Residency Test Moves Into Automatic

Last week draft legislation announced, amongst many other things, a statutory test for UK residency to take effect from 6th April 2013.  Up until now 'residence' has not been defined in tax legislation and the rules of residency have been laid out in HMRC's booklet 'HMRC 6'. A move therefore to clearly define what amounts to UK residency is to be welcomed.

Although the current draft legislation could be amended before Finance Bill 2013 receives Royal Assent next year, HMRC has published its guidance as to how they interpret the legislation and its application to individuals.

Basic Rule

A person will be resident in the UK if they meet either the automatic residence test or the sufficient ties test.

Somebody who does not meet either of these tests will be not resident for UK tax purposes for that tax year.

Automatic Residence Test

This test will apply to a person in a tax year if they meet any of the automatic UK tests and they do not meet any of the automatic overseas tests.

Automatic overseas tests

Where a person meets any one of the following three tests they will be considered automatically non-resident for a tax year.

Test 1

Resident in the UK for one or more of the three tax years preceding the tax year and spend fewer than 16 days in the UK in the actual tax year.

Test 2

Not resident in the UK for the three tax years preceding the tax year and spend fewer than 46 days in the UK in the actual tax year.

Test 3

Work full-time overseas for the tax year without any significant breaks from that overseas work and:

• spend fewer than 91 days, excluding deemed days, in the UK in the tax year; AND
• the number of days in the tax year in which a person works for more than 3 hours in the UK is less than 31.

If none of the tests apply to an individual then they must then look at the automatic UK tests.

Automatic UK tests

Anyone satisfying any one of the following tests will be classed as automatically UK resident.

Test 1

Spending 183 days or more in the UK in the tax year.

Test 2

Have a home in the UK.

This test will be met where:

• a person has a home in the UK for a period of more than 90 days;
• a person is present in that UK home on at least 30 separate days during the tax year; AND
• whilst having that UK home there is a period of 91 consecutive days some or all of which falls within the tax year in question when a person:

1. has no overseas home; OR
2. has one or more homes overseas in which the person is not present for more than 30 days during the tax year.

Someone who has more than one home in the UK will need to consider each of their homes separately to establish whether or not they meet the test. The test is triggered if any one of such homes meets the criteria.

Test 3

Working full-time in the UK for 365 days or more with no significant break from UK work and:

• all or part of the work period falls within the tax year; AND
• more than 75% of the total number of days in the tax year are spent working more than 3 hours per day.  

Sufficient Ties Test

Where an individual does not meet any of the automatic overseas or UK tests they then have to consider if they have sufficient ties to the UK to make them resident. This test involves looking at:

• family
• accommodation
• work
• number of days spent in the UK
• whether a person spends more time in the UK than anywhere else

Split Year Treatment

Under the statutory residence test (SRT) a person is either UK resident or non-UK resident for a full tax year and at all times for that tax year. There are circumstances however that allow the tax year to be split into two parts:

• a UK part in which an individual is charged to UK tax as a UK resident; and
• an overseas part in which, as a general rule, income will not be taxed here. This will however depend on the source of income.

Split year treatment already exists but this will be extended and will apply in the following circumstances:

1. Going to work full-time overseas;
2. Joining a partner who starts full-time work overseas;
3. Leave the UK to live abroad;
4. Come to live or work full-time in the UK; and
5. Start to have a home in the UK.

Temporary Period of Non-residence

For certain charges to tax, there may be periods where an individual is regarded as being temporarily non-resident. In these circumstances, certain income and gains falling in the period of non-residence, such as pensions, capital gains, offshore income gains, may be taxed in the UK

The Statutory Residence Test guidance (PDF) contains numerous examples of how the tests will apply in given situations as well as providing detailed definitions of:

• What counts as a day spent in the UK and the exceptional circumstances;
• The deeming rule for counting days spent in the UK;
• 'Work'  – activities, hours and significant breaks;
• Temporary period of non-residence;
• Home and accommodation; and
• Family

Where somebody wishes to determine their UK residence status in the tax years 2013-14, 2014-15 and 2015-16 they will be able to elect, in writing to HMRC, to have their residency status for years prior to 6th April 2013 determined by reference to the SRT. This will not change the tax position for the years to which the election applies as the election is solely for the purpose of establishing residency status for the years 2013-14, 2014-15 and 2015-16.

So much for tax simplification but this is probably a case where the rules need to be spelled out in order to bring as much certainty to taxpayers as possible.