Wednesday, October 4, 2023

The UK Statutory Residence Test – Unpicking Expat Tax Residency Status

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Paphos, Cyprus,  1st July 2022, ZEXPRWIRE, The UK’s Statutory Residence Test (SRT) is something you’ll come across if you live abroad, split your time between countries, or earn an income overseas – but it can be far from simple.

HMRC introduced the process in 2013 to help expatriates and foreign nationals define whether they are considered British tax residents. Although the SRT is used extensively in tax assessments, retirement planning and investment management, it’s often misinterpreted. Professional support is always advisable if you need to evaluate your position, especially as a British expat living abroad. Chase Buchanan Wealth Management is authorised and regulated in Cyprus, with accredited financial advisors located in many countries.

The UK Statutory Residence Test Explained

The SRT runs through three sets of ‘tests’, in ascending order of importance, to determine whether you are liable to pay UK taxes as a resident.

Note that residency and tax residency are two different things and should never be confused. You could be a resident of one country with a valid residency permit but spend enough time in Britain to still be treated as a UK tax resident.

The three parts of the SRT are as follows:

  • Automatic overseas test
  • Automatic UK test
  • Sufficient ties test

There are also tie-breakers used where the outcome isn’t definitive, so it’s a case of methodically working through each step and never assuming that your preferred result is accurate. 

The deeming rule is a ‘last resort’ and is used where it still isn’t apparent whether a tax residency threshold has been met having run through all of the previous tests. If you have been a UK resident in one year of the last three and meet at least three sufficient ties, you will often be classed as a tax resident.

The Importance of Tax Residency for International Expats

It is impossible to overstate the importance of understanding your tax residency status and applying the above rules and tests correctly.

Most non-residents still pay UK taxes, but only on domestic income, which can substantially affect your annual liabilities, particularly if you live in an overseas country with a favourable tax regime.

There are also considerations if you are planning to relocate.  In the year you move, the period is normally split into two, with one part where you are a resident and another where you are a non-resident. This division typically means you are only liable for UK taxes on foreign-sourced income during the proportion of the year spent in Britain – and might stand to reduce your tax obligations if you time your move wisely.

Expatriates should usually submit a form P85 to HMRC to report a change in tax residency or submit a self-assessment tax return with updated information.

Understanding Your Tax Residency Status

This simplifies the SRT process to illustrate how it works and the particular situations which will influence your tax residency – but it is important to reiterate that the right outcome will rely on meeting specific definitions. Therefore, we suggest seeking professional advice if you require any help planning for a tax-efficient move abroad or understanding your appropriate tax residency position.

You can find more information here Tax Return Obligations and Deadlines as a UK Non-Resident, or are welcome to contact the Chase Buchanan Wealth Management team for further assistance.

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