Article
Statutory residence test - Finance Act 2013
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The statutory residence test to determine an individual's residence status for tax purposes came into effect on 6 April 2013. Following two years of consultation and consideration, the legislation was enacted on 17 July 2013 in the Finance Act 2013.
HMRC subsequently published guidance (RDR3) to explain how the new rules should be interpreted.
The statutory residence test
Prior to 6 April 2013, the rules for determining whether an individual was resident in the UK for tax purposes consisted of a mixture of case law (some dating back to the 19th century), HMRC guidance of questionable assistance and a few broad statutory provisions. As such, it was difficult to advise with confidence as to whether someone was UK resident. Therefore, the introduction of a statutory residence test is welcome.
Summary of the rules
The test combines a test of presence in and connections with the UK. It applies only to individuals and covers income tax, capital gains tax and, where relevant, inheritance tax and corporation tax. It supersedes all existing legislation, case law and guidance for tax years following its introduction.
The test is divided into three parts, as follows:
- the automatic overseas tests, the satisfaction of one of which for a tax year means the individual is automatically non-UK resident for that year. If none of these tests applies to an individual;
- the automatic residence test, divided into three automatic UK tests for those living at the end of a tax year, the satisfaction of one of which for a tax year means that the individual is automatically UK resident for that year. If neither automatic test applies to an individual;
- the sufficient ties test will determine the position. This test compares the number of days during a tax year spent by an individual in the UK with the number of 'ties' the individual has with the UK during that year. These 'UK ties' relate to family, work, accommodation, days spent in the UK in earlier tax years (90-day tie) and days spent in the UK in the relevant tax year compared with other countries (country tie).
There are specific tests which apply to determine the residence status of international transport workers. These are not covered in this note.
The tests in detail
The automatic overseas tests, the existence of any one of which makes an individual non-resident for that tax year, are as follows:
- the individual was UK resident for one or more of the previous three tax years and spends fewer than 16 days in the UK in the current tax year; or
- the individual was UK resident for none of the previous three tax years and spends fewer than 46 days in the UK in the current tax year; or
- the individual works 'sufficient hours overseas' as assessed over the relevant tax year with no 'significant breaks from overseas work' of 31 days or more during that year and spends fewer than 91 days in the UK in the tax year. During the tax year, no more than 30 days should involve over three hours' work in the UK.
- the individual dies in the relevant tax year, during which he/she has spent fewer than 46 days in the UK, having either been non-UK resident for both of the previous 2 tax years or non-UK resident for the tax year preceding the relevant tax year if the tax year before that one was a split year due to the individual leaving the UK.
- the individual dies in the relevant tax year having either been non-UK resident for both of the preceding 2 tax years because he/she met the test of working sufficient hours overseas (the 'third automatic overseas test') for each of those years, or non-UK resident in the tax year preceding the relevant tax year because he/she met the third automatic overseas test for that year and the tax year before that one was a split year due to the individual starting full-time work overseas. In either case, the individual would meet the third automatic overseas test in the relevant tax year in respect of the period prior to his/her death.
The automatic residence test is met for a particular tax year if an individual meets at least one of the automatic UK tests and none of the automatic overseas tests in that year. The automatic UK tests are as follows:
- the individual spends at least 183 days in the UK in the relevant tax year (the old statutory test); or
- there is a consecutive 91 day period (or longer), at least 30 days of which are in the tax year, when the individual has a home in the UK and no home overseas (other than one at which they are present on fewer than 30 days in the relevant tax year) and he/she is present at the UK home on at least 30 days in the tax year; or
- the individual works 'sufficient hours in the UK' as assessed over a period of 365 days (at least part of which is in the tax year) with no 'significant breaks from UK work' of 31 days or more, more than 75% of the total number of days in the 365-day period involving over 3 hours' work are days when this is done in the UK, and at least one of these days is in both the relevant tax year and the 365-day period.
- the individual dies in the tax year, having met the automatic residence test for each of the previous 3 tax years, the most recent of which was not a split year, and when the individual died, either his/her home was in the UK or, if he/she had more than one home and one was in the UK, that he/she was not present on at least 30 days in the relevant year (or on all the days in the tax year up to and including his/her date of death) in any one of his/her overseas homes, each considered separately.
If, for any tax year, an individual satisfies a condition in both the automatic overseas test and the automatic residence test, the former will prevail and the individual will be non-resident in that tax year.
