Statutory Residence Test – Finance Bill 2013

28^th March 2013

As confirmed in the 2013 Budget, a statutory residence test will be introduced with effect from 6 April 2013. Ordinary residence will also be abolished for most tax purposes from this date.

How will the new residency rules affect our clients?

Clients who are already resident in the UK are unlikely to see their status change.

However, there will be a significant impact on persons claiming non-residency in the UK but retaining connections to the UK. The number of days such individuals can spend in the UK before becoming UK resident will be drastically reduced under the new rules.

Non residents who frequently visit the UK e.g. on business but who have no other connections to the UK are likely to be unaffected by the changes, provided that they are mindful of their days in the UK and the possibility of a favourite hotel constituting a connection.

The new rules will take effect from 6^th April 2013. The current rules will continue to apply for tax years prior to the introduction of the statutory test. Individuals will not be allowed to apply the new definition retrospectively to determine their residence status for prior years.

The most notable changes from the original proposals detailed in our Tax Bulletin released in June 2011 are as follows:

• The number of days required to determine tax residence
• An automatic residence test to cover the year of death
• Changes to what constitutes “a day” in the UK (the ‘deeming’ rule)

Subject to any further changes between now and Royal Assent in the summer, the new rules for most individuals (but not aircrew) are now as follows:

Summary of the New Rules for Residency

Automatic Tests of Non Residence

Individuals will be conclusively not tax resident in the UK if:

• they were UK resident in any of the 3 preceding tax years, but are present in the UK for fewer than 16 days in the current tax year and they do not die during that tax year;
• they were not UK resident in any of the 3 preceding tax years and are present in the UK for fewer than 46 days;
• they are “working” full-time overseas (without a “significant break” from work of 31 days or more) and spend fewer than 91 days in the UK, and spend fewer than 31 days “working” in the UK; or,
• in the year of death they spent fewer than 46 days in the UK and were not resident in the previous 2 tax years.

Automatic Tests of Residence

Individuals will be conclusively tax resident in the UK if:

• they are either present in the UK for 183 days or more in the tax year;
• their “only or main home” (determined by availability and presence there) is in the UK;
• they work full-time in the UK with no “significant break”; or,
• the year of death they had a home in the UK and one of the above tests was met in each of the previous 3 tax years.

Sufficient Ties Test

Individuals who do not meet any of the automatic tests can determine their residence status by reference to a “sufficient ties test”.  The number of ties defines how many days an individual can be in the UK without being UK resident depending on whether or not an individual is an “arriver” or “leaver”.

Arrivers have a more generous regime than leavers and are not subject to the deeming rule detailed below.

When deciding which table to use, an individual needs to ascertain his or her residence for the previous years. Under the draft legislation, taxpayers can elect to use the new rules when looking back to 2012/13, but the case law basis is to be used for previous years. This could create perverse results, but may possibly be to the taxpayer’s advantage.

The relevant ties for “arrivers” (persons who have not been UK resident in any of the preceding 3 tax years) are as follows:

• Your family (spouse/partner OR minor children) are UK resident;
• You have substantive (40 days or more) employment in the UK;
• You have “available accommodation” in the UK; and,
• You have spent 90 days or more in the UK in either of the previous two tax years.

Days spent in UK*	Impact of relevant ties
Less than 46 days	Always non-resident
46 to 90 days	Resident if individual has 4 ties (otherwise not resident)
91 to 120 days	Resident if individual has 3 ties or more (otherwise not resident)
121 to 182 days	Resident if individual has 2 ties or more (otherwise not   resident)
183 days or more	Always UK resident

*Note that the days are pro-rated where an individual claims split-year treatment.

Clearly when looking at e.g. a married couple or civil partners, the test could become circular when each party’s residence depends on the other’s status. In this situation, this tie can be ignored for the test.

The relevant ties for “leavers” (persons who have been UK resident in any of the preceding 3 tax years) are as above plus an additional connection will apply which is whether they have spent more days in the UK in the tax year than any other single country.

Days spent in UK*	Impact of relevant ties
Less than 15 days	Always non-resident
15 to 45 days	Resident if individual has 4 ties or more (otherwise not   resident)
46 to 90 days	Resident if individual has 3 ties or more (otherwise not resident)
91 to 120 days	Resident if individual has 2 ties or more (otherwise not   resident)
121 to 182 days	Resident if individual has 1 ties or more (otherwise not   resident)
183 days or more	Always UK resident

*Note that the days are pro-rated where an individual claims split-year treatment.

What is a “day in the UK”?

A day continues to be counted if the taxpayer is present in the UK at midnight, unless the individual arrives in the UK and leaves the next day and does not engage in any activity unrelated to their travel via the UK, in which case the day is not counted. Days spent in the UK for “exceptional circumstances” are also excluded from the day count, subject to a maximum of 60 days.

