New residence rules bring new pitfalls

The long-awaited statutory residence test (SRT) is now effectively in place, even though it won’t be formally passed into law until the Finance Bill is passed, there are unlikely to be significant further changes. We have devoted a lot of coverage to the new residence tests, in our commentary on the 2013 budget and as the test has made its lengthy way from original proposal to almost-final legislation.
Therefore this article focuses on the changes that are likely to cause particular problems.

New anti-avoidance: temporary periods of absence

A new set of five year absence rules applies to both CGT and certain types of income. They replace the existing Taxation of Chargeable Gains Act 1992 section 10A and extend the temporary non-residence charges to income that the Treasury fears may be manipulated for tax avoidance purposes:

  • certain pension lump-sums and withdrawals;
  • relevant foreign income under the remittance basis;
  • company distributions;
  • chargeable event gains; and
  • offshore income gains.

Day counting

Many people are used to counting the number of days they spend in the UK. The new tests will mainly be based on presence in the UK at midnight but people who make short frequent, short visits may be caught by a new 30 day rule. Someone who makes more than 30 visits to the UK will not be able to disregard every day on which they are present in the UK during the day but leave before midnight. Only the first 30 such days can now be disregarded: the others will count as days of presence in the UK.

Passengers in transit

Passengers who are in the UK only for the purposes of a journey between two places outside the UK and undertake no activities that are not connected with their journey do not have to count those days on which they are in the UK at midnight in the course of such a journey.

This sounds generous but HMRC has refused to shift from very strict application of this rule. So even the most innocent of incidental activities, perhaps as trivial as opening up a laptop to check business emails in the transit lounge, or passing the time in a long wait by going to see a film could lead to a stopover being treated as a day of presence, even where the stopover is unduly prolonged due to factors beyond the individual’s control.

Is it a simplification?

As before the new rules came in, the great majority of people will be unaffected by the details of the residence rules but for anyone whose status is marginal or who need to know whether they will be taxable on income or gains that they realise while out of the UK for a limited time the new rules will be every bit as complex as the old rules. HMRC have already published a 55-page draft guidance note, something that may not be a good omen when the origin of the problem with residence stemmed from their previous guidance in their leaflets, IR20 and HMRC6.

For guidance about the statutory residence test and accompanying new rules contact: Chris Williams