UK Tax Residency for tax purposes

How is UK Residency different from the UK domicile and non dom status and most importantly how changes to both affect your UK tax residency.

UK Tax residency status is an important area that needs constant review. Previous years’ records must be maintained to establish any exposure to a change in status, as well as forward planning to establish the number of days that can be spent in the UK to maintain your most beneficial tax residency status.

Current pandemic has had a big influence on many people’s residential status in the UK.

2020 has been a strange year by any standard.  We have all learnt the impact a global pandemic can have on our day to day lives, working arrangements and travel plans.

For many the impact on their travel plans over the last 12 months has been restricted to a postponed or cancelled holiday, but for others traveling between countries is a fundamental part of their lifestyle, be it for work or visiting family dispersed across the globe.

If that is your position, the travel restrictions imposed during the pandemic may have resulted in significant changes to your planned travel and the time spent in various countries.  This can have an impact on tax residency status, which can have far reaching consequences.

Since 2013 the UK has used a Statutory Residency Test to decide if an individual is UK resident for tax purposes. This looks at various aspects including places of work, location and number of “homes” and other ties to the UK.  The test then puts a limit on the number of days that can be spent in the UK for each individual before they are treated as UK tax resident.

In extreme cases this test can result in someone being UK resident with as few as 16 days in the UK or being non-UK tax resident with as many as 182 days in the UK in a single tax year.  Due to this it is important to confirm the number of days you can spend in the UK based on your own personal circumstances. It is possible to exclude up to 60 days spent in the UK where your presence is for exceptional circumstances. HM Revenue and Customs have issued guidance on how they will view Coronavirus-related claims for this exclusion, although these broadly state that every possible effort to leave the UK as soon as travel restrictions allow must be made.

With the past year likely to have resulted in a change to the “normal” time spent in the UK, it is worth reviewing your residency status and any impact this has on your tax position.

What impact does a change in UK residence status have on your affairs?

For some, the impact can be minor but for others it can lead to significant changes to their UK tax exposure.

In general, becoming UK tax resident will bring your worldwide income and gains within the scope of UK Income and Capital Gains Tax.  There may, however, be the option to claim the remittance basis on overseas income and gains if you are not UK domiciled.

But it is not quite as straightforward as that, especially where domicile is an issue.

Domicile is different to residence. You are usually domiciled in the country in which your father’s permanent home was at the time of your birth, unless you have acquired a domicile of choice by settling in another country permanently. However, for tax purposes you can also be deemed UK domicile if you were UK tax resident in 15 of the previous 20 tax years, or if you have a UK domicile of Origin, subsequently acquired a domicile of choice overseas, and then become UK tax resident again.  Therefore, an unexpected year of UK tax residency can make you deemed UK domicile.  This would prevent claims for the potentially more beneficial remittance basis for overseas Income and Capital Gains, and expose your worldwide Estate to UK Inheritance tax, potentially unravelling years of careful tax planning.

Another unintended consequence of becoming UK resident is the potential to be treated as “temporarily non-UK resident”.  This occurs if the period of non-UK tax residence is less than 5 years.  If this is the case then certain capital gains and income arising whilst non-UK resident come back into the charge of UK tax in the year of return.  Again, an unintentional year of UK tax residency could lead to unexpected tax liabilities.

As part of tax, financial and probate planning, Trusts are often used to provide asset protection and tax efficiencies among other benefits. The tax treatment of Trusts is based on the Trustees’ residency status. A Trust is UK resident if all the Trustees are UK tax resident or, if the Settlor was UK resident and domiciled when the Trust was settled and there are both UK and non-UK resident Trustees.

Where a Trust is non-UK tax resident, a Trustee becoming UK tax resident could cause the Trust to become UK resident.  The reverse is also possible.  A Trustee’s unexpected year of UK residency could therefore import a Trust to, and then export it from the UK. When a Trust becomes non-UK resident a Capital Gains Tax “exit charge” arises based on the market value of the assets, possibly leading to significant tax liabilities.

Companies are resident where they were incorporated and centrally managed and controlled.  Changes to the residence of the board and shareholders of a close company may result in the decision making and management of the company moving to or from the UK bringing it into charge of UK taxes, or preventing certain UK reliefs or grants being available.

Residency also goes beyond tax considerations. The ability to invest in UK ISAs relies on the investor being UK tax resident. Furthermore, how best to arrange any pension provision will also depend on your residency status.

We highly recommend you to speak with a UK tax planning specialist to ensure you maintain your most beneficial tax residency status.    

At Rickard Luckin we believe that every client is unique and has their own issues and needs. In order to advise our clients we need to know more than just the figures, and we therefore look to build lasting relationships and an understanding of our clients, their family situations and their goals to help insure that their tax structures and plans support and aid those aims. To find out more: https://www.rickardluckin.co.uk/