Chapter 2 - Residence, Ordinary Residence & Domicile

2.1 WHY DO RESIDENCE & DOMICILE MATTER?

The short answer is that residence and domicile affect the amount of tax you have to pay.

UK residents who are also UK domiciled (we'll explain domicile later) have to pay UK income tax and capital gains tax on their 'worldwide income and gains'. No matter where in the world your assets are located or in what country your income is earned, it all falls into the UK tax net.

Those who are UK resident but non-UK domiciled can choose to be exempt from UK income tax and capital gains tax on foreign income and gains, until such time as the money is remitted to the UK. However, choosing to be taxed under the remittance basis can be extremely expensive.

If you are a non-resident you do not have to pay UK tax on non-UK income. However, you still have to pay UK tax on your UK salary, business profits (if the business is carried out in the UK), pension income and investment income. There are, however, some special rules that can reduce the tax non-residents pay on some types of UK income.

Capital gains tax depends on both your residence and 'ordinary residence'. If you cease to be resident in the UK without also ceasing to be ordinarily resident here, you will remain liable to UK capital gains tax in respect of gains on your worldwide assets.

If an individual ceases to be both resident and ordinarily resident, he is outside the scope of UK capital gains tax, even on UK assets.

Your residence and domicile have a huge effect on the size of your UK tax bill. The crucial question: how do you qualify for these reliefs and exemptions?

There have been numerous changes to the definition of "residence" for tax purposes that apply from 6 April 2013. When looking at tax residence before 6 April 2013 you need to look at a combination of court decisions and HMRC guidance.

However, a new Statutory Residence Test applies from 6 April 2013. There is quite comprehensive and should make it easier to determine residence status from 6 April 2013.

This means that you may need to consider two sets of rules, depending on when you left the UK.

If you left before 6 April 2013 you would look at the "Old" rules to determine your residence up to 5 April 2013. After 5 April 2013 you would look at the "New" rules.

If you left on or after 6 April 2013 you would look at just the "New" rules.

In this guide we look at both sets of rules.

2.2 BECOMING NON-RESIDENT -- OLD RULES BEFORE 6 APRIL 2013

HMRC's practice -- based on a mixture of statute and court decisions -- has historically been to regard you as resident in the UK during a tax year if:

• You spend 183 days or more in the UK during the tax year, or
• Although here for less than 183 days, you have spent more than 90 days per year in the country over the past three years (taken as an average). You will then be classed as UK resident from the fourth year.

For example, an individual who regularly returns to the UK for 87 days per tax year may still be regarded as UK resident.

Although the 90-day time limit is important, it is not necessarily decisive any longer. In various court cases in the last few years HMRC has argued that an emigrant remains UK resident if strong ties to the UK are retained.

This is a crucial point to remember.

Simply restricting your visits to the UK after you have left will not necessarily be enough to establish non UK residence.

The first change to this effect was in 2005 and came out of the Commissioners' decision in the 'Shepherd case'.

This case examined whether an airline pilot had ceased to be UK resident.

Mr Shepherd was an airline pilot employed by a British company, flying long-haul flights which started and ended at Heathrow. He retired on 22nd April 2000 and decided to live abroad. In October 1998 he started renting a flat in Cyprus and lived there before purchasing an apartment in 2002.

While working, he continued to stay in his UK family home before and after each flight, remained on the UK electoral roll and had all his correspondence sent to the UK.

The taxman said that he was UK resident 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 argued that he had ceased to be resident, having established a new home in Cyprus.

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

The crux of this decision was that Mr Shepherd worked in the UK, stayed in the family home and visited friends. In this context the simple fact that he had spent less than 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-day limit was never in itself a rule that established non UK residence. To actually establish non residence you would need to show that you have left the UK permanently (for at least three years) or for a settled purpose/employment, and that any UK visits averaged less than 90 days.

In this case, Mr. Shepherd couldn't establish that his new life was overseas.

Therefore the impact of this case shouldn't be as widespread as the newspapers reported. Mr. Shepherd's position was made worse by the fact that he couldn't even establish 'treaty residence' in Cyprus (treaty residence is where a person is considered to be a resident in accordance with the terms of a tax treaty).

Another case ('Gaines-Cooper') looked at the method of calculating the 90 day average and could have important repercussions for those near the limit.

It is never advisable to be in this predicament as the 90 day limit is not set in stone -- if you approach this figure the taxman could argue that you are UK resident, especially where evidence shows you have strong UK ties. This was confirmed in the revised Revenue guidance issued in March 2009 which makes it clear that having close ties to the UK can still make you UK resident. In particular they have stated:

"Your status is determined by the facts of your particular case. It is not simply a question of the number of days you spend in the country".

Previously Revenue and Customs accepted that, when calculating the number of days spent in the UK, the days of arrival and departure could be ignored. A common practice was to arrive on a Friday and depart on a Sunday. This would then be classed as only one day in the UK.

