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Tax Residency for different taxes

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If you are non-resident for Income Tax and Capital Gains, that means you’re non-resident for the other taxes right? Of course not – that would be too simple. This is tax we’re talking about!

Our tax system has built up over time with residency definitions developing independently based on historical contexts, legal precedents, and changing economic conditions.

Due to the different definitions, an individual could (in theory) be non-UK resident for Income Tax, Capital Gains Tax, and Stamp Duty Land Tax, but UK resident for VAT, National Insurance, Withholding Tax and the Non-Resident Landlord Scheme. And they might also be domiciled in the UK for Inheritance Tax purposes.

Some of the definitions of tax residency are below:

𝗜𝗻𝗰𝗼𝗺𝗲 𝗧𝗮𝘅 𝗮𝗻𝗱 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗚𝗮𝗶𝗻𝘀 𝗧𝗮𝘅 – this goes by the Statutory Residency test, which has Automatic Overseas tests, Automatic UK tests, and a Sufficient Ties test. Note that the UK test can be overridden by a Double Tax Treaty, meaning you can be UK resident under domestic law but non-resident by virtue of a Treaty.

𝗡𝗮𝘁𝗶𝗼𝗻𝗮𝗹 𝗜𝗻𝘀𝘂𝗿𝗮𝗻𝗰𝗲 𝗖𝗼𝗻𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻𝘀 – non-residency is where you are ‘ordinarily resident’ outside the UK. This is not defined in the legislation but there is case law which assists in interpreting the definition. Your residency is where you have a settled and regular mode of life, and where you live apart from temporary/occasional absences. Although the need to use this definition can be overridden by Bilateral Social Security Agreements.

𝗦𝘁𝗮𝗺𝗽 𝗗𝘂𝘁𝘆 𝗟𝗮𝗻𝗱 𝗧𝗮𝘅 – non-residency occurs when you spend fewer than 183 days in the UK in any continuous period of 365 days beginning 364 days before and ending 365 days after the transaction occurs.

𝗪𝗶𝘁𝗵𝗵𝗼𝗹𝗱𝗶𝗻𝗴 𝗧𝗮𝘅 𝗮𝗻𝗱 𝘁𝗵𝗲 𝗡𝗼𝗻-𝗥𝗲𝘀𝗶𝗱𝗲𝗻𝘁 𝗟𝗮𝗻𝗱𝗹𝗼𝗿𝗱 𝗦𝗰𝗵𝗲𝗺𝗲 – you are non-resident if your ‘usual place of abode’ is outside the UK.

𝗜𝗻𝗵𝗲𝗿𝗶𝘁𝗮𝗻𝗰𝗲 𝗧𝗮𝘅 – this is not actually based on residency (currently) but on a closely linked concept called ‘domicile’. Massively simplifying, you can be non-UK domicile and therefore not subject to Inheritance Tax where you have a ‘voluntary residence as an inhabitant’ overseas and a ‘settled intention to permanently reside’ there.

𝗩𝗔𝗧 – you are non-resident if your ‘usual place of residence’ is overseas. Again, this is not defined in legislation but there is a raft of case law to assist.

Do we really need all these separate definitions? This could have been something for the Office of Tax Simplification to look at, if it hadn’t been abolished back in 2022.

Inheritance Tax and frozen thresholds – Part 2

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In a previous post I discussed, amongst other things, the effect of several allowances for inheritance tax (IHT) being the same today as they were in 1984.

Let’s concentrate on the IHT Marriage Allowance. This is from a real client case that I’ve come across, obviously with details and names changed.


David and Charlotte are getting married and Charlotte’s mum, Elizabeth, decides to pay the cost of the wedding. Elizabeth has used up her Annual Exemptions and Nil Rate Band.

The wedding cost Elizabeth £30,000. For IHT purposes, the first £5,000 of this is not a Potentially Exempt Transfer, per the IHT Marriage Allowance (in my previous post I show that if this had kept up with inflation it would now be £15,480). The remaining £25,000 is a Potentially Exempt Transfer.

Unfortunately, Charlotte’s mum passes away within three years of the wedding. This leaves the happily married couple in a very sticky situation. The £25,000 becomes chargeable to IHT. However, the IHT due on this sum is not, as you might expect, paid from the estate of Charlotte’s mum. It is payable by David and Charlotte themselves. This means the couple are not only mourning the death of Elizabeth, but they are also presented with an entirely unexpected tax bill of 40% of £25,000, being £10,000.

They have (broadly) six months from the death of Elizabeth to raise this money and pay it to HMRC. Further, they do not have the option to pay this in instalments.

