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UK tax residency and COVID-19: are individuals sleepwalking into a UK tax trap?

06 August 2020

As we write it is four months, or roughly 120 days, since the start of the current UK tax year on 6 April 2020.

COVID-19 has meant that many individuals have been present in the UK continuously since the start of the current tax year. Although they may normally consider themselves resident somewhere else, they may now be on the brink of acquiring UK tax residency. The time for assessing (and planning for) this is short, and many individuals will need to leave the UK by early September or early October to avoid becoming UK resident. Contrary to common misconceptions, the HMRC guidance on this does not simply provide a free pass for individuals to avoid UK residence because of COVID-19.

The key points for these clients to know are as follows:

  1. Many individuals who are normally non-resident for UK tax purposes will need to restrict their days in the UK under the rules for assessing residence, known as the Statutory Residence Test (SRT). Most such individuals will have up to 90 or 120 days (depending on the number of ties they have under the SRT) per tax year before they become UK tax resident. Under normal circumstances, most individuals who have remained in the UK since 6 April 2020 would therefore already have spent sufficient days in the UK to be considered tax resident for the whole tax year.
  2. Earlier this year HMRC issued some welcome guidance, clarifying that the COVID-19 pandemic would allow some individuals to ignore some of the days that they spend in the UK for the purposes of their day count under the SRT. However, this guidance is widely misunderstood and many individuals seem to be operating under one of two common misconceptions.
    • That the guidance broadly applies in all cases. It does not. The guidance is fact specific and contains a number of traps, some of which we considered in an earlier article which can be found here.
    • That the ability to deduct days is unlimited. It is not. The maximum number of days that can be deducted is 60. This is a statutory limit.
  3. As a consequence, many individuals may already be UK tax resident having assumed that the ‘exceptional circumstances’ exemption applies to them in circumstances where it does not. Even if an individual does fall within the ‘exceptional circumstances’ exception, and is able to deduct the full 60 days from their day count, they may be fast approaching their day limit. Assuming that they have been in the UK continuously since 6 April 2020, an individual who is usually permitted to stay for 90 days under the SRT will have until early September before they become tax resident. An individual who is normally allowed 120 days under the SRT will have until early October.

Becoming UK tax resident can have wide ranging impacts for individuals, companies of which those individuals are a director, and trusts of which they are a settlor or beneficiary. Individuals affected by the above will need to act fast and make suitable arrangements to either leave the UK or plan for UK residence as soon as possible.

If you, or your client, would like advice on the implications of the Statutory Residency Test or the exceptional circumstances exception please contact our Private Client and Tax team.

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