Residency and Your Liability to Tax

Due to modern advancements, access to international travel has never been more accessible to people that might decide to travel for a variety of reasons (work, sight-seeing, friends and family etc).

If you are considered a UK resident via the statutory residency tests (more on this below), then you are liable to pay UK tax on your worldwide income and capital gains.  There are exceptions to this for those who qualify as non-UK domicile, in which case they should familiarise themselves with the remittance basis.

If you are not UK resident, you are only taxable on income that arises within the UK.  Furthermore, allowing for some exceptions (such as residential property), non-UK residents do not pay capital gains tax.

The Statutory Residence Test – Determining Your Residency

Since 06 April 2013, the Statutory Residence Test (‘SRT’) is how we determine whether an individual is a UK resident (or not) for tax purposes in a given tax year.  The test is made up of three parts:

1. the automatic overseas tests;
2. the automatic UK tests; and
3. the sufficient ties test.

The SRT could be split into two parts: one part is to test whether you are UK resident, and the other part is to test whether you are non-UK resident.

The UK resident part is comprised of two tests: the automatic UK test and the sufficient ties test.

The non-UK resident part is an automatic overseas test.

You are automatically a UK resident if you meet one of the conditions within the automatic UK test and none of the automatic overseas tests.  Therefore, a logical order to take the tests in is as per the order above.

Step One: Automatic overseas tests

The automatic overseas tests are the first step of the SRT.  If you meet any of the conditions in these tests, then you are automatically considered non-UK resident for the tax year in question.  If you satisfy any of the following then you are not considered UK resident for the tax year:

1.  You were UK resident in one or more of the three previous tax years and are present in the UK for a maximum of 15 days in the current tax year.
2.  You were UK resident in none of the three previous tax years and are present in the UK for a maximum of 45 days in the current tax year.
3. You work sufficient work hours overseas with no significant breaks and are present in the UK for a maximum of 90 days.

If you do not meet any of the conditions, then you move on step two.

Step Two: Automatic UK tests

The automatic UK tests are the second step of the SRT.  If you meet any of the conditions in these tests, then you are automatically considered UK resident for the tax year in question.

1. You are present in the UK for at least 183 days.
2.  You have a UK home.
3. work full time in the UK.

Each of the above conditions have further definitions and are not quite as simple as expressed.  If you do not meet any of the conditions, then you move on to step three.

Step Three: Sufficient ties tests

The sufficient ties tests is the final step of the SRT.  If you do not meet any of conditions in these tests, then you will not be considered UK resident.  The sufficient ties are as follows:

• Accommodation
• Work
• Family
• Country
• 90 Day

All of the above tests have nuances that can be complex, which is why it is suggested that an experienced tax advisor is sought before determining whether you should be paying tax in the UK.

Split Year Treatment

When you are UK resident, you are deemed to be so for the full tax year and as such are taxable on worldwide income for that full year.  However, if certain conditions are satisfied you may be able to split the year into a part where you are non-UK resident and a part where you are not.  The conditions are presented as 8 cases, and if met they apply automatically.  The 8 Cases are:

Case 1 – starting full-time work overseas

Case 2 – the partner of someone starting full-time work overseas

Case 3 – no longer having a home in the UK

Case 4 – starting to have a home in the UK only

Case 5 – starting full-time work in the UK

Case 6 – stopping full-time work overseas

Case 7 – the partner of someone stopping full-time work overseas

Case 8 – starting to have a home in the UK

Each case has a further set of conditions within it that make them complex.

Split year treatment can be beneficial where you are in receipt of overseas income during a part of the tax year in which you were non-UK resident.  By claiming split year treatment, you can remove some income from the scope of UK taxation.

Domicile Status

Domicile is a legal concept that is entirely separate from residence.  There would be too much content to cover, however you should know that it is crucial in determining your liability to UK tax. 

If you are non-UK domiciled and not deemed UK domicile, you can choose to be taxed on the remittance basis.  In such instances, you are only taxed on your UK source income and capital gains and any foreign income or gains that are remitted to the UK.  For example, you might have an offshore bank account that generates interest.  If you transfer this money to a UK bank account, then that would be a remittance and therefore taxable within the UK.

Failure to Declare Worldwide Income

Understanding your residency and how it can affect your tax liability is vital, failure to do so can result in fines or criminal prosecution.  You will first know that HMRC suspects something is incorrect when you receive a letter from them which says that they have information on your overseas income or gains which you should pay UK tax on.  These are called nudge letters, and they should be taken seriously.  Do not underestimate the resources HMRC has available to detect your overseas assets.

Recent nudge letters have been sent out in relation to the worldwide disclosure facility (more on this here).

If you would like to discuss your residency and/or domicile status and how this may affect your UK tax liability, or if you are worried you may have made a mistake in the past, please do not hesitate to contact us

For up to date year-end tax planning tips keep an eye on our socials Facebook Instagram and LinkedIn