New Residence rules for individuals
As you are probably aware from 06/04/2013 UK government implements new tax rules which would regulate tax residency matter. We believe that these rules make a tax residency legislation more clear and easy to use in order to establish tax residency of a particular individual. It is worth to mention that under current legislation there is no statutory definition of "residence". Instead, it takes its normal, everyday meaning. That interpretation is quite subjective and caused many complications in the past. Tax advisers have been expecting below summarised news for quite a while. We would like to stress that it is still considered to be as draft legislation, which would be finally announced in the Budget in March 2013. The government issued a consultation document on 17 June 2011, along with draft legislation in December 2011. Second consultation document was published in June 2012 and we are expecting final draft to be published in the forthcoming Budget. The new tax residency legislation would be effective from new tax year for individuals (06/04/2013).
Three tests would be introduced to determine the position of the individual.
- automatic overseas tests
- automatic UK test
- sufficient ties tests
If the individual qualified as non UK tax resident under automatic overseas tests, he / she does not require to comply with automatic UK or sufficient ties tests. If the tax position of individual is not clear under automatic overseas test, he / she needs to refer to the next test and comply with automatic UK test and sufficient ties test.
In order to be definitely non resident in the UK under automatic overseas test, the individual should comply with below stated conditions:
- resident in the UK for one or more of the 3 tax years preceding the year
- and spending less that 16 days in the year in the UK
- resident in the UK for none of the 3 years preceding the year
- and spending less than 46 days in the year in the UK
- working full time overseas for the year
- spending less than 91 days in the year in the UK
- and having no more than 21 days in the year on which the individual does more than 3 hours work in the UK
As per working full time overseas, we would like to note that it can be full time employment or combination of various jobs.
As we stated above if an individual is not able to indentify his / her tax residency status in the UK under automatic overseas test, the person requires to apply next test, which is automatic UK test.
Under this test, the following rules are applicable:
- spending 183 days or more in the tax year in the UK; or
- having only one home which is in the UK
- working full - time in the UK for a period of 276 days
- have died in the year after being a resident in the UK under the automatic resident test for each of the previous 3 tax years.
The last test in presented hierarchy is sufficient ties test, which represents the below summarised factors (ties).
- a family tie
- an accommodation tie
- a work tie
- a 90 day tie and
- a country tie
We would like to briefly touch above stated ties in more details.
Family ties represents if an individual has a relevant relationships with another person who is a resident in the UK for that tax year. As you can see it can be interpreted very broadly. So government has corrected their position on it, saying that a relevant relationship means husband or wife or civil partners if they are not separated; living together as husband and wife or, as civil partners, children under 18. Special rule is applied for children under 18 years old, who are on full time educational basis in the UK. Those children are treated as non residents in the UK, if time spent in the UK outside the academic terms is less than 21 days. Also it is beneficial to mention that a child in the UK can be a family tie for individual, but if the parent sees his / her child for less than 60 days in the year, it would not be considered as above stated tie.
As per residential property concern, if this property is accessible to be used as a place of residence, and it is used by individual in the year for at least one night, or in case of homes of adult "relatives" at least 16 nights, it would qualify for individual accommodation tie.
It's very important to consider work tie. if individual works in the UK for at least 40 days (whether continuously or intermittently) in the year, it would be considered as a work tie. Working in the UK for a day, means doing more than 3 hours of work. Special rules are applied for workers of the transportation industry, who obviously can do more than 3 hours per day work in the UK but they are remained to be non UK resident for tax purposes and are being regulated in the respect differently.
90 day tie is regulated as following:
- more than 90 days in the UK in the tax year preceding the year in question, or that tax year before that tax preceding year, or in each of those tax years.
- If in the UK at the end of the day - counts as a day in the UK
- Ignore transit days
- Ignore "exceptional circumstances" up to 60 days maximum
- even if not in the UK at the end of the days - counts if
- 3 UK ties
- more than 30 days in the UK but not at the end of the day
- resident in one of the 3 proceeding tax years
- such days in excess of 30 counts as UK days
- this deeming rule does not count in deciding if 90 day test is satisfied for the purposes of the 3 ties in this test
- the deeming rule does not apply to other countries.
Last tie is country tie, which basically means that there is no other country in which more days ended that in the UK.
Separate day counting applies for arrivers and leavers.
Arrivers (resident in none of preceding 3 tax years)
- non resident - fewer than 46 days
- 46 - 90 days + 4 factors
- 91 - 120 days + 3 factors
- 121 - 182 days + 2 factors
- 183 days or more
Leavers (resident in none of preceding 3 tax years)
- non resident - fewer than 16 days
- 16 - 45 days + 4 factors
- 46 - 90 days + 3 factors
- 91 - 120 days + 2 factors
- 121 - 182 days + 1 factors
- 183 days or more
Split Year treatment would be available for certain group of taxpayers but with some further limitation. Concept of ordinary residence is abolished with effect from 06/04/2013. Specific statutory regime would replace the ordinary tax resident status.
The new rules will eliminate for individuals the possibility of creating artificial short periods of non-residence, during which they receive a large amount of income (which accrued during periods of UK residence) free of UK tax and then bringing the income back into the UK tax free.
Above stated rules would help individuals to use tests to self-assess their residence status. There are still some detailed points to iron out but the legislation is definitely heading in the right direction. The aim is tests that delivers certainty, produces clear results and is as simple as possible.
We provide this information without liability and would always recommend a full consultation for individuals in order to establish their residence status in the UK.
If you would like to arrange a consultation please contact us and we would be happy to assist you on this matter.
Posted on Feb 25, 2013.