Leaving the UK and how to avoid tax timing traps
Strictly, the decision as to whether you are resident/ordinarily resident needs to be made for an entire tax year. In other words, you are not normally resident for part of a tax year.
Example 1
Keith is present in the UK from 6th April 2013 to 7th October 2013 (185 days). He would be resident in the UK for the entire 2013/14 tax year.
In practice, an exception used to be made to this rule where a person leaves the UK to take up a 'permanent' residence elsewhere. Such a person is regarded as resident in the UK from 6th April to the date of his departure. In other words, rather than being regarded as UK resident for the whole of the tax year, the individual will be regarded as non-resident for the period that he is overseas.
This treatment is known as 'split year' treatment and was allowed by way of a Revenue and Customs concession. In fact its use is widespread - particularly for income tax purposes. There are significant restrictions on its use for capital gains tax purposes.
Before 6 April 2013 the split year basis was generally used where an individual:
• Either leaves the UK permanently or indefinitely (defined as at least 3 years)
• Or leaves the UK under a full time contract of employment which last at least a complete tax year.
In the case of someone leaving the UK it means that they are only subject to UK income tax on foreign income up to the point they leave the UK. After they leave the UK they are then not subject to UK income tax.
The new statutory residence test
As part of the change to a statutory residence test they are also going to formalise the split year rules.
However, as this is going to be legislated they want to be crystal clear and avoid any ambiguities. Therefore they have said:
"...It is not possible to recreate the conditions of the current extra statutory concessions exactly because they rely on the subjective and imprecise concept of becoming 'permanently' resident in the UK or elsewhere.
Therefore, in keeping with the intention of introducing clear and objective rules, the statutory provisions on split years will be linked to the conditions contained in the statutory residence test..."
This means the new rules will only treat a tax year as being split into periods of residence and non-residence in a specific number of defined cases.
These are:
• You become resident in the UK if you start to have a home in the UK;
• You become resident by starting full-time employment in the UK or by going to live in the UK;
• You lose UK residence by establishing your only home in a country outside the UK;
• You lose UK residence by virtue of working full-time abroad (or your partner does).
Under the existing rules you can qualify for split year basis when you leave the UK or come to the UK for a full time employment.
This remains broadly the same under the old and new rules although the new rules include a number of detailed provisions as to precisely when the split year basis is available.
They also include a useful table that reduces the 90 day visit limit in the tax year that you leave, dependent on the month that you leave the UK (ie if you left in May you could visit for 82 days, compared to just 7 if you left in March).
However, what has changed is that the only other occasions when the split year basis will apply are where you either leave the UK and cease to have a UK home or you come to the UK and establish your only home in the UK.
Currently providing you can show a permanent departure from the UK the tax year is split.
However as from April 2013 unless you're leaving under a contract of employment you would need to establish your only home abroad and meet the other conditions to be non resident.
This will therefore significantly reduce the occasions when the split year basis will apply. HMRC have specifically stated that the various other occasions when you lose UK residence (the sufficient ties factors such as having UK family) won't be taken into account when considering the split year basis.
This can make ceasing to have a UK home and establishing your only home overseas very attractive in the tax year that you leave the UK.
ESTABLISHING YOUR MAIN HOME OVERSEAS
If you want to claim the split year basis and make your main home overseas you need to make sure that within six months of departure your normal home is overseas.
You can also spend up to 16 days in the UK in the year of departure.
In addition, the following conditions will apply:
• you must have been resident in the previous tax year (this includes where the previous year was a split year);
• must cease to have a UK home in the tax year
• must be non-resident in the following year.
From the point you cease to have a home in the UK you must spend fewer than 16 days in the UK and either
You'll see from this that's its not strictly necessary to establish your home overseas. Rather you need to cease to have a UK home and then either establish tax residence overseas, be present in another country for 6 months or establish an overseas home.
Of course in most cases the above will entail establishing your home overseas in any case.
It's also worth noting that the above, combined with the rest of the provisions makes it clear that in order to lose UK tax residence it is not necessary to establish tax residence overseas. You could also still claim the split year basis even without tax residence overseas.
The above may make it more difficult for transient individuals such as fiscal nomads to claim the split year basis in the year of departure.
Before you submit your tax return it is possible to obtain an informal review of your status by submitting a form P85 (www.hmrc.gov.uk/cnr/p85.pdf) stating that you regard yourself as non-resident from a certain date.
However, if you receive a self assessment tax return, you would enter details of your non residence on your tax return as part of the normal self assessment process.
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.
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Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
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