The new statutory residence test from April 2013
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.
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 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:
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.
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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