Non-Resident & Income Tax

Non-Resident & Income Tax

Non-Resident and Income Tax

Non-Resident & Income Tax

Non-Resident and Income Tax

Statutory Residence Test

Whether you are already living overseas or are thinking of leaving the UK for employment or retirement or indeed returning permanently to the UK, your UK income tax and capital gains tax liabilities on worldwide income and gains will be defined by your residence status. 
 
Since 6th April 2013, HMRC have introduced the new "Statutory Residence Test" which has various tests within it. Depending on your circumstances and looking at each test in order, the first test under which you fall will indicate the number of midnights you can visit the UK in that tax year and still qualify as not-resident for that tax year. If the number of midnights specified in that test is exceeded, you will be treated as UK resident for that tax year.

This method of determing an individual's residence status is now on a legal footing replacing the guidelines that had previously built up over time through HMRC concessions and statements of practice, which had led to an amount of uncertainty.

Overview 

As a basic overview of the statutory residence test, there are three automatic overseas tests and three automatic UK tests which are applied to each tax year to determine whether you qualify as not-resident or UK resident. (The status of not-ordinarily resident having been abolished).

Where neither of these automatic tests are met, a sufficient ties test is applied to decide one's UK residence status. This looks at specific ties you may have with the UK i.e. family, accommodation, work, time spent in the UK in the previous 2 tax years and whether more time is spent in the UK than elsewhere. Depending upon the individual's residence status in the previous 3 tax years, the more UK ties one has, the fewer days can be spent in the UK (by counting midnights) before becoming UK resident for tax purposes. 

The visit limitations can, therefore, range from 15 to 182 days in the tax year, depending upon your individual circumstances. Days qualifying as being in transit and those due to exceptional circumstances will not be counted. 

It should be borne in mind that visiting the UK for life events (such as birth, marriage, divorce and death) and for medical treatment etc. are not usually regarded as exceptional circumstances. 

Automatic Overseas Tests

Automatic Overseas Tests

First we need to look at the automatic overseas tests to see if one qualifies as not-resident:

First test

Where resident in the UK for 1 or more of the previous 3 tax years before the tax year of assessment and spends less than 16 days in the UK during the tax year.

Second test

Where not-resident for the whole of the previous 3 tax years before the tax year of assessment and spends less than 46 days in the UK during the tax year.

Third test

Where working in full time overseas employment/self employment (as defined by an average of at least 35 hours per week over the tax year, with no significant break of more than 30 days and with fewer than 31 days of more than 3 hours a day spent working in the UK) and spending less than 91 days in the UK during tax year. 
This test does not apply to those who work on a vehicle, aircraft or ship eg lorry drivers, aircrew or seafarers, unless they have less than 6 cross-border trips in the tax year which either start or end in the UK.

First test

Where resident in the UK for 1 or more of the previous 3 tax years before the tax year of assessment and spends less than 16 days in the UK during the tax year.

Second test

Where not-resident for the whole of the previous 3 tax years before the tax year of assessment and spends less than 46 days in the UK during the tax year.

Third test

Where working in full time overseas employment/self employment (as defined by an average of at least 35 hours per week over the tax year, with no significant break of more than 30 days and with fewer than 31 days of more than 3 hours a day spent working in the UK) and spending less than 91 days in the UK during tax year. 

This test does not apply to those who work on a vehicle, aircraft or ship (e.g. lorry drivers, aircrew or seafarers) unless they have less than 6 cross-border trips in the tax year which either start or end in the UK.

First test

Where resident in the UK for 1 or more of the previous 3 tax years before the tax year of assessment and spends less than 16 days in the UK during the tax year.

Second test

Where not-resident for the whole of the previous 3 tax years before the tax year of assessment and spends less than 46 days in the UK during the tax year.

Third test

Where working in full time overseas employment/self employment (as defined by an average of at least 35 hours per week over the tax year, with no significant break of more than 30 days and with fewer than 31 days of more than 3 hours a day spent working in the UK) and spending less than 91 days in the UK during tax year. 

