In the United Kingdom, an individual is assessed for income tax if they are deemed a UK resident for fiscal purposes. Unlike in the United States, where citizenship is a basis for levying income tax, the UK focuses on residency status.
Criteria for UK Tax Residency
A person is considered a UK resident for tax purposes under the following conditions:
1. Living in the UK
If they live in the UK for more than 182 days in any tax year.
2. Frequent Visits
If they visit the UK for more than 91 days per tax year over four consecutive years, they become a UK tax resident in the fifth year, or from the commencement of the tax year in which they first expressed their intention to make such visits.
3. Regular and Obligatory Visits
If they make regular, habitual visits to the UK, which are obligatory and follow an almost mechanical regularity, excluding elements of chance or occasion.
Becoming a Non-Resident
An existing UK resident can become a non-resident for tax purposes by being out of the country for at least 365 days, during which they did not spend more than 91 days in the UK. Days of arrival and departure are not counted.
In July 2005, the Special Commissioners in the case of Shepherd v HMRC decided that the 90-day rule was not the sole factor in determining UK residency. Despite Mr. Shepherd, a professional pilot, spending 180 days out of the UK on flights, 77 days in Cyprus, and 80 days in the UK at the family home, the Commissioners ruled that he had not made a distinct break from his former life and remained a UK resident for tax purposes.
Clarification on the 91-Day Rule
In January 2007, HM Revenue and Customs (HMRC) clarified its position on UK tax residency, emphasizing that the 91-day rule applies only to individuals who have left the UK and live elsewhere but visit the UK regularly. HMRC’s guidance notes, as set out in booklet IR20, make it clear that days of arrival and departure are disregarded when calculating days under the 91-day test.
In the Gaines-Cooper v HMRC case (SpC 568), the Commissioners emphasized the importance of considering an individual’s overall lifestyle and patterns of presence in the UK versus overseas. The ruling stated that Gaines-Cooper had not ceased to be a UK resident, as he had not made a distinct break from the UK.
Non-Resident Tax Obligations
Non-residents are generally only liable to UK income tax on income derived from:
1. Property situated in the UK.
2. Any trade or profession carried on through a branch or agency in the UK.
3. Any employment where duties are performed in the UK.
Severing Ties with the UK
With HMRC employing an ever-broadening test to determine UK residency for tax purposes, British-born expatriates must take greater measures to sever ties with the UK. HMRC’s rewritten guidance in booklet HMRC 6 emphasizes broader criteria in investigations of residency status. The Gaines-Cooper legal case illustrates that simply counting days spent in and out of the UK is insufficient to qualify as a true non-resident.
Recommendations for Expats
To ensure a decisive break from the UK for tax purposes, PKF Accountants recommend the following actions:
1. UK Property
Sell or let out your UK property for at least 12 months, and ensure it is not available for your use when you visit the UK.
2. UK Business
Consider resigning from any UK company directorships or disposing of your UK business interests.
3. Other UK Connections
Notify your UK doctor, dentist, and cancel memberships with UK sporting and social clubs.
4. Taxes
Submit form P85 to HMRC, declaring non-resident status, and avoid returning to the UK for an entire tax year.
5. Finances
Cancel UK credit cards, reduce balances in UK bank accounts, and consider transferring pension arrangements overseas.
6. Cars
Sell your car, cancel insurance, and subscriptions to motoring organizations.
7. New Country of Residence
Establish employment or business links, obtain a residence permit, purchase or rent property, register with local authorities, and move with your family to your new country.
The EU Savings Tax Directive
The EU Savings Tax Directive (STD) impacts individuals residing in an EU Member State who earn savings income from deposits or investments held in another EU Member State or a third country covered by the Directive.
The STD, effective from 1st July 2005, applies to four main categories of savings income:
1. Interest on Debt Claims
Interest is paid out or credited to accounts.
2. Interest on Debt Repayment
Interest is rolled up and paid out when a debt claim is repaid or sold.
3. Investment Fund Distributions
Distributions made by certain unit trusts and other collective investment funds with over 15% of their investments in debt claims.
4. Income from Investment Funds
Accumulated income is paid out when units in collective investment funds with over 40% of investments in debt claims are redeemed or sold.
The STD requires banks and financial institutions (paying agents) to provide details of their customers’ tax residence and Tax Identification Number (TIN) to tax authorities in the customer’s country of residence.
Double Tax Treaties
In April 2003, the United States and Britain signed a new tax treaty, the first update in 30 years. The treaty abolished the 5% withholding tax on dividends from UK companies’ American subsidiaries, simplifying regulations relating to pension taxation in both countries. This was expected to save British firms millions of dollars annually.
In December 2011, the United Kingdom had 119 tax treaties in place. These treaties are reviewed annually by the government to ensure they meet the needs of businesses and individuals receiving income from abroad.
UK-Switzerland Tax Agreement
In August 2011, HM Treasury announced a tax agreement with Switzerland aimed at resolving the abuse of Swiss banking secrecy. The agreement includes a one-off deduction of 19% to 34% on existing funds held by UK taxpayers in Switzerland to settle past tax liabilities, with a CHF 500m up-front payment from Swiss banks to the UK. From 2013, a new withholding tax on investment income and gains ensures the effective taxation of UK residents with Swiss bank accounts. The agreement also introduces an information-sharing provision, making it easier for HMRC to identify Swiss accounts held by UK taxpayers.
European Commission’s Challenge
In November 2011, the European Commission (EC) announced its intention to challenge the tax agreements between Switzerland and the UK, as well as a similar deal between Switzerland and Germany. The EC argues that these treaties are incompatible with European law and undermine the Savings Tax Directive’s aim of taxing investments held by residents in other member states. The Commission continues to advocate for the automatic exchange of tax information.
Offshore Disclosure Programmes
HMRC has implemented various offshore disclosure programs to address undisclosed offshore accounts. The New Disclosure Opportunity (NDO), announced in the 2009 budget, applies to offshore accounts worldwide and caps penalties at 10%. The Liechtenstein Disclosure Facility (LDF), signed in August 2009, also caps penalties at 10% but has a shorter recovery period of 10 years. HMRC plans to negotiate further disclosure facilities with other jurisdictions in the coming years.
Conclusion
With HMRC broadening its criteria for establishing UK residency, British expatriates must take decisive steps to sever ties with the UK. The key to proving non-resident status is to demonstrate a clear and decisive break from the UK, ensuring that the overall pattern of life reflects the declared non-resident status.
