The residency status of a globally mobile individual is a key factor for income taxation. It is also important for social security and estate and gift taxes. Residents and non-residents are often subject to significantly different tax rules in a country.
UK tax residency
Residency had been a major issue in the UK for many years, falling outside of tax legislation and based mostly on case law. In an effort to reduce uncertainty and bring matters under a legislative framework, HMRC introduced a Statutory Residency Test in April 2013, which has significantly changed the way that tax residency is determined.
There are three tests to determine tax residency, namely "automatic non residency", "automatic residency" and the "UK ties" tests. When completing each test it is necessary to consider each year separately and work through the tests from the top down. Once you can answer "yes" to one of the tests, this determines your residency position for that tax year.
Automatic non residency will apply in any tax year that an individual:
- has been non resident for the prior 3 years and spends less than 46 days in the UK; or
- has been resident in one of the prior 3 years and spends less than 16 days in the UK; or
- leaves the UK to work full time overseas and spends less than 91 days and no more than 30 working days in the UK
Automatic residency will apply in any tax year that an individual:
- is present in the UK for 183 days or more; or
- has all of their homes in the UK and spends more than 30 days there; or
- Works “sufficient hours” in the UK (broadly more than 75% of overall workdays are spent in the UK over a 365 day period)
If you do not meet the requirements for "automatic non residency" or "automatic residency", then you must look to the "ties test". This provides the maximum number of days that an individual can spend in the UK before becoming tax resident, according to the number of "connection factors" that they have with the UK. The more connection factors, the lower the number of days that can be spent in the UK before becoming resident, or conversely, the more days that you need to remain outside of the UK to become a non resident.
The rules are extremely complex and require professional UK tax advice prior to any move. An added complication is that, for many globally mobile individuals, the UK domestic rules may be overridden by international tax agreements permitting "treaty" residency to another jurisdiction. Whilst this can complicate matters further, it can also be an effective planning tool, particularly where domestic UK residency rules provide a less favourable outcome, or a double taxation issue. What is clear is that both domestic and international law must now be considered with any UK inbound or outbound move and whilst the UK rules may now be under a statutory footing, they may still not provide the final answer!
Overseas workday relief
As part of these changes, the concept of Ordinary Residence was abolished and the overseas workday relief that used to be available to individuals who could claim "not ordinary resident" status has now been defined in statute. This allows certain individuals moving to the UK (with some restrictions on prior UK residency) to claim exemption from UK tax for earnings relating to days spent working outside of the UK for the year of arrival and the following two tax years.
However, one of the main conditions for the workday relief is that the proceeds from earnings relating to non UK workdays must be paid outside of the UK and kept outside. The employment income must also be paid into a 'Qualifying Account' in order to be able to make an overseas workday claim and benefit from "Special Mixed Fund Rules" (if the account is not qualifying, the relief is still possible, but is subject to the highly complex normal mixed fund rules requiring analysis of each and every remittance to the UK). In order to be considered as a Qualifying Account the account must meet a number of conditions making pre-assignment planning so vital.
Taxation of Share Options
The tax and National Insurance rules regarding share options and restricted shares changed significantly in respect of any income realized on or after 6 April 2015. Under the new rules, the gain that is deemed to accrue in the UK will be considered taxable for both grants made when UK resident and non UK resident. This is a change from the previous rules, where no liability to tax on exercise would arise where an option was granted whilst non-resident.
For the first time, the income chargeable to National Insurance is now also pro-rated, aligning itself with the tax rules. Whilst this may simplify matters on the UK side, there is already much confusion as to how this "apportionment" will interact with overseas jurisdictions that do not have a similar basis. Whilst this is outside the scope of this newsletter, a separate article on this issue will be available shortly.
Capital gains tax changes for non residents
The recent UK Budget Statement also extended the reach of UK capital gains tax to include disposals of UK residential property by non residents of the UK. Prior to 6 April 2015, any sale of a UK property by a non resident individual would be outside the scope of capital gains tax at the point of sale, provided that the individual was either non resident when the property was purchased, or spent at least five full tax years outside of the UK. From 6 April 2015 onwards, gains on the sale of UK property owned by non residents will be chargeable to capital gains tax, based on the increase in value from 6 April 2015 onwards. A valuation at that date will be required to determine the base cost for tax purposes.
UK "domicile" status
Finally, there has been much political debate over the concept of "domicile" status and associated tax advantage in the UK. Currently, an individual can claim non-domicile status if they are a non UK citizen moving to the UK and do not intend to remain indefinitely. The status allows exemption from UK on overseas income and gains provided these are not remitted to the UK.
A non domiciled individual that has been tax resident in the UK for at least 7 out of the last 9 years is required to pay an annual charge of £30,000 to maintain the exemption (effectively from year 8 onwards), or commence reporting worldwide income and gains, whether or not remitted. The annual charge increases to £60,000 for individuals who have been resident in the UK in at least 12 of the last 14 years and £90,000 for individuals who have been resident in the UK in at least 17 of the last 20 years.
As part of the 2015 Summer Budget, the newly elected Conservative government declared their intent to introduce new legislation to limit the number of years that a non domicile claim can be maintained. From April 2017, any individual that has been resident in the UK for more than 15 of the past 20 tax years will now be deemed to be domiciled in the UK for tax purposes, without any possibility of paying an annual charge to avoid declaring worldwide income. This will have significant implications for many high net worth overseas nationals residing in the UK.
If you have any questions please contact Richard Watts-Joyce at email@example.com or +44 (0) 207 100 2126.
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.