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Owen Clutton: When is a resident not a resident?

Author: Owen Clutton

Published: 22/11/2007 00:00

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The definition of what is meant by UK residence is of central importance for UK taxation purposes. Whether a person is UK-resident or not will determine, in many cases, their liability to income tax and capital gains tax and also to some extent their inheritance tax status. Residence will be even more important when the new proposals announced in the Pre-Budget Report are introduced.

It is surprising that there is no specific test laid down in the taxation legislation. The concept of residence in legal terms derives from a number of decisions of the courts, many of which were heard in the early 20th century. While there are indications in those cases on the factors that need to be taken into account in determining residence there is no specific concise test laid down. The courts have held that the question of residence is one of degree and there is no technical or special meaning attached for tax purposes.

To give more certainty, HM Revenue & Customs set out in its booklet IR20 the well-known tests that a person will be classified a UK resident as a short term visitor if 1) the person is in the UK for 183 days or more in a tax year; or 2) the person visits the UK regularly and, 3) after four years, the visits during those years averaged 91 days or more per tax year.

Generally days of arrival and departure are not counted as days of presence, although that rule is not universally applied. However, in the Pre-Budget Report of October 2007 it was announced that days of arrival and departure will be counted as days of presence in the UK.

In practice, IR20 has been used by lawyers and accountants as the basis upon which they would advise on the length of time that a person could stay in the UK without becoming a UK resident. The rules in IR20 are not, however, of binding legal force and there is an element of uncertainty, particularly in marginal cases.

In the light of the uncertainty arising from the lack of clear definition, there is a strong argument in favour of Parliament bringing into force a statutory test as to when a person will become UK resident. This could be based on a day count test, which is an approach adopted by a number of other countries including the US and the Republic of Ireland.

One test that might be favoured is that of the US where a person would be allowed 180 days per tax year before becoming resident. The 180 days would be made up of all the days in the calendar year, one third of the days in the preceding year and one-sixth of the days in the year before that. For example, a person who was present in the UK for 50 days in year one, 120 days in year two and 138 in year three would be resident under a US-style test. However, a person present for less than 30 days in a year would not be resident in that year. Days of arrival and departure would be treated as days of presence in the UK which would seem more appropriate if coupled with a higher day count threshold.

If a statutory day count test were adopted for residence this could be followed through in a test for ordinary residence. In the Republic of Ireland a person is treated as ordinarily resident after being resident according to the statutory test for three years.

In the light of this, there is certainly an argument that in the 21st century — there being far greater mobility than before — a clear test for residence should be enacted by Parliament. This is something which the Society of Trust and Estates Practitioners has advocated in the past and which it will continue to do.

Owen Clutton is a member of the technical committee of the Society of Trust and Estates Practitioners and a partner at Macfarlanes.

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Owen Clutton: When is a resident not a resident?

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