Revamping the Residency Rules

Whether an individual is UK resident or not can have a significant impact in relation to the taxation of their worldwide income and gains. Current rules to define tax residence are complex and unclear, resulting in a worrying lack of certainty for internationally mobile individuals, as demonstrated by recent high profile cases on this issue (such as the on-going Gaines-Cooper case).

The Government has issued a consultation paper as a step towards introducing a Statutory Residence Test (SRT). The Government's intention is that this test will be more objective and easier to use. However, it is important to note that this is a consultation paper only and therefore may undergo numerous changes before any new legislation is introduced next year. The Government has stated that the SRT is not intended to have retrospective effect and there will be no transitional relief available (although this is one of the points being consulted on). For this reason, we urge individuals not to rely on the SRT now, but to wait for the test to be introduced in statutory form. However, the SRT is a useful indication of the Government's intentions. Please see below for a summary of the main points concerning the SRT and the Government's other proposed changes for non-UK domiciliaries (non-doms).

Overview

The proposed new framework distinguishes between people who have not been resident in the UK for all of the previous three tax years ("Arrivers") and individuals who have been resident in the UK in one or more of the previous three tax years ("Leavers"). The proposals make it easier to become tax resident in the UK as an Arriver, than to lose UK residency, as a Leaver. This reflects current case law which supports the idea that residence should have an "adhesive" quality.

The proposal introduces a three part test.

Part A contains rules which, if met, confirm that an individual is non-resident. If an individual falls within the 'safe harbours' outlined in part A, they would have certainty of their non-UK resident status, and do not need to consider parts B or C of the proposed test. Arrivers who spend less than 45 days in the UK or Leavers who spend less than 10 days in the UK would automatically be non-UK resident.

As mentioned above, Part B only applies if Part A does not, and contains categories where individuals would definitely be considered UK resident. If both Parts A and B could apply, then Part A has precedence. In broad terms, individuals who spend in excess of 183 days in the UK; individuals whose only home(s) are in the UK; and individuals who carry out full time work (35 hours or more a week) in the UK would automatically be UK resident.

If neither Part A nor Part B applies conclusively, then Part C is used to determine residence.

Part C looks at 'connecting factors' linked to day counts. Overall, the more connecting factors a person has to the UK, the less time they will be able to spend in the UK without becoming tax resident. The connecting factors are:

1. family (defined as spouse, civil partner, common law partner and minor children) who are resident in the UK;
   
2. available accommodation in the UK;
   
3. working in the UK for 40 or more days in the tax year (working 3 or more hours a day constitutes one working day for these purposes);
   
4. spending 90 days or more in the UK in either of the last two tax years;
   
5. (for Leavers only) spending more time in the UK than in any other single country.

New Anti Avoidance Rules for Income Tax

There are anti avoidance rules already in place to avoid people leaving the UK for a short time to avoid capital gains tax, but as yet, there is not a similar provision for income. The Government is looking to put in place anti avoidance measures in relation to investment income (such as dividend income) for income arising during a period of non-residence for up to 5 years. However, earnings from employment would not be affected.

The Government also proposes to introduce changes to the ordinary residence test.

The Taxation of Non-Doms

There are three areas which the Government is looking at to reform the taxation of non-doms. These are as follows:

1. The remittance basis charge
   
   Currently, individuals who have been resident in the UK for at least 7 of the last 9 tax years pay a remittance basis charge of £30,000 for claiming the remittance basis. The Government is proposing that the level of the charge be increased to £50,000 for those who have been resident in the UK for at least 12 of the last 14 tax years.
   
2. Investment in UK businesses
   
   The Government has proposed that a non-dom can remit foreign income or capital gains to the UK if they invest it in a UK business. The type of businesses that can be invested in includes those carrying out a trading activity and developing or letting commercial property. The business must be a company rather than a partnership or other entity.
   
   There is a possibility that the exemption will apply to investments in currently listed companies, rather than simply companies which are not listed, or are quoted on markets such as AIM.
   
   Businesses that are excluded from this exemption include those that hold and let residential property, lease tangible moveable property, or provide personal services.
   
   If the interest in the business is later sold by the non-dom, any money paid to them in relation to that business interest must either be reinvested in a new relevant business in the UK, or it must be taken back out of the UK within two weeks of the money being received by the non-dom.
   
3. Simplifying current tax rules

• Nominated income:
  As non-doms can nominate as little as £1 of income for the purposes of the remittance basis charge, it is proposed that up to £10 of nominated income may be remitted to the UK without charge, to help prevent the inadvertent remittance of such income.
  
• Foreign Currency Bank Accounts ("FCBA's"):
  Currently, FCBA's are chargeable assets for capital gains tax purposes. Any gains or losses on the foreign currency in the account crystallise when the funds are withdrawn and a capital gains tax charge can arise. Due to fluctuations in exchange rates this can represent a significant adminiSRTative burden for many individuals. The Government has therefore proposed that all sums within an FCBA will be removed from the scope of CGT for all individuals.
  
• Taxing assets which have been brought to the UK and then sold:
  Certain items can be bought into the UK without being liable to tax, even where they have been bought using foreign income or gains. However, currently, if the asset in question is sold in the UK, there will then be a tax charge on the initial cost of the asset. The Government has proposed that this charge is non-applicable, as long as the proceeds of sale are sent out of the UK within two weeks of the sale.
  
• Statement of practice 1/09 ("SP 1/09"):
  The Government propose to legislate SP 1/09, the practice which allows employees who have employment duties in both the UK and abroad to have their salaries paid into one bank account without falling within the "mixed fund" rules, and to calculate liability by looking at total rather than individual transfers on the account.

Conclusion

Overall, these changes are positive and we hope will be introduced in a form next year which succeeds in simplifying the determination of residency and the taxation of non-doms. We will be submitting our thoughts on these Consultation documents to HMRC to assist with this process. The Consultation document reaffirmed the Budget announcement by the Government that there will be no further changes to the taxation of non-doms for the remainder of this Parliament, providing some welcome reassurance to such individuals in the UK.

For more information on how the proposed reforms may affect you or your clients, please contact Glen Atchison or Dhana Sabanathan in the Tax and Private Client Practices.