So how could this situation have been avoided?

Firstly, when Elizabeth paid for the wedding, life insurance could have been taken out which pays any IHT due should Elizabeth die within 7 years. After 7 years, the £25,000 Potentially Exempt Transfer is outside the scope of IHT. If Elizabeth is in good health, this tends to be relatively cheap, as it is ‘term insurance’, i.e the insurance only lasts 7 years and is not lifelong.

Secondly, Elizabeth could have taken advice and gifted money to Charlotte and David over a period of time instead of in one lump sum. If Elizabeth had excess income (i.e income greater than expenses), and she made regular gifts to Charlotte and David, say £10,000 for three years, instead of £30,000 in one go, the amounts would not have been Potentially Exempt Transfers. It would be a ‘Normal expenditure out of income’ and therefore entirely exempt. As such, the amounts gifted would not be chargeable on her death, saving the young couple £10,000 in IHT.

It’s always worth considering the IHT implications when money is gifted, because it could land individuals with an unexpected IHT bill should the donor pass away.

Inheritance Tax and frozen thresholds

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There has been a lot in the press recently about inflation pushing people into higher income tax brackets. But what about Inheritance Tax?
The Inheritance Tax Act was brought in in 1984, where the world was a different place. Many of the rates have been left unchanged since introduction.

Take the exemption for marriage. A total of £5,000 can be given by a parent to their child on occasion of marriage without it being a Potentially Exempt Transfer.

In 1984, the average house price was £29,675. The average cost of a wedding was about £1,150. Therefore a £10,000 gift (£5,000 from both sets of parents) would give the married couple enough to easily cover the cost of a wedding plus a deposit for a house. Now, £10,000 will get you less than the half the cost of the wedding itself (average cost is now £24,109). If this allowance had increased with inflation it would be £30,960.

The same is true of the Annual Exemption, the amount an individual can gift without it being a Potentially Exempt Transfer. It has stood at £3,000 since 1984. In today’s money, that is £9,288.

Finally, let’s look at the Nil Rate Band (the value below which assets can be passed on free of IHT) and the Residence Nil Rate Band (applicable where a main home is passed to a lineal descendant). Whilst these have increased over time the Nil Rate Band has been stuck at £325,000 since 2009. In today’s money, that is £492,965.

The Residence Nil Rate Band has been stuck at £175,000 since April 2021. Back then, the average house price was £250,210. It is now £289,818.
Both the Nil Rate Band and the Residence Nil Rate Band will remain at this level until April 2028.

An individual who is unmarried and owns their home outright is likely be subject to IHT. As an example, the average price of a property in London is now £741,126, far in excess of the combined Nil Rate Band and Resident Nil Rate Band (being £500,000).

At present, only around 4% of estates pay any IHT. But things are changing rapidly.

Sources below:

https://www.propertyinvestmentproject.co.uk/property-statistics/nationwide-average-house-price/
https://www.compareweddinginsurance.org.uk/blog/average-cost-uk-wedding.php
https://www.gov.uk/check-house-price-trends
https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
https://www.weddingideasmag.com/wedding-costs-decades/

R&D Tax Credit Changes

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I was interviewed regarding R&D tax credits for this month’s North West Business Insider (link below).

HMRC are cracking down on R&D tax claimants. As with many government policies, it has gone from one extreme to another – an effective ‘anything goes’ with a number of cowboy ‘specialist claim firms’ to HMRC routinely challenging (and denying) entirely legitimate claims. In other words, taking a sledgehammer to crack a nut.

The rules have been tinkered with endlessly since 2021. So far we have had:
-A new tax credit cap – with exceptions
-A new part of the tax return to be completed by claimants (CT600L)
-Denial of relief for overseas contractors in 2023 (which was pushed back to 2024) – with exceptions
-Changes to the rates in 2023
-Changes to qualifying costs to include data hosting/cloud computing
-Changes to qualifying activities to include pure mathematics
-A requirement for an Additional Information Form;
-A new ‘R&D intensive rate’, for which the percentage to qualify changed from 2023 to 2024;
-Advanced notification; and
-Arguably most importantly, a change to HMRC’s underlying policy on R&D, which was never legislated.

We finally have an end in sight with the ‘merged scheme’, which is – according to Jeremy Hunt – a “new simplified R&D tax relief, combining the existing R&D Expenditure Credit and SME schemes”. Except it’s not. There’s going to be two separate schemes running, which includes a second scheme for loss making SMEs. The less generous ‘merged scheme’ came into force yesterday. HMRC updated their guidance on this on Wednesday last week, five days before it came into force (link in comments). Plenty of time to plan then…

Businesses, on the whole, hate tax uncertainty. The R&D tax field since 2021 has been a prime example of an unstable tax environment. Businesses and R&D tax advisors are hoping for a long period of stability after these tumultuous years.

