UK government introduces new tax residence test

On June 21, 2012 the UK government published draft legislation implementing statutory test for tax residence and abolishing the concept of ordinary tax residence. The draft legislation is expected to come into force on 6 April 2013. One must keep in mind that the replacement of the ordinary tax residence test will be with respect to individuals and not companies.

Under the basic rule an individual will be a UK resident for tax purposes in the year in which either:

  1. The automatic residence test is met; or
  2. Sufficient ties test is met.

The two tests are considered in turn below.

Automatic residence test is met in a particular year if both of the following conditions are satisfied:

An individual meets none of the automatic overseas tests; and
An individual meets at least one of the automatic UK tests.

There are three automatic overseas tests:

  1. 45-day test – satisfied if an individual was not a resident in the UK in one or more of the previous 3 tax years and has not spent more than 45 days in the UK in the specific year for which the residence is being established;
  2. 15-day test – satisfied if an individuals was a resident in the UK in one or more of the previous 3 tax years and spends not more than 15 days in the UK in the year for which the residence is being established. This test cannot be used if an individual died in the UK in such year.
  3. Full-time work abroad test – satisfied if an individual works full time abroad, spends not more than 30 hours working in the UK and spends not more than a total of 90 days present in the UK in such year.

As stated above, it would not be sufficient to establish that the individual does not meet one of the automatic overseas tests above, but also that such individual meets one of the four automatic UK tests below:

  1. 183-day test – an individual spends 183 or more days in the UK in this particular year. This test is the same as was used under the ordinary residence test concept and if this particular test is met, then the person will be automatically a UK tax resident in any specific year, since it would not be possible to meet any of the automatic overseas tests above;
  2. Only-home test – satisfied if an individual’s only home is in the UK or if he/she has multiple places of abode they are all located in the UK. In order to satisfy this test, however, an individual would have to spend a period of 91 days or more per year at such home (whether as a continuous period or by adding multiple periods);
  3. Full-time work in the UK test – an individual works full-time in the UK for a period of at least 276 days and some of such working days fall in the year for which tax residency is being established and provided that an individual does not take significant breaks during such period of employment (significant break is deemed to be a break of more than 31 days);
  4. Death-in-year test – satisfied if an individual dies in the particular year, such individual was a resident in the UK in the past 3 years and at the time of death an individual’s normal home was in the UK.

Sufficient ties test is satisfied if both of the following conditions are met:

  • An individual meets neither of the automatic UK tests nor either of the automatic overseas tests; and
  • An individual has sufficient UK ties.

The sufficient ties test differs based on whether a particular individual is considered a leaver (an individual who was a UK resident for one or more of the previous 3 tax years) or an arriver (an individual who was not a resident in the UK in any of the past 3 tax years).

There are five connecting factors that need to be considered:

  1. Family ties – if an individual’s spouse, civil partner or a common law equivalent is a resident in the UK during the year in question. There is a slight exception to this provision where only an individual’s minor children are resident in the UK and such individual spends no more than 60 days per year in the UK.
  2. Accommodation tie – an individual has a place of abode available to him/he in the UK and he/she spends at least one night a year at such place. Here, the accommodation tie will also be met if such place of abode belongs to a close relative of an individual and such individual spends at least 16 nights there; where “close relative” means – parent, grandparent, sibling and an adult child or grandchild (whether by blood, half-blood, marriage or civil partnership), but excludes spouses, civil partners and minor children. Another thing to keep in mind, is that an individual does not have to own the property in his/her own name, but such place of abode must be simply available to him/her (this situation may arise where the ownership of the place of abode is in the name of a corporate entity of which an individual is a beneficial owner).
  3. Work tie – exists if an individual works in the UK for at least 40 days in any specific year.
  4. 90-day tie – exists if an individual spent more than 91 days in the UK in one or both of the previous two tax years.
  5. Country tie – applies only to leavers and exists where an individual has spent more days in one year in the UK than in any other country. There is a tie breaker in favour of the UK if an individual spends an identical number of days in two or more countries – he/she will be deemed to satisfy the country tie test.

Number of UK ties that are sufficient for UK residence

The table below demonstrates how a sufficient ties test may be met and thereby an individual may be deemed a UK tax resident via a combination of the days during which the individual was present in the UK, the status of leaver and arriver and the number of required ties.

Days spent in the UK Number of ties sufficient to be UK resident
Arriver Leaver
Fewer than 16 days Always non-resident Always non-resident
16-45 days Always non-resident 4 or more
46-90 days 4 3 or more
91-120 days 3 or more 2 or more
121-182 days 2 or more 1 or more
183 days Always resident Always resident

The information above is provided as a general guidance only. The rules on UK tax residence are complex and therefore you should always seek legal advice when determining your status in the UK. Oracle Family Office, a law firm and a network partner of Arlington Corporate would be happy to assist you and answer all your further queries.