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Private Client Business
2014
How to do the splits: Finance Act 2013 - improved flexibility for leavers and
arrivers?
Emma-Jane Weider*
Fiona Poole*
Claire Roberts*
Subject: Tax
Keywords: Capital gains tax; Income tax; Residence; Split years
Legislation: Finance Act 2013 (c.29)
*P.C.B. 236 A quirk of English tax law is that, in the absence of specific rules, an individual is either
UK tax resident or non-UK tax resident for an entire tax year. This article considers the benefits and
difficulties of relying on split year treatment to mitigate the rigours of the UK tax system for individuals
arriving in or leaving the UK part way through a tax year. In particular, it considers the difficulties for
non-UK domiciliaries who become UK tax resident without having established a pot of clean capital
and who wish to rely on split year treatment to do this.
UK tax residence
The Finance Act 2013 (FA 2013) saw the introduction, for the first time, of a comprehensive statutory
definition of residence for most UK tax purposes1 with effect from April 6, 2013. In accordance with
the law that applied prior to this date, the FA 2013 requires residence to be determined for a year of
assessment as a whole and an individual is either UK resident or non-UK resident for a full tax year
and at all times in that tax year. On its own, this rule can lead to harsh results where an individual
arrives in, or leaves, the UK part way through a tax year: such an individual may still be subject to UK
tax for the entire year. More nuanced rules are therefore required to address this position. *P.C.B.
237
The position pre-April 6, 2013: concessionary treatment only
Prior to April 6, 2013, three extra-statutory concessions were potentially available to individuals
coming to or leaving the UK part way through a tax year:
(a)
Extra-Statutory Concession A11, together with the accompanying spouse/civil partner
Concession A78, in relation to certain income only; and
(b)
Extra-Statutory Concession D2, in relation to capital gains.
However, given the inherent uncertainty in relation to their application (being based on administrative
discretion rather than the strict letter of the law) and the difficulties of obtaining a remedy should
HMRC fail to apply the concession, many advisors were loath to advise clients to rely on these
concessions.
As Scott L.J. observed in Absolom v Talbot 2
"[t]he fact that such extra-legal concessions have to be made to avoid unjust hardships is conclusive
that there is something wrong with the legislation".
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The position from April 6, 2013: statutory rules
The legal position has been addressed with effect from April 6, 2013. Provided certain conditions are
met, FA 2013 Sch.45 Pt 3 provides for a tax year to be split into two parts if an individual either leaves
the UK to live or work abroad or comes from abroad to live or work in the UK:
•
a UK part during which the individual is charged to tax as a UK resident; and
•
an overseas part during which, for certain defined tax purposes, an individual is
charged to tax as a non-UK resident.
It is important to note that the rules have no impact on whether someone is or is not in fact resident
under the statutory residence test. The impact of this will be made clear later in this article.
The cases
There are three circumstances in which an individual leaving the UK can split the tax year into a UK
and an overseas part3:
Case 1: they lose UK residence by virtue of commencing full-time work abroad;
Case 2: they are the spouse or partner accompanying someone leaving the UK to
take up full-time work abroad; or
Case 3: they cease to have a home in the UK.
There are five further circumstances in which an individual arriving in the UK can split the tax year into
UK and overseas parts:
Case 4: during the year, there comes a day when their only home or homes is or are
in the United Kingdom;
Case 5: they become resident by starting full-time work in the UK;
Case 6: they return to the UK following a period of full-time work abroad;
Case 7: they are the spouse or partner of someone returning to the UK following a
period of full-time work abroad; or
Case 8: they acquire a home in the UK for the first time. *P.C.B. 238
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The purpose of this article is not to consider the detailed conditions that apply to each case (although
it is important to ensure each condition is met on a case by case basis) but rather to flag some of the
more interesting points that arise in practice.
