UK Taxation - Becoming non-UK resident

Recent developments in the UK suggest that it is harder to become non-UK resident for tax purposes. Since UK taxes are normally due on worldwide income and gains made by UK residents, people living outside the UK may find that they have to pay UK taxes on foreign income and gains.

HM Revenue & Customs (HMRC) have won a series of test cases that show the "90 day rule" is not a reliable guide to UK residence. As a result, HMRC has recently updated its guidance to determine whether someone is non-UK resident and is looking far more closely at people who claim non-UK resident status.

One of the benefits of living or working abroad is that it can often mean you pay no UK taxes or at the least, less tax. Therefore, a summary of the current practice is provided below.

To become non-UK resident you need to be able to show that you have left the UK and settled abroad, making a clean break from the UK. When deciding on residence status, HMRC are likely to take into account social, economic and family ties and if your circumstances suggest that your family life is still rooted in the UK, they may take the view that you are still UK residence.

One crumb of comfort comes from working abroad. Provided a person physically leaves the UK to work abroad under a contract of employment for at least one UK tax year, and adheres to the 90-days rule, the non-UK residence status should be applicable under the right circumstances. In accordance with section 830 Income Taxes Act 2007, "living accommodation available in the United Kingdom for the individual's use" should be ignored when considering UK residence.

Despite a foreign employment contract, if a person's lifestyle suggests that he/she is away from the UK on a temporary basis, he/she may continue to be UK resident and the 90 day rule may be irrelevant.

HMRC’s approach to consider a person’s connection to the UK and looking for signs that they have severed all ties with the country when determining non-UK residence may be to stop people avoiding UK taxes by leaving the UK temporarily. But in the absence of a legal definition of “resident” in the UK, we will have to depend on an ever-expanding body of case law and HMRC guidelines to clarify the circumstances when a person can become non-UK resident.

These new guidelines came into effect on 6 April 2009 and are likely to affect individuals who may have moved abroad and still have ties with the UK. If HMRC’s view prevails unchallenged it may be virtually impossible for someone to become non-UK resident without taking the rest of their family with them, regardless of the disruption to other people’s careers or children’s education and social needs. This seems wrong on so many levels it is difficult to know where to begin.

The UK seems to be edging closer to the American system of taxing its passport-holding citizens regardless of where they live in the world. The European Court of Justice might have something to say about that one day. In the meantime, it has become more difficult to let clients know what they need to do to achieve or maintain their non-resident status. “Get out and never come back” just doesn’t sound like the sort of advice they’re looking for.