The Split Year Basis and the new Statutory Residence Test

You're usually resident or non resident in the UK for an entire tax year. Based purely on the tax legislation there is no facility to split tax years with you being resident for a part but non resident for another part. However, by concession HMRC do adopt the split year basis. In fact its use is widespread - particularly for income tax purposes. There are significant restrictions on its use for capital gains tax purposes. The split year basis is 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 We've looked in other articles at the new statutory residence test that will apply from April 2012. Essentially it is intended to more firmly define when an individual is, and is not UK resident. As part of the changes they are also planning 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 if a person:

becomes resident in the UK by virtue of their only home being in the UK;

becomes resident by starting full-time employment in the UK;

establishes their only home in a country outside the UK and becomes tax resident in that country and does not come back to the UK in that tax year;

loses UK residence by virtue of working full-time abroad; or

returns to the UK following a period of working full-time abroad. These are however the only occasions when the split year basis will apply (under the proposals to date). Currently providing you can show a permanent departure from the UK the tax year is split. However as from April 2012 unless you're leaving under a contract of employment you would need to establish your only home abroad, become tax resident there and avoid coming back to the UK for that tax year. 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 so called "part C" factors such as having UK family) won't be taken into account when considering the split year basis.