TAX PLANNING

The Statutory Residence Test Explained

For British expatriates, or those spending a significant period of time overseas, the issue of residence is an important topic. Simply moving abroad to avoid UK tax is an outdated concept, and recently those wanting to adopt or maintain non-resident status have been scrutinised.

ABOUT THE STATUTORY RESIDENCE TEST

The test works as a series of steps. Each ‘step’ needs to be reviewed in turn and if a conclusion is not reached the next ‘step’ is tackled. As soon as your circumstances meet one of the steps your residence status is decided.

KEY COMPONENTS OF THE STATUTORY RESIDENCE TEST

The test uses a framework of questions and tools. Essentially, the test divides taxpayers into three separate possible categories, each with their own rules.

1. Those considered automatically non-resident

2. Those considered automatically resident

3. Those who need to review ties with the UK and the amount of time spent here

CALCULATING THE NUMBER OF DAYS SPENT IN THE UK IN A TAX YEAR

Generally the number of days spent in the UK is calculated by counting how many times you are present in the UK at midnight.

THE AUTOMATIC OVERSEAS TEST 

Generally you will be classed as non-resident if:

• You were resident in one or more of the previous three tax years and visit the UK in the year for fewer than 16 days, or;

• You were non-resident for all of the previous three tax years and visit the UK in the year for fewer than 46 days, or;

• You work ‘sufficient hours’ overseas with no significant breaks and visit the UK for fewer than 91 days and spend less than 31 days working in the UK.

The first two conditions are simple numerical tests based on a low level of visits to the UK in the year. The third test is more complicated – ‘sufficient hours worked overseas’ is taken as an average of 35 hours a week over the course of the tax year. This is determined using a detailed calculation reviewing hours worked overseas, less hours worked in the UK against a reference period which deducts periods of annual/sick/parental leave.

THE AUTOMATIC RESIDENCE TEST

If the Automatic Overseas Test doesn’t apply, you will be classed as resident if any of the following conditions are met:

• You were in the UK for more than 183 days, or

• You have a home in the UK which is available for at least one period of 91 consecutive days, of which at least 30 days fall in the tax year and you are there on at least 30 days in the year. Throughout that 91-day period either you have no home overseas or if you have one you spend less than 30 days there in the tax year, or

• You work ‘sufficient hours’ with no significant breaks in the UK for 365 days and one day of that period falls into the tax year and more than 75% of work days in that period are UK work days.

It’s worth bearing in mind that the definition of ‘home’ is fairly vague. The second condition seeks to pinpoint where your home or ‘normal residence’ is. Even if you have a UK home, provided you have an equivalent ‘home’ overseas and at least 30 days are spent there during the year, residence does not automatically apply.

The final condition regarding work in the UK again uses a specific calculation meaning that it is necessary to review actual time worked in the UK rather than simply assuming that this section does not apply.

THE SUFFICIENT TIES TEST 

If neither of the first tests apply then the Sufficient Ties Test is used to decide the status of an Arriver (someone who has been non-resident in all of the three tax years immediately preceding the tax year under consideration) or a Leaver (someone who has been resident in one or more of the three tax years immediately preceding the tax year under consideration).

The number of connecting ties with the UK that apply for the year are reviewed using the following guidance:

  • Family Tie – whether a spouse/partner/common law equivalent or minor children are UK resident
  • Accommodation Tie – whether accessible accommodation which is available for at least 91 days and at least one night is spent there in the tax year, or if the accommodation is owned by a close relative, at least 16 nights there in the tax year
  • Work Tie – whether more than 40 days’ work in the UK is undertaken (any day where more than three hours’ work is performed in the UK)
  • 90 Day Tie – whether more than 90 days has been spent in the UK in either of the previous two tax years
  • Country Tie (applies to leavers only) – whether more days were spent in the UK than any other single country in the tax year

The numbers of ties relevant are then combined with the days spent in the UK for that year to make a decision on your status.

THE STATUTORY RESIDENCE TEST AND SPLIT YEAR

One of the most complex areas of the Statutory Residence Test allows you to ‘split’ a tax year when leaving or returning to the UK. This means that the relevant tax year will be split into two separate parts – one when you were UK resident and one when non-resident.

The rules allow the tax year to be split in eight different situations or ‘cases’, each with their own specific criteria. The three cases when leaving the UK are:

  1. When starting ‘full-time’ work overseas
  2. When accompanying a partner who has started work ‘full time’ overseas
  3. When leaving the UK to live abroad and ceasing to have any home in the UK

The criteria when leaving the UK is strict to ensure a distinct break is made. Expert advice is vital, as the rules are very specific. For example, it might feel natural to think that leaving the UK for a job overseas would allow a split. Yet you must have been UK resident in the previous year, your work overseas is considered ‘full time’ and that any visits made to the UK after departure remain within pro-rata limitations, for this to apply.

The circumstances when a tax year can be split when arriving in the UK are:

  1. When coming to live in the UK and establishing their only home there
  2. When starting to work ‘full time’ in the UK
  3. When ceasing ‘full-time’ work overseas and coming to live in the UK
  4. When accompanying a partner who has returned to the UK following a period of full-time work overseas
  5. When starting to have a home in the UK

Again, expert advice is essential. The timing of the split in the tax year is not necessarily linked with your physical arrival in the UK. For example, you might find yourself resident without setting foot in the UK! If you plan to relocate in the UK and your only overseas property is sold, your only home may be in the UK, leaving you exposed. If you live overseas, but spend time in the UK, understanding the Statutory Residence Test is essential. It is important to seek advice from a professional to give you peace of mind in this complex area of tax planning. Our team of experts can help you understand your exposure to UK tax so please contact your nearest office to discuss your own situation.

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