And on the bright side there is still a lot of benefit to completing an R&D tax credit claim where eligible.

https://www.insidermedia.com/publications/north-west-business-insider/north-west-business-insider-april-2024/guiding-you-through-the-rd-maze

Thoughts on the conservative budget

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My take on the three main points of the budget.

Reduction in NIC rates – 1% for self-employed, 2% for employees

I am a big proponent of this. NIC is effectively a tax on ‘active’ work. If you are sitting with a big rental portfolio, investment income, or living off a fat pension you don’t pay NIC. If you undertake a trade or you are an employee you do. Arguably, this is the wrong way round. I would like to see NIC merged with income tax to simplify the system, but then basic rate employees would realise they have a marginal rate of 32%/30% and not 20%, which is politically unpalatable.

As a result of these changes higher/additional rate employees will save £754 a year.

Full expensing of plant and machinery

Full expensing allows companies to deem plant and machinery an expense for tax purposes, even if it is capitalised on the balance sheet. E.g if a company bought a digger for £200,000, it can take £200,000 off its taxable profits. Make no mistake, the change announced is a tax cut for large businesses. All companies already get a £1m full expensing allowance. It is rare for SMEs to breach this, whereas multi-nationals will often breach this many times over.

R&D scheme merging

It was announced by Hunt that the two R&D schemes are now going to be merged. This is after a huge amount of messing around with the administration and rules relating R&D in the past couple of years, which included hiring inexperienced HMRC officers to challenge claims which were clearly compliant.

Two points – it comes in for accounting periods starting 1 April 2024, so doesn’t give companies much time to prepare. Secondly, R&D isn’t actually being merged into one scheme as Hunt suggested. There will still be two schemes – the merged scheme and the SME intensive scheme (see link in comments).

Let’s hope this can be the final change to what has been a tumultuous couple of years in R&D.

American exceptionalism in regards to tax

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A global minimum tax of 15% was introduced for large multi-national enterprises on 1st January, with almost no media fanfare. At the time of writing, around 55 countries have implemented this, including the UK and the EU bloc.

USA has not. Should we be surprised? No.

Below are some examples of the USA going against international tax norms.

1.      USA taxes its citizens rather than those who are resident in the USA. This means that if you were born in the US but have lived in the UK for your entire life, USA’s Inland Revenue Service will still – potentially – want a chunk of your income. The only other country in the world to attempt to do this (badly*) is Eritrea.
2.      Double Tax Treaties between countries override domestic law in (almost) every circumstance. They must have this status to allow for proper functioning of the treaty. The US, uniquely in international tax, in Internal Revenue Code §7852(d) effectively gave itself the right under their domestic law to override a treaty.
3.      As far as I’m aware, all OECD countries use the OECD Model Tax Treaty as the basis for their treaties. Developing countries will generally use the UN Model Tax Treaty. About 90% of the world’s treaties are based on these two models. However, the US again decides to be different, and bases its treaties on the US Model Tax Treaty.
4.      The US implemented FATCA in 2010, which essentially placed a massive compliance burden on any financial institution in the world that serves US citizens. It forces them to report detailed information on their US citizen account holders or have account holders face penal measures. Arguably, only the US with its massive economic and political strength could have implemented such a measure. In 2014 the OECD implemented the Common Reporting Standard (“CRS”), which allows for information on taxpayers to flow between signatories, with over 120 jurisdictions who have now signed. The US has never been a signatory to the CRS.
5.      Double Tax Treaties often contain words or phrases which need interpreting. As an example, in the case of Macklin V HMRC (2015), the word ‘established’ in a Double Tax Treaty in regards to a pension fund needed to be clarified. Rules on treaty interpretation are found in the Vienna Convention on the Law of Treaties, coming into force in 1980. There are now 116 jurisdictions who are signatories. USA has never become a party to the convention.
6.      The Multi-Lateral Instrument (“MLI”) allowed for some the recommendations of the OECD’s Base Erosion and Profit Shifting action points to be implemented into tax treaties without needing to renegotiate the entire treaty. It’s why if you search for many tax treaties you’ll find what appear to be two versions; the original treaty and the treaty containing the changes made by the MLI (e.g search UK/France double tax treaty). At the time of writing, 102 states have signed this. Guess what? The US has never signed up for the MLI.