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Making sense of the statutory residence test (“SRT”)

Andy Wood • Apr 22, 2024

A person’s residence status – for the purposes of this article whether they are resident for tax purposes in the UK – is incredibly important.

It determines what taxes are payable and the quantum of such payments.

With this in mind, one might be slightly surprised that it took until the 6 April 2013 for the legislators to enshrine a statutory test of residence. 

Prior to this, it was generally the piecemeal body of case law which determined someone’s status along with HMRC’s long standing

guidance set out in IR20.


Residence status – liability to taxes


But, why does it matter?


Residence is the main determining factor for exposure to income taxes and capital gains tax.




Up to now, IHT is primarily concerned with one’s domicile position. However, as part of the surprising announcement in Spring Budget 2024 that significance of domicile will be removed from UK tax code, IHT will, in the future, be determined by residence.


An overview of the SRT


he SRT created a lot of criticism when introduced.

The rules can be quite complex. However, modern life can very complex. So, we shouldn’t be too surprised.

This contrasts with the case law (on which cases were being previously being determined) was decades, and in some cases centuries, old. Where, under this old case law international business involved time consuming and expensive journeys overseas, it is now exceedingly easy to travel to far flung countries.

What the SRT aims to do is set out are a number of objective tests. Even where the application of these test can be quite complex, If one, based on the facts, can fall the ‘right side of the line’ then one can plan with certainty that one is non-UK resident.

Where one can obtain certainty, then this must be an improvement on the old state of affairs.


The ‘SRT Roadmap’


General


he SRT can be thought of as a road map. However, it is a roadmap to a destination that nobody know at the outset.

The first stage is to determine whether one satisfies the ‘Automatic Overseas’ tests (“AO Tests”). If one does qualify as being ‘automatically overseas’ then, unsurprisingly, one is non-UK resident. One can consider the SRT journey over at this point.

If one does not meet one of the AO Tests then you are moved on the next leg of the journey. This step will determine whether one satisfies the Automatic UK Tests (“AUK Tests”). If one of the tests is met then the individual is UK resident.

If one has not met either of the above tests, then the journey continues on to a third and final leg.

This involves considering whether one has ‘sufficient ties’ to the UK. The sufficient ties test is essentially a ‘day counting’ exercise. The rule of thumb is that the more ‘ties’ one has to the UK then the less days one can spend in the UK without becoming UK resident.

These thresholds differ depending on whether you are trying to ‘leave’ the UK or are a ‘visitor’.


The Automatic Overseas (AO) Tests


General


Technically, the legislation sets out five AO tests. However, from a practical perspective, there are really two tests here – one totting up days in the UK and the other identifying whether one works abroad on a full time basis.


Day-counting


As eluded to above, the day count test will differ depending on whether we are talking about someone leaving the UK (“Leaver”) or someone coming to the UK (“Visitor”):


  • A Visitor is automatically non-UK resident if his days in the UK for the tax year are less than 46;
  • A Leaver presents a slightly more complex position. The general rule is that he will be non-UK resident if his days in the UK number less than 16. However, in certain circumstances single day visits to the UK (i.e. no presence at midnight) can count towards the days.


Full time work abroad


In the pre SRT days, this was often the most certain method of becoming non-UK resident. It is good to see that this remains in a relatively unsettled form.

However, the test is slightly more complex than one might imagine – largely as a result of the second part of the test where one is determining whether the overseas work is full time or not.


First of all, the individual must meet a ‘threshold’ condition. This requires the following:


  • The number of midnights spent by the Individual in the UK to be less than 91; and
  • The number of days doing 3 hours of work or more in the UK to be less than 31.


Assuming the threshold test is met, we then need to go through a step by step calculation to see if the remainder of the test is satisfied.

In the first instance one must work out the taxpayer’s ‘net overseas hours’. Essentially, this is total overseas hours worked by the individual in the year, less any ‘UK work hours’. UK work hours are only deducted if the person worked more than three hours in the UK on a particular day (a UK work day).

A ‘reference period’ is then calculated by deducting the number of UK work days and days of holiday / sickness from 365 days. This reference period is then divided by seven to give a ‘number of weeks’.

The final step is then to divide the ‘net overseas hours’ by the ‘number of weeks’.

If the result of this rather laborious calculation results in 35 or more then the test is met.


The Automatic UK (“AUK”) Tests


General


As outlined, if one does not meet the AO Test then, and only then, do we move on to the AUK test. There are three limbs under which one might be automatically resident in the UK. You might be so resident under:


  • A day-counting test;
  • A home test; and
  • Another full-time work test


Day counting


First of all, and quite simply, if a person spends 183 or more days in the UK then this is a point of no return. That person will always be considered as resident in the UK.


