The UK law on residence is notoriously convoluted and complex, largely due to the lack of one definitive statutory test. Furthermore, from 6 April 2009, the taxpayer cannot rely on the official guidance issued by HMRC (now known as "HMRC6") in court. Instead individuals are expected to understand the law on UK residence from the wide ranging and sometimes contradictory case law in this area.

Case Law

The case law demonstrates how difficult it can be to effectively leave the UK and become non-UK resident for UK tax purposes. A flurry of recent cases has seen individuals who took what they believed to be reasonable steps to cease being UK resident for tax purposes (such as being in the UK for less than 183 days, and acquiring property and interests in another country), only to find that HMRC were still able to successfully contend that they had never actually "left" the UK. The unsatisfactory current position is that most individuals (except those who are emigrating permanently with no intention to return to the UK) will require expert advice if they want to take the appropriate steps to ensure that they do not remain UK resident for UK tax purposes.

The now infamous Gaines-Cooper case has exposed as a myth the belief that an individual only needs to satisfy the "day count" tests to be non-UK resident. Whilst being in the UK for more than 182 days in a tax year (or more than 90 days on average over a 4 year period) will automatically amount to a finding of UK residence, not satisfying these day count tests will not necessarily lead to non-UK residence. It is in fact possible (although only rarely) for a person to continue being considered UK resident in a tax year where he or she has not set foot in the UK for that entire tax year.

The individuals with the strongest argument (as against HMRC) of ceasing to be UK resident are those that leave the UK for full-time foreign employment for the duration of more than one tax year, whilst complying with the day count tests. Even in this situation, as the case of Derek William Hankinson v Revenue and Customs Comrs demonstrates, such employment has to be genuine, full time (guidance suggests between 35 and 40 hours a week) and should not relate to UK duties to any significant extent, if it is to successfully withstand scrutiny from HMRC.

Breaking Free

The requirement for the taxpayer (not being in full-time foreign employment) to make a "distinct break" from the UK has also highlighted the need for individuals claiming non-UK residency to keep documentary evidence. Such evidence is required to prove the number of days spent in the UK, how they have severed ties in the UK and how they have established new ties in another country. The perceived need in many cases to dispose of UK property, be removed from the UK electoral roll and minimise contact with friends and family in the UK shows that clients need to weigh up the potential high personal and emotional costs of becoming non-UK resident.

Many individuals have international connections, and it is important to note that a person can be considered resident in more than one country. In some cases (where there is no applicable double taxation agreement with the UK), individuals may find themselves subject to double taxation.

Coming to the UK

The risk of being considered UK resident is less for non-resident individuals coming to the UK who comply with the day count tests, compared to UK residents trying to lose their UK residency and who comply with the day count tests. This is particularly the case where non-residents are in full-time foreign employment. However, it is important to remember that residence is not merely a day count test, and that several factors including: a pattern of visits to the UK; entering into a long-term lease; and acquiring interests/property in the UK, would all be treated by HMRC as evidence of establishing residency here.

The Future

Each decided case dealing with UK residency has turned upon the unique circumstances of the individual involved, compounding the difficulty of applying case law to clients more generally. Hopes of positive change in this area in the near future have been thwarted with the Finance Bill 2010 failing to introduce (notwithstanding extensive consultation on this issue with HMRC) a statutory residence test.

The recent announcement that the new coalition Government will be reviewing the tax rules for UK Resident and Non-Domiciled individuals ("UK Res Non Doms") has been met with some trepidation by such individuals who are still grappling with the controversial changes brought in by the Finance Act 2008. Whilst those changes did not themselves lead to the feared mass exodus of UK Res Non Doms, they have been perceived as dramatically reducing the fiscal attraction of the UK to non-UK domiciliaries. Further changes may see yet more individuals considering severing their ties with the UK.

Please contact a member of our Private Client or Tax Practices if you would like advice on any of the issues discussed in this note.