Tie Breaker Rules Could Decide UK Tax Residency


Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

British expatriates do not necessarily escape the attention of the UK tax authority just because they spend less than 91 days in the UK, and the existence of a double tax treaty does not provide a

British expatriates do not necessarily escape the attention of the UK tax authority just because they spend less than 91 days in the UK, and the existence of a double tax treaty does not provide as much protection as you may imagine. It is possible for an individual to be initially classed as a tax resident in both their country of residence and the UK under each country?s local rules. The UK can argue, despite you being a tax resident in your country of residence under the local rules, that you remain a UK tax resident if you have not made a ?distinct break? from the UK and cannot prove that you have gone abroad ?permanently or indefinitely?. This argument can prevail even when you spend less than 91 days in UK. Maintaining a UK home available for you use in particular is a red flag to the HMRC bull.

Robert Gaines-Cooper maintained that he was non-UK resident, since he spent less than 91 days in the UK each tax year, and therefore he fell within the guidance given in HMRC?s booklet IR20 on residency and non-residency (revised as HMRC 6), regarding the number of days a non-UK resident can spend in the UK, averaged over four UK tax years. But he had also retained many ties with the UK such as a house for his use, in which his second wife and son lived, and his son attended public school in the UK. Gaines-Cooper also has a collection of classic cars and paintings at the property, and had his Will drawn up under English law.

In upholding a High Court decision, the Court of Appeal found that Gaines-Cooper had not left the UK ?permanently or indefinitely? as referred to in IR20, and deemed that he had indeed been UK tax resident and was potentially liable for UK taxes going back over thirty years. Gaines-Cooper has since won the right to appeal in the Supreme Court, but whichever way the Court rules it is important to remember that each residency case is different and a decision is made on each individual?s set of circumstances. Other court cases also show that spending less than 91 days in the UK is not necessarily enough for HMRC to regard you as non-UK resident.

Tie breaker rules

Many countries, including Spain, France, Portugal and Cyprus, have a double tax treaty which will determine an individual?s tax residency status in favour of just one country, forcing the other to drop their residency claim. If you remain within the UK?s residency rules and the tax residency rules of your country of residence, then tie breaker rules will come into effect.

Using Spain as an example (it is similar in many other countries) In Spain, you will become resident for tax purposes if you spend more than 183 days in the calendar year (tax year) in Spain; or your ?centre of economic interests? is in Spain.

The first tie breaker rule is that if you are resident in both countries according to each country's domestic rules, you are deemed to be resident in the country in which you have a permanent home available to you. Note that a ?permanent home? is any form of accommodation which is continuously available to you for your personal use, and does not have to be owned by you.

Where you have a permanent home available in both countries, the second tie breaker rule comes into play and that is which country is your centre of vital interests, i.e. the country with which your personal and economic relations are the closest. The term ?centre of vital interests? covers the full range of social, domestic, financial, political and cultural links within your personal and economic relations. For example, if you have a home in the UK where many of your possessions are kept, and your family and majority of friends live in the UK, and you have UK based pensions and investments, it can be difficult to prove that Spain is the centre of your vital interests.

If this test is indeterminate, then the third tie breaker is used: in which country you have an ?habitual abode?. This broadly means the country in which, over a reasonable period, you stay more frequently. The comparison must be made over a sufficient length of time for it to be possible to determine whether residence in either the UK or Spain is habitual.

Finally, if the answer to the third test cannot be determined i.e. you have an habitual abode in both countries, you are deemed to be resident in the country of which you are a national. At this point UK nationals will be regarded as UK residents.

How you can protect yourself

?There are steps you can take so as not to give HMRC reason to question your UK residency:

?Keep well within the 91 day residency rule, remembering that presence at midnight in the UK counts as a day spent there.

?Sell your UK home and certain possessions and do not keep a property there for your personal use. Personal effects such as family photos, furniture, cars and pets can go with you.

?Your spouse, minor children and any dependants should move abroad to live with you. It is not necessary for adult children or aged parents move with you.

?Dispose of as many UK investments, bank accounts and credit cards as possible.

?Resign from UK club memberships and sever UK business connections.

Under the UK self assessment system, HMRC do not have to agree your tax residence position. Even though you submit a UK non-resident tax return (or even don?t submit any tax return) HMRC can argue the case several years later.

If you are at all concerned about your UK residency status and would like further advice on this and how to minimise your tax liabilities both in the UK and the country you have moved to or are moving to, contact Blevins Franks for advice on solutions best suited to your personal circumstances.

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; individuals should seek personalised advice.