Tax residence can have a significant bearing on your UK tax liability, especially if you have non-UK income or capital gains.

For tax years up to 5 April 2013, there was no full statutory definition of tax residence and instead it had largely rested on the results of legal cases decided in the courts. The result was residence rules were vague, complicated and perceived to be subjective. 

The 2013 Finance Bill received Royal Assent on 17 July 2013 and a new statutory residence test (SRT)is now in place from 6 April 2013. A statutory residence test had been on the agenda for at least 77 years as the 1936 Income Tax Codification Committee apparently thought it scandalous that a statutory definition of residence did not exist. In theory, taxpayers are now able to assess their resident status in a "straightforward" way although in reality it can still be very complicated.

Q1 What taxes will the SRT apply to?

Income tax, capital gains tax, inheritance tax and corporation tax. It does not apply to national insurance.

Q2 Why is residence important?

Broadly speaking, individuals who are UK resident are taxable on their worldwide income, whereas taxpayers who are non-UK resident only pay tax on their UK source income (their foreign income is not taxed).

Q3 Where do you start in determining residence?

The SRT is a three part test: an automatic overseas test, an automatic UK test and a sufficient ties test. You start with the automatic overseas test, if that is not met the automatic UK test is considered next, and if that is not met, the sufficient ties test must be applied.

Q4 When will an individual be regarded as automatically non-UK resident? ('the automatic overseas test')

An individual will be regarded as automatically non-UK resident where they:

i) were resident in the UK for one or more of the three preceding tax years and spend fewer than 16 days in the UK in the tax year, or

ii) were not resident in all three preceding tax years and spend fewer than 46 days in the UK in the tax year, or

iii) work sufficient hours overseas for the year without any significant breaks from that overseas work, and

-spend fewer than 91 days, excluding deemed days, in the UK in the tax year, and

-the number of days in the tax year on which they work for more than 3 hours in the UK is less than 31.

Separate rules apply in the tax year of death.

Q5 When will an individual be automatically UK resident? ('the automatic UK test')

An individual not meeting the 'automatic overseas test' will automatically be UK resident where they:

i) spend at least 183 days in the UK in a UK tax year (6 April to 5 April), or

ii) have a home in the UK and certain day counting tests are met, or

iii) work sufficient hours in the UK, assessed over a 365 day period.

Separate rules apply in the tax year of death.

Q6 What is the 'sufficient ties test'?

Using Geoffrey Boycott (ex-England cricketer) terminology, an individual not meeting the automatic overseas test or the automatic UK test is situated in the 'corridor of uncertainty' otherwise known as the sufficient ties test. This test examines an individual's ties to the UK to determine whether they are sufficient for them to be considered UK resident. What counts as a 'UK tie' varies according to whether or not the individual was UK resident for one or more of the three tax years before the tax year under consideration.

When I started working in expatriate tax in the 1980's clients were asked whether they had remained in full-time and continuous employment overseas with no UK duties performed. They invariably responded 'yes' and assuming their return visits to the UK were within permitted tolerances, their non-UK resident status was confirmed for another tax year.

With the introduction of the new SRT from 6 April 2013, it is now a much more precice science involving a prescribed five step process. Employees should now maintain records on a daily basis and if they fail to adhere to this advice, problems could arise if HMRC subsequently make an enquiry into an individual's self assessment tax return and ask to see supporting evidence of the hours worked.

Q9. What records do HMRC suggest be maintained for the sufficient hours test? (IMPORTANT!)

They suggest you should keep information and records relating to:

-the split in your working life between the UK and overseas, particularly noting days where you worked (including training, being on stand-by and travelling) for more or less than 3 hours.

Q10 When working out the average time worked, what will reduce the length of the period?

From a starting point of 365 days (or 366 in a leap year) the following can be subtracted:

-disregarded days

-sick leave where you cannot work as a result of sickness or injury

-reasonable amounts of annual leave/parenting leave

-certain non-working days embedded within a block of leave

-certain gaps between two employments

Q11 What is a disregarded day?

A disregarded day is one on which more than 3 hours work in the UK has been performed.

Q12 What is a non-working day?

A non-working day is any day on which an individual is not expected to work and does not in fact work e.g. weekend, bank holiday etc

Q13 What is a significant break from overseas work?

Where at least 31 days go by and not one of those days is one where more than 3 hours work are performed overseas, or a day on which more than 3 hours work would have been performed but for being annual leave, sick leave or parenting leave.