Home test


The second limb of the AUK test is the ‘home test’. For ‘home test’ it is perhaps better to think about it as the ‘only home test’.

It is mildly confusing at the nitty gritty level, however, one will meet the ‘home test’ in circumstances if you:


  • have a home in UK and spend at least thirty days or part days in it; and
  • do not have an overseas home (this second limb is a bit more nuanced than this but this gives you the gist).


In summary, one needs to have a UK home and not have an overseas home.


Full time work test


This test is almost exactly as the full time work test under the AO Test.

However, and rather intuitively, its purposes is to assess the work days in the UK rather than the days overseas. Therefore, we are interested in ‘net UK hours’ rather than ‘net overseas hours’.

If the final answer which pops out of the sausage machine is 35 or more then, this time, one is UK resident.

The key difference is that the reference period may be a 365 day period which is non-coterminous with the tax year.

If one does not come to an answer after reviewing the AUK tests then you move on to the ‘Sufficient ties’ test.


Sufficient ties test


This test involves applying a day count to a specific threshold.

However, that threshold is higher or lower depending on the number of ties one has with the UK. The more ties, the fewer days one may spend in the UK without being treated as resident for tax purposes.

It is first worth considering what constitutes a ‘tie’:


  • Family tie: A person will have a family tie if a member of his family is UK resident. Broadly, family includes a spouse and minor children.
  • Accommodation tie: A person will have an accommodation tie in the UK if he has property available for his use.
  • Work tie: if the individual performs more than three hours work in the UK on 40 or more days in the tax year he will have a work tie.
  • 90 day tie: if the individual spent 91 days or more midnights in the UK in one or both of the two prior years then he will have a 90 day tie.


There is, of course, much more depth and nuance to the definition of these ties. However, such detail is outside the scope of this article.

In addition, for ‘leavers’, there is a fifth potential tie which will be triggered where the personal has spent more midnights in the UK than in any other country.


The thresholds differ depending on whether one is a ‘leaver’ or an ‘arriver’. In summary, it is harder to escape from the UK, than it is for a visitor to become UK resident.






Conclusion


Under the old rules, in order to determine and individual’s residence status, we had an unsatisfactory ‘patchwork’ of case law plus HMRC’s published guidance in IR20. However, it was clear from seminal cases such as Gaines-Cooper that even HMRC’s guidance was beginning to creak at the seams.


Since the 2013/14 tax year, we have had cold hard legislation. It is not simple by any means as it is designed to catch a wide range of complex, modern practices. In our modern world, simplicity is probably too much to ask.


However, regardless of complexity, we do have some hard and fast rules. This will present some readily identifiable safe harbours in which a person can shelter if the fact patter permits.

What should long term expats do about domicile changes in UK?

