The statutory residence test

Residence is a hugely important concept for the taxation of individuals, as it has a profound effect on whether, and to what extent, they are subject to tax. In this note we review the very complex rules which apply to determine residence for UK tax purposes.

Background

Prior to 6 April 2013, the rules for determining whether an individual was resident in the UK for tax purposes were largely based on cases decided around a hundred years ago. These cases had become hard to apply in practice, particularly given increases in international mobility. It was therefore difficult in some situations for an advisor to give a conclusive view on whether a client was, or was likely to become or remain, UK resident.

In response to this problem, the UK government introduced a statutory residence test (the SRT), which has been in force since 6 April 2013.  The SRT is in some respects an improvement on the old rules, since it can be used to determine with much greater certainty when an individual will be regarded as UK resident.  In particular, it avoids ambiguities under the old rules about what a UK resident individual needs to do, in terms of spending less time in the UK and/or severing links to the UK, to become non-UK resident.

However, aspects of the SRT are hugely complicated, and the tests can be very difficult to apply in practice. If the intention was to produce a statutory test of residence which would be easy for individuals to use, without legal advice, the SRT must be regarded as a failure.

Structure of the SRT

The SRT determines residence status on a tax year by tax year basis.  UK tax years run from 6 April one calendar year to 5 April the next.Under the SRT, an individual may be:

• conclusively non-UK resident, if certain conditions are met; or
• conclusively UK resident, if certain other conditions are met.

If the individual does not meet the conditions to be treated as conclusively resident or non-resident, his status is determined by the so-called ‘sufficient ties’ test.  This takes into account whether he has been resident in previous tax years, the number of days he spent in the UK in the relevant tax year, and the number of ‘ties’ to the UK that he had in the relevant tax year.

Simplified summary of the residence tests

Split year treatment

Under 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). 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 (which is preceded by, or followed by, a tax year of non-UK residence). If, applying the SRT, an individual is non-UK resident for a tax year, the split year rules are irrelevant for that tax year.

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 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, if a UK resident individual is taxable on income received by a trust, as the trust’s settlor, this will be the case throughout the tax year – notwithstanding split year treatment.  In addition, 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 where it is thought that split year treatment may be available. It should not be assumed that this treatment will necessarily apply, as the conditions are very specific. 

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, which may be before the individual first set foot in the UK.

Simplified summary of the split year rules

Living with the SRT

The majority of UK taxpayers have been unaffected by the transition from the old law of residence to the SRT.  However, the SRT poses challenges to a minority of individuals who are internationally mobile and who split their time between the UK and other countries. Such individuals may be concerned to retain UK resident status, as this may be preferable to being non-UK resident and potentially increasing the risk of being deemed resident in another country.  Conversely, they may be seeking to ensure that they remain non-UK resident, or to cease being UK resident.

For individuals in these categories, the SRT often imposes substantial burdens in terms of forward-planning and record-keeping.  Personal records may need to cover midnights in the UK, days of presence in the UK, days of presence at UK homes, days of presence at foreign homes, hours worked in the UK, hours worked outside the UK, etc.; and the prudent taxpayer will also retain evidence to back up such records in case of challenge. 

It is fair to say that the clarity provided by the SRT, compared to the old law of residence, has come at a huge cost in terms of complexity; and that the SRT has increased, rather than decreased, the need for individuals in these categories to obtain expert professional advice.