An individual who is UK resident is taxed on their worldwide income and gains. A non UK resident is generally only liable to pay tax on income arising from UK sources, and capital gains derived from residential property located in the UK. However, there are anti avoidance rules, and also different rules apply to those who are not UK domiciled (which essentially means they did not originate from the UK).
The tax residence status of an individual used to be determined on a non statutory basis, and took into consideration the average number of days the person concerned spent in the UK. If they spent on average more than 90 days in the UK per tax year, they would generally have been considered to be UK resident.
Eventually the government decided they needed some legislation to clarify matters, so in April 2013 the Statutory Residence Test (SRT) was introduced. You can find a guide to the SRT online which is 103 pages long; I am now going to try and summarise this guide in a few paragraphs!
The SRT works by looking at how closely linked to the UK a person is. Do they have a home in the UK and/or overseas, do they work here or overseas? Do they have a spouse or minor children who live in the UK? It also considers how much time is spent in the UK in the tax year in question, and in the preceding few tax years.
The 90 day test still has a place, as it is unlikely that someone who resides in the UK for less than 90 days will be UK resident, and likely that they will be if they spend more than 90 days here in a given tax year.
The SRT is fairly logical, in that firstly it seeks to determine whether someone is clearly non resident, then likewise if someone is clearly tax resident in the UK (such as if they spend more than half a tax year here). If none of these clear tests are passed, it the test then looks into how closely linked the person is to the UK by implementing a set of ties.
Normally you are considered to be either tax resident in the UK for an entire tax year, or non resident. In some instances, such as the year of arrival or departure it is possible to split the year, in which case your tax residence status will be considered to have changed on a specific date. For this reason it is worth getting advice before departing from or arriving in the UK, as in some circumstances it is possible to arrange matters in a way that will prevent some offshore income and gains from becoming taxable in the UK.
The anti-avoidance rules prevent individuals from visiting tax havens temporarily, in order to sell UK assets free of UK CGT. Taxpayers have to be non resident for 5 entire tax years in order to ensure gains derived from the sale of UK assets are not taxed upon that persons return to the UK.
Matters get further complicated if Inheritance tax is at stake as HMRC then consider a persons domicile (country of origin) as well as their residency status. Broadly speaking, if a UK domiciled individual has been UK resident in any of the 3 tax years preceding their death, HMRC will take an interest in the value of their entire estate, irrespective of where they died. Likewise a non domiciled individual will attract HMRC’s attention if they have been resident in the UK during at least 15 out of the 20 tax years preceding their death.
Finally, I should point out that HMRC have recently spent a lot of time and effort checking that UK resident individuals have been correctly declaring their offshore income and gains. A disclosure facility remains upon until 30 September 2018. Anyone wishing to bring their affairs up to date via the disclosure facility has until 30 September 2018 to register their intent, should they wish to qualify for reduced rates of penalties.
If you have any queries about international tax matters, please contact Tom Foster.