The sufficient ties test acts as a tie-breaker where neither the automatic overseas test nor the automatic residence test is met. It looks at four or five relevant UK ties and compares them with the number of days that the individual spends in the UK in a tax year.
The ties are as follows:
- Family tie - the individual's spouse or civil partner (unless they are separated), or someone with whom they are living as such, or a minor child of the individual, is resident in the UK in the relevant tax year. There is no family tie if the individual sees the minor child in the UK on fewer than 61 days in the relevant tax year (or in the part of the year before the child turns 18, if relevant).
A minor child who is only resident in the UK in a relevant tax year due to being in full-time education here will, for these purposes, be treated as not being so resident if he/she spends fewer than 21 days in the tax year in the UK outside term-time (term-time having been confirmed to include half-term breaks).
It should be noted that, in deciding if someone is UK resident for the purposes of determining whether an individual has a family tie, that person's family tie to the individual is disregarded. This avoids the exercise potentially becoming circular. - Accommodation tie - the individual has a place to live available to him/her during a tax year for a continuous period of at least 91 days (including any gaps during this period of fewer than 16 days), and spends at least one night at that place in the year. A 'place to live' is defined as a home in the UK, a holiday home, temporary retreat or 'something similar', or accommodation otherwise available to the individual where he/she can live when in the UK.
A stay of at least 16 nights in the year, rather than one, is required if the accommodation is the home of a 'close relative' (a parent, grandparent, sibling, adult child or grandchild of the individual, whether by blood, half-blood, marriage or civil partnership); - Work tie - the individual works in the UK for at least 40 days in a tax year, on each of which he/she does more than three hours' work;
- 90-day tie - the individual spent more than 90 days (applying the 'midnight test' discussed below) in the UK in either or both of the previous two tax years; or
- Country tie (only relevant to an individual who was resident in the UK for one or more of the preceding three tax years) - an individual has a country tie for a tax year if the number of days he/she spends in the UK in that tax year (in which he or she satisfies the midnight test) is no fewer than the number spent in any other single country in that tax year.
For an individual who was resident in the UK for none of the three tax years preceding the relevant tax year, the test works as follows using the first four of the above five ties:
- 46 to 90 days in the UK - only resident if all four ties apply;
- 91 to 120 days in the UK - only resident if at least three ties apply; or
- 121 to 182 days in the UK - only resident if at least two ties apply.
For an individual who was resident for one or more of the three tax years preceding the relevant tax year, the test will work as follows using the five ties above:
- 16 to 45 days in the UK - only resident if at least four ties apply;
- 46 to 90 days in the UK - only resident if at least three ties apply;
- 91 to 120 days in the UK - only resident if at least two ties apply; or
- 121 to 182 days in the UK - only resident if at least one tie applies.
Definition of 'home'
The definition of 'home' does not include a holiday home or temporary retreat (or similar). However, there is no indication as to the meaning of the terms which are included. As a result, the meaning of 'home' is unclear, as is the meaning of a 'place to live' for the purposes of the accommodation tie. Both are left to a large extent to be determined by the individual with the assistance of HMRC guidance.
Definition of 'work'
'Work' is defined to include periods of training and travelling. The calculation of 'sufficient hours' of work is complex, but works out at an average of 35 hours a week across a given period of days, which will vary according to which test is being applied. Periods of annual or parenting leave or of sickness can be deducted. Certain 'non-working days' may also be taken into account.
The maximum permissible gap between different employments which may be included in the calculation is 15 days for each gap, with a limit of 30 days in total during a period. This limit may be proportionately reduced for shorter periods, for example, when applying relevant split year tests.
Definition of 'days spent' in the UK
For the purposes of the statutory residence test, the definition of 'days spent' in the UK is the same as that which applies under the previous rules, (that is, one on which an individual is in the UK at the end of the day (the so-called 'midnight test')). A day spent in transit, where the individual arrives in the UK as a passenger, departs on the next day and does not engage in any activity substantially unrelated to their passage through the UK, does not count as a day spent in the UK.
However, the Government was concerned that the midnight test could be abused by individuals who spend large numbers of days in the UK without being present at midnight. Accordingly, it introduced a rule which applies to certain individuals who, on more than 30 days in a tax year, are present in the UK at some point but not at midnight. In such cases, all days in excess of the 30-day threshold on which such an individual is present in the UK at some point in the day will be included as days spent in the UK for the purposes of the day count.
This so-called 'deeming rule' only applies to an individual who has at least three UK ties for a tax year and has been resident in the UK for at least one of the three tax years preceding the relevant tax year. The rule does not apply for the purposes of the third automatic overseas test, nor to determine whether an individual satisfies the 90-day tie or country tie.
