The Statutory Residence Test (SRT) was introduced on 6 April 2013 and sets out a series of tests and rules that are used to establish an individual’s UK tax residency status. Understanding your tax residency is extremely important as this will help calculate the income and gains you need to report to HM Revenue and Customs.
Generally speaking, if you are not a UK resident – where the non-residence period has spanned at least five complete years – your overseas income and worldwide capital gains are typically exempt from UK taxation, apart from the disposal of UK land, property and assets used in a UK trade.
When you are a UK resident, if you are UK domiciled as well, you are taxable on your worldwide income and gains on an arising basis. If you are a UK resident but not UK domiciled, you will be taxable on your UK income and gains as they arise. However, your overseas income and gains can be excluded from UK taxation, provided various conditions are met. Each tax year is looked at separately, so you must use the test to work out your tax residence status each year.
How does the Statutory Residence Test work?
The SRT is a three-step test and, to determine your UK residence status you need to work through each of these steps in order. The three steps are:
- Automatic overseas test
- Automatic UK test
- Sufficient ties test
This information is used to determine how much tax a person should pay in the UK for that specific tax year. You will not be considered a UK resident if you meet the requirements of the automatic overseas test, or do not meet the automatic UK test and stay within your limits for visiting the UK to maintain UK non-residence under the sufficient ties test. Below, we are going to look at the requirements of each test in more detail.
Automatic Overseas Test
The automatic overseas test consists of determining the following three components:
- First automatic overseas test: You will not be considered a UK resident if you have lived in the UK for one or more of the three tax years before the current tax year and spend less than 16 days in the UK during the current tax year.
- Second automatic overseas test: You will not be considered a UK resident if you have lived in the UK for none of the three tax years before the current tax year and spend less than 46 days in the UK during the tax year.
- Third automatic overseas test: You will not be considered a UK resident if you have worked full-time overseas during the tax year. You must have spent less than 91 days in the UK during the year, worked in the UK for fewer than 31 days, and have no significant breaks in overseas work. A significant break is defined as 31 days or more, not due to annual leave, sickness, etc.
Automatic UK Test
The automatic UK test also consists of three components:
- First automatic UK test: You spend 183 days or more in the UK during the tax year.
- Second automatic UK test: you have a home in the UK for 91 or more consecutive days and you spend at least 30 days in that home in the tax year and at least 30 days of that 91 day period falls into the tax year concerned. You will not have a home overseas if you have a property overseas but spent fewer than 30 days there during the tax year. If you own more than one home in the UK, then you must consider each property separately. You only need to meet this test for one home to be considered a UK resident.
- Third automatic UK test: You work full-time in the UK for 365 days with no significant break in employment. There are several calculations involved in this test which can make it complex. You can refer to the HMRC manual for further guidance and examples.
Sufficient Ties Test
You use the sufficient ties test to determine your UK tax residency status if you do not meet the requirements of the automatic overseas test and the automatic UK test. If your UK residence status is determined by the sufficient ties test, then you will need to consider your connections to the UK (known as ties), and determine whether your ties, taken together with the number of days you spend in the UK, are sufficient enough for you to be considered a UK resident for tax purposes for a particular tax year. The ties to consider are:
- Family tie: You have family members living in the UK.
- Accommodation tie: You have a continuous place to stay in the UK for 91 consecutive days in the tax year.
- Work tie: You work for more than 40 days in the UK.
- 90 day tie: You spent more than 90 days in the UK during the past two tax years.
- Country tie: You spent more time in the UK than in any other country during the tax year. This tie is only relevant if you have been a UK resident in one of the previous three years.
If you have not been a UK resident in any of the previous three years, the number of nights you are able to spend in the UK without triggering UK tax residence are as follows:
4 ties – 45 nights
3 ties – 90 nights
2 ties – 120 nights
1 tie – 182 nights
However, if you have been a UK resident in any of the previous three years the number of nights you are able to spend in the UK without triggering UK tax residency are as follows:
4 or 5 ties – 15 nights
3 ties – 45 nights
2 ties – 90 nights
1 tie – 120 nights
0 ties – 182 nights
The Statutory Residence Test and Split Year Treatment
If you leave the UK or arrive in the UK part way through a tax year, you may be able to apply for split year treatment if you meet certain criteria. This allows you to minimise the amount of tax that you have to pay, as you will only be considered a UK resident for part of the tax year. Several different split-year cases may apply, each with individual requirements. You can refer to HM Revenue’s manuals from RDRM12000 onwards for full details on split-year treatment.
Final Thoughts on the SRT
Your residence status determines the income and gains that you need to report to HM Revenue and Customs and your liability to UK tax. There can be serious consequences and penalties if you do not get this right. Therefore, it is important to ensure that you have correctly understood your residence status.
For more information on the Statutory Residence Test or to discuss your own personal situation, please contact us.