Your expat guide to UK residency rules - Part 2

I recently published a fairly lengthy, (some might say boring!), blog post...

All about the Statutory Residence Test (the SRT), and how Brits abroad like us need to work out our residency status, as it affects our potential liability for UK tax.

There are times in most expats’ lives when we are seemingly neither a resident nor a non-resident, however – and this is where the split year treatment can come into play.

Because it can have an impact on you and any accompanying partner, and also come into play if you acquire or give up a property in the UK, I thought it was important to cover in this second part of my UK residency rules mini-series.

As before, I’ve divided it into titles and subtitles so you can navigate to the information pertinent to you without getting too lost in the complexities of it all.

If you have concerns about your tax status, you’re strongly advised to seek professional advice. And if you want to talk about tax in relation to your portfolio, savings, investments, property holdings etc., assuming your net worth is in excess of £500,000 please do get in touch and I’ll do all I can to help.

Table of Contents

1. Important split year facts for British expats
2. Split year treatment and how it applies to expats
3. When is a tax year split?
4. Eight ways the split year treatment can apply
5. Case 1: Starting full-time work overseas
6. Case 2: Applicable for the partner of someone starting full-time work overseas
7. Case 3: No longer having a home in the UK
8. Case 4: If you start to have a home in the UK only
9. Case 5: Starting full-time work in the UK
10. Case 6: Stopping your full-time work abroad
11. Case 7: The accompanying partner of someone who stops full-time work abroad
12. Case 8: If you start to have a home in the UK in a tax year
13. What to do if your situation meets more than one Case
14. Living abroad temporarily
15. Treaty non-residence
16. Year of departure and period of return

Important split year facts for British expats

SRT terms deem you’re either a UK resident or a non-UK resident for a full tax year and at all times in that tax year.

There is an exception to this, however, and it’s very relevant for expats.

If during a given year, you either leave or return to the UK, the tax year may be split into two parts.

Split year treatment and how it applies to expats

If you’re in the UK for part of a tax year, and you are liable for UK tax as a UK resident during that part and, if you’re overseas for part of the year for which, for most purposes, you are liable to UK tax as a non-UK resident, there’s specific guidance that you need to acquaint yourself with.

HMRC call it "RDR1", and it’s all about residence, domicile and the remittance basis.

RDR1 is a guide to the way your sources of income are taxed so you can work out the impact that split year treatment will have on the tax you pay in the UK.

When is a tax year split?

The most important thing to know is that for the split year treatment to apply, you have to be UK resident for the tax year in question, according to SRT rules.

Also, split year treatment in this context applies to you as an individual, it doesn’t apply to anyone acting as a personal representative.  

Note: split year treatment doesn’t have any effect on whether you’re considered to be a UK resident for the purposes of any double taxation agreements.

Eight ways the split year treatment can apply

There are eight ways the split year treatment might become applicable.

HMRC call these “Cases”, and they are set out below.

For some people, their situation means they may actually meet the criteria of more than one of the Cases.

I look at this below after setting out the terms of each of the Cases.

Case 1: Starting full-time work overseas

As an expat you may well meet the criteria for split year treatment for the tax year in which you go abroad and if you begin full-time work overseas.

For this case to apply, you must:

• be UK resident for the tax year in question;
• be UK resident for the previous tax year;
• be non-UK resident in the following tax year because you meet the third automatic overseas test; and
• satisfy the overseas work criteria during a relevant period.

Relevant period

A relevant period for Case 1 is any period consisting of a day or more that:

•  begins within the tax year;
•  is a day on which you do more than three hours work overseas; and
•  ends with the last day of the tax year.

Overseas work criteria

Overseas work in this Case means you:

• work full-time overseas during the relevant period;
• have no significant breaks from your overseas work during this period;
• don’t work for more than three hours in the UK on more than the permitted limit of days during the period in question;
• spend no more than the permitted limit of days in the UK during that period.

How to calculate if you work overseas full time for the purposes of Case 1

HMRC say:

"You have to apply the sufficient hours overseas calculation to the relevant period with these modifications:

The maximum number of days you can subtract from the reference period for gaps between employments is reduced from 30 days to the permitted limit of days that can be subtracted for gaps between employments.”

This table from the Revenue sets out the permitted limits for Case 1 – the appropriate portions of the full-year permitted limits:

Table 1: Overseas part of the year starts on

X = permitted limit on days where you can work more than 3 hours and maximum number of days that can be subtracted for gaps between employments

Y = permitted limit on days spent in the UK

The overseas part of your tax year

The overseas part of your tax year starts on the first day of the relevant period, as long as you meet the overseas work criteria for that period.

