Offshore tax article - Tax treaty residence and why it can be important in reducing your UK tax liability
We've looked at losing your UK residence status in previous articles (such as Non UK residence in 2007). Treaty residence though is a completely different 'animal'. Even if you're classed as UK resident for domestic tax law purposes you can still establish your treaty residence as overseas. In essence the two are completely different.
When you're resident overseas under the double tax treaty
There are basically two key occasions when this can apply:
- Firstly, if you are a resident under the overseas country's tax rules but you're not classed as UK resident under the UK rules, or
- Secondly, you're classed as UK resident and resident overseas
In the first case the Revenue will usually accept that you are treaty resident overseas (provided you can provide a certificate of residence from the overseas tax authority).
The second case is not as straightforward. There are many situations where you could be treated as resident in the UK as well as overseas. The recent Commissioners decision made it clear that you may spend a short period in the UK (less than the 90 days stated in the Revenue guidance) and still be UK resident. If you spent the rest of the year in another country you'd be very likely to be tax resident there as well.
In this case it would be in your interests to look at whether there is a double tax treaty with the UK, and if there is you should look carefully at the residence article.
The residence Article in most modern double tax treaties apply a tie breaker provision (the agreement with the Gambia is one of the exceptions here). This tie breaker clause basically determines in which country a person will be treated as resident for the purposes of the double tax treaty.
The `tie-breaker' rules are basically some tests that are considered one by one until a condition is satisfied. The standard OECD treaty would provide for the tests in the following order:
- Permanent home.
An individual is a resident of the country in which he has a permanent home available to him (though not necessarily owned by him). The Revenue will generally look here for evidence of either a freehold or leasehold ownership of land. If you have a permanent home available in both the UK and overseas it is then necessary to look at the next test:
- Centre of vital interests.
You will be a resident in the country where your 'personal and economic relations' are the closest. This is a very wide term and means that you'll need to look at where you base your life and regard as your home. So you'll be looking at the location of family, your job, reason for UK visits, location of investments, where your bank accounts are, where you own property etc.
If you can't determine this, you then look at the next test:
- Habitual abode.
You'll be a resident of the country in which you have a habitual abode. This is simply the country that you live in for most of the time. If you have a habitual abode in both Countries (or in neither), the final test is to look at:
- Nationality.
An individual is a resident of the State of which he is a national.
Impact on UK tax liability
If you've looked at the above rules and are satisfied that for treaty purposes you are resident overseas this will have a number of tax implications. The detailed impact will depend on the terms of the relevant double tax treaty - but in essence you get all the advantages of being non UK resident under the tax treaty.
This means that an individual who is 'treaty resident' in another country is entitled to make claims to relief from UK tax as provided for under the tax treaty on the basis that he is a `resident of' the other country. Some of the cases where this could lead to a reduction in UK tax include:
- Income arising overseas (in the treaty country) which will be exempt from UK tax
- Capital gains arising overseas (in the treaty country) which will be exempt from UK CGT
- Employment income where duties are carried out in the UK can be exempt subject to various criteria
- 'Other income' will be taxed overseas
- UK Pension income (usually non governmental) is taxed overseas
- UK trading income is only charged to UK income tax if there is a UK permanent establishment
Note that treaty residence applies only for the purposes of the tax treaty. So even though you may be resident for the purposes of the tax treaty overseas, if you're still a UK resident under domestic tax law you'll still have to complete UK tax returns.
So, if you're going overseas to a country that has a double tax treaty with the UK, establishing your treaty residence there should always be considered.
This usually means establishing your permanent home there, as even if the UK tax authorities were to argue that you were UK resident under domestic law, if you're treaty non resident you can then apply the treaty provisions as a non resident (eg in relation to pensions etc).
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.