Q14 When could a full day of overseas work be disregarded?

Time spent travelling counts as time spent working in certain instances. So for example, if an employee takes more than 3 hours from disembarking their plane to travel home, they will have worked more than 3 hours in the UK. Potentially, that day which the employee may have worked overseas will be disregarded and the overseas hours will be lost.

Q15 When will travelling time be regarded as work?

i) travel time where the cost would have been a deductible expense for tax purposes had the costs been incurred by the individual, regardless of whether or not they work during the travel in question.

ii) travel time to the extent that an individual works during their journey regardless of the rules on tax deductibility.

Q16 Why is it important for individuals to know how many hours they have worked in the UK during a day when claiming non-UK residence under the third automatic overseas test?

In order to meet the third automatic overseas test, an individual must not work for more than three hours a day in the UK on more than 30 days in the tax year.

Q17 When counting UK workdays, does it matter whether the UK duties performed are incidental or substantive?

The 30 day UK workday count will from 6 April 2013 include any days where 'incidental duties' (e.g. attendance at a training course) are performed. Prior to 6 April 2013, Revenue practice would not have counted these days.

The distinction between incidental and substantive duties will still be important when calculating an individual's UK tax liability. A non-UK resident will not be liable to pay UK tax on remuneration associated to the performance of incidental duties in the UK, but substantive duties will be taxable here.

Q18 What is meant by a day in the UK?

An individual is considered to have spent a day in the UK if they are here at the end of the day (i.e. at midnight). This is subject to the deeming rule.

Q19. What is the deeming rule?

This is an anti-avoidance rule which applies where an individual:

i) satisfies three of the sufficient ties tests for a tax year, and

ii) has been present in the UK on more than 30 days without being present at the end of the day (known as 'qualifying days'), and

iii) has been UK resident in one or more of the preceding three tax years.

Where the deeming rule applies to an individual, they must aggregate all days they were present in the UK with any qualifying days over and above the 30 day threshold.

Q20 What is regarded as a home in the UK for the purposes of the 'automatic UK test'?

An individual will be considered to have a UK home where:

i) they have a home in the UK for a period of 90 days

ii) they are present in that UK home on at least 30 separate days during the tax year, and

iii) whilst they have that UK home there is a period of 91 consecutive days (some of which fall into the tax year in question) when they have no home overseas or one or more homes overseas in none of which they are present for more than 30 days during the tax year.

Q21 What happens if an individual has more than one home in the UK for the purposes of the above test?

Each of those UK homes must be considered separately to see whether the test is met. An individual need only meet this test in relation to one of their UK homes.

Q22 What is split year treatment (SYT)?

Under the SRT, you are either resident or non-UK resident for a full tax year and at all times in that tax year. However, if during a year you either start to live or work abroad, or come from abroad to live or work in the UK the tax year will be split into two parts if your circumstances meet specific criteria.

-a UK part for which you are charged to tax as a UK resident;

-an overseas part for which, for most purposes, you are charged to UK tax as a non-UK resident.

Q23 When is a tax year split?

You must be UK resident for a tax year under the SRT to meet the criteria for split year treatment for that year.

Q42 When will you receive split year treatment?

There are eight sets of circumstances where split year treatment may apply. Three relate to where you go overseas part way through a tax year (Cases 1-3) and five cover situations where you might come to the UK part way through a tax year (Cases 4-8).

Case 1-Overseas work

Case 2-Accompanying a partner overseas

Case 3-You no longer have a home in the UK

Case 4-Starting to have your only home in the UK

Case 5-Starting full-time work in the UK

Case 6-Ceasing full-time work abroad

Case 7-Returning or relocating to the UK with your partner

Case 8-Starting to have a home in the UK

Q24 When will Case 1 SYT (overseas work) apply?

To meet the criteria for split year treatment for a year in which you begin full-time employment overseas you must:

-be a UK resident for the tax year in question

-be UK resident for the previous tax year (whether or not it is a split year)

-be non-UK resident in the following year by virtue of the third automatic overseas test.

-satisfy the overseas work criteria during a relevant period.

Q25 What is a relevant period for Case 1?

A relevant period is any period consisting of one or more days that:

-begins with a day that falls in the tax year

-is a day when you do more than 3 hours work overseas

-ends with the last day in the tax year

Q26 What is the overseas work criteria for Case 1?