The Commissioners disagreed and argued that the number of nights spent in the UK should be considered. In the above example this would mean two days in the UK.

Revenue and Customs published guidance shortly after this stating there had been no change in their application of the 90 day rule.

As of 6th April 2008, new legislation has been introduced; any day that you are present in the UK at midnight will be classed as a day spent in the UK for the purposes of the 183-day test. This usually applies to the 90-day test.

The key point is that you have to establish residence overseas. Only then does the 90 day rule come into the picture. If you then meet the 90 day rule you'll remain non-UK resident. If, however, you've never really left the UK you remain UK resident, whether or not you pass the 90-day test.

The Gaines-Cooper case looked at much more than just number of days spent in the UK when deciding a taxpayer's residence. The Commissioners decided to apply the law rather than the Revenue guidance. The law is vague; the Commissioners said that residence should be given its natural and ordinary meaning.

As there is no legislation which lays down the required number of days spent in the UK, it's necessary to take into account all the facts of the case and look at a taxpayer's life in some detail.

The Commissioners stated that it is important to look at the existence of other ties to the UK, including the duration of an individual's presence in the UK, the number and frequency of visits, the place of birth, family and business ties, the nature of visits, and other connections with the UK.

The availability of living accommodation in the UK should also be taken into account, although this has always been the case and traditional advice has been to sell or rent out any UK property prior to going overseas.

Most of these guidelines are common sense. The taxman wants to stop people claiming non residence solely on the grounds of days spent in the country, even though the UK is their home in all other respects.

In the Gaines-Cooper case, the Commissioners decided that the evidence added up to UK residence being retained: the individual was born in the UK, went to school here, had strong UK business ties, made regular visits, and his wife and son lived in the country.

As stated above, Revenue and Customs published a statement in January 2007 explaining that there has been no change in practice in relation to residence and the '91-day test'.

In particular, it states that the taxman will continue to:

• Follow the published guidance on residence and apply it fairly and consistently.
• Treat individuals who have not left the UK as remaining resident here.
• Consider all the relevant evidence, including the pattern of presence in the UK and elsewhere, to determine whether or not a person has left the UK.

This was also confirmed in the revised guidance that HMRC issued for non UK residents.

2.3 RECENT COURT OF APPEAL DECISI0NS

A couple of decisions on UK residence have come out of the Court of Appeal during 2009 and 2010. These make very interesting reading for anyone determining their residence status before 6 April 2013.

Grace Decision

This case also concerned an airline pilot. The individual worked for British Airways (BA), flying long-haul flights out of Gatwick and Heathrow. He had to be in England for several days before any outward flight and, in practice, sometimes between inward and outward flights.

From 1986 to 1997 he was resident in the UK but in August 1997 he took a rented apartment in Cape Town and then bought a house there. He argued that he became non UK resident at that point.

He regarded his house in Cape Town as his home and spent as much time there as he could. He also planned to retire there in the future.

HMRC argued that his continued presence in the UK, as the base from which he did his work, showed that he was still resident in the UK, just as he was before 1997.

The Court of Appeal did agree with the High Court judge's list of factors that should be taken into account when determining residence:

"(i) The word "reside" is a familiar English word which means "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place". This is the definition taken from the Oxford English Dictionary in 1928 and is still the definition in the current on-line edition;

(ii) Physical presence in a particular place does not necessarily amount to residence in that place where, for example, a person's physical presence there is no more than a stop gap measure;

(iii) In considering whether a person's presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place;

(iv) Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity;

(v) However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as business obligations) and the sequence of visits excludes the elements of chance and of occasion;

(vi) Although a person can have only one domicile at a time, he may simultaneously reside in more than one place, or in more than one country;

(vii) Where a person has had his sole residence in the United Kingdom he is unlikely to be held to have ceased to reside in the United Kingdom (or to have "left" the United Kingdom) unless there has been a definite break in his pattern of life."

Crucially, this list confirms that, although some degree of permanence is required to establish residence, regular visits to the UK can amount to residence if they arise from an ongoing obligation (such as work commitments).

Distinct Break with the UK

The Court of Appeal also agreed with the High Court judge and reiterated the importance of making a distinct break with the UK.

The court stated that, in this case, there had not been a distinct break by the pilot:

"…The demands of his employment did not change in 1997, and the time which he spent in the UK attributable to his employment did not change. In that respect there was continuity in his pattern of existence. What did change was the place where he spent that part of his time when his whereabouts was not dictated by his employment…"

This is essentially as far as the Court of Appeal went:

"…I agree that a finding of residence is a possible conclusion, and perhaps a likely one, but it does not seem to me that it would be right for the court to pre-empt the decision of the Special Commissioner on that issue…"

Although the Court of Appeal agreed with much of the High Court reasoning, the judges didn't go as far as to state that the pilot was UK resident. In their view this was a decision of fact and needed to be considered by the Special Commissioners (now the First Tier Tribunal).

