From 6 April 2013, the tax rules relating to residence in the UK were set out in legislation. This is a welcome improvement on the previous position, under which the tests for residence for tax purposes were based on some Court decisions, mostly of considerable antiquity, as amplified by HMRC practice. The combination of these factors gave the result that the relevant tests were rather vague and unreliable.
The legislation relating to residence now states that for someone who has not been resident in UK for any of the previous three tax years, that person does not in any circumstances become UK resident if he or she spends fewer than 46 days in the UK in the current tax year.
Equally, if a person is working full time outside the United Kingdom (on average at least 35 hours per week) and spends fewer than 91 days in the United Kingdom without there being any significant breaks from overseas work, the person will not be UK resident. Up to 30 days working in the UK are allowed under this rule.
On the other hand, someone who came to the UK for the first time after 5 April 2016 will be UK resident this year if he or she spends 183 days or more in the UK. For this purpose, a day counts as a day spent in the UK if the person is present here at midnight on that day. Some days spent in the UK due to exceptional circumstances, outside his or her control, may not count towards the total day count.
Those who come to the UK to work here full time will also acquire UK residence status for tax purposes. There are some detailed rules relating to what constitutes full time work in the UK but broadly, if more than 75% of work days are in the UK, this will amount to full time employment here.
Those who acquire a home in the UK which they stay at for at least 30 days in the tax year will become UK resident if during that time:
The above sets out only a brief summary of the rules used to determine whether a person is either conclusively resident or non-UK resident this year. There are some matters of detail which have not been covered. More difficult situations will arise where a person is not within any of the scenarios set out above but he or she acquires what the legislation terms as "ties" with the United Kingdom whilst spending more than 45 days here during the tax year. In such cases, a person spending 46-90 days in the UK will be resident if he or she has four of the ties listed below; if the person spends 91 – 120 days, UK residence will apply if there are three ties; a person spending 121-182 days will be UK resident with two ties.
The ties referred to above are summarised below.
This applies where a person's spouse, civil partner (unless legally separated), common law spouse or infant child is UK resident in the UK. If the infant child is in the UK simply for the purposes of full time education and does not spend more than 20 days in the UK outside term time, that will not in itself constitute a family tie.
This applies where the person has a place to live in the UK that is available to him during the tax year for a continuous period of 91 days or more and the person spends at least one night at the property. An accommodation tie could be the home of a close relative, in which case the test is that 16 or more nights are spent there. It will be seen therefore that it is not necessary for the accommodation to be owned by the person concerned so that in theory, a hotel room reserved for that person can constitute an accommodation tie.
If a person works in the UK for at least 40 days in the tax year for more than 3 hours a day, this constitutes a work tie.
This applies for those who have spent at least 91 days in the UK in either or both of the previous two tax years.
Assuming that a person comes to the UK for the first time after 5 April 2016, it may be seen from the tests set out above that only the family tie, the accommodation tie and the work tie might be relevant. This means that the person can spend up to 90 days in the UK without becoming UK resident, even if all three ties apply. If the person is not working in the United Kingdom, up to 120 days can be spent in the UK without becoming UK resident. If either the family tie or the accommodation tie do not apply as well, then up to 182 days can be spent in the United Kingdom without UK resident status being acquired.
Those who came to the United Kingdom after 5 April 2016 and who as a result become UK resident for tax purposes, will be liable to UK income tax on all sources of UK income which they may have during that year. Initially at least, foreign sources of income will not be liable to UK tax unless the income is brought into the United Kingdom; this applies to those who are not domiciled in the United Kingdom which will be the case for the majority of those coming to this country for the first time. However, it should be noted that there are circumstances in which a person may be domiciled in this country because their parents were domiciled here, even though the person has never lived here.
The charge to tax on money brought into the United Kingdom is known as the "remittance basis charge" and is subject to very detailed rules not covered in this memorandum. This will not be the case for the majority of those coming to this country for the first time.
The remittance basis for foreign income and capital gains can be freely claimed for the first 7 tax years during which a person is UK resident. After 7 out of 9 years of residence in the UK, a flat rate charge of £30,000 must be paid in order to continue claims to be taxed on the remittance basis. Based on current legislation, the flat rate increases to £50,000 for those non-doms who are UK resident for more than 12 of the past 14 years, and to £90,000 for those who have been UK resident for more than 17 of the past 20 years.
Under new proposals taking place next year, non-doms who have been UK resident for at least 15 out of the last 20 years will be deemed UK domiciled for all taxes. Long term UK residents who are also non-domiciled will have to pay UK taxes on their personal worldwide income and gains as they arise with effect from 6 April 2017. Specialist advice should be sought before 6 April 2017 for those affected by this change.
It should be noted that if the remittance basis is claimed, entitlement to Income Tax personal allowances is lost, as well as the Capital Gains Tax annual exemption.
As regards Capital Gains, any gains realised on the disposal of United Kingdom assets will be within the scope of charge to Capital Gains Tax after UK resident status is acquired. Most commonly, in the circumstances under consideration here, this will most apply to the sale of investments quoted on the London Stock Exchange. Any gains on foreign assets will not be liable to UK Capital Gains Tax so long as no part of the funds realised is brought into the United Kingdom, once again assuming the person is neither a UK domiciled nor a longer term UK resident.
Those who are well advised will therefore sell and buy back quoted investments before arriving in the United Kingdom, so long as this does not cause an unacceptable tax liability overseas.
Previously, long term non-resident individuals meeting certain conditions have escaped Capital Gains Tax on the sale of their UK residential property. Non-UK residents will now be liable to Capital Gains Tax on any gains arising after 6 April 2015. Essentially, this will involve a re-calculation of the gain as if the UK asset had been acquired at Market Value on 6 April 2015.
However, where gains subsequently become taxable in the UK after UK resident status is acquired, the whole gain since original acquisition of the asset is charged to tax and not just the part of the gain arising after you resume UK residence. Those affected may therefore be in a better position selling their UK property prior to their return to the UK to benefit from the 6 April 2015 ‘rebasing’, so long as this does not cause an unacceptable tax liability overseas.
For those non-domiciles coming to the UK for the first time, there should be no existing UK assets affected by these new rules.
It was always the case that those coming to the UK to live for the first time could be treated as UK resident from the date of arrival, and not from the previous 6 April, being the start of the tax year. This rule continues to apply and now forms part of the new legislation. Specialist advice should be taken, as split year treatment relies on the arriver meeting a number of complex conditions.
Those who come here to work may perhaps be seconded to a UK office of a foreign company, although they may still carry out some work overseas. If all the remuneration is paid under the employment in the United Kingdom, it will be fully liable to UK Income Tax. In such circumstances, it can be advantageous to have a separate employment for the work which is carried on outside the United Kingdom, so that this will not be taxable here if the earnings are not brought to the United Kingdom and the employee is not domiciled here. This is known as a split contract arrangement and it requires careful structuring, as HMRC will not accept the validity of any attempt to divide the overseas work artificially from the UK duties.
The National Insurance rules for those coming to the UK do not follow the tax regulations. There are complicated rules surrounding short term business visitors and multi-state workers, and specialist advice should be sought.
This memorandum has set out just a broad outline of the complex issues which arise for foreigners coming to the United Kingdom. It is advisable for advice to be sought before first coming to the UK and it is unfortunate that many do not discover this until it is too late.
Please note that this Memorandum is not intended to give specific technical advice and it should not be construed as doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic.
Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.