You will satisfy the overseas work criteria if you:

-work full-time overseas during a relevant period

-have no significant break from overseas work during that period

-do not work for more than 3 hours in the UK on more than the permitted limit of days during that period

-spend no more than the permitted limit of days in the UK during that period

Q27 When will Case 4 SYT apply (starting to have your only home in the UK)?

You may receive SYT for a tax year if you did not meet the only home test at the start of the tax year but at some point in the tax year that ceases to be the case and you then continue to meet the only home test until the end of the tax year.

You must:

-be UK resident for the tax year

-be non-UK resident for the previous tax year

not meet the only home test at the start of the tax year, but at some point in that tax year you do meet the only home test and continue to do so until the end of the tax year.

not meet the sufficient ties test for the part of the tax year before the day on which you only meet the only home test (the day count limits should be reduced using HMRC table).

Q28 How can I meet the only home test?

The vast majority of people will only have one place where they live and this will be their home.If an individual has more than one place to live then each of those places may be a home. In this situation, whether or not either place is a home will be determined by the facts.

A home can be a building, a vehicle, vessel or structure of any kind which is used as a home by an individual. It will be somewhere which an individual uses with a degree of permanence or stability to count as a home.

Q29 What is the overseas part of the tax year?

The overseas part of the year commences at the beginning of the tax year and ends the day before the earliest point at which you meet the only home test.

Q30 What is the UK part of the tax year?

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

Q31 What is an international transportation worker?

An international transportation worker (ITW) is someone whose job consists substantially of duties performed on board a vehicle, aircraft or ship as it makes international duties (generally 80% of time).

Q32 Give some examples of ITWs

Pilots, airline cabin crew, ferry staff, mariners and lorry drives.

Q33 Does it matter whether an individual is employed or self employed?

No, provided that substantially all duties are performed during international duties they will be treated as an ITW.

Q34 What are the tax implications of being an ITW?

If you are an ITW, you cannot be resident under the third automatic UK test (full-time work in the UK) and you cannot be non-resident under the third automatic overseas test (full-time work overseas).

Q35 What other options do ITWs have?

ITWs can determine their residence status by reference to the other automatic tests where they apply. If none of the automatic tests are met the sufficient ties test will need to be considered for residence to be determined.

Q36. What happens if I let my UK home/property whilst I am living or working abroad?

Any profit made from letting a UK property will remain subject to UK tax even if you qualify as non-UK resident. This is because it is UK source income.

Q37 Will tax be withheld at source from my UK letting income?

Letting agents, or tenants if there is no letting agent, must usually deduct basic rate Income Tax from UK rental income if the landlord has a usual place of abode outside the UK (under the non-resident landlord provisions).

Q38 Can anything be done to avoid the tax being withheld at source from my UK letting income?

Yes, landlords have the option of applying for approval to receive their UK rental income with no Income Tax deducted by simply completing form NRL1i.

Q39 Does HMRC approval mean the letting profit is not taxable?

The granting of approval does not grant exemption from UK Income Tax; any tax liability will be dealt with under self assessment. If the rental income is also charged to tax in your country of residence, then that country should give the relevant tax credit for the UK tax paid.

Q40. How many forms NRL1 should be completed if a property is owned jointly?

If you jointly own a property, the income is usually shared equally; owners are individually responsible for any UK tax liability arising from their share of that income. Therefore, each owner has to complete form NRL1.

Q41. What is a wear and tear allowance?

Where a property is let fully furnished a wear and tear allowance can be claimed which is calculated as 10% of rents less payments that a tenant would normally pay e.g. water charges (but see point below).

Q42 From what date is the wear and tear allowance no longer available?

6 April 2016.

Q44 On what basis must letting accounts be prepared?

HMRC will permit the use of a 'cash basis' for lettings where gross rental income does not exceed £15,000 per annum provided it is adopted consistently and does not materially affect results. In other cases, the strict 'earnings basis' must be used with adjustments made for amounts in advance and in arrear.

Q45. If I live abroad and receive a pension from my former employer. How will this be treated for UK tax purposes?

In general, income arising from sources within the UK to a non-resident individual remains liable to UK tax. However, you may be due tax relief under the terms of any Double Taxation Treaty between the UK and your country of residence.

Q46 For the purposes of the 183 day test in a Double Taxation Treaty, how are days counted up until 5 April 2009?