The UK part of your tax year  

The UK part of your tax year is the period from the start of the tax year until the start of the overseas part…

Case 2: Applicable for the partner of someone starting full-time work overseas

If you’re a so-called “trailing spouse” (HMRC's unattractive term, not mine! – my wife and I prefer "accompanying partner"), you might receive split year treatment for the purposes of your tax too. 

But this happens only if your partner meets the conditions for Case 1 split year treatment for that particular year (or the previous year), and you move overseas so that you can continue to live with them while they are working overseas.

You also have to meet these criteria…

You must:

• be UK resident for the tax year being considered for split year treatment;
• also have been UK resident for the previous tax year;
• be non-UK resident for the tax year following the tax year being considered for split year treatment;
• have a partner whose circumstances meet Case 1 (see above) for the tax year or the previous tax year;
• have been living together in the UK – either at some point in the tax year or the previous tax year and;
• move overseas so you can live together while your partner is working overseas and in the period beginning on your deemed departure day and ending on the last day of the tax year either have no home to live in in the UK or, if you have a home in the UK and overseas, spend the most time living in your overseas home.

And you must spend no more than the permitted number of days in the UK.

Who is considered to be a partner?

A partner for the purposes of this case can be a husband or wife or civil partner, or someone you live with as your husband, wife or civil partner.

What is your deemed departure day?

Your deemed departure day is the latter of either the day you join your partner to live together overseas or the day which is your partner’s first day of their overseas part of the year under Case 1.

What is considered to be the overseas part of a tax year?

Unsurprisingly the overseas part of the year is considered to be the part of the year that starts on your deemed departure day and ends on the last day of the tax year. 

What is considered to be the UK part of a tax year?

The UK part is the bit from the start of the tax year until the start of the overseas part.

Note: if you separate from your partner after your deemed date of departure you will still be given split year treatment, provided you meet all the other conditions for Case 2.

Case 3: No longer having a home in the UK

This is a Case that’s quite often of relevance to expats.

Under Case 3 you might get split year treatment for a tax year if you leave the UK to live abroad and you no longer have a home back in the UK.

Qualifying criteria are:

You must:

• be UK resident in the tax year in question;
• have been UK resident for the previous tax year;
• be non-UK resident in the following tax year; and
• have one or more homes in the UK at the start of the tax year, and then at some point in that year, cease to have any home in the UK for the rest of the tax year. 

And then, from the date you no longer have a home in the UK, you must:

• Spend fewer than 16 days in the UK and in relation to whatever country you move to, either:
  • become resident there for tax purposes within six months or;
  • be in that country at the end of each day for six entire months; or
  • have your only home, (or homes if you have more than one), in that country within six months. 

The overseas part of the tax year

The overseas part starts on the day you no longer have a home in the UK until the end of the tax year.

The UK part of a tax year

The UK part is the period from the start of the tax year until the start of the overseas part!

Case 4: If you start to have a home in the UK only

You may be eligible for split year treatment for a tax year if you did not meet the only home test at the start of the tax year, but at some point during that same tax year that becomes no longer the case – that is: you acquire a home in the UK, and you then continue to meet the only home test until the end of the tax year.

What is the only home test?

If you have only one home and it’s in the UK or, if you have more than one home but all of them are in the UK, then you meet the terms of this test.

Qualification criteria

To qualify for this case you must:

•  be UK resident for the tax year; and
•  be non-UK resident for the previous tax year;

And according to HMRC:

“you must not meet the sufficient ties test for the part of the tax year before the day on which you meet the only home test - when you are considering whether you have sufficient UK ties in this part of the year, you should reduce the day count limits in the sufficient UK ties tables by substituting the values from the table below.”

(Note: I covered sufficient ties in the first section of this UK residency rules mini-series.)

Table 2: Day before satisfying only home or having a UK home tests

What constitutes the overseas part of the tax year?

This starts at the beginning of the tax year and ends the day before the earliest point at which you meet the only home test.

What constitutes the UK part of the tax year?

The UK part of the tax year is the period from the end of the overseas part until the end of the tax year.

Case 5: Starting full-time work in the UK

It’s possible you will receive split year tax treatment if you start to work full-time in the UK, and you meet the third automatic UK test over a period of 365 days.

If there is more than one such period then the UK part of the year will run from the beginning of the first period.

To qualify you must:

•  be UK resident in the tax year;
•  be non-UK resident for the previous tax year; and
•  not meet the sufficient ties tests that we looked at in part one of this mini-series for the part of the tax year before when you first meet the third automatic UK test.

And when you are considering whether you have sufficient UK ties in this part of the year, you need to reduce the day count limits in the sufficient UK ties tables from my other part of this taxing blog, as shown in Table 2 above.

