Split Year Treatment and leaving the UK
Whilst the steady stream of people leaving the UK for the UAE has slowed down a little in recent months it seems, becoming non-resident for UK tax purposes is still a popular consideration when it comes to tax planning, be it for short to medium-term income tax or capital gains tax planning, or for the longer-term potential Inheritance tax benefits.
One area that often gets overlooked is how the timing of departure can affect the UK tax position.
When to go?
For many, the departure date is, quite rightly, scheduled to coincide with the start of a new school year, or the beginning of the new calendar year. In many (sensible) countries, the start of the calendar year marks the start of the new tax year, which can simplify taxes in that country. However, because the UK tax year runs from 6 April to the following 5 April, a departure from the UK over the summer or in January will be part way through the UK, by which time, many people will already have met the conditions for being treated as UK tax resident for that year.
UK tax residency is governed by the Statutory Residency Test, and someone who is leaving the UK mid-way through a tax year is unlikely to meet any of the three automatic non-resident tests but is highly likely to have met one or more of the automatically UK resident tests at the point they leave the UK.
Split Year Treatment
If that were the end of the story, then someone in this position would ordinarily be subject to UK tax on their worldwide income for the whole of the tax year, albeit with relief for taxes paid overseas if there is a double tax treaty that allows that. For example, someone moving to Dubai in January for work could potentially still be exposed to UK tax on their employment income earned in the three-month period from January to 5 April.
Helpfully, the UK tax system includes the concept of Spit Year Treatment, and under very specific circumstances, or “cases”, it is possible to split the tax year between the UK part and the overseas part for some taxes – namely income tax and Capital Gains Taxes.
How Split Year works
If you qualify for split year treatment, then overseas income will not be subject to UK tax in the overseas part of the tax year. UK income will remain taxable in the UK for the whole of the year and then may or may not be taxable here from the start of the next tax year, depending on the nature of the income and the provisions of the double tax treaty. Capital gains may also escape UK tax, but it will depend on the nature of the asset. Importantly, a split year is ignored for counting years for IHT purposes and the year will continue to be treated as a UK tax resident year.
How to qualify for Split Year
If you are leaving the UK mid-way through the year, there are three specific Cases to consider (there are five others if you are arriving in the UK):
Case 1
Beginning to work full time overseas
Case 2
Accompanying a partner who is beginning to work full time overseas
Case 3
Ceasing to have a home in the UK
To get Split year treatment, you only need to meet one of the cases, and at first glance, these would all seem straight forward. This is where things can go wrong. Qualifying for Split Year Treatment in practice is notoriously difficult because behind all of those Cases are a lot of very specific conditions, and it can be very easy to be caught out because those conditions potentially span multiple tax years.
Case 1
For example, Case 1 can only be claimed if you have been UK tax resident in the year prior to the year you are trying to split, and you will also need to meet the conditions for the third automatic non-resident test – working full time overseas and spending less than 90 days in the UK with less than 30 days working in the UK – in the tax year following the split. As a result of this, you have to consider your circumstances over three tax years, not just the year in which you are hoping to split.
There are other conditions associated with Case 1 in the year of the split, including (but not limited to) beginning to work “full time” overseas (and HMRC provide a complex calculation to establish that which can have surprising results sometimes), not taking a significant break from working, and restricting both the time spent in the UK and time spent working in the UK in accordance with set limits, which vary depending on the month of your departure.
Case 2
The conditions for Case 2 are similar to Case 1 in terms of limiting days in the UK and spanning three tax year, but without the working conditions, provided your spouse or partner can meet Case 1. For example, you still need to be non-resident in the following year, but this does not have to be achieved by the third automatic non-resident test.
There are additional restrictions in relation to how long you and your partner have lived together prior to departure and if you retain a UK home, you will still need to spend more time living in the overseas home.
Case 3
Case 3 is arguable the most restrictive, because among other conditions, you will genuinely need to cease to have a home in the UK, restrict your time to no more than 15 nights in the UK between your departure date and the end of the tax year as well as create a “sufficient link” with an overseas country. HMRC provide three options for creating that link, and any one will do, but these options may be harder to achieve than they first appear.
Option 1 is to become tax resident in the other country within 6 months of leaving the UK. Whether you are able to do this will depend heavily on local conditions for residency, which could potentially be impacted by when the tax year in the other country runs from, and whether it allows you to become resident part way through their tax year.
Option 2 involves you being present in that country at the end of EVERY day for 6 months. Not useful if you want to go on holiday during that time, but at least you will not have to worry about exceeding your permitted 15 nights in the UK!
Option 3 requires you to have your only home (or homes) in that country within 6 months. This may suit many people, but if you also happen to have a holiday home somewhere else in the world, then this will preclude you from this particular option.
What can you do?
If you are planning to leave the UK and the aim is to lose your UK tax resident status, then it is important to take advice well in advance so that you understand whether it is viable to become non-resident for tax purposes straight away, or whether there will be a delay until the start of the next tax year. This is especially important if your plans require you to be non-resident at the time of a particular transaction.
By taking advice early, you can have a clear plan in place before you go so that you do not inadvertently fall into any of the potential tax traps.
Qualifying for Split Year treatment is not always guaranteed and so if this is something you hope to achieve, please call the Gravita Tax Consultancy team for an initial chat about your situation.
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