'Ordinary residence' - a look at the proposed new test
In our last newsletter, we set out the UK government's proposals for a statutory residence test (SRT) for individual taxpayers (see Resources below).
In this newsletter, we look at the Government's proposed changes to the rules surrounding ordinary residence, which were included in the consultation document.
Significance of ordinary residence
Ordinary residence can play a significant part in determining an individual's tax liability since someone who is not ordinarily resident can remove from the UK tax net non-UK source income that they do not bring into the UK. For example, relief from tax is available in respect of income earned on business trips outside the UK provided it is not paid in or brought into the UK.
Currently, individuals are regarded as ordinarily resident in the UK if they live here permanently or if their presence here has a settled purpose. Someone coming to the UK will be regarded as ordinarily resident here if their intention is to remain here for 3 years or more or if they buy a house or rent one out on a long term lease of 3 years or more. An individual who is not ordinarily resident will become ordinarily resident from the beginning of the tax year in which the third anniversary of their arrival falls or from the beginning of the tax year where their presence becomes more long term (e.g. buys a house, intends to stay for 3 years or more).
The Government's proposals
The Government has put forward two options. Under both, the Government's preference is that it should only be possible for individuals who are not domiciled in the UK to be not ordinarily resident.
- Abolish ordinary residence for all purposes except overseas workday relief and create a statutory definition of 'not ordinarily resident'
- Retain 'ordinary residence' for all current tax practices and create a statutory definition of 'ordinary residence'.
The definition of not ordinary resident and ordinary residence would be determined by reference to the same factors.
Where a statutory definition of 'not ordinarily resident' is introduced it will apply to anyone who has been not resident in all of the previous five years, unless they are UK resident on the basis that their only home (or all their homes if more than one) is in the UK. Although the document does not say so specifically, it has to be assumed that the five year residence test refers to the five years prior to an individual's arrival in the UK otherwise not ordinarily resident status would only be available for the year of arrival.
Where a statutory definition of 'ordinary residence' is introduced, it will apply to all UK residents who have come to live permanently in the UK or have been resident here in any of the previous five tax years.
Someone who is not ordinarily resident will be regarded as such for the year of arrival and for a maximum of the two tax years following the year of arrival.
It can be assumed that the Government would wish to treat long term visitors to the UK as ordinarily resident. However, while the document makes clear the Government's wish that those who come here on a permanent basis are treated as ordinarily resident from the outset, other long term visitors are not specifically mentioned.
It is also difficult to see how it can be established that someone has come to the UK on a permanent basis (or otherwise) other than by considering the person's intentions on arrival as is the case currently. This does not sit well with the Government's stated desire to remove intention as a factor in determining whether an individual is ordinarily resident or not. If the aim is to treat long term visitors as ordinarily resident, it seems that 'intention' is a determining factor in such cases also.
Absent 'intention' as a determining factor, the proposed statutory definitions could also lead to some unwanted anomalies. For example, someone who comes to the UK for the first time and who retains a home overseas would be not ordinarily resident under the proposed statutory definition regardless of how long they intend to stay. On the other hand, someone who comes to the UK for the first time and for a period of two years and who has given up rented accommodation in the home location for rented accommodation in the UK will be ordinarily resident in the UK. This would seem to be contrary to the Government's aim.
There is a clear aim to restrict further the group of individuals who may be regarded as not ordinarily resident in the UK. It follows then that the aim is to regard more people as ordinarily resident. Since there is generally a higher tax take from people who are ordinarily resident as opposed to not ordinarily resident, it should be recognised that these proposals also have a revenue gathering purpose which is reinforced by the proposal in option 1 to abolish not ordinarily status for all tax purposes except overseas workday relief.
For further information or to discuss any of the issues raised, please contact John Mooney on +44 20 3051 5711.