Determining your residency status for UK taxes

As a general rule, taxpayers who are resident in the UK in a tax year are taxable on their worldwide income and capital gains arising in that year, while taxpayers who are not resident in the UK in a tax year are only taxable on their UK income arising in that year. Subject to certain exception (such as UK owned property), non-residents do not pay capital gains tax.

It’s therefore important to correctly determine your residence status in a given tax year as this will form the basis upon which you are taxed.

The UK uses several tests (known as the ‘Statutory Residence Test’ (SRT)) which apply to determine your residence status for income tax and capital gains tax. It doesn’t apply for the purposes of National Insurance (residence for NIC is discussed in a separate article, here).

Dual Residence and Non-Residence

It’s possible to be resident in the UK and at the same time be resident in another country under that country's rules. If an individual has dual residence, they should establish whether there is a Double Tax Treaty between the UK and that other country as a “tie-breaker” clause within the Tax Treaty will normally allocate residence to one country or the other.

Where there is no Double Tax Treaty in place, all income and gains (both UK and foreign source) will be subject to UK tax, but relief can be claimed for foreign tax paid through the filing of a self-assessment tax return.

Although rare, it’s also possible for an individual not to be resident in any country if their lifestyle is such that they don’t trigger the residence rules in any of the countries in which they are present during the tax year.

The Statutory Residence Test (SRT)

The SRT determines whether an individual is UK resident or non-resident for a tax year. There are three steps, which need to be applied in the following order:

1.       Automatic overseas tests

2.       Automatic UK tests

3.       Sufficient ties tests

Automatic overseas tests

An individual is not resident in the UK for a tax year if they meet any of the following:

• The individual spends under 16 days in the UK and was UK resident in at least one of the three preceding tax years.

• The individual spends under 46 days in the UK and was not UK resident in any of the three preceding tax years.

• The individual works full-time overseas. ‘Full-time‘ broadly means an average of at least 35 hours per week; with only limited visits to the UK.

Automatic UK tests

If an individual does not meet any of the automatic overseas tests, then we move on to the automatic UK tests. If any of the following tests are met, the individual will be regarded as UK resident for the tax year:

• The individual spends at least 183 days in the UK in the tax year

• The individual has a home in the UK which is available for a period of 91 consecutive days or more (at least 30 of which must fall within the tax year), and that home is actually used for at least 30 days in the tax year and they either have no overseas home(s), or, if they do, they spend fewer than 30 days in any overseas home in the tax year.

• The individual works full-time in the UK for any 365-day period, part of which falls in the tax year (with no significant breaks and subject to various conditions).

Sufficient ties test

Some people won’t meet any of the automatic overseas or automatic UK tests. In this instance, their residence status is determined by the sufficient ties test.

This considers both the number of days spent in the UK and the extent of the individual's connections (or ‘ties’) to the UK.

The five possible ties are:

• Family tie

• Accommodation tie

• Work tie

• 90-day tie

• Country tie

Under this test, the number of days you can spend in the UK before UK residency is triggered will vary depending on the number of UK ties you have.

Split year treatment

Under the SRT, an individual is either UK resident for a whole tax year or not. However, where an individual arrives in or leaves the UK part way through a tax year, ‘split year treatment’ may apply. This in effect allows the tax year to be split into two periods – a period of UK residence and a period of non-UK residence.

As with many things in tax, there are several conditions that must be met for split year treatment to apply.

If you would like to learn more about how your residency status impacts your taxes, contact Bearstone today.