Comment: The pandemic has dramatically complicated issues of tax residency

We all know that the residency status and the domicile of an individual can have a dramatic impact on their tax position, so it is important to understand what impacts both. As a result of the covid-19 pandemic many people have been caught the wrong side of borders and for some this could be expensive. Neil Jones explains the added complexities affecting residency status, and outlines how to stay on the right track

In the normal course of events the ability, or inability, to travel to and from the UK would have consequences, however fortunately HMRC issued guidance. This deals with the exceptional circumstances presented by covid designed to help advisers and individuals understand the impact on both residency and domicile

Before looking at the impact of the guidance, we need to understand how residency and domicile work.

Since 2013 an individual's residency is determined by the Statutory Residence Test (SRT).

This test starts with conditions to establish if an individual is non-UK resident. If they were resident in the UK for at least one of the last three tax years and present for fewer than 16 days in the UK in the current tax year, or were not resident in the UK in the three previous tax years and present in the UK for fewer than 46 days in the current tax year, then they would be classed as non-resident. This would also be the case if they worked overseas full-time and are present in the UK for fewer than 91 days, and work fewer than 31 days in the UK.

If they fail these conditions, then there are three tests to establish whether the individual is UK resident. This would be the case if they were present for 183 days or more in the UK in the current tax year, have a home in the UK where they were present for more than 30 days or work "full-time" in the UK. Meeting any of these tests would mean they would qualify as a UK resident.

If they failed the tests for both non-UK residency and UK residency then there are a series of tests around ties to the UK based on whether they are leaving or arriving in the UK. The ‘sufficient ties' tests produce a result depending on the number of days the individual has been in the UK; 183 days or more and they are resident.

If borders are closed or international travel restricted, you can see that it could be easy for a non-UK resident to find themselves unintentionally being treated as a UK resident.

It can be harder to change domicile as this is where an individual considers home to be. Somebody with a UK domicile will find it hard to remove that domicile unless they sever all ties with the UK and can clearly demonstrate a move to a new country, making it their permanent home. Therefore, being resident in a foreign country for too long will not necessarily change a domicile status.

For those who have come to the UK, they will retain their domicile unless they intend to make the UK their permanent home. This is therefore largely unaffected by the Covid restrictions as it is a lifestyle choice rather than something forced upon them.

There is also the ability for someone to be deemed-UK domicile and this applies when they have been resident in the UK for 15 of the previous 20 tax years. Those with this status do not have a UK domicile but are treated the same regarding income tax, capital gains tax and inheritance tax. So, in the normal course of events, if someone comes to the UK and stays longer than planned then they could be treated as a UK domicile.

So what contingency is in place to help those who have been impacted by the travel restrictions imposed by Covid lockdowns, both in the UK and abroad?

The legislation allows for up to 60 days to be spent in the UK for ‘exceptional circumstances' and HMRC have confirmed that there are certain Covid-related circumstances that they would consider to be exceptional. These include where the individual:

  • is quarantined or advised by a health professional or public health guidance to self-isolate in the UK due to Covid
  • receives official Government advice not to travel from the UK as a result of the virus
  • is unable to leave the UK as a result of the closure of international borders, or
  • is asked by their employer to return to the UK temporarily as a result of the virus.

The individual claiming days due to exceptional circumstances must be able to demonstrate that remaining in the UK is beyond their control and that they are prevented from leaving. They need to make every effort to leave once the relevant restrictions have been lifted.

The guidance is included in the Residence, Domicile and Remittance Basis Manual under section RDRM11005.

Where a non-UK resident is in the UK due to lockdown restrictions and works, HMRC will not tax the income from those days worked provided that the income is taxable in the individual's home country and again the individual leaves the UK at the earliest opportunity.

The individual will need to demonstrate that they were unable to leave the UK and any days spent in the UK where they worked more than 3 hours will count towards the 30 UK workdays allowed as part of the SRT, even though they are not taxable.

The need to establish and clarify the residency status of an individual is important as it impacts their tax position and the impact of the pandemic and various lockdowns can mean they are caught the wrong side of borders.

For individuals who are approaching the required 15 years of UK residency but were planning on leaving before becoming deemed-UK domicile it is important to make sure that they are aware of the implications as as this can have a much more dramatic impact on tax. 

While becoming deemed-UK domicile can have a much more dramatic impact on tax, for those who are approaching the required 15 years of UK residency it is important to make sure that they are aware of the implications.

Neil Jones is a tax and estate planning manager at Canada Life

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