The overseas part of the year

This starts at the beginning of the tax year and ends at the point you first meet the third automatic UK test by working full-time in the UK.

The UK part of the year

The UK part is from the end of the overseas part until the end of the tax year.

Case 6: Stopping your full-time work abroad

This is again a very relevant Case for some expats.

If you were a non-UK resident in the previous tax year because you worked full time abroad but you stop working full-time abroad in the tax year to which split year treatment applies, you may be eligible for split year treatment.

But, you must:

• be UK resident for the tax year in question;
• have not been UK resident for the tax year before because you either satisfied the third automatic overseas test for that year (see above) or, if the year was 2012 to 2013, worked full-time overseas for the whole of the tax year under the rules in force prior to the introduction of the SRT;
• have been a UK resident for 1 or more of the 4 tax years before the year in which you are not UK resident under the previous bullet point;
• be a UK resident in the tax year following the year in question; and
• satisfy the overseas work criteria for a relevant period.

What constitutes “a relevant period?”

For Case 6 a relevant period is a period that:

• begins with the first day of the tax year; and
• ends with a day in that tax year on which you do more than three hours of work abroad.

What constitutes “overseas work?”

For this case, it is if you:

• work full-time abroad during a relevant period;
• have no significant break from that work during that period;
• do no more than three hours in the UK on more than the permitted limit of days during that period; and;
• spend no more than the permitted limit of days in the UK during that period.

How to work out whether you worked full-time overseas during a relevant period

First, apply the sufficient hours overseas calculation to the period in question; then factor in these modifications:

• the maximum number of days you can subtract from the reference period for gaps between employments is reduced from 30 days to the permitted limit of days that can be subtracted for gaps between employments.

The permitted limits for Case 6 – the appropriate portions of the full year permitted limits:

Table 3: UK part of year starts on

X - permitted limit on days where you can work more than three hours in overseas part of the year or maximum number of days which may be subtracted from the reference period on account of gaps between employment.

Y - permitted limit on days spent in the UK in overseas part of year

What is the overseas part of the tax year?

This is from the beginning of the tax year until the last day of the latest period for which you satisfy the sufficient hours test, when tested between the beginning of the tax year and that day

What is the UK part of the tax year?

This runs from the end of the overseas part until the end of the tax year.

Case 7: The accompanying partner of someone who stops full-time work abroad

If you’ve been living abroad with your partner while they were in full-time work and your partner stops working abroad and either returns or relocates to the UK and you accompany them, you may qualify for Case 7 split year treatment.

Qualification criteria include that you must:

• be UK resident for the tax year;
• not been resident in the UK for the previous tax year; and
• have a partner whose circumstances fall within the criteria for Case 6 split year treatment (see above), either in the tax year in question or in the previous tax year. 

You must also move to the UK so you can continue to live with your partner and then be resident in the UK in the following tax year.

Also, in the part of the year prior to your deemed arrival day in the UK, either you had no home in the UK at any time or, if you did have a home in the UK and abroad you spent the majority of your time living in your home abroad.

You must not have exceeded the permitted limit of days spent in the UK in the overseas part of the tax year before the UK part of the year began.

What is deemed arrival day?

 Simply, your deemed arrival day is the later of the following:

•  the first day of the UK part of the year for your partner under Case 6; or
•  the date you move to the UK so you can live with your partner.

What’s the overseas part of the tax year?

This is the period from the beginning of the tax year until your deemed arrival day.

What’s the UK part of the tax year?

This is the part that starts on your deemed arrival day and finishes at the end of the tax year.

Case 8: If you start to have a home in the UK in a tax year

If you have no home in the UK, but then at some point during a tax year you start to have a home in the UK, you may be eligible for split year treatment under Case 8.

Qualification criteria are that you must:

• be resident in the tax year;
• be non-resident for the previous tax year;
• be UK resident for the following tax year and this can’t be a split year;
• have had no home in the UK at the beginning of the tax year, but acquire a home in the UK at some point during the tax year; and
• then continue to have the UK home for the rest of the tax year and all of the following tax year as well.

You cannot have sufficient UK ties to make you UK resident in the period from the start of the tax year to the point at which you acquire your UK home.

When you are considering whether you have sufficient UK ties in this part of the year, you should reduce the day count limits in the sufficient UK ties tables by substituting the values from Table 2 above.

Your UK part of the tax year

This starts on the date you acquire a home in the UK and continues until the end of the tax year.

Your overseas part of the tax year

This starts at the beginning of the tax year and ends when the UK part starts.

