UK Tax Residence explained: what you need to know

In recent days it has been reported that Lord Alan Sugar, a leading figure in the UK's business community, attempted to avoid a £186 million tax bill by becoming non-UK resident for tax purposes. Setting to one side the veracity of reports regarding Lord Sugar's movements and the reasons for them, they do raise an important question: how do the UK's rules on tax residence work?

What are the UK's rules on tax residence?

The UK's current rules for determining someone's residence for tax purposes are neatly contained in what is known as the 'Statutory Residence Test' (SRT), the detail of which is contained in Schedule 45, Finance Act 2013.

How does the SRT work?

The SRT is made up of three distinct parts:

• one to determine whether someone is automatically non-UK resident for tax purposes;
• one to determine whether someone is automatically UK resident for tax purposes; and
• (if neither of those tests can determine someone's residence) one to determine if someone has 'sufficient ties' with the UK to make them tax resident here.

It is important to understand that applying any part of the SRT to someone's tax affairs can be difficult and will depend on the facts of their situation: each component of the SRT employs specific criteria that need to be worked through in order to determine whether or not someone is UK tax resident or not. This will include, amongst other things, consideration of:

• the number of days in a tax year (and previous tax years) a person is present in the UK;
• the extent to which they work in the UK and for how long; and
• whether or not they have a home in the UK and elsewhere.

In short, the application of the SRT for individuals who have their 'roots' (employment, family, home etc) in the UK and do not leave for an extended period should be fairly simple in that they would automatically be UK resident and the SRT needn't be considered. Any worldwide income or gains realised in that tax year will be subject to UK income and / or capital gains tax.

The complications can arise where someone's circumstances change such that they spend extended periods of time outside the UK e.g., for reasons of employment. Someone's status under the SRT would need to be looked at on an annual basis.

What happens if someone is non-UK resident under the SRT?

The general idea of the SRT is to establish the UK's taxing rights over income and / or gains of those who are / have been resident in the UK. To the extent that someone is not UK-resident in a tax year, they will generally not be obliged to pay UK income / capital gains tax on their total worldwide income. However, for specific UK cited assets there are rules that can bring them into the scope of the UK's tax regime e.g., UK land and property.

To what extent does physically leaving the UK impact residence under the SRT?

Care needs to be taken with arriving / leaving the UK part way through a tax year. There are special rules under the SRT that apply when:

• someone arrives in / leaves the UK part way through a tax year; and
• people that would otherwise be UK resident under the SRT, leaving the UK for a temporary period and realising a significant chargeable gain while outside the UK – such temporary periods of non-residence do not always release individuals from UK tax obligations.

What does all of this have to do with Lord Sugar?

Members of the House Commons and House of Lords (Lord Sugar being a member of the latter) are subject to a special set of rules when it comes to their residence status. Under the Constitutional Reform and Governance Act 2010, while they are in office, they are treated as being both resident and domiciled in the UK. In other words it will not matter, for tax purposes, where a member of either house physically was resident in a given tax year – the SRT will not need to be considered. Under the 2010 Act, if they received income and / or capital gains in that tax year it would be subject to UK income and / or capital gains tax.

Can someone be resident in more than one country at the same time?

Leaving special categories of taxpayer (like politicians and peers) to one side, it is perfectly possible for a taxpayer to be both resident in the UK under the SRT, and in another country under its residence rules. In that situation there is the possibility for double taxation i.e., in both the UK and the other country. There are avenues to secure relief from double taxation but that will need to be considered on a case-by-case basis.

Is residence the same as domicile?

The concepts of residence and domicile are different concepts but are equally important.

For tax purposes, residence relates someone physically is in a given tax year, which will primarily determine their liability to UK income and capital gains tax. On the other hand, domicile is primarily concerned, for tax purposes, with whether or not someone considers the UK as 'home' and, amongst other things, the extent to which UK inheritance tax will apply to someone's estate on their death. It is worth noting that residence can still be important when someone's domicile is not clear.

The UK's rules on tax residence are complicated (albeit an improvement on the historic position) and do need to be worked through carefully where someone is considering leaving or moving to the UK for a period of time.