A new definition of residence

In the 2011 Budget, the Government announced that it would introduce a statutory definition of tax residence.  There is currently no full statutory definition and the existing rules are unclear and complicated.  The proposed statutory test is therefore designed to remedy this and provide what will hopefully be a simple process and a clear outcome for individuals.   In particular it should remove the current uncertainty surrounding residence following the Gaines-Cooper case and HMRC 6 guidelines.

On 17 June 2011, the Government published its consultation on the plans for the statutory test.  The consultation will seek views on the design and implementation of the proposed new test to determine tax residence.  The consultation period will run for 12 weeks from 17 June 2011 to 9 September 2011. 

The new test will be a combination of the amount of time an individual spends in the UK and the level of their other connections to the UK.  It will define tax residence for individuals (not companies) and will apply for the purposes of income tax, capital gains tax (CGT) and inheritance tax.  The test is proposed in 3 parts.  Part A will list a number of factors that would be sufficient to make an individual not resident, for example, if an individual leaves the UK to carry out full time work abroad, they will need to be present for fewer than 90 days in the tax year and spend no more than 20 days working in the UK in a tax year.  (A working day is any day on which 3 hours or more of work is carried out in the UK).  Part B will list factors that would make an individual resident, such as them being present for 183 days or more, or carrying out full time employment here. 

If an individual’s tax resident status cannot be determined by part A or B, then part C will need to be considered.  This lists a number of other connection factors and day counting rules, such as whether an individual’s spouse or children are UK resident, if they have accessible accommodation here, whether they spend more time in the UK than in other countries or whether they have spent 90 days or more in the UK in the previous 2 tax years.  It also includes those who carry out “substantive work” in the UK, which is defined as working in the UK for 40 or more tax days in the year.

Separate scales are proposed for arrivers to the UK and leavers from the UK.  An individual who has not been resident in all of the 3 years preceding the year under consideration would be considered an “arriver.”   If an individual was resident in one or more of the 3 tax years immediately preceding the tax year under consideration, they are considered a “leaver.”  The scales illustrate that it will be much harder for leavers to relinquish their residence, than for new arrivers to acquire it. 

The above reforms are intended to take effect from 6 April 2012, although it is possible there may be further changes during the consultation period.  Hopefully the final result will be a more transparent test that is far simpler to use, although this still remains to be seen.  If you would like to receive a copy of our more detailed briefing document, please contact either Elizabeth Kristensen or Mads Birkeland on 0207 592 8900.