With coronavirus quarantine measures and travel restrictions across the world, the ability to move freely between countries has been greatly reduced. While some people have been able to choose where they self-isolate, others have been forced to stay wherever they were at the time restrictions took effect.
For some British expatriates, this means battening down the hatches in Portugal, voluntarily or otherwise. Others may have decided to return to the UK to be close to family, or got stuck there accidentally when the rules changed. Some households may even be separated.
While tax may not be your priority during these unprecedented times, it does need consideration. Spending time in a place you are not normally resident could impact your residence status and potentially invite an unexpected tax bill.
The UK Statutory Residence Test
Expatriates forced to stay in the UK may find their UK tax residence position is compromised under the Statutory Residence Test (SRT).
The SRT is made up of three tests: the automatic overseas tests, the automatic residence tests and the sufficient ties tests. These determine whether an individual is either resident or non-resident in the UK for tax purposes during a tax year (April 6 to the following April 5).
There is, however, a strong focus on day counting. Depending on circumstances and ties, the number of days you can spend in the UK before becoming resident for tax purposes can vary widely from as little as 16 days to 183 days. Spending 183 days or more there in a particular tax year will therefore make you UK resident – and subject to UK taxes on worldwide income and gains.
UK expatriates who have become Portuguese tax resident may be used to limiting the number of days spent in the UK each year to avoid confusing their residence status. However, these careful plans risk being disrupted by the unforeseen public health lockdown. If this affects you or a family member, you/they could unexpectedly come into range for full UK taxation.
Exceptional circumstances under the Statutory Residence Test
Those affected by illness, self-isolation or travel restrictions may be able to benefit from relief in the form of the ‘exceptional circumstances’ rule in the SRT. Under current rules, the maximum number of days that may count as exceptional circumstances in any tax year is 60 days per taxpayer.
Does the COVID-19 pandemic constitute exceptional circumstances?
On March 19, Her Majesty’s Revenue and Customs (HMRC) specified four circumstances which would be considered ‘exceptional’ for the purposes of obtaining relief. Circumstances can be treated as exceptional if you are:
1. Quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus; or
2. Advised by official government advice not to travel from the UK as a result of the virus; or
3. Unable to leave the UK as a result of the closure of international borders; or
4. Asked by your employer to return to the UK temporarily as a result of the virus.
HMRC has made it clear that decisions will be made on a case-by-case basis, depending on the facts and circumstances. It has indicated that they will look sympathetically at any individual cases where the virus has caused specific issues of difficulties.
Tax residence in Portugal
What about if you are UK resident but locked down in Portugal? While Portugal has not specified exceptional circumstances for residence during the coronavirus pandemic, the rules are arguably more straightforward. Generally, you are considered Portuguese tax resident if you spend 183 days or more (not necessarily consecutively) within any 12-month period. But if you own Portuguese property that’s seen to be your main home, you could trigger residence much sooner. Once resident, you are liable for Portuguese taxes on worldwide income and some capital gains.
It is possible to meet the residency criteria for both Portugal and the UK and be considered resident in both countries at the same time. Where your status is unclear, the double tax treaty comes into play.
This sets out ‘tie-breaker’ rules, such as the location of your permanent home, where your personal and economic relations are closest and where you normally live to determine residence. If your residency still cannot be decided, it comes down to your nationality or by mutual agreement between the two countries.
If the global lockdown endures beyond several months, we can reasonably expect the rules to be further revised.
At this stage, you will likely have much more immediate concerns than your tax position. But when you are ready to focus on other issues, taking specialist, personalised advice can help establish where you stand and adapt accordingly in these rapidly changing, highly challenging times.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
By Dan Henderson
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com