UK Residency – Home or away?
When it comes to UK residency, you may think that your residency status is a clear-cut situation. However, nowadays many people have dual nationality, move for work or go travelling, making their residency status more complex. Let’s not forget the fact that Brexit is looming and the sudden demand for Irish and EU passports has skyrocketed. Your residency will have tax implications and now with the statutory residency tests, planning your residence position and thus future liabilities has become much easier.
The Ordinary Residence Test
Before the 2013-14 tax year, the guide to your UK residency status was the cloudy ordinary residence test. As this test was not statute as such, it would have been necessary to consider the case law surrounding it and comparing the cases to your personal situation. For the most part the ordinary residence test would make no difference at all, however for some individuals it could offer certain tax benefits e.g. a lot of foreign income was within the scope of the remittance basis or interest could usually be received tax-free. The ordinary residence test looked at the bigger picture rather then your year to year residency. As it was not statutory, it meant that your ordinary residence was open to interpretation and therefore meant that it could be argued.
The Statutory Residence Tests
Bringing us back to present day. The ordinary residence is a thing of the past and we now have in place our statutory residency test in which your residency is calculated on a year to year basis. This splits into the automatic UK tests and the automatic overseas tests followed by the sufficient ties test (if needed). First and foremost, you have the basic rule. The basic rule states that you will be automatically a UK resident if you do not meet any of the requirements for the automatic overseas tests and if you meet one of the automatic UK tests and have sufficient ties to the UK. The benefits of the statutory residence tests are that they offer a more concrete position in terms of residency. No one could argue that you are non-UK resident if you pass the first automatic UK test (having spent over 183 days in the UK).
The statutory tests now mean you can have a solid idea of whether you are resident or not. This can be a benefit in respect of planning for the future. If you are planning to emigrate, then you will know beforehand exactly what income you’re going to be taxed on and where. UK residents are taxed on their world-wide income on an arising basis, whereas non-UK residents are only taxed on their UK sourced income and certain gains.
Split Year Treatment
If you are planning a big move, there is a possibility that you could elect for split year treatment. Split year is when you are UK resident for part of the year and non-resident for the remainder. Or vice versa. There are 8 cases in which you can elect for split year treatment, these vary from moving aboard for work or following a spouse (or partner). Electing for split year could be beneficial if you are making a move and have income from overseas. Any overseas income that is received after the date you become a non-resident is no longer taxable. However, it is prudent to bear in mind that temporary non-resident rules are in place in respect of Capital Gains Tax (CGT). For example, if you left the UK and sold standard shares in a company while you were non-resident. If you were to come back to the UK within 60 months of departure, you would be liable for CGT on any gains that arose while you were non-resident.
Double Tax Agreements
Most double tax agreements contain provisions relating to residency and which country has priority i.e. the tie breaker clause. Also, double taxation agreements may also contain provisions setting out where certain income or gains are taxed.