When will you be UK tax resident?

Note - This is an archived article and does not reflect the recent tax changes. Visit the members area for an uptodate version of this article.

People look to leave the UK for a variety of reasons including personal, social and financial. At the top of the list though in my experience expats leave due to obtain the significant tax benefits of non UK residence status, as well as getting away from the general deterioration in society.

For some when they leave the UK, that will be it, and they will never return. Undoubtedly in tax terms this is the best option. If you leave the UK permanently and never return your UK status is never really in doubt and you would be non UK resident. As a non resident you would be exempt from UK tax on your overseas income and gains, therefore any overseas investments for example would be completely free of UK tax.

However, this is not a practical option for many. They are happy to leave the UK and live overseas but would not completely sever ties with the UK, and would be looking to return. This may be for holidays, to see family, attend to UK business etc.

The position of those who return to the UK is not as clear cut as the 'permanent' emigrants, and they would always be an easy target for the UK taxman.

The Revenue has published guidance which states that providing visits to the UK average less than 90 days per tax year (taken over an average of four tax years) this would not prevent non UK residence status. This was relied upon by many, (although it's fair to say this is guidance only and the taxman has never had any problems about going back on previous guidance).

In particular given the number of people leaving the UK, and the relative ease with which they can establish overseas residence, in my view the Revenue are looking at ways in which they can still claim a slice of the overseas earnings.

There are two changes here that spring to mind, although I'll monitor this and report back any additional points.

Changes to residence 'emphasis'

The first change was in 2005, and resulted from the commissioners decision in the Shepard case.

It was a case that looked at whether an airline pilot who had ceased to be UK resident.

Shepherd v HMRC; the facts

Mr Shepherd was an airline pilot employed by a British company flying long haul flights which started and ended at Heathrow. He had to retire on 22 April 2000, and decided to retire overseas. In October 1998 he rented a flat in Cyprus and stayed in rented accommodation there until he purchased an apartment there in 2002. He continued to pay the mortgage on the UK family home, where he remained on the electoral roll, and paid all the household bills and had his correspondence sent there. He still stayed in the family home before and after each flight. On 22.4.00 Mr Shepherd retired.

The taxman said that he was resident in the UK as he remained in the UK for a settled purpose, to perform the duties of his employment and to continue to see his wife, family and friends.

Mr Shepherd disagreed and stated he established a new house in Cyprus, where he lived with a sufficient degree of continuity, and thereafter there was a material change in the character and quality of his presence in the UK as he ceased to be resident.

His visits to the UK were less than 90 days, and the remainder of time was spent in Cyprus and flying (the majority of his time was spent flying).

The Special Commissioner found that his presence in the UK was substantial and continuous, and there was no distinct break. Therefore he remained UK resident.

It's important to note that he worked in the UK, stayed in the family home and visited friends and in this context the fact that he had spent less than the 90 days per tax year in the UK did not make him non UK resident.

In my view this decision was not surprising, and essentially represents a change in emphasis, rather than a new change in practice.

The 90 days requirement was never in itself a rule that established non UK residence. The Revenue's guidance states that in order to establish non UK residence you must have gone abroad permanently or for a settled purpose, and the UK visits must average less than 90 days.

Therefore in order to claim non UK residence you would need to show that you've either gone abroad permanently or for a settled purpose before the 90 day test would even be looked at. In this case, Mr Shepherd hadn't satisfied this and therefore the 90 day test was to some extent irrelevant.

This case is though a welcome reminder of the need to establish clearly that a new life has been established overseas and that there is little continuing connection with the UK. In terms of the application of this case if you simply returned to see family for holidays in the UK, and had no UK property available for your use it's unlikely you'd remain UK resident. As above you should be able to establish a settled purpose overseas.

Even the high net worth tax exiles living in Monaco and returning to the UK to see to UK business would have a good claim to non UK residence.

Therefore the application of this case will be pretty limited. Mr Shepherds position was also made worse by the fact that he couldn't even establish treaty residence in Cyprus.

Possible Change to counting of days

Another commissioners decision has looked at the method of calculating days spent in the UK for the purpose of calculating the 90 day average. This could have important repercussions if you're just inside the 90 day average, although again this would not in any case be advisable as the 90 day limit is certainly not set in stone, and if you were approaching this figure the taxman could well argue you were UK resident, particularly if this was also compounded with some evidence that showed you had strong ties in the UK.

Previously the Revenue used to accept that when calculating the days spent in the UK, the days of arrival and departure were ignored. Therefore a common practice was for an individual to arrive on a Friday and go back on a Sunday. This would then only be classed as 1 day in the UK.

The Commissioners disagreed with this and felt that the number of nights spent in the UK should be considered. Therefore in the example above this would be classed as 2 days in the UK.

This latter change is well worth noting (although the decision would not be binding unless confirmed by the high court) when assessing the number of days you spend in the UK.

The Revenue have since published guidance on this which states that there is no change in their application of the 90 day rule and that the facts of the above commissioners decision were unique. As stated above, the key point is that you can establish residence overseas. Once you've done that then the 90 day rule is taken into account. If you then meet the 90 day rule you'll remain non UK resident. If however you have never really left the UK you'll remain UK resident even if you met the 90 day limit.

That is what happened in this case, and the periods spent in the UK indicated he remained UK resident.

Both of these cases should not have a significant impact provided you could clearly establish your new home and life being in the foreign country. Most people would also in any case establish treaty residence overseas due to having a permanent home there, and as such would be subject to the terms of any relevant double tax treaty.