Tax Residency Rules – New Statutory Residence Test

A new statutory residence test (SRT) will be introduced on 6 April 2013 to determine the UK tax residency of individuals. The existing rules are complex and uncertain as they are largely based on case law and while HMRC guidance assists in determining residency, it is often difficult to confirm UK residence with certainty. The SRT will apply for the purposes of income tax, capital gains tax and inheritance tax, with the concept of “ordinary residence” generally being abolished from the same date.

Under the SRT, an individual will be a resident in the UK if they meet the “automatic residence test” or the “sufficient ties test”. The “automatic residence test” will be met if the individual meets any of the four “automatic UK tests” and none of the five “automatic overseas tests”. The “automatic UK tests” generally take account of the number of days spent in the UK, the use of a UK home and UK employment. The “automatic overseas tests” generally take account of the number of days spent in the UK, along with previous periods of residency and employment.

In more complex cases, where an individual does not meet any of the “automatic UK tests” or the “automatic overseas tests”, he will still be considered a UK resident if he has “sufficient ties” to the UK, such as accommodation, family and work. Whether an individual has enough ties to the UK will be assessed against whether or not they were resident in the UK for any of the three tax years before the tax year under consideration, and also the number of days the individual spends in the UK in the tax year under consideration.

Despite the fact that the overarching aim behind the introduction of a SRT was to create clear and uncomplicated rules, it is evident that the new rules are still complex and will require employers to monitor carefully internationally mobile employees to ensure that their UK tax residency is kept under review.