Automatic UK Tests

Where none of the automatic overseas tests apply, we then look at the automatic UK tests to see if one qualifies as UK resident:

First test

Where 183 days or more are spent in the UK during the tax year

Second test

Having a home in the UK for a period of at least 91 consecutive days during which at least 30 days fall within the tax year and
Where present in that UK home on at least 30 separate days during the tax year and
Whilst having that UK home, there is no home overseas or
Have one or more homes overseas where present for less than 30 days in each during the tax year.

Third test

Where working in full time employment/self employment in the UK for a period of 365 days or more and
Where all or part falls in the tax year and
With no significant break of more than 30 days and
More than 75% of those work days are for more than 3 hours in the UK and
Where at least one of those days is both in the 365 day period and the tax year.

Again this test does not apply to those who work on a vehicle, aircraft or ship (e.g. lorry drivers, aircrew or seafarers) unless they have less than 6 cross-border trips in the tax year which either start or end in the UK. 

First test

Where 183 days or more are spent in the UK during the tax year.

Second test

  • Having a home in the UK for a period of at least 91 consecutive days during which at least 30 days fall within the tax year 
  • Where present in that UK home on at least 30 separate days during the tax year 
  • Whilst having that UK home, there is either no home overseas 
  • Have one or more homes overseas where present for less than 30 days in each during the tax year.

Third test

  • Where working in full time employment/self employment in the UK for a period of 365 days or more
  • Where all or part falls in the tax year 
  • With no significant break of more than 30 days 
  • More than 75% of those work days are for more than 3 hours in the UK 
  • Where at least one of those days is both in the 365 day period and the tax year.
Again this test does not apply to those who work on a vehicle, aircraft or ship eg lorry drivers, aircrew or seafarers, unless they have less than 6 cross-border trips in the tax year which either start or end in the UK. 

Sufficient Ties Test

If the automatic UK test does not apply, the sufficient ties test is then looked at:
Those not resident in the previous 3 tax years before the tax year of assessment, need to consider whether they have the following ties in the UK:
  • Family - spouse/partner or child under 18.
  • Accommodation - available for a continuous period of 91 days or more during the tax year and where one spends at least 1 night or that of a close relative where one spends 16 nights or more.
  • Work - at least 40 days of more than 3 hours a day.
  • 90 day - more than 90 days spent in the UK in either or both of the previous 2 tax years.
Therefore, taking the following UK visits in the tax year, an individual becomes UK resident where there is at least the indicated number of UK ties, otherwise they qualify as not-resident:
Visits
Less than 46
46 to 90
91 to 120
121 to 182
183 or more
Ties
Always not-resident
Resident if 4 ties
Resident if 3 ties
Resident if 2 ties
Always resident
Visits
Less than 45
46 to 90
91 to 120
121 to 182
183 or more
Ties
Always not-resident
Resident if 4 ties
Resident if 3 ties
Resident if 2 ties
Always resident
Those who were resident in the UK for 1 or more of the previous 3 tax years before the tax year of assessment also need to consider the following tie:
  • Country - if the UK is where the greatest number of midnights has been spent in the tax year.
Therefore, in those circumstances, taking the following UK visits in the tax year, an individual becomes UK resident where there is at least the indicated number of UK ties, otherwise they qualify as not-resident:
Visits
Less than 16
16 to 45
46 to 90
91 to 120
121 to 182
183 or more
Ties
Always not-resident
Resident if 4 ties
Resident if 3 ties
Resident if 2 ties
Resident if 1 tie
Always resident
Visits
Less than 16
16 to 45
46 to 90
91 to 120
183 or more
Ties
Always not-resident
Resident if 4 ties
Resident if 3 ties
Resident if 2 ties
Always resident
Visits
Less than 45
46 to 90
91 to 120
121 to 182
183 or more
Ties
Always not-resident
Resident if 4 ties
Resident if 3 ties
Resident if 2 ties
Always resident

Deemed UK Visit Days

One extra consideration for those who have been a UK resident in 1 or more of the previous 3 tax years before the tax year of assessment and have at least 3 UK ties (although this is not applicable for the third automatic overseas test) is the number of “deemed days” spent in the UK.
 
A deemed day is where you visit the UK but are not present at midnight (e.g. if you commute to the UK to work and depart before midnight). If the number of deemed days exceeds 30 in the tax year, the excess days are added to the days spent in the UK at midnight to arrive at your total day count for the tax year. 

