Tax residence for a fiscal nomad - before and after 6 April 2013
The basic principle behind the idea of becoming a fiscal nomad is to exploit the residency rules in a number of countries so that you're not caught by any one country's tax net. Most people will do this by either travelling continuously or basing themselves in a handful of countries and only spending a few months in each. Providing care is taken as to the length of stay you could simply be treated as a tourist in each country and be exempted from any requirement to pay income tax.
In practice of course. travelling continuously can usually only be maintained for a few years due to the other burdens of being so nomadic, and it is the second option of splitting your time between a few well chosen countries that is most popular.
However, in terms of UK tax can you actually avoid being UK resident if you leave the UK and don't establish tax residence overseas?
The UK tax position will vary significantly depending on whether you left before or after 6 April 2013.
Before 6 April 2013
When you leave the UK, if you want to be classed as non UK resident from the date of your departure you need to be able to show that you have left the UK permanently or indefinitely. You can then claim the split year basis. This is primarily a question of fact.
If you're looking at establishing non UK residence it's crucial that you:
• limit visits to the UK, particularly if there is any continuous obligation that ties you to the UK
• show a distinct break from the UK, including a change in the established pattern of your life
• avoid having a UK home or any UK available accommodation
The key issue for most people leaving will be to ensure that they show a "distinct break" with the UK. This is essentially a question of fact and would involve HMRC looking at UK visits and UK ties to assess whether they had a substantial ongoing connection with the UK. In the Gaines Cooper cases this was referred to as having a 'Gravity of Interests' in the UK.
Recent cases have made it clear that having UK available accommodation is a factor to be taken into account when assessing residence status.However, having UK accommodation is only one factor to be considered. In particular they will want to look at your overall connections and ties to the UK.
It would be important that you:
• Avoid a pattern of regular and significant UK visits that suggest a UK lifestyle
• Keep UK visits to an absolute minimum
• Ensure you establish a base for yourself overseas
• Spend much more time overseas than you do in the UK
• Move your possessions overseas
• Ensure your family is with you overseas
• Consider establishing treaty residence overseas by virtue of having a permanent residence overseas
The above all apply equally to someone who leaves the UK and doesn't establish tax residence overseas. They would still need to show a distinct break from the UK, including a change in the established pattern of their life.
A prospective fiscal nomad would therefore need to look at their lifestyle before the planned departure and again after the departure and be able to show a sufficient break in the pattern of his life to convert his residency status to non residence. Particular care should be taken with family and social ties. The Court of Appeal judgement in Gaines Cooper stated that a distinct break requires severance of all family and social ties in the UK.
HMRC have argued that residence has an adhesive quality- however its important to bear in mind that it is significantly different to domicile. Everybody has a domicile and when one is lost, another is gained. Residence is not as adhesive as domicile and residence can be lost without having to acquire tax residence elsewhere.
After 5 April 2013
The new statutory residence test applies after April 2013. This provides specific statutory rules that where followed will provide certainty as to residence status.
Finance Act 2013 contains the relevant provisions.
It starts by stating:
"The basic rule
3 An individual ("P") is resident in the UK for a tax year ("year X") if--
(a)the automatic residence test is met for that year, or
(b)the sufficient ties test is met for that year.
4 If neither of those tests is met for that year, P is not resident in the UK for that year."
It then states
"...5 The automatic residence test is met for year X if P meets--
(a)at least one of the automatic UK tests, and
(b)none of the automatic overseas tests..."
Therefore if you meet an "automatic overseas test" you shouldn't be UK resident.
Looking at the "automatic overseas test" it states:
"11 There are 5 automatic overseas tests.
12 The first automatic overseas test is that--
(a)P was resident in the UK for one or more of the 3 tax years preceding year X,
(b)the number of days in year X that P spends in the UK is less than 16, and
(c)P does not die in year X.
13 The second automatic overseas test is that--
(a)P was resident in the UK for none of the 3 tax years preceding year X, and
(b)the number of days that P spends in the UK in year X is less than 46..."
Therefore for most UK residents leaving the UK they should be able to establish non residence if they spend less than 46 days in the UK in a tax year. There is no mention of having to establish tax residence overseas.
When does the legislation require tax residence overseas?
Looking through the legislation there is just one occasion where foreign tax residence is taken into account. This applies when an individual is looking to establish the split year basis when they leave the UK. There are 5 different occasions where the split year basis can be claimed. Number 3 applies where an individual ceases to have a home in the UK.
The legislation states:
"...Case 3: ceasing to have a home in the UK
46 (1)The circumstances of a case fall within Case 3 if they are as described in sub-paragraphs (2) to (6).
(2)The taxpayer was resident in the UK for the previous tax year (whether or not it was a split year).
(3)At the start of the relevant year the taxpayer had one or more homes in the UK but--
(a)there comes a day in the relevant year when P ceases to have any home in the UK, and
(b)from then on, P has no home in the UK for the rest of that year.
(4)In the part of the relevant year beginning with the day mentioned in sub-paragraph (3)(a), the taxpayer spends fewer than 16 days in the UK.
(5)The taxpayer is not resident in the UK for the next tax year.
(6)At the end of the period of 6 months beginning with the day mentioned in sub-paragraph (3)(a), the taxpayer has a sufficient link with a country overseas.
(7)The taxpayer has a "sufficient link" with a country overseas if and only if--
(a)the taxpayer is considered for tax purposes to be a resident of that country in accordance with its domestic laws, or
(b)the taxpayer has been present in that country (in person) at the end of each day of the 6-month period mentioned in sub-paragraph (6), or
(c)the taxpayer's only home is in that country or, if the taxpayer has more than one home, they are all in that country..."
Therefore tax residence overseas can be taken into account for the split year basis.