Residence is a curious beast. For most countries, it determines what income and gains are taxable, and where, with many countries taxing residents on their worldwide income, and often gains. Some countries have a relatively simple system – spend six months there a tax year and you are resident. Others include day counting over several years, the application of several tests, or considering where your main home is located.
And then there is the UK.
Until April 2013, the UK had no statutory residence test. Residence was based on ‘judge made’ law, formed over a number of years from landmark cases. They cross-referred to earlier cases in different levels of courts, resulting in grey areas and causing problems for anyone trying to traverse the ‘residency minefield’. The basic premise was that you had to make a distinct break with the UK, and spend less than 91 days there on average, but in practice it was more complicated than that.
The new Statutory Residence Test, although complex, can generate a level of certainty about an individual’s tax position going forward which was absent before.
For at least three years, however, the old and new rules are living side by side. For those affected, the position during the three years prior April 2013 is relevant to how the new test is applied.
Even now, HM Revenue & Customs (HRMC) are catching up with people over their residence position several years ago. There are two recent ‘landmark’ cases: HMRC v Rumbelow, and Glyn v HMRC. Both left the UK specifically to take advantage of different tax breaks, and both took professional advice.
Mr and Mrs Rumbelow initially went to Belgium, then spent time in Portugal. They visited the UK frequently, and although they contended they did not overstay, HMRC used their frequent banking activity in the UK in evidence against them. It seems they retained business interests in the UK, winding these down gradually, and their 15 year old daughter (her age at their departure) remained UK resident. They retained their fully furnished UK property for their personal use and kept a fully insured car there.
Mr and Mrs Glyn moved to Monaco in 2005. They spent at least 200 days there during the relevant year. Although they returned to the UK frequently, even up to 22 occasions one year, they were always within the 90-day period. They also retained their UK cars and, interestingly, applied for a car parking permit. They also returned to the UK regularly to be with family and friends for religious festivals, having regular Friday dinners with family.
So what are the differences between these two couples?
The record keeping: Mr and Mrs Rumbelow did not keep adequate records and could not always prove where they were. Mr and Mrs Glyn had excellent, contemporaneous records, including boarding cards, bank and credit card statements and diaries – all missing for extensive periods in the Rumbelow’s evidence.
Another is severing ties such as work and business. Mr Glyn’s business was being wound up. He did not return to the UK for a “settled purpose” such as work (although the Revenue tried to claim the Friday night dinners were a settled purpose). He moved, with his wife, directly to Monaco. Mr and Mrs Rumbelow did not settle in Belgium or Portugal initially, returned to the UK for business purposes and had ongoing business interests there throughout the period.
Finally was the need to have both achieved a “distinct” break from the UK and being able to show they were moving for a “settled purpose”. The Rumbelows left the UK and spent some time travelling around Belgium before renting an apartment there, spending very little time in Belgium. They visited their daughter (a minor) in the UK, staying in the family home. The First Tier Tax Tribunal considered there was sufficient evidence that they were resident in the UK for at least two of the years they claimed to have been non-UK resident, and insufficient evidence that they had been non-resident for the remaining years. It held that they had not sufficiently loosened their ties, and that there was no distinct break in the pattern of their lives.
Conversely, Mr and Mrs Glyn had changed the pattern of their lives, loosened their social and family ties, and took up ‘quality’ residence in Monaco.
The morals of these two cautionary tales? Take professional advice, follow it, and keep evidence of your movements so that, even if challenged, you should be able to prove your case. The difference? Mr and Mrs Rumbelow have a £600,000 tax liability in the UK; Mr Glyn has saved around £5.5 million in tax.
Good advice works; not following it can cost you. Can you afford not to take advice?
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarized; an individual should take personalized advice.
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This article was written on the 05th of December, 2013.