Jersey focus | Key to residence is in the detail

The UK statutory residence test, introduced in April 2013, has helped advisers to provide clients with a more definitive guide regarding their UK residence position. But is it really possible to apply an objective test to what is perhaps the most subjective issue: an individual’s lifestyle?

Our close proximity to the UK, coupled with a very favourable tax regime, means that in Jersey we often see individuals moving to the island, looking to break UK residence. Historically, it has been our role to advise clients that they must sever all ties with the UK and not retain that long-awaited golf membership or season ticket.

Now with a more formulaic and less subjective approach, it is no longer necessary to break such news to our clients. Is the new test really as straightforward as it seems, though?

As with all things in tax, the devil is in the detail. No two individuals are the same and the danger of the amateur ‘adviser’ – at the Yacht Club, perhaps – is that an individual thinks they are non-resident when a minor difference in their circumstances can lead to a very different technical analysis.

Consider a seemingly simple scenario and its consequences.

Alex loves his job and lives to work. He has lived in the UK all his life and is domiciled there. Having spent many years building up his business, he is considering the possibility of selling the company to invest in new ventures. With no capital or wealth taxes, and income tax set at circa £125,000 per annum, Alex has decided that prior to disposing of the business, he will move to Jersey.

Having met the criteria to obtain high net worth status in Jersey, Alex sells his main UK residence, buys a large property in Jersey with a sea view and moves in.

In anticipation of business sale, Alex begins to research new investment opportunities. While assessing these, he takes up a number of non-executive directorships in both Jersey and the UK. As a result of these directorships, he has a number of day trips to the UK. On the occasions that Alex spends the night in the UK, he stays in the flat he jointly owns with his sister.

Alex has heard that by spending fewer than 16 nights in the UK, he will automatically be treated as non-resident for UK tax purposes. As a result, he intends to spend no more than ten nights in the UK to remain comfortably below this limit and to protect the capital gains tax position.

As the year progresses, Alex finds he is drawn to more meetings in the UK and consequently has 37 day visits to the UK. Combined with meetings on days when Alex spends a night, he works for more than three hours (including transit) in the UK for a
total of 42 days.

Based on his understanding of the legislation and the conversations he has had with friends in a similar situation, Alex believes that he will continue to meet the automatic non-residence test, having spent fewer than 16 nights in the UK.

As he has not been out of the UK for three complete tax years, the deeming rule may be in point. If Alex has three or more ties under the sufficient ties test, and has more than 30 days where he flies into the UK and out again on the same day, each of these days in excess of 30 is deemed to be a night.

It is therefore necessary to consider the sufficient ties test to understand whether he will, in fact, meet the automatic non-residence test. Alex needs to consider five potential ties under this legislation. Briefly these are:

• UK resident family. This includes spouse, spousal equivalent and dependent children. There are special rules for custody visits and children at boarding school.

• Available accommodation in the UK. An individual has available accommodation if they have accommodation available to them for a continuous period of at least 91 days and they spend at least one night in that accommodation during the period. Consideration should be given to the regular use of the same hotel or club, as well as accommodation that is rented or owned by the individual. An individual can spend up to 16
  nights staying with a close relative.

• UK work. A UK work day is any day on which an individual carries out more than three hours’ work in the UK. Work is defined as anything in the performance of duties of an employment and would include training, client entertaining and potentially transiting through the UK for work purposes.

• 90 days spent in the UK. This tie arises if an individual has spent 90 days or more in the UK in either of the two preceding tax years.

• Country. This tie arises if an individual spends as many days in the UK as in any other country.

In Alex’s case, he has no UK resident family; as he uses the flat he owns with his sister, he will have this tie; he works in the UK on 42 separate occasions; he has spent more than 90 days in the UK in either of the previous two tax years; and he spends more time in Jersey than the UK and therefore does not have this tie.

Alex has three ties and as he left the UK in the last three years, the deeming rule will apply. With ten nights spent physically in the UK and 37 day visits, for the purposes of the test, Alex will, in fact, have 17 UK nights and so will not meet the automatic non-residence test.

He must therefore consider the other elements of the statutory residence test to understand his residence position. The alternative automatic non-residence test is to
work full time abroad in the UK.

However, having spent more than 30 days working in the UK, Alex will not meet the criteria for automatic non-residence and must therefore consider the automatic residence test.

Alex will be automatically a UK resident if any of the following apply:

• Spending 183 or more days in the UK: this test will not be met.

• Home: Alex will be automatically resident if it can be shown that he has a home in the UK and is present there on 30 or more occasions and, for a period of 91 days, does not have an overseas home that he spends at least 30 days in. Alex has only spent ten nights in the UK flat and has not been present at any other time. Additionally, he is confident that the property they own in Jersey is his home. Alex should not meet this test.

• Full-time work in the UK: to
  meet this test, at least 75 per cent
  of Alex’s working time must be spent in the UK. Work is anything in the performance of duties for
  any employment. Having spent
  only 42 days working in the UK, Alex is comfortable that this test has
  not been met.

On the basis that Alex will not meet any of the automatic residence test criteria, it is necessary to look to the sufficient ties test.

Based on the analysis above, Alex has three ties, and as a UK leaver this will give him 45 nights in the UK before becoming a UK resident. With ten actual nights and seven deemed nights, Alex is comfortably below this level and will be non-resident for UK tax purposes in the current year.

So, look at the detail, the exact circumstances of an individual’s lifestyle and their realistic expectations of how they can leave the UK without compromising what they are used to. This is a very subjective, and often emotive, matter, so applying an arithmetic approach will rarely work except for the very determined.

Garry Bell is director and Rebecca Turnbull is senior manager at PwC Channel Islands