The legislation also provides for exceptional circumstances, where an individual spends a day in the UK for reasons beyond their control, such as national or local emergencies, (e.g. war, civil unrest or natural disasters) or sudden or life threatening illness or injury. This provision is restricted to 60 days in any tax year.
Additional issues
Split-year treatment
HMRC's previous concession, enabling a tax year to be split into periods of residence and non-residence when individuals left the UK or arrived here during a tax year, has been replaced by statutory rules. Following comments made during the consultation, HMRC has made a number of changes to the categories of individuals who may benefit from this treatment. In very broad terms, the rules now apply to an individual who falls within one of the following eight "cases":
- Case 1 – starting full-time work overseas: applies to an individual who loses UK residence during the relevant tax year by virtue of 'satisfying the overseas work criteria' by, amongst other things, working sufficient hours overseas assessed over the relevant period;
- Case 2 – the partner of someone starting full-time work overseas: applies to an accompanying spouse or civil partner of an individual within Case 1, or a person with whom such an individual lives as a spouse or civil partner;
- Case 3 – ceasing to have a home in the UK: applies to an individual who has a 'sufficient link' (based on residence, presence or homes) with a country overseas at the end of a period of six months beginning with the day in the relevant tax year on which he/she ceases to have a home in the UK, and he/she continues to have no UK home for the rest of the tax year;
- Case 4 – starting to have a home in the UK only: applies to an individual who was not UK resident in the previous tax year and, during the relevant tax year, having not done so at the beginning of the tax year, he/she starts to meet the 'only home test', having his/her only homes in the UK and, in that tax year prior to that day, he/she did not have sufficient UK ties to meet the relevant test for that part of the year;
- Case 5 – starting full-time work in the UK: applies to an individual who becomes UK resident by virtue of working 'sufficient hours in the UK' in a period of 365 days, starting with a day in the relevant tax year, having not had sufficient UK ties in the part of the tax year prior to the start of that period and having not been UK resident for the previous tax year;
- Case 6 – ceasing full-time work overseas: applies to an individual who becomes UK resident during the relevant tax year having previously 'satisfied the overseas work criteria' during that year, and having not been UK resident for the previous tax year on the basis of the third automatic overseas test, but having been UK resident for at least one of the 4 tax years immediately preceding that year;
- Case 7 – the partner of someone ceasing full-time work overseas: applies to an accompanying spouse or civil partner of an individual within Case 6, or a person with whom such an individual lives as a spouse or civil partner;
- Case 8 – starting to have a home in the UK: applies to an individual who has a home in the UK from a day in the relevant tax year, having had no UK home during the relevant tax year prior to that day, and continues to do so for the rest of that tax year and the whole of the next.
All of the situations above are subject to a number of different additional conditions, including rules relating to an individual's residence status in preceding or subsequent tax years.
New rules were introduced during the passage of the Finance Bill through Parliament to determine which split-year case has priority in determining an individual's status and the relevant date of the split – the 'split year date' – to be used in circumstances where the individual meets the requirements of more than one case.
Split-year treatment in the context of the statutory residence test only applies to individuals in their capacity as such. It does not apply to individuals acting as personal representatives. It applies in a limited way to an individual acting as a trustee of a settlement if such an individual becomes or ceases to be a trustee during a tax year and the period for which he or she is a trustee falls within the overseas part of the tax year. This is because the trustee's residence status at a particular time may affect the residence status of the settlement.
Anti-avoidance
To prevent short periods of non-residence (whether actual or under the terms of a double tax arrangement ('Treaty non-residence')) being used to avoid a liability to UK income tax, certain types of income accruing during a period of non-residence of five years or fewer to an individual who has been UK resident (actually and for Treaty purposes) during four or more of the previous seven tax years are, for tax purposes, deemed instead to accrue to the individual in the period following his/her return to the UK (and, where relevant, after he/she also ceases to be Treaty non-resident).
This rule covers distributions from close companies, lump sum benefits from employer-financed retirement benefit schemes and chargeable event gains from life assurance contracts. This is in addition to the types of income and gains which are covered by existing rules for temporary non-residents, such as chargeable gains, income withdrawals under certain foreign pensions and under registered pension schemes, and remittances of relevant foreign income.
