UK Statutory Residence Test Update

HM Treasury has now released draft legislation for the new UK Statutory Residence Test. It will come into effect on 6th April 2013, after being delayed a year, and determine whether

HM Treasury has now released draft legislation for the new UK Statutory Residence Test. It will come into effect on 6th April 2013, after being delayed a year, and determine whether or not an individual is UK resident and therefore liable for UK tax on income and capital gains, wherever they arise.

There have not been any major changes to the proposed rules published last year, and it remains the same in principle. The day count has changed slightly, but in most cases only by one day. The latest Treasury document also clarifies some terminology like ?only home? and ?accommodation?.

Here is a summary of the key aspects of the Statutory Residence Test. The number of days referred is per UK tax year (6th April to 5th April) and a day is counted when you are in the UK at midnight. There are separate detailed rules for those working full time abroad, which are not covered here.

The distinction between ?leavers? (individuals who were UK resident in the previous three tax years) and ?arrivers? (not resident in all the previous three tax years) remains, and you need to be careful to follow the rules for your category. If you get it wrong you may unexpectedly find out that you were UK tax resident.

The main change for the leaver category is that you can now spend 15 days in the UK without being UK resident, regardless of connecting factors. Previously it was just nine days. Arrivers can spend 45 days in the UK without becoming UK resident.

In both cases, you will always be UK resident if you spend 183 days or more in the UK, or your ?only home? is there, or if you are working full time in the UK, covering a continuous period of nine months, and 75% or more of your duties are carried out there (the Treasury is consulting on increasing this period to 12 months).

Otherwise, whether or not you are UK resident is determined by how many ?connecting factors? you have to the UK and the number of days you spend there.

The connecting factors are:

1) Family in the UK (spouse/minor children)

2) Available accommodation

1) Substantive employment (40 days or more)

2) UK presence in previous years (more than 90 days in either of the previous two tax years)

3) More time spent in the UK than any other single country

Each factor is subject to its own specific criteria and can be complex.

These factors are combined with day counting into a scale to determine residence status.

So, for example, if you are an arriver and have two connecting factors, you can spend up to 120 days in the UK without being UK resident. If however you are a leaver, you can only spend up to 90 days there.

There will be an online assessment tool, but the government says it will not be binding ?as each case will ultimately turn on its own facts?. You therefore cannot rely on it to provide certainty on your tax status and will still need professional advice.

The draft legislation also brings split years onto a statutory footing; outlines exceptional circumstances under which days in the UK are discounted (not as accommodating as you may have liked); a transitional rule for some circumstances and anti avoidance measures.

Another consultation period is now running until mid-September and the final legislation will be included as part of the 2013 Finance Bill. The government believes the draft is close to being the final version.

The government rejected many of the tax industry?s suggestions to ease the rules that make someone UK resident, but the Statutory Residence Test is still a welcome improvement on the current unclear and subjective guidelines. It will provide much more certainty for expatriates, but this does not mean the rules are simple. The legislation is detailed and complex in places, and it could be costly if you get it wrong. You should therefore still take advice to clarify your tax position. Importantly, you also need to consider the Spanish tax residence rules and application of the double tax treaty.

Blevins Franks has in depth knowledge and experience of the tax and residence laws of both the UK and Spain, and how they interact. We are happy to guide you through the rules, impact and potential solutions.

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.