They did however state that because he was in the UK on a regular basis because of his employment, this would not necessarily make him UK resident:

"…It seems to me that it would be wrong to treat the appellant's presence for the purposes of his employment as a factor which necessarily shows residence.

It may well be a strong pointer in that direction, but the decisions in Scotland, in the House of Lords and by Rowlatt J show clearly the need to take into account, weigh up and balance all relevant factors. I do not think it would be right to regard Mr. Grace's presence in this country in order to perform the duties of his employment as a trump card which of itself concludes the issue in favour of residence…"

2011 Grace Decision

In February 2011 the case was passed back to the First Tier Tribunal which published its final judgement and found that Mr. Grace was UK resident.

HMRC argued that residence has an 'adhesive' nature -- it is harder for a person who has been resident to shake off resident status than it is for a person who has not been resident to show they have not acquired residence.

This is similar to the test for domicile and shows a definite convergence of HMRC's tests for losing residence and domicile.

The tribunal judge found that Mr. Grace would need to show a sufficient break in the pattern of his life to convert his residency status to non residence (i.e., the 'distinct break' test that we looked at above).

The tribunal held that Mr. Grace was resident in both the UK and South Africa. Mr. Grace considered himself resident in South Africa only. He spent roughly equal amounts of time in both jurisdictions.

When he was in the UK, Mr. Grace stayed at his house in Horley, where he had a settled abode. His presence in the UK was indefinite since that was where his employment was -- and employment was a matter of choice.

The fact that he lived in his own house gave a different quality to his time in the UK than staying in hotels would. The tribunal judge thought that how he spent his leisure time was of less significance. He had in this case failed to demonstrate a sufficient break with the UK.

It's no real surprise in this case that Mr. Grace remained UK resident. Looking at the requirement to have shown a distinct break with the UK, it's pretty clear that the substantial periods he was obliged to spend here and the fact that he had a UK property available for his use made it difficult to argue that a definite break from the UK had taken place.

2010 Gaines-Cooper Decision

The Court of Appeal decision in February 2010 in the long-running battle between Robert Gaines-Cooper and HM Revenue & Customs generated an abundance of publicity in the popular press.

However, there have been no significant developments since the previous Gaines-Cooper decision or the Grace decision, examined above.

The Court of Appeal decision followed an attempt by Robert Gaines-Cooper to try a different attack. He lost before the Commissioners and the Courts and now wanted a judicial review of the way that HMRC applies its published guidance on non residence.

The decision is interesting but in terms of actually obtaining non residence, the position is roughly the same. You need to show that there has been a distinct break from the UK (the Court of Appeal reiterated the same test that was evident in the recent Grace case, as outlined above) and you have to show that you have no substantial ongoing connection with the UK (or as the Court of Appeal put it, you need to ensure that your "centre of gravity" is not in the UK).

What Exactly Did the Court of Appeal Say?

The Court of Appeal looked in detail at HMRC's published guidance on non residence in its IR20 document, which applied up to April 2009 and has now been replaced with HMRC 6 (www.hmrc.gov.uk/cnr/hmrc6.pdf).

IR20 provided for two key ways of becoming non UK resident:

• Going overseas under a full-time contract of employment
• Going abroad for a permanent or indefinite absence (lasting for at least three years)

In this case, Gaines-Cooper was looking at the second option. The Court said that there was a clear distinction between these two options.

To become non-resident by working abroad you have to establish that you left to work abroad full-time and that this continued for at least the entire tax year.

If you claim non residence due to having left permanently or indefinitely, you have to demonstrate a distinct break from former social and family ties within the UK.

The court held that the actual wording of IR20, including terms such as "full-time employment" and "permanent departure", was vague and there would therefore be conflicts between HMRC and taxpayers.

IR20 has been withdrawn post April 2009 and replaced by HMRC 6.

The two key methods of establishing non residence are still included (i.e. employment and permanent or indefinite absence) but there are now much stricter statements in terms of ensuring that the absence is genuine and that the emigrant has genuinely left the UK.

The Court of Appeal decision reiterates the importance of making a distinct break and of not having your centre of vital interests in the UK.

Gaines Cooper has been granted leave to appeal to the Supreme Court, and the final decision is yet to be known.

What Impact Do These Decisions Have?

These cases imply that to become non-resident before 6 April 2013, you need to clearly establish that your new home and life are in a foreign country and that there has been a distinct break from the UK.

If you want to make regular visits and maintain strong UK ties, this will likely affect your residence status.

Anyone who wants to establish non-residence should make only minimal visits to the UK (in particular in the year of departure and in the following year) and UK property should be sold or rented out on a long lease while you are overseas.

A person can also be resident in two countries at the same time. It is therefore not possible to escape UK residence by arguing that you are resident elsewhere.

It is important to note that UK residence is a question of fact and not intention. Therefore, although you may intend to leave before the 183-day limit, if you are forced to remain in the UK as a result of unexpected circumstances, you will nevertheless be regarded as UK resident.

