Tax man wants views on new UK residence test

The UK government has finally published a long-awaited consultation laying out the details of a statutory residency test for individuals.

The test is aimed at removing uncertainty over residence for tax so individuals have clearer opportunities for tax and pension planning.

Publishing the test is an important milestone in tax law because traditionally, HM Revenue and Customs has favoured not to issue statutory definitions but preferred to examine each case on its own merits.

This practice has lead to confusion with several cases going through the courts at the moment – notably an outstanding appeal by millionaire businessman Robert Gaines-Cooper who left the UK in 1985 to live abroad but was judged a UK resident for tax in 2010.

One of the major financial planning issues for ex pats is defining residence for tax – and getting the calculation wrong means unravelling investment and pension planning in the face of massive fines and penalties demanded by HMRC.

For instance, ex pats who believe they are non-UK residents who transfer UK pension funds offshore to a QROPS face a fine of at least 55% of the transfer value of their fund if they are later ruled as UK tax resident.

The new test looks at the ‘quality’ or residence rather than time spent in the UK, which reflects the findings of courts in the latest residence tax cases.

Full details of the proposed three-part statutory residence test are laid out in a consultation document published by HM Treasury called ‘Statutory definition of tax residence: a consultation’.

A copy is available for download here

“By introducing an SRT, the Government aims to make the rules simpler and clearer but the tax residence status of the vast majority of people will be unaffected,” said a Treasury spokesman.

The consultation also covers new proposals for taxation in the UK of foreign nationals.

Both consultations close on September 9, 2011. A summary of responses twill be published in the autumn.

Draft legislation will be published for comment later in 2011 with a view to including final legislation in Finance Bill 2012.