Breaking UK tax residence

What does it mean and why does it matter?

If you move into or out of the UK, it is important to understand when your UK tax residence begins or ends. Your residence status determines whether the UK can tax your income and gains and can have a significant impact on your overall tax position. The rules are not always straightforward, and moving overseas does not automatically mean you stop being UK tax resident.

Why does breaking residence matter?

UK tax residents are generally taxed on their worldwide income and gains. This includes from employment, pensions, investments, businesses and property.

By contrast, individuals who are non-UK resident are not taxed on their foreign source income/gains and certain UK income/gains can also fall outside the UK tax net.

The benefits available for a non-UK resident will depend on individual circumstances, the tax rules in both the UK and their country of residence and any relevant double tax treaty.

The statutory residence test

Since April 2013, UK residence has been determined by the statutory residence test (SRT). The test considers a range of factors and is divided into three main parts. Each part is carried out in order for each tax year as follows:

The automatic overseas tests (if the conditions are met, you are non-UK resident)

You spend no more than 15 or 45 days in the UK depending on your previous UK residence history, or
You work full-time overseas while meeting specific conditions relating to UK workdays, term of employment and UK visits

If the conditions are not met, move to:

The automatic UK tests (if the conditions are met, you are UK resident)

You spend at least 183 days in the UK during the tax year, or
Your only home is in the UK, and you are in it for a sufficient period, or
You work full-time in the UK

If the conditions are not met, move to:

The sufficient ties test (this determines your residence status if not previously concluded by the automatic tests)

This considers how many “ties” you have with the UK including family, accommodation and work, as well as previous UK residence and the amount of time spent in the UK.
Generally, the more ties you have, the fewer days you can spend in the UK as a non-resident. If you exceed the allowed number of UK days, you are UK resident.

The above refers to the conditions very generally and should not be relied upon when considering a residence status.

Simply moving overseas is not enough

Many people assume that obtaining overseas residence, securing a visa or leaving the UK permanently is enough to cease UK residence. However, that is not always the case.

It is important to go through the SRT as the number of days you can spend in the UK as a non-resident is dependent on your personal circumstances.

Split-year treatment

If are UK resident but leave or come to the UK during a tax year, you may qualify for split-year treatment. This means the tax year is divided into two parts; a period of UK residence and a period of non-UK residence.

Split-year treatment can be beneficial if you receive overseas income and gains during the non-resident part of the year which may fall outside the scope of UK tax.

Strict criteria applies for split-year treatment, so professional advice is recommended and this treatment should never be assumed.

Capital gains tax opportunities

Being non-UK resident can create planning opportunities in relation to capital gains tax. Most gains realised by a non-resident are not liable to UK capital gains tax. However, gains on the disposal of UK property/land remain taxable in the UK.

Anti-avoidance rules apply for certain temporary non-residents, whereby gains realised when non-resident become taxable when UK residence is resumed.

Anyone considering a significant disposal while non-resident should seek advice before proceeding, especially if UK residence is likely to be resumed later or visits to the UK are expected to be made while living overseas.

Keeping evidence is essential

It is important to keep certain records that support a non-residence status. These include travel in and out of the UK, accommodation information (both in the UK and overseas), employment contracts and work diaries.

In the event of an HMRC enquiry, clear documentation is an important part of supporting your non-residence status.

Planning ahead

If you are planning to come to or leave the UK, planning and advice should ideally start the tax year before the move. By understanding the rules in advance, you reduce the risk of being UK resident unexpectedly which in turn can incur unwelcome tax consequences.

We have a designated international team ready to provide assistance regarding the SRT and UK tax planning around leaving or coming back to the UK. In addition, certain individuals who have lived overseas long-term can receive reliefs from UK tax when they first become UK resident. Please contact our team for assistance.