Treasury to tighten UK residence tax rules

The Treasury is proposing to strictly define who is an ordinary British resident for tax purposes, as part of reforms announced in the Budget.

The government's proposed definition is that individuals who spend time in the UK should be treated as 'ordinarily resident' for tax purposes unless they have been non-resident in the UK in all of the previous five tax years.

Individuals should only be able to access ordinary resident tax status in the tax year in which they arrive in the UK, and for a maximum of two full tax years following the year of arrival.

Under current rules, individuals are treated as ordinarily resident if they usually live in the UK (or intend to do so), or come to the country regularly and for 91 days or more per tax year.

Ordinary residence cases have become increasingly prone to legal wrangling over tax status and the government wants to tighten the rules to avoid more litigation, the paper states.

The high profile and long-running case of Robert Gaines-Cooper, the Seychelles-based UK multi-millionaire, is one such legal battle ongoing with HMRC.

Ordinary residence is relevant to an individual's UK tax liability in two main ways. Individuals who are not ordinarily resident in the UK can claim the remittance basis of taxation for foreign investment income. This offers beneficial treatment as they are only liable to UK tax on their foreign investment income if it is remitted to the UK.

In addition, certain tax liabilities such as capital gains tax, can apply if a person is not resident in the UK but is ordinarily resident.

In 2008-09, approximately 29,800 individuals indicated on their Self Assessment (SA) tax return that they were resident but not 'ordinarily resident' in the UK. Of these 23,100 were also non-domiciled, and 6,700 were domiciled in the UK.

Of the 6,700 domiciled and not ordinarily resident individuals, approximately 300 claimed the remittance basis.