The Government has subsequently issued a Consultation Paper that provides a view on how this could potentially work. Once the consultation period concludes, new legislation will be enacted that will bring new residence rules into effect from the 6 April 2012.
Now that the Government’s view on these matters have been publicised through the consultation, it is clear that the proposed changes are likely to have an impact on the UK tax planning of all British expatriates, to a greater or lesser degree.
Looking at the consultation in greater detail, it is pleasing to see that Government has an appreciation of the difficulties people have faced when trying to establish whether they are considered resident in the UK or not. As a result, it is clear that the Government is determined to arrive at a new set of rules that are faithful to the principles established in case law over the years.
If there are no major changes after the consultation period concludes, the 6 April 2012 will see a new system where residence status is determined annually, with each year being viewed in isolation from the previous.
The new rules
The new rules are ultimately aiming to make it more difficult to break residence for UK taxation purposes than to become resident again or to drift back into residence.
The renowned ’91 day average test’ will cease to remain and the following rules will instead apply:
- Those present in the UK for 183 days or more will always be resident
- Those who are present in the UK for less than 10 days will always be non-resident
- And for anyone who falls outside of these narrow definitions will be reviewed through a series of tests
The tests include:
- Test A – a ‘Conclusive non-residence test’ – if certain conditions are met, the individual is definitely non-resident
- Test B – a ‘Conclusive residence test’ – if certain conditions are met, the individual is definitely resident
- Test C – an ‘Other connection test’ – if the results from tests A and B are inconclusive, the matter is determined by a combination of time spent in and a person’s connectedness to the UK. Test C operates a sliding scale whereby the more a person is connected to the UK, the less time they may spend in the UK during the year. The connecting factors include whether the individual has family, employment and accommodation in the UK, how much time has been spent in the UK in the two previous tax years and whether the individual spends more days in the UK than in any other country.
The number of factors present will set the limit on the maximum number of days a person may spend in the UK in a particular tax year. For example, if someone has four or more of the factors present in the year, the maximum number of days they can spend in the UK is 44. If they have three or more factors, the maximum number of days is 89 and so on.
On the face of it, the proposed rules seem basically unchanged for those leaving the UK for full-time overseas employment, save a complication if they work for more than 20 days in the UK per tax year. This will be a great relief to many thousands of expatriates.
However, anyone leaving the UK for any other reason, for example through retirement or change of lifestyle, they may find the rules restrictive and an exit from the UK would need to be planned very carefully.
For example, in certain circumstances leaving the UK for anything less than full-time overseas employment and spending more than 10 days in the UK in the year of departure, will still mean ensuring resident status in the UK for tax purposes for that year. As a result, the timing of a departure from the UK is likely to become more important.
Already non-resident
For individuals already non-resident and who are not working full-time, advice will be needed as to the strength of connections to the UK, and the maximum amount of time that can be spent in the UK per annum. An annual review will almost certainly be required. Those who claim non-resident status whilst undertaking ‘substantive’ employment in the UK and who have other connecting factors are likely to be the most at risk of becoming resident.
The Government appears focused on applying new guidelines to those who are trying to claim non-resident status whilst everything in the way they live their life points in the opposite direction. Therefore, it is a question of how carefully expatriates plan their overseas lives.
For those British expatriates not working full-time abroad, whose main home may be in the UK, whose families continue to be in the UK, and who are keen to spend as much time as possible in the UK, the proposals are not much more concerning. And, for those who reside overseas with modest connections to the UK, the proposals look to be good news.
What is clear is that the final rules may potentially be rather different to what is in the consultation and so only time will tell just what British expatriates will have to face in terms of residence rules. Watch this space for updates.
