The proposed statutory definition of tax residence
On 17 June 2011, HM Treasury and HMRC published a consultation document on a statutory definition of tax residence (statutory residence test) and reforms to the concept of ordinary residence.
The consultation seeks responses from interested parties on the design and implementation of the proposed new test to determine tax residence. As part of this consultation, the Government is also seeking views on options to reform the concept of ordinary residence.
The consultation will run for 12 weeks from 17 June 2011. The closing date for responses is 9 September 2011.
Statutory residence test (“SRT”)
The SRT will apply:
- Only to individuals, not companies;
- Only for the purposes of income tax, capital gains tax and inheritance tax.
The test consists of three parts:
- Individuals will always be non-resident if they fall within Part A;
- If they do not fall within Part A, they will always be resident if they fall within Part B. (That is, Part A and Part B are not mutually exclusive, but Part A prevails.);
- Individuals who fall within neither Part A nor Part B will be resident if they satisfy the required number of connection factors in Part C. The required number varies according to days spent in the UK in the tax year concerned.
It will continue to be possible for individuals to split tax years into periods of residence and non-residence.
Split-year treatment will only be available if an individual:
- Becomes resident in the UK by virtue of their only home being in the UK;
- Becomes resident by starting full-time employment in the UK;
- Establishes their only home in a country outside the UK, becomes tax resident in that country and does not come back to the UK in that tax year;
- Loses UK residence by virtue of working full time abroad. In this case, split-year treatment will also apply to the individual’s spouse or civil partner provided their sole or main home is outside the UK.
Individuals whose residence changes because of changes in the connection factors in Part C of the test will not benefit from split-year treatment.
The government will introduce an anti-avoidance provision to prevent individuals avoiding Income Tax by creating artificial short periods of non-residence during which they receive a large amount of income accrued during periods of UK residence. The new provision will be based on existing anti-avoidance rules for capital gains tax.
The new provision will apply to some forms of investment income, including dividends paid by close companies.
It will not apply to employment or self-employment income, or investment income such as bank interest or dividends from listed companies.
No transitional period
The government is not proposing any transitional rules because it intends that the statutory residence test will broadly recreate the outcome of the current rules.
The government asks for views on two options for the reform of ordinary residence:
- Keeping the concept of ordinary residence only for overseas workday relief, which allows individuals not ordinarily resident in the UK (irrespective of their domicile) to claim the remittance basis;
- Keeping the concept of ordinary residence for all current purposes
In either case, the government proposes to:
- Introduce a statutory definition of ordinary residence;
- Restrict ordinary residence status to non-UK domiciled individuals.
Proposed statutory residence test
Part A: conclusive non-residence factors
An individual is not resident in the UK for a tax year if they meet any of the following conditions:
- They were not resident in the UK in any of the previous three tax years and were present in the UK for fewer than 45 days in the current tax year;
- They were resident in the UK in one or more of the previous three tax years but were present in the UK for fewer than ten days in the current tax year;
- They left the UK to carry out full-time work abroad, provided they:
→ are present in the UK for fewer than 90 days in the tax year; and
→ spend no more than 20 days working in the UK in the tax year.
An individual who does not satisfy any of these conditions should move on to Part B.
Part B: conclusive residence factors (subject to Part A)
If Part A does not apply, an individual is resident in the UK for a tax year if they meet any of the following conditions:
- They were present in the UK for 183 days or more in the tax year;
- They have only one home and that home is in the UK, or they have two or more homes and all of these homes are in the UK;
- They carry out full-time work in the UK.
An individual who does not satisfy any of the conditions in Part A or Part B should move on to Part C.
Part C: connection factors
If an individual does not fall within either Part A or Part B of the test, he must consider whether the connection factors in Part C apply.
Part C of the test distinguishes between:
- Arrivers: individuals who were not UK-resident in any of the previous three tax years;
- Leavers: individuals who were resident in one or more of the previous three tax years.
The first four connection factors apply to both Arrivers and Leavers:
- Family. The individual’s spouse, civil partner or common law equivalent (if not separated from them) or minor children (those under 18) are resident in the UK;
- Accommodation. The individual has accessible accommodation in the UK and makes use of it during the tax year, subject to exclusions for some types of accommodation;
- Substantive work in the UK. The individual does substantive work in the UK (but does not work in the UK full time, which would make him resident under Part B of the test);
- UK presence in previous tax years. The individual spends 90 days or more in the UK in either of the previous two tax years.
The fifth connection factor applies only to Leavers
- More time in the UK than in other countries. The individual spends more days in the UK in the tax year than in any other single country.
Table: connection factors required to be UK resident
|Days spent in UK||Number of connection factors required to be UK resident|
|Fewer than 10 days||Always non-resident under Part A|| Always non-resident under
|10-44 days||Always non-resident under Part A||4 or more|
|45-89 days||4||3 or more|
|90-119 days||3 or more||2 or more|
|120-182 days||2 or more||1 or more|
|183 days or more||Always resident under Part B||Always resident under Part B|
Chapter 4 of the consultation document proposes definitions of the following terms for the purposes of the statutory residence test:
- Accommodation. This means residential property that is:
→ accessible to be used by an individual as a place of residence; and
→ used by the individual or their family as a place of residence.
There are specific exclusions for accommodation provided by an employer that is also used by other employees not connected to the individual, short leases, accommodation accessible to the individual’s minor child as a student at a UK educational establishment, short-term hotel accommodation and temporary lodging with relatives.
- Day of presence in the UK. There will be no change to the rule based on presence in the UK at midnight at the end of a day, or to the rules on transit;
- Family. An individual has family in the UK in a tax year if either of the following applies:
→ the individual’s spouse, civil partner or common law equivalent is resident in the UK for any part of that tax year, unless separated from the individual under a court order or separation agreement, or where the separation is likely to be permanent; or
→ the individual’s minor children are resident in the UK and the individual spends time with those children, or lives with them, for any part of 60 days or more (in the UK or elsewhere) during that tax year. A child whose residence is mainly caused by time spent at a UK educational establishment will not be treated as resident if the child spends fewer than 60 days in the UK when not present at the establishment and the child’s main home is not in the UK.
The terms "common law equivalent" and "main home" are not defined.
- Full-time work abroad. The individual must work abroad for at least 35 "combined total hours" per week (on average if self-employed) for at least one full tax year. (This suggests that at least 35 hours must actually be worked, making the test more stringent than the test below for full-time work in the UK.)
- Full-time work in the UK. The individual must work in the UK for at least 35 "combined contracted hours" per week (on average if self-employed) for a continuous period of more than 9 months and undertake no more than 25% of the duties outside the UK during that period.
Only home. A single home that is UK, or two or more homes that are all in the UK. There is no definition of "home".
- Substantive employment (including self-employment). This means working in the UK for 40 or more days in the tax year. It can include days on which the individual is not present in the UK at the end of the day.
- Working day. Only days on which the individual works for at least three hours count. This can include days on which the individual is not present in the UK at the end of the day.
- Proposed definition of ordinary residence. The government proposes that:
→ Individuals who are resident in the UK should also be treated as ordinarily resident unless they have been non-resident in the UK in all of the previous five tax years
→ The status of not being ordinarily resident should be available only in the tax year of arrival in the UK and for a maximum of two full tax years following the tax year of arrival.
→ The status of not being ordinarily resident should not be available if the individual:
♦ is resident in the UK on the basis that their only home is in the UK; or
♦ has more than one home and all of their homes are in the UK.
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.