Residence is a curious beast. For nearly all countries, it determines what income and gains are taxable, and where, with many countries taxing residents on their worldwide income, and often gains. Some countries have a relatively simple system, whereby if you spend six months there during the tax year, you are resident. Others have systems which include day counting over several years, the application of several tests, or simply considering where your main home is located.
And then there is the UK.
Until April 2013, the UK had no statutory residence test. The ‘residence test’ situation was based on ‘judge made’ law, formed over a number of years through judgment in a number of landmark cases. With new decisions cross referring back to earlier cases in different levels of courts, many grey areas resulted, causing real problems for anyone trying to traverse the ‘residency minefield’. The basic premise of the test before April 2013 was that you had to make a distinct break with the UK, and spend less than 91 days there on average thereafter. However in practice it was actually more complicated than that, but that is the simplest way of explaining. The new Statutory Residence Test, although complex, does generate a level of certainty about an individual’s tax position going forward which was absent before.
For at least three years, however, the old and new rules will be living side by side. For those affected, the position during the three years prior to the introduction of the new statutory residence test is relevant to how the new test is applied.
Even now, people are finding that HM Revenue & Customs (HRMC) are catching up with them over their residence position several years ago. There are two recent ‘landmark’ cases that are diametrically opposed. Firstly, there is HMRC v Rumbelow, a couple who left the UK to go to Portugal in 2001/2002. Secondly there is Glyn v HMRC, a property mogul who left the UK with his wife for Monaco in 2005. Both left the UK specifically to take advantage of different tax breaks, and both took professional advice on how to do this.
Mr and Mrs Rumbelow were unable to provide clear evidence as to where they spent much of their time after leaving the UK. Initially they went to Belgium, and then spent time in Portugal. However they visited the UK frequently during this period, and though they contended that they did not overstay, their frequent banking activity in the UK was used by HMRC in evidence against them. It would seem they retained some business interests in the UK, winding these down gradually, and their 15 year old daughter (her age at their departure) remained UK resident. They retained their fully furnished UK property for their personal use during return trips to the UK and had a fully insured car on the driveway.
Mr and Mrs Glyn moved to Monaco in 2005. They spent at least 200 days in Monaco during the relevant year, and although they returned to the UK frequently, even up to 22 occasions in one year, they were always within the 90-day period allowed. They also retained their UK cars and, interestingly, applied for a car parking permit for their London property. They also returned to the UK regularly to be with family and friends for religious festivals, and were known to have regular Friday dinners with family.
So what are the differences between these two couples? Both took professional advice before leaving the UK.
One point is clearly the record keeping. Mr and Mrs Rumbelow did not keep adequate records and could not always prove where they were. Mr and Mrs Glyn had excellent, contemporaneous records, including boarding cards, bank and credit card statements and diaries, all things that were missing for extensive periods in the Rumbelow’s evidence. Even the new statutory residence test has day counting requirements, and this highlights the importance of retaining good records and information to help prove your case.
Another is severing ties such as work and business. Mr Glyn’s business was being wound up, and he did not return to the UK for a “settled purpose” such as work (although the Revenue tried to claim the Friday night dinners were a settled purpose). Mr Glyn moved, with his wife, directly to Monaco. Mr and Mrs Rumbelow did not settle in Belgium or Portugal initially, and returned to the UK for business purposes and had ongoing business interests in the UK throughout the period in question.
The final points which are worth mentioning here are the need to have both achieved a “distinct” break from the UK and also being able to show that they were moving for a “settled purpose”. Mr and Mrs Rumbelow left the UK and spent some time travelling around Belgium before renting an apartment there, spending very little time in Belgium. They visited their daughter (a minor) in the UK and stayed together in the family home. The First Tier Tax Tribunal considered that there was sufficient evidence that they were resident in the UK for at least two of the years that they claimed to have been non-UK resident, and insufficient evidence that they had been non-resident for the remaining years. It held that they had not sufficiently loosened their ties, and that there was no distinct break in the pattern of their lives.
Conversely, Mr and Mrs Glyn had changed the pattern of their lives, loosened their social and family ties, and took up ‘quality’ residence in Monaco.
The morals of these two cautionary tales? Take professional advice, follow it, and keep evidence of your movements so that, even if challenged, you should be able to prove your case. The difference? Mr and Mrs Rumbelow have a £600,000 tax liability in the UK; Mr Glyn has saved around £5.5 million in tax.
Good advice works; not following it can cost you. Can you afford not to take advice? We need to talk.
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Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
Written by Gavin Scott, Senior Partner, Blevins Franks
W: www.blevinsfranks.com
E: algarve@blevinsfranks.com
T: 289 350 150
