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Resident Evil? - New Statutory Test From 6th April

Posted on March 27, 2013

Resident Evil? Thankfully not...

The tax treatment of share option gains, as with other income and gains, depends on whether an individual is UK tax resident. In this article, Tax Advisory Partnership provides an explanation of the new Statutory Residence Test.

The concept of UK tax residence has long been a bone of contention amongst taxpayers, HMRC and professional advisers alike, so most will be thankful that the long awaited Statutory Residence Test will come into force from 6th April this year (2013). First and foremost, the new rules will provide taxpayers, employers and advisers with some much needed certainty going forward.

From the 2013/14 tax year onwards, an individual's residence position will be based on a series of specific tests, in the first instance regarding days spent in the UK. This is a welcome change from the somewhat subjective regime currently in place, which has led to some high profile court cases involving HMRC and often disgruntled taxpayers.

The new legislation is unsurprisingly vast (HMRC's Guidance Note is a mere 55 pages long!) given the breadth of current case law which it seeks to encapsulate. That said, with careful planning, individuals should now find it possible to effectively break UK residence, or indeed acquire UK residence, with a previously unavailable level of assurance.

The introduction of "automatic tests" for both UK and non-UK residence based on day counting, previous residence status and (where relevant) overseas employment, should give many UK "arrivers" and "leavers" the potential to structure their move to result in an advantageous tax position.

Where the automatic tests are not met, the residence position is then dictated by a series of "connecting factors" to the UK, and some more involved day counting rules. The relevant ties to the UK in this context are broadly as follows:

  • A spouse or civil partner who is tax resident in the UK
  • Available (not necessarily owned) accommodation in the UK
  • "Substantial" work in the UK (more than 3 hours a day for at least 40 days in the tax year)
  • 90 nights or more spent in the UK in either or both of the previous two tax years
  • Whether more midnights are spent in the UK than in any other country ("leavers" only)

The number of connecting factors then sets the basis for the number of days an individual can spend in the UK before they are treated as resident for that tax year (i.e. the more ties to the UK, the less days are allowed), which seems all very sensible.

As a result, some individuals may find that they are able to spend up to 120 days in the UK without becoming UK resident; a significant relaxation to the often cited 91 day average referred to in HMRC guidance (though they have been known to litigate against this!).

Another positive development is the abolition of the equally uncertain "ordinary residence" status, which often involved debating how long an individual planned to live in the UK. This is particularly important for employees moving to the UK for less than three years, who can often claim relief from UK tax in respect of days worked overseas on the basis of non-ordinary residence.

From 6th April 2013, this overseas workdays relief will be available to taxpayers on a statutory footing; all individuals arriving in the UK who have not been UK resident in any of the previous three tax years will have the opportunity to claim overseas workdays relief. This is a welcome clarification which we hope will incentivise multinational companies to do business in the UK, and simplify matters for firms with existing expatriate arrangements.

Overall, the forthcoming changes should be a positive move for most of those affected, and an opportunity for both taxpayers and advisors to know where they stand and, where appropriate, plan effectively for the future.

For more information on the content covered in the above article, please contact the Tax Advisory Partnership directly on 020 7655 6957, or email them via enquiries@taxadvisorypartnership.com.

 
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