20 June 2011 - Statutory residence test proposals unveiled

HM Treasury and HMRC have published a consultation document setting out their proposals for a statutory residence test for individuals. This will apply for income tax, capital gains tax and inheritance tax purposes, but not for national insurance purposes.

It is intended that the statutory test will take effect from 6 April 2012, with no transitional period, the current rules still applying for all earlier tax years.

The test will consist of three parts:

Part A - Conclusive non-residence

An individual who meets any of the following three conditions will be conclusively non-resident:

• They were not resident in the UK in all of the previous three tax years and are present in the UK for fewer than 45 days in the current year; or
• They were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current year; or
• They leave the UK to carry-out full time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B - Conclusive residence

An individual who meets any of the following three conditions will be conclusively resident:

• They are present in the UK for 183 days or more in a tax year; or
• They have only one home and that is in the UK (or have two or more homes all of which are in the UK); or
• They carry out full-time work in the UK.

If an individual satisfies one of the conditions in both Part A and Part B, Part A will take precedence, and they will be treated as non-resident. 

Part C - Other factors

If an individual's residence position is not determined under Parts A and B, it will be determined by reference to the following UK connection factors: 

• The presence of family in the UK; 
• The availability of accommodation in the UK which is used during the tax year; 
• Substantive (but not full time) work in the UK; 
• Presence in the UK for more than 90 days in either of the previous two years;  and
• More time spent in the UK than in any other single country.

These factors will be taken into account in conjunction with the number of days spent in the UK in a tax year, with different tables applying for individuals arriving in and leaving the UK:

Arrivers (i.e. non-resident in all of the previous three tax years): 

Days spent in UK	Impact of connection factors on residence status
Fewer than 45 days	Always non-resident
45–89 days	Resident if individual has 4 factors (otherwise not resident)
90–119 days	Resident if individual has 3 factors or more (otherwise not resident)
120–182 days	Resident if individual has 2 factors or more (otherwise not resident)
183 days or more	Always resident

 

Leavers (i.e. resident in one or more of the previous three tax years):

Days spent in UK	Impact of connection factors on residence status
Fewer than 10 days	Always non-resident
10-44 days	Resident if individual has 4 factors or more (otherwise not resident)
45–89 days	Resident if individual has 3 factors or more (otherwise not resident)
90–119 days	Resident if individual has 2 factors or more (otherwise not resident)
120–182 days	Resident if individual has 1 factor or more (otherwise not resident)
183 days or more	Always resident

Interactive tool

HMRC has also published a draft version of an interactive online tool to help individuals determine whether or not they are UK-resident in a particular tax year.

Points to note:

• For individuals who  leave the UK to carry-out full time work abroad, the number of permitted working days in the UK each year without affecting non-resident status will be doubled to 20, but a working day is defined as one in which three or more hours' work is carried out.
• The test will open up opportunities for tax avoidance by short absences from the UK, so there will be a rule that certain types of investment income received during an individual’s absence will continue to be taxable unless the non-residence lasts at least five tax years, in line with the current rules for capital gains. This would include dividends paid by closely controlled companies that reflect profits that have built up during a period of residence and which are then taken out during a short period of non-residence, but not normal types of regular investment income, such as bank interest or dividends from listed companies.
• Depending on the outcome of the consultation, the concept of ordinary residence will either be retained and put on a statutory basis, or it will be abolished for all tax purposes except overseas workday relief. The latter option would represent a considerable simplification and remove much uncertainty, but it would mean that a small number of individuals who are UK domiciled but not ordinarily resident would no longer be able to claim the remittance basis in respect of foreign investment income. 

 Conclusion

A statutory residence test is long overdue, and it will bring much-needed clarity and certainty. However, it is unfortunate that the current rules will continue to apply for some time, for the purposes of determining residence for tax years up to 2010/11.

Responses to the consultation should be sent to HMRC by 9 September 2011.

Please contact Ashley Hill to discuss the proposals.