Where Are You Tax Resident?

The issue of where you are resident for tax purposes can be more complicated than many people realise. If you get it wrong, you could have to pay a large and unexpected tax bill. You need to have all the facts and keep detailed records.

The issue of where you are resident for tax purposes can be more complicated than many people realise. If you get it wrong, you could face a tax investigation. If the tax authority wins its case, you could have to pay a large and unexpected tax bill, with interest and penalties. Even if you get it right, you may still have to argue your case, so it is important to be armed with all the facts and keep up-to-date and detailed records.

Residence is a matter of fact. It is where you spend your time. Each country uses different domestic rules to work out who is resident for tax purposes. If you satisfy these rules, you are resident there for tax purposes and liable to tax there, very often on worldwide income and gains. Therefore, you cannot choose where to pay tax.

You can however choose where you spend your time, to determine your tax residence. You can also choose when to sell assets, to determine where you pay tax on the gains. But this is where it gets complicated. It is easy to slip up and specialist guidance is essential.

In Spain, you are resident for tax purposes if you spend more than 183 days there a year. You will also be resident if your “centre of economic interests” or “centre of vital interests” is in Spain. As a resident, you are liable to Spanish income, capital gains and wealth taxes on your worldwide income, and subject to the Spanish succession tax rules.

In Portugal, you are resident for tax purposes if you spend more than 183 days there a year. Alternatively, if you have a “permanent home” available in Portugal you may be deemed to be tax resident.  As a resident, unless you qualify for the Non-Habitual Residents Regime, you are liable to Portuguese tax on worldwide income and, to some degree, on capital gains.

In France, you are resident for tax purposes if any of the following apply: Your main residence or home in France; France is your principal place of abode (you spend more than 183 days a year there); your principal activity is in France or France is the country of your most substantial assets (centre of economic interests). As a resident, you are liable to French income, capital gains and wealth taxes on your worldwide income, and subject to the French succession tax rules.

In Cyprus, you are resident for tax purposes if you spend more than 183 days there in the tax year (calendar year). Residents of Cyprus are taxable on their worldwide income, including all pension income, and gains on local real estate.

Likewise, if you are resident in the UK you are liable for UK tax on your worldwide income and gains. However the UK residence rules are far more complex. Prior to April 2013 the concept and definitions of “residence” were not defined within UK legislation. Taxpayers had to rely on previous case law and HM Revenue & Customs (HMRC) guidance to determine their residence position. The rules contained many grey areas and some taxpayers inadvertently fell foul of these.

The new Statutory Residence Test, in effect since April 2013, provides more certainty going forward, although it is still complex. It is based on a combination of day counting and the number of ties you have with the UK. For three years the old and new rules work side by side.

HMRC are still catching up with people over their residence position several years ago. Two recent court cases highlight the importance of taking expert advice, and following the advice carefully and keeping meticulous records.

Mr and Mrs Rumblelow, living in Portugal, lost a court case with HMRC over their residence status and now have a tax liability of £600,000 to settle. On the other hand, HMRC lost a similar case against Mr Glyn, who saved around £5.5 million in tax through very careful planning and record keeping over his move to Monaco.

Unless your situation is straightforward – and you are you sure it is? – it is essential to take specialist advice from an adviser who is up-to-date and experienced with the residency and tax rules of both the UK and the country where you are living.

6 December 2013

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 is advised to seek personalised advice.