Residence enquiries: reminders for trustees

07 September 2023

A recent enquiry raised by HMRC concerned a taxpayer’s residence status during a period falling within the COVID-19 pandemic. The taxpayer is the chairman of a trading company and had been a non-UK resident for the three tax years prior to the year of assessment. During the enquiry year he spent more time in the UK than anticipated due to travel restrictions. The question is, does this make him UK resident for that tax year? 

Understanding residence status

A taxpayer’s residence status is vital to understanding their exposure to UK taxes. Broadly, UK residents are taxed on their worldwide income and capital gains, although there are special rules for those who are non-domiciled and taxed on the remittance basis.

From a trustee’s perspective, making a distribution or providing a benefit to a beneficiary who is an UK resident will have tax implications. The benefits may need to be matched to the relevant income pool or the pool of stockpiled gains and disclosed by the beneficiary on their tax return. On the other hand, if the beneficiary is a non-UK resident, the onward gift rules may need to be considered.

It’s not surprising that we are now starting to see HMRC challenge individuals who have claimed they were a non-resident for UK tax purposes. This is especially true for periods in which they were also working in the UK. This enquiry provides valuable insight into the level of detailed evidence HMRC requires in these cases. 

Applying the statutory residence test

For tax years from 2013/14, a taxpayer’s residence position is determined by applying the statutory residence test (SRT). 

The SRT is intended to provide a clear answer on a taxpayer’s UK tax residence position, albeit the rules are complex but generally defined with very specific detail. It’s important that clients and advisers understand the complicated legislation and its application. In some cases, the application of the SRT is straightforward. However, in many instances with more complex fact patterns, the application can be difficult and is often open to challenge by HMRC. Broadly, in circumstances where a taxpayer doesn’t clearly meet the automatically UK resident or automatically non-UK resident tests, the number of days a taxpayer spends in the UK must be compared with the number of connections and ties they have with the UK.

One focus in the enquiry was a thorough review of the ‘work tie’. This tie applies where an individual works in the UK for more than three hours a day on at least 40 days in a tax year. A combination of the following information and documents were requested.

  • The number of days that were workdays.
  • The number of hours worked in each workday.
  • The nature of duties performed on each workday.
  • A copy of the taxpayer’s personal and business calendars.
  • Email and telephone records in relation to work duties.
  • The employment contract.

For an employee who records their working hours through a timesheet, collating the above details may be relatively straightforward. However, for those who do not complete timesheets, collating this information could be challenging. In the enquiry case, a picture could be built of where the individual was on each day of the year by scrutinising his email accounts and mobile phone records. By analysing the research, it was possible to provide evidence to HMRC that the individual had not breached the threshold for the work tie to apply, and thus, he was not a UK resident.

As this example shows, it’s not always easy to determine whether someone is a resident in the UK or not. In this case, it was possible to demonstrate to HMRC that the individual was not a UK resident. This was only after working closely with him and undertaking significant amounts of research and analysis to provide the information HMRC required. The outcome might have been very different if it had not been possible to establish such detailed underlying data.

Reminders for trustees

It should also serve as a reminder for trustees that they should check with beneficiaries what their tax residence status is each time they make a distribution. There is a real risk that trustee actions may have taken place before the residence status of the beneficiary is ultimately determined, especially since tax residence status may change over a period of time. Making a distribution in a year when a beneficiary is UK resident can have a substantial tax impact on the beneficiary and on the trust tax pools, and unexpected residence periods of settlors can have an impact on a range of issues such as inheritance tax and capital gains tax, so it is very easy to be caught out if communication is not good.

For more information, please get in touch with Rachel de Souza, Andrew Robins or your usual RSM contact.