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Tony Wickenden: HMRC residence tax tests

HMRC reviews legislation in relation to the taxation of controlling persons

Tony Wickenden Tax Planning Technical Area

Regarding the proposed new legislation in relation to the taxation of controlling persons, no specific new legislation is proposed at this stage. In the Autumn Statement the Government announced that, following representations on the consultative document, it does not intend to proceed with the proposal to tax at source those who meet the definition of ‘controlling person’. Instead, it will deal with potential tax loss in this area by extending the existing IR35 legislation.

The statutory residence test has been a relatively long running saga. The tax residence rules which underpin a person’s tax liability are vague, complicated and perceived to be subjective. In certain circumstances it is not possible for a person to be sure whether they are tax resident in the UK or to know what activities or circumstances would make them tax resident. Tax and professional bodies and other interest groups have long argued that this is unsustainable and unfair to the taxpayer.

For this reason, for some time HM Revenue and Customs has let it be known that it would like to introduce a statutory definition of tax residence for individuals. In effect a statutory residence test.

The Government has stated that it is committed to introducing a statutory test that is transparent, objective and simple to use. This will enable taxpayers to assess their residence status in a straightforward way. It also intends that the tax residence status of the vast majority of people will be unaffected by the introduction of a statutory test.

With this in mind HMRC issued a consultation document for general comment. Following consideration of representations, HMRC announced that a statutory residence test will be introduced in 2013/14. In addition to setting down in detail how a person’s residence status should be determined, the legislation will:

  • Provide for a tax year to be split into a UK part and an overseas part in certain circumstances; and contain new rules for the taxation of certain income and gains arising during a period of temporary non-residence.
  • Remove the concept of ‘ordinary residence’ for tax purposes as far as possible. In particular, overseas workday relief (which is used by remittance basis users who have been non-UK resident for 3 tax years and come to work in the UK whilst retaining some duties abroad) will, in future, apply for a fixed period regardless of whether or not the individual intends to settle in the UK.

Still on “offshore matters” I would like now to consider, in connection with inheritance tax, excluded property trusts.

When a person, who is non-UK domiciled for IHT purposes, establishes a trust ni is, and remains, invested in overseas assets, then those trust assets will be excluded property for IHT purposes – irrespective of whether the settlor later acquires a UK domicile for IHT purposes.

Since 2002, this rule also applies where the trust property is UK authorised unit trusts or Oeics. However, due to a technical flaw in the legislation, if the trustees of a discretionary trust hold UK situs assets and reinvest these in offshore investments, there will be no IHT exit charge whereas if they reinvest in UK unit trusts and Oeics there will be a possible IHT exit charge.

The legislation will be amended so that it reflects the original intended position. The legislative change will be retrospective to October 2002.

That UK authorised collectives can constitute excluded property for IHT might come as a surprise for some but it has been so for a while now. Holding these ‘inside an excluded property trust’, which can be UK or offshore resident, can represent very effective IHT planning.

Tony Wickenden is joint managing director at Technical Connection

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