July 2009
This month’s article is about “residence” as applied in connection with an individual’s (UK) taxation liabilities.
“Residence” and “Ordinary Residence”
These terms are similar but not identical. However, the difference can be very important: a distinction is made between an individual who is both UK resident and ordinary resident compared to being UK resident but not ordinary resident.
· In this latter scenario (viz UK resident and domicile but not ordinary resident in the UK) the remittance basis of taxation would apply to the individual’s non UK sourced income and non UK derived capital gains.
(This is exactly the same situation as would apply to a non UK domicile but UK resident individual; this topic has been subject to much adverse professional comment following the enactment of the Finance Act 2008.)
This entire subject is a proverbial minefield with many traps for the unwary! It is not helped by a lack of statutory definition to the term “residence” – the closest to what might be termed a definition are comments made in a publication produced by HMRC referred to as “IR20”.
The rules contained in IR20 illustrate guidance, as to how residence and ordinary residence may be determined, with respect to individuals arriving in the UK and individuals departing from the UK.
It should be noted that the booklet sets outs HMRC’s views as to what constitutes residence and ordinary residence taken from decided tax cases over time. It is not a statement of tax law.
The rules quoted in IR20 relating to residence and/or ordinary residence can be split according to various categories:
· Short absences – regular trips abroad which could be for a number of weeks – the individual is simply treated as being UK resident and ordinary resident.
· 183 day test - There are no exceptions to this rule:
Any individual, who is physically present in the UK in any tax year for at least 183 days in aggregate, will be treated as resident for that tax year. Pre FA 2008 days of departure and arrival were excluded - but now from 06 April 2008 days of arrival are no longer excluded. (A “day” in the UK is now determined whether the individual is in the UK at midnight).
· Alternative tests of residence or ordinarily residence (even if the 183 day test is not breached):
· Individuals arriving in the UK if coming to the UK for three (normal) years permanently are treated as both resident and ordinary resident from the day of arrival.
· Those individuals unclear about future intentions – from the commencement of the fifth (UK) tax year after arrival, if over the preceding four (UK) tax years, the number of days spent in the UK average 91 days or more. (Again since FA 2008 days of arrival and departure are subject to the “midnight” test).
· Individuals departing from the UK – here there are two categories to determine whether resident and ordinary resident:
· Full time working abroad –if an individual leaves UK to work abroadsatisfying the following conditions then that individual is not resident and not ordinarily resident from the day following departure to the day before return to the UK at the end of the contract.
· These conditions must be satisfied - individual to work full time abroad; any contract of employment to cover a full tax year and any visits to the UK (during period of absence) must amount to less than 183 days in any tax year and less than 91 days per tax year on average (over a four tax year period).
· Three years/permanent departure – here an individual will be treated as neither resident nor ordinarily resident from the day following the date of departure if the individual leaves the UK for at least threeyears orpermanently.(The three years are “normal” yearsnot tax years.)
· Any return visits to the UK, during the period of absence, must not amount to either 183 days or more in any tax year or 91 days or more on average per tax year over a four tax year period. (Remember, if an individual is in the UK at midnight then, since the 6 April 2008, that day counts as a day in the UK.)
Next month: Legacies
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article.