It is also extremely important to point out that many people are able to establish 'treaty residence' overseas (for example, you are an expat living in Spain or France), due to having a permanent home there.

Treaty residence is determined by double tax treaties (see Chapter 14). It's a way for two countries to agree who has taxing rights over various types of income and gains. It can be a useful back up if you still retain connections with the UK.

2.4 DAYS SPENT IN THE UK

Revenue and Customs confirmed in early 2007 that the days of arrival and departure would not be taken into account when assessing the number of days that you spend in the UK for the purposes of determining your residence status. This tied into their published guidance and provided a certain flexibility in the operation of the requirement not to spend more than 90 days (on average) in the UK in any tax year.

You could, in theory, arrive in the UK on Friday, leave on Sunday and this would only be classed as one day spent in the UK. As from 6th April 2008 this rule is changed; any day when you are in the UK at midnight is taken into account when looking at your residence status.

This means that if you arrive in the UK on Friday and leave on Sunday evening, you will be classed as spending two days in the UK.

There are also provisions to exclude 'transit' days that are spent in the UK from being counted towards the 90 or 183 day limits. These are days that are spent in the UK for the purpose of travelling between two places outside the UK (e.g., to transfer to a connecting flight).

It is doubtful whether these changes will have a significant impact on many non-residents. It should only seriously affect those who make very frequent visits to the UK. In this case, the new rule could dramatically increase the number of days spent in the UK.

However, sailing too close to the wind when it comes to days spent in the UK, has always been a risky strategy. Although Revenue guidance stated that the days of departure and arrival would not be counted, the courts and the Commissioners stated that they would.

Regular visits back to the UK indicate that you have not made a permanent break with the country, and may result in failure to establish non-UK residence. If you are returning to the UK on only a few occasions, this new rule should simply be factored into your travel plans to ensure you remain well below the 90-day requirement.

In fact, HMRC's revised guidance in HMRC 6 downplays the importance of day counting.

The new version of HMRC 6 states that:

"...This is the general practice, but it will not necessarily be appropriate in all cases. If you spend very significant amounts of the year travelling internationally, you should keep a record both of the days you were present in the UK and of those days where you are here at midnight. Both will be factors when looking at the pattern and purpose of your visits..."

Although HMRC can't simply refuse to apply a statutory test, strictly speaking the statutory rules apply only to the 183-day test and not the 90-day test. HMRC did state that it would apply the legislation consistently in respect of the 90-day test.

When assessing average visits and the 90-day test, there may be a new approach. HMRC may well count every day in which an individual spends any time at all in the UK and use that information to decide whether they are resident.

2.5 NON-RESIDENCE AFTER 5 APRIL 2013 -- THE NEW STATUTORY RESIDENCE TEST

In the March 2011 Budget it was announced that HMRC would be consulting on a new statutory residence test ("SRT"). This was initially supposed to be implemented from 6th April 2012. However, it was postponed to allow more time for consultation.

It will now apply from April 2013. At the time of writing we have had draft legislation, so this clearly could change.

Given that the UK residency rules are extremely vague, the introduction of a more concrete test for UK residence, laid down in legislation, could make life much easier for anyone wanting to leave the UK.

What Will The Statutory Residence Test Require?

The new test brings a range of "key" factors into account when assessing residence. Rather than considering a lot of vague and uncertain factors, you can determine your residence by looking at the factors laid out in the legislation.

Legislation focused on the key UK ties such as having UK accommodation, UK family or UK employment. Other less important ties such as UK clubs, UK burial plot ownership, and UK bank accounts are not included in the new test. Therefore in most cases you will only need to consider the specific factors laid out in the legislation.

There is still the odd subjective element to the new rules. For instance having a UK home will make you automatically UK resident in many cases. However "home" isn't accurately defined and you need to look at whether, on the facts, a UK property is your home.

There is also a system of recognising that to establish non residence, there can be more ties with the UK if there are fewer visits. They use a scale which takes account of different UK ties according to the length of UK visits and whether you are a "leaver" or an "arriver".

The Government was clear on this and they said that to avoid the complexity of current case law:

• the test should not take into account a wide range of connections;
• relevant connections should be simply and clearly defined;
• the weight and relevance of each connection should be clear.

The test has been designed so that it is harder to become non-resident when leaving the UK after a period of residence than it is to become resident when an individual comes to the UK.

Once an individual has become resident and built up connections with the UK, they should be required to scale back their ties to the UK significantly, spend far less time here, or a combination of the two before they can relinquish residence.

This is consistent with the principle, reflected in case law, that residence should have an adhesive nature.

How the New Statutory Residence Test Operates

There are 3 main classifications:

• People who will always be non resident
• People who will always be UK resident
• Others who may be UK resident or may be non resident depending on their UK visits and ties.

People who are always non-resident

For UK residents leaving the UK, this will apply to anyone leaving the UK to work under a full time contract overseas.

