Breaking UK residence: What to watch out for?

If you are planning to leave the UK and live abroad, you may be wondering how this will affect your tax situation. You may want to know how to stop being UK tax resident and what are the consequences of returning to the UK too early.

There are several tax benefits available to new arrivers in the UK but the definition of a new arriver depends on the benefit you are considering. For those benefits to be reset properly, you need to have stayed outside of the UK for a sufficiently long period which depends on the given benefit.

In this article, we will explain the main rules and concepts that you need to be aware of, such as the statutory residence test, the overseas workday relief, the remittance basis and the temporary non-residence rules. We will also give you some practical tips on how to plan your departure and potential return in a tax-efficient manner.

The Statutory Residence Test

The first thing you need to know is how to determine your UK residence status for tax purposes. This is done by applying the statutory residence test (SRT), which is a set of rules that came into effect from 6 April 2013. The SRT consists of three parts: an automatic non-resident test, an automatic resident test and a sufficient ties test. You need to consider them in that order and stop as soon as you meet one of them.

The automatic non-resident test

You will be automatically non-resident for a tax year if you meet any of the following conditions:

• You spent less than 16 days in the UK in that tax year and you were UK resident for one or more of the previous three tax years
• You spent less than 46 days in the UK in that tax year and you were not UK resident for any of the previous three tax years
• You worked abroad full-time (averaging at least 35 hours a week) for that tax year, without any significant breaks (more than 30 days), and you spent less than 91 days in the UK, of which no more than 30 were spent working If none of these apply, you need to move on to the automatic resident test.

The automatic resident test

You will be automatically resident for a tax year if you meet any of the following conditions:

• You spent 183 days or more in the UK in that tax year
• You had a home in the UK for at least 91 consecutive days (including at least 30 days in that tax year), and either you had no home overseas or you spent less than 30 days at each of your overseas homes in that tax year
• You worked full-time in the UK for at least 365 days (including at least one day in that tax year), without any significant breaks, and more than 75% of your working days were in the UK If none of these conditions apply, you need to move on to the sufficient ties test.

The sufficient ties test

This is the most complex part of the SRT, as it involves counting how many ties or connections you have with the UK and comparing them with how many days you spend in the UK. There are five possible ties:

• Family tie: You have a spouse, civil partner, common-law partner or minor child who is resident in the UK (unless they are only there temporarily)
• Accommodation tie: You have a place to live in the UK that is available to you for at least 91 consecutive days (including at least one day in that tax year) and you spend at least one night there in that tax year (or 16 nights if it belongs to a close relative)
• Work tie: You work in the UK for at least 40 days in that tax year (a day counts as a workday if you do more than three hours of work)
• 90-day tie: You spent more than 90 days in the UK in either or both previous two tax years
• Country tie: The UK is the country where you spent the most days in that tax year (only applicable if you were UK resident for one or more of the previous three tax years) Depending on how many ties you have and whether or not you were UK resident for any of the previous three tax years, there is a different threshold of days that will make you resident or non-resident.

The Remittance Basis

One of the tax benefits one gets when they arrive in the UK is the ability to use the Remittance Basis of Taxation. This is an alternative way of taxing your foreign income and gains that allows you to only pay UK tax on what you bring (remit) to the UK, rather than on what you earn or realise abroad. However, there are preconditions and tax implications to being able to use the remittance basis, such as:

• You will lose your personal allowance and capital gains annual exempt amount, which means you will pay more tax on your UK income and gains
• You may have to pay an annual charge of £30,000 or £60,000 (called the Remittance Basis Charge) if you have been resident in the UK for at least 7 out of the previous 9 years or at least 12 out of the previous 14 years, respectively.
• You will not be able to claim certain reliefs and exemptions, such as double taxation relief or business investment relief
• You will have to keep detailed records of your foreign income and gains and your remittances to the UK
• You will have to file a Self-Assessment tax return and complete additional pages (form SA109 and form SA106)

The remittance basis is not available to everyone. It is only applicable if you are either:

• Not domiciled in the UK (meaning that your permanent home is outside the UK)
• Not deemed domiciled in the UK (meaning that you have not been resident in the UK for at least 15 out of the previous 20 years)

Your domicile is a complex concept that depends on various factors, such as your place of birth, your father's domicile, your intentions and your connections with different countries. It is not necessarily the same as your nationality or residence.

From the above description, it's easy to understand that if you were UK resident, left the UK and they came back less than 3 full tax years later, you would most probably fail the RBC test if you had been UK resident for a while before you left and you might have to pay the RBC much sooner than expected. Similarly, if you came back to the UK less than 5 full tax years later, you would fail the deemed domicile test much sooner than the 15 years that most first arrivers enjoy.

The Overseas Workday Relief

Another benefit attached to the remittance basis is what's called the Overseas Workday relief. This relief allows you to exclude from UK tax any income from your overseas employment that relates to the days you work outside the UK, as long as you meet certain conditions. The main conditions are:

• You were not UK resident for any of the previous three tax years before the year you start working abroad
• Your overseas employment income is paid into a bank account outside the UK
• You do not remit (bring) any of your overseas employment income to the UK

The OWR can apply for up to three tax years, starting from the year you become UK resident again. This means that if you work abroad for a short period of time (less than three full tax years) and then return to the UK, this won't be enough to reset the clock and this relief won't be available for you.

The Temporary Non-Residence Rules

And finally, another thing to be aware of is a set of rules called the temporary non-residence rules. If you leave the UK and become non-resident for less than five years, you may be caught by those rules. These rules are designed to prevent people from avoiding UK tax by moving abroad temporarily and realising income or gains while they are not UK tax resident.
These rules applies if you were solely UK resident for at least four out of the seven tax years before you left the UK, and you resume sole UK residence within five years of leaving (not tax years but calendar years). The types of gains and income that are subject to this rule are:

• Foreign income and gains that would have been taxable in the UK if the individual had remained resident.
• Gains on assets that were held before leaving the UK and disposed of during the period of temporary non-residence. This does not include gains on UK land and property, which are subject to separate rules and would have been taxed already as those are taxed on all non-residents anyway.
• Income from offshore trusts or companies that are not taxed in the UK on the arising basis.

The income and gains that are subject to the rules are taxed in the year of return to the UK, as if they had arisen in that year. This means that the individual may have to pay tax at a higher rate than they would have if they had remained resident. However, they can also claim relief for any foreign tax paid on the same income or gains. The individual must report the income and gains that are subject to the rules on their Self-Assessment tax return for the year of return.

As you can see becoming non UK tax resident is not as straightforward as it sounds and even if you manage to do it, coming back to the UK too quickly will have tax implications that someone coming into the UK for the first time might not have. It's therefore important to understand how all the different tax reliefs and anti-avoidance rules might affect you if it is your intention to break your UK residence for a short period of time.