In response to the 2011 Budget, HM Treasury published a consultation document on 17 June 2011 on the proposed introduction of a new statutory residence test, as well as a new statutory definition for ordinary residence.  The consultation period has just closed.

Proposed statutory residence test

The key elements of the proposed statutory residence test are as follows:

1. The test applies to individuals, not companies.

2. The test applies for the purposes of income tax, capital gains tax and inheritance tax.

The proposed statutory residence test consists of three parts: 

PART A – Conclusive non-residence factors

Part A of the test will conclusively determine that an individual is not resident in the UK for a tax year if they fall under any of the following conditions, namely they:

i  were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 45 days in the current tax year; or

ii  were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than ten days in the current tax year; or  

iii  leave the UK to carry out full-time work abroad, provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

PART B – Conclusive residence factors (subject to Part A)

Provided Part A of the test does not apply, an individual will be conclusively resident for the tax year under Part B if they meet any of the following conditions, namely they:

i  are present in the UK for 183 days or more in the tax year; or 

ii  have only one home and that home is in the UK (or have two or more homes and all of these are in the UK); or 

iii  carry out full-time work in the UK. 

PART C – Connection factors

An individual who does not fall within either Part A or Part B will be resident if they satisfy the required number of connection factors. The number of connection factors required varies according to the number of days spent in the UK in the relevant tax year.  The connection factors also depend on whether the individual is arriving in or leaving the UK.  The connection factors include family resident in the UK, accessible accommodation in the UK, work undertaken in the UK, residence in previous tax years and whether more time is spent in the UK than in other countries.

Under the proposed statutory residence test, it will remain possible for individuals to split tax years into periods of residence and non-residence.  However, split-year treatment will only be available if the individual fulfils specific criteria. 

The Government intends to publish draft legislation later this year for inclusion in the Finance Bill 2012. It intends the new test to come into effect on 6 April 2012, which will make it difficult for practitioners to advise with certainty before legislation is in place.

Reaction to the proposals has been divided.  Leading UK barrister Keith Gordon stated to Penningtons: 'I have always been concerned that a statutory residence test that HMRC would be happy with would make it virtually impossible for anyone to lose UK residence status if they had any enduring connections with the UK.  However, if the consensus is that would be a price for certainty (something that we are desperately lacking), then I would not seek to oppose it.'

Individuals who are planning to come to or leave the UK should seek advice on the proposals and how this may affect their treatment for tax purposes.