As under the present guidance they won't need to sever UK ties and they'll be non resident from the date of departure. This applies providing UK visits are fewer than 91 days in the tax year and no more than 30 days are spent working in the UK in the tax year (this is defined as spending more than 3 hours per day working in the UK).

However it will also apply to anyone who is:

• Not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 46 days in the current tax year; or
• Resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 16 days in the current tax year.

So, if you've been UK resident for the last few years unless you can arrange your return visits to be less than 16 days for the next 3 year you'll only qualify for automatic non residence if you go to work overseas.

Nevertheless this is a great opportunity for someone leaving the UK.

You can leave the UK and spend up to 16 days in the UK for the first 3 years and thereafter up to 46 days irrespective of the number of ties you have in the UK. It would not matter if you had UK family or accommodation. So long as you keep your visits to within these limits you would be non UK resident.

People definitely UK resident

If the above does not apply then you will definitely be UK resident if:

• You are present in the UK for 183 days or more in a tax year; or
• You have only one home and that home is in the UK (or you have two or more homes and all of these are in the UK); or
• You carry out full-time work in the UK

This is pretty much in line with the current provisions and isn't any more onerous. This will effectively catch anyone who in reality has their home or job in the UK but looks to argue that they are non resident.

When do you carry our full time work in the UK?

HMRC classes you as UK resident if you work full time in the UK for 365 days or more with no significant break from UK work.

In order to be caught by this rule (and therefore be automatically UK resident) you need to spend more than 75% of the total number of days in the tax year when you do more than three hours work, working in the UK.

The reference to "significant break" is interesting. HMRC state that you will have a significant break from UK work if at least 31 days go by and not one of those days is a day on which you:

• work for more than three hours, or
• would have worked for more than three hours, but you do not do so because you are on annual leave, sick leave or parenting leave.

Having an Overseas Home

Having an overseas home will be an important issue. HMRC have provided additional details on when having a UK home will make you UK resident if you also have an overseas home.

The notes issued to date state that you will be UK resident where:

• you have a home in the UK for a period of more than 90 days
• you are present in that UK home on at least 30 separate days (individual or consecutive days) during the tax year, and
• while you have that UK home, there is a period of 91 consecutive days, some or all of which falls within the tax year in question, when you
• have no home overseas, or
• have one or more homes overseas in none of which you are present for more than 30 (not necessarily consecutive) days during the tax year.

Therefore, you need to assess whether there is a period of 91 consecutive days, falling partly within the tax year when you have a home in the UK and no home overseas (or a home which is occupied for less than 30 days in the tax year). You also need to be present in your UK home on at least 30 days during the tax year.

If you meet all these conditions you would be UK resident..

If you have more than one home in the UK, you should consider each of those homes separately to see if you meet the test. You need only meet this test in relation to one of your homes.

If you have a UK home and an overseas home and want to avoid being UK resident by virtue of this condition one option could be to:

• Make sure that your overseas home is available for at least 91 days
• Ensure that you spend at least 30 days each tax year in your overseas home.

The rules relating to this "home" connection are complex, and anyone who thinks this could apply to them should consider the dates of their UK return visits and occupation of overseas properties very carefully.

What if I have more than one overseas home?

Based on the notes issued by HMRC, you would consider each home separately to assess whether it meets the 30 day requirement. It should apply irrespective of where the property is located.

People who could be UK resident or non-resident

This will apply to most people leaving the UK and takes account of the different ties that people can have to the UK and overseas.

It reflects the principle that the more time someone spends in the UK, the fewer connections they have with the UK if they want to be non-resident. It also incorporates the principle that residence status should adhere more to those who are already resident than to those who are not currently resident.

The Government proposes that the following five connection factors should be relevant to an individual's residence status, but only when linked to the amount of time the person spends in the UK:

• Family - the individual's spouse, civil partner, common law equivalent (provided the individual is not separated from them) or minor children are resident in the UK
• Accommodation - the individual has accessible accommodation in the UK and makes use of it during the tax year (subject to exclusions for some types of accommodation)
• Substantive work in the UK - the individual does substantive work in the UK (but does not work in the UK full-time)
• UK presence in previous years - the individual spent 90 days or more in the UK in either of the previous two tax years
• More time in the UK than in other countries - the individual spends more days in the UK in the tax year than in any other single country.

These connection factors would be combined with days spent in the UK into a "scale" to determine whether the individual is resident or not.

Leavers

When someone is leaving the UK and was resident in one or more of the three tax years immediately preceding the tax year of departure, the scale of factors to take into account where he or she spends:

• fewer than 16 days in the UK, he or she is always non-resident
• 16 to 45 days in the UK, he or she is resident only if four or more factors apply
• 46 to 90 days in the UK, he or she is resident only if three or more factors apply
• 91 to 120 days in the UK, he or she is resident only if two or more factors apply
• 121 to 182 days in the UK, he or she is resident only if one or more factors apply
• 183 days or more in the UK, he or she is always resident.

