An individual’s UK tax residence status has a significant bearing on the amount of income and gains that is taxable in the UK.
Somewhat surprising then is the fact that the United Kingdom does not have a clear definition of UK tax residence. The current definition rests primarily on court decisions from legal cases over a long period of time. This has resulted in a vague system that is somewhat subjective in nature, especially for those who travel to and from the UK frequently or have certain connections to the UK. This was typified in the now famous case of Gaines-Cooper vs. The Commissioners for HMRC where a UK businessman migrated to the Seychelles in 1976, and spent less than 91 days in the UK each tax year but maintained UK property and other UK interests. On October 19, 2011, he lost his appeal before the UK Supreme Court and was considered a tax resident despite following what he thought was Her Majesty’s Revenue and Customs’ (HMRC) guidance on non-residence.
All this could be about to change with the introduction of a statutory residence test (SRT), expected to take effect beginning April, 2012. Adopting its policy on consulting with the public and practitioners on a proposed framework, the UK HMRC finalized the consultation stage in early September and now is moving to draft legislation.
The proposed framework provides a clear residence outcome for the vast majority of people whose circumstances are straightforward. For more complex situations, it provides clarity on the specific definitions and weighting of relevant connections and time spent in the UK. For example, under proposed rules an individual is not resident in the UK for a tax year if he or she satisfies any of the following conditions:
Residence should not be confused with domicile. Domicile is a complex subject but can broadly be described as where you have your permanent home. A person not domiciled in the UK, even if a UK resident, generally does not pay UK tax on foreign income and gains unless it is remitted to the UK. For longer term residents (7 out of 10 years) the remittance basis can be maintained at an annual charge of £30,000, which is creditable in the United States. The UK HMRC is also looking to reform the taxation of non-domiciled individuals. The consultation period on the proposed reform has also recently closed and could result in an increase in the annual charge to £50,000 for those who have been residents in the UK for the past 12 out of 14 years. It may also enable non-domiciles to remit foreign income and gains tax-free to the UK for the purpose of commercial investment in UK businesses.
These rules can have an impact on UK nationals living in the U.S. and those who spend significant time in the UK or are contemplating a move. With a top income tax rate of 50 percent, tax planning for UK residency can be especially important where credits for UK tax paid may not be fully utilized against U.S. tax. Greater certainty around these rules will enable clearer planning.
Editor's Note: Information in this article is current as of December 19, 2011.
David A. Roberts, Managing Director in the New York office of WTAS LLC, has over 20 years of experience in working with international high net worth individuals and families on tax and financial matters. His practice area includes planning and compliance for pre-immigration and expiration, U.S. taxpayers residing overseas, inbound U.S. investments and planning for multijurisdictional families with U.S. connections. He qualified as a tax professional in the United Kingdom and has worked in the UK, Singapore, Miami and New York during his career.