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Split year treatment

For individuals moving to or moving from the UK, the rules on split year treatment can be very useful, as they may provide valuable relief from UK tax on income or gains. However, the rules are complex and such relief is not always available. Even where it is available, split year treatment may not provide a complete shield against UK taxation.

Background

Under the UK’s statutory residence test (the SRT), an individual is either UK resident for a tax year (in its entirety) or non-UK resident for that tax year (in its entirety). UK tax years run from 6 April in one calendar year to 5 April in the next. Generally, the result of being resident for a tax year is that the individual is subject to income tax and capital gains tax (CGT) throughout the tax year (possibly subject to the remittance basis, if the individual is non-UK domiciled).

However, under the SRT, an individual can in certain circumstances rely on what is called split year treatment. Such treatment can only apply in a tax year of UK residence. That tax year must be preceded by, or followed by, a tax year of non-UK residence.

How split year treatment works

If, in a tax year of UK residence, split year treatment is available, the tax year can be divided into two parts. In one of those parts (the UK part), the individual is taxable as a resident, whereas in the other part (the overseas part), the individual is treated (broadly) as if he were non-UK resident. Generally, the effect is that the individual is only within the charge to income tax and CGT in the UK part of the tax year.

For example, an individual becoming resident in the UK for the first time who has not previously had a home in the UK may, if certain conditions are met, be able to split the first tax year of residence, so that he is not within the charge to income tax and CGT for the period prior to the acquisition of a UK home.

However, where protection from UK tax is available by virtue of split year treatment, such protection is not always complete.  For example, split year treatment does not necessarily protect against tax charges on distributions or benefits received from a trust in the overseas part of a split year.

The split year rules are complex, and specific advice should be sought. It should not be assumed that split year treatment will necessarily apply.  Where split year treatment is not available, the individual will be taxable in the UK (subject, possibly, to relief under a double taxation treaty) throughout the UK tax year.  In the case of an individual becoming resident in the UK, the effect of this can be to ‘back-date’ the commencement of residence. Residence will be treated as having commenced on the 6 April at the beginning of the relevant tax year. This may be before the individual first set foot in the UK.

The split year rules: a simplified summary


Split year rules that may apply in a year of DEPARTURE 
(ie a tax year of UK residence before a tax year of non-UK residence)

Scenario Broad effect of split year treatment

Starting full-time work overseas

The individual commences full-time work outside the UK in the tax year, and the next tax year is a tax year of non-UK residence because the individual works full-time outside the UK    

Income/gains are non-taxable from the commencement of full-time work outside the UK (but taxable up to that date)

Partner of someone starting full-time work overseas

The individual (A) is the spouse or civil partner of another individual (B) who qualifies for split year treatment under Case 1, and A moves overseas to accompany B

Income/gains are non-taxable from date of the move overseas (but taxable up to that date)

Ceasing to have a home in the UK

It becomes the case partway through the tax year that the individual no longer has any home in the UK, and thereafter he/she spends no more than 15 days in the UK, and within six months of ceasing to have any UK home he/she becomes tax resident in another country

Income/gains are non-taxable from date on which the individual ceases to have a UK home (but taxable up to that date)


Split year rules that may apply in a year of ARRIVAL
(ie a tax year of UK residence following a tax year of non-UK residence)

Scenario Broad effect of split year treatment

Starting to have a home in the UK only

It becomes the case partway through the tax year that the individual’s only home is in the UK

Income/gains are taxable from the date on which this becomes the case (but non-taxable up to that date)

Starting full-time work in the UK

The individual commences full-time work in the UK

Income/gains are taxable from the commencement of full-time work in the UK (but non-taxable up to that date)

Ceasing full-time work overseas

The individual ceases to work full-time outside the UK, having been non-UK resident in the previous tax year because he/she worked full-time outside the UK, and having been resident in the UK in one or more of the four tax years before that

Income/gains are taxable from the cessation of full-time work outside the UK (but non-taxable up to that date)

Partner of someone ceasing full-time work overseas

The individual (A) is the spouse or civil partner of an another individual (B), who qualifies for split year treatment under Case 6, and A moves to the UK to accompany B

Income/gains are taxable from the date of the individual’s move to the UK (but non-taxable up to that date)

Starting to have a home in the UK

The individual acquires a UK home for the first time in the tax year, and continues to have a home in the UK until the end of the following tax year

Income/gains are taxable from the acquisition of the UK home (but non-taxable up to that date)

For more information please contact Dominic Lawrance or Mark Summers in our Private Client team.

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