If you want to remain non resident your limits:
0 - connection factors -- up to 182 days
1 connection factor -- up to 120 days
2 connection factors -- up to 90 days
3 connection factors -- up to 45 days
4 connection factors -- up to 15 days

Arrivers

In the case of someone arriving in the UK and who has not been UK resident during the previous three tax years, the scale of factors is more attractive. Where he or she spends:

• fewer than 46 days in the UK, he or she is always non-resident
• 46 to 90 days in the UK, he or she is resident only if four factors apply
• 91 to 120 days in the UK, he or she is resident only if three or more factors apply
• 121 to 182 days in the UK, he or she is resident only if two or more factors apply
• 183 days or more in the UK, he or she is always resident

This is a novel system for recognising ties. For most people who are genuinely leaving the UK , it would be welcomed.

The main thrust of the Statutory Residence Test is to combat people looking to artificially avoid being UK resident whilst retaining strong UK links.

Most people who leave the UK look to reduce their UK visits. This would reduce their possible UK ties to just 1 or 2 from the above list. This is likely to be highly satisfactory and ensure that UK available accommodation could be retained in certain cases.

Example

Johnny is a long-term UK resident. He decides to leave the UK permanently at a time when the statutory residence test is in operation (in the proposed form discussed above).

Because Johnny has been UK resident throughout each of the previous three tax years, he will not automatically be non-UK resident when he leaves the UK, unless he is leaving under a full-time contract of employment or spends fewer than 16 days in the UK during the current tax year. We will assume that neither of these circumstances applies.

Johnny would not automatically be UK resident either, unless he spent more than 183 days in the UK during the tax year, had his only home(s) in the UK or was working in the UK. Again, we'll assume that these circumstances do not apply in Johnny's case.

Whether he is UK resident or not will depend on the type of connections he has to the UK and the number of days he spends in the UK.

Having UK available accommodation is just one factor. Providing he clearly establishes a home overseas, he could retain his UK accommodation, as long as he restricts his other UK connecting factors and his UK visits.

Therefore, if we assume his wife and minor child go overseas with him and he is not planning on carrying out any work in the UK, he would at most have two connecting factors, providing he spends more time in his new overseas country of residence than the UK. This means he could visit the UK for up to 90 days during the tax year without being classed as UK resident.

Note that the new test is planned to apply from April 2013.

The existing regime will apply for 2012/13.

Anti Avoidance Rule

There is also a new anti-avoidance rule that could affect dividends from your own company. Currently, if you extract cash as a dividend, as a non-resident it may be free of additional income tax.

However the new rule can mean that anyone moving abroad and classed as a "temporary non-resident" could remain subject to UK income tax UK dividends. We look at this later in the guide.

Deemed Days

The day tests under the "Sufficient Ties" test in particular can be favourable to anyone leaving the UK.

By carefully limiting UK ties emigrants can still spend significant periods in the UK without being classed as UK resident.

In earlier guidance on the Statutory Residence Test, HMRC made it clear they were looking at some form of restriction where an individual makes a lot of separate visits to the UK.

This has now been formed into the "Deemed Days" provisions.

You are only classed as spending a day in the UK if you are in the UK at midnight. For someone arriving on Friday and leaving on Monday, they would have Friday, Saturday and Sunday as days spent in the UK.

Where the deeming rule applies, the test can count days that you are not in the UK at midnight as days spent in the UK.

In practice the deeming rule will applies to someone who makes numerous return visits back to the UK.

When will the deeming rule apply?

The deeming rule applies where you:

• have at least three UK ties for the tax year, and
• have been present in the UK on more than 30 days in the tax year, without being present at the end of that day ('qualifying days'), and
• have been UK resident in one or more of the preceding three tax years.

If you meet these conditions, only the first 30 qualifying days are excluded. All other days above 30 are classed as days spent in the UK for the UK residence tests.

Key points

A qualifying day is effectively a day that you leave the UK. The aim of the deeming rule is to catch people who make frequent short visits back to the UK.

Based on the standard residence tests they may well be non resident due to having a low number of days in the UK, but when you class the days of departure as deeming days they may well be UK resident.

For most people though, 30 qualifying days should be more than sufficient, and it will only be extremely frequent UK visitors who will need to consider this rule. Even then once they have established non residence for 3 years it won't be immediately relevant.

You also need to have 3 UK ties under the Sufficient Ties test before the deeming rule applies.

If you have 2 UK ties and need to decide whether or not you have spent more than 90 days in the UK in either or both of the previous two tax years (which would make your 3rd UK tie), you exclude the deeming rule and only count days you were actually in the UK at midnight.

2.6 THE IMPORTANCE OF 'ORDINARY RESIDENCE'

Even if you qualify as non-resident you may still fall into the taxman's clutches by being classified as UK ordinarily resident, at least before 6 April 2013.

