1. Introduction
The modernisation of the UK tax regime for individuals proposed in the Autumn Budget has come in for significant criticism. However, one positive aspect of the Budget is that it replaces the old fashioned and subjective concept of domicile as a factor for establishing the tax treatment of a person to a more straightforward residence-based approach.
While the concept of domicile is underway towards “retirement” to most tax aspects following the proposed changes, another concept that had been inactive for some time might be brought back to life (at least temporarily) by the new regime: the pre-Statutory Residence Test (“SRT”) rules on residence.
The circumstances in which the pre-SRT rules might be relevant in the new regime are as an element for determining the status of the individual as a “Long-Term Resident” in a given tax year from 6 April 2025.
As proposed in the new regime, a person will be a “Long-Term Resident” in a given tax year if they have been UK tax resident in 10 or more of the previous 20 tax years. Starting on 6 April 2025, this means that a person will be a “Long-Term Resident” if they have been UK tax resident in 10 or more of the tax years between 2005/06 and 2024/25. The relevance here is that the estate of the individual might be subject to UK inheritance tax (IHT) in relation only to its UK assets (if the person is not a Long-Term Resident), or to their UK and non-UK assets (if the person is a “Long-Term Resident”).
As the rules for determining UK tax residence changed with effect from tax year 2013/14, in the first 7 tax years of the new regime, the 20-year period for assessing “Long-Term Residence” status will overlap with two different sets of rules for determining UK tax residence for each individual tax year.
For tax years up to 5 April 2013, the residence status of the person will be assessed based on the pre-statutory, common law rules. For tax years from 6 April 2013, the residence status of the person will be assessed based on the current Statutory Residence Test. That “dual” assessment will last until the “Long-Term Residence” 20-year period no longer reaches back periods before 6 April 2013, which will occur in the 2032/33 tax year. (And, even after that date, HMRC enquiries and investigations – which can take many years to conclude, may still need to refer back to the pre-SRT rules).
2. Pre-SRT rules
Case law
Until 5 April 2013, the residence status of individuals for tax purposes was determined under common law. Principles on residence were established by case law over the years, and the general rules derived from those principles were not coded in statute.
Although the SRT has been in force for over 10 years, a UK tribunal has recently judged a case whereby it analysed the UK tax residence status of a person on the basis of the pre-SRT rules for tax purposes. The judgement from the Tribunal was timely, and it might provide useful guidance on the exercise of determining whether a person is a “Long-Term Resident” in some circumstances when the new tax regime is in effect.
Kevin McCabe v HMRC
In Kevin McCabe v HMRC [2024] UKUT 00280 (TCC), the tribunal analysed the residence status of the taxpayer from the point of view of a person who leaves the UK having been previously solely resident in the UK. It therefore considered whether the taxpayer did lose or did not lose his UK residence following his move to Belgium.
The basic proposition of the analysis was that the previous life of the person in the UK should be taken into account, and a comparison with the new life outside the UK should be carried out to determine whether the move resulted in a “definite or distinct break in the pattern of their life in the UK”, in which case the person would not retain their UK residence.
A definite or distinct break in the pattern of the person’s life in the UK would emerge by the person either “severing or substantially loosening their ties with the UK”. If the move results in the person loosening their ties with the UK, but not to a significant degree, no distinct break in the pattern of the person’s life would arise, and the person would be considered to retain UK residence.
The impact of the move on the person’s ties to the UK is to be measured through a multifactorial inquiry exercise involving social, family and working ties, as well as days spent in each country.
Based on the above, the judges then considered a number of factors for deciding on the case.
The tribunal noted that, during the period Mr McCabe lived in Belgium, the taxpayer remained visiting the UK frequently for business, family and social activities. Although the length of each of the individual visits was not particularly substantial (ranging from day trips to a few nights spent), they were productive, and so were deemed to be significant from a qualitative point of view. Remote connections with the UK were also considered.
While living in Belgium, the taxpayer established businesses in Europe, Far East and Australia, but he also maintained significant business ties with the UK, including headline roles in his UK business. Although most of his business was conducted from outside the UK, he did spend some working hours in the UK, and around 25% of the board meetings he attended in the period were in the UK. Again, the analysis of his working pattern was carried out both from a quantitative and a qualitative perspective.
The taxpayer also spent meaningful time in the UK with family and friends, which included attending a significant number of Sheffield United (football club that he owned at one time) matches in the UK during the period.
The fact that the taxpayer slept in hotels, or at houses of family members or friends while in the UK was not considered a mitigating factor against UK residence.
Following the multifactorial and comprehensive analysis carried out by the judges, the tribunal considered that whilst the taxpayer loosened his ties with the UK, the change of pattern in the taxpayer’s life was not significant, and therefore not sufficient to represent a distinct break with the UK.
As a result, it was decided that the taxpayer retained continued UK residence over the relevant period (the judges also decided on the impact of the UK/Belgium double tax treaty tie-breakers to the taxpayer’s position. See more in this article).
Impact of the judgement to the new tax regime
Whilst the tax impact of the judgement for the taxpayer concerned income tax and CGT issues, the decision of the Upper Tribunal on the Kevin McCabe v HMRC case will be relevant when the new tax regime is implemented on 6 April 2025, in particular to persons who maintained residence in the UK during a period of time and then moved elsewhere but retained certain ties with the UK during years up to tax year 2012/13. Some of those persons may be considered to have retained UK residence over the years, and those years of UK residence might contribute for the person to be considered a “Long-Term Resident” in the new regime, with the IHT implications deriving from that.
A careful analysis should be undertaken for establishing the residence status of the person during the relevant period, as this could be determinative in relation to the status of the person as a “Long-Term Resident” in the new regime.
We can assist you navigating the new regime and advise you on setting up bespoke structures for you to plan your tax affairs in the most compliant and efficient way.
This article was written by Ricardo Sitrangulo.