Overview of the statutory residence test

An overview of the new statutory residence test

In a recent press release, the Chartered Institute of Taxation (CIOT) gave the introduction of the long awaited Statutory Residence Test (SRT) the thumbs up and declaring it as “a positive step towards modernising the UK's system of deciding tax residency.”

The CIOT welcomed the abolition of the concept of 'ordinary residence' and expressed regret that the legislation had increased in size, although they accepted it was necessary.

John Barnett, a Chair of one of the CIOT sub-committees remarked in the press release that in 1936, the Income Tax Codification Committee, that was appointed by the Chancellor of the Exchequer, had described the absence of a definition of UK residency for tax purposes as “intolerable”. Now, 77 years on, we have a comprehensive statutory test for residence. Better late than never!

Schedule 43, Finance Bill 2013 provides the new residency legislation, effective from 6^th April 2013 and which is accompanied by, thankfully, HMRC's 101 page 'Guidance Note: Statutory Residence Test (SRT)'.  The test involves a number of stages and numerous rules in order to determine whether or not a person is UK resident for the purposes of Income Tax and Capital Gains Tax and, where relevant, Corporation Tax and Inheritance Tax.

The Basic Rule

A person will be resident in the UK for a tax year and at all times in that tax year (except under split year treatment), if they do not meet any of the automatic overseas tests and: 

• they meet one of the automatic UK tests, or 
• the sufficient ties test. 

Automatic Overseas Tests

As an individual will be non-UK resident if they meet any of these tests it is therefore logical to consider these first because if any one of them is fulfilled it is not necessary to consider any other parts of the test.

Test 1

You were resident in the UK for one or more of the three tax years preceding the tax year, and you spend fewer than 16 days in the UK in the tax year. If an individual dies in the tax year then this test does not apply.

Test 2

You were resident in the UK for none of the three tax years preceding the tax year, and you spend fewer than 46 days in the UK in the tax year.

Test 3

You work full-time overseas over the tax year, without any significant breaks during the tax year from overseas work, and:

• you spend fewer than 91 days in the UK in the tax year, 
• the number of days in the tax year on which you work for more than three hours in the UK is less than 31. 

A person will be considered to work full-time overseas if they work for sufficient hours overseas as calculated over the tax year . This calculation is performed by reference to five steps contained in the guidance.

This test isn't relevant to those who have a relevant job on board a vehicle, aircraft or ship at any time in the relevant tax year and who satisfy certain criteria regarding cross-border trips.

Where none of the above tests can be met it is then necessary to look at the automatic UK tests.

Automatic UK Tests

Where any of the following tests are met then a person will be resident in the UK for a tax year. 

Test 1

You spend 183 days or more in the UK in the tax year.

Test 2

You have or had a home in the UK during all or part of the tax year. You will meet this test if there is at least one period of 91 consecutive days, at least 30 days of which fall in the tax year, when you have a home in the UK in which you spend a sufficient amount of time, and either you:

1. have no overseas home; or
2. have an overseas home(s) in which you spend no more than a permitted amount of time. 

There is a raft of detailed guidance to refer to when considering this test.

Test 3

You work full-time in the UK for any period of 365 days, with no significant break from UK work and:

• all or part of that 365-day period falls within the tax year. 
• more than 75% of the total number of days in the 365-day period when you do more than three hours of work are days when you do more than three hours of work in the UK. 
• at least one day in the tax year is a day on which you do more than three hours of work in the UK.

Again, there is much detail to be observed when considering this test.

Sufficient ties test

Where someone does not meet any of the automatic overseas tests or any of the automatic UK tests, they should use the sufficient ties test to determine their UK residence status for a tax year.

You will need to consider your connections to the UK, called ties, and determine whether your ties, taken together with the number of days you spend in the UK, are sufficient for you to be considered UK resident for tax purposes for a particular tax year.

If you were not UK resident for any of the three tax years before the tax year under consideration, you will need to consider if you have any of these UK ties:

• a family tie 
• an accommodation tie 
• a work tie, and 
• a 90-day tie 

If you were resident in the UK for one or more of the three tax years before the tax year under consideration, you will also need to consider if you have a country tie.

All of the ties are defined within the guidance.

The number of days spent in the UK in a tax year dictates the number of UK ties that are needed for a person to be UK resident and these are set out in the SRT guidance.

Split Year Treatment

If during a year you either start to live or work abroad or come from abroad to live or work in the UK the tax year will be split into two parts if your circumstances meet specific criteria: 

• a UK part for which you are charged to UK tax as a UK resident; 
• an overseas part for which, for most purposes, you are charged to UK tax as a non-UK resident. 

 There are eight sets of circumstances where you might meet the criteria for split year treatment for a particular tax year. Three cover situations where you might go overseas part way through the tax year and five cover situations where you might come to the UK part way through the tax year.

There is no doubt that where any of your clients are affected by residency issues they are going to need your advice and you therefore need to become conversant with the new rules as soon as possible. The full guidance can be downloaded by visiting http://www.hmrc.gov.uk/international/rdr3.pdf.

HMRC are piloting a Tax Residence Indicator tool that your clients are able to use to determine their residency status but, again, they are most likely to require your advice and assistance in steering them through this.