The additional deeming rule applies to leavers if the individual has at least 3 ties to the UK in a tax year and on more than 30 days in that tax year, the individual is present in the UK at some point during that day, but not at midnight (normally this would not count as a UK day), i.e. a leaver with 3 ties making regular day trips to the UK can only make 30 such trips before they are deemed to be actual UK days for the normal day count tests.

Ties

There are copious pages of legislation defining the various terms and so the clarity and simplicity hoped for with a statutory test are at risk here. If you are unsure whether or not you do have a tie to the UK, we recommend that you ask us for clarification.

For example, the ‘home’ test for automatic residence has 4 sub-conditions, including treating any accommodation available for a period of 90 days, and in which you stay for 30 days as being a home.  ‘Accommodation’ may be counted as a tie for the home test if it is ‘available’, i.e. even if an individual has no legal interest in the property, e.g. a hotel, or one’s parents’ home.  Regular visitors to the UK should vary their choice of hotel, since a gap of less than 16 days between bookings (not physical presence) in the same hotel will count towards the continuous period of availability.  There is however a sensible relaxation which allows an individual to stay for up to 16 nights at the home of a close relative before that property is treated as being ‘available accommodation’.

The definition of “work” is rather incongruous, a mere 3 hours constitutes a work day in the UK, and time spent travelling or training can also count as working in certain circumstances.

Split Year Treatment

Split year treatment will continue to be available in the years of arrival and departure from the UK, provided that an individual is resident in the UK in the tax year under the rules described above and the taxpayer falls into one of the following cases:

• Starting full-time work overseas – this applies where a taxpayer leaves the UK for full-time work abroad lasting at least one complete tax year, is non-resident the following tax year, and does not exceed the allowable work days ‘X’, or days of presence in the UK ‘Y’.  The figures for X and Y are pro-rated (X can range from 30 days to nil, and Y from 90 days to nil) depending on when the taxpayer leaves the UK.

• Accompanying spouse etc. – this applies to taxpayers accompanying their spouse, partner or civil partner, leaving the UK for full-time work overseas.  The conditions are broadly the same as for the working partner, except that instead of the X days condition, the accompanying spouse must spend more time in the non-UK home.

• Leaving the UK to live abroad – this applies to taxpayers who cease to have a home in the UK, spend less than 16 days in the UK in the remainder of the tax year following their departure, within 6 months of their departure establish a “sufficient link” with a country overseas, and are non-resident in the following tax year.

• Coming to live or work full-time in the UK – this applies to taxpayers who were not previously resident in the UK (and, for the year of arrival, do not meet the sufficient ties test in the period before arrival using pro-rated day thresholds) and for the rest of that year their only home(s) is in the UK or they have come to the UK to work full-time.

• Starting to have a home in the UK – this applies where a taxpayer who did not previously meet the pro-rated sufficient ties tests in a tax year then acquires a home in the UK during that tax year and is resident in the UK for at least one complete tax year (i.e. is resident for the following tax year too).

The consequence of split year treatment is that foreign income and gains in respect of the non-resident period are not subject to UK tax. Assuming these conditions are included in the final form of the legislation means that taxpayers will now have the certainty that pre-arrival or post-departure foreign income and gains are outside the scope of UK taxation without having to rely on extra-statutory concessions.

Ordinary Residence

Ordinary residence will be abolished with effect from 6^th April 2013. However Overseas Workday Relief (“OWR”) will continue to be available to non-doms coming to the UK in the tax year of arrival and the two following tax years provided that they have not been resident in the UK in the 3 tax years prior to arrival. This relief will be statutory and available regardless of the individual’s intentions to remain in the UK. This will give individuals coming to the UK more certainty over the availability of this valuable relief.

It is also intended that transitional rules will ensure that anyone already benefitting from OWR when the rules come into force will not be affected by the abolition of ordinary residence and can continue to claim OWR as they would have done under the existing rules.

Our View

We welcome the introduction of a statutory residence test which will remove years of uncertainty around UK residency status for even the well advised tax payer. However, these rules will encourage individuals to avoid visiting and establishing connections with the UK which will reduce their personal spending here. This consequence is in stark contrast to the proposed changes to the taxation of non-doms to encourage their investment in the UK.

We would therefore recommend that you seek further advice before relying on any of the above tests and take particular care in structuring your affairs where there is a risk that you may be caught by any of these ties.

Mark Davies	James Hodgson-Barker
Director	Senior Manager
+ 44 (0) 20 3008 8102	+44(0)20 3008 8108
mdavies@mdaviesassociates.co.uk	james@mdaviesassociates.co.uk

See a PDF of the original here.

This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.