individual would otherwise be resident in the UK during that year and their circumstances for leaving the UK fall under one of the following cases:

  1. Starting full time work abroad.
  2. Accompanying spouse who is starting full time work abroad.
  3. Leaving the UK to live abroad permanently.

In respect of people arriving into the UK a split year treatment may apply in the following circumstances:

  1. Coming to live or work full time in the UK

Case studies

Case Study 1 – Leaving to work abroad

Mr X, a single man, leaves the UK to work abroad, (he has not worked in the UK in the tax year).  He has a contract of employment starting on 1st June 2013, working a 30 hour week.  He has spent all three of the previous tax years in the UK and he plans to return to the UK during the tax year 2013/14 for a one month holiday.  He sells his house before he leaves and does not have any dependent children in the UK.

Under the new rules we could not conclude he is non UK resident under part A.  To be classed as non-resident under part A, he would need to increase his work contract to at least 35 hours a week.  Alternatively he could leave the UK before the 21st April 2013 and not return for his one month holiday; therefore spending less than 16 days in the UK in that tax year.

However, once part B and C are taken into account it is clear this is not necessary, as he would be classed as non-resident under part C, based on day count and connections.

Mr X will be connected to the UK by virtue of the ’90 day tie’ rule only as he has not worked in the UK.  Therefore he can be present in the UK for up to 120 days in the tax year and be non-resident.

Case Study 2 – Leaving to live abroad

Mr Y and his family are considering moving to Israel (he does not yet have full time work there).  He decides to travel to Israel alone before the permanent move.  Both the husband and wife work in the UK until they leave.  He travels on 30th June 2013 and his wife follows shortly afterwards with the children (after selling the house).  Unfortunately Mr Y’s mother becomes ill and he has to return to the UK for two weeks.

Under the new rules he would be classed as UK resident under part C, as he will spend 99 days in the UK and has two connecting factors – ‘work’ and ’90 day tie’.  His wife should not be treated as resident for the tax year.  HMRC have said that they will not invoke circular residence tests i.e. that in this instance could bring the wife back in as resident just because she has a family connection at Part C (increasing her connecting factors to three).  HMRC may accept his mother’s illness as exceptional circumstances and allow classification as non-resident for that tax year (as the day count would then be only 85, and under the required 91 days).

In order to be classed as non-resident without relying on HMRC’s compassion, he could reduce his connecting factors by working less than 40 days in the UK in that tax year before going to Israel or he could leave the UK  earlier i.e. before the 21st June.

Further details

Anti-Avoidance

An anti-avoidance rule has been introduced to stop individuals receiving tax-free income by leaving the UK for short periods of non-residence.  This is similar to the existing rule for capital gains tax.  This new rule applies where the individual has been resident in the UK for four out of the seven previous tax years and becomes resident again within five years of leaving the UK.  Certain income which arises in a non-resident year is treated as though it has arisen in the year of return to the UK.

Ordinary residence

This is usually known as “habitually resident” and is typically very complicated with limited application, so the Government has decided to abolish these rules.

Conclusion

The new statutory residence test is expected to make tax residence more clear, allowing the tax payer to plan and structure their affairs with knowledge of their position.  The new test is an improvement on the current rules, however it is not as simple to use as was expected, leaving some ambiguity in definitions such as ‘accommodation’ that may still require court intervention.

 

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