The new UK tax residence rules provide lots of certainty for clients. The detailed rules are quite intricate but the outline is fairly clear and it is easy enough to get a grasp of the basics.
Residence is really important for your clients’ tax position, particularly affecting their liability to income tax and capital gains tax. These are the rules that apply from 6 April 2013 and this is the first tax year to which they apply.
If you or your clients are depending on the old rules, you could be in for a nasty surprise – the changes are pretty sweeping.
The first thing to remember is that the domicile rules have not changed. That is the country or jurisdiction you regard as your permanent home.
The domicile rules have been built up over the years and are hugely important for tax – but they are not the same as residence.
The new rules on residence put you in one of three categories:
1. Definitely or automatically non-resident.
2. Definitely or automatically UK resident.
3. It depends. You might be non-resident or you might be resident in UK.
So, to sum up, when it comes to non-residence, the answer will be yes, no or maybe. And if it is maybe, it is just a bit more involved but reasonably certain.
Let’s take a look at the rules in a bit more detail.
1. Definitely non-resident in the UK for a particular tax year – the “automatic overseas test”.
If you meet any one of these tests, you will be definitely, automatically non-resident and you will not have to worry about any other tests.
The tests are:
- You have spent fewer than 16 days in the UK during a particular tax year after being resident here in at least one of the three preceding tax years.
- You have spent fewer than 46 days in the UK during the tax year in question and you have not been resident in the UK in any of the three preceding tax years.
- You work “sufficient hours overseas” in the tax year, with “no significant breaks from overseas work”. Furthermore, during the tax year in question, you spend fewer than 31 days in the UK working more than three hours a day and you spend fewer than 91 days in the UK altogether for any reason.
There are some special rules to determine the residence of someone who dies during a tax year.
2. Definitely resident in the UK – the “automatic UK test”.
You will certainly be treated as UK resident if you meet the following tests during a particular tax year
- You spend at least 183 days in the UK.
- You have a home in the UK and basically you stay there at least 30 days in the year. Alternatively you have no overseas home or your visits there are minimal over a 91-day period.
- You work in the UK full time, with more than 75 per cent of your working days in the UK.
3. Not automatically resident or not resident – the “sufficient ties test”.
This depends on how much time you spend in the UK and how many ties you have with the country. These ties include:
- Family tie – you have a spouse or civil partner or cohabitee or minor child who is resident in the UK.
- Accommodation tie – you have accommodation in the UK that is available for you to stay in and you use it for at least one night.
- Work tie – you work in the UK for at least 40 days a year for at least three hours a day.
- 90-day tie – you have spent more than 90 days in the UK in either of the two tax years before the year in question.
- The country tie – this depends on whether you are arriving in the UK or leaving the country. If you are arriving, that means you have not been resident in the UK for the previous three tax years. If you are leaving, it means you have been UK resident in at least one of the previous three tax years. If this is the case, then the possible tie is that in the tax year in question, you spend more days in the UK than in any other country (which in practical terms means midnights in the UK).
The more ties you have, the fewer days you can spend in the UK (and vice versa). The position is a bit tougher for a leaver than someone who is arriving in the UK.
Residence is really important for tax. The new rules will affect many thousands of clients, so it’s worth getting to grips with at least the basics.
For more coverage, look at Taxbriefs Advantage for a clear and practical guide.
Danby Bloch is editorial director at Taxbriefs
Taxbriefs Advantage is a new online reference resource to give financial advisers, planners and paraplanners a clear business advantage. Advantage provides you with unbiased, independent, answers to all your technical queries – visit www.taxbriefsadvantage.co.uk and find out more.