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
| (1) THE TESTS FOR ‘CONCLUSIVE’ NON-UK RESIDENT STATUS | |
| Resident in any of the three preceding tax years? | Non-resident if … |
| No | fewer than 46 days in the UK |
| Yes | fewer than 16 days in the UK |
|
Full-time work outside the UK Non-UK resident if in the tax year:
|
|
|
If none of the above conditions are met, then go on to …
|
| (2) THE TESTS FOR ‘CONCLUSIVE’ UK RESIDENT STATUS |
| Resident if 183 days or more in the UK |
|
Sole/main home in the UK Resident if:
(a) the individual has no home outside the UK; or (b) the individual does have a home outside the UK, but in the relevant tax year he is present at the non-UK home on fewer than 30 days |
| Full-time work in the UK
Resident if, in a 365 day period which overlaps to some extent with the tax year:
|
|
If none of the above conditions are met, then go on to …
|
| (3) THE ‘SUFFICIENT TIES’ TEST FOR UK RESIDENCE | ||
|
Relevant ties:
|
||
|
Resident in any of the three previous tax years? |
Yes |
No |
|
Number of days in the UK required for residence (or permitted if residence is to be avoided): |
|
|
|
With 4 or more ties |
16 (15) |
46 (45) |
|
With 3 ties |
46 (45) |
91 (90) |
|
With 2 ties |
91 (90) |
121 (120) |
|
With 1 tie |
121 (120) |
183 (182) |
| KEY DEFINITIONS IN THE SRT | |
|
Day |
Generally this means any day on which the individual is physically present in the UK at midnight. In general, days on which the individual is present in the UK are not counted if the individual is not present in the UK at midnight. However, there is an anti-avoidance rule which applies in certain circumstances, in which case a day on which an individual is physically present in the UK at any point, even if not at midnight, will be counted. |
|
Home |
This means a dwelling used with a sufficient degree of permanence to be regarded as a home, which can include a property occupied under a short-term tenancy, but does not include a holiday home or weekend home. The concept of a home differs from the concept of accommodation, which can include a holiday or weekend home, or a relative’s home which the individual is permitted to use (and sometimes even a hotel, if the same hotel is used for an extended period).
|
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
|
Case |
Scenario |
Effect of split year treatment (subject to certain exceptions) |
|
Split year rules that may apply in a year of DEPARTURE (i.e. a tax year of UK residence before a tax year of non-UK residence) |
||
|
1 |
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) |
|
2 |
Partner of someone starting full-time work overseas The individual (A) is the spouse or civil partner of an 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) |
|
3 |
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 the individual spends no more than 15 days in the UK, and within 6 months of ceasing to have any UK home the individual 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 (i.e. a tax year of UK residence following a tax year of non-UK residence) |
||
|
4 |
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) |
|
5 |
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) |
|
6 |
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 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) |
|
7 |
Partner of someone ceasing full-time work overseas The individual (A) is the spouse or civil partner of an 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) |
|
8 |
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) |
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.