Change of Tax rules for expats effective 2013
Statutory Residence Test: Update
Responses to the UK Treasury’s proposed statutory residency test, which is aimed at replacing a cumbersome residency system based mainly on case law, have been published by HM Revenue & Customs.
The UK Government’s plans to establish a statutory residency test were first announced in April 2011. A consultation document was subsequently published in June 2011, seeking views from the industry and public on how the test might most fairly be devised. In December, the Treasury announced it was postponing the publication of its draft legislation, effectively delaying the introduction of the new test by a year, to 2013.
But what does the proposed Statutory Residence Test mean for expats?
The current UK residence rules are based on the number of days of residence in the UK and are relatively generous (91 and 183 day rules) compared to the proposed new rules due from 6 April 2013.
So what are the proposed new rules which were revised recently, and need we be worried?
Under the new rules you will not be resident in the UK for a tax year if you fall under any of the following conditions:
• you were not resident in the UK in all of the previous three tax years and you are present in the UK for fewer than 46 days in the current tax year;
or • you were resident in the UK in one or more of the previous three tax years and you are present in the UK for fewer than 16 days in the current tax year;
or • you leave the UK to carry out full-time work abroad (35 hours a week or more), provided you are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.
Many British expats living abroad but flitting back to the UK will be classed as "leavers" (resident in one or more of the three tax years immediately preceding the year of return) not "arrivers" (not resident in all of the three tax years preceding the year of return).
Leavers can only be in UK for less than 16 days or above in a tax year to have absolute ‘certainty’ of non-residence. That’s hardly enough time to get over jet lag! However, if you want more days in UK you must determine how many ‘connecting factors’ apply to you.
For ‘leavers’, the five connecting factors, simply put, are:
1. UK resident family connections;
2. Substantive UK employment (including self-employment);
3. Accessible UK accommodation;
4. You spent 90 days or more in the UK in either of the previous two tax years;
5. You spend more days in the UK in the tax year than in any other single country. Once your connecting factors are calculated you can apply them to the ‘leavers’ scale below for your classification of non-residence from 6 April 2013.
Fewer than 16 days spent in UK Always non-resident
16 - 45 days in UK Resident if you have 4 factors or more (otherwise not resident)
46 – 90 days in UK Resident if you have 3 factors or more (otherwise not resident)
91 – 120 days in UK Resident if you have 2 factors or more (otherwise not resident)
121 – 182 days in UK Resident if you have 1 factor or more (otherwise not resident)
183 days or more in UK Always UK resident
There is also a potential impact of UK residence for non-domiciled spouses on inheritance tax if they are deemed to be UK resident on a regular basis under the new rules.
The new rules will be complex so you really need to plan for those UK visits or risk being declared UK resident and taxed accordingly.
Is it time to start considering some changes to your yearly migration?
Yes, I was very worried about this last year as I spent about 150 days back in UK last year. Glad to see it's not effective til next tax year. I'm largely staying away this year to get my 4 year average back down again. I'm currently flying pretty close to the wind and don't want to end up being deemed resident (which would apply retrospectively over my entire time away).