When counting to 183 days for these purposes a part day counts as a part day (see the example below*) and days of arrival and departure and all other days spent in the UK should be included in the calculation.

Q47 For the purpose of the 183 day test in a Double Taxation Treaty, how are days counted from 6 April 2009?

From 6 April 2009 (2009-10 onwards) the method of counting days should follow the OECD commentary days of physical presence method. Under this method, the general principle is that any day during any part of which, however brief, the person is present in the UK counts as a day of presence for the purposes or computing the 183 day period with limited exceptions.

Q48. I am non-UK resident. Should I consider opening a non-UK bank account?

From a UK tax perspective, the answer is probably yes. In explanation, whilst you remain non-UK resident for UK tax purposes your non-UK income e.g. overseas bank interest, will not be liable to UK tax. This will preserve your UK personal allowance (assuming you are entitled to claim one) to offset against any on-going UK source income e.g. letting income.

Q49. I have been non-UK resident for a number of years. Should I close my offshore bank accounts prior to the date I return to the UK?

Again, from a UK tax perspective, it will probably make sense to close your offshore interest bearing bank accounts prior to the date you return to the UK. This will crystalise a final payment of interest which if received whilst non-UK resident will not be liable to UK tax. You must however consider the tax implications in the country where you are currently living.

Q60. Should form P86 be completed when an expatriate employee returns to the UK?

Form P86 is now obsolete and therefore should not be completed. HMRC guidance indicates that whilst there is no statutory time limit for notifying an employee's return to the UK, it will be in the employee's best interests to inform them promptly.

Q90. Which rules can affect the payment of social security for an employee working outside the UK?

An employee working abroad may be affected by UK domestic contribution laws, EC legislation, reciprocal arrangements with other countries and the legislation of other non-EC countries with whom no reciprocal arrangements currently exist e.g. the Middle East.

Q91. Do UK domestic rules trump EC legislation or reciprocal arrangements?

No, where EC legislation or a reciprocal arrangement apply, they displace UK domestic rules.

Q92. What is the 52 week rule for employees leaving the UK?

For employees working in a country outside the EEA/which has no reciprocal social security arrangement with the UK, national insurance will be payable for the first 52 weeks of the tour of duty overseas if:

-the employee is ordinarily resident in GB or Northern Ireland;and

-the employee was resident in GB or Northern Ireland immediately before the overseas assignment; and

-the employer has a place of business in GB or Northern Ireland.

Q93. What is the EEA?

For social security purposes, the European Economic Area (EEA) is the countries of the European Free Trade Area and European Community.

Q94. Is it possible to pay voluntary UK national insurance contributions whilst working overseas?

Yes, provided certain conditions are met, an employee no longer paying UK national insurance can consider paying voluntary contributions instead.

Q95. Why should I consider paying voluntary UK national insurance contributions?

To maintain an entitlement to certain UK state benefits e.g. UK state retirement pension.

Q96. How many qualifying years are required to get a full basic State Pension?

You need 35 qualifying years. Previously it was 30 years.

Q97. Which type of voluntary national insurance contributions should I pay?

Class 2 contributions are cheaper than class 3 contributions and provide a wider entitlement to some benefits.

Q98. What is the basic social security rule in the EU regulations?

The basic rule in the old and the new Regulations is that people are subject to the social security legislation of the Member State where they carry on their work. They pay their contributions only to that Member State.

Here in the UK that means that just like under the old rules, employees coming to the UK from other Member States and their employers have to pay National Insurance contributions as soon as the employee starts work here.

Similarly, when people go abroad to work in the other Member States they generally have to pay social security contributions in that country and stop paying here in the UK.

There are some important exceptions to this basic rule.

Q99. What is the EC 24 month posting rule?

As detailed in question 98 above, there are exceptions to the basic rule and one such exception covers posted workers. From 1 May 2010, subject to certain conditions, a worker posted from one Member State to work temporarily in another Member State will remain subject to the legislation of the first Member State if the work is not expected to last more than 24 months at the outset.

For an employee posted from the UK, the employer must apply for Form A1 (previously form E101) to show that the employee is entitled to continue to pay UK Class 1 National Insurance.

Q100. When do the 'Rest of the World' (ROW) provisions apply?

Where EC Regulations and Reciprocal Agreements do not apply the provisions contained in UK domestic legislation apply.

Q101.How much are voluntary class 2 contributions?

 2.80 per week (2015/16).