Individuals across the world have experienced restrictions on their freedom of movement following the outbreak of Covid 19. Naturally, such constraints can be highly disruptive to people’s lives, but they may also impact on an individual’s tax residency, and even domicile, status.
In broad terms in England and Wales, a person’s domicile status can be summarised as the country with which an individual is most closely connected and therefore arguably, can be largely subjective. In contrast, tax residency is a much more precise concept which is determined by the statutory residence test (‘SRT’) and is concerned with the number of days in which an individual spends in the UK. Unlike a person’s domicile status, tax residency is determined on a tax year-by-tax year basis. Whilst it is possible to be tax resident in a number of jurisdictions, one can only ever have one domicile at any given time.
The concepts of domicile and tax residency impact directly on the way an individual is subject to Inheritance Tax, Capital Gains Tax and Income Tax in the UK. However, it is the precise nature of the SRT which makes tax residency especially problematic during the Covid 19 pandemic.
The SRT is notoriously complex (in anything but the most straightforward of situations) but the key point to bear in mind is that an individual can only be deemed tax resident in the UK if they do not satisfy the automatic non-UK tests, and one of the following applies:
- they satisfy any of the automatic UK tax resident tests; or
- they satisfy the day count limits depending upon their “sufficient ties” for the tax year in question.
The convoluted “sufficient ties test” takes three key factors into account:
- Number of “ties” the individual has to the UK (which include the family tie, work tie, accommodation tie, 90-day tie and country tie – which only applies to individuals who were UK resident in none of the three tax years before the relevant tax year)
- Number of days the individual has spent in the UK; and
- Whether or not the individual was resident in the UK for one or more of the previous three tax years.
The following table demonstrates how the above factors interact with each other in allowing a person’s tax residency status to be determined.
|Number of days spent in the UK during the tax year||Number of UK ties sufficient for an individual to be UK tax resident in the tax year.|
|16 to 45 days||4 or more||N/A|
|46 to 90 days||3 or more||All 4 (country tie N/A)|
|91 to 120 days||2 or more||3 or more|
|121 to 182 days||1 or more||2 or more|
*A ‘recent’ UK resident is somebody who has been UK tax resident for one or more of the three tax years immediately before the relevant tax year.
**Someone who has not been UK resident in any of the three tax years before the relevant tax year.
It is clear to see why being stuck in one country owing to the Government travel constraints can affect an individual’s day count and, as a result, their tax residency status. Such restrictions may be particularly problematic for individuals who are stuck in foreign jurisdictions during the pandemic, but wish to maintain their UK tax residency status, or in the juxtapose are stuck in the UK and wish not to become UK tax resident.
The restrictions may also affect individuals who, although based in the UK, normally spend significant periods of time working overseas and are therefore able to exclude large amounts of their income generated abroad from the UK Income Tax net. Indeed, individuals with significant investment income and gains offshore annually would also be at risk, as well as those returning UK domiciled of origin persons whose domicile in the UK will automatically re-engage after 1 year of UK tax residency. Being unable to travel overseas for work, or to return home, may mean that these individuals find that their income and gains become subject to UK Income Tax and/or Capital Gains Tax (i.e loss of split year tax treatment and other such favourable treatments).
Fortunately for those individuals who wish to remain outside the UK tax net, especially during Covid19 lockdown, it may be possible for individuals to discount days spent in the UK due to “exceptional circumstances”. HMRC has published guidance on this issue (RDRM11005) which states that whether or not days spent in the UK can be disregarded owing to “exceptional circumstances” depend on the facts in question and will be considered on a case-by-case basis. HMRC has confirmed that if an individual finds themselves in any of the following situations then they will normally qualify as “exceptional circumstances”:
- Quarantined or otherwise advised by a health professional or public health body to self-isolate in the UK as a result of Covid 19
- Advised by a Government official not to travel from the UK as a result of Covid 19
- Unable to leave the UK due to the closure of an international border
- Asked by an employer to return to the UK temporarily as a result of Covid 19.
There is no other published guidance but given the scale and magnitude of the Covid 19 pandemic, HMRC may be more lenient than usual in applying the SRT to determine an individual’s tax residency status; we will only know HMRC’s treatment as cases are reported and the position tested.
One important and key note to add is that the ‘exceptional circumstances ‘provisions can only discount a maximum of 60 days in any tax year, no more. It is also important to note that the provisions do not apply to all of the tests under the SRT.
Therefore, in summary, the discounting of days should not be relied upon as a matter of course and where possible individuals should try to stay within their assessed allowable day count under the SRT so as to have certainty of not becoming UK tax resident.
Finally, the impact of Cvoid-19 may also impact companies whose directors have become UK tax resident as this could impact the tax residency of the company, with heavy consequences.