HMRC Guidance on Tax Residence
Following changes in the tax legislation governing the income tax payable by non-domiciliaries, and some relevant tax cases, HM Revenue and Customs (HMRC) have updated their guidance on tax residence and domicile. This replaces the old guidance, which was contained in booklet IR20.
One of the main changes in approach is that HMRC are now taking a harder line on what has to be done to qualify as being non-resident. To cease to have UK residence, not only must you leave the UK, but you must, in effect, reduce your connection to the UK to a minimal level.
The new leaflet should be read carefully by anyone considering moving abroad who wishes to ensure that they become non-UK resident for tax purposes. HMRC’s guidance states that ‘you should always look at the pattern of your lifestyle when deciding whether you are resident in the UK. Things you should consider would include what connections you have to the UK such as family, property, business and social connections. Just because you leave the UK to live or work abroad does not necessarily prove that you are no longer resident here if, for example, you keep connections in the UK such as property, economic interests, available accommodation, and social activities or if you have children in education here. For example, if you are someone who comes to the UK on a regular basis and have a settled lifestyle pattern connecting you to this country, you are likely to be resident here.’ Recently, HMRC were successful in a claim that an airline pilot who lived in South Africa was tax resident in the UK by virtue of his frequent presence here.
One particularly odd feature to note is that HMRC now seem to regard the whole of UK territorial waters and airspace as being in the UK for the physical presence test.
In the spring of 2011, following a number of high-profile cases, the Government announced that major reform of taxpayer residence law was to be undertaken. The new system for determining residence is based mainly on physical presence and, to a lesser extent, on one’s ‘connection’ with the UK. HM Treasury have now issued statutory guidance on residence.
In the Summer Budget of 2015, the inheritance of the foreign domicile of the father for UK-born children was abolished and the concept of domicile was amended (similarly to the way it operates for Inheritance Tax) to remove foreign domicile from long-term UK residents.
Further changes to the rules on non-dom taxation were introduced in the Finance (No 2) Bill in 2017, with some changes deferred until 2018. Among the main chages are the extension of the ‘deemed domicile’ concept which has existed for many years in Inheritance Tax law to cover Capital Gains Tax and Income Tax. The broad purpose of the changes is to tax long-term residents of the Uk who are non-UK domiciled in the same way as those who are.
It should be remembered that when a property is owned in the UK by a person who is now tax resident abroad, there is still a requirement to inform HMRC on sale and to make any necessary tax return. Although in late 2017 and early 2018 a number of Tribunal decisions reduced or removed penalties for foregin-resident taxpayers who filed returns late, the compliance burden nevertheless remains.