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Statutory residence test more certain but less simple

The government yesterday (21 June) published further details of its new statutory residence test. The new test, which will take effect from 6 April 2013, will determine whether an individual is UK resident for tax purposes.

22 June 2012

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Experts welcomed its introduction, but criticised its complexity. “Confirmation that there will finally be a statutory test to determine UK tax residency will be greeted with a sigh of relief,” said Carolyn Steppler, private client services tax partner at Ernst & Young.

“Residence status is the most basic building block for determining an individual’s tax liability and so the announcement has significant implications for the UK’s competitiveness. A ream of recent tax cases has resulted in mounting ambiguity and uncertainty, which will have undoubtedly discouraged some high-net-worth individuals from entering UK shores.

“However, while the new test will provide certainty for many, it is unlikely that it will provide simplicity - the new legislation is 60 pages. Under the proposals, from 6 April next year, an individual’s residence will depend partly on the number of days spent in the UK, but also on their connections to the UK. This will take into account a whole range of factors,” continued Steppler.

“For example, individuals must also consider the residence of their family members. Do they have children who spend more than 20 days in the UK outside term time? Do they have available accommodation in the UK? Even using the same hotel once a week may have an impact on determining tax residency.”

The new statutory residence test comprises three parts that will determine whether an individual is a UK resident for tax or not.

Part A looks to confirm non-residence. If an individual satisfies any of the following conditions he will not be UK resident:

  • the individual was not resident in the UK in all of the previous three tax years and is present in the UK for fewer than 45 days in the current tax year; or

  • the individual was resident in the UK in one or more of the previous three tax years and is present in the UK for fewer than 15 days in the current tax year; or

  • the individual leaves the UK to carry out full-time work abroad, provided he is present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year, although this is subject to further consultation.

Part B of the test confirms residence. If Part A does not apply, an individual will be UK resident for the tax year if he meets any of the following conditions:

  • the individual is present in the UK for 183 days or more in a tax year; or

  • the individual only has one home and that home is in the UK (or has two or more homes and both/all of these are in the UK) and that remains the case for at least 91 days; or

  • the individual carries out full-time work in the UK.

Part C will be used if an individual falls outside of Part A and B. It includes the presence of family in the UK; the availability of accommodation in the UK used during the tax year; substantive - but not full-time - work in the UK; presence in the UK for more than 90 days in either of the previous two tax years or simply spending more time in the UK than in any other country.

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Tax & Wealth structuring