Timeout for statutory residence test
HM Treasury has published draft legislation covering the definition of tax residence in the UK
The draft legislation for the statutory residence test, issued in June, highlights that financial advice before leaving the UK is essential for those planning to spend time working abroad. The government has confirmed it intends to push ahead with the introduction of a statutory residence test from April 2013.
For most individuals, the introduction of a SRT for UK residency will have no impact on their current resident status. Those with more complex affairs or who have business travel involving time spent in different countries might welcome the introduction of an SRT, for the clarity it brings. And so too should their advisers. This will allow greater certainty when planning and should avoid the unexpected tax charges experienced in a string of recent court cases.
But the draft rules are complex and will require some very detailed record keeping for those seeking to claim they are non-UK resident. Advisers can help by alerting clients on the level of detail required and to potentially save them from retrospectively tracing their whereabouts and what they were doing.
The government remains committed to the same basic test outlined in the original consultation. But there has been some fine tuning to the test of conclusive non-residence. For those leaving the UK, the maximum days of UK presence to be considered non-resident is to be extended from 10 to 15 days. This should allow former UK resident to return to the UK for a two week period, perhaps as a holiday or to visit friends and family, without regaining their UK residence, a welcome development.
And there are to be amendments for those claiming to be non-resident as a result of taking up full-time work abroad. Options under consideration are to extend the number of allowable working days in the UK work to 25, or to stick with the original 20 days but extend the hours which constitute a working day from 3 to 5 hours.
Advisers will need to be aware of new anti-avoidance rules for temporary non-residents which will apply to certain types of irregular income.
The new SRT will mean that the rules are clearer about how much an individual would need to spend overseas to escape UK tax. Income payments could be timed to coincide with a period of non-UK residence and less income tax paid as a result.
For example, a director of a private company could satisfy the conclusive non-residence test for a single tax year and pay himself a large dividend payment free of UK tax.
To combat this, new measures will mirror the existing capital gains tax anti-avoidance provisions. Individuals leaving the UK who have been UK resident for at least four out of the previous seven tax years will be subject to income tax on “non-regular” forms of income should they return within five years.
Employment income, interest on savings and most forms of pension income (annuities, capped drawdown) are not affected by this measure. But those receiving taxable lump-sum payments, for example, under flexible drawdown and EFRBs will be caught.