As from 6 April 2013 Ordinary Residence status is being abolished. However, we have retained it in this guide as it will affect anyone looking at their tax position before 6 April 2013.

There is no statutory test of ordinary residence. You will be classified as a UK ordinary resident if the UK is your 'normal place of residence'.

On leaving the country you will continue to be regarded as UK ordinary resident unless you go abroad with the intention of taking up permanent residence overseas.

Revenue and Customs normally interprets 'permanent' to mean three years or more.

It is therefore possible to be non-UK resident but UK ordinarily resident. This would occur, for example, where you go abroad for a long holiday and do not return to the UK during a particular tax year. You will continue to be classed as UK ordinary resident until you can show that you have taken up a permanent residence elsewhere.

The consequence of being classed as non-UK ordinary resident (as well as non-resident) is that you will not have to pay UK capital gains tax on your worldwide capital gains.

A person who is UK resident under the 183-day test may not necessarily be UK ordinary resident. Such a person may then claim to pay tax on overseas income that is brought into the UK.

However, a person who is UK resident as a result of the 90-day test would find it difficult to argue that he or she is not also UK ordinary resident and therefore worldwide income would be taxed as it arises, not just when brought into the UK. This is because the visits over a number of tax years would be evidence of an ongoing connection with the UK which would indicate UK ordinary residence status.

One factor to take into account in assessing ordinary residence is whether you continue to own and occupy property in the UK -- in particular, where the use or occupation of the property is combined with other factors, such as regular visits to the UK only slightly below the 90-day average. This will be persuasive evidence that you have not taken up a permanent residence elsewhere.

Many of the factors studied when assessing ordinary residence status will now also be looked at when assessing residence status. In particular, the extent of close ties to the UK will be of crucial importance (for example, family, property and employment).

However, a person who leaves the UK will cease to be UK ordinary resident if he or she establishes non-UK residence for three consecutive tax years.

2.7 ORDINARY RESIDENCE WHEN COMING TO THE UK

Establishing that you are not ordinarily resident is crucial in terms of avoiding capital gains tax if you plan to leave the UK.

However, establishing non UK ordinary residence status is also important for anyone coming to the UK. In particular, an individual who is UK resident but not ordinarily resident can claim the remittance basis of tax and avoid UK tax on overseas income or capital gains by retaining the income or proceeds abroad.

Ordinary residence was looked at in detail in February 2010 in the potentially important case of Andreas Tuczka. Just as the Gaines-Cooper and Grace decisions looked at residence status under common law, the Tuczka case looked at ordinary residence status following a review of the case law.

The position in HMRC 6 (formerly IR20) in respect of ordinary residence status is clear, but it is not legally binding. In this case HMRC pushed for a hearing before the tax tribunal where the strict legal interpretation of ordinary residence was applied rather than the HMRC practice.

What Does the HMRC Guidance Say?

HMRC will class you as ordinarily resident in the UK from the date you arrive, if it is clear that you intend to stay for at least three years.

If you don't intend to stay for three years when you first arrive HMRC will treat you as ordinarily resident from the beginning of the tax year after the third anniversary of your arrival.

This means there is a three year window in which you can avoid being classed as UK ordinary resident. However, to avoid losing the benefit of this three year period of non UK ordinary residence it is important that you:

• Do not originally intend to stay for at least three years, and
• Do not show any change of intention after you come to the UK, and
• Do not acquire any UK property or sign a lease lasting more than three years

Doing any of these could result in you being classed as ordinary resident in the UK before the three years are up.

If, after you have come to the UK, you decide to stay for at least three years from the date of your original arrival, you will be treated as ordinarily resident from:

• The day you arrive if your decision is made in the tax year of arrival, or
• The beginning of the tax year in which you make your decision when this is after the year of arrival

Similarly, if you buy accommodation in the UK after you come here you will be classed as UK ordinary resident from the start of the tax year.

An exemption worth noting: if you are treated as ordinarily resident only by virtue of owning or leasing property in the UK and you sell the property and then leave the UK within three years of your arrival, the taxman can treat you as not UK ordinarily resident for your period in the UK.

Ordinary Residence from April 2013

In the March 2012 Budget it was announced that ordinary residence status will be abolished from April 2013. The special relief for non ordinarily resident individuals working overseas will still remain (known as overseas workday relief).

As from April 2013, there should be no impact of ordinary resident status on capital gains tax.

However, the "old rules" (explained earlier) still apply for the 2012/13 tax year.

2.8 RESIDENCE IN A NUTSHELL

As you can see, residence issues can be fairly complex. It is useful to consolidate the above before looking at the detailed rules:

• An individual who is UK resident/ordinarily resident and domiciled will be liable to UK tax on his/her worldwide income and gains.
• An individual who is UK resident/ordinarily resident but not UK domiciled can claim to be liable to UK tax on overseas income/gains only when the income/proceeds are remitted to the UK. This is known as the remittance basis.
• An individual who is UK resident but not ordinarily resident can also claim to be subject to the remittance basis for overseas income.
• An individual who is non-resident and not ordinarily resident will be liable to UK income tax on UK source income but will be exempt from UK capital gains tax on all assets (whether situated in the UK or overseas), except for assets used in a UK trade.

