Statutory residence for tax purposes - sponsored feature

Deloitte experts advise on personal tax

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Left to right: Gordon Rowell, Rob Morgan, David Hicks, Stephen Hall

Introduction

The statutory residence test has now been with us for two years and has helped to provide individuals with more objective criteria by which to decide upon their tax residence position (when compared with the old rules) and to give all parties concerned greater certainty as to their UK tax status. However, this has come at the cost of some very detailed rules, of which an outline is set out below. It must be stressed however, that the rules are complex and full professional advice should be taken in relation to specific circumstances.

Basic framework

The test has three main constituent parts.

The first two parts look at more straightforward circumstances where an individual will be treated as ‘automatically overseas’ or ‘automatically resident’. The third test applies where neither of the first two tests are met and a wider range of factors must be considered.

The ‘automatic overseas’ test

The first part is the 'automatic overseas test', which allows an individual to spend up to 15 days in the UK in the year without being treated as UK resident (or up to 45 days if he was non-resident in the previous three tax years). Those working abroad full-time will also be automatically non-resident provided fewer than 91 days are spent in the UK (including fewer than 31 UK workdays).

The ‘automatic residence’ test

If the individual does not meet the first test, he must consider the second test which is the 'automatic residence test'. Broadly, an individual will be treated as automatically resident in a tax year if he is present in the UK for 183 days or more, has his only home in the UK for at least 91 consecutive days or works full-time in the UK.

The ‘sufficient ties’ test

If neither of these tests is satisfied, the third test is considered. This is the 'sufficient ties test' whereby the individual's ties to the UK are considered in conjunction with his UK visits. The ties include family ties, available accommodation, substantive UK work, spending more than 90 days in the UK in either of the previous two years and, in the case of those leaving the UK, time spent in the UK exceeding time spent in another country. The more ties an individual has, the fewer days of UK presence are allowed before being treated as resident.

The ties are favoured for individuals arriving in the UK (i.e. not UK resident in the previous three tax years) over those leaving, broadly allowing arrivers more time in the UK in comparison with leavers with the same number of ties.

The trade-off between UK ties and days of presence (for arrivers and leavers) is summarised as follows:

Days in UK Minimum number of UK ties which make individuals coming to the UK resident (i.e. not UK resident in the previous three tax years) Minimum number of UK ties which make individuals leaving the UK resident
< 16 days Always non-resident Always non-resident
16 - 45 days Always non-resident 4
46 – 90 days 4 3
91 – 120 days 3 2
121 – 182 days 2 1
> 182 days Always resident Always resident

The ties include family connections, available accommodation, substantive UK work, 90 days in the UK (over the last two years) and a country tie based on whether the individual spends more time in the UK than any other country. The rules regarding these ties are, in themselves, very complex and advice will need to be sought to ensure that incorrect assumptions regarding the meeting of these ties are not made.

Example

If a wealthy Italian individual (who has never been resident in the UK) owns a house in the UK, (as well as several other houses worldwide) he will be able to make regular visits of up to 45 days per year without being treated as UK resident, as he will satisfy the automatic overseas test. If he spends longer here and so does not meet the tests for 'automatic overseas', he will then need to consider whether he meets the test for automatic residence. Assuming he does not meet that test, the number of days he has available to spend in the UK will be determined by the ‘sufficient ties test’.

As he owns a property in the UK (which we assume is available to him for a continual period of at least 91 days during the year and he spends at least one night there in the 2015/16 tax year) he will have met the accommodation criteria “tie” for the basis of the SRT.

He has no further ties with the UK for the purposes of the SRT as his family live in Italy and he doesn’t perform substantive work in the UK (40 days or more in the tax year).

As such, our Italian has one tie with the UK and is therefore able to spend up to 182 days in the UK in the 2015/16 tax year before he is treated as UK resident for UK tax purposes.

However, if he spends more than 90 days in the UK in 2015/16 (even if he spends insufficient days to be treated as UK resident) he will have created another tie for consideration in 2016/17, and so will only be able to spend up to 120 days in the UK in 2016/17 before he is treated as UK resident. In either case, had the relevant limit been exceeded, our individual would have been treated as UK resident for tax purposes for the relevant tax year, meaning that he would be chargeable to tax in the UK against his worldwide income for that year.

Split year treatment

Residence status is usually considered for the tax year as a whole, although there are provisions in place for split year treatment to apply in certain circumstances. These provisions essentially allow for the tax year to be split between UK and overseas parts and they are will usually apply to many arrivers and leavers. It should be noted that the rules regarding this are very complex.

Conclusion

Overall, the statutory residence test is a positive introduction, as it offers a great deal more certainty to internationally mobile individuals who need to determine their residence status than was available before. This increased level of certainty allows individuals to make active choices as to the number of ties they have with the UK and are therefore in a position to plan the number of days that they spend here in the UK

However, there is a great deal of complexity in the rules and as such, advice should be sought if any of this applies to you.

What to do next

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Any investment mentioned in this article is for illustrative purposes only and is not intended as investment advice. Any tax advantages mentioned are based on current legislation accurate at the date of print which is subject to change. The opinions expressed in this document are not the views held throughout Brewin Dolphin. No Director, representative or employee of Brewin Dolphin accepts liability for any direct or consequential loss arising from the use of this document or its contents

Brewin DolphinBrewin Dolphin

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Business & IP Centre NewcastleDeloitte

Deloitte is a leading professional services firm, with an office in Newcastle, which provides audit, consulting, financial advisory, risk management, tax and related services. Its diverse North East client base ranges from owner-managed businesses to multinational corporations.

For more information, please visit www.deloitte.com


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