Split Tax Year Treatment 

There is also the provision to split the tax year between being resident and not-resident where one leaves the UK to live or work overseas and also when arriving or returning to live or work in the UK. There are 8 different situations (or cases) as defined by HMRC, each having its own criteria to determine the date from which the tax year is effectively split and the allowable proportion of UK visit days for the non-resident period.
The different split tax year situations are defined as follows:

Leaving the UK 

Case 1 – Starting full-time work overseas

Case 2 – The partner of someone starting full-time work overseas

Case 3 – Ceasing to have a home in the UK

Arriving in the UK

Case 4 – Starting to have a home in the UK only

Case 5 – Starting full time work in the UK

Case 6 – Ceasing full-time work overseas

Case 7 – The partner of someone ceasing full-time work overseas

Case 8 – Starting to have a home in the UK 

Leaving the UK 

Case 1 – Starting full time work overseas

Case 2 – The partner of someone starting full time work overseas

Case 3 – Ceasing to have a home in the UK

Arriving in the UK

Case 4 – Starting to have a home in the UK only

Case 5 – Starting full time work in the UK

Case 6 – Ceasing full time work overseas

Case 7 – The partner of someone ceasing full time work overseas

Case 8 – Starting to have a home in the UK 

Temporary Non-Residence

If you qualify as not-resident which lasts less than 5 years, you will be regarded as temporary not-resident. The effect of this will mean that certain income arising and capital gains realised whilst you have been temporary not-resident will become liable for UK tax in the tax year that you return to the UK. 

Personal Allowances

British citizens, European Union citizens and European Economic Area citizens (EU plus Norway, Iceland and Liechtenstein) are entitled to claim personal allowances against UK arising income plus the annual capital gains exemption whilst they are not-resident in the UK, to reduce their UK tax liability. 

In addition, it may be possible for residents and/or nationals of those countries where there is a double taxation agreement with the UK to also claim personal allowances and the annual capital gains exemption.

Citizens of Commonwealth countries were only entitled to claim personal allowances up to 5th April 2010. After this it is a case of referring to the relevant double taxation agreement.

However, the Government announced in the 2014 Budget that there would be a consultation into whether personal allowances should be restricted for non-residents to bring this in line with other countries. The outcome of this is awaited.

Transfer of Allowances between Partners

Marriage Allowance - with effect from 6th April 2015, married couples and civil partners born on or after 6th April 1935 can transfer up to 10% of their unused personal allowances to the other, in order to reduce their partner's income tax liability. This is provided the recipient is a basic rate (20%) taxpayer. Unfortunately, this is not available to higher rate (40%) or additional rate (45%) taxpayers.

Non-resident individuals can take advantage of this provided the transferor is entitled to claim personal allowances.

Married Couples' Allowance - those born before 6th April 1935 may be able to claim the more generous married couples' allowance which can be allocated between them in the most tax efficient way.

Bank and Building Society Interest - Personal Savings Allowance

Although it is not permitted to continue to place money into an ISA whilst not-resident, with effect from 6th April 2016 UK bank and building society interest etc. will in future be paid gross without the deduction of tax at source. 

Basic rate taxpayers (20%) will be able to receive the first £1000 of interest tax-free, whilst for higher rate taxpayers (40%) the tax-free amount will be £500. Additional rate taxpayers (45%) will not have a tax-free allowance and therefore will continue to pay tax on their interest in full.

Dividend Income

From 6th April 2016, UK dividends have been paid gross with the 10% tax credit being abolished. Instead, there is a special tax rate tax applied to dividends as follows:

     0% tax rate on the first £500 of dividends (effective from 6th April 2024)

(Previously £5000 6th April 2016 up to 5th April 2018, £2000 from 6th April 2018 up to 5th April 2023, £1000 6th April 2023 up to 5th April 2024). 
                  
  7.5% on dividends within the basic rate band
32.5% on dividends within the higher rate band
38.1% on dividends within the additional rate band

From 6th April 2022 an additional 1.25% Health & Social Care NIC levy has been introduced and added to each of the three above tax rates.