The Statutory Residency Tests – May 2023

For individuals with residences, properties and other sources of income in multiple countries, correctly applying the complex Statutory Residence Test (SRT) rules can be a daunting task in itself.

As a General Rule, taxpayers who are resident in the UK in a tax year are taxable on their worldwide income and capital gains arising in that year, and taxpayers who are not resident in the UK in a tax year are only taxable on their UK income arising in that year.

Subject to certain exceptions, non residents do not pay capital gains tax.

Since 2013, the UK has had a statutory residency test, which determines whether an individual is UK resident, or non-resident for a tax year.

The following tests need to be applied in order:

• Automatic overseas tests
• Automatic UK tests
• Sufficient ties tests

While at first glance this may seem relatively straightforward, the tests are split into several smaller tests to determine whether you are UK resident for tax purposes in a given tax year.
If you are unsure whether you will be considered a UK resident for 2022/23, or indeed any tax year, please get in touch with one of the team.

As the UK tax system requires residence status to be self assessed, it is important that individuals maintain records to support this self assessment. In particular HMRC could look for evidence to establish presence at a particular home (for example: council tax bills, TV subscriptions, insurance documents relating to that home), and also working hours and location of work done (in which case HMRC would look at Contracts of employment and days worked in a particular country)

Split Year Treatment

There are cases where an individual arrives in or leaves the UK part way through a tax year, where ‘split year treatment’ may apply. This will mean that rather than being resident or non resident, there will be a designated ‘overseas part’ of the tax year. When considering whether residency for a tax year can be split, the circumstances should be compared to the circumstances in cases 1 to 8, which are summarised as follows:

Cases 1 to 3 apply to individuals leaving the UK to live or work abroad:

Case 1 – Starting Full Time work overseas
Case 2 – The partner of someone starting Full time work overseas
Case 3 – Ceasing to have a UK home

Whereas Cases 4 to 8 apply to individuals coming to the UK to live or work:

Case 4 – Starting to have a home in the UK only
Case 5 – Starting Full time work in the UK
Case 6 – Ceasing Full time work overseas
Case 7 – The partner of someone ceasing Full time work overseas
Case 8 – Starting to have a home in the UK

Each case has its own circumstances which should be read through and understood carefully to ensure the circumstances for that case apply.

Taxation of Foreign Income

For individuals who are resident and domiciled in the UK, foreign income is taxed on an arising basis. This means that income is taxed in the year it is received.

For individuals who are resident and domiciled abroad, foreign income is also taxed on an arising basis, however a claim for the remittance basis can be made (explained in further detail below).

Foreign income arising to non resident individuals is not taxable in the UK. For example, if a resident of France is earning French income, the UK government have no authority to tell that citizen that they should pay UK income tax on their French income.

There are therefore anti avoidance rules in place, to prevent taxpayers creating short periods of non-residence in order to shelter income which would otherwise be taxable in the UK.

In this case, individuals are taxed on the income received in a year of non residence in the year that individual returns to the UK. Temporary non residence applies if an individual:

• Has been resident in the UK for four out of seven tax years prior to their departure, and
• They are non resident in the UK for five years or less (extending from the day the individual loses UK residence until the day before UK residence is resumed)

Offshore Tax Non-Compliance

In 2014, to help in the fight against global tax evasion, over 100 countries signed up to the Common Reporting Standard (CRS).

This is an agreement between governments for the automatic exchange of financial information. This has resulted in more enquiries by HMRC in recent years, and the extended time limit for HMRC to investigate offshore matters regarding income tax, capital gains and inheritance tax is currently 12 years.

It is therefore important to ensure that you have historically disclosed everything correctly, and if you are unsure then please feel free to get in touch to let us know so that we can assist you in setting matters right, as any penalties for a disclosure prompted by HMRC far outweigh any potential penalties for an unprompted disclosure.

If you have any further queries regarding the above, please do not hesitate to contact our Tax Manager.

Cody Goldsbrough 

cody@treeaccountancy.co.uk