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New statutory residence rules – going abroad

Those who leave the United Kingdom to set up home overseas will have no problem as regards their residence status for UK tax purposes if they sell up completely in the United Kingdom, move abroad and make no return visits here. This, of course, is usually not practical at all. They may have friends or family still in the United Kingdom whom they will want to visit and they may want to keep a home here which they can use on return visits. The question then arises as to what extent they can keep their UK connections whilst becoming non-UK resident.

Up to 5 April 2013, the general rule was that one had to make a permanent break with the UK in order to become non-UK resident. Exactly what constituted a permanent break was not necessarily all that clear.

With effect from 6 April 2013, the rules regarding UK residence for tax purposes were set out in legislation. These rules are very detailed but they give the considerable advantage that they do lay down some clear guidelines.

Conclusive non-resident status

In two circumstances, a person leaving the UK will be conclusively non-resident for UK tax purposes. These are as follows:

  1. The person spends fewer than 16 days in the UK in the tax year in question.
  2. The person has gone abroad for full time work overseas, without any significant breaks from that work and not spending more than 30 days working in the UK, or more than 90 days in the UK for any purpose whether work or not.

It has always been the case that going abroad for full time work was the best way to secure non-resident status for UK tax purposes. This remains the case under the new statutory rule because it does not matter that a UK home is retained or that family members remain in this country. However, the legislation is very clear as to the definition of full time work without any significant breaks from that work, and so careful consideration must be given.

Keeping a home in the UK

Where a person goes abroad for reasons other than full time work and makes return visits to a home in the UK of more than 15 days in a tax year, it will be important to ensure that the person also has a home overseas and that sufficient use is made of that home on a continuing basis. This is because there is a complex rule which can treat the person as remaining UK resident where certain tests are satisfied as regards the use of the two properties. Specialist advice should always be taken where this may be an issue. Careful management of the time spent at the UK property and at the home overseas will be necessary. If the UK home is let then this point will not arise.

Spending more than 6 months in the UK

If a person spends at least 183 days in the UK in any tax year, he or she will be UK resident for that year.

Retaining ties with the UK

Many of those who do move abroad for non-work related reasons will keep connections with the UK. If they spend between 16 and 182 days here in a tax year and take care to make sufficient use of a home overseas, as already explained, their residence status for UK tax purposes will be decided by a more complex set of tests based on their "ties" with the UK.

The ties referred to above are summarised below.

Family Tie

This applies where a person's spouse, civil partner (unless legally separated), common law spouse or infant child is UK resident. 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.

Accommodation 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.

Work 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.

90 Day 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.

Country tie

If the UK is the country in which a person spends the most days during the tax year out of all the countries visited, this satisfies the country tie test. For the purposes of this test, days are counted by reference to being present at midnight.

Applying the above tests

Anyone leaving the UK to live abroad will remain resident for UK tax purposes if they spend 16 to 45 days here and have 4 of the ties listed above. A person spending 46-90 days in the UK will be resident if he or she has three of the ties. With 91 – 120 days in the UK, two ties will give rise to UK tax residence and 121-182 days just requires one tie to give rise to continuing UK residence.

Generally

It was always the case that those leaving the UK could be treated as non-UK resident from the date of departure and not from the following 6 April, being the start of the next 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 leaver meeting a number of complex conditions.

The above sets out a broad summary of the fairly detailed rules to determine UK residence for tax purposes under the new statutory rules. There are some matters of detail which have not been covered and specific professional advice should always be obtained.

Tax Position after Acquiring Non-resident Status

It is a common fallacy that those who are not UK resident for tax purposes are not liable to UK income tax. In fact, there is continuing liability to tax on UK sources of income although detailed rules apply to different categories of income. Accordingly, those retaining sources of UK income after leaving the UK may still be required to make UK tax returns under the self-assessment system after departure. The normal penalties for non-submission of returns or for late returns will continue to apply. The key points are:

  1. Any sources of rents from UK property remain fully liable to UK tax and it will normally be advisable to apply to HMRC for exemption from the Non-Resident Landlord Scheme (by which tax is deducted from rents by collecting agents) so that the income can be declared on tax returns in the normal way. Another example of income which would remain fully liable to UK tax is any income from a UK trade.
  2. UK income not liable to income tax to non-residents includes the state pension and any bank interest where tax is not deducted at source. Dividends paid by quoted companies are also effectively not liable to tax to non-residents. Dividends were previously paid with a tax credit which satisfied the tax liability of those who were non-resident, although the credit was not repayable. Recent changes mean that dividends are no longer paid with the UK tax credit, although non-residents remain largely unaffected. The same applies to distributions from unquoted companies but dividends from family companies will not be tax free if paid to a shareholder who is non-UK resident for five years or less and the dividend is paid out of retained profits in hand up to the company's accounting period ending in the year when the shareholder leaves the United Kingdom. This is designed to prevent shareholders in such companies taking out accumulated profits tax free by leaving the UK for one or two tax years. Where this rule applies, such dividends are charged to tax on the shareholders in the year of return to the UK.
  3. 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.

Dividends from family companies and gains on assets held at the time of leaving the UK and sold during a period of temporary non-residence (five years or less) continue to remain liable to UK Capital Gains Tax.

The tax liability on temporary non-residents in respect of family company dividends and capital gains arises in the year of return to the UK.

ISAs

Those who already hold ISAs at the time of leaving the UK can retain them and keep the tax exemptions which apply to them but no further subscriptions to an ISA can be made once a person is non-UK resident for tax purposes.

FOR GENERAL INFORMATION ONLY

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.

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