HMRC extends the length of absence required to achieve non-UK residence
The “temporary non-residence rules” are rules designed to ensure that if a person becomes non-resident for a (relatively) short period in order to realise gains, generate income or make remittances at a time when they are non-resident, these gains and income are visited on them when they return, resulting in tax.
Before 6 April 2013, it was possible to avoid coming within the temporary non-residence rules by remaining non-UK tax resident for five complete tax years. The new rules that have been in force since that date are drafted slightly differently and are, in many ways, more favourable to individuals who leave the UK and subsequently return. However, a quirk in the details of the legislation means that, in certain circumstances, it may now be necessary to remain non-UK resident, in accordance with the new statutory residence test (the SRT), for six complete tax years to avoid the application of the temporary non-residence rules.
The new rules
The new rules, which apply where the year of departure is 2013-14 or later, state that an individual is to be regarded as temporarily non-resident if the temporary period of non-residence is 5 years or less. This is a change from the previous temporary non-residence provisions, which applied if there are fewer than 5 tax years between the year of departure and the year of return.
A significant advantage of the new rules is that they will apply more favourably to individual who either (a) is entitled to split year treatment in the UK tax year of departure or return; or (b) is considered tax resident in another jurisdiction with which the UK has a double tax treaty in the tax year of departure or return. Such an individual may no longer need to remain non-UK resident (under the SRT) for “five complete tax years”. However, the new legislation gives rise to a problem when an individual is not entitled to split year treatment or treaty relief.
Under the old rules, such an individual could leave the UK on or before 5 April in one year (so as to be non-resident from 6 April), stay outside the UK for 5 complete tax years (being both 5 tax years and 5 calendar years) and return to the UK on or after 6 April (so as to be tax resident from that point), and not fall foul of the temporary non-residence rules. In accordance with the new legislation, such an individual will still be temporarily non-resident as he will be non-tax resident (in accordance with the SRT) for precisely 5 tax years and not more. This appears to mean that such an individual would need to stay non-UK resident for 6 complete tax years.
Having seen nothing to indicate that this was the intention behind the legislation, we had originally assumed that this was an error in the drafting rather than an intentional change of policy. However, to our surprise, HMRC have now confirmed (on an informal basis) that this was a deliberate policy decision.
What is most disappointing about this change is that it was not mentioned expressly in HMRC’s lengthy and detailed consultation on the statutory residence test and is not mentioned in HMRC’s guidance note on the statutory residence test (RDR3). HMRC have also confirmed that they have no intention to update RDR3 to make this point clear.
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