UK Ordinarily Resident or Habitually Resident
If you live outside the UK and comply with the UK Statutory Residence Test (April 2013), you are not resident but this does not mean you can move overseas for one year and be free of income tax or capital gains tax.
You may still be deemed ordinarily resident or habitually resident and therefore subject to either income tax, capital taxes or both. You may also still be UK domiciled and subject to inheritance taxes on your Worldwide assets.
Habitually Resident Test - for Income Tax
You are habitually resident in the UK and subject fully to UK Income Tax on income overseas even if you live and work overseas if:
- You have a permanent home in the UK that you have access to e.g. it is not rented or available for rent
- Your spouse lives in the UK
- Your children live and go to school in the UK
Ordinarily Resident Test - for Capital Gains Tax
As well as being resident for income taxes (Statutory Residence Test), if the UK is your 'habitual home' i.e. you 'normally' live in the UK or you arrive in the UK and intend to 'normally' live in the UK, you are 'ordinarily resident' and therefore also subject to UK capital gains tax.
Ordinarily Resident: Foreign National Coming to UK
If you come to the UK with the intention of staying in the UK for 3 or more years, you become ordinarily resident on day 1. This means you are subject to both income taxes (as you are resident) and capital gains taxes (as you become ordinarily resident). Therefore, many people claim that they are coming to the UK for 2 years or less. The danger is then if you stay for longer than 2 years.
UK Ordinarily Resident - Leaving UK
If you move overseas for a period of time out of the UK and become a non-resident, you may still be deemed ordinarily resident for capital gains tax purposes. You cannot simply move overseas for a year, sell your portfolio of rental property investments and avoid capital gains taxes and return to the UK a year later.
IF YOU LEAVE THE UK WITH A DEFINITE INTENTION NOT TO RETURN TO THE UK YOU ARE FREE TO SELL ASSETS AND ARE FREE FROM UK CAPITAL GAINS TAX IMMEDIATELY (YOU MAY STILL BE LIABLE TO LOCAL TAXES WHERE YOU LIVE). HOWEVER, IF YOU RETURN PERMANENTLY TOO EARLY OR SPEND TOO MUCH TIME IN THE UK OVER A 5 YEAR PERIOD YOU MAY FALL BACK INTO BEING ORDINARILY RESIDENT AND CAPITAL GAINS TAX WOULD BECOME PAYABLE ON ANY DISPOSALS MADE IN THE TIME YOU WERE LIVING, SUPPOSEDLY PERMANENTLY AS AN OVERSEAS RESIDENT.
Difficult to Lose UK Ordinarily Resident Status
If you habitually live or visit the UK on a regular basis after you have left and spend too much time in the UK, you will still be deemed ordinarily resident and subject to capital taxes.
- 91 Day, 5 Year Rule - Broadly speaking, if you spend 91 days or more each year for five consecutive 'tax years' in the UK, you retain Ordinarily Resident status.
- After 5 Years you become ordinarily resident overseas and not subject to capital taxes.
- Deliberate Intention - You must clearly be able to demonstrate that you do not intend to make habitual and substantial visits to the UK
- All of this is of course assuming you pass the 'habitually resident' test above.
We suggest you cross reference the above rules with the Statutory Residence Test 2013. At the time of writing (March 2013), HMRC has been unable to advise us on the interaction between the above rule and the Statutory Residence Test 2013 as their technical desk does not yet have the published HMRC practice notes.