Residency gets a dressing down – how many ties do you have?

The Finance Act 2013 brought in some significant changes to tax law in the case of determining an individual’s residence. The new rules, which apply from 6 April 2013, scrap the old ‘Ordinarily Residence’ status and introduce a rigorous residence test, which provides the certainty that was previously missing, but adds a significant degree of complexity.

So if an individual is coming to or leaving the UK in a tax year, how will the new rules apply to them?

There are three tests, which should be considered in order: if an individual meets one test, stop there; otherwise, keep going until a test is met.

The first tests to check are the automatic tests.

The Automatic Overseas Test:

An individual is automatically non-resident in UK if he:

  • was UK resident for one or more of the past three tax years and spends less than 16 days in the UK in the current tax year;
  • was not resident in the UK for any of the past three tax years and spends less than 46 days in the UK in the current tax year;
  • leaves the UK to work full-time overseas and
    • Works an average of 35 hours a week overseas, and
    • Has no significant break in work i.e. more than 30 days, and
    • Spends less than 91 days in the UK, and
    • Has no more than 30 UK workdays.

If none if the above conditions are met, move on to the next automatic test.

The Automatic UK Test:

An individual is automatically resident if he:

  • spends 183 days or more in the UK in the current tax year;
  • has a home in the UK for more than 90 days (at least 30 days of which falls within the current tax year) and no home overseas (disregarding any home at which he is present for less than 30 days in the current tax year);
  • is in full time work in the UK for any period of 365 days starting or ending in the current tax year. Full time work is classed as working at least 35 hours a week or more than 75% of working days.

If he does not meet any of the automatic tests, he must then look at the ‘sufficient ties’ test.

Sufficient ties test:

The number of sufficient ties that apply to an individual in order for them to be treated as UK resident depends on the number of days they have spent in the UK and whether they are coming to the UK or leaving.

Individuals entering the UK:

Number of days spent in the UK UK ties and residence status
Fewer than 46 Always non-resident
Between 46 and 90 Resident if has 4 ties
Between 91 and 120 Resident if has 3 ties
Between 121 and 182 Resident if has 2 ties
183 or more Always UK resident

 

Individuals leaving the UK:

Number of days spent in the UK UK ties and residence status
Fewer than 16 Always non-resident
Between 16 and 45 Resident if has 4 ties
Between 46 and 90 Resident if has 3 ties
Between 91 and 120 Resident if has 2 ties
Between 121 and 182 Resident if has 1 tie
183 or more Always UK resident

 

So what constitutes a sufficient tie? (You will find the guidance to these in FA13.)

  1. UK resident family: Para 32 states that ‘family’ only goes as far as spouses and children;
  2. Substantive UK work, substantive being at least 40 days in the tax year and at least 3 hours a day;
  3. Available accommodation in the UK for at least 91 days of the tax year;
  4. More than 90 days spent in the UK in either or both of the previous two tax years;
  5. Country ties: the UK is the country where you have the most presence during the tax year.

So by the end of this long winded process, the individual should finally have a clear cut decision of whether they are resident or not. Of course, the individual can still split the tax year into resident and non-resident in certain circumstances, although the rules here differ slightly from the above! There are also scenarios where an individual is treated as resident in more than one country. In this case, the residency is then determined by the Double Tax Treaty in place between those countries , so, even if an individual is UK resident, they may still be non-UK resident under the terms of the Treaty. There are also temporary non-residence rules to watch out for!

But why is residency important?

An individual’s residency determines how their income is taxed in the UK:

Status UK Income Overseas Income
UK Resident and Domicile Arising basis Arising basis
UK Resident and Non-Domicile Arising basis Arising basis or remittance basis depending on circumstances
Non-Resident Arising basis Not taxable


The final picture

The new rules are certainly more in depth but they are hoped to take out the uncertainty that could surround the previous case law based rules and have been developed as a direct result of those cases and scenarios that have come to light in court.

The above is a basic outline of the position. Within each test, there are various concepts and definitions which are explained in the legislation.

If you have a case where an individual needs their residency determined or where an individual needs advice on how to retain their residency, please get in contact on 01730 893039.