What to do if your situation meets more than one Case

If your own situation means you meet more than one of the Cases, then each will be considered in the following order, to work out which split year date applies to you:

• if you were a full UK resident in the year before the tax year under consideration and your circumstances for that year fall within two or more of Cases 1 to 3:
  • Case 1 has priority over Cases 2; and 
  • Case 2 has priority over Case 3
• if you were not a UK resident in the year prior to the tax year in question and your circumstances fall within two or more of Cases 4 to 8 then:

Table 4:

In this context, what is the split year date?

In relation to split year Cases 4 to 8, the split year date means the final day of the overseas part of the year for that particular Case.

Living abroad temporarily

So far in this article, I've been talking about those who move abroad for fairly long periods. 

However, some expats relocate overseas for quite brief periods.

If this sounds like you, or if you're abroad for less than five tax years, the following sections may apply to you. 

If you move abroad for a short period and are temporarily non-resident for tax, then you return to Britain, you may be charged tax on certain income and gains that you either received or remitted to the UK in your period of temporary non-residence.

This is really important to consider if you’re currently an expat, have been for a short period, and are thinking of returning to Britain.

What is temporary non-residence?

HMRC considers you to be temporarily non-resident if:

• after a period when you hold sole UK residence, you then have one or more residence periods when you no longer have sole UK residence;
• in four or more of the seven tax years immediately preceding your year of departure you had either:
  • exclusive UK residence for the tax year; or
  • the year was a split year that included a residence period for which you had sole UK residence; and
• your period of non-residence is a period of five years or less.

For these special tax rules not to apply, you have to have been a non-resident for over five years (for a minimum of five years and a day). 

What constitutes a residence period?

In relation to being temporarily non-resident or not, a residence period according to HMRC is either:

•  a full tax year;
•  the overseas part of a split year; or
•  the UK part of a split year.

What does sole or exclusive UK residence mean?

According to HMRC:

“you will have sole UK residence for a residence period consisting of an entire tax year if you are resident in the UK for that year, and there is no time in that year when you are Treaty non-resident, and you will have sole UK residence for a residence period consisting of part of a split year if the residence period is the UK part of that year and there is no time in that part of the year when you are Treaty non-resident.”

Which leads to the question – what is Treaty non-residence?

You are considered a Treaty non-resident if you are a resident in any country other than the UK for the purposes of a double taxation agreement having effect at the time. 

And you are a Treaty resident in the UK if you’re regarded as a resident in the UK for the purposes of double taxation arrangements having effect at the time.

Start and end dates for your period of temporary non-residence

Your period of temporary non-residence starts from the day after your last residence period when you were considered solely resident in the UK, (HMRC refer to this as Period A) or, if split year treatment applies in your case, the date following that on which the last residence period for which you had sole UK residence ends.

Your period of temporary non-residence ends on the day before the date of the start of the next residence period when you’re considered as having sole UK residence. 

Year of departure and period of return

Your year of departure will be the tax year when you were last solely resident in the UK.

Or, if split year treatment applies, then this will be the date following the day when your last residence period when you had sole UK residence ends.

New temporary non-residence rules only apply if your year of departure is 2013 to 2014 or later.

Your year of departure may fall earlier than the year in which you physically leave the UK because of how the tax year runs in the UK.

In terms of what HMRC mean by your period of return, this is the first residence period after period A (see above) for which you have sole UK residence.

How are you taxed when you move back to the UK after a period of temporary non-residence?

If you haven’t yet had your brain fried and you’re following me so far, and you think you fall within the scope of the temporary non-residence rules, then you will become liable to tax in the year, or part of the year in the case of a split year, of your return to the UK on certain parts of your income and gains, accruing, arising, or remitted to the UK during the periods when you were temporarily non-resident.

You will be liable for tax on the following:

•  some pension payments and lump sums;
•  income taxable under the disguised remuneration rules;
•  any remitted foreign income for remittance basis users;
•  distributions from closely controlled companies;
•  loans to participators written off or released;
•  chargeable event gains;
•  offshore income gains; and
•  capital gains.

Note: you’re likely to be treated for tax purposes as if the income or gains arose in the period that you returned to the UK.

Conclusion

The rules relating to residency status should not be open for interpretation, but if you’ve read all of the above and my previous blog about the SRT, you’ll see how confusing and conflicting they can appear.

The main thing to remember is; never assume you’re not liable – because when it comes to tax, the onus is on you to declare and pay. 

If you fail to do so, you’re guilty of tax avoidance whether that was a deliberate intention or not! 

Speak to an accountant for clarification if you need it.

And as stated at the beginning of this article, if you’d like to discuss tax with us in relation to your portfolio and holdings and your net worth is in excess of £500,000, please get in touch.