Tax residency, which is not always the same as (legal) residency, has always been, and still is a highly complex and contested area of tax legislation. Often the stakes are very high – and arguably getting higher – and therefore the incentives to achieve Residency or Non Residency are great on both sides.
The Statutory Residence Test (SRT) has now been with us for over a decade, providing taxpayers with more certainty over their residency position.
Background
With the changes in tax legislation which will affect not only income tax and capital gains tax but also Inheritance tax for the first time, understanding whether you are UK tax resident or not will be more important than ever.
A common misconception is that it is possible to become non-resident in the UK by becoming resident in another jurisdiction, under their local rules, which may not even require you to spend much time there. Sadly, that is not often the case and to guarantee non-residency for UK tax purposes, following the requirements of the SRT is still key.
The test, which came into force on 6 April 2013, was designed to provide, if not absolute certainty in all cases, something approaching this for the majority of people. However, due to the complexity of the area, the test, or rather tests, that resulted are equally complicated, and in some cases are not final.
But why is Residency such an important issue, and how does the Statutory Residency Test affect the tax payer?
The importance of Residency
Residency is one of the key issues in deciding whether an individual is liable to tax in the UK. Broadly speaking, if you are resident in the UK, you will be liable to pay tax in the UK on your worldwide income and gains in any given tax year.
New rules which abolish the remittance basis are due to come into force from 6 April 2025, and only those who have been living in the UK for 4 or fewer tax years will have any chance of escaping UK taxation of their worldwide income and gains. In addition, changes to the way Inheritance Tax will work from that date will mean that anyone who has been in the UK for 10 or more years over a 20-year rolling basis, will suffer UK IHT on their worldwide estate, whether they are still resident at the time of their death or not.
By contrast, if you are not resident (and not just temporary non-resident), you are only liable to UK tax on UK situs income – e.g. rental income on UK property. Your capital gains are also usually not taxable in the UK, unless again they relate to residential property.
Over recent years, residency has grown in importance further still as other areas of the tax legislation now include reference to it – for example, you will (usually) only be able to claim Principal Private Residence on properties situated in your country of residence.
It is therefore vitally important that you establish what your UK residence status is. Having this certainty will allow you to plan, and should also prevent long and expensive battles with HMRC, like the Gaines Cooper case, which lasted for over five years.
The Tests
In general terms, there are three tests – one that definitively proves Non Residence, a second that definitively proves that you are Resident, and a third which is only used if the first two prove inconclusive.
The tests are most easily understood by way of a flow chart – please click the image to enlarge it. However, each test can be in itself complex and so needs to be looked at with significant care – especially in borderline cases.
Key Questions
As was the case pre 6 April 2013, day count is still an important factor, especially when considering definitive residency and definitive non residency – Anyone who has spent less than 16 days in the UK in any tax year is conclusively non-resident, and anyone who has spent more than 183 is conclusively resident.
The definitive tests also look at previously undefined concepts, including where your home is, and whether you work full time, in addition to considering your whereabouts in previous tax years.
When it is not possible to determine absolutely the position using the first two tests, test three is employed. This is split into two routes; one for those who are recent arrivers to the UK, and one for those leaving the UK.
Once the correct route has been chosen, the test takes two things into consideration:
- Day Count
- Connecting Factors
Day count looks at your whereabouts, counting any day as “in” where you were physically situated in the UK at midnight.
Connecting factors broaden the scope of the first two tests, and looks at:
- Whether your family is resident in the UK
- Whether there is available accommodation in the UK
- Whether you have significant employment in the UK
- Whether you have been present in the UK for more than 90 days in any of the previous three tax years
Day count and connecting factors are examined in combination – day count will determine how many connecting factors you are allowed before becoming resident, and vice versa.
And so there are two ways in which the test can be approached:
Firstly, from a historical point of view, to determine where you were resident in a previous year. In this case, it is probably simplest to start with your day count and then check connecting factors.
Secondly, you can use the test as a planning tool. In this case, it is usually easier to start with connecting factors, as generally these are the things that you will be least likely to be able to change. Once you have determined how many factors you have, you can then ascertain how many days that you can spend in the UK either to preserve your residency status or, of course, to lose it.
Other Issues
Once you have used the tests to determine your residency status, or have established what you must do in order to achieve that status in the coming year, what next?
Unfortunately, simply proving that you are UK Resident (or not) in terms of the test is not always the end of the story, and so there may still be an element of doubt. Just because the test has shown that you are UK tax resident, you are not necessarily precluded from being tax resident in one or more other jurisdictions at the same time as the UK. The local legislation in those particular countries will need to be consulted to see if you also qualify as resident, and sometimes only the tie breaker clauses of the Double Taxation Treaties will give you a final answer that can be relied upon.
Importantly, even if you are able to use the Double Tax Treaty to be treated as non-resident in a particular year, if you are resident under the SRT , the tax year will still count towards the number of years you have been here for Inheritance Tax purposes.
What next?
It is therefore essential that the test is used as a good starting place, but that in addition appropriate advice is taken well in advance of your residency status. To discuss this, please contact Michaela Lamb or any member of the Gravita tax team, who will be happy to assist.