By Stuart Stobie • 29 Apr, 2024
Background UK Chancellor Jeremy Hunt announced significant changes to the UK's taxation regime in the Spring 2024 budget. Those changes can broadly be summarised as follows: the abolition of the remittance basis for income tax and capital gains tax for non-UK domiciled individuals; and possible changes to inheritance tax (IHT) based on residence, not domicile. It is the second of these points that will likely to have a significant impact on long-term British expats and their future tax liabilities. Key Tax Changes Income and gains From 6 April 2025, new UK residents will only be exempt from UK tax on "foreign income or gains" during their first four years of UK residence. After that, they will be taxed on their worldwide income and capital gains. Transitional arrangements are being made for existing UK residents who are not UK domiciled, but they will also be taxed on their worldwide income sooner than before. Inheritance Tax (“IHT”) Another significant change involves inheritance tax (IHT). Currently, IHT is based on domicile and is charged at 40% on the total value of the deceased's estate, after exemptions. However, the Chancellor indicated that the government is considering making IHT liability dependent on residence rather than domicile. This change could lead to UK residents of 10 years or more paying IHT on their worldwide estates. This shift in policy may have profound implications for long-term UK expats. Potential Implications Foreign income and gains The proposed changes to the remittance basis for income tax and capital gains tax could have wide-ranging impacts on non-domiciled individuals. A one-dimensional view is that, if non-domiciled status is abolished, then it will lead to increased tax revenues. Indeed, the stated policy intention behind these changes is to increase tax revenue by GBP2 billion. However, this fails to take into account any behavioural shifts. The elephant in the room here is that many high-net-worth individuals, who are generally internationally mobile, might leave the UK or become non-UK tax residents to avoid increased taxation. It is therefore a high-wire act for the Government. IHT Regarding IHT changes, the shift from domicile-based to residence-based taxation may simplify the rules. At the moment, an expat remains exposed to UK IHT on their worldwide assets whilst they remain domiciled in the UK. Even where they have been expats for a long period of time, this can be a problem because: Domicile is sticky – it is difficult to acquire a domicile of choice elsewhere and can be precarious [LINK]; Clarity – HMRC will be reluctant to provide a view on this in many cases so one is planning with uncertainty As such, linking IHT is residency, a more objective link, is helpful. If one has been outside the UK for, say, 10 years then it is easy to ascertain the position (depending on the precise nature of the final rules!) I have hear it suggested that a potential Labour government could extend UK IHT to include anyone holding a British passport, complicating the process for expats seeking to reduce their UK IHT liability. However, I am not sure whether this has any real providence. Recommended Actions for British Expats General Given these uncertainties, long-term British expats should consider taking proactive steps to protect their assets and reduce their future tax liabilities. Due to the shifting tax tectonic plates at play here, there is no definitive answer. However, depending on their mindset and objectives, an expat might consider the following strategies: #1 Action Strategy #1a Obtain Opinion of Domicile Before making significant financial decisions, expats should obtain a legal opinion confirming that they have shed their UK "domicile of origin" and acquired a new "domicile of choice" in their current country of residence. This, from a practical perspective, involves demonstrating a long-term commitment to residing in the new country and forming an intent to stay indefinitely. #1b Transfer Wealth into Offshore Trusts Expats who have obtained legal opinions confirming their new domicile might then wish to consider transfer as much wealth as possible into offshore trusts before 6 April 2025. This approach is expected to be governed by the existing IHT regime based on domicile, providing a safeguard against future tax liabilities. One important consideration is that the Labour government has already announced plans [LINK] , contrary to the Government’s proposals, that they will make sure such a trust is within the scope of IHT. This provides a dilemma – do nothing and potentially suffer IHT on worldwide assets or incur costs which, in a worst case scenario, might be wasted. #3 "Wait and See" Approach Given the uncertainty and potential changes (tax and potential governments!), it is understandable that expats might want to adopt a “wait and see” approach. We have sympathies with this approach. However, it must be understood what is at stake. As stated above: doing nothing will ensure no professionalfees are wasted – but potentially suffer mean that one is exposed to IHT on worldwide assets; or potentially incur unnecessary costs which, in a worst case scenario, might be wasted on ineffective planning Conclusion These are difficult times for those internationally mobile people with a UK footprint – whether British expats or UK resident non-doms. The times are, as they say, ‘a changin’. It might well be that your plans have to be ‘a changin’ too. For more advice on these matters, then please get in touch.

Dub(ai) be good to me?