Transitional rules
Individuals who need to know their residence status in one or more of the tax years prior to the introduction of the test in 2013/14 (a 'pre-commencement tax year') for the purpose of determining their residence in one of the five tax years from 2013/14 onwards may apply the new rules to relevant pre-commencement tax years. A formal election is required for this, which is irrevocable and which must be made by the first anniversary of the end of 2013/14 or the relevant subsequent year.
Where it is necessary for the purposes of assessing an individual's liability to tax in a future tax year to determine whether a pre-commencement tax year was a split year, the extra-statutory concession which would have been relevant to the individual's (or his/her partner's) circumstances in that pre-commencement tax year is to be applied to make that determination.
In relation to periods of temporary non-residence, where the tax year of departure was one prior to 2013/14, the temporary non-residence provisions in force prior to 2013/14 will apply. In applying those temporary non-residence rules, however, the question of whether an individual is resident in the UK in 2013/14 or a subsequent tax year is to be determined in accordance with the new rules.
Planning points
- Automatic residence test: UK home - under the automatic UK test for those with one or more homes in the UK, subject to an overall 91 day qualifying period which may straddle two tax years, an individual must be present at a UK home at some point on at least 30 days in a tax year, whilst being present at any of his or her overseas homes, looked at individually, on no more than 29 days in the same tax year.
- Individuals with homes in the UK and other jurisdictions should ensure they keep a careful record of the number of days in a tax year on which they are present for any period of time at any of their homes, both in the UK and overseas.
- Pure presence test - certain individuals who do not meet the automatic overseas test may nevertheless be able to consistently maintain their tax status as non-UK residents purely on the basis of day-counting. The requirements are as follows:
- the individual does not meet the automatic residence test and, in particular, by virtue of visiting a UK home on more than 30 days and no overseas home on more than 29 days in a tax year;
- the individual was resident in the UK for none of the preceding three tax years;
- he or she spends or has spent fewer than 91 days in the UK in every tax year (including 2011/12 and 2012/13 for those arriving in 2013/14).
However, such individuals must bear in mind that an average of 90 days in the UK over a number of years is no longer relevant. Each year's day count stands alone.
- Deeming rule - individuals who fall within the parameters of the deeming rule in relation to days spent in the UK should keep careful records of any days on which they are present in the UK at any point in the day, but not at the end of the day, in order to ensure they do not exceed the 30-day threshold. If they do exceed this threshold they should ensure that any additional days spent in the UK accrued under this rule are not sufficient to affect their residence status.
This will be of significance primarily to individuals who make a large number of short visits to the UK during a tax year, perhaps arriving and leaving within a single day or staying for two or three days on each occasion. - Transitional rule - the first of the proposed transitional rules mentioned above applies to the first two automatic overseas tests and for the purposes of determining the number of UK ties relevant to him or her in the sufficient ties test and whether he or she meets the 90-day tie. If any of these aspects are relevant to an individual, his/her residence status in tax years prior to 2013/14 may affect his/her status from 2013/14 up to and including 2017/18.
In these circumstances, the transitional rule enables an individual to apply the new residence test to one or more of the tax years preceding the introduction of the test in 2013/14 if he/she elects irrevocably to do so. Individuals should review their residence status for relevant pre-commencement tax years and whether it may be advantageous for them to consider such an election for one or more of such tax years.
Conclusion
When the original proposals were published, the proposed residence test seemed likely to introduce a welcome degree of certainty provided a number of areas of uncertainty were clarified. In particular, the need to make a 'definite break' in order to leave the UK is not a feature of the test and this should have made it significantly easier to determine an individual's residence status.
Unfortunately, during consultation and the passage of the Finance Bill through Parliament, whilst there was some welcome relaxation of some of the time limits for days which can be spent in the UK whilst remaining non-resident, both in relation to working and generally, in other areas the test became stricter and more complex. The deeming rule for individuals who spend significant time in the UK without being present at midnight is one example of this.
As discussed above, the provisions of the second automatic UK test in relation to an individual's homes are also significant and may require detailed record-keeping, even by individuals who do not otherwise have strong connections with the UK.
These rules and the fact that definitions of vital terms such as 'work' and 'home' are still unclear and, in some cases, left largely to HMRC guidance, make the new test harder to explain and to apply to an individual's circumstances. This was not what was anticipated when the proposals were first announced.
That said, the option to elect for the new rules to apply to a determination of residence status in pre-2013/14 tax years where this is relevant to tax status in subsequent years is positive. As suggested above, for these purposes and those of the 90-day tie, individuals should review their residence status for earlier tax years.
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