Proposed UK residency test explained

By Paul Beckwith [email protected]

Paul Beckwith is an International Financial Advisor working with Blacktower Financial Management (International) Limited

Over the past decades, successive UK governments have made the subject of tax residency more difficult to comprehend. Finally in this year’s Budget, it was decided to create a framework that could be used to help people easily decide with certainty whether they are resident in the UK or not, each year by drafting a legally-binding definition of residence.

The Government has now issued a Consultation Paper that outlines how this could potentially work. After the consultation period, new legislation will be enacted that will bring new residence rules into effect from April 6 2012. This will have a large impact on UK tax planning for British expatriates.

If there are no changes after the consultation period, there will be a new system where residence status is determined annually, with each year being viewed in isolation from the previous starting from April 6 2012.

• The new rules

• The new rules are ultimately aiming to make it more difficult to break residence for UK taxation purposes than to become resident again or to drift back into residence.

• The 91 day average test will no longer exist and the following rules will apply instead:

• Those present in the UK for 183 days or more will always be resident

• Those who are present in the UK for less than 10 days will always be non-resident

• And for anyone who falls outside of these narrow definitions will be reviewed through a series of tests

The tests include:

• Test A – a ‘Conclusive non-residence test’ – if certain conditions are met, the individual is definitely non-resident

• Test B – a ‘Conclusive residence test’ – if certain conditions are met, the individual is definitely resident

• Test C – an ‘Other connection test’ – if the results from tests A and B are inconclusive, the matter is determined by a combination of time spent in and a person’s connectedness to the UK. Test C operates a sliding scale whereby the more a person is connected to the UK, the less time they may spend in the UK during the year. The connecting factors include whether the individual has family, employment and accommodation in the UK, how much time has been spent in the UK in the two previous tax years and whether the individual spends more days in the UK than in any other country.

The number of factors present will set the limit on the maximum number of days a person may spend in the UK in a particular tax year.

For example, if someone has three or more of the factors present in the year, the maximum number of days they can spend in the UK is 89. If they have four or more factors, the maximum number of days is 44 and so on.

For those leaving the UK for full-time overseas employment, the proposed rules seem basically unchanged unless they work for more than 20 days in the UK per tax year.

However, anyone leaving the UK for any other reason, for example through change of lifestyle or retirement, might find the rules restrictive and leaving the UK would need to be planned carefully.

For example, in certain circumstances, leaving the UK for anything less than full-time overseas employment and spending more than 10 days in the UK in the year of departure will still mean ensuring resident status in the UK for tax purposes for that year.

As a result, the timing of a departure from the UK is likely to become more important.

Already non-resident

For individuals already non-resident and not working full-time, advice will be needed as to the strength of connections to the UK, and the maximum amount of time they can spend in the UK per annum.

An annual review will be required. Those who claim non-resident status whilst undertaking ‘substantive’ employment in the UK and have other connecting factors are likely to be the most at risk of becoming resident.

For those British expatriates not working full-time abroad, whose main home may be in the UK, whose families continue to be in the UK, and who are keen to spend as much time as possible in the UK, the proposals are not much more concerning.

And, for those who reside overseas with modest connections to the UK, the proposals look to be good news.

This facility is not suitable for all expatriates and we recommend that advice is sought before one makes any commitment. As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances. Please contact us for further details 289 355 685.