By Andy Wood • 22 Apr, 2024
Some time ago I wrote a rather bilious article after viewing a video post by a ‘tax influencer’ (should that be effluencer?) shilling the tax benefits of Dubai (UAE). In short, move here and pay no tax on your personal and business income. It wasn’t a great take. However, it is also not a unique one. That’s not to say I don’t like Dubai or the UAE, of course. I live here. I love the sun. I feel I should have been born in a different company. A unique form of body dysmorphia perhaps? Further, and more seriously, the UAE is bursting with business opportunities and the ambition of the region is as remarkable as it is refreshing. As such, the attractions for setting up one’s business and life over there are not lost on me. But does our fresh-faced influencer have a point or not? Getting serious Of course, historically, the UAE has had an exceedingly light touch (we’re talking helium, here) to taxation. However, as we will see, this recently shifted for corporate taxes and did so in most of the gulf states for VAT a number of years ago. So, can we move seamlessly, fiscally speaking, from the UK to the UAE? Things tend to relatively simple where one is upping sticks and moving to the UAE.  Say, breaking UK residency and taking up residency in the UAE. But what about where the entrepreneur is not able, or willing, to leave the UK from a residence perspective? Well, this is where the position is trickier. In that case, one cannot simply remain in the UK and offshore one’s activities to a new company in the UAE without some substantial tax issues. Depending on the circumstances – these may or may not be manageable. However, our influencer, who thinks the UK’s Transfer of Assets Abroad (TAA) provisions are simply a cryptic crossword description of suitcase, has not missed a beat. Corporate taxes I will start with corporate taxes, as this is perhaps where – from the UAE perspective – the biggest change has been. UK corporation tax Assume that our intrepid entrepreneur has: set up a new company in the UAE (Dubai); and has appointed directors in that jurisdiction such that it is ‘managed and controlled’ from the UAE Here, the company should not be resident for tax purposes in the UK. However, a UAE company could still have a UK taxable presence where it has a UK trade or where it has a UK Permanent Establishment. (“PE”) The Company might have a UK PE where is has a UK sales office, for example. It should be noted that the fact that the Company has UK customers is largely irrelevant. However, clearly, at the other end of the spectrum, where the client base is almost wholly non-UK, then the chances of creating taxable touch points in the UK is less likely. Further, for corporation tax matters, unless it can be argued he or she is managing and controlling the company from the UK, the location of the individual shareholder does not really matter. However, if the shareholder remains UK resident, then this will cause issue with a key set of anti-avoidance provisions, the aforementioned TAA provisions, that we will discuss this below. UAE corporate tax Up until 1 June 2023, the UAE levied no tax on the direct profits of individuals or companies. However, following the enactment of a new corporate income tax law, taxable persons are likely to be subject to tax on business profits. As one would expect for a ‘corporate income tax’ UAE companies and other non-natural persons (referred to simply as Companies for the rest of this article) that are incorporated or effectively managed and controlled in the UAE are potentially subject to the tax/ In addition, Non-resident Companies that have a Permanent Establishment (think branch) in the UAE are within its scope. Perhaps more surprisingly is that natural persons (including individuals) who conduct a Business or Business Activity in the UAE are also within its scope. Companies established in a UAE Free Zone are also within the scope of Corporate Tax as “Taxable Persons”. However, there is an all-important qualification around so-called Qualifying Free Zone Persons. These persons pay 0% on their Qualifying Income, which is a narrowly defined category.. Broadly, the exposure to UAE corporate tax is as follows: Resident Persons: taxable on income derived from both domestic and foreign sources Non-Resident Persons: taxed only on income derived from sources within the UAE The headline rate of corporate tax is 9%, which applies to Taxable Income exceeding AED 375,000. Below this threshold, the rate of tax is 0% One important feature of the regime is a relief called Small Business Relief. This valuable relief might apply where revenue is no more than AED 3m. Where an election is made for SBR then the Taxable Person is deemed to have no income at all – and therefore has no tax to pay. Not too shabby. Personal taxes Perhaps somewhat counter-intuitively, it can be the personal tax rules, and the personal tax anti-avoidance rules in particular, that make or break such an exercise. Leaving the UK (for UAE?) As stated above, whether our entrepreneurial friend is leaving the UK or not will be the seminal question here. Of course, when I say ‘leaving the UK’, I mean becoming non-UK resident for tax purposes. I haven’t got the space to discuss the Statutory Residence Test here. However, here’s one we prepared earlier! [Draft and link] Where the shareholder in the new company is going to be non-UK resident, we do not have to worry about the anti-avoidance provisions listed below. In addition, if the individual is non-UK resident, then any dividends paid by the new UAE company will be free of UK tax. One needs to be mindful of the 5-year temporary non-residence rule here. However, if the profits of the Company arise after breaking UK residence, then this should not be an issue even if the individual returns within the 5 year window. The position is much more perilous where the individual remains in the UK, however… UK anti-avoidance If the shareholder remains UK resident, then we have to run the gauntlet of the TAA rules. These rules have been on the statute for many decades but are over-looked by those who think that ‘doing a Google’ is as easy as the press want us to think. These rules bite where, in the context of a company, assets are transferred to a non-UK company to avoid tax and they produce non-UK income. Under basic principles, the Company may escape corporation tax for the reasons set out above. However, the rules put an end to this relatively simple wheeze by allowing HMRC to essentially look through the entity and assess the individual shareholder on the profits. There are two relevant defences to these rules. Firstly, where the non-UK entity is established broadly for commercial purposes. Also, there is a statutory EU defence if the Company is resident in an EU member state (clearly not relevant for the UAE!) and, for obvious reasons (the B word), the standing of this defence is a little uncertain. Local personal taxes in the UAE? At present, there is no personal income tax in the UAE. Value added tax VAT was also introduced in the UAE relatively recently. The standard rate is 5%. Conclusion So, there we have it. As with any tax planning, it all boils down to the personal and commercial objectives of the individual. In fact, some might say it’s all in the ‘Tank fly boss walk jam nitty-gritty’. Something that is difficult to distil into a Tik Tok video. If you require further information on UK tax advice for expats or any other tax planning advice then please get in touch
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