For the internationally mobile, expats, or those who travel extensively for work or leisure, covid-19 has placed an unexpected focus on one’s tax residency.
Because of this, international financial planners will need to have a good understanding of the 2013 Statutory Residence Test (SRT), including what the SRT considers ‘exceptional circumstances’ in determining tax residency.
Additionally, HM Revenue & Customs has recently issued fresh guidance on what it considers to be ‘exceptional circumstances’ specifically in the context of the covid-19 pandemic, writes David Denton, head of technical sales at Quilter International.
Before we consider these exceptional circumstances in the context of the new guidance; it’s important for clients to understand this does not relate to unexpected and unplanned for personal or work related decisions, in terms of one’s own or families mobility, even if these personal decisions are significantly guided by the course of the pandemic.
It’s merely the inability to travel, either physically or through official government advice, that is of relevance.
Let’s look at the context
The current situation means it’s likely that other nuances of the SRT will also be brought into sharper focus, which I’ll look at first.
There’s little reason to expect clients to be up to date with the nuances of tax residency
Pre 6 April 2013, a slightly different set of residency conditions applied.
These conditions were not codified, and included concepts such as ‘ordinarily resident’, that no longer exist.
In other words, some people’s expectations won’t be met, because their understanding has become outdated by the SRT 2013.
Secondly, the ‘split year’.
Most people think that residence applies for the whole of a tax year, which is the case, unless the tax year qualifies as a split year for an individual.
Split year treatment may apply if an individual arrives in the UK part way through a tax year or leaves the UK part way through a tax year.
Let’s focus on those who arrive back unexpectedly, for fear of being stranded due to recent events.
Upon arrival, if under the standard SRT they would be considered tax resident for that year, split year treatment applies if the conditions of one of four situations known as ‘cases’ are satisfied.
The headlines, but not the full qualifying conditions, are that:
– case 4 requires an individual to start to have a home in the UK only;
– case 5 requires starting full-time work in the UK;
– case 6 requires ceasing full-time work overseas;
– case 7, the partner of someone ceasing full time work overseas, and
– case 8 requires starting to have a home in the UK.
What about leavers, so those whose departure is delayed?
If for that year they would otherwise qualify as tax resident, the split year can also apply:
– case 1- starting work fulltime overseas,
– case 2- the partner of someone starting work full time overseas, and
– case 3 – ceasing to have a home in the UK.
Where a tax year is a split year, an individual is subject to income and capital gains tax with respect to income and gains arising in the UK part of the tax year, but not so to income and gains arising in the overseas part of the tax year.
This can have a significant impact in terms of what tax is paid according to when income and bonuses and gratuities are paid, as well as disposals of investments.
And third
Temporary non residence rules could apply to someone returning to the UK prematurely.
Unless exceptional circumstances have the effect of reducing a UK day count.
The temporary non-residence rules exist to ensure that where an individual becomes non-resident for a short period, certain income and gains are chargeable upon their return, resulting in UK tax being delayed rather than mitigated.
What’s out of scope?
Importantly not all income and gains are within the scope of the rules.
For example, only gains realised on UK assets held at the date of departure are within the scope of the rules.
Likewise, only certain types of income are within scope, such as distributions by closed companies – limited companies with five or fewer ‘participators’.
Generally, this doesn’t include wages or other employment income.
Pension income needs to be considered, but with its own rules. Here, any available pension commencement lump sum (PCLS) and additionally up to £100,000 ($125,824, €112,177) of income can be taken within a period of temporary non-residence, without being taxed upon return.
These rules (called ‘temporary non-residence’) apply if both:
- you return to the UK within five years of moving abroad (or five full tax years if you left the UK before 6 April 2013)
- you were a UK resident in at least four of the seven tax years before you moved abroad.
Holding investments on a conventional proprietary or banking platform does not change the impact of this legislation.
However, where an insurance-based investment or redemption bond is used as an investment platform, uniquely any period of non-residency (even temporary ones) can be used in the calculation to reduce the chargeable event gain on profits through ‘time apportionment relief’ (also known as ‘non-resident relief’).
This little-known feature allows the chargeable gain from purchase to sale to be proportionately reduced by the amount of time the policyholder has been resident outside the UK during the term of the policy.
Midnight rule
So, what are exceptional circumstances following HMRC’s covid-19 announcement for tax residency purposes, and how might they be interpreted?
As we know, the SRT provides, through a series of day count and connections tests, a complex but definitive way to determine UK tax residency.
An individual is treated as being in the United Kingdom on any day where they are in the United Kingdom at midnight at the end of that day.
There are two exceptions to this ‘midnight’ rule: when travelling ie days in transit, and time spent in the United Kingdom due to exceptional circumstances entirely outside an individual’s control.
HMRC’s interpretations of these circumstances are specific and narrow (bereavement or serious illness) with travel difficulties not normally considered to be exceptional.
However, guidance in March stimulated specifically by covid-19 confirms that days spent in the United Kingdom can be disregarded for the SRT if an individual is:
- quarantined or advised by a health professional or public health guidance to self-isolate in the United Kingdom as a result of the virus
- advised by official government advice not to travel from the United Kingdom as a result of the virus
- unable to leave the United Kingdom as a result of the closure of international borders, or
- is asked by their employer to return to the United Kingdom temporarily as a result of the virus.
Currently a maximum of 60 days in the United Kingdom can be disregarded for these reasons.
In terms of being quarantined, there is no indication of whether you need to be directly or indirectly infected by the virus, nor quarantined by virtue of others around you, or what evidence may be required given the paucity of testing.
Although not entirely clear, it’s likely that the Foreign and Commonwealth Office’s advice against all non-essential travel has effect here.
And this could evolve, as all covid-19 guidance unsurprisingly states, events resulting from the impact of the virus are changing rapidly.
Also due to COVID-19 the government has taken additional and specific steps not to prejudice expertise from around the world staying in the UK, the full details of which are beyond the scope of this article. In essence, a medical or healthcare professional, for purposes connected with the detection, treatment, or prevention of coronavirus disease, and for purposes connected to the development or production of medical products, (including vaccines) devices, equipment or facilities related to the detection, treatment, or prevention of coronavirus disease, between 1st March and 1st June 2020, are likely to see a number of easements regarding the SRT.
Despite these emergency measures, it is highly important as ever to maintain records in case of HMRC scrutiny, as the concept of residence is fundamental to the determination of an individual’s UK tax liability, and recent measures are largely untested.
This article was written for International Adviser by David Denton, head of technical sales at Quilter International.
