Last week, as a result of the publicity given to the recent Gaines-Cooper case heard by the Special Commissioners, I started to look at residence, ordinary residence and domicile.
In connection with residence, I initially mentioned the 183 days and 90 days rules As well as residence, though, we also need to consider ordinary residence when looking at UK income tax and CGT.
An individual is ordinarily resident in the country in which he is normally resident, even though he may not be technically resident in that country in a particular tax year.
An individual is regarded as ordinarily resident in the UK if this is his normal place of residence. This, therefore, implies a degree of continuity.
The concept of ordinary residence is, for example, particularly important to individuals who are habitually resident in the UK year after year but who leave the UK for, say, a long holiday or for an otherwise extended period.
In such a case, even if the individual does not set foot in the UK during a tax year (and so will not be resident in that particular tax year), HM Revenue & Customs will treat them as ordinarily resident in the UK for that year.
In short, an individual will continue to be ordinarily resident in the UK unless they have gone abroad to take up permanent residence elsewhere. Permanent in this context is interpreted by HMRC to mean intended overseas residence of at least three tax years.
An individual who is resident in the UK under the 183 days rule will not automatically be ordinarily resident in the UK. However, an individual who is resident under the “over 90 days” average test will also, generally, be ordinarily resident unless they can prove otherwise.
By concession, HMRC considers that an individual who goes abroad with a fulltime contract of employment capable of lasting a complete tax year will normally be regarded as both non-resident and non-ordinarily resident from the day following departure.
The Gaines-Cooper case has, however, illustrated the potential danger in relying on the application of concessions and practices. We are reminded of this by “words of warning” incorporated into HMRC booklet IR20.
If a person leaves the UK for a purpose other than full-time employment abroad, they may be provisionally treated as not resident and not ordinarily resident if they can produce evidence of leaving the UK permanently (for example, selling their home in the UK and buying one abroad).
The provisional ruling will be confirmed when their absence has spanned a complete tax year. If evidence is not available at the start of the absence, they will provisionally be treated as remaining UK resident for a period of up to three years and, if their visits have averaged less than 91 days in a tax year, they will be treated as not resident and not ordinarily resident from the day after the date of departure.
If they have property in the UK available for their use, they will need to be able to show that retaining the property is consistent with their stated intention of living permanently abroad.
An individual who arrives in the UK intending to remain for three years or more or to live here permanently will also be considered ordinarily resident from the day of arrival. This treatment may be revised if the circumstances change and the UK stay was, in fact, short term. Those whose intended stay is less than three years would not initially be regarded as ordinarily resident. Someone who does not know how long they are going to stay will be regarded as ordinarily resident from the start of the tax year after that in which the third anniversary of his arrival falls or earlier if it becomes clear before then that they intend to stay on a long-term basis or if they remain in the UK and purchases accommodation in the UK or lease it for a period of three years or more.
While, as indicated above, residence is particularly relevant to income tax, both residence and ordinary residence are relevant for capital gains tax. If an individual ceases to be resident in the UK but is still treated as UK ordinarily resident, they will remain liable to UK capital gains tax in respect of gains made on disposal of his worldwide assets, whether or not gains on overseas assets are remitted to the UK (the remittance basis will apply if the individual is non-UK domiciled).
Only when they cease to be ordinarily resident as well as resident will they be outside the scope of UK CGT subject, of course, to the temporary non-residence rules.