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How U.K. Tax Residency Rules Could Impact You

As the U.K. implements its new set of tax residency rules, expats living in the U.K. should be aware that they could end up being categorized as tax residents who are responsible for additional U.K. tax payments.

"If a person is a U.K. tax resident under the new tests, they are liable to the U.K. tax authorities for U.K. taxes on their worldwide income and gains - subject to any double tax treaties which may apply," says Donald Simpson, a partner at Turcan Connell, a London and Edinburgh firm that specializes in legal, wealth management and tax issues. "The consequences for having too many ties to the U.K. or spending too many days in the U.K. could be very significant."

Until now, there was no clear definition of what constituted residency according to tax laws, and each situation was evaluated on a case-by-case basis in the courts. Here's what expats with U.K. visas should know.

The more ties an individual has, the fewer days they’re allowed to stay in the U.K. before becoming a tax resident.

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The Old Rule vs. the New Rule

Previously, a person was generally considered a tax resident if he or she spent more than 183 days in the U.K. during Great Britain and Northern Ireland's tax year. Or someone could be categorized as a tax resident if he or she was in the U.K. for more than 90 days per year over a four-year period, Simpson says.

Now, says Ronnie Ludwig, partner at Saffery Champness, a U.K.-based chartered accountancy, individuals are automatically considered U.K. residents if they meet any one of these criteria:

·      Spend 183 days or more in the U.K.

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·      Have their only home located in the U.K.

·      Work full time in the U.K. for at least 276 days

The Quality of Time Spent in the U.K.

The new statutory residence test has automatic tests for determining if someone is a non-U.K. resident or is a tax resident in the U.K. If the automatic tests are not satisfied, under the new rules, the overall "quality" of time spent in the U.K. will also be taken into account. This is now set out in legislation, Simpson says.  

Her Majesty's Revenue and Customs (HMRC) now has a series of "connection factor" tests to evaluate a person's ties to the U.K. The number of tests will vary depending on individual circumstances, according to HM Treasury.[1]

For example, one test probes whether the expat has a spouse, civil partner or children residing in the U.K. Another test looks at whether the individual has "accessible accommodation in the UK and makes use of it during the tax year."[1]

Finally, the HMRC will look at whether the individual spends more time in the U.K. than in any other countries. The more ties an individual has, the fewer days they're allowed to stay in the U.K. before becoming a tax resident.[1]

How to Limit Residency Ties

In some cases it's possible to limit the ties an individual has to the U.K. For example Ludwig says if an American owns property in the U.K. for foreign investment purposes, it may be wise to lease out the property and ensure that the lease "covers a full U.K. tax year and gives you no right of occupancy in any part of the property."

In the event that an individual is categorized as a U.K. tax resident, he or she can use a trusted online foreign exchange provider to secure the latest exchange rates when converting currency from dollars to pounds for a money transfer to the U.K. for their tax payments.

[1] "Statutory definition of tax residency: a consultation," June 2011, HM Treasury 

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