Example 1

John, who is UK domiciled, has purchased a villa in Spain and intends to spend as much time there as possible.

He stays 10 months in the villa and, in order to supplement his income, rents out his property in the UK through a letting agent on a long lease and obtains a small part-time job in a Spanish vineyard, tasting local wines. He has sold all of his other UK investments. When he is not in the villa makes short trips to the UK to visit friends and spends the rest of his time travelling.

As from 6 April 2013 he would need to spend less than 16 days in the UK to be automatically non resident, given he has not gone overseas under a full time contract of employment. We'll assume he doesn't meet this requirement.

He should not be automatically UK resident and therefore it would be a case of looking at his UK ties. He could be classed as having UK accommodation (due to his UK trips) but even assuming this was the case, he should have just two ties so long as he doesn't have UK family.

From a UK tax perspective, he will be regarded as non-UK resident as he could visit for up to 90 days with two UK ties (but in fact spends much less than this). Therefore:

• His UK source income (in other words, rental income) will be subject to UK income tax.
• His overseas income (his income from his part-time job in Spain) will not be subject to UK taxation.

If Spanish property prices were to suddenly increase, John may decide to take advantage of this and dispose of his Spanish villa in July 2013 for a healthy profit.

As he is non UK resident, his profit from the sale of the Spanish villa will not be subject to UK capital gains tax.

2.9 WHY DOMICILE IS SO IMPORTANT

The concept of domicile is extremely important when it comes to both inheritance tax and overseas tax planning.

It is important to point out that your 'nationality' or 'citizenship' is NOT necessarily the same as your domicile.

You are normally domiciled in the country that you regard as your home -- not the place where you happen to be temporarily living. Your domicile is, in a sense, the country that you regard as your true 'homeland' and has frequently been described as the country in which a person intends to die.

It is therefore possible for a person to live in the UK for 40 years yet still remain legally domiciled in another country. Losing your UK domicile is substantially more difficult than losing your UK resident status.

While it is possible to be resident in two countries at the same time, it is only possible to be domiciled in one.

There are three types of domicile:

1. Domicile of Origin

A domicile of origin is acquired when a person is born. Under normal circumstances this is the father's domicile at the date of the child's birth. If the parents are unmarried, it is the mother's domicile that matters.

A domicile of origin continues unless the individual acquires either a domicile of dependency or a domicile of choice. This new domicile will remain in force unless it is abandoned, in which case the domicile of origin is revived.

2. Domicile of Choice

In order to acquire a domicile of choice, a person must voluntarily make a new territory his residence and intend to remain there for the rest of his days -- unless and until something occurs to make him change his mind.

Obtaining a domicile of choice is primarily a question of intent. However, once such a domicile has been established it is relatively difficult to abandon. It would be necessary for an individual to cease to reside in the country of choice indefinitely. Later on we list some practical steps that can be taken to help establish a domicile of choice.

3. Domicile of Dependency

This type of domicile only applies to children under the age of 16. A child's domicile of origin is replaced by a domicile of dependency if there is a change in the father's domicile (mother's domicile in the case of unmarried couples). If this happens, the parent's domicile of choice becomes the child's domicile of dependency. The child keeps this domicile unless the child does not live in the territory and never intends to live there. In this case, the child's domicile of origin revives.

Example

John was born in Latvia and is regarded as being of Latvian domicile. John went to live in France and successfully established France as his domicile of choice. His son Jack, who was born in Latvia, would also initially have a Latvian domicile of origin. However, he would 'inherit' his father's French domicile. This would become his domicile of dependency. If Jack intends to permanently return to Latvia on his 18th birthday and makes preparations for this, his domicile will revert to his domicile of origin. The domicile of dependency has essentially been changed -- by indicating his intention to return to Latvia, the domicile of origin 'reasserts' itself.

2.10 WATCH OUT FOR THIS INHERITANCE TAX TRAP

Inheritance tax issues are dealt with later in the guide. For inheritance tax purposes only there is the concept of 'deemed domicile'. Individuals are deemed to have a UK domicile:

• If they have been UK resident for 17 out of the last 20 years, or
• They have lost their UK domicile in the last three years.

Example

David was born in France, but has been living in the UK since 1960. He has always intended to return to France, and still regards France as his home. For income tax purposes, and under the general law, David is of French domicile.

However, for inheritance tax purposes, he is deemed UK domicile as he has lived in the UK since 1960 and would therefore have been resident for more than 17 years.

Therefore for inheritance tax purposes, David would be subject to UK inheritance tax on his worldwide estate. On his return to France, David would continue to be deemed UK domicile for inheritance tax purposes for three years after leaving the UK.

About the Author

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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