According to reports, the number of people leaving the UK during 2020 was “unprecedented”. The Economic Statistics Centre of Excellence reported that as many as 700,000 left London alone in the 15-month period to September 2020. This brings the question of tax residence into sharp focus.
For any given tax year, an individual is either UK-resident or non-UK resident for tax purposes as determined by the statutory residence test (SRT) set out in Finance Act 2013, Sch. 45. However, if they move out of (or indeed into) the UK part-way through a tax year, it is possible that the tax year will be split into a UK and overseas part. The personal allowance is available for the full year, irrespective of whether it will be available in subsequent years.
Income tax and CGT
The consequences of this are that non-UK income will only be subject to UK tax if it is received during the UK part of the year, and foreign gains will only be charged to CGT if they arise in the UK part of the year. For UK gains, only gains on immovable UK property will be taxable in the overseas part – subject to the rules for temporary non-residents if UK residence is resumed within five years.
This is highly useful for avoiding double taxation. Additionally, considerable savings may be made by timing income and gains to coincide with the overseas part of the year where the country the individual is becoming resident in has more favourable tax rates than the UK. However, split year treatment does not apply in all cases (though where it does it is automatic and not optional), so it is crucial to understand the rules and be certain of the date the overseas period commences to avoid mistakes. The tax position in the new country of residence will need to be considered, so advice will need to be taken accordingly. The relevant double tax treaty (if one exists) should also be consulted.
Note that the split year rules only need to be considered if the individual is resident in the UK under the SRT. If the test provides a non-resident result for the year, non-UK income and gains will not be subject to UK tax anyway – even if they are received or arise before the departure date. Taxable UK gains are restricted to those arising on immovable UK property. Remember that if a gain on UK property does arise, it needs to be reported using the UK property gains reporting service within 30 days of completion. There is no longer an option for non-residents who complete self-assessment returns to delay reporting the gain until the return is filed – the change was made for disposals made on or after 6 April 2020.
It should also be noted that the split year treatment does not affect actual residence under any double tax treaty.
Split year treatment – the Cases
In order for split year treatment to apply to the year of departure, there must be an actual or deemed departure from the UK. We are not considering the position for those coming to the UK (“arrivers”) here.
Part 3 of Sch. 45 then sets out eight “Cases” where split year treatment will apply. Only the first three apply to leavers, so we do not consider Cases four to eight here. In each of the three Cases, there is a common requirement that the taxpayer must have been UK-resident in the previous tax year (including where the year was a split year).
Case 1 – Starting full-time work overseas
In order to meet the first Case, the individual must be non-resident under the SRT in the subsequent year by way of meeting the third automatic overseas test (concerned with working sufficient hours overseas and minimal work in the UK).
They must also satisfy the relevant overseas work criteria during a “relevant period”. A relevant period is any period consisting of 1 or more days that:
– begins with a day that falls within the tax year (i.e. the year of departure);
– is a day on which the individual does more than 3 hours work overseas;
– ends with the last day of the tax year.
The overseas work criteria is that the individual:
– works full-time overseas during a relevant period;
– has no significant break from overseas work during that period;
– does not work for more than 3 hours in the UK on more than the permitted limit of days during that period; and
– spends no more than the permitted limit of days in the UK during that period.
The permitted limit of days tests referred to here depend on when the individual leaves the UK. If the individual leaves relatively early in the tax year, say June, they will be able to spend more days in the UK than if they leave shortly before the tax year end. The way the limits are calculated are set out in RDRM12070.
Where case 1 applies, the overseas part of the split year begins on the first day of the relevant period discussed above. That is, the first day they undertake more than 3 hours work overseas – assuming the overseas work criteria is then met until the end of the tax year. This is usually later than the actual date of departure, so if an individual is waiting to trigger gains they should wait until after they commence work to do so, and ensure that they meet the overseas work criteria for the remainder of the tax year.
Case 2 – Partner of someone starting full-time work overseas
Split year treatment can also apply to the “partner” of someone who meets the Case 1 criteria, which is useful where a couple or family move overseas together. In addition to the requirement for the partner to meet the Case 1 criteria, the individual must:
– be UK resident for the tax year being considered for split year treatment;
– be UK resident for the previous tax year (whether or not it is a split year);
– be non-UK resident for the tax year following the tax year being considered for split year treatment;
– be moving overseas to live with their partner while they are working overseas; and
– in the period beginning on their deemed departure day and ending on the last day of the tax year:
– have no home in the UK or, if they have homes in both the UK and overseas spend the greater part of the time living in the overseas home, and
– spend no more than the permitted limit of days in the UK (calculated in the same way as for case 1)
“Partner” has a wider meaning than spouse or civil partner here. Unmarried partners can qualify if they are living together, in much the same way as they are considered as “living together” for tax credits/universal credit purposes, i.e. there is a stable partnership based on more than just economic convenience.
Where Case 2 applies, the deemed departure day (and first day of the overseas part of the split year) is the later of:
– the day the individual joins their partner to live together overseas; and
– the day which is the first day of the overseas part of the year under Case 1 for their partner.
Case 3 – ceasing to have a home in the UK
For Case 3 to apply, the individual must again be resident in the previous year and non-resident in the subsequent year to the year of departure. They must also have at least one “home” in the UK at the start of the tax year, and cease to have any home in the UK at some point in (and for the rest of) the tax year in question.
Once they cease to have a UK home, the individual must:
– spend fewer than 16 days in the UK; and
– in relation to a particular country, either:
– become resident for tax purposes in that country within 6 months
– be present in that country at the end of each day for 6 months, or
– have their only home, or all of their homes, if they have more than 1, in that country within 6 months.
For these purposes a property does not need to be owned (or even a building, e.g. it could be a houseboat etc.) in order to be a “home”. In contrast, ownership of a property does not necessarily mean that a home is available – for example where the individual lets it out, or has it marketed for sale. The key thing to consider is how easy it is for the individual could occupy it quickly with a degree of permanence or stability. The legislation also states that something used only periodically, e.g. a holiday home will not count as a “home”. Each case will need to be assessed on it’s merits.
The overseas part of the year starts on the date that the individual ceases to have any UK home on.
Priority of Cases
It should be intuitively obvious that, in the right circumstances, all three Cases might be relevant. For example, if A and B are married, and both commence overseas work at slightly different times, and cease to have a UK home in the same tax year, there could be three different potential start dates for the overseas part of the year. To avoid manipulation of these rules, the legislation stipulates that Case 2 has priority over Case 3, and Case 1 has priority over both Case 2 and Case 3.