UK Statutory Residence Test and Taxation of non-domiciled Individuals
In the Budget earlier this year the Chancellor, George Osborne, announced the government’s intention to introduce a statutory definition of residence to provide clarity and greater certainty to individuals and to reform the taxation of non-domiciled individuals resident in the UK. It was proposed that a consultation paper would be published with the draft legislation later in the year.
The consultation paper has now been published, with the consultation period running until early September with a view to final legislation in Finance Bill 2012, to take effect from 6 April 2012. A summary of the proposals are set out below.
The Consultation Paper
The proposed Statutory Residence Test (“SRT”) takes into account both the amount of time an individual spends in the UK and the strength of the connection with the UK.
It is proposed that there would be three elements to the test:
Part A: contains conclusive “resident factors” that will be sufficient to make an individual non-resident for that tax year. If the factors are not satisfied then Part B should be applied.
Part B: contains resident factors that will be sufficient to make an individual resident for that tax year. If these conditions are not met then the conditions in Part C should be applied.
Part C: for individuals with more complex personal circumstances, a test is proposed which examines “other connection factors” and day counting to determine their status.
In the rare situation where an individual satisfies factors in Part A and B; Part A will take precedence and they will be considered non-resident for that tax year.
Part A Conclusive non-residence
This test examines only the time spent in the UK without consideration of the individual’s connection with the UK. An individual is non-resident if they:
- were not resident in all the previous three tax years and are present in the UK for fewer than 45 days in the current tax year; or
- were UK resident in one or more of the previous three tax years and present in the UK for fewer than 10 days in the current tax year; or
- leave the UK for full-time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.
Part B Conclusive residence
If any of these conditions apply the individual will be considered to be resident if they:
- are present in the UK for 183 days or more in any tax year; or
- have one home and that home is in the UK (or have two or more homes and all are in the UK; or
- carry out full-time work in the UK.
Part C Other connecting factors and day count
For individuals whose circumstances are more complex this test provides that the more connections an individual has with the UK the less time they can spend to remain non-resident. The following connections are considered:
- has UK resident family;
- has substantive UK employment including self-employment;
- has accessible accommodation in the UK;
- spent 90 days or more in the UK in either of the two previous tax years;
- spending more time in the UK than any other single country.
These connecting factors may be relevant to the individual’s residence status if they occur at any time in the tax year. They are then combined with the days spent in the UK to determine the individual’s residence, in the tables below.
For individuals arriving in the UK, ie those not resident in all of the three tax years preceding the year under consideration:
Fewer than 45 days spent in UK: Always non-resident.
45 to 89 days spent in UK: Resident if 4 connecting factors, otherwise not resident.
90 to 119 days spent in UK: Resident if 3 factors or more, otherwise not resident.
120 to 182 days spent in UK: Resident if 2 factors or more, otherwise not resident.
183 days or more days spent in UK: Always resident.
For individuals leaving the UK, ie those resident in one or more of the three preceding tax years:
Fewer than 10 days spent in UK: Always non-resident.
10 to 44 days spent in UK: Resident if 4 connection factors or more, otherwise non-resident.
45 to 89 days spent in UK: Resident if 3 factors or more, otherwise non-resident.
90 to 119 days spent in UK: Resident if 2 factors or more, otherwise non-resident.
120 to 182 days spent in UK: Resident if 1 factors or more, otherwise non-resident.
183 days or more spent in UK: Always resident
These tests appear to provide more clarity than the existing system as to an individual’s residence or non-residence in the UK though more clarity will be required of the defined terms in future legislation.
Taxation of UK Resident Non-doms
The proposed changes in this consultation paper do not affect the basic principles of the existing tax system applicable to non-doms.
Increase to the Remittance Basis Charge
As outlined in the budget it is proposed that the remittance basis charge (“RBC”) will be increased. For individuals who came to the UK before 6th April 2001 and have remained resident since then, if they have been resident for 12 of the previous 14 tax years the RBC will be increased to £50,000.
For non-doms who have been UK resident for 7 of the previous 9 tax years the existing charge of £30,000 will continue to apply until the £50,000 charge applies.
Investing in UK business
With the stated aim of encouraging investment in UK businesses the government is proposing not to tax any untaxed foreign income or capital gains that are invested in UK businesses subject to certain qualifications.
These qualifications include the requirement that the business must be a UK resident company or permanent establishment, it must be a trading company and there may or may not be a connection with the non-dom individual or his family. No minimum or maximum sum is proposed.
On the sale of the business the fund must be exported or reinvested in another qualifying business within 2 weeks of the sale. If not, the initial funds remitted for investment will be treated as remitted and taxed on that basis.
Other proposed changes included in the consultation are the exemption of foreign currency bank accounts, the simplification of the nominated income procedure and certain other concessions which will be incorporated into legislation.