Residence before and after the split year
The conditions for each Case include requirements in relation to the tax years before and after the
split year. For example, Case 6 only applies when the individual has been a UK tax resident in one of
the previous four tax years and was non-resident under the full-time work abroad automatic overseas
test4 in the previous tax year. Whilst Cases 4, 5, 6, 7 and 8 require the individual to be resident in the
following tax year, under Case 8 only, the following year must be a full year of residence rather than a
split year. An individual who wishes to rely on split year treatment needs to be aware of the limitations
that this can impose.
Priority between Cases
It is of course possible that an individual could fall within more than one Case. The legislation
therefore includes rules to determine which Case has priority over another5. This means it is important
to ensure that an individual does not jeopardise their tax planning by inadvertently ending the
overseas part through satisfying the criteria for a Case that would take priority over another more
favourable Case. Broadly speaking, the impact of the rules is that the Case which would result in the
shortest overseas part has priority.
There are two separate priority rules: one governs priority as between split year Cases 1–3. The other
governs priority as between split year Cases 4–8.
Where the individual is leaving the UK and is within two or all of Cases 1–3 then:
(a)
Case 1 has priority over Case 2 and Case 3; and
(b)
Case 2 has priority over Case 3.
Where the individual is arriving in the UK and is within two or more of Cases 4–8, priority will be
determined in accordance with the following table6:
First case applying
Second case applying
Case taking priority
Case 5
Case 6
Case with earlier split year date.
Case 7 (but not Case 6)
Case 5
Case with earlier split year date.
Two or all of Cases 4, 5 and 8 Case or Cases with the only (or the earlier) split year date
(but not Cases 6 or 7)
HMRC have confirmed their view that these priority rules mean that it is not possible to split the tax
year more than once7.
Modified day count requirements
In order to determine whether split year treatment applies, specific rules are used to determine the
pro-rata amount of days that it is permissible for an individual to spend (and in some cases, work) in
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the UK in *P.C.B. 239 the overseas part of the year. Many individuals who wish to rely on split year
treatment will therefore need to carefully monitor their presence in the UK.
For Cases 4, 5 and 8, the individual must not meet a modified version of the "sufficient ties test" for
the part of the tax year before the day on which they start to have a home in the UK (Cases 4 and 8)
or meet the full time work in the UK test (Case 5).
For Cases that involve full-time work abroad (Cases 1, 2, 6 and 7) there is also a limit on the number
of days that the individual can spend in the UK and can work in the UK.
Starting to have a "home" in the UK
Although the concept of a "home" is critical to the statutory residence test, this subjective term is not
defined in the legislation and we can only therefore rely on HMRC’s guidance and, in due course,
judicial interpretation.
As set out in Annex A to HMRC’s guidance note on the statutory residence test (RDR3), HMRC
"consider that a person’s home is a place that a reasonable onlooker with knowledge of the material
facts would regard as that person’s home." When considering Case 4 and Case 8, a difficult question
may arise in relation to the point at which a taxpayer starts to have a home in the UK. For example,
consider an individual who takes a lease on an apartment in London before the date they actually
move to the UK: it is possible that this could start being a home before they actually move to the UK.
In these circumstances, HMRC notes in RDR3 that:
"Your home starts to be your home as soon as:
•
"it is capable of being used as your home, for example, you have taken ownership of
it, even if it is temporarily unavailable because of renovation
•
you actually use it as your home."
If the first point above is satisfied, but in fact you never actually use it as your home, then it will not be
your home.
In these circumstances, an individual who wishes to rely on split year treatment and extend the
overseas part of the year beyond the date on which they acquired their UK property should be
advised (if possible) not to visit the property or move any of their belongings into the property until
their planning is complete.
Starting full-time work in the UK
As anyone who has had the pleasure of applying the third automatic UK test will appreciate,8 it is very
easy for an individual to become tax resident in the tax year before the year in which they actually
start full-time work in the UK simply by spending a day working in the UK in the previous tax year. The
reason is that this day could, when looked at retrospectively, form part of the 365 day period used for
the purpose of assessing full-time work in the UK. In order to avoid this trap, it may be necessary for
an individual to ensure that there has been a "significant break" from UK work.
The effect of splitting a tax year
As noted above, an individual is either UK resident or non-UK resident at all times in the tax year.
However, by splitting a tax year the effect of this rule is relaxed in accordance with the special
charging rules of FA 2013.
Part 2 of Sch.45 introduces amendments to particular charging provisions in the Income Tax Acts so
that income arising in the overseas part of a split year is treated, for these purposes, as arising to a
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non-UK *P.C.B. 240 resident. The statutory amendments mean that split year treatment will apply to
the following sources of income9:
•
certain employment income under the Income Tax (Earnings and Pensions) Act 2003
(ITEPA);
•
foreign pension income under Pt 9 ITEPA;
•
trading income under Pt 2 of the Income Tax (Trading and Other Income) Act 2005
(ITTOIA);
•
income from an overseas property business under Pt 3 ITTOIA;
•
savings and investment income under Pt 4 ITTOIA;
•
miscellaneous income under Pt 5 ITTOIA;
•
relevant foreign income charged on the remittance basis under s.832 ITTOIA.
In any case it is imperative to check whether a particular source of income is protected by split year
treatment. The list of legislative amendments in FA 2013 provides a handy checklist for this purpose.
The Taxation of Chargeable Gains Act 1992 is similarly amended so that an individual is not
chargeable to CGT in respect of any chargeable gains accruing in the overseas part of the year.10
Rather unfortunately, the amendments originally introduced by FA 2013 meant that gains arising in
the overseas part of a year to a remittance basis user but remitted in the UK part of that year, or in a
subsequent period of UK residence, would be charged to tax. This anomaly sparked a debate
between practitioners in relation to whether, as was believed, this was simply a deficiency in the
drafting or whether it reflected a deliberate policy decision. Fortunately, the Government admitted that
this was in fact a mistake. The legislation has now been amended by the FA 2014 (retrospective to
April 6, 2013) so that the charging of gains on the remittance basis excludes gains arising in the
overseas part of a split year.
Transfer of assets abroad: a nasty trap
Of particular concern for practitioners advising clients with offshore structures is the failure to extend
split year treatment to income treated as arising to UK resident individuals under the Transfer of
Assets Abroad (TOAB) legislation.11 The result is that whilst UK resident individuals may not be
taxable on actual income received during the overseas part of a tax year, they will still be subject to
income tax on income that is treated as arising to them during that period under the TOAB provisions.
The significance of this cannot be overstated where individuals coming to the UK are dependent on
offshore structures to fund their lifestyle (or indeed any UK business interests). For example, whilst an
income distribution from a trust in the overseas part (prima facie taxable as miscellaneous income)
would be protected by split year treatment, the TOAB provisions may still result in a UK tax charge if
there is available income in the structure. In such a case, careful consideration will need to be given
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to whether or not the motive defence12 will be available.
Limitations of split year treatment
As split year treatment has no impact on whether someone is or is not in fact resident for a particular
tax year, there are many examples of areas in which the full rigours of the UK tax system continue to
apply. The following are some of the main issues that may be encountered in practice. *P.C.B. 241
Double taxation agreements
Split year treatment will not affect whether an individual is regarded as UK resident for the purposes
of any double taxation agreement.
Deemed domicile and the remittance basis charge
For the purposes of the 17 year residence rule for IHT purposes,13 the legislation makes clear that
"residence" has its normal income tax meaning. Split years will therefore count as full years of
residence for these purposes.
The same is true of the 12 year residence test and the seven year test for the remittance basis
charge.14
Disregarded income
The limitation on a non-resident’s UK liabilities under s.811 of the Income Tax Act 2007 will not be
relevant in the overseas part. This could have far-reaching consequences, including for offshore
trustees where an individual beneficiary is coming to the UK for the first time. If that trust holds UK
investments then, whilst there are no UK resident beneficiaries, the trustees’ tax liability on
"disregarded income" will be limited. However, this limit will cease to apply as soon as there is a UK
resident beneficiary of the trust15 and the trustees will be subject to UK tax without the benefit of this
limit for the whole tax year, regardless of whether or not the relevant beneficiary is entitled to split
year treatment.
Personal representatives and trustees
Split year treatment applies to an individual’s personal tax situation. It is not relevant to an individual’s
role as a personal representative.
It applies in a limited way to individuals acting as trustee of a settlement in determining the trustees’
residence status.16 Where an individual is entitled to split year treatment, but has only been a trustee
of the settlement in the overseas part of the split year, then for the purposes of the trustee residence
tests, the individual trustee can be treated as if they were not resident for the year. The effect is that
the trustees of a settlement will not become UK resident in a situation where one of the trustees is
eligible for split year treatment and only acts as a trustee of the trust during the overseas part of that
split year. Individuals must therefore be careful not to confuse their personal tax position with the tax
position of any structures of which they are trustee.
Conclusion
Many people coming to, or leaving, the UK may not appreciate that their UK tax liabilities are not
governed by their actual dates of arrival or departure and, unless properly advised, will not plan
accordingly.
Non-UK domiciliaries seeking to establish a pot of clean capital using distributions from offshore
structures must be very careful where this planning is done in the overseas part of a split year as they
may find themselves on the wrong side of the anti-avoidance rules that are not relaxed by split year
treatment.
Emma-Jane Weider
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Partner
Maurice Turnor Gardner LLP
Fiona Poole*
Senior Associate (CTA)
Maurice Turnor Gardner LLP
Claire Roberts*
Associate
Maurice Turnor Gardner LLP
P.C.B. 2014, 5, 236-241
*.
Emma-Jane Weider is a Partner at Maurice Turnor Gardner LLP. One of her specialisms is advising non-domiciled
clients on UK tax and estate planning matters, particularly when they are planning their arrival to (or departure from) the
UK. Tel: (0)20 7786 8716; email: emma-jane.weider@mtgllp.com; Fiona Poole is a Senior Associate at Maurice Turnor
Gardner LLP who specialises in complex tax-efficient structuring of clients’ personal and business assets in multiple
jurisdictions and international trust issues for high net worth individuals. Tel: (0)20 7786 8737; email:
fiona.poole@mtgllp.com; Claire Roberts is an Associate at Maurice Turnor Gardner LLP. Claire advises trustees, banks
and high net worth individuals on tax and trust planning and in particular on international wealth planning structures.
Tel: (0)20 7786 8727; email: claire.roberts@mtgllp.com.
1.
The Finance Act 2013 (FA 2013) Sch.45 para.1 confirms that the rules apply for the purposes of income tax, capital
gains tax, inheritance tax and corporation tax.
2.
Absolom v Talbot [1943] 1 All E.R. 589.
3.
FA 2013 Sch.45 Pt 3.
4.
FA 2013 Sch.45 para.14.
5.
FA 2013 Sch.45 paras 54 and 55.
6.
See RDR3, para.5.7.
7.
Expatriate Forum meeting July 2013, see www.hmrc.gov.uk/consultations/joint-forum-expat-tax.htm [Accessed August
7, 2014].
8.
FA 2013 Sch.45 para.9.
9.
See FA 2013 Sch.45 paras 57 –91.
10.
See FA 2013 Sch.45 paras 92 –101.
11.
Income Tax Act 2007 Ch.2 Pt 13.
12.
Income Tax Act 2007 ss.737 and 739.
13.
Inheritance Tax Act 1984 s.267.
14.
Income Tax Act 2007 s.809H.
15.
Income Tax Act 2007 s.812.
16.
Taxation of Chargeable Gains Act 1992 s.69 and Income Tax Act 2007 s.475.
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