Global mobility in a nutshell
The world is shrinking, and ‘globe-trotting’ is no longer the privilege of the super-rich. People of relatively modest means are increasingly choosing to live, work and retire in places that may be vastly different from where they were born. The tax and social security implications for such individuals and their trailing families can be complicated. Sound tax planning at the outset is invaluable.
For those leaving or coming to the UK, determining UK tax residence is arguably the starting point for any further international tax planning.
What is tax residence and why does it matter?
Tax residence is a concept that does not rely upon a person’s nationality, place of birth or the location of their home. However, these factors amongst others may be considered in determining a person’s tax residence.
A person’s tax residence status determines the taxing rights of the jurisdiction.
It is important to note that many jurisdictions refer to residence and domicile in an interchangeable manner. This is not the case in the UK. In the UK, domicile is a domestic law concept that determines the UK’s right to levy inheritance tax, and allows for the sheltering of offshore income gains from UK income and capital gains tax.
How is residence status in the UK determined?
Since 6 April 2013 an individual’s residence status in the UK is assessed under domestic law by the Statutory Residence Test (SRT). This is a three part test involving:
- an automatic non-residence test
- an automatic residence test, and
- a sufficient ties test
The sufficient ties test only applies if the individual does not meet the automatic tests. The tests look to day counts, place of work and place of home, each of which have their definitions.
UK tax residence status is determined according to a UK tax year. The way the SRT works often means that an individual’s residence status can only be definitively determined after the end of a tax year.
It is possible in certain circumstances, to split a tax year into resident and non resident parts for the application of particular taxes. It is important to note that this does not change the individual’s residence status but does allow for some taxes to applied to only part of a tax year. The conditions for split year treatment are defined in law and can look to the individual’s residence status in previous and subsequent tax years.
What if an individual is tax resident in more than one country?
If someone is tax resident in more than one country, then they may become subject to tax in both places. It will therefore become necessary to look to international legislation.
The UK has double tax treaties with several countries which are largely modelled on the OECD model convention. Whilst many treaties are similar, it is vitally important to look at each applicable treaty in detail as there can be significant tax implications for what may appear to be a nuanced variation.
The treaties will in the first instance seek to determine a country’s taxing rights where an individual is tax resident in more than one country under their respective domestic laws. This removes the potential for double taxation in most cases.
However, it remains possible that certain forms of income/ gains/ estates/ gifts etc. remain subject to tax in both contracting states. In such circumstances the treaties will allow for mitigation of double taxation, usually by applying a tax credit in one contracting state for taxes suffered in the other.