RESIDENCE OF INDIVIDUALS  

There is no statutory definition of residence – or indeed ordinary residence - for UK tax purposes. Yet these are fundamental concepts. An individual is chargeable to UK income tax only if either he is resident in the UK or (in relation to some types of income) the income derives from a UK source. An individual is chargeable to capital gains tax only if he is either resident or ordinarily resident in the UK.

Until a couple of years ago the lack of a definition was largely compensated for by HMRC’s guidance booklet on residence, IR 20. This set out HMRC’s understanding of the law and in practice most people were content to follow it. However it became apparent a couple of years ago that HMRC’s view had changed, particularly where a person goes abroad intending to stay overseas for at least three years but retains accommodation available for his use in the UK. It used to be generally accepted that such a person ceased to be UK resident, usually from the date of his departure, provided that his visits back to the UK did not exceed on average 90 days a year. Most advisors urged caution and recommended that a person should keep his visits to the UK to a minimum in the first couple of years and if possible not to visit the UK at all in the first full tax year abroad. However if this were done one could rely on HMRC’s 90 day test.

HMRC’s new approach has made two major changes. Firstly they say that the 90 day test does not apply until such time as the individual has demonstrated that he ceased to be UK resident. To do so he needs to have gone abroad permanently or for a settled purpose. In looking at whether someone has gone abroad for a settled purpose HMRC look at all of the surrounding circumstances. This will include whether he has retained accommodation in the UK, whether he has family remaining in the UK, what business interests he retains in the UK and what other connections he has retained in the UK. Secondly they now normally count as a day in the UK any day on which the person is here at midnight, whereas IR 35 required a day to be counted only if it was spent entirely in the UK.

The Gaines-Cooper Case

 The first case that they litigated under this new procedure was R Gaines-Cooper v HMRC. Mr Gaines-Cooper had left the UK in 1976 (yes, that’s right, over 30 years ago) and claimed to have become resident in the Seychelles. Mr Gaines-Cooper was an international businessman with businesses in a number of countries, including both the UK and the Seychelles, and tended to live where a particular business needed his intention. He had houses in both the UK and the Seychelles. He married in 1979 and he and his wife set up their matrimonial home in California. The marriage did not last long. Mr Gaines-Cooper divorced in 1986 and seems to have moved his home back to the Seychelles. During the period 1976 to 1980 his UK house was let, so not available for his use, but from 1980 he used it whenever he came to the UK. In 1993 he remarried, to a Seychellois lady that he had met in the Seychelles in 1975. The marriage took place in England but there was then a blessing ceremony in Mauritius (which is near the Seychelles).

The tax case was concerned with the period from 1992/93 to 2003/04. During that period Mr Gaines –Cooper spent an average of 58 days in the UK (counting days on the basis set out in IR 20). However HMRC put forward a couple of alternative methods of counting days under which Mr Gaines-Cooper’s days in the UK would have averaged around 130 days a year. Mr Gaines-Cooper was held to be UK resident throughout the period from 1992/93. This was not based only on the number of days he spent here. Mrs Gaines-Cooper, although Seychellois, liked living in the UK and accordingly she (and their son) lived mainly here although they visited Mr Gaines-Cooper in the Seychelles from time to time. Mr Gaines-Cooper had used the UK address when applying for a gun licence. The appeal tribunal regarded as significant the fact that nearly all of Mr Gaines-Cooper’s connections with the UK were located in a comparatively small area of Berkshire/Oxfordshire. In that small area he was born and went to school and his mother lived there until her death in 2004. Also in that same small area he married (twice); purchased two houses; invested in at least two farms; had business offices; had a number of old friends; attended Royal Ascot; and attended shooting events. The tribunal also placed significance on the facts that Mr Gaines-Cooper had not applied for Seychelles citizenship and he used UK solicitors for his will.

The “Common Law” Tests

In a subsequent case, Grace v HMRC the judge set out a summary of the legal principles that can be derived from the many decided cases on residence over the last century. This is as follows:

i) The word "reside" is a familiar English word which means "to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place": Levene v Commissioners of Inland Revenue [1928] AC 217, 13 TC 486, 505, 97 LJKB 377. This is the definition taken from the Oxford English Dictionary in 1928, and is still the definition in the current on-line edition;

ii) Physical presence in a particular place does not necessarily amount to residence in that place where, for example, a person’s physical presence there is no more than a stop gap measure: Goodwin v Curtis [1998] STC 475, 70 TC 478, 510;

iii) In considering whether a person’s presence in a particular place amounts to residence there, one must consider the amount of time that he spends in that place, the nature of his presence there and his connection with that place: Commissioners of Inland Revenue v Zorab (1926) 11 TC 289, 291;

iv) Residence in a place connotes some degree of permanence, some degree of continuity or some expectation of continuity: Fox v Stirk [1970] 2 QB 463, 477, [1970] 3 All ER 7, 68 LGR 644; Goodwin v Curtis [1998] STC 475, 70 TC 478, 510;

v) However, short but regular periods of physical presence may amount to residence, especially if they stem from performance of a continuous obligation (such as business obligations) and the sequence of visits excludes the elements of chance and of occasion: Lysaght v Commissioners of Inland Revenue [1927] 2 KB 55, 13 TC 511, 529, 6 ATC 326;

vi) Although a person can have only one domicile at a time, he may simultaneously reside in more than one place, or in more than one country: Levene v Commissioners of Inland Revenue [1928] AC 217, 13 TC 486, 505, 97 LJKB 377;

vii) "Ordinarily resident" refers to a person’s abode in a particular place or country which he has adopted voluntarily and for settled purposes as part of the regular order of his life, whether of short or long duration: R v Barnet LBC ex parte Shah [1983] 2 AC 309, 343, [1983] 1 All ER 226, 81 LGR 305;

viii) Just as a person may be resident in two countries at the same time, he may be ordinarily resident in two countries at the same time: Re Norris (1888) 5 Morr 111, 4 TLR 452; R v Barnet LBC ex parte Shah [1983] 2 AC 309, 342;

ix) It is wrong to conduct a search for the place where a person has his permanent base or centre adopted for general purposes; or, in other words to look for his "real home": R v Barnet LBC ex parte Shah [1983] 2 AC 309, 345 and 348;

x) There are only two respects in which a person’s state of mind is relevant in determining ordinary residence. First, the residence must be voluntarily adopted; and second, there must be a degree of settled purpose: R v Barnet LBC ex parte Shah [1983] 2 AC 309, 344;

xi) Although residence must be voluntarily adopted, a residence dictated by the exigencies of business will count as voluntary residence: Lysaght v Commissioners of Inland Revenue (1928) 13 TC 511, 535;

xii) The purpose, while settled, may be for a limited period; and the relevant purposes may include education, business or profession as well as a love of a place: R v Barnet LBC ex parte Shah [1983] 2 AC 309, 344;

xiii) Where a person has had his sole residence in the United Kingdom he is unlikely to be held to have ceased to reside in the United Kingdom (or to have "left" the United Kingdom) unless there has been a definite break in his pattern of life: Re Combe (1932) 17 TC 405, 411.

As these are principles rather than rules, it is difficult for an individual to apply them to his own particular circumstances and be confident that the conclusion that he draws is likely to be shared by HMRC. That is why in the past people relied on IR 20. It seemed to set out a set of rules that could be fairly readily understood.

HMRC’s New Guidance

Last month HMRC formally withdrew IR 20. They have replaced it with a new booklet, HMRC6, which, of course, reflects their new approach. HMRC6 gives the following guidance:

● There are many different factors which will determine whether a person is resident in the UK during a tax year. It is not simply a question of the number of days that the person is physically present in the UK during a tax year, although this is an important consideration (para 2.2).

● Different considerations apply depending on whether the person is arriving in the UK for the first time from another country or whether he has been resident in the UK in earlier years (para 2.2).

● From 6 April 2008, when considering days of presence in the UK, all of the days in which the person is present at the end of the day (i.e. at midnight) must be included (para 2.2).

● A person will always be resident in the UK in any tax year in which he is physically present in the UK for more than 183 days. There are no exceptions to this (para 2.2).

● It is possible to be resident in the UK and some other country (or countries) at the same time (para 1.4). However, if the other country is one with which the UK has a double taxation treaty the agreement is likely to contain a ‘tie-breaker clause’ which might prevent the UK as treating the individual as UK resident for the purpose of the agreement. Double tax agreements do not usually deal with income from third countries.

● Strictly speaking, a person is UK resident for the whole of a tax year if he is resident here for any part of it (para 1.5). However, extra-statutory concession A11 provides that if an individual ceases to reside in the UK and he has left for permanent residence abroad (or comes to the UK to take up permanent residence or to stay for at least two years) he will be taxed only for the part of the year up to the date of his departure (or from the date of his arrival). This is known as the split year concession. It will not apply if the individual remains ordinarily resident in the UK (see below) after his departure or was ordinarily resident in the UK prior to becoming resident here. HMRC6 states that ESC A11 applies if a person has been resident in the UK and ‘leaves to live abroad permanently or for a period of at least three years’ There is a further concession (ESC A78) which allows split year treatment for a person accompanying a spouse or civil partner when they leave the UK to work full-time abroad, or in the year of return to the UK (para 2.4). . There is a corresponding CGT concession (ESC D2) but this is much more limited. It does not apply where a person leaves the UK (unless he was not resident and not ordinarily resident here for the whole of at least four out of the last seven tax years preceding that in which he leaves the UK). It applies to a person coming to the UK only if he has not been either resident or ordinarily resident in the UK at any time during the five tax years preceding that in which he becomes resident here.

● If a person comes to the UK to live here permanently or to remain here for three years or more, he will be resident and ordinarily resident from the date of arrival. “By saying that you have come here … for at least three years, you have made it clear that you are not simply visiting the UK” (para 7.2).

● If a person whose home has been abroad comes to the UK as a student for less than four years for a period of education or study he will be resident here, but not ordinarily resident as long as he does not own or buy (or rent for three years) accommodation here and when he leaves the UK he is not planning to return here regularly for visits that average over 90 days in a tax year (para 7.3).

● If a person whose home has been abroad comes to the UK intending to remain for less than three years, he may simply be visiting (para 7.4). Such a person will be resident and ordinarily resident in the UK from the fifth year he visits if his visits average over 90 days or from such earlier year as he realises that his visits will exceed a 90-day average (para 7.5).

● A person is not regarded as simply visiting if he comes to the UK for a purpose which means that he will be remaining here for at least two years (e.g. an employment). Such a person will be resident (but not necessarily ordinarily resident) from the day of his arrival (para 7.4).

● If a person comes to the UK voluntarily and for a settled purpose, he will be ordinarily resident from the time he comes to the UK. If he owns or buys (or rents for over three years) accommodation in the year of arrival, that may be an indication that his presence in the UK forms part of the regular and habitual mode of his life for the time being and so he is ordinarily resident from when he arrives (but if he already owned accommodation here and sells it within three years of his arrival he will not be ordinarily resident here) (para 7.7.3). He will also not normally be regarded as ordinarily resident if he actually leaves the UK within three years of arrival (para 7.7.3).

● If a person does not become ordinarily resident when he first comes to the UK he will do so from the beginning of the tax year in which the third anniversary of his arrival falls (e.g. a person who comes to the UK on 4 April 2010 will become ordinarily resident from 6 April 2012 as 4 April 2013 falls in 2012/13) (para 7.7.3). He can become ordinarily resident here earlier (from the beginning of the tax year in which the trigger event falls) if he makes a decision to stay for three or more years or buys a property here (para 7.7.4).

● If a person leaves the UK permanently (i.e. to live abroad and not return) or indefinitely (i.e. to live abroad for at least three years but acknowledging that he might eventually return to live here) the act of going abroad does not mean that he will automatically become non-resident or non-ordinary resident. This depends on a number of factors including

• the reason he has left the UK (e.g. to work or live abroad permanently),
• what visits he makes to the UK after he has left, and
• what connections he keeps in the UK such as family, property, business and social connections

(para 8.1).

● If a person leaves the UK permanently or indefinitely he will become non-resident and non-ordinary resident from the time of his departure only if he has physically left the UK for the purpose stated. If he goes abroad on holiday until he moves into his new home or begins his overseas employment, he is regarded as remaining resident here during his holiday period (para 8.2).

● Even if a person has left the UK permanently or indefinitely he will remain resident and ordinarily resident in the UK if his visits back average over 90 days (para 8.2).

● A person will be ordinarily resident in the UK if all of:

a) he has come to the UK voluntarily (which would include at the request of his employer),

b) his presence here has enough continuity to be properly described as settled (business, employment and family all provide a settled purpose), and

c) his presence in the UK forms part of the regular and habitual mode of his life for the time being (para 3.2).

● A person who leaves the UK to work full-time abroad under a contract of employment is treated as not resident and not ordinarily resident in the UK if his absence from the UK and the employment abroad both last for at least a whole tax year (and visits back do not breach the 183 or 91 day rule) (para 8.5). This is considered further below.

● In applying the 90- and 183-day tests a day must be counted as a day of presence in the UK if the individual is physically present here at midnight on that day. There is an exception if the individual is in transit (ie he arrives in the UK as a passenger and departs from the UK on the next day) and while in the UK he does not engage in activities that are to a substantial extent unrelated to his passage through the UK. HMRC appear to consider that any activity that the individual plans to carry out while he is in transit will prevent the exception applying.

What Does This All Mean?

On the basis of HMRC6 the best advice that we can give is as follows:

a) An individual who goes abroad to work full-time under a contract of employment that spans at least one complete tax year will (as in the past) be regarded as being both non- resident and non-ordinarily resident from the day he leaves until the day he eventually returns. This also applies to a self-employed individual who works full time overseas for such a period. HMRC regard a person as working full-time only if he works a five day week covering the hours of work that constitute the normal working day in the country in which he works. Where a person qualifies as non resident under this test an accompanying spouse will also be regarded as non resident.

b) An individual who does not meet the above conditions will not be regarded as non-resident until such time as he can show that he has left the UK for a settled purpose. This probably requires him to demonstrate that there had been a significant change in his normal pattern of life. HMRC will look in particular at the reason he has left the UK (e.g. to work or live abroad permanently), what visits he makes to the UK after he has left, and what connections he keeps in the UK such as family, property, business and social connections. However that is not an exhaustive list. They will be looking to see what connections he has retained with the UK and why he has done so.

c) In the light of this a person should seek to sever as many connections with the UK as possible. In particular it is dangerous to retain accommodation available for use in the UK. This does not mean only that it is inadvisable to own a UK property. It is also inadvisable to have the use of a property owned by a trust or a relative. It is acceptable to stay with family members when visiting the UK (unless the visitor owns the relative’s house) but inadvisable to keep personal possessions at the relative’s house.

d) It is likely to be very difficult in future for one party to a marriage to seek to establish non-residence if the other will remain in the UK. This is likely to apply irrespective of the reason that the spouse remains here (unless the two are separated in circumstances that are likely to be permanent). Accordingly it may be dangerous for a former UK resident to have his children educated here if that will involve his wife maintaining a family home here and spending a significant amount of time in the UK in order to be close on hand in case of emergency.

e) A person who claims to be resident nowhere is likely to find it very difficult to demonstrate that he has left the UK unless he severs all connections with the UK.

f) A person who emigrates to a country with which the UK has a full double tax agreement will be able to claim the benefit of the “tiebreaker” clause of that agreement provided that he genuinely intends to live there. A person who uses such a country as a convenience, obtaining a residence permit but spending little time in the country should still be bale to claim the benefit of the double tax agreement provided that he remains tax resident in the other country. The tiebreaker tests do not look at the amount of time spent in the two countries. A person who emigrates to a tax haven is likely to find it more difficult to establish that he has left the UK.

g) There is a problem where in order to avoid capital gains tax a person emigrates to a country which itself taxes capital gains. It is no longer possible to spend a little time in a third country between leaving the UK and arriving in the new country as HMRC will not agree that the individual has “left” the UK until he arrives in the new country in which he intends to live long term. h) It sees likely that a person who was born overseas and leaves the UK to return to his own country will find it much easier to establish that he has left the UK than other people.

i) As previously, a person who comes to the UK to work for three years or less should not buy a house here or rent one under a long lease. A succession of 12 month leases is recommended.

j) If the individual is prepared to go abroad and not visit the UK at all during a tax year, and to live full time in a single place during that year, he should still be able to rely on the court decision in Reed v Clark that a year is a long enough period to establish both non-residence and non-ordinary residence.

k) As HMRC’s new approach is largely based on a person’s intentions and reasons for going abroad, spending time in the UK and keeping connections with the UK, it is likely to be important to document those intentions. Obviously it would look odd for an individual to minute his decisions. However a letter to us, or to a friend or business associate, explaining such reasons is good contemporary evidence.

None of the above are necessary fatal. They represent the ideal circumstances. It is the overall picture that HMRC draw from the facts that will be decisive.

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