Tuesday, 20 December 2011

Have you NOT lost your UK-resident status by going abroad?

These words are important to decide in which country a person pays income and capital gains tax: Residency, ordinary residence and domicile. The rules have been laid out by court cases over the years, but no definite legislation exists (statutory residence test comes into effect from April 2012), hence a lot of grey stuff at the moment!

There have been two cases recently, which (although different between them) (Gaines Cooper, Davies & James), seem to have moved the goalposts in the taxman's favour and made it more difficult for taxpayers to benefit from non-residency.

The critical question for many people who emigrate to another country is: When do I lose my UK-residency status? The answer should be straight forward by reading the taxman's guidance as contained in their IR20: From the day of departure if your move abroad is permanent or for at least 3 years or for a settled purpose and in all cases you have been absent for a whole tax year (with any visits to the UK totalling less than 183 days in any tax year and averaging less than 91 days per tax year over a four-year period).

The difficult part is, defining "permanent" . The HMRC seems to interpret the "going abroad" test very strictly, as a distinct break from the UK (incorporating taking up home permanently in a different country and breaking significant links with the UK) as opposed to just a mere change in circumstances (e.g. accommodation) for a number of years.

When it comes to employment taken up abroad, by concession IR20 states that you become non-UK resident if you are employed abroad for a complete tax year (the understanding has been so far that if not a complete tax year of employment in the year of leaving, then reliance could be placed on having full-time employment in the whole of the next tax year). Again, non-residency begins for date of departure if conditions are satisfied. The Supreme Court, however, in the Davies & James case saw that you have to be working full time for the whole of the relevant tax year in which a capital gain arises to qualify for non-residence status for capital gains tax!

I think what these two cases have done is that, unless you fit precisely into the words or examples given by the taxman in IR20 or HMRC6), you cannot expect the courts to extend the HMRC guidance to cover your non-residency claim, especially when there is a lot of tax at stake!

Bottom line is, some taxpayers, who have left the UK to escape UK income tax or capital gains tax, may have never left the UK for those taxes and they don't even know it! For example, those who left the UK for 5 complete tax years to escape capital gains tax on gains that arose in the tax year of their departure and worked as full-time employees abroad, may find to their detriment that the 5-year period never commenced!

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