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Advisers must consider changes to definitions of residence and the taxation of non-domiciled individuals

Sandwiched between the considerable number of recent consultations on taxation are those issued on June 17 in relation to the proposed new statutory definition of residence and the further reform to the taxation of non-domiciled individuals, the consultation periods for which closed on September 9.

For most UK-based financial advisers, the basic principles of residence and domicile, let alone the nuances, do not have to occupy front of mind as most of their clients will be UK-resident and domiciled. There will be no doubt over that status, meaning their tax position will be straight-forward. Broadly speaking, worldwide income and gains are taxable, subject to any double tax treaties, and the remittance basis of taxation is not available.

In cases where an individual’s residence and domicile is not so clear, these new consultations need a bit of taking on board. Let’s look first at residence.

Most would accept that the current rules determining tax residence for individuals are complicated and unclear. The number and frequency of cases going to law on the subject provide further corroboration for this view.

The Government announced in the 2011 Budget that it would introduce a statutory definition of tax residence to take effect from April 6, 2012. Its aim is to create clear rules that provide greater certainty for taxpayers and are simple to use. Most practitioners welcome this move, at least in principle.

The first chapter of the consultation document incorporates the statement that the existing rules are “vague, complicated and perceived to be subjective”.

It is also stated that:

“The Government agreed this lack of certainty is unsatisfactory.” A statutory residence test should be designed, says HM Treasury in chapter three of the consultation, to provide a simple process and clear outcomes for the vast majority of people whose affairs are relatively straightforward. In keeping with this, three categories of individual have been proposed:

  • Those who are conclusively non-UK-resident. People in this category will be those who:

– were resident in the UK in at least one of the previous three tax years but present in the UK for less than 10 days in the current tax year;

– were not resident in the UK in any of the past three tax years and present in the UK for less than 45 days in the current tax year; or

– have left the UK to take up full-time work abroad and are present in the UK in the current tax year for less than 90 days, of which 20 days or less were spent working in the UK.

  • Those who are conclusively UK-resident. People will be in this category if they:

– spend more than 182 days in the UK in a tax year;

– have a home/homes in the UK in a tax year; or

– carry out full-time work in the UK in a tax year.

  • Individuals who are neither conclusively non-UK resident nor conclusively UK resident. Their tax residence will be determined first by considering the number of days they spend in the UK in a tax year and, in light of that, applying certain connecting factors to them (see below). In general, the fewer days an individual spends in the UK, the more the number of connecting factors that must apply for them to be UK tax resident.

The first two categories seem relatively straight-forward. The rules are largely numbers based and clearly stated and where an individual could fall within both categories, then non-residence status will prevail.

The more detailed changes to the rules on residence are in relation to the third category. For the this category the new test will take into account both time spent in the UK and the other connections the individual has with the UK.

It is also intended that clear rules will be set out for so-called arrivers – individuals who were not UK resident in any of the three previous tax years – and leavers – those who were resident in at least one of the previous three tax years.

The category three test will effectively involve running through a checklist of connecting factors. Whereas working out residence currently involves weighing up different factors, in the future it will be necessary to first do some counting of days spent in the UK. Then, depending on the results, it will be necessary to apply other connecting factors to determine if the individual is UK resident.

These factors include:

  • the presence of a UK- resident family;
  • substantive UK employment, which means working in the UK for 40 or more days in the tax year, a working day being one on which three or more hours of work is undertaken;
  • having accessible accom-modation in the UK; and
  • spending 90 days or more in the UK in either of the two tax years prior to the tax year in question.

The category three test effectively applies only to those individuals whose residence status is not determined by either of the first two tests and, therefore, whose circumstances are less straightforward.

This test reflects the principle that the more time someone spends in the UK, the fewer connections they can have with the UK if they want to be non-resident. A kind of sliding scale will operate. It also incorporates the principle that residence status should adhere more to those who are already currently resident than to those who are not.

Under this third test an individual would need to compare the number of days they spend in the UK against a small number of clearly defined connection factors. Individuals who know how many days they spend in the UK and how many relevant connection factors they have should then find it straight-forward to assess whether they are resident or not.

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