Written by Ray Coman
This article refers to the rules effective prior to 6 April 2013, for current guidance refer to the Statutory Residence Test.
The terms residence and ordinary residence are not defined by statute law. The current rulings have developed from HMRC interpretation. The residency of a person has significant tax implications. In broad terms a UK resident is subject to UK tax on worldwide income, whereas a non-UK resident is only subject to tax on income arising in the UK.
The basic test of residence is whether you have been present in the UK at midnight for at least 183 days in a tax year, excluding any days spent in the UK while in transit only. The tax year starts on 6 April and ends on the following 5 April.
Even if not present in the UK for more than 183 days, it is still possible to be a UK resident, if in the UK for more than 91 days per year on average over any four year period. You would be treated as resident from the start of the tax year in which visits exceed 183 days (or 91 days on average over four years.) In deciding the number of days present in the UK, days spent in the UK for exceptional circumstances beyond a person's control, e.g. illness of a family member, are ignored.
The residency test also measures your intentions. You would be treated as resident from the start of the first tax year in which your intention is to be in the UK for more than 183 days per year (or more than 91 days on average over any four year period.) For instance, where you have been visiting the UK for 91 days per calendar year, you would become UK resident from the start of the fifth tax year of such visits. However, where, before the start of the fifth year, you decide to make such regular visits, you will be treated as resident from 6 April of the tax year in which the decision is made.
A person who comes to work as an employee in the UK for at least two years will be resident from the day of arrival to the day of departure. Those coming for less than two years (or with no definite intention) will only be treated as resident on spending 183 days or more in the UK for any tax year.
In addition to the number of days spent in the UK, HMRC may take into account a person's property, business, social and family connections in determining residency. Owning a UK property does not make a person resident, however available accommodation in the UK is a factor indicating residency.
In addition to residency, the ordinary residence of a person also has tax implications. Individuals who are not ordinarily resident may use the remittance basis of taxation for foreign income. The remittance basis can only be used by a UK resident for foreign gains if that person is both not ordinarily resident and not domiciled in the UK.
You would be ordinarily resident in the UK if your habitual and regular way of life includes a presence in the UK. If you have family in the UK, who you can return whenever business allows, you would be treated as ordinarily resident. This would apply even if you were not physically present for more than 91 days per year. You are not ordinarily resident if you do not have any settled purpose to remain in the UK, for instance, if you have no permanent accommodation here.
Arriving in the UK
You will be treated as ordinarily resident from the day of your arrival, if you come to the UK to take up residence permanently, indefinitely or for a period of three years or more. You would also be treated as resident if you come to stay for a period of more than 183 days per tax year (or 91 days on average over any four tax ears.)
The date on which you become ordinary resident depends on your intentions. You will be ordinarily resident from the date you arrive in the UK if it apparent from the outset that you intend to stay for at least three years. Where you subsequently decide to stay in the UK for at least three years from the date of the original arrival, you will be treated as ordinarily resident from the start of the tax year in which you make that decision.
Where you do not intend to stay in the UK for three years, but end up staying for three years, you will be treated as being ordinarily resident in the UK from the start of the tax year after the third anniversary of your arrival.
Accommodation is usually the clearest indication of your intention to stay in the UK. Therefore, you will be ordinarily resident from the date of arrival if you already have accommodation, or acquire accommodation, on a lease of three years or more during the tax year of arrival. You will be ordinarily resident from 6 April in any tax year in which accommodation becomes available that would bring your stay to three years or more from the day of your arrival.
HMRC have indicated that in special cases, where you disposed of an accommodation and left the UK within three years of arrival, your accommodation may be ignored in deciding residency.
It is possible to be resident but not ordinarily resident. This would occur, for instance, if you are in the UK for more than 183 days per tax year, but stay here for less than three years.
It is also possible to be ordinarily resident if you stay here for less than three years, for instance because your original intention was to settle in the UK.
Leaving the UK
The broad implication of becoming non-resident is that you will only be liable to UK tax on income arising in the UK, regardless of amounts which you send back here. Consequently, the rules relating to becoming non-resident are more stringent. To become not ordinarily resident, you should intend to leave the UK permanently, indefinitely or for a period of three years or more.
HMRC would require evidence that you have severed ties with the UK and intend to live abroad permanently. As an example, you should be able to demonstrate accommodation abroad. Becoming resident in another country is not sufficient evidence in itself that you are no longer resident in the UK. For tax purposes it is possible to be simultaneously resident in more than one country.
If you claim to have ceased to be resident and ordinarily resident in the UK and can produce some evidence for this, such as setting up a permanent home abroad, then HMRC will normally provisionally accept that you are non-resident. If no evidence can be produced, HMRC could postpone their decision to treat you as non-resident for up to three years. In this case, HMRC would make retrospective adjustments for the years that you are non-resident, but were provisionally treated as resident.
If you are not physically present in the UK for any day during a complete tax year, you will not be treated as resident for that tax year. If you leave the UK to work on an employment contract that lasts for a whole tax year, then you will not be resident for that tax year. A similar rule applies where you leave the UK to become self-employed. As an employee abroad, you would remain non-resident provided return visits do make you resident under the basic test.
It is possible to be not resident, but remain ordinarily resident. This would occur where you are not physically present in the UK for a temporary period, but your settled purpose is to live in the UK.
Splitting the tax year
A person is normally resident for the whole tax year if resident for any part of it. However, by concession, HMRC will allow a person to split the tax year for income tax purposes. Consequently, a person will not be treated as resident for tax purposes prior to their date of arrival in the UK, or after their date of departure from the UK. The split year treatment is granted where a person is a permanent resident or comes to stay for at least two years. A stay for at least two years would be indicated by taking up employment expected to last two years. A person cannot be considered for the split year treatment if ordinarily resident prior to arriving in the UK.
The split year treatment applies where you leave the UK for permanent residence abroad, or leave to take up employment which covers at least a whole tax year. The treatment only applies where return visits in the meantime do not make you resident under the basic test.
A spouse's residence is determined independently of their partner's status, except (by concession) where a spouse accompanies a person taking up full time employment abroad.
The place in which a person is resident for tax purposes can have a significant impact on tax liability. It is likely that a non-UK resident is resident in another jurisdiction and therefore subject to foreign tax laws. Coman & Co. can advise on the tax implications of your residency status. Please make an arrangement for a meeting to discuss your requirements with us.