The UK?s March budget confirmed that the government will introduce a statutory definition of tax residence on 6th April 2013. This will not be a moment too soon for many British expa
The UK?s March budget confirmed that the government will introduce a statutory definition of tax residence on 6th April 2013. This will not be a moment too soon for many British expatriates who have had to deal with uncertainty over UK tax residence issues for too many years. While the Gaines-Cooper residence case is the most well known, other cases also show how ambiguous the rules can be and how it is possible to get caught out and faced with an unexpected tax bill.
One issue that causes some debate is property. If you are a British expatriate and want to make sure you cannot be deemed to be tax resident in the UK, is it risky to own a property for your use in the UK? Our view has been that HM Revenue and Customs (HMRC) could potentially use property ownership as an indicator that an individual may be UK resident, or as weight in an argument that an individual has not left the UK sufficiently to be non-UK resident. To err on the side of caution, and depending on what your other ties to the UK are, it would be safer to not own a property unless it is rented out at arm?s length to a third party, and not available for your use.
If you have been non-UK resident for many years and then buy a property for your use in the UK, provided you keep to a similar pattern of visits as before, it is unlikely that HMRC would seek to claim you are UK resident, particularly if you do not spend more than a month a year there and are not working there.
However, if you are planning on returning to live in the UK, and buy or rent property for your use before you leave your current country or residence to use when visiting the UK while planning your return, HMRC could decide your residence started earlier than you believe it did.
This was the subject of the latest case in the First-Tier Tribunal won by HMRC.
The individual, Rupert Kimber, had been working and living in Japan with his family for a number of years and was non-UK resident. After he resigned his position in Japan he spent time in the UK with his family in July 2005 on a planned holiday, staying with his mother-in-law. During the holiday, he signed a lease for a property in Norfolk and enrolled his children in a local school from September 2005.
The whole family then left the UK and spent August in Italy (a holiday which had been pre-booked from Japan).
While he was in Italy he sold shares, which would have generated a UK capital gains tax liability of ?99,500 if he had been a UK tax resident.
He returned to the UK at the end of August and began employment there on 1st September 2005.
Kimber believed he did not become tax resident in the UK until he returned from Italy at the end of August.
Although UK tax law does not have split tax years, there is an Extra Statutory Concession which usually permits split year treatment so that for certain types of income and gains you are only considered tax resident from the date you arrive in the UK.
HMRC accepted that the concession was available for Kimber, but argued that he became UK resident prior to the disposal of his shares so it was of no benefit to him.
On 8th February 2012, the First-Tier Tribunal ruled that sometime before 30th July 2005 Kimber formed the intention to stay in the UK permanently and become resident. So when he arrived on 17th July it was not for a temporary purpose but, apart from the pre-booked holiday in Italy, he was returning to the UK. He was therefore UK resident on 12th August and liable to capital gains tax on the disposal of the shares.
It is possible to be resident in more than one country, based on each country?s domestic residence rules, in which case it would be necessary to depend on any relevant double tax treaty. However, this does not always give the result you expect so you should seek professional advice.
While Kimber had no clear residence position elsewhere (which may have affected the decision as he could not rely on a tax treaty, for example), this case highlights that HMRC are looking more closely at residence than ever before. Even after the statutory residence test is introduced, the case will still be relevant for all years prior to the test, and as we can see from Kimber?s case, the authorities can look back for some years, and even further if they suspect fraud.
HMRC?s current guidance on tax residency (HMRC 6) sets out how an individual can go to the UK for a temporary purpose but immediately become resident for tax purposes if their intentions change. If you are visiting the UK to prepare for future residence, you are very vulnerable to this.
The split year concession will be included in the new statutory residence test but the consultation document does not include any specific rule on the start date of an individual?s residence. It will be interesting to see if something is introduced to this effect in the final regulations.
If you are planning to return to live in the UK, it is important to take advice from a firm like Blevins Franks which advises on taxation in both the UK and countries like Spain, France, Portugal, Cyprus and Malta to make sure that you do not accidentally become tax resident before you expect to. They can also help you improve your tax position for when you do return.
By David Franks, Blevins